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Monday, April 28, 2008

Intellectual Shift

Many of the posts on this blog are written with the idea of countering arguments in support of the great tide of statism that rolled across the globe in the past century. Personally, I wish to avoid traveling along The Road to Serfdom.

As described in The Industrial Counterrevolution :
In the wake of the Industrial Revolution and the arrival of mechanized mass production, a powerful new idea began to take hold and remake the world in its image. That idea, reduced to its bare essence, was that the economic revolution of industrialization both enabled and required a revolution in social organization: the eclipse, partial or total, of markets and competition by centralized, top-down control. The intellectual and political movements spawned by this idea emerged in the last quarter of the 19th century and utterly dominated the first three-quarters of the 20th.

In analytical terms, the common intellectual thread that runs through all of these movements -- namely, the rejection or demotion of market competition in favor of top-down control -- represents a direct assault on the principles of social order that gave rise to industrialization and are truest to its full promise.

According to Deepak Lal in Reviving the Invisible Hand (p.65):
There had been some extension of government intervention in the late nineteenth century with the passage of antitrust legislation following populist attacks against the “robber barons.” But it was Roosevelt’s New Deal which led to “an ideological shift – from widespread skepticism about the ability of the central government to improve the functioning of the economy to widespread faith in the competence of government.”

Rockoff argues that the Depression in itself could not have been responsible for this shift, as there were earlier crises in the 1830s and 1890s, with severely depressed incomes and high unemployment which did not lead to a dirigiste response. He argues that a change in the dominant ideology among intellectuals and opinion-makers was responsible. As George Stigler was first to point out, this change in opinion was not based upon any hard empirical evidence. The European move to dirigisme, their construction of the welfare state, and the supposed success of Stalinist planning in transforming an underdeveloped Russia, were the dominant factors in the change of opinion. This process was aided by the development of Keynesian economics and welfare economics, which, as Myint noted, with its: “emphasis on market failures, externalities, and the divergences between social and private costs, has for many decades been a powerful intellectual force behind interventionist policies.”

Not till the stagflation of the 1970s did opinion shift toward the more skeptical view of government of the nineteenth century. This had been presaged by the growing recognition that, because of problems related to information and incentives, planning and Keynesianism were not the touted panaceas, while the “new” political economy showed how most welfare programs would be capture by the “middle classes.”
Many intellectuals are still denouncing the more recent movement towards greater economic freedom in the world. I wish to counter their peddling of defective ideas.


Harry Eagar said...

Uh, there was a change between 1830 and 1930, and it wasn't just from small government to big government. It was from a world of small producers to a world of propertyless wage earners.

Free markets had done nothing for them. On the contrary, they were starving.

But go right ahead with your ahistorical fantasies.

Anonymous said...

Are you referring to Communism? Or are you claiming that (for instance) the average American was less wealthy (had less property) in 1930 than 1830? Or that nobody was starving prior to 1930?

It is just astounding to me that anyone can look at the massive, global increase in wealth from 1830 to 1930 and think "how terrible!".

Howard said...

Things were no picnic and the disruption in Europe with the breakdown of the feudal order was probably worse then in America. On the other hand, living standards rose and the negative propaganda was abundant.

Bret said...

harry eagar wrote: "It was from a world of small producers to a world of propertyless wage earners."

That's a good point, for sure. It's much easier to be willing to shift paradigms when you have no serious assets at stake.

However, since the majority now own houses, stock, other assets, etc., and the means of production is much more technology and information based than it used to be, we shouldn't be surprised to see the paradigm shift back a bit. Which is what we're seeing (on the decades scale).

Harry Eagar said...

In East Tennessee, a lot of Americans didn't have any property in 1932, they didn't even have food. Some didn't have clothes.

My great-aunt, who was a school principal, used to extort clothes from her brother's merchant friends so children could leave their homes and go to school.

I mentioned cotton in the other thread. you might want to read Barry's 'Rising Tide' with its inventory of the average worldly goods of a southern cotton tenant farmer in 1927 before you imagine that Americans were richer in 1930 than in 1830.

Yeah, bret, and why do they own houses? Because of the New Deal, that's why. You may be right that they are now prepared to behave like junior plutocrats, but that just means the average homeowner doesn't know any more economic history than Howard does.

Anonymous said...

The existence of localized poverty doesn't mean the average is lower. You also presume no such specific areas or classes of poverty existed in 1830, or were much fewer. If your standard is "all groups / regions / classes must have improved", I doubt you'll find mixed economies successful either.

P.S. Can I just counter anecdote you with slaves in 1830 vs. 1930?

Bret said...

harry eagar wrote: "...why do they own houses? Because of the New Deal..."

That's certainly plausible. One simple rule of economics is that when consumption is subsidized, you tend to get more of it, at least in the short term. However, in the case of the New Deal related mortgage subsidies, I think the subsidies were translated into higher lot and housing prices, bigger houses, and then possibly more home ownership, in that order.

Also, the flip side of the subsidy coin is the taxation required to offset the subsidies. Another simple rule of economics is that when you tax something you get less of it. So taxes on productivity and consumption have correspondingly reduced our wealth and income in other areas.

So bigger and pricier houses, maybe more of them, but less wealth in other areas. Not terrible, for sure, but not necessarily great either.

Howard said...

Somehow my great grandparents came to this country in the late 1800s with nothing and within a generation they owned houses, rental properties and businesses all before The New Deal. Entrepreneurship is the key. Most people are not so inclined. Institutions that are favorable to private sector wealth creation benefit everyone although not equally. Focusing on the static notion of who owns property misses the more crucial dynamic view of an ongoing process of capital formation. That is the process which lifts more and more of the population further above subsistence.

Harry Eagar said...

bret, you don't understand the New Deal, do you? I'm not surprised.

FHA was self-supporting, provided a service that the private market wouldn't.

As for averages: the average of, say, $50,000 (the value of a farm in 1830) and $10 (the rough value of the personalty of a cotton sharecropper in 1930) is $25,005, which tells you nothing about any trend in conditions.

Destitution in 1930 was not local or minor. It was widespread and affected tens of millions of people. And, absent the New Deal and government intervention, it was getting worse, not better.

Bret said...

So are you saying that you don't think government guaranteed loans are a form of a subsidy?

Harry Eagar said...

Not if the borrower pays for the insurance. Which FHA borrowers do.

Never cost the taxpayer a penny until the free marketeers got involved in the '80s.

Bret said...

The insurance premium is set lower than any entity other than the U.S. government could get away with. That means the loans are cheaper than they otherwise should be. That's a subsidy.

Businesses would love credit on the same terms but don't get it. Why not? Maybe there should be a Federal Business Loan Administration that insures, for a modest fee, business loans that are ultimately backed by the taxpayer.

Harry Eagar said...

Actually, there is.

Anyhow, when I got my market mortgage, I paid less, not more than if I had gotten an FHA mortgage.

It was too big to be FHA insured, but I still paid less than the FHA rate, by half a percent -- the cost of insurance.

joe shropshire said...

I know of a software startup that was partly financed on two home equity loans against VA mortgages. I think that probably is closer to the mark, since both guys took out a little more than the down payments they didn't have to make. Taxpayers' exposure wouldn't be very much, but it wouldn't be nothing, either, and I'm fine with it. Vaya con dios. I don't know if these guys ever applied to SBA. Anyway: you probably should not generalize too much on one statement, but it's hard to see how this:

Yeah, bret, and why do they own houses? Because of the New Deal, that's why. You may be right that they are now prepared to behave like junior plutocrats

can mean anything other than that the New Deal really is dead now.

Harry Eagar said...

It's been dead for quite a while. That's why we're in trouble.

Instead of killing Glass-Steagell, it should have been extended and strengthened to take account of new deviousness.

Howard said...

Since there are no villains or incompetents in D.C. we should just turn all control over to them. (sarcasm off)

joe shropshire said...

Instead of killing Glass-Steagell, it should have been extended and strengthened to take account of new deviousness.

That would simply kill the New Deal even deader than it is now, Harry, for two very simple reasons. First, the new deviousness is a grassroots deviousness. People speculated in their own houses to get a higher rate of return than they could in other markets. The financial industry did encourage them, but it also responded to a real demand. People knew what they were doing; and to put the lid back on, you'd have to go to war against the children and grandchildren of FDR's original coalition. Now, you personally might be happy with that. Which brings us to, second: at the point when you are viewing at your own voters with that kind of disgust, they know.

Harry Eagar said...

Very few people speculated on their own houses.

The problem is that the few who did damaged the many who didn't. I haven't had a chance to post it, but 400 workers in Hawaii just lost their airline jobs because of Mainland mortgage speculation.

There was very little of that in Hawaii. If I have to lose my job because of some free-market criminal, then, sure, I'm ready to regulate markets.

I say the same thing about free marketers that I say about religious exegetes: If whenever you describe your belief to an outsider, you find yourself making excuses, find a new scripture.

joe shropshire said...
This comment has been removed by the author.
joe shropshire said...

If whenever you describe your belief to an outsider, you find yourself making excuses, find a new scripture.

Harry, my belief, whole and entire, is this: the world doesn't owe me a living. That's it. How can you believe otherwise, and how would that not be the mother of all excuses?

joe shropshire said...

Let me expand on that a little. You're proposing a low threshold of criminality, thus: damaging someone else's livelihood is potentially a crime. Very well. We're friends with a guy who tries to make his living building houses, on Moloka'i. In fact, She Who Must Be Obeyed is visiting him and his girlfriend and is probably sleeping up at their place tonight. His last customer was the software guy, the one the trustafarians and the beach kids drove off the island in that riot, excuse me, protest, a couple of years ago. You know who I mean. I hold no brief for the software millionaire; he's a dick on roller skates, the way most of those guys are. But the riot cost our friend a piece of his livelihood for sure, and don't forget his crew, eight guys, who are out of work right now. So, do we lock the beach kids up, and if not, what's their excuse? They're not likely free marketeers, any of them, so maybe that suffices.

joe shropshire said...

Or, does he not count because he's just one guy. Of course. Sorry, I did miss that in your last post.

joe shropshire said...

And yes, a lot of people did speculate in their own houses, by buying more house than they were sure they could afford. They took a risk. That's not a crime.

Harry Eagar said...

No, it's not. But the mistake does deserve punishment, even under your standards.

When I see Wall Street ex-operators peddling pencils out of a tin cup, I'll start taking the moral risk theories of the Shykago Skoolboyz seriously.

A system that rewards the scoundrels and punishes the innocent needs fixing.

Or, as I used to say when Lee Iacocca wanted to stiff the taxpayer, if you didn't offer me a piece of the action on the way up, don't offer me a piece of the losses on the way down.

Howard said...

...if you didn't offer me a piece of the action on the way up, don't offer me a piece of the losses on the way down.

Well, we're in agreement there!

joe shropshire said...

The reverse is true, too. If you do offer me a piece of the action on the way up, I can't ask you to bail me out on the way down. Housing was, for a while, grassroots action, at least on the mainland. By the way, if the island economy is pure and innocent, and the mainland economy is corrupt and criminal, then there is a very simple and enforceable remedy for that. You guys are on an island.