Socialism – Page 10 – artdiamondblog.com

Remembrances of Galbraith (and Buckley and Demsetz and Drucker)

John Kenneth Galbraith passed away a couple of days ago, on Sat., April 29, 2006 at the age of 97. (see: "Economist, Writer Galbraith Dies at 97." Omaha World-Herald (Sun., April 30, 2006): 11A)

I remember at a Republican Convention in Miami (1968 I think) when one of the networks had the late Frank Reynolds sitting with Galbraith and William F. Buckley, Jr., to provide occasional commentary on the scene. On this occasion, Galbraith was going on and on about how all of the Republicans had arrived at the convention in their yachts. Buckley sat by, nodding, in uncharacteristic silence. Finally, with a few seconds until they needed to break away, Buckley slowly and deliberately drawled at Galbraith something like the following: ‘And John, when you visit your friends in Hyannis Port, I trust that you find the accommodations adequate?’ As they cut to commercial, you could hear Reynolds, and others in the background, convulsed in laughter.

Actually Buckley and Galbraith were friends, for several years skiing together in Europe. Apparently Galbraith was an indifferent and very slow skier, leading Buckley to observe that Galbraith looked as though he was skiing up the slope backwards. (I read this many years ago, but, alas, do not remember where.)

David Levy and I once wrote a paper in which we measured the writing quality of articles by many important economists. When we presented the paper to the meetings of the American Economic Association, Galbraith was the discussant of our paper. For his comments, he basically recycled an old paper he had written on writing economics, and showed no signs of having read our paper. But he did seem to enjoy our mentioning that by our measures, he turned out to be one of the best writers in the profession. My memory is that at one point, just before or just after the formal proceedings, he actually patted me on the back.

Galbraith wrote many books. One that I enjoyed, and learned from, was his account of the stock market crash of 1929.

Perhaps his most famous book was The New Industrial State, in which he argues that some of the larger firms in the United States form what he called the "technostructure." The technostructure firms were widely held, by many stock owners, few of whom had the incentive or power, to closely monitor whether the firms’ managers were serving the stock owners by maximizing profits. As a result, the technostructure firms’ managers were free to pursue other goals, such as their own power. (Galbraith was OK with the assumption that firms outside the technostructure were maximizing profits.)

Harold Demsetz tested this hypothesis by comparing the rate of profit of firms in and out of the technostructure, reasoning that if technostructure firms were not maximizing profits, we would expect their profits to be lower than those of other firms. He found that there was no difference between the rate of profits of the so-called ‘technostructure’ firms, and the non-technostructure firms. Demsetz’s conclusion was that there was no distinguishable technostructure, and no new industrial state.

I tell my classes that if we don’t throw entrepreneurs such as Michael Milken in prison, they can provide us with the means to keep CEOs pursuing shareholder value (profits) as their goal. The way it would work would be that if CEOs start pursuing something else, their firm’s stock price falls, and the firm becomes an attractive take-over target for someone like Milken.

I also point out that if firms maximize profits, a lot of rich people benefit, but that a lot of average people benefit too—Drucker emphasized that roughly half of the value of stock equity in the United States is held by worker pension funds.

I did not agree with Galbraith’s efforts to grow the government, but he was witty, and urbane, and intelligent. The intellectual scene was more interesting, and fun, with him than without him. He will be missed.

Some references to publications mentioned in, or supporting, the discussion above:

Demsetz, Harold. "Where Is the New Industrial State?" Economic Inquiry 12, no. 1 (1974): 1-12.

Diamond, Arthur M., Jr., and David M. Levy. "The Metrics of Style: Adam Smith Teaches Efficient Rhetoric." Economic Inquiry 32, no. 1 (1994): 138-45.

Drucker, Peter Ferdinand. The Unseen Revolution: How Pension Fund Socialism Came to America. 1st ed: Harpercollins, 1976.

Galbraith, John Kenneth. The Great Crash 1929. Houghton Mifflin Co., 1961.

Galbraith, John Kenneth. The New Industrial State. Houghton Mifflin, 1967.

Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. William Morrow & Co., 1992.

Source of book image: http://www.whatihaveread.net/biblio/book_1458.html

Fascism’s “Most Notable Achievement Was that It Survived as Long as it Did”

Source of image of book cover: Amazon.com.

Some experts on National Socialism have concluded that its economy was not as efficient as usually believed. According to a recent expert, facism also was not a very efficient economic system (in spite of its oft-mentioned reputation for the trains running on time):

(p. B36) Yet for all the personality cult, the regime’s most notable achievement, as Mr. Bosworth sees it, was that it survived as long as it did. Virtually irrespective of where it set its sights — culture, science, economics, let alone the military — its performance persistently fell short of its discredited Liberal predecessor’s.

Note: in the review, “liberal” refers to 19th-century liberals. E.g.:

(p. B36) Like their 19th-century peers from Belgium to Romania, Italian Liberals yearned for a common flag, parliament, economy, identity, even empire. To a point, the truths held to be self-evident north of the Alps worked in Italy, too. But the transition to constitutional government was a work in progress, where progress needed all the help it could get.
By 1914, it was clear that it would take more than a constitutional monarchy, a railroad, a gold-based currency and African colonies to overcome the limits imposed by geography, culture and history. Eager to play with the big powers, Italians were not only poor, illiterate and economically underdeveloped, they were also allergic to any state, modern or otherwise. This would include dictatorship.

For the full review, see:
DAVID SCHOENBAUM. “Books of The Times | ‘Mussolini’s Italy’; Where Fascism Was Stylish and Vicious, if Ineffectual.” The New York Times (Fri., March 3, 2006): B36.

The book is:
R. J. B. Bosworth. MUSSOLINI’S ITALY: Life Under the Fascist Dictatorship, 1915-1945. Penguin Press, 2006. Illustrated. 692 pages. $35. ISBN: 1594200785

R.J.B. Bosworth. Source of image: NYT book review quoted and cited above.

Solow’s Wit (But Not Wisdom): Treat Schumpeter “Like a Patron Saint”

(p. 195) As Robert Solow wrote acidly in 1994, commenting on a series of papes on growth and imperfect competition, “Schumpeter is a sort of patron saint in this field. I may be alone in thinking that he should be treated like a patron saint: paraded around one day each year and more or less ignored the rest of the time.”
Schumpeter was a most unwelcome guest at the neoclassical table. Yet it was hard for the mainstream to reject him out of hand, since Schumpeter was such a celebrant of capitalism and entrepreneurship. He thought it a superb, energetic, turbulent system, one that led to material betterment over time. He hoped it would triumph over socialism. He just didn’t believe it functioned in anything close to the way the Marshallians did, and he was appalled that economists could apply an essentially static model to something as profoundly dynamic as capitalism. Schumpeter wrote presciently, “Whereas a stationary feudal economy would still be a feudal economy, and a stationary socialist economy would still be a socialist economy, stationary capitalism is a contradiction in terms.” Its very essence, as the economic historian Nathan Rosenberg wrote, (p. 196) echoing Schumpeter, “lies not in equilibrating forces, but in the inevitable tendency to depart from equilibrium” every time an innovation occurs.

Source:
Kuttner, Robert. Everything for Sale: The Virtues and Limits of Markets. Chicago: University of Chicago Press, 1999.

Solzhenitsyn Endures: The Return of “The First Circle”

Source of book image: Amazon.com.

I remember Ben Rogge recommending The First Circle, decades ago when it first appeared in English. It is a powerful, courageous, wise work, bearing many lessons. As you read the book, you keep hoping you can find someone to blame for the evil that is happening. But as Solzhenitsyn works his way up the bureaucracy, each bureaucrat has a plausible motive for his part in evil; one motive, for example, is the protection of the bureaucrat’s family. Only when you reach Stalin, do you find someone who you can really despise. But he seems borderline crazy, so even he is not a totally satisfying villian.

The book can be seen as illustrating a point that Rogge often made: socialism is not bad because it is run by bad people; it is bad because it provides ordinary people incentives to do bad things. (These are not his words, but I believe they capture his point.)

Alexandr Solzhenitsyn. Source of image: online version of the NYT article quoted and cited below.

(p. A1) MOSCOW, Feb. 8 — A grandfatherly figure, his bearded face wrinkled into a smile, peers down from billboards around town.

It is surprise enough that the man is Aleksandr I. Solzhenitsyn, the once-exiled writer, Nobel Prize winner and, of late, octogenarian scold. It is even more so that the billboards advertise his adaptation — broadcast on state television, no less — of one of his fiercely anti-Soviet novels, “The First Circle.”

Solzhenitsyn has been called the conscience of the nation, but his reputation has risen and fallen as tumultuously as Russia itself since the collapse of the Soviet Union. “First Circle” has once again placed him on the national stage, reaching an audience that would have been inconceivable to him four decades ago, when he smuggled the book out of the Soviet Union.

For the full article, see:

STEVEN LEE MYERS “Toast of the TV in Russian Eyes: It’s Solzhenitsyn.” The New York Times (Thurs., February 9, 2006): A1 & A3.

A scene from the Russian mini-series version of The First Circle. Source of image: online version of the NYT article quoted and cited above.

“Sachs Aid Model Has Financed Tyranny”: More on Why Aftrica is Poor

Famine in Niger is no surprise — desert wastes, locusts and decades of Marxist rule keep it second-to-last on the world poverty list. Famine in the fertile climes of southern and eastern Africa, however, seems more shocking. But there’s a common thread: centralized state rule — incompetent at best — marked by corruption and sustained by aid. These are the shackles that keep Africans poor: It would be nice if EU and U.S. trade barriers were removed at trade talks in Hong Kong this week, but exports are a distant notion to the 75% of Africans who live off the land.
Niger is little-blessed by nature, but it has also spent its postcolonial era trying various forms of failed government, with Marxism reigning longest. A quarter of the population — 2.5 million people — faces starvation. Yet more temperate southern and eastern African countries are on the edge of famine, too, with 10 million affected in southern Africa alone. Again, we find the same economic profile: Zimbabwe, Malawi, Zambia, Mozambique, Swaziland and Lesotho all lack economic freedom and property rights; all have economies mismanaged by the state; all depend on aid. All these countries have a history of utopian schemes that failed to produce everlasting manna. State farms, marketing boards, land redistribution, price controls and huge regional tariffs left few incentives or opportunities for subsistence farmers to expand. Despite torrents of aid, these cruel social experiments could not turn sands verdant or prevent the granaries of southern and eastern Africa from rotting.
Ethiopia’s Prime Minister Meles Zenawi believes that allowing Ethiopians to own their land would make them sell out to multinationals. He seems to have overlooked a basic market principle: It demands a willing seller and a willing buyer at an agreed price. If that price is worth selling for, the farmer might have some money to reinvest elsewhere; if that price is worth buying for, the purchaser must have plans to make the land profitable. If there is no sale, owners might have an incentive to invest in their own land and future, having, at last, the collateral of the land on which to get a loan. After decades of socialism, Ethiopia’s agricultural sector — the mainstay of the economy — is less productive per capita than 20 years ago when Band Aid tried to defeat famine. Although 60% of the country is arable, only 10% has been cultivated. Ethiopia is entirely dependent on donations; but instead of grasping reality, Mr. Zenawi, a member of Tony Blair’s “Commission for Africa,” is forcing resettlement on 2.2 million people.
In Zimbabwe, the murderous kleptocrats of Robert Mugabe’s regime deny that land seizure has pushed their rich and fertile country into famine: Some three million people face starvation today.
. . .
African leaders must be pushed to reduce economic intervention, free financial markets, remove bureaucratic obstacles to setting up businesses, establish property rights and enforce contract law. These are the forces that release entrepreneurial energy. But the ruling cliques will do none of these unless forced to do so as a condition of aid. The Sachs aid model has financed tyranny and corruption for 40 years, leaving Africans destitute. The world trade meeting in Hong Kong will hear cries for “Trade Justice” for Africa, representing more protectionism and more state-run, aid-fueled schemes. What we really need is economic freedom and the rule of law at home: We are perfectly capable of improving our own lot if only allowed to do so.

For the full commentary, see:
FRANKLIN CUDJOE. “The Terms of Trade: Africa Needs Freer Markets — and Fewer Tyrants.” The Wall Street Journal (Weds., December 14, 2005): A20.
(Note: ellipses added.)
(Note: The WSJ identifies Mr. Cudjoe as “director of Imani, a policy think tank in Ghana.”)

Ben Rogge on Bread, Capitalism and Free Choice

‘I believe that capitalism is the system that produces the wholesome bread, and socialism is the system that produces the moldy bread,’ Ben Rogge used to tell us. ‘But,’ he would continue, ‘even if I was wrong, and if it was the other way around, and it was capitalism that produced the moldy bread, and socialism that produced the wholesome bread, I would still choose capitalism. I would choose it because capitalism is the system of free choice.’
But most of us are not like Ben Rogge. Most of us are more like Deng Xiaoping, whose most famous saying is ‘It does not matter whether a cat is black, or white, as long as it catches mice.’ Contra Rogge, he cared only about which economic system produces the goods.
Personally, I believe Rogge was right. But I also believe that if capitalism is to survive, it will only be by continuing to convince the far more numerous Deng Xiaopings of the world.

Gradualism Doomed to Failure

Perhaps these observations are relevant to the claim by what I call the “left Schumpeterians” (e.g., Tom Friedman) that a substantial labor safety net is necessary for creative destruction to work.

(p. 271) In Warsaw, from 1978 onward, he had directed what became known as “the Balcerowicz group,” a long-running study group that was devoted to analyzing the “problems” of socialism and the question of how to reform the Polish economy. It focused on such basic questions as property rights, the proper role of the state in the economy, inflation, and what was increasingly becoming the true hallmark of socialism-shortages. All of this convinced Balcerowicz that “gradualism” was doomed to failure. Unless enough changes were combined and applied rapidly, the necessary “critical mass” would not be reached. Unlike many economists, he also dabbled in social psychology. He was particularly impressed by the theory of cognitive dissonance. As Balcerowicz summed up its significance for economic reform: “People are more likely to change their attitudes and their behavior if they are faced with radical changes in their environment, which they consider irreversible, than if those changes are only gradual.”

Source:
Yergin, Daniel, and Joseph Stanislaw. The Commanding Heights: The Battle Between Government and the Marketplace that is Remaking the Modern World.. New York: Simon & Schuster, 1998.

Nazi Economy Was Not Efficient

A common view of National Socialism is that it was evil, but efficient. A recent book by Richard J. Evans challenges the “efficient” part of the common view. Here is a relevant paragraph from a useful review of Evans’ book:

(p. B5) The Nazi machine, as Mr. Evans describes it, moved forward with a good deal of creaking and squeaking. The economy was no exception. On many fronts, the Nazis managed nothing more than to bring the economy back to the status quo that existed before the Depression. As late as January 1935, one estimate put the number of unemployed at more than four million, and food shortages were still a problem in 1939. Workers put in longer hours simply to stay even.

For the full review, see:
WILLIAM GRIMES. “The Radical Restructuring of a Germany Headed to War.” The New York Times (Weds., October 26, 2005): B8.

The reference to the book is:
Richard J. Evans. The Third Reich in Power: 1933-1939. The Penguin Press, 2005.