Sentimental Economics

I am finally reading Caplan's Myth of The Rational Voter. I feel like I've read 90% of it online already, but as usual Caplan has me agreeing and disagreeing within a given moment. Somehow balancing brilliant and vacuous on the head of a pin.

In any case, it got me thinking. Why is it - and a million people have asked this question, its nothing new - that humanity is so drawn to ideologies like socialism?

While a materialist like Sasha might argue that politicians and voters choose policies they believe to be in their own material self-interest, the desire for socialism seems not to be materialistic. True, for the political entrepreneur it is a good materialistic choice, but not for the masses. And, yet many don't seem to care. Utopian socialists did not expect it to bring wealth, and many cling to the ideology even after seeing the poverty it can bring. The staying power of the desire for socialism is amazing- people do not want to give up the sentimental ideology underlying this economic system.

Caplan argues that belief is a normal good - people are willing to spend money on it; they will give up material wealth for the chance to hold their beliefs. Even if the belief is wrong, and this costs the adherent, he will spend money to maintain the belief in the face of contrary evidence. Okay, but why do people want to believe in socialism? Why, for example, would they be willing to spend a huge amount of money on it - potentially giving up half or even 90% of their future personal wealth?

One thing is that it is probably quite recent that we have realized just what must be given up. Caplan points out that, while the average voter underestimates the ability of markets to perform well, even the average economist underestimates this ability as compared with government - they overestimate government. And, if we step back to earlier centuries, if we underestimated the market we might not realize how amazingly prosperous we could be in the long run, using markets. So, even if we properly estimated government (which surely we did not), we might still underestimate markets to a great enough extent that we would not see the full opportunity cost of giving them up.

Still, what draws people to socialism and keeps them entranced? Many have called it a religion, and this is true. But it isn't simply a religion because people want to believe in it, and don't care about facts. It is more than that- socialism itself plays the role of a religion particularly well.

And this is really the crux of it. The same drive that calls people to seek out God draws people to socialism. The self separates a person from others, the separation from God, as many see it, or from the womb. People long to reunite, and look for it in true love, religion, spirituality, drugs, sex, music, and so on.

The reason for this is an interesting question in itself- I tend to think that it must be biological (except when I am feeling spiritual, in which case I have an irrational explanation), and is part of the same emotional drive that compels us to want to procreate. This is very important especially today when kids are expensive and useless (you can't even send them out into the field to till wheat until they are, what, 18?) But it is also at the core of who we are. What would life be without this drive? It is a drive for life, for love and for greater purpose.

There is a longing to be one with the universe, to come home to a Greater Self or soul, so as to end the eternal loneliness of the isolated self. And, better than any other political ideology, socialism offers this.

It isn't just a uniting movement, like some nationalist ideology, and it isn't just a cold planned order. Socialism offers the coming together of all people, united in a collective desire, acting as one. All people on Earth coming together for a common purpose, to better the common good. No more isolation, no more struggle on your own, no more separation from God. Together, we can achieve anything, and you won't be alone. All good is in socialism, because it is made by all people for the good of all people.

How could you not be entranced?

Corporatism in America Part V

(this post is new)

To follow up on the earlier posts which were based on the Cato article and Fools Gold (see below), I will now add some thoughts from NRA Economic Planning. I hope to follow up with lots more from that excellent book later.

"...industrial planning implies the standardization of production,employment and prices; the standardization of materials, products and methods, and the substitution of concerted action and forethought for unco-ordinated and predatory competition either in a single industry or over the entire area of industry. It means the shaping of individual and corporate industrial activities into a co-ordinated whole...Industrial planning is the conscious guidance of our industrial life by collective methods"

Who said this?

George B. Galloway, chief of the planning division of the NRA. He went on to admit the areas of freedom which might be lost under his collective planning:

"To be sure, the execution of group plans involves some limitations upon the economic decisions of individuals or corporations whose activities must be adjusted to the policies adopted for the industry as a whole. The decisions subject to limitation include those pertaining to production, prices, hours, wages, savings, investment, trade practices and the use of property."

Oh, is that all? Just production, prices, hours, wages, savings, investment, trade practices and the use of property? That's not too bad then.

One interesting are of research is the effect of rent-seeking by labor unions and corporations, using the powerful levers of the NRA's more discretionary rulings, or the laws for which they can offer exemptions to industry. It is well known that in countries with more bureaucracy and less free markets, corruption and political wrangling replace market entrepreneurship. In the case of the NRA laws, overtime pay was suggested as a replacement for maximum hours; but interest groups and corporations could battle for exemptions to maximum hours instead. Labor unions did so because they wanted monopolistic control over wage setting; firms, meanwhile, wanted exemptions rather than having to incur overtime pay costs.

Hence, while a rule of overtime pay applied equally to all industry would have been simpler and would have given firms more flexibility, it was never enacted and instead dozens of codes for dozens of industries (many completely unenforceable) were supplemented with dozens of exceptions each.

And, the evidence suggests that this somehow did not help relieve unemployment. Go figure.

Corporatism in America Part IV

Some thoughts
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Most of what I've posted up to here was from that Cato article. The bit about North Dakota and maybe a snippet here or there was from the book I mentioned, Fool's Gold. These thoughts and quotes are mostly from the latter.

1. FDR ran on a platform promising to cut government spending by 25%

...Franklin D. Roosevelt was elected as a Democrat on a platform that declared for sound money, a balanced budget, a reduction in the expenses of federal government, and the abolition of the many useless boards and bureaus...
...The direct pledge was made by the Democratic candidate that the cost of conducting federal government would be reduced by twenty-five per cent. That had a nationwide appeal. The direct pledge was also made that a system of sound money would be maintained, by which the people believed he meant the retention of the gold standard. That also had nationwide appeal.

a) Wow - who even suggests that these days? Doesn't that show where the America public was at that time.
b) How could he get away with doing not just the opposite, but actually growing government more than 3-fold -- from 3% of GNP to 10% of GNP. Obviously the crisis of the onset of the depression was the excuse, but what an incredible 180, what a wildly dishonest turnaround. And yet he is so fondly remembered(!?)


2. In a letter from the Comintern to the communist and socialist parties (who were all pro-Soviet and from whose ranks many in government later came) in the US in 1921, urging communists to take part in all elections including the general election from within one or the other of the two major parties (and also to continue their good work in infiltrating trade unions and other organizations, and schools and so forth) it was said:

The Communist party must remember that it is not its purpose to reform the capitalist state. The purpose of the Communist is, on the contrary, to cure the working masses of their illusions, through bitter experiences. Demands upon the state for immediate concessions ... to the workers are formulated, not to be 'reasonable' from the point of view of capitalism, but to be reasonable from the point of view of the struggling workers, regardless of the state's power to grant them without weakening itself. Thus, for instance, a demand for payment out of the Government treasury, of full union standard wages for millions of unemployed workers is highly reasonable from the point of view of the unemployed workers but damaging from the point of view of the capitalist state.

And some strange decisions were made.

...farmers could not find sufficient help to enable them properly to harvest their crops. Thousands of idle men loafed around the towns and villages but disdained to work because the dole they received from the government was as much, or nearly as much, as the farmers could afford to pay them in wages.

Originally it had been argued to give relief money to the Red Cross-- but that would not allow the money to funnel properly through government and into the right pockets:

Officious bureaucrats and designing individuals...have used the money to build gigantic political machines...
...The thing, however, that has caused an uproar--and rightfully--is the established fact that relief agencies in many cities appear to be dominated largely by communists, and that the communists are using the public money they thus secure to carry on their battle to destroy our form of government and our system of economics. General Hugh S. Johnson, sent to New York by the Roosevelt administration to "put men to work," found it necessary to establish a special department to ferret out the large number of communists who "chiseled in" on public funds. He expressed himself rather forcefully on the subject when he left his job. His successor, Victor Ridder, however, according to the press, immediately disbanded the special committee.

3. Some other things you might not know about the policies enacted at that time:

Fined and imprisoned for competitive pricing: A little tailer in New Jersey was fined and sent to jail because NIRA asked him to charge forty cents for pressing a pair of pants and he charged thirty-five. Sent to jail for violation of government set prices -- in the United States. Wait, can that still happen if it is housing or some other area where government controls prices?

NIRA labor laws were really enforced: Some employees of Harriman Hosiery Mills Company went on strike, others did not. The company was told by NIRA to discharge loyal employees and take back the strikers, it refused. General Johnson, head of administration of NIRA in charge withdrew their Blue Eagle and set up a government boycott to prevent products of the mill from being sold. The company was forced to close, with great financial loss.

Farmers told how much and which crop to plant: The Potato Control bill reads like Soviet agriculture, with farmers being told not to plant certain crops and how many acres of another crop he must plant.

Corporatism in America Part III

The Decline and Fall of American Corporatism
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WWII may have been the height of Corporatism, but the end of the war did not signal a drop back to pre-NRA levels. In fact, it took many years to unravel the regulations and restrictions put in place during the corporate years.

Libertarians often argue that in fact we may be becoming less free and more state run today. I don't think this is the case. Over the 50 years following the union-peak (34% unionized, still a far cry from Sweden's 80-90%) there was a matching fall in regulation. Corporatist restraints slowly uncoiled.

Regulatory timeline:

1940s: After NIRA is overturned, antitrust law and policy becomes "pro-competitive" and for low-price rather than fair-price.

1945: End of major price controls, output controls, nationalization and other firm controls. Some nationalization left in place, along with regulation and some price controls.

1947: Taft-Hartley reinstated the right to not join a union, the right to fire unionized workers and some other basic rights in the labor market.

Korean War: A return to price controlling and regulation during wartime.

1961: JFK still used his powers to force the hand of the steel industry, on the wage front explicitly and on the price front through threats. No corporation felt safe firing unionized workers for fear of this kind of government intervention.

1970s controls: Nixon and Carter impose price controls, Nixon as part of ending gold-backing of Bretton Woods and then "due to the oil crisis"; Carter as part of trying to keep gas cheap for consumers. These were the last national-level price controls to be explicitly enacted. There are some calls for healthcare-related price controlling but there is no longer unanimous support for such things.

1970s deregulation: Ford proposes deregulating the airline industry, becomes law under Carter (ADA); Deregulation in utilities (PURA and NGPA); ICC ended with MCA; Deregulation (and breakup) of AT&T.

1981: Reagan signals to firms that they can fire unionized workers by himself firing the striking government airline workers.

1992: Caterpillar hires replacements for (fires) UAW members after a 5 month strike.


Theory and public opinion (summarized from the Cato article):
1. Competitive pricing is understood, above-competition prices cause unemployment. This comes with changes to anti-trust, the neoclassical wave in economics etc.
2. Union political power is recognized as having its own problems. Hayek and Friedman and others weigh in.
3. Public choice economics takes this to the next stage, on the economic side: unions do not create offsetting productivity to pay for higher wages but just collect rents; on the political side: rent-seeking means consolidation of power and garnering of public funds for private use. The main beneficiaries of regulation turn out to be the regulated companies (which explains why they were always the ones fighting for it!).
4. The old assumptions about competition leading to conglomeration fail to emerge.
5. Unions are only useful with the rest of corporatism in place-- when prices are controlled to allow for union wages, for example. Unions remain interesting only to public employees.


What about intra-corporate questions:
Unocal v. Mesa Petroleum (see also "Revlon v. McAndrews & Forbes Holdings, Inc.") -- can a director of a corporation reject a takeover because the takeover would be bad for workers, even if it is good for shareholders (or what about, just because he feels like it)? Isn't that intra-firm and should be left to the private actors to battle it out? Cato represents this case as anti-corporatist because the director must do what is in the interests of shareholders, of the firm, rather than the firm being subjected to labor control. I'm not buying it.

Corporatism in America Part II

American Experiments in Socialism
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1. The Non-Partisan League built socialism in North Dakota, circa 1917. With near complete control of the legislature they took control of the mills and grain elevators, put controls on all banks and established a state bank, created dozens of new state offices and worked toward the "general socialization of all industry."

The Non-Partisan League (NPL) was not the brain-child of one man (Townley), it was discussed in socialist publications for years ahead of time and advertisements for organizers for the new league to organize in many Midwestern states appeared in a Kansas socialist weekly in 1916.

The policies failed and the farmers - the voters - turned against the NPL. The NPL then threatened to destroy their crops by fire or other sabotage if farmers did not employ strictly IWW members - to ensure socialist keeping of power. IWW then formed wage committees to plan the wages and hours of North Dakota farmers. Their plans were laid out in their publication Solidarity in 1917.

Many of the socialists who founded the NPL and were involved in the North Dakota experiment went on to become part of the Roosevelt administration.


2. NIRA and NRA

Under NIRA, firms could group as cartels, set "fair" prices and those prices once accepted by the NRA would be enforced by law on the industry; labor unions gained political power and government promised to intervene if wages were not "fair".

The passage of NIRA ushered in a unique experiment in U.S. economic history—the NIRA sanctioned, supported, and in some cases, enforced an alliance of industries. Antitrust laws were suspended, and companies were required to write industry-wide "codes of fair competition" that effectively fixed prices and wages, established production quotas, and imposed restrictions on entry of other companies into the alliances.

NIRA was a failure due to competitive cheating and was also declared unconstitutional, However the NLRA left unions in an even more powerful position, making it mandatory to join or pay dues and making it illegal for employers to fire workers for striking. Thankfully, this was overturned in 1947 with Taft-Hartley, and today NIRA is better known for its rodeo, and NRA for their guns.


3. Corporatism got its second wind when during WWII industries became directed more than just regulated by the Interstate Commerce Comission, the Civil Aeronautics Board, the Federal Power Commission and others. These boards set prices for the industry and regulated entry and exit. And Roosevelt intervened during any dispute between labor and management and nationalized (by executive order) any firms which would not obey his command. Between 1941 and 1945 more than 1/3 of the top 100 American corporations were seized either in whole or in part. Among those seized were railroads, mines and even the Montgomery Ward department store. In 1944 Roosevelt, angry at union strikes which were still going on, supported a National Service Act which would require Americans to either work or fight. The latter did not pass, and most of the price controls and much of the regulation and nationalization was dismantled after the war. This experiment went better than the others though it is hard to say how well and also how much of the success was due to short-term war-induced nationalism, mobilization, war industry and of course massive debt.

Corporatism in America

(this series originally posted on Facebook some months ago)

An excellent article in Regulation magazine (a Cato publication) describes the rise and decline of unions in America and the relationship of union legal power to "corporatism" in America. Corporatism is explained - it is in fact a regulated economy that depends on both corporations and unions having price control power in the market, so that corporations are promised a "fair" price and unions are promised a "fair" wage. It is a kind of soft planning.

The history of corporatism in America is fascinating, the period when it reigned can easily be seen as an experimental step toward socialism (or fascism) which indeed is what corporatism is -- a socialism-lite that lends government power to both firms and workers but stops short of directing output or completely owning the profits and losses.

As I have learned from the book Fool's Gold, many in the administration at the time of the NLRA and NRA were in fact socialists and wanted to take the next step after corporatism, toward a fully planned economy. Whether you believe that this was widespread, whether you would favor it or not, it is interesting when comparing the economic systems to consider how corporatism would indeed have been an appropriate and necessary step toward a fully planned economy.

While corporatism is a regulated economy, with regulated prices in the major industries and regulated wages, a fully planned economy - socialist or fascist - would also involve regulated output and regulated profit - with "excess" profit from one industry offsetting "planned losses" in another.

Under fascism, the firms would still be nominally owned by private individuals but those individuals would have power within the government; under socialism they would be described as "public" and those in charge would be government officials -- the names would change but the structure would be the same. The government would be setting the profit, prices and wages, determining who is to thrive and who to starve and what the economy is to produce.

(to be continued)

A Plan in Everything

Economist Tyler Cowen likes to point out the market in everything. Here I shall muse, post links, rant and sometimes write sophisticated analysis on topics planning.

I will point out planning in current policy, historical policy, policy of other nations, and particularly, I will point out the absurdity and failure of such plans. Hopefully this will be amusing for someone other than myself.