PART I:

 

 

AN OVERVIEW:  THE CHALLENGES AND THEIR IMPLICATIONS

 

 

 

 

¼However much you may believe in liberty for its own sake, you are unlikely, unless you are mentally unbalanced, to recommend liberty if there is reason to believe that liberty must necessarily involve chaos.  Therefore, before the leaders of eighteenth- and nineteenth-century liberalism could recommend liberty in economic relations, it was necessary that there should exist a body of thought which showed, or which purported to show, that, if left uncontrolled save by due process of law, individual initiative in the economic sphere would not lead to economic disaster; that is to say, it was necessary to show that the interplay of spontaneous self-interest would harmonize for the public good.

 

                                                                                        Lord Lionel Robbins

 

 

 

Only capitalists can kill capitalism, but our system cannot stand much more abuse of the type we have witnessed recently, nor can it stand much more of the financial and social polarization we are seeing today.

 

                                                                                          Felix Rohatyn

 

 

 

The supreme function of statesmanship is to provide against preventable evils.  In seeking to do so, it encounters obstacles which are deeply rooted in human nature.  One is that by the very order of things such evils are not demonstrable until they have occurred: at each stage in their onset there is room for doubt and for dispute whether they are real or imaginary.  By the same token, they attract little attention in comparison with current troubles¼.

 

                                                                                           Enoch Powell 

 

 

 

 

 

 

 

 

Chapter 1

 

Overview and Author’s Preface

 

INVITATION TO AN INTELLECTUAL ODYSSEY

 

 

Not long ago in the mid-1990s Americans were deeply concerned about the outsourcing of jobs, the hollowing-out of their country’s industrial base, and the growing inequalities of income and wealth. These had deeply rooted causes that deserved much consideration.  The concern over those causes has, however, ebbed and flowed with events that have spread new issues before the American public, making a clear understanding difficult. 

          The original concern abated with the economic boom that followed in the late 1990s.  Then the “Great Credit Crisis of 2007-2009” tore away the rose-colored glasses – although this time with an understandable focus not on the long-term, fundamental causes of economic displacement so much as on the complex destructive policies and social values that precipitated that particular crisis.

 

The causes of the financial meltdown in late 2008 have been much commented upon, and it will not be our concern to deal with them here, since our intention is to examine factors that are at work concurrently with and beyond them.  They were, however, far-reaching in themselves, and by no means mere incidentals.  As is well known, the causes included (1) the Federal Reserve’s long sponsorship of monetarily expansionist “bubbles” first in the stock market and then in housing (signifying a profound failure in the monetary policy upon which American society had come to rely); (2) social policies that encouraged, indeed insisted upon, mortgage loans to a great many borrowers (particularly minority borrowers) who could not afford them; (3) the relaxation of margin requirements and other regulations that had placed crucial limits on financial speculation; (4) the packaging of loans into securities (without meaningful Securities and Exchange Commission oversight, critical evaluation by the pivotal credit rating agencies, or truly independent accounting reporting) that were sold to investors worldwide who did not or could not exercise due diligence about their soundness; and (5) problems of ethics and character, especially as shown by banks and other financial institutions, that make us recall Emerson’s phrase “abuses in which all connive.”

          The fact that the economic crisis in the United States spread quickly to hit countries throughout the world highlights yet another problem that is inherent in the 2008 meltdown.  This is that the gigantic world capital flows and the scale of trans-national competition have taken the control of economic events out of the hands of national and local governments and of central banks. In his 2008 book The World Is Curved: Hidden Dangers to the Global Economy, economic adviser and commentator David Smick says that the whole thing “is unbelievably fragile.  It is a house of cards that could come tumbling down for any number of reasons.”

 

With the focus on these more obvious flaws, the deeper problem of overall deindustrialization was again lost sight of.  Even the assistance that was given to keep the American automobile companies alive in late 2008 and thereafter was discussed only in the context of those companies, and not of the industrial system as a whole.  Little attention is given to what is inevitably the inability of firms and workers in an advanced society to compete with incredibly low-cost foreign labor (so long as labor remains a major factor of production).

          The acceleration of communications, transport and migration, and the development of a worldwide financial market, has gone far toward making each country's economy a mere subset of a worldwide competitive market.  Only in recent years have the percentages of imports and exports in relation to the total American economy increased rapidly.  As this worldwide market continues to mature, virtually everyone will be in close competition with everyone else.

          The globalization has produced a relentless drive to reduce costs.  As so many business management books have said, anyone who does not cut costs again and again, while at the same time increasing quality and adding innovative new products, will be undersold and forced out of business. 

           The economic systems of the present, as of the past, are centered on scarcity, the need for production and work.  To live, everyone who is not supported by relatives, friends or government must find a place in that productive system to obtain income from it.  That is, entrepreneurship or work in some form is a necessity not just for production but for peoples' participation and consumption.  Indeed, our cultures and moralities are centered on it. We judge each other by performance in these terms; and everyone’s livelihood depends upon it.  Nothing is more fundamental to each country’s economy and culture.

          Now, however, the global economy puts workers in the advanced nations into direct competition with hundreds of millions of workers – by no means all low-skilled, since many of them are increasingly highly trained – from among the poorly-paid peoples of the Third World.  Profits for firms and investors who stay ahead of the competitive curve shoot up, but the inexorable process of supply and demand, given the immense source of low-cost labor, trends the wages downward in the developed countries potentially to depths unimaginable to Americans.  Many authors see this as an impending crisis for workers in the advanced economies as they come under increasing pressure about how to find a place in the economy.  Patrick Buchanan is a conservative who in his 1998 book The Great Betrayal showed that he is fully aware of this. Likewise, the global financial adviser David Smick we have referred to recognizes that “mere wage earners, relative to those with a global stock portfolio, can’t participate in this wealth creation.”

           It is commonplace to say that this inability would be overcome “if only there were a level playing field” of equal labor legislation and environmental regulations.  But this inability would only in small part be mitigated if all other peoples were somehow induced to adopt the same rules that are in force in the United States – and even if all of the many protectionist barriers that other nations impose against imports from America were scuttled.  (I don’t mean to suggest that the United States does not also intervene into trade.) Those disparities between the United States and the rest of the global market are relevant, to be sure; but the deeper problem is the presence of vast populations that create an overhang of labor that must necessarily bid, on a purely supply and demand basis, the price of labor far below what American workers have enjoyed.  With the recent revolution in transportation, communication, finance and migration – all producing “globalization” – that overhang of labor is no longer stationed at a remote distance from the United States, but is right on the country’s doorstep. 

          With an unquestioning devotion to global free trade ideology blocking a consideration of this fundamental inability to compete, there is little chance that even a correction of the many other factors that most immediately led to the “crisis of 2007-9” will make the American economy truly healthy.  New booms will almost certainly be created, hopefully (but not assuredly) to a less destructive extent than the ones that preceded the 2008 meltdown; but that will not mean that the hurricane of competitive obliteration will stop its on-going destruction of the American economy. 

          The unmitigated “free trade ideology” that became dominate in the United States and among the world elite well before the end of the Cold War causes most observers to insist that there is no reasonable alternative to allowing the competition to force the closure of most productive enterprises in the advanced economies.  In fact, such observers insist that the closures are a good thing (and even cite them as an example of the economist Joseph Schumpeter’s much-lauded concept of “creative destruction”). An examination of this ideology (which we will see later is ill-suited to a free society and a market economy) will be one of the principal undertakings of this book.  Because much of what we say here runs directly counter to what almost everybody believes he knows about economics and free-market principle, it is important that readers give serious attention to our later discussion of the conceptual foundations of a free society and market economy.

          Even before we examine the ideology itself to evaluate its sufficiency (as we will do in Chapter 14), we can see that “capitalism” has under the impact of globalization and an overall deterioration of values profoundly changed its nature from what it has been in the United States historically.  Instead of serving the great body of the people – a broad middle class --, it has become transformed into something best described as a “crony capitalism” that marries a global elite to an uncaring ideology and to a politics that primarily services interest groups. In effect, such a form of “capitalism” has left those who are loyal to the market economy in the dust.  It no longer deserves automatic loyalty from those who wish to remain true to “the free market” in the best sense.  In his 2009 book Enough, John C. Bogle, founder of the Vanguard Mutual Fund Group, quotes Felix Rohatyn: “Only capitalists can kill capitalism, but our system cannot stand much more abuse of the type we have witnessed recently, nor can it stand much more of the financial and social polarization we are seeing today.”

         

It would be nice if an examination of all of this could be made simple.  Simplicity is rendered impossible, however, by the fact that the long-term forces (i.e., those distinct from the immediate causes of the financial crisis) have to be understood (and met) in two very distinct parts.

          1. The first of these is the one just mentioned: the hollowing-out of the American and other advanced economies by the competition from low-cost labor in the global market.       

          The fact that the economic rewards will go to the owners of the technology makes it all the more important to the people of a nation such as the United States that there be no hollowing out – that they retain their ownership of productive assets, and not let them slip away to foreign buyers who hold American dollars because of the massive trade deficits the United States has been incurring for so long.  The need for the ownership of productive assets implies a vital link between (1) the need to reindustrialize despite low-cost foreign labor and (2) the need, which will be one of the points most emphasized in this book, to distribute broadly the rewards of capital ownership in a world in which the return will almost entirely go to the owners of technology.  Of course, the advancing adoption of non-labor-intensive technology will over time lessen the role of low-cost foreign labor.  The need, however, is to maintain a robust technological base in the United States until that day comes so that it will be there to provide the rewards of capital.

          Because I have long been an advocate of a market economy, as I will explain in the next chapter, I hope I have some standing with which to urge others who also favor free markets not to close their minds to an essential point that I now find necessary to make: that if those economies are to retain – or, more to the point, reestablish – a major industrial base, they will have to be shielded from that competition to the extent necessary for the purpose. The advantages of intense competition for innovation will have to come from within their internal markets, which are extensive.  International trade can be welcomed, but only to the extent that is consistent with the heretofore advanced economies’ regaining and maintaining their industrial base. Vigorous internal competition can be accomplished if the trend toward gigantism in business is reversed.  This will require breathing new life into the anti-trust laws (which in recent years have been desiccated by well-meaning but ill-advised “market ideology” arising especially out of the Chicago School of Economics) and into establishing a framework of competition within the domestic market.

          2. The second part of the analysis pertains to longer-term forces that are rapidly coming upon us, and are in fact already underway, but that many people are inclined to downplay as unduly futuristic.  This second aspect is that even if reindustrialization is accomplished, the revolutionary sweeping-away of almost everything we have been accustomed to in business and even in society will continue. The world is experiencing an exponential growth of science and technology, especially of computerization.  Even with the impediments and slowing that economic crises can cause, the possibilities are staggering.

          What to this point has been obvious has been the displacement caused in the United States by cheap labor in the world market.  But there is another displacement beyond that one, and it comes from the new technology’s on-going substitution of robotics, computerization, biotechnology, and other labor-saving processes (such as computer integrated technology (CIT) and mechanical harvesting) for “work” as the world has known it. We will examine this technology in detail in Chapter 6. As this advances, gainful employment will recede as a source of support for peoples’ lives (even though until a system that will allow them to share in the productivity is devised they will no doubt scratch harder and harder to find forms of “work” that will provide them a living, and this inevitable scratching will provide the outward appearance of a traditional economy to those who don’t see how desperate it will be becoming).  As millions scratch for a place, the great bulk of the rewards will go to those who own the technology. It is easy to see how radical a change this will cause in societies as we have known them historically.  Hence, I call it a “destructive” factor even though, at the same time, it offers the “astonishing affluence” just mentioned.

          The world will find it necessary to adapt to what Jeremy Rifkin has aptly called “the end of work.”  Automation will take the place of the labor that has formed the basis for economic and social relations throughout history.   Displacement from low-cost Third World labor offers to be, relatively speaking, a short-term phenomenon (even though it is very important in that short term and will have to be overcome if a given country’s economy is to maintain or regain its industrial base).  The non-labor intensive processes will soon undercut, cost-wise, even the poorly-paid workers of the Third World.  When something can be made at almost no cost in a scientized setting, there is a competitive undercutting of the ability of people everywhere to fill a role as workers.  The result will be a crisis even more for the low-paid workers of the Third World than for people in the advanced economies.  But the latter need to realize that insulation from foreign competition won't be an adequate solution (except temporarily to reinstate the industrial base), since it won't address the technological undercutting of the wage system and of much business enterprise that will be occurring at home.

          As the demand for work diminishes, remuneration will spring more and more not mainly from “work,” but from “capital.”  This will make it essential that, to live, people in general will need to be plugged into the vast flow of wealth that can be created by the technology.  They will need to be plugged in especially if they are no longer able to sustain themselves through jobs.

         This second phase of reducing the need for work is already long underway, even though it is nevertheless accurate of think of it as still in its incipient stages.

         

I just mentioned the technological revolution that is ushering in the second aspect, but it merits additional explication. We need to understand that it offers – at one and the same time – (1) almost unthinkable promise and (2) vast economic and social upheaval.  The new economic revolution includes three favorable factors, which are accompanied, however, by a fourth that is potentially destructive of civilization itself unless managed with a wisdom that Americans’ current ideologies militate against.            

          The three favorable factors are (a) a flowering of science and technology beyond anything thought possible by earlier generations; (b) the growth of a global market, highly competitive (itself an enormously favorable development – if the advanced economies take the necessary steps to maintain their industrial base and to keep its elements within a manageable scale); and out of these, (c) the prospect of astonishing affluence. It no longer seems unrealistic to predict near-utopian possibilities from all of this (mitigated seriously by the vagaries of human character).  Food, goods and services of kinds that we haven't even thought of yet, health care, entertainment: the prospect is within sight that all can be produced at low cost and in massive volume.  The potential as we look into the future is present for affluence, not just in the industrialized countries but everywhere. The science and technology are here or rapidly advancing.

          The destructive factor follows from the first three: the threatened displacement of hundreds of millions – on a world scale, very likely billions – of people in all walks of life by the downsizing that will increasingly be forced everywhere by non-labor-intensive technology. This produces a relentless drive to reduce costs.  As so many business management books have said, anyone who does not cut costs again and again, while at the same time increasing quality, will be undersold and forced out of business.

          The thought that we are just at the threshold may be startling when we consider the new innovation that has already come into being (and indeed has been occurring, albeit at a slower pace, for centuries).  Because we are just at the beginning, and the main potential lies slightly ahead of us, most people even now don't grasp the changes or, to the extent they do, don't appreciate the displacement they will cause.    Those who think seriously about these things are in for an intellectually wrenching time. (Those who don’t think them through will simply be drenched in confusion and, perhaps, angry frustration.)

          What is necessary is that the products of the new science and technology be fully put to use, that the inertia of existing ways not serve to block them – and that civilized order and humane values be maintained while societies churn their way through revolutionary times.  So great are the needs in the world that a full realization of this affluence will occupy humanity, even under the best of conditions, for a very long time.  The means, however, are coming into our possession.  Accordingly, this will not be a "Luddite" book that opposes the new science and technology.  Those are, in fact, the wings that can carry the world's billions into a better future.  (Environmentalists rightly see a threat to world ecology, but the new technologies offer to be a great deal cleaner than those of the past, and many can even lead to a much-improved environment.)

 

A Radical Reexamination is Needed

          Although large international companies will reap enormous benefit from the new labor-saving technology, the displacement of many millions of people will create a crisis of legitimacy for the global market system – and for the entire classical liberal theory of a market-centered free society – unless a society becomes structured in a way that will allow everyone to share in the productivity of the economy.

          In itself, the financial crisis will have required much rethinking and many reforms just to address the issues raised by that crisis, including reestablishing the ability of governments and central banks to control events.  Then, second, the issues raised by global competition from low-cost foreign labor must be resolved, with an eye toward stopping the trade deficits and toward reindustrializing. And, third, the “end of work” makes it imperative – even though there will be great ideological resistance to doing so – to embark upon a radical reconsideration of everything we have thought about society and the lives of individuals.  This will point toward continuing a vigorous market economy while at the same time constructing a mechanism for the entire population’s sharing in the economy’s output: thus, the concept of a “shared market economy,” by which I mean one in which large sums are pumped into business through index mutual funds, and the income from the funds is distributed through an independent agency to the public at large, providing income from the on-going business economy even to those who do not have employment within it.

          Such a fundamental rethinking will continue to address what has long been an intellectual need for the classical liberal “philosophy of a free society.”  The rationale for such a system of capitalism-with-broad-based-public-distribution requires a reexamination of several of the main pillars of free-market thinking.  When those pillars are revisited, it becomes evident that they are very much in need of emendation.

          The rethinking will be forced upon us no matter what point of view we presently hold. It will be especially important for those who, like this author, have long embraced the intricate philosophical system that undergirds free-market capitalism.  That is why I have headed the chapter with a title that invites everyone, and most especially free-market thinkers, to become engaged with me on an intellectual odyssey.

 

Perceptive readers will notice that my concern for “American interests” and for the fate of the American public differs in a very important way from the conventionally embraced theory of a global market economy.  Harking back to the economist David Ricardo, the theorists of a global free market have thought that overall economic efficiency is what is important, not what role any particular people will play.  The conflict between the concern for specific peoples and the desire for worldwide open competition has long raged in economic literature, and is certainly not being raised by me for the first time.  It is a conflict that will be considered as part of our “intellectual odyssey” here and later discussion of social and economic theory.