On Government, Morality and Competition

== The age-old enemies of competition ==

As part of my eclectic and contrarian approach to life, I subscribe to a number of conservative and libertarian newsletters and sites... and some rather lefty ones, too. While I am skeptical of all prescriptive-simplistic dogmas, I do keep searching for that germ or core concept or variation that might be worthwhile. As a result, and despite my well-known views about the noxious New Confederacy, I nurse some concepts and notions that shock my left-leaning friends.  Indeed, what follows is sure not to please dogmatists of any stripe. Still, you might learn something.

One of the more hard-hitting, Rothbardian-Libertarian sites is Casey Research, headed the brash but smart and sorry-but-I-can’t-help-liking-him master-provocatuer Doug Casey. One of Doug’s Fellows, Mr. Paul Rosenberg, just issued a manifesto assailing the core morality of “government”… a central catechism of the Rand-Rothbard-Cato wing that has taken over libertarianism, for more than a generation. You should read this missive; it will give you a better understanding of the incantations that transfix many of your neighbors. (Hey, you have your own glib and oversimplifying incantations – are you honest enough to admit it?)

I generally shrug off the polemics while sifting for pearls in manure. In this case, however, I felt I simply had to respond. Go have a look… then come back here.

== Hatred of all government - enabling an older enemy of freedom ==

Alas, amid his blanket denunciations of “government” as inimical to liberty, Mr. Rosenberg ignores the elephant in the room -- the failure mode that destroyed freedom and competitive markets and enterprise in 99% of human cultures, across the last 6000 years.  Feudal lordships in which owner-oligarchs crushed the hopes of the great masses of peasants below, while quashing any advances that might destabilize their family grip on power.  Steep pyramids of power, in which a few bullies with swords owned everything and used hired priesthoods to declare "it is GOOD that our sons will own your sons!"

Compare the horrific "morality" of any feudal oligarchy to the flawed but often progressively positive morality of a modern, western state.  This is not a comparison that Mr. Rosenberg's jeremiad can survive... so he evades the contrast, altogether.

Mr. Rosenberg knows darned well that owner-oligarchy is the great failure mode.  The one denounced by Adam Smith as the relentless market destroyer.  The calamity against which our American founders rebelled.  Yet, he is part of the campaign to yell "squirrel!" and point our attention elsewhere.

To be clear, competition is the greatest creative force in the cosmos.  Adam Smith focused on the positive outcomes when competition can be engendered in the best ways.  Competition made us! But in nature it is vicious and inefficient, working slowly, atop mountains of corpses.

It is seldom much better in human affairs. Look across the centuries; we see almost every renaissance of competitive creativity (e.g. in markets) is almost always quickly suborned and ruined by cheaters.  By conniving men with swords or deeds of ownership over everything.  The rentier caste that Adam Smith denounced.(Indeed, even Ayn Rand denounced Olde Money cheaters... though her New Lords would quickly become more or the same; that's why she never showed her Galtian characters having kids!)

Competition that is open, fair and productive has only survived more than one generation  - anywhere - when it was regulated to minimize cheating. Exactly as Smith recommended.

In fact, that success, getting the good, positive outcomes from creative competition, while excluding the nearly automatic cheating modes that always ruined it in the past, has truly only happened for more than two generations in a row once in all of the history of Homo sapiens... during this marvelous western renaissance we are living in.

You'll notice that my portrayal of the situation fits into neither the simplistic model of the Left nor that of the Right!  

One side's lunacy is to ignore the fantastic fecundity of competition at generating such vast amounts of wealth that we can then afford to do progressive things. 

The contrasting insanity of the right is to ignore those 6000 years and pretend that competition's fecundity and productivity can happen amid the usual, festering swarm of opportunist-cheaters!

= Prevention of cheating requires...regulation! =

I can prove all of this with one spectacular example. 

The exact parallel is professional sports, one of the tightest-regulated realms of human experience.  Yes, most of the regulations are decided by cabals of team owners. But I never said regulation has to be "governmental"! It simply has to prevent the failure modes (cheating that Adam Smith said always ruin markets.

  What is key is that most of the regulations in a sporting league are intended to level the playing field and eliminate cheating.  Because if cheating reigns, then the system fails to deliver the desired product... excited fans, eager to buy tickets.  (Do you deny that individual players and teams would cheat, if they could get away with it? Or that the sports franchises become valueless, when the customers notice rampant cheating?)

Adam Smith knew all of this and recommended state endeavors to balance out the inevitable rise of cheaters and to do what F. Hayek later demanded... to maximize the number of skilled competitors!

You liberals, forget your cliches about Smith!  Actually read and rediscover the founder of your movement.

Smith wanted free public education, state financed infrastructure and health measures, the breaking up of monopolies and other reforms that would ease the way for bright sons of the peasantry to compete with the sons of owner-lords.  The very first acts of the American Founders, after the Revolution, included seizure of half the land in the former colonies from a few lordly families and redistribution, in order to create a (somewhat more) level playing field.

Indeed, many of the reform movements since then have revolved around spreading that circle of fairness.  Not just because it's nice, but because it is stupid to waste talent and let cheaters stifle competition by the maximum number. In other words, it takes some socialism to deliver the world that Hayek recommended!

None of which is part of today's libertarian doctrine!  All talk of level-flat-fair-open competition and Smithian libertarianism is quashed, replaced by the New Dogma -- idolatry of unlimited, lordly accumulations of private ownership... which (let me reiterate) was THE failure mode for 6000 years.

Property is now the libertarian god! Competition is shrugged off and never appraised for what it is, an explosively creative force that must be maintained, like an engine, lest the grit of cheating destroy it.

== To be clear... ==

While I hold many liberal or progressive views, I also proudly and unabashedly proclaim others that are Smithian-Heinleinian Libertarian, in that I deem healthy suspicion of government over-reach to be fit and proper! But I can turn my head and see such dangers - abuse of power - looming from all directions. 

(Can you?)

Yes, "government" can be captured by crony oligarchs!  That is why the democrats (and never republicans) de-regulated away and erased captured agencies like the ICC and CAB and broke up AT&T and gave an unregulated Internet to the world. 

Worth-noting: all of those deregulatory measures were opposed by the GOP at the time. The only industry that the GOP has ever de-regulated (despite all the rhetoric) is finance and Wall Street.  And you know how that went.

Keeping a close eye on government, skeptical to all over-reach, is a fine role for a sane libertarianism, and it inspired my book: "The Transparent Society: Will Technology Make Us Choose Between Privacy and Freedom?"

But assuming we do keep the bureaucrats leashed, then it is proper to recall that they... and the scientists too... are "elites" we can use to counterbalance the inevitable cheaters-from-oligarchy who betrayed freedom and competition in every other era.  Indeed, the war on science and all other castes of "smartypants" expertise is being funded precisely by those who want feudal oligarchy to come roaring back.

== But is capitalism a good thing? ==

Guardedly, you bet! In that market competition is the engine of our cornucopia and the wealth that enabled us to then take on progressive causes!

  Indeed, healthy market capitalism should be viewed as a top victim of crony-oligarchy. Indeed, You liberals need to admit that the issue of "globalization" is not settled and your reflexes were dead wrong.  Aside from the two billion people rising rapidly in China and India...

...read about potential real progress in three more countries that together contain 1.5 billion people.  Nor are these the only such examples.

Have investments in infrastructure, education, science RandD and public health paid off? According to one of the top (still-sane) conservative economics research houses, that “social capital” of shared investment in the future is responsible for most of our current standard of living.

“The United States and the rest of the post-industrial, developed world owe their epic rise in living standards to the underlying “social capital” that properly incentivized innovation, entrepreneurship, and thus technological transformation over the last two centuries.” - says Worth Wray of Mauldin Economics, a noted conservative investment newsletter:

“MIT Professor Robert Solow would agree with us on this front. Solow’s work on the US economy – which has become a textbook economics lesson – explains that innovation has accounted for more than 80% of the long-term growth in US per capita income, with capital investments accounting for only 20% of per capita income growth.” 

So much for supply side (voodoo) economics (SSVE), which proclaims that the only way to engender growth and development is huge tax cuts for the uber-wealthy… even at the cost of cutting back on infrastructure, education, science R&D and public health… exactly opposite to the prescription cited by Adam Smith.

Funny thing. Not one prediction ever made by SSVE has ever, ever, ever come true.

Liberals, this is your fault too.  Again... until I am blue in the face -- instead of bad-mouthing capitalism, you must embrace Adam Smith and declare true, healthy, flat-open-fair capitalism to be a top victim of the campaign of crony-cabal grabbing by the New Lords.  Investments in infrastructure, education, science R&D and public health are what feed and engender a thriving market economy.

A Primer on Supply-Side vs Demand-Side Economics

Russ Daggatt's latest missive discusses whether the Stimulus Bill has had good effects.  His analysis is well worth perusing... and spreading the link.

My own take on things is more abstract. So let's step back and examine how Democrats and Republicans have become identified with two quite opposite economic theories. We'll start with the Republicans, who still clasp fealty to Supply Side Economics (SSE), a theory once labeled "voodoo" by the elder George Bush, but now mainstream conservative catechism for three decades.

A PRIMER ON SUPPLY SIDE VS DEMAND SIDE ECONOMICS

Supply Side holds that you best stimulate economic activity by Increasing the net wealth possessed by society's top echelons -- people and groups who have no urgent material needs.  Instead of spending it on direct "demand" purchases, these wealth-owners will invest any marginal wealth-gain (say from tax cuts) on things that increase "supply" -- factories, new businesses, innovative goods and services.  Thus the name Supply-Side. 

Interestingly, the most famous proponent of this approach was Karl Marx, who maintained that the owner-capitalist class propels industrial development by re-investing profits in plants and equipment, thus building up society's capital stock and the means of production. SSE is, in that respect, an entirely Marxist theory.

Of course, Marx then looked farther ahead.  He hypothesized an eventual "completion" of this capital-formation process, a final phase when all the factories are finished - an image we now find ludicrous, since productive capacity must be updated at an accelerating pace. (Hence there will always be a need for capitalists.)  Still, it seems kind of sad that SSE supporters won't ever acknowledge this fundamental root of their theory. They do not study their ideological forebear. Nor do they try, as Marx did, to extrapolate where their prescription may eventually lead.

But let's examine the key SSE predictions. (All theories should make confident predictions that are clearcut and testable.) For thirty years we have heard Supply Side zealots forecast that reducing taxes on the rich will:

1) result in direct investment of the released wealth into "supply" capacity for producing innovative goods and services.

2) stimulate so much new economic activity that even lower tax rates will rake in enough new revenue to erase any deficit caused by reducing taxes on the rich.

3) eliminate government debt, resolving any apparent conflict between reducing revenue and fiscal responsibility.

EFFECTS UPON POLICY

This lengthy definition is needed understand why a credibility deficit now burdens the Republican Coalition.  All through the 1980s, 1990s and 2000s, the mantra was:

- if the federal budget is in deficit, cut taxes on the rich, in order to repair that deficit.

- if the federal budget is in surplus, cut taxes on the rich, because it's their money, not the government's, and there will henceforth be no rainy days.

- in times of peace, cut taxes on the rich, because government has lower priority in peacetime.

- in times of war, cut taxes on the rich, because... well, this one never made sense even by conservative logic. Indeed, this was the first time in US history that the clade of uber-wealth demanded ever-increasing state largesse even while the nation was under deadly threat.

In any event, we must admit that the core demand of SSE believers has been utterly consistent. Reducing taxes on the uber-wealthy is good for America, across all circumstances, under all conditions and without limit.

TESTING SUPPLY SIDE THEORY

For three decades, SSE proponents told skeptics "just watch and see what will happen!"  (Whenever top tax rates were cut.)  Okay, we've watched. And absolutely every large-scale forecast made by promoters of Supply Side Economics failed -- diametrically -- without major exception.

The uber-rich did not take their tax-break largesse and invest it in innovative/productive equipment.  They poured it into either passive investments -- what Adam Smith derided as "rent-seeking" -- or else risky financial instruments and asset bubbles.  Above all, the direct forecast that reduced revenues would erase federal deficits went directly opposite to observed fact.

TESTING THE OPPOSING THEORY

The one period over which deficits decisively vanished came right after Bill Clinton got moderate increases in taxation on the rich, in 1993, followed by stringent pay-as-you-go budgetary management. What we saw then was a combination of budget balancing, strong economic activity and revenue-based debt reduction.

So now let's examine the competitive theory - Demand Side Economics (DSE)... also called modified-Keynsianism.

Named for long-ago FDR advisor John Maynard Keynes, this theory holds that economic activity is driven by demand for goods and services. Moreover, money in the hands of the middle and lower classes has greater inherent VELOCITY -- meaning that a given dollar will be spent and then re-spent more often, if the middle class is passing it around with sequential purchases, than if it is stockpiled in a rich person's portfolio.

(Mind you, by this theory, tax cuts for the rich might actually make sense when rapid inflation in an overheated economy calls for decreased monetary velocity!  I never said that such cuts are NEVER called for. Indeed, JFK's tax cuts did achieve all of its intended goals.)

Under Keynsian or Demand-Side theory, the government should spend heavily, even deep into debt, when the nation is in recession, in order to get high-velocvity economic activity going again.  Hence the recent surge in stimulus activity, in the first year of the Obama administration (see Daggatt's article)... in sharp contrast to the equal-scale "stimulus" measures taken in the last year of George W. Bush's term, most of which went to shoring up the positions of those at the top of the social-economic order.

Now, to a person who genuinely despises all deficit spending, both SSE and DSE methods may seem horrific.  Both claim to use deficits and state-largesse to stimulate the economy, under a notion that economic activity will thereupon surge ahead and resulting revenues will later erase the incurred debt.  Only there are some truly major differences.

1) Demand-Side (Keynsian) deficit spending goes to where each dollar will have high velocity impact, as their theory predicts. In contrast, Supply Side largesse for the rich definitely did NOT go into predicted capital formation. (Marx was wrong.) It simply made the rich richer.

2) Completely aside from macro-economic effects, the beneficiaries of Demand Side largesse - the poor and middle class - may have some actual direct need. Fulfilling that need (if done well) may result in creation of either more-skilled workers or more small businesses. In contrast, it is hard to see how Supply Side sends the money to a place (the rich) where a direct need merits government intervention.

3)  Supply Side is a monotone.  "Give money to the rich under ALL circumstances, at all times and conditions, no matter what.

In contrast, Keynsians have proved that their policy is adaptable and variable, un-dogmatic and contingent upon circumstance.  They spend lavishly in order to get out of recession, because that is what Keynsians do. (Right-wing rants and rails against the current governing party acting consistently with its own economic theory is simply hypocritical.  You had your turn, now it is theirs.)

But the 1990s prove that Democrats have credibility for being situationally flexible.  When a recession ends, they spend more cautiously, remove the largesse, and start building up savings. In fact, had Bush continued the Clintonian policy of debt buy-down in good times, a considerable reserve fund would have been available to help us ride out the present crisis.

4) The experts -  professionals who have actually spent their lives studying this difficult field - generally despise Supply Side Economics. That may seem a good thing from the perspective of those who increasingly call expertise a disqualifying trait. From contempt for the Civil Service and the US Officer Corps to distrust of universities and the climate experts who have achieved miracles in weather forecasting, it's become clear that one side in our tragic, debilitating "culture war" does not want to hear the professionals on any matter, least of all economics.

.5) In fact the situation is not entirely black and white! Keynsianism has had its failures. Economics is a dismal "science" and Demand-Side has many problems dealing with a complex economy.  Furthermore, pre-Clintonian Democrats sometimes acted as if the law of gravity did not apply. That potential always lurks on the left (witness Greece, today.) Moreover, Democrats did play some (lesser) role in the unleashing of our recent Asset Bubble.

Nevertheless, Keynsianism has a long, eighty-year record of being right in the most general sense.

Government should outspend its revenues in recession, directing high-velocity stimulus toward the middle class.  Then, in good times, it should use adequate revenues to build up reserves.  The Pharoahs knew this. It is even in the Biblical story of Joseph.  It is common sense.

What does not make sense is to hold fast to an alternative "voodoo" theory - Supply Side Economics - that has always and universally failed in every major prediction, after being tried repeatedly for three decades.

A theory that is quasi-Marxist, in that it openly aims to propel the rise of an all-powerful aristocracy of wealth in exactly the manner that Marx prophesied, taking us toward the sort of class divisions that had old Karl chortling and rubbing his hands, murmuring "Yessss!"

== Addendum November 2012  R.I.P. "supply side economics" ==

Only... in that context take this proof of what I've long held. The blatant fact that Supply Side economics has never been true. In a November 1 report we learn that that Senate Republicans applied pressure on the nonpartisan Congressional Research Service (CRS) in September to withdraw a report finding that lowering marginal tax rates for the wealthiest Americans had no effect on economic growth or job creation. 

"The pressure applied to the research service comes amid a broader Republican effort to raise questions about research and statistics that were once trusted as nonpartisan and apolitical," the Times reported. Democrats in Congress resurfaced the report. Republicans objected that it underminde the governing fiscal philosophy of the party, that tax cuts for the wealthy will spur growth and benefit everybody.

Changes over 65 years in the top marginal tax rate and the top capital gains rate do not correlate with economic growth. Reduction in top rates appears to be uncorrelated with saving, investment, and productivity growth. However, top rate reductions do associate with increasing divergence of national income going to the top 0.1%

This is important... and was always obvious.  Even in 1776 Adam Smith described what the rich actually do with sudden cash infusions. They put it to work in "passive rent seeking" and only rarely into capital equipment or risky new products and services. (Risk taking can be rewarded in other ways.) And that cash flow to the rich reduces the velocity of money. If there were ever a time not to do that, it is during a recession, when we want high money velocity, put cash in middle class pockets! (In fairness, during runaway inflation, largesse to the rich - reducing money velocity - actually makes some sense.) 

George H.W. Bush called Supply Side "voodoo economics. It was and is.

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