The Deconstruction of the West

What concerns me most from the following article is the misguided notion that pan-nationalism and global citizenship has displaced the sovereign nation-state international system. The sovereign nation-state is all we have to manage global affairs in a representative democratic, people-centered global society. Without it we are all vulnerable to constellations of power among political elites and authoritarians of all stripes.

Reprinted from The American Interest:

The Deconstruction of the West

ANDREW A. MICHTA

April 12, 2017

The greatest threat to the liberal international order comes not from Russia, China, or jihadist terror but from the self-induced deconstruction of Western culture.

To say that the world has been getting progressively less stable and more dangerous is to state the obvious. But amidst the volumes written on the causes of this ongoing systemic change, one key driver barely gets mentioned: the fracturing of the collective West. And yet the unraveling of the idea of the West has degraded our ability to respond with a clear strategy to protect our regional and global interests. It has weakened the NATO alliance and changed not just the global security calculus but now also the power equilibrium in Europe. If anyone doubts the scope and severity of the problem, he or she should ask why it has been so difficult of late to develop a consensus between the United States and Europe on such key issues as defense, trade, migration, and how to deal with Russia, China, and Islamic jihadists.

The problem confronting the West today stems not from a shortage of power, but rather from the inability to build consensus on the shared goals and interests in whose name that power ought to be applied. The growing instability in the international system is not, as some argue, due to the rise of China as an aspiring global power, the resurgence of Russia as a systemic spoiler, the aspirations of Iran for regional hegemony, or the rogue despotism of a nuclear-armed North Korea; the rise and relative decline of states is nothing new, and it doesn’t necessarily entail instability. The West’s problem today is also not mainly the result of the economic decline of the United States or the European Union, for while both have had to deal with serious economic issues since the 2008 meltdown, they remain the two largest economies in the world, whose combined wealth and technological prowess are unmatched. Nor is the increasing global instability due to a surge in Islamic jihadism across the globe, for despite the horrors the jihadists have wrought upon the peoples of the Middle East and North Africa, and the attendant anxiety now pervading Europe and America, they have nowhere near the capabilities needed to confront great powers.

The problem, rather, is the West’s growing inability to agree on how it should be defined as a civilization. At the core of the deepening dysfunction in the West is the self-induced deconstruction of Western culture and, with it, the glue that for two centuries kept Europe and the United States at the center of the international system. The nation-state has been arguably the most enduring and successful idea that Western culture has produced. It offers a recipe to achieve security, economic growth, and individual freedom at levels unmatched in human history. This concept of a historically anchored and territorially defined national homeland, having absorbed the principles of liberal democracy, the right to private property and liberty bound by the rule of law, has been the core building block of the West’s global success and of whatever “order” has ever existed in the so-called international order. Since 1945 it has been the most successful Western “export” across the globe, with the surge of decolonization driven by the quintessentially American precept of the right to self-determination of peoples, a testimony to its enduring appeal. Though challenged by fascism, Nazism, and communism, the West emerged victorious, for when confronted with existential danger, it defaulted to shared, deeply held values and the fervent belief that what its culture and heritage represented were worth fighting, and if necessary even dying, to preserve. The West prevailed then because it was confident that on balance it offered the best set of ideas, values, and principles for others to emulate.

Today, in the wake of decades of group identity politics and the attendant deconstruction of our heritage through academia, the media, and popular culture, this conviction in the uniqueness of the West is only a pale shadow of what it was a mere half century ago. It has been replaced by elite narratives substituting shame for pride and indifference to one’s own heritage for patriotism. After decades of Gramsci’s proverbial “long march” through the educational and cultural institutions, Western societies have been changed in ways that make social mobilization around the shared idea of a nation increasingly problematic. This ideological hollowing out of the West has been accompanied by a surge in confident and revanchist nationalisms in other parts of the world, as well as religiously inspired totalitarianism.

National communities cannot be built around the idea of collective shame over their past, and yet this is what is increasingly displacing a once confident (perhaps overconfident, at times) Western civilization. The increasing political uncertainty in Europe has been triggered less by the phenomenon of migration than it has by the inability of European governments to set baselines of what they will and will not accept. Over the past two decades Western elites have advocated (or conceded) a so-called “multicultural policy,” whereby immigrants would no longer be asked to become citizens in the true sense of the Western liberal tradition. People who do not speak the national language, do not know the nation’s history, and do not identify with its culture and traditions cannot help but remain visitors. The failure to acculturate immigrants into the liberal Western democracies is arguably at the core of the growing balkanization, and attendant instability, of Western nation-states, in Europe as well as in the United States.

Whether one gives the deconstruction of the Western nation-state the name of postmodernism or globalism, the ideological assault on this very foundation of the Western-led international system has been unrelenting. It is no surprise that a poorly resourced radical Islamic insurgency has been able to make such vast inroads against the West, in the process remaking our societies and redefining our way of life. It is also not surprising that a weak and corrupt Russia has been able to shake the international order by simply applying limited conventional military power. Or that a growing China casts an ever-longer shadow over the West. The greatest threat to the security and survival of the democratic West as the leader and the norm-setter of the international system comes not from the outside but from within. And with each passing year, the deconstruction of Western culture, and with it the nation-state, breeds more internal chaos and makes our international bonds across the West ever more tenuous.

Andrew A. Michta is the dean of the College of International and Security Studies at the George C. Marshall European Center for Security Studies. Views expressed here are his own.

The New Old World Order

I cite this article because it is quite insightful of the failed political culture in the modern democratic West and particularly the failures of US party elites. It also exposes the larger historical forces at work that suggest the road forward may be rather rocky.

For me this 2016 moment resonates with historical analogies such as the Savonarolan episode in Renaissance Florence that I wrote about in The City of Man, the dissolution of the Weimar Republic in 1930s Germany, and the Iranian Fundamentalist Revolution in 1979. We haven’t reached those precipices yet, but all arrows point in that direction unless we come to grips with our current failures of both modern liberalism and neo-conservatism.

Donald Trump Does Have Ideas—and We’d Better Pay Attention to Them

The post-1989 world order is unraveling. Here are 6 ideas Trump has to replace it.

Politico, September 15, 2016

Ideas really don’t come along that often. Already in 1840, Alexis de Tocqueville observed that in America, “ideas are a sort of mental dust,” that float about us but seldom cohere or hold our attention. For ideas to take hold, they need to be comprehensive and organizing; they need to order people’s experience of themselves and of their world. In 20th-century America, there were only a few ideas: the Progressivism of Wilson; Roosevelt’s New Deal; the Containment Doctrine of Truman; Johnson’s War on Poverty; Reagan’s audacious claim that the Cold War could be won; and finally, the post-1989 order rooted in “globalization” and “identity politics,” which seems to be unraveling before our ey.es.

Yes, Donald Trump is implicated in that unraveling, cavalierly undermining decades worth of social and political certainties with his rapid-fire Twitter account and persona that only the borough of Queens can produce. But so is Bernie Sanders. And so is Brexit. And so are the growing rumblings in Europe, which are all the more dangerous because there is no exit strategy if the European Union proves unsustainable. It is not so much that there are no new ideas for us to consider in 2016; it is more that the old ones are being taken apart without a clear understanding of what comes next. 2016 is the year of mental dust, where notions that stand apart from the post-1989 order don’t fully cohere. The 2016 election will be the first—but not last—test of whether they can.
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If you listen closely to Trump, you’ll hear a direct repudiation of the system of globalization and identity politics that has defined the world order since the Cold War. There are, in fact, six specific ideas that he has either blurted out or thinly buried in his rhetoric: (1) borders matter; (2) immigration policy matters; (3) national interests, not so-called universal interests, matter; (4) entrepreneurship matters; (5) decentralization matters; (6) PC speech—without which identity politics is inconceivable—must be repudiated.

These six ideas together point to an end to the unstable experiment with supra- and sub-national sovereignty that many of our elites have guided us toward, siren-like, since 1989. That is what the Trump campaign, ghastly though it may at times be, leads us toward: A future where states matter. A future where people are citizens, working together toward (bourgeois) improvement of their lot. His ideas do not yet fully cohere. They are a bit too much like mental dust that has yet to come together. But they can come together. And Trump is the first American candidate to bring some coherence to them, however raucous his formulations have been.

***

(Blog Note: It’s Not about Trump.)

Most of the commentary about Trump has treated him as if he is a one-off, as someone who has emerged because of the peculiar coincidence of his larger-than-life self-absorption and the advent of social media platforms that encourage it. When the world becomes a theater for soliloquy and self-aggrandizement, what else are we to expect?
But the Trump-as-one-off argument begins to fall apart when we think about what else happened in politics this year. First of all, Trump is not alone. If he alone had emerged—if there were no Bernie Sanders, no Brexit, no crisis in the EU—it would be justifiable to pay attention only to his peculiarities and to the oddities of the moment. But with these other uprisings occurring this year, it’s harder to dismiss Trump as a historical quirk.

Furthermore, if he had been just a one-off, surely the Republican Party would have been able to contain him, even co-opt him for its own purposes. After all, doesn’t the party decide? The Republican Party is not a one, however, it is a many. William F. Buckley Jr. and others invented the cultural conservatism portion of the party in the 1950s, with the turn to the traditionalism of Edmund Burke; the other big portion of the party adheres to the free-market conservatism of Friedrich Hayek. The third leg of the Republican Party stool, added during the Reagan years, includes evangelical Christians and Roman Catholics of the sort who were still unsure of the implications of Vatican II. To Burke and Hayek, then, add the names John Calvin and Aristotle/Thomas Aquinas. Anyone who really reads these figures knows that the tension between them is palpable. For a time, the three GOP factions were able to form an alliance against Communism abroad and against Progressivism at home. But after the Cold War ended, Communism withered and the culture wars were lost, there has been very little to keep the partnership together. And if it hadn’t been Trump, sooner or later someone else was going to come along and reveal the Republican Party’s inner fault lines. Trump alone might have been the catalyst, but the different factions of the GOP who quickly split over him were more than happy to oblige.

There is another reason why the Republican Party could not contain Trump, a perhaps deeper reason. Michael Oakeshott, an under-read political thinker in the mid-20th century, remarked in his exquisite essay, “Rationalism in Politics,” that one of the more pathological notions of our age is that political life can be understood in terms of “principles” that must be applied to circumstances. Politics-as-engineering, if you will. Republicans themselves succumbed to this notion, and members of the rank and file have noticed. Republicans stood for “the principles of the constitution,” for “the principles of the free market,” etc. The problem with standing for principles is that it allows you to remain unsullied by the political fray, to stand back and wait until yet another presidential election cycle when “our principles” can perhaps be applied. And if we lose, it’s OK, because we still have “our principles.” What Trump has been able to seize upon is growing dissatisfaction with this endless deferral, the sociological arrangement for which looks like comfortable Inside-the-Beltway Republicans defending “principles” and rank-and-file Republicans far from Washington-Babylon watching in horror and disgust.

Any number of commentators (and prominent Republican Party members) have said that Trump is an anti-ideas candidate. If we are serious about understanding our political moment, we have to be very clear about what this can mean. It can mean Trump’s administration will involve the-politics-of-will, so to speak; that the only thing that will matter in government will be what Trump demands. Or, it can mean that Trump is not a candidate who believes in “principles” at all. This is probably the more accurate usage. This doesn’t necessarily mean that he is unprincipled; it means rather that he doesn’t believe that yet another policy paper based on conservative “principles” is going to save either America or the Republican Party. In Democracy in America, Tocqueville was clear that the spirit of democracy is not made possible by great ideas (and certainly not by policy papers), but rather by practical, hands-on experience with self-governance. Ralph Waldo Emerson’s mystical musings in his essay, “Experience,” corroborate this. American democracy will not be rejuvenated by yet another policy paper from the Inside-the-Beltway gang. What I am not saying here is that Trump has the wisdom of an Oakeshott, a Tocqueville or an Emerson. What I am saying is that Trump is that quintessentially American figure, hated by intellectuals on both sides of the aisle and on the other side of the Atlantic, who doesn’t start with a “plan,” but rather gets himself in the thick of things and then moves outward to a workable idea—not a “principled” one—that can address the problem at hand, but which goes no further. That’s what American businessmen and women do. (And, if popular culture is a reliable guide to America, it is what Han Solo always does in Star Wars movies.) We would do well not to forget that the only school of philosophy developed in America has been Pragmatism. This second meaning of being an anti-ideas candidate is consonant with it.

If, as some have said, Trump’s only idea is, “I can solve it,” then we are in real trouble. The difficulty, of course, is that in this new, Trumpean moment when politics is unabashed rhetoric, it is very difficult to discern the direction a Trump administration will take us. Will he be the tyrant some fear, or the pragmatist that is needed?

It’s not unreasonable to think the latter. This is because, against the backdrop of post-1989 ideas, the Trump campaign does indeed have a nascent coherence. “Globalization” and “identity politics” are a remarkable configuration of ideas, which have sustained America, and much of the rest of the world, since 1989. With a historical eye—dating back to the formal acceptance of the state-system with the treaty of Westphalia in 1648—we see what is so remarkable about this configuration: It presumes that sovereignty rests not with the state, but with supra-national organizations—NAFTA, WTO, the U.N., the EU, the IMF, etc.—and with subnational sovereign sites that we name with the term “identity.” So inscribed in our post-1989 vernacular is the idea of “identity” that we can scarcely imagine ourselves without reference to our racial, gender, ethnic, national, religious and/or tribal “identity.” Once, we aspired to be citizens who abided by the rule of law prescribed within a territory; now we have sovereign “identities,” and wander aimlessly in a world without borders, with our gadgets in hand to distract us, and our polemics in mind to repudiate the disbelievers.

What, exactly, is the flaw with this remarkable post-1989 configuration of ideas? When you start thinking in terms of management by global elites at the trans-state level and homeless selves at the substate level that seek, but never really find, comfort in their “identities,” the consequences are significant: Slow growth rates (propped up by debt-financing) and isolated citizens who lose interest in building a world together. Then of course, there’s the rampant crony-capitalism that arises when, in the name of eliminating “global risk” and providing various forms of “security,” the collusion between ever-growing state bureaucracies and behemoth global corporations creates a permanent class of winners and losers. Hence, the huge disparities of wealth we see in the world today.

The post-1989 order of things fails to recognize that the state matters, and engaged citizens matter. The state is the largest possible unit of organization that allows for the political liberty and economic improvement of its citizens, in the long term. This arrangement entails competition, risk, success and failure. But it does lead to growth, citizen-involvement, and if not a full measure of happiness, then at least the satisfactions that competence and merit matter.

Trump, then, with his promise of a future in which the integrity of the state matters, and where citizens identify with the state because they have a stake in it rather than with identity-driven subgroups, proposes a satisfying alternative.

This is also why it would be a big mistake to underestimate Trump and the ideas he represents during this election. In the pages of the current issue of POLITICO Magazine, one author writes: “The Trump phenomenon is about cultural resentment, anger and most of all Trump. It’s primal-scream politics, a middle finger pointed at The Other, a nostalgia for a man-cave America where white dudes didn’t have to be so politically correct.”
I have no doubt that right now, somewhere in America (outside the Beltway), there are self-congratulatory men, probably white, huddled together in some smoky man-cave, with “Make America Great Again” placards on their John-Deere-tractor-mowed lawns.
But do not mistake the part for the whole. What is going on is that “globalization-and-identity-politics-speak” is being boldly challenged. Inside the Beltway, along the Atlantic and Pacific coasts, there is scarcely any evidence of this challenge. There are people in those places who will vote for Trump, but they dare not say it, for fear of ostracism. They think that identity politics has gone too far, or that if it hasn’t yet gone too far, there is no principled place where it must stop. They believe that the state can’t be our only large-scale political unit, but they see that on the post-1989 model, there will, finally, be no place for the state. Out beyond this hermetically sealed bicoastal consensus, there are Trump placards everywhere, not because citizens are racists or homophobes or some other vermin that needs to be eradicated, but because there is little evidence in their own lives that this vast post-1989 experiment with “globalization” and identity politics has done them much good.

The opposition to the post-1989 order is not just happening here in America; it is happening nearly everywhere. The Brexit vote stunned only those who believe in their bones that the very arc of history ends with “globalization” and identity politics.
The worry is that this powerful, growing disaffection with the status quo—both within Europe and elsewhere—will devolve into nefarious nationalism based on race, ethnicity or religion. To combat this, we are going to have to find constructive ways to build a new set of ideas around a very old set of ideas about sovereignty—namely, that the state and the citizens inside it matter. If we don’t find a way to base nationalism on a healthy understanding of what a liberal state is and what it does and expects from citizens to make it work well, dark nationalism, based on blood and religion, will prevail—again.
Nothing lasts forever. Is that not the mantra of the left? Why, then, would the ideas of globalization and identity politics not share the fate of all ideas that have their day then get tossed into the dust-bin of history?

***
Of course, when new ideas take hold, old institutional arrangements face upheaval or implosion. There is no post-election scenario in which the Republican Party as we knew it prior to Trump remains intact. The Republicans who vote for Hillary Clinton will not be forgotten by those who think Trump is the one chance Republicans have to stop “globalization-and-identity-politics-speak” cold in its tracks. And neither will Inside-the-Beltway Republicans forget those in their party who are about to pull the lever for Trump. One can say that Trump has revealed what can be called The Aristotle Problem in the Republican Party. Almost every cultural conservative with whom I have spoken recently loves Aristotle and hates Trump. That is because on Aristotelian grounds, Trump lacks character, moderation, propriety and magnanimity. He is, as they put it, “unfit to serve.” The sublime paradox is that Republican heirs of Aristotle refuse to vote for Trump, but will vote for Clinton and her politically left-ish ideas that, while very much adopted to the American political landscape, trace their roots to Marx and to Nietzsche. Amazingly, cultural conservatives who have long blamed Marx and Nietzsche (and German philosophy as a whole) for the decay of the modern world would now rather not vote for an American who expressly opposes Marx and Nietzsche’s ideas! In the battle between Athens, Berlin and, well, the borough of Queens, they prefer Athens first, Berlin second and Queens not at all. The Aristotle Problem shows why these two groups—the #NeverTrumpers and the current Republicans who will vote for Trump—will never be reconciled.

There are, then, two developments we are likely to see going forward. First, cultural conservatives will seriously consider a political “Benedict Option,” dropping out of the Republican Party and forming a like-minded Book Group, unconcerned with winning elections and very concerned with maintaining their “principles.” Their fidelity is to Aristotle rather than to winning the battle for the political soul of America. The economic conservatives, meanwhile, will be urged to stay within the party—provided they focus on the problem of increasing the wealth of citizens within the state.

The other development, barely talked about, is very interesting and already underway, inside the Trump campaign. It involves the effort to convince Americans as a whole that they are not well-served by thinking of themselves as members of different “identity groups” who are owed a debt that—surprise!—Very White Progressives on the left will pay them if they loyally vote for the Democratic Party. The Maginot Line the Democratic Party has drawn purports to include on its side, African-Americans, Hispanics, gays, Muslims and women. (Thus, the lack of embarrassment, really, about the “basket of deplorables” reference to Trump supporters.) To its credit, the Democratic Party has made the convincing case, really since the Progressive Era in the early part of the 20th century, that the strong state is needed to rearrange the economy and society, so that citizens may have justice. Those who vote for the Democratic Party today are not just offered government program assistance, they are offered political protections and encouragements for social arrangements of one sort or another that might not otherwise emerge.

But where does this use of political power to rearrange the economy and society end? Continue using political power in the service of “identity politics” to reshape the economy and society and eventually both of them will become so enfeebled that they no longer work at all. The result will not be greater liberty for the oppressed, it will be the tyranny of the state over all. Trump does have sympathies for a strong state; but correctly or incorrectly, he has managed to convince his supporters that a more independent economy and society matters. In such an arrangement, citizens see their first support as the institutions of society (the family, religion, civic associations), their second support as a relatively free market, and their third support as the state, whose real job is to defend the country from foreign threats. Under these arrangements, citizens do not look upward to the state to confirm, fortify and support their “identities.” Rather, they look outward to their neighbor, who they must trust to build a world together. Only when the spell of identity politics is broken can this older, properly liberal, understanding take hold. That is why Trump is suggesting to these so-called identity groups that there is an alternative to the post-1989 worldview that Clinton and the Democratic Party are still pushing.

Now that Trump has disrupted the Republican Party beyond repair, the success of the future Republican Party will hang on whether Americans come to see themselves as American citizens before they see themselves as bearers of this or that “identity.” The Very White Progressives who run the Democratic Party have an abiding interest in the latter narrative, because holding on to support of entire identity groups helps them win elections. But I do not think it can be successful much longer, in part because it is predicated on the continual growth of government, which only the debt-financing can support. Our debt-financed binge is over, or it will be soon. The canary in the coal mine—now starting to sing—is the African-American community, which has, as a whole, been betrayed by a Democratic Party that promises through government largesse that its burden shall be eased. Over the past half-century nothing has been further from the truth, especially in high-density inner-city regions. While it receives little media attention, there are African-Americans who are dubious about the arrangement by which the Democratic Party expects them to abide. A simultaneously serious and humorous example of this is the long train of videos posted on YouTube by “Diamond and Silk.” To be sure, the current polls show that Trump has abysmal ratings among minorities. If he wins the election, he will have to succeed in convincing them that he offers an alternative to permanent government assistance and identity politics consciousness-raising that, in the end, does them little good; and that through the alternative he offers there is a hope of assimilation into the middle class. A tall order, to be sure.

These observations are not to be confused as a ringing endorsement for a Republican Party that does not yet exist, and perhaps never will exist. But they are warning, of sorts, about impending changes that cannot be laughed off. The Republicans have at least been given a gift, in the disruption caused by Trump. The old alliances within it were held together by a geopolitical fact-on-the-ground that no longer exists: the Cold War. Now long behind us, a new geopolitical moment, where states once again matter, demands new alliances and new ideas. With the defeat of Bernie Sanders in the primaries, Democrats have been denied their gift, and will lumber on, this 2016, with “globalization-and-identity-politics-speak,” hoping to defend the world order that is predicated on it. If Sanders had won, the Democrats would have put down their identity politics narrative and returned to claims about “class” and class consciousness; they would have put down the banner of Nietzsche and taken up the banner of Marx, again. And that would have been interesting! Alas, here we are, with, on the one hand, tired old post-1989 ideas in the Democratic Party searching for one more chance to prove that they remain vibrant and adequate to the problems at hand; and on the other, seemingly strange, ideas that swirl around us like mental dust waiting to coalesce.

 

Why I Will Vote Neither…Nor…

Halfway through the presidential primary season I decided I would not and could not conscientiously vote for either Donald Trump or Hillary Clinton in the 2016 election. As a political scientist, this was not an uninformed decision. I have been observing, and studying, the degeneration of American party politics for the past two decades and nothing has reversed this trend.

Today, faced with the reality that these are the two major party nominees, I have carefully reconsidered my position but have come to the same conclusion. I do not believe Trump has the temperament, nor do I feel Clinton has the integrity, while neither display the requisite political skills to lead this nation.

So what is one to do? Flip a coin and hold one’s nose? However, as I will argue here, there is a meaningful alternative.

My decision to vote neither-nor is based on several assumptions which all voters may not share. First, I equally disapprove of both presidential candidates offered up by the Democrat and Republican parties. You may not share that sentiment and thus should vote your conscience. (BTW, if you are truly enamored of the status-quo, perhaps you should cast a write-in vote for Ben Bernanke. Our current economic fate has little to do with Obama, Clinton, or the Congress. In geopolitics it seems we’ve just blindly bumbled along.)

Second, I live in a state where the Electoral College votes are not really in contention. More simply, I live in CA. Thus whether I vote for Trump or Clinton will have no impact on the outcome and thus can be considered a wasted vote. Unless you live in a closely contested swing state, such as FL, PA, or OH, your vote for either candidate is also a meaningless vote.

But do neither-nor voters really have a meaningless say in this election? Only if you hold your nose and vote for one of the above. If you are dissatisfied with the choices presented, this may be the first time in our lifetimes that an alternative vote has meaning – and it matters not which alternative you prefer. An abstention, or a vote for Gary Johnson, or Jill Stein, or a write-in for Mickey Mouse or Bernie Sanders is a protest vote – a vote that neither major party can count on and must respond to as the tally grows. What is the signal sent if Clinton and Trump both get 30% of the vote and 40% is captured by a neither-nor protest? How will either President-elect govern with such a dearth of public support? It’s political suicide to ignore upwards of 70% of the country.

This strategy is a slightly different argument than support for a 3rd party. A 3rd party can’t win unless it displaces one of the two major parties. Thus it’s success depends on the failure of one of those parties. However, a protest vote is different in that left and right anti-establishment groups coalesce on their dissatisfaction with the status quo. In other words, Sanders and Tea Party voters can combine as a force to influence the two major parties.

Others may apply a different logic. Some will claim a protest vote is an irresponsible waste of a vote, but I consider voting against one’s conscience while knowing better is the true irresponsible action. (A more erudite exposition of my sentiments was written by Jonah Goldberg at National Review, but his is an internecine conflict on the right. One wonders what the leftist Bernie Sanders voters are thinking at this point.)

Our society’s future is more important than an emotional partisan showdown. Things won’t change unless we change from the ground up. With enough protest votes, perhaps the Washington establishment will finally have to respond to a majority of Americans voicing dissatisfaction with the political status-quo.

Brexit: Failure of the Central State

This is the best article I’ve seen on Brexit. Basically we’re witnessing the failure of statism, politically and economically…and a desperate reassertion of the principles of democracy, sovereignty and freedom.

Brexit: A Very British Revolution

The vote to leave the EU began as a cry for liberty and ended as a rebuke to the establishment

By FRASER NELSON
The Wall Street Journal, June 24, 2016 4:33 p.m. ET

The world is looking at Britain and asking: What on Earth just happened? Those who run Britain are asking the same question.

Never has there been a greater coalition of the establishment than that assembled by Prime Minister David Cameron for his referendum campaign to keep the U.K. in the European Union. There was almost every Westminster party leader, most of their troops and almost every trade union and employers’ federation. There were retired spy chiefs, historians, football clubs, national treasures like Stephen Hawking and divinities like Keira Knightley. And some global glamour too: President Barack Obama flew to London to do his bit, and Goldman Sachs opened its checkbook.

And none of it worked. The opinion polls barely moved over the course of the campaign, and 52% of Britons voted to leave the EU. That slender majority was probably the biggest slap in the face ever delivered to the British establishment in the history of universal suffrage.

Mr. Cameron announced that he would resign because he felt the country has taken a new direction—one that he disagrees with. If everyone else did the same, the House of Commons would be almost empty. Britain’s exit from the EU, or Brexit, was backed by barely a quarter of his government members and by not even a tenth of Labour politicians. It was a very British revolution.

Donald Trump’s arrival in Scotland on Friday to visit one of his golf courses was precisely the metaphor that the Brexiteers didn’t want. The presumptive Republican presidential nominee cheerily declared that the British had just “taken back their country” in the same way that he’s inviting Americans to do—underscoring one of the biggest misconceptions about the EU referendum campaign. Britain isn’t having a Trump moment, turning in on itself in a fit of protectionist and nativist pique. Rather, the vote for Brexit was about liberty and free trade—and about trying to manage globalization better than the EU has been doing from Brussels.

The Brexit campaign started as a cry for liberty, perhaps articulated most clearly by Michael Gove, the British justice secretary (and, on this issue, the most prominent dissenter in Mr. Cameron’s cabinet). Mr. Gove offered practical examples of the problems of EU membership. As a minister, he said, he deals constantly with edicts and regulations framed at the European level—rules that he doesn’t want and can’t change. These were rules that no one in Britain asked for, rules promulgated by officials whose names Brits don’t know, people whom they never elected and cannot remove from office. Yet they become the law of the land. Much of what we think of as British democracy, Mr. Gove argued, is now no such thing.

Instead of grumbling about the things we can’t change, Mr. Gove said, it was time to follow “the Americans who declared their independence and never looked back” and “become an exemplar of what an inclusive, open and innovative democracy can achieve.” Many of the Brexiteers think that Britain voted this week to follow a template set in 1776 on the other side of the Atlantic.

Mr. Gove was mocked for such analogies. Surely, some in the Remain camp argued, the people who were voting for Leave—the pensioners in the seaside towns, the plumbers and chip-shop owners—weren’t wondering how they could reboot the Anglo-Scottish Enlightenment for the 21st century. Perhaps not, but the sentiment holds: Liberty and democracy matter. As a recent editorial in Der Spiegel put it, Brits “have an inner independence that we Germans lack, in addition to myriad anti-authoritarian, defiant tendencies.”

Mr. Cameron has been trying to explain this to Angela Merkel for some time. He once regaled the German chancellor with a pre-dinner PowerPoint presentation to explain his whole referendum idea. Public support for keeping Britain within the EU was collapsing, he warned, but a renegotiation of its terms would save Britain’s membership. Ms. Merkel was never quite persuaded, and Mr. Cameron was sent away with a renegotiation barely worthy of the name. It was a fatal mistake—not nearly enough to help Mr. Cameron shift the terms of a debate he was already well on the way to losing.

The EU took a gamble: that the Brits were bluffing and would never vote to leave. A more generous deal—perhaps aimed at allowing the U.K. more control over immigration, the top public concern in Britain—would probably have (just) stopped Brexit. But the absence of a deal sent a clear and crushing message: The EU isn’t interested in reforming, so it is past time to stop pretending otherwise.

With no deal, all Mr. Cameron could do was warn about the risks of leaving the EU. If Brits try to escape, he said, they’d face the razor wire of a recession or the dogs of World War III. He rather overdid it. Instead of fear, he seemed to have stoked a mood of mass defiance.

Mr. Obama also overdid it when he notoriously told the British that, if they opted for Brexit, they would find themselves “in the back of the queue” for a trade deal with the U.S. That overlooked a basic point: The U.K. doesn’t currently have a trade deal with the U.S., despite being its largest foreign investor. Moreover, no deal seems forthcoming: The negotiations between the U.S. and the EU over the trans-Atlantic Trade and Investment Partnership are going slowly, and the Brits involved in the talks are in despair.

Deals negotiated through the EU always move at the pace dictated by the most reluctant country. Italy has threatened to derail a trade deal with Australia over a spat about exports of canned tomatoes; a trade deal with Canada was held up after a row about Romanian visas. Brexit wasn’t a call for a Little England. It was an attempt to escape from a Little Europe.

Many British voters felt a similar frustration on security issues, where the EU’s leaders have for decades now displayed a toxic combination of hunger for power and incompetence at wielding it. When war broke out in the former Yugoslavia in 1991, the then-chair of the European Community’s Council of Ministers declared that this was “the hour of Europe, not the hour of the Americans—if one problem can be solved by the Europeans, it is the Yugoslav problem.” It was not to be.

Nor did the EU acquit itself much better in more recent crises in Ukraine and Libya. Field Marshal Lord Charles Guthrie, a former chief of the British military, put it bluntly last week: “I feel more European than I do American, but it’s absolutely unrealistic to think we are all going to work together. When things get really serious, we need the Americans. That’s where the power is.” Brits feel comfortable with this; the French less so.

Throughout the campaign, the Brexit side was attacked for being inward-looking, nostalgic, dreaming of the days of empire or refusing to acknowledge that modern nations need to work with allies. But it was the Brexiteers who were doing the hardest thinking about this, worrying about the implications of a dysfunctional EU trying to undermine or supplant NATO, which remains the true guarantor of European security.

In the turbulent weeks and months ahead, we can expect a loud message from the Brexiteers in the British government: The question is not whether to work with Europe but how to work with Europe. Alliances work best when they are coalitions of the willing. The EU has become a coalition of the unwilling, the place where the finest multilateral ambitions go to die. Britain’s network of embassies will now go into overdrive, offering olive branches in capital after capital. Britain wants to deal, nation to nation, and is looking for partners.

Even the debate about immigration had an internationalist flavor to it. Any member of any EU state has had the right to live and work in Britain; any American, Indian or Australian needs to apply through a painstaking process. Mr. Cameron’s goal is to bring net immigration to below 100,000 a year (it was a little over three times that at last count). So the more who arrive from the EU, the more we need to crack down on those from outside the EU. The U.K. government now requires any non-European who wants to settle here to earn an annual salary of at least £35,000 (or about $52,000)—so we would deport, say, a young American flutist but couldn’t exclude a Bulgarian convict who could claim (under EU human-rights rules) that he has family ties in the U.K.

To most Brits, this makes no sense. In a television debate last week, Mr. Cameron was asked if there was “anything fair about an immigration system that prioritizes unskilled workers from within the EU over skilled workers who are coming from outside the EU?” He had no convincing answer.

The sense of a lack of control over immigration to Britain has been vividly reinforced by the scenes on the continent. In theory, the EU is supposed to protect its external borders by insisting that refugees claim asylum in the first country they enter. In practice, this agreement—the so-called Dublin Convention—was torn up by Ms. Merkel when she recklessly offered to settle any fleeing Syrians who managed to make it over the German border. The blame here lies not with the tens of thousands of desperate people who subsequently set out; the blame lies with an EU system that has proven itself hopelessly unequal to such a complex and intensifying challenge. The EU’s failure has been a boon for the people-trafficking industry, a global evil that has led to almost 3,000 deaths in the Mediterranean so far this year.

Britain has been shielded from the worst of this. Being an island helps, as does our rejection of the ill-advised Schengen border-free travel agreement that connects 26 European countries. But the scenes on the continent of thousands of young men on the march (one of which made it onto a particularly tasteless pro-Brexit poster unveiled by Nigel Farage, the leader of the anti-immigration UK Independence Party) give the sense of complete political dysfunction. To many voters in Britain, this referendum was about whether they want to be linked to such tragic incompetence.

The economists who warned about the perils of Brexit also assure voters that immigration is a net benefit, its advantages outweighing its losses. Perhaps so, but this overlooks the human factor. Who loses, and who gains? Immigration is great if you’re in the market for a nanny, a plumber or a table at a new restaurant. But to those competing with immigrants for jobs, houses or seats at schools, it looks rather different. And this, perhaps, explains the stark social divide exposed in the Brexit campaign.

Seldom has the United Kingdom looked less united: London and Scotland voted to stay in the EU, Wales and the English shires voted to get out. (Scottish First Minister Nicola Sturgeon has already called a fresh vote on secession “highly likely.”) Some 70% of university graduates were in favor of the EU; an equally disproportionate 68% of those who hadn’t finished high school were against it. Londoners and those under age 30 were strongly for Remain; the northern English and those over 60 were strongly for Leave. An astonishing 70% of the skilled working class supported Brexit.

Here, the Brexit battle lines ought to be familiar: They are similar to the socioeconomic battles being fought throughout so many Western democracies. It is the jet-set graduates versus the working class, the metropolitans versus the bumpkins—and, above all, the winners of globalization against its losers. Politicians, ever obsessed about the future, can tend to regard those left unprotected in our increasingly interconnected age as artifacts of the past. In fact, the losers of globalization are, by definition, as new as globalization itself.

To see such worries as resurgent nationalism is to oversimplify. The nation-state is a social construct: Done properly, it is the glue that binds society together. In Europe, the losers of globalization are seeking the protection of their nation-states, not a remote and unresponsive European superstate. They see the economy developing in ways that aren’t to their advantage and look to their governments to lend a helping hand—or at least attempt to control immigration. No EU country can honestly claim to control European immigration, and there is no prospect of this changing: These are the facts that led to Brexit.

The pound took a pounding on the currency markets Friday, but it wasn’t alone. The Swedish krona and the Polish zloty were down by about 5% against the dollar; the euro was down 3%. The markets are wondering who might be next. In April, the polling firm Ipsos MORI asked voters in nine EU countries if they would like a referendum on their countries’ memberships: 45% said yes, and 33% said they’d vote to get out. A Pew poll recently found that the Greeks and the French are the most hostile to the EU in the continent—and that the British were no more annoyed with the EU than the Swedes, the Dutch and the Germans.

The Brexit campaign was led by Europhiles. Boris Johnson, the former London mayor turned pro-Brexit firebrand who now seems likely to succeed Mr. Cameron, used to live in Brussels and can give interviews in French. Mr. Gove’s idea of perfect happiness is sitting on a wooden bench listening to Wagner in an airless concert hall in Bavaria. Both stressed that they love Europe but also love democracy—and want to keep the two compatible. The Brexit revolution is intended to make that point.

Mr. Gove has taken to borrowing the 18th-century politician William Pitt’s dictum about how England can “save herself by her exertions and Europe by her example.” After Mr. Cameron departs and new British leadership arrives, it will be keen to strike new alliances based on the principles of democracy, sovereignty and freedom. You never know: That might just catch on.

Unicorns, Tooth Fairies, and Free Markets

The most frequent criticism of free markets lies in their comparison to unicorns, fairies, and leprechauns. In other words, they exist only in our imaginations and thus are unworthy of serious discussion. This is sheer nonsense. It is like denying the value of Plato’s ideal forms as a means of comparison and judgment. Democracy also does not exist in its pure, idealistic form, so, is it a useless figment of our imaginations? I don’t believe so.

Free markets should be thought of as markets for free people, much like democracy is a political market for free people. In terms of exchange, people are free when buyer and seller can either mutually agree on an exchange or walk away. This freedom obtains best when there are lots of competing and comparable alternatives to any particular good or service. Also, voluntary action is enhanced when the terms of the transaction are transparent to both parties. Some markets offer better and more options than others, while some are more transparent than others, so markets are defined along a continuum from “free” to “unfree.” The whole thrust of free market theory is to point us in the right direction.

Oddly enough, the failure of unfree, or controlled, markets is often cited as proof that markets don’t work. This is like pulling the wheels off my car and then stating that since it can’t go anywhere, cars are a poor form of transportation. Such arguments should be the butt of jokes, not serious debate. Some may qualify this argument by saying some markets are easier to manipulate or control by narrow interests or are less transparent, and thus need to be regulated by a disinterested third party such as a government bureaucracy. But that just begs the more important question over what means will insure that any particular market becomes freer?

Regulation vs. Competition

We can’t really answer this question without a careful analysis of behavioral incentives, of both the economic and political variety. It is widely accepted that economic and political actors pursue their narrow self-interests, with economic behavior determined by loss aversion and profit/utility maximization and political behavior more influenced by power, status, and control. These behaviors dovetail in real people as we all seek to survive by pursuing wealth, power, and control over our own destinies. When we scrape beneath the surface we find that survival is more about not losing (loss aversion), than winning (big rewards).

We would assume from these incentives that most actors would like to manipulate markets to their personal advantage, so how do we constrain or redirect this?

Most people would look to contract law as the explanation for what keeps us honest, but that offers only a narrow understanding of how markets work. We make dozens, if not hundreds, of market transactions every day and very few ever reach that threshold where we feel the need to consult legal counsel or call our Congressperson in Washington. Instead, we rely on more efficient means, such as trust, reciprocity, the implicit value of repeat business, and competing alternatives to guide our choices.

This point about competing alternatives is crucial because while trust, reciprocity, and relationships help ameliorate the need for transparency, competition gives us freedom of choice. Anti-competitive monopolies are considered economic evils because they control the market for their product or service, so consumers must pay their price or go without. (Likewise why we despise political tyranny.) Critics often deride market capitalism as a competitive conflictual system, but that too is a myopic point of view. Markets foster cooperation as much as competition, and many of the transactions in economic markets are win-win positive sum games rather than win-lose zero-sum games.

Think about it: Sellers compete among themselves in order to develop a long-term cooperative relationship with their buyers and suppliers. Ever wonder why a department store takes back that dress or pair of shoes you bought last week because you changed your mind? That doesn’t seem in their immediate profit interest, but it does when you consider how the retailer values repeat business against the freedom you have to take your business elsewhere.

It is not laws or regulatory watchdogs but open competition under accepted market rules that constrains most of our selfish economic behavior. In addition, market competitors have the biggest incentive to insure all play by the established rules, thus they are the watchdogs. This implies the need for transparency. Third party regulatory agencies are inadequate to the task of monitoring the multitude of transactions in markets, especially financial markets. For example, the banking industry is the most regulated industry in the US, and yet the financial crisis of “too big to fail” revealed how ineffective that regulation was. So the test should not be regulation OR competition, but regulation FOR competition. Financial markets in particular need to be open, transparent, and competitive to constrain behavior that risks the integrity of the financial system. In financial markets, failure is a big inducement for prudence.

For an illustrative case, consider the policy response to the financial crisis of 2008, the 2010 Dodd-Frank law. Under that legislation, “too big to fail” banks have gotten even bigger, while 1,500 community banks—the source of half of all loans to local businesses—reportedly have been destroyed. The remaining community banks have had to hire 50% more compliance staff just to keep up with the regulations. That means far less competition among lenders to serve borrowers and more concentrated finance that does not respond to the bankruptcy constraint. It means a far less efficient and just credit market and far more control centralized in a financial oligopoly seeking to influence the policymaking process in its favor. According to the practice of regulatory capture – where lobbyists “buy” politicians with campaign contributions to formulate policy to constrain their competitors – we’ve discovered too often that big government mostly works for big business, the powerful, the wealthy and the well-connected to the detriment of open and honest competition among free people.

One could make the same argument against health care reform under the Affordable Care Act. Has policy made the market more open, transparent, and competitive, or less? Health care provision is really about competition and abundance in the supply of health care rather than the price and distribution of access. With an abundance of competitive health care providers, price and access take care of themselves.

The most important argument in favor of markets is the crucial role they play in providing information feedback signals. Free markets provide the most accurate and essential signals to consumers and producers needed to make efficient economic decisions, like comparing alternatives to maximize preferences, or where to invest and how much to produce, and how to adapt to changing market conditions. These signals are embodied in prices and inventory quantities and without these, producers are operating in the dark about what people want. Hayek was the first to point out the lack of private exchange markets would make central planning under socialism untenable over time. He was right.

Market failures do exist and we don’t live in a world of idealized free markets. But in addressing those failures we should strive not to make the perfect the enemy of the good, because free markets support free people and that’s the bottom line.

Besides, it would be heartbreaking to admit to our children that this is best we can do when it comes to unicorns and tooth fairies:

adult-unicorn-costume toothfairy1

What Is Inclusive Capitalism?

We can distill “inclusive capitalism” down to a single word that captures the concept in its fullest dimensions. That word is EQUITY.

There is a movement afoot called The Coalition for Inclusive Capitalism that counts Prince Charles, Pope Francis, Bill Clinton, and the world’s richest industrialist Carlos Slim among its supporters. Our first reaction to this news might be to ask, “What exactly is meant by the term Inclusive Capitalism?”

The Coalition provides this definition:

“Inclusive Capitalism provides that firms should account for themselves, not just on the bottom line, but on environmental, social, and governance (ESG) metrics… Every firm has a license to operate from the society in which it trades. This is both a legally and socially defined license… Firms must contribute proportionately to the societies in which they operate. Without fairly contributing, firms free-ride on services that other people have paid for. Firms that practice unsustainable activities, disrespect their stakeholders and the communities in which they operate will find their licenses threatened, first by the engaged consumer, then by government. Firms practicing Inclusive Capitalism will see their license strengthened.”

While laudable in its aspirations, operationalizing this value-laden definition poses a few questions and challenges.

First, this definition focuses on firm responsibility according to ESG sustainability metrics and firm performance. In fact, citing studies of corporate performance measures, the IC literature asserts that such practices deliver superior firm performance in terms of profit and market valuations. If true, then market competition should insure the widespread adoption of best practices with the gradual attrition of less profitable, less sustainable firm behavior. In other words, markets should provide sufficient correctives. If they do not, we probably need to question such assumptions that the market is functioning as expected, that it is complete, or that best practices across firms and industries are readily transparent.

Second, one can inadvertently blur the operational differences between public corporations and non-corporate, small business where ESG metrics are more difficult to discern or measure. Since much of capitalism’s innovation, job creation, and business expansion occurs at the small business level, we need to expand the idea of inclusion beyond corporate management practices and stakeholder governance.

Third, the search for an acceptable definition can also put different class segments of society at odds. The British Guardian has already described the Coalition’s efforts as a “Trojan Horse” cynically deployed to placate the public so that crony capitalism can thrive unscathed. Our definition then must not only articulate a vision and a direction, but also gain acceptance and buy-in from all segments of society. In other words, our definition must be “inclusive” in order to mediate conflicts among groups that appear to harbor diverging interests.

Finally, when we probe practitioners we find that different people have different ideas of what Inclusive Capitalism means, so we still lack a consistent and concise definition. Perhaps we can start by eliminating what it is not. It’s more than just corporate social responsibility (CSR) or ESG sustainability. It’s not defined by charity, philanthropy, or noblesse oblige. It’s more than “people-centered” and not really Robin Hood-style tax and redistribution, or even social welfare.

This is not to declaim or disparage these policies and activities, which in many cases yield positive social and economic results. The problem is that these policies are not really designed to be inclusive; rather they target compensation for past exclusion. In contrast, we should understand that inclusive capitalism seeks to reduce the need for such compensation. Thus, the motivating criterion is bottom-up empowerment, not top-down redirection. For example, inclusive capitalism is less about artificially raising wages, and more about creating the demand for and utilization of labor where a minimum or living wage becomes a moot issue.

With this objective, I believe we can distill “inclusive capitalism” down to a single word that captures the concept in its fullest dimensions. That word is EQUITY. Why equity? Because the multiple meanings and usage of the word “equity” expand the idea into every realm of a free society: political equity in terms of democratic participation, legal equity in terms of rights and accountability, moral equity in terms of justice, and economic equity in terms of capital ownership structures, control, risk, and reward. A free society that lacks any one of these dimensions of equity is in need of repair.

Economic Equity

Naturally, the focus of the term “inclusive capitalism” applies primarily to economic equity, begging the next question of how we define and understand economic equity. This can be problematic because a moral precept of equity as “fairness” is not definitive. In other words, What is economically fair? is a question that cannot really be answered objectively. In economic relations, equity implies a linkage between action and consequence; in finance we might refer to the direct link between risk and reward. In fact, the financial framework may offer the clearest insight into the logic of economic equity in capitalism.

Economic growth is a result of successful risk-taking and productive work. The rewards of success are, or should be, distributed accordingly. The simplest formulation asserts that capital takes the risks and labor does the work. The distributional outcomes of success or failure are then perceived as a protracted conflict between capital and labor over issues of equity. I would argue this conflict is misconstrued.

The linkage between risk and reward is inter-temporal. In other words, financial risks are assigned and taken before the enterprise is engaged: capital is borrowed and invested, suppliers are paid, and labor is contracted. The payment contracts reflect a complex web of legal relations and covenants that stipulate the assignment of liabilities and the seniority of claims over the product after it has been produced and, hopefully, sold. The liability risks of all participants are encoded in these contracts. After standard accounting practices measure the results, the returns to success or the losses of failure are distributed accordingly.

In starkest terms: In capitalism, she who takes the risk, gets the reward (or the loss). We can see the importance of residual claimancy over the profits of the enterprise. Under most corporate legal covenants, these profits accrue to “equity holders,” also referred to as shareholders or owners of firm assets. We should note the usage of that word “equity.”

Inclusive capitalism warrants “inclusion” in the profit-making enterprise of capitalism, which by legal necessity requires contractual claims on residual profits as well as the assumption of liabilities for loss. To control the financial risks associated with these liabilities, the corporate charter was deliberately designed to limit liability to the liquidation value of the firm’s assets.

Some correctly make the argument that wider stakeholders in capitalism (those without ownership claims) have rights that should be reflected in the governance of capitalist enterprise. An example might be a community downriver that suffers water contamination from a producer upstream. Economic externalities, such as environmental degradation, are important considerations for inclusion. Politically imposed regulation can be one means of asserting stakeholders’ interests, but the preferred strategy would be to assign stakeholder claims through the accepted legal structures of ownership and control. In other words, stakeholders should be represented as the voice of shareholders participating as owners in capitalist enterprise. In this way, stakeholders assert their interests and can also claim the material benefits of success, i.e., profits.

Thus, inclusive capitalism explicitly requires inclusion in the economic system as “capitalists,” as well as workers. This all can be as simple as being a passive shareholder. This begs the penultimate question of why, in a capitalist economy, we are not all striving to be capitalists? Alternatively, we might ask: Why is economic inclusion so elusive?

I believe this is where the discussion of inclusive capitalism gets interesting. The answers hinge on the risk-taking nature of capitalist enterprise juxtaposed against the risk-averse, loss-averse behavior dictated by our natural survival instinct. There is a selective bias among successful capitalists to perceive a natural order of things whereby some people are natural risk-taking innovators, while others are not. For them, this “natural order” explains the distribution of success in a capitalist society. The elitist bias can reveal itself in attitudes of paternalism and noblesse oblige.

This perspective is largely the product of a theoretical approach to the market economy where participants are grouped by function: producers vs. consumers; employers vs. workers; investors and borrowers vs. savers and lenders; innovators and wealth-creators vs. welfare dependents. When it comes to distributional outcomes, this is a limited analytical paradigm. Let us just consider the risk-takers. Innovators like Bill Gates, Steve Jobs, Jeff Bezos, or Google’s Page and Brin are perhaps one in a million. But each of these immensely successful individuals has been eager to share the risks and returns of their enterprise through the sale of equity in financial markets. The important lesson is not the fact that Gates may have a net worth of more than $30 billion, but that Microsoft (and Apple and Amazon) has enriched thousands of other stakeholders along the way. This is the key to inclusion and we should pay mind to how it is narrowing.

Though risk preferences and animal spirits do vary across the population, economic risk is ubiquitous and borne in some manner by all. As the capitalist risks loss of principal, the worker risks loss of income. The real question is whether the risk-bearers are receiving just compensation commensurate with those risks and whether the risk-takers are also accountable for losses. This is equity in the moral and economic sense of the word. A free society demands that the innocent not pay for the mistakes of the guilty and this applies in capitalist enterprise as well. (Our recent financial bail-outs appear to have violated this moral imperative.)

For inclusion to work, participants in capitalist enterprise must also be empowered to control and manage their risks. Inclusion and participation then becomes a question of enforceable property rights and gets us back to the legal conventions of assigning ownership rights and risks to tangible assets of the firm. In many situations, different stakeholders eschew the risks because they cannot control or manage them, so they pay to have someone else assume them (i.e., sign a labor contract for a lower risk-return profile). Overcoming these impediments to equity participation inherent to the governance issue is the main challenge of inclusion.

Unfortunately, we have many tax and regulatory policies, as well as financial practices and conventions, that contradict the goal of inclusion through equity. Access to credit, debt leverage, collateral requirements, capital and income taxes, conflicts of interest in governance, etc. work to the disadvantage of those who are thereby excluded from the financialization of the economy. A long laundry list of reforms can be offered in this respect, but that is beyond the purview of this effort, which is to first define what we mean by inclusive capitalism.

A more serious challenge is posed by an industrial global economy being transformed by the digital information age, globalization, and AI robotics. Production in the digital age is revealing itself as labor-saving, capital and skill intensive, with winner-take-all product and service markets. Some of the effects we observe are the rise of celebrity branding; the marginalization of wage labor as a distributional mechanism and mode of inclusion; and the explosive growth of wealth concentration enjoyed by those who feed off digital processes—companies like Amazon, Apple, Google, and Facebook. These trends present a dire challenge to the concept of equity and inclusion. It is a challenge that will require far deeper thinking and rethinking of the 21st century economy and how we conceive of a free society. Despite what politicians may promise, I would advise there is no going back.

2016: Bernie vs. The Donald? Missing the Message.

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Most Americans are reduced to the passive role of spectators, fans, groupies. Or they are persuaded not to bother with politics. An elaborate class of professional technicians has taken charge of electoral politics—campaign managers and advertisers, pollsters, fundraisers, crowd organizers. These professionals, one could say, manage the passions or passivity of voters. They shape the content of what citizens know—and shape their ignorance too.

The ongoing circus of the presidential partisan primaries has voters fretting that our choices may whittle down to a contest between the bombastic Donald Trump vs. the radical socialist Bernie Sanders. I wouldn’t worry so much about that. Instead I would worry more about the underlying message regarding American “politics as usual.”

Below is an essay written by the journalist and author William Greider published in The Nation that reviews a book by Lawrence Goodwyn, Democratic Promise: The Populist Moment in America. Greider correctly applies this history of American populism to the modern movement that is the deeper current under the froth created by Trump and Sanders.

This movement, which is actually a gradual disenfranchisement of the American voter marked by the decline of party affiliation (as Greider points out, “Voters who stay home on Election Day are now by far the ‘largest’ political party”), is a real threat to the “politics as usual” of both the Democrats and the Republicans. And this is how it should be.

The resilience of American democracy is found in the pressures of the system to adapt to change or die. This does not imply the rise of third parties, except to displace one of the two major parties, either of which could easily suffer that fate. But the genius of our electoral two-party system has turned out to reinforce this need to adapt or die.

Multi-party systems fracture into uncompromisable positions that lead to instability in national government and over-dependence on fragile coalitions that often empower narrow interests at the margin. A two-party winner-take-all system forces parties to the center of voters’ demands in order to capture a majority. This is a good thing in a large pluralistic polity like we have in the U.S.

But, as Greider clearly points out, that doesn’t mean that democratic system cannot breakdown under this electoral design. American politics has become unresponsive to voter demands and needs for a variety of reasons. This gives rise to the anti-establishment tenor of modern movements such as the Tea Party and Occupy groups. These anti-establishment groups have more in common than in opposition, but the establishment seeks only to divide and conquer its opposition in order to continue to enjoy the spoils.

Goodwyn also wisely points out that for democracy to work, voters do not need to be perfectly informed, they only cannot be misinformed with a systemic bias. Unfortunately, the media today can promote that systemic bias, which is why it is failing us. This applies to mainstream as well as alternative media. In other words, we’re not getting the unvarnished objective truth from ABC, CBS, NBC, or FOX; and not from the NY TImes, Washington Post or The Wall Street Journal. And certainly not The Huffington Post or TownHall. We’re getting what appeals to each media channel’s targeted political audience.

On an optimistic note, the party “establishment” candidate that first discovers how to appeal to the disaffected and brings them back into the party fold by adapting to their demands and compromising the establishment party’s platform will be successful in future elections. And this is how it should be. Greider suspects we’re not quite there yet, but the momentum has been building for about 20 years now (maybe 40+). But it’s highly unlikely we will be led into the future by the likes of an angry Donald Trump or Bernie Sanders.

Bernie, Donald, and the Promise of Populism

Both candidates have been mislabeled as populists. The movement of that name was a genuine people’s rebellion that reinvigorated democracy. We can do it again.

By William Greider

September 21, 2015

The New Yorker recently attempted to explain two “populists” running for president, the only candidates generating huge and enthusiastic audiences. Instead, the article’s snide tone reflected the nearsightedness of cosmopolitan elites. Both candidates were mislabeled as “populist.” Bernie Sanders is a democratic socialist; Donald Trump is a trash-talking billionaire. But the magazine also mangled the true historical meaning of populism.

The writer seemed to be channeling Richard Hofstadter, the Columbia historian who back in the 1960s famously put down populism and other rebellious movements as “the paranoid style in American politics.” People are irrational, Hofstadter explained, driven by delusional fears and conspiracy theories. Not to be trusted with governing power.

Class condescension is as old as American democracy and is back in vogue this season, thanks mainly to the plutocrat with big hair. Only, Donald Trump turned “populist” anger upside down. He’s a super-rich guy ridiculing the “stupid” people in government and bragging about how he and his fellow billionaires buy politicians to get free stuff from government. Sanders, meanwhile, is plowing a parallel furrow of dissent—a substantive and serious program for reform.

But neither fits the label “populist” because they are both working within the established order. By definition, populism requires plain people in rebellion, organizing themselves to go up against the reigning powers. Major pushback from fed-up people is not present—not yet anyway—but the great disturbances already roiling party politics suggest that the political status quo is vulnerable to more upheavals, particularly if timidity and stalemate continue to suppress meaningful change.

It depends, first, on whether the 2016 results promise real changes in economics and social equity and/or convince people they have to dump both parties and attempt power-seeking politics of their own. This is a tender moment for the two-party system.

Elites naturally fear popular uprisings, but rebellion can be good for democracy. Even if they fail, self-generated citizen insurgencies can ventilate the musty corridors of government and compel governing parties to change or die. A century ago, the original Populists provoked fright and ridicule in establishment circles on a far more threatening scale. We are not there yet. But don’t count it out if timidity wins the election next year and politics continues to run away from fundamental questions.

The People’s Party in the last decades of the 19th century was self-organized by scattered groups of distressed farmers. It grew rapidly across the South and West to oppose the powerful forces—banks, railroads, industrial corporations—destroying small, independent producers. The farmers realized the federal government was an active accomplice in their economic destruction. There was nothing delusional about their alarm and anger. It was driven by a ruinous deflation of farm prices for three decades—hard money that rewarded capital and crushed producers.

The agrarian revolt set out audaciously to win power by winning elections—electing Populist governors, representatives, and senators—hoping ultimately to elect the People’s President. They failed, of course, but their legacy was profound. These self-taught citizens developed original ideas for governing the economy, business, and banking. They envisioned a central bank to regulate money and credit that would advance equality, serving people and producers rather than the fortunes of New York bankers. The Populist vision was the road not taken.

The New York Times called them “slime.” (This magazine was pretty bad too, as The Nation’s 1896 attack on William Jennings Bryan shows.) It denounced their proposal as “one of the wildest and most fantastic projects ever seriously proposed.” Yet years later, John Maynard Keynes saluted the American Populists as “a brave army of heretics.” They failed to gain power, but Keynes recognized that their economic analysis anticipated his own. Many of the original Populist proposals were eventually enacted as New Deal reforms.

For the true history, read Lawrence Goodwyn’s Democratic Promise: The Populist Moment in America. The book profoundly altered my understanding of American history and democracy (the excellent shorter version, widely available in paperback, is titled The Populist Moment: A Short History of the Agrarian Revolt in America). Goodwyn’s account provides powerful rebuttal to pessimism and resignation. His unsentimental narrative keeps alive the possibility of deep structural reforms in politics and government.

Democratic Promise puts people back at the center of the story—ordinary people who tried, against all odds, to act like self-directed citizens, actively participating in self-government. Goodwyn suggested that authentic democracy remains possible—not easy or assured, only possible—if people rediscover their voice and potential power.

In modern political culture, the idea of this deeper democracy has been hollowed out, obliterated. The promise endures, insofar as we have regular elections to select officeholders, but that ritual normally does very little to alter actual power relationships. And people know this.

Most Americans are reduced to the passive role of spectators, fans, groupies. Or they are persuaded not to bother with politics. An elaborate class of professional technicians has taken charge of electoral politics—campaign managers and advertisers, pollsters, fundraisers, crowd organizers. These professionals, one could say, manage the passions or passivity of voters. They shape the content of what citizens know—and shape their ignorance too.

The process of manipulating the electorate is enormously expensive, and mostly paid for by private donations. Donors naturally expect to influence the content of the messages, so campaigns are nearly always biased in favor of moneyed interests and affluent citizens. The ultimate purpose of campaigns is thus not educating citizens; it is electing or defeating politicians. The result of this narrow-form democracy is the steadily shrinking electorate. Voters who stay home on Election Day are now by far the “largest” political party.

The critical claim in Goodwyn’s analysis is that ordinary people are both capable of participating more directly in self-government and that their engagement is necessary for a genuinely functioning democracy. Otherwise, politics produces a closely held management system with control concentrated at the top. It makes distant decisions too opaque for ordinary citizens to understand or influence, much less control. This deformity roughly resembles our current conditions. Governing elites typically fault the people for their ignorance, and many discouraged citizens internalize the blame.

But Goodwyn insisted that ordinary people, though discouraged from active citizenship, have essential knowledge—knowledge they haven’t learned from books or newspapers. Their knowledge is crucial for balanced self-government. Because ordinary Americans, regardless of status or education, know things the authorities did not teach them. They frequently know things that contradict the governing experts, and they learn them before elected representatives do.

Where do people get this distinctive knowledge? From life itself, as Goodwyn explained. Of course, people are fallible and prone to error, false enthusiasm, and fears. But so are elected politicians. So are the corporate CEOs and investment bankers, including the ones who led the country over a cliff in 2008 and crashed the middle class.

The popular anger exploding in the run-up to 2016 baffled press and political leaders. They would not have been surprised if they had listened more respectfully to the broad ranks of citizens during the past three decades. Working people knew the “American dream” was falling apart. They knew because it was happening to them. They told their stories in great detail to anyone who would listen (as a young reporter I heard those stories from auto workers, steel workers, machinists, debt-burdened families, and other victims, trying to hang on and losing the struggle).

With brave exceptions, politicians in both parties turned their backs on the cries of distress. Learned economists assured political leaders that what working people saw happening in their neighborhoods wasn’t the real story. Over time, they predicted, prosperity would reach everyone and people would agree that deindustrialization was a good thing, a necessary evolution in the economy. It didn’t happen, and neither party has come clean on its failure.

I think that’s where the anger comes from. There is widespread feeling across ideological and partisan divides not only that government failed to ensure economic prosperity and security but also that both political parties denied or ignored what average working stiffs knew and were trying to tell the politicians. Many believe they were betrayed, that the politicians lied.

Modern government lost its sense of balance and credibility for many reasons, but partly because authorities distanced themselves from the common-sense and popular knowledge of ordinary Americans. This disconnect permeates government and politics, and it’s not always due to corporate greed or corruption. Sometimes, it is due to plain ignorance.

It’s true that we have not arrived at a new “populist moment”—not yet. But the political situation looks combustible, and perhaps more promising than the usual cynicism and resignation will recognize. Could citizens come out of their passivity and restart the fight for authentic self-government? Sounds fanciful, I know, but consider this: If the original Populists could organize millions to overcome their handicaps, people should be able to do the same now. After all, the Populists didn’t even have telephones, much less e-mail.

We are already deep into a stormy new era of democratizing technologies—people are getting the power to control their own communications—and inventive new channels are flowing freely from citizens themselves.

This new condition potentially destabilizes the old politics. I think it is a major factor in generating the dizziness of this election season. Among other things, it drastically reduces the cost of making political connections, of organizing across long distances and social divisions. That itself could become an insurrectionary virtue. It might even dilute the political domination of the 1 Percent, the corporations and billionaires.

I see possibilities for meaningful unrest ahead.

SandersTrump2

The Economics of a Stagnating World

economics-cartoon

This article by Edmund Phelps in the upcoming issue of the NYROB is excellent for bringing the important underlying issues to the fore. The “good life,” as Aristotle describes it, is based on humanist values that often get lost in discussions about materialistic economics or even abstractions of moral justice. Thus, our policy challenges are not only about delivering the sustenance for life, but making life worth living.

Phelps correctly focuses on the humanist values of creativity and innovation for pursuing meaning in our lives. (I would suggest that equally important to meaning is the process of sharing that creativity through community, and Phelps would certainly agree.)

But how can we achieve a world of shared creative discovery?

Creativity is a function of imagination and taking risks into the unknown when it comes to acting on our imaginations. This is where the materialist concerns enter in. Human beings are rationally loss averse because survival is paramount to the individual, the community, and the species. As Phelps argues, our pursuit of material prosperity has reduced our economic lives to the pursuit of greater efficiency, rather than greater meaning. At the same time, as we pursue greater efficiency by the rationalization of production-principly by reducing labor costs-we’ve exposed large segments of our society to greater individual risks, while not managing them very well.

Phelps correctly attributes this to the demands of classical economic theory – and we operate on what we know. Thus, we need to pursue new paradigms to manage economic change that also foster inclusion into economic and political society. I’ve discussed several aspects of what a new paradigm might look like in previous blogs such as:

Why Ownership Matters

Power Laws I, II, III

Rethinking Inequality and Redistribution in a Free Society

Beyond Piketty’s Capital

What is wrong with the economies of the West—and with economics?

by Edmund Phelps, The New York Review of Books, August 13, 2015

It depends on whether we are talking about the good or the just.

Many of us in Western Europe and America feel that our economies are far from just, though our views on justice differ somewhat. One band of economists, led for decades by the British economist Anthony Atkinson, sees the West as being in another Gilded Age of inequality in income and wealth.1 Adopting Jeremy Bentham’s utilitarian view, they would redistribute income from those in high brackets to those farther down—until we reach the highest “sum of utilities.” It is a question, though, whether this doctrine captures intuitive views of what is just.

Philosophers over these same decades have been more interested in the work by the American philosopher John Rawls. His book A Theory of Justice argues for a fundamental shift away from Bentham: economic justice is about the distribution of “utilities,” for him a word usually denoting the satisfactions of consumption and leisure, not the sum of those utilities.2 It is about the terms on which each participant contributes to the fruit of the society’s economy. For Rawls, justice requires the state to use taxes and subsidies to pull up people with the lowest wages to the highest level possible. That way, the least advantaged get the largest possible portion of the gain from people’s cooperation in the economy.

A struggle persists between these views. The Benthamite view has morphed into the corporatist idea that a nation’s government ought to provide benefits, whether in the form of money or tax advantages, or free services, to interest groups—whether corporations, or unions, or consumers—that voice a need until more benefits would be deemed to cost too much. Meeting these claims of many different interests has left little in the public purse for low-wage workers.

The Rawlsian view has found little support among legislators, it is true. In the US, the Earned Income Tax Credit was passed in 1975. But it mainly supplements the income of low-wage mothers of young children. It does nothing for low-end workers as a whole and, to some extent, it actually reduces paychecks for low-paid work of childless women and single men. In Europe, a few countries spend much more than the US on job subsidies but statistical analyses have not found large effects on wages or unemployment.

With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades—mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia—have proceeded, unopposed, to drag down both employment and wage rates at the low end. The setback has cost the less advantaged not only a loss of income but also a loss of what economists call inclusion—access to jobs offering work and pay that provide self-respect. And inclusion was already lacking to begin with. In America, black urban teenagers have long been lacking in inclusion. In France there is a comparable lack of inclusion among North Africans. In much of Europe there has been little attempt to include the Roma.

This failing in the West’s economies is also a failing of economics. The classical idea of political economy has been to let wage rates sink to whatever level the market takes them, and then provide everyone with the “safety net” of a “negative income tax,” unemployment insurance, and free food, shelter, clothing, and medical care. This policy, even when humanely carried out, and it often is not, misses the point that, even if we confine our attention to the West since the Renaissance, many people have long felt the desire to do something with their lives besides consuming goods and having leisure. They desire to participate in a community in which they can interact and develop.

Our prevailing political economy is blind to the very concept of inclusion; it does not map out any remedy for the deficiency. A monograph of mine and a conference volume I edited are among the few book-length studies of ways to remedy failure to include people generally in an economy in which they will have satisfying work.3

Commentators are talking now about injustice of another sort. Workers in decent jobs view the economy as unjust if they or their children have virtually no chance of climbing to a higher rung in the socioeconomic ladder. And moving up appears harder now. Even in the Gilded Age, many of the moguls came up from the bottom. (The rungs were far apart, yet the ladder was climbed.) The feeling of injustice comes from a sense of unfair advantages: that those above are using their connections to stay there—or to ensure that their children can follow them. The bar to upward mobility is always the same: barriers to competition put up by the wealthy, the connected, corporations, professional associations, unions, and guilds.

But the truth is that no degree of Rawlsian action to pull up low-end wages and employment—or remove unfair advantages—could have spared the less advantaged from a major loss of inclusion since Rawls’s time. The forces of productivity slowdown and globalization have been too strong. Moreover, though the injustices in the West’s economies are egregious, they ought not to be seen as a major cause of the productivity slowdowns and globalization. (For one thing, a slowdown of productivity started in the US in the mid-1960s and the sharp loss of manufacturing jobs to poorer countries occurred much later—from the late 1970s to the early 1990s.) Deeper causes must be at work.

While people need a just economy for their self-respect and national pride—Rawls regarded justice as the first virtue of a society—justice is not everything that people need from their economy. They need an economy that is good as well as just. And for some decades, the Western economies have fallen short of any conception of a “good economy”—an economy offering a “good life,” or a life of “richness,” as some humanists call it.

The good life as it is popularly conceived typically involves acquiring mastery in one’s work, thus gaining for oneself better terms—or means to rewards, whether material, like wealth, or nonmaterial—an experience we may call “prospering.” As humanists and philosophers have conceived it, the good life involves using one’s imagination, exercising one’s creativity, taking fascinating journeys into the unknown, and acting on the world—an experience I call “flourishing.” These gains are gains in experience, not in material reward, though material gains may be a means to the nonmaterial ends. As the writer Kabir Sehgal put it, “Money is like blood. You need it to live but it isn’t the point of life.”4

How might such a good life prevail in a society? Historically, as my book Mass Flourishing argues,5 prospering and flourishing became prevalent in the nineteenth century when, in Europe and America, economies emerged with the dynamism to generate their own innovation. Responding to the challenges and opportunities of an ever-evolving economy, the more entrepreneurial participants were immersed in the experience of solving the new problems and overcoming the new hurdles posed in the process of innovation: these people were “prospering.” Sparked by the new spirit of dynamism, the more innovative participants were constantly trying to think of new ways to produce things or new things to produce: these people were “flourishing.”

What were the origins of this dynamism? It sprang from the development of a favorable culture. In nineteenth-century Britain and America, and later Germany and France, a culture of exploration, experimentation, and ultimately innovation grew out of the individualism of the Renaissance, the vitalism of the Baroque era, and the expressionism of the Romantic period. In view of the explosion in poetry, music, and art in the “creative” sector of the economy, it should not surprise us that imagination exploded in the rest of the economy too. In these years George Stephenson conceived the steam railway, John Deere the cast-steel plow that “broke the plains”; Isaac Singer developed and marketed a commercial sewing machine, Thomas Edison the phonograph, the Lumière brothers the cinema, and Florence Nightingale effected a reorganization of hospitals. Innovation was rampant—and very apparently in America, as observers testified. Abraham Lincoln, touring America in 1858, exclaimed that the country had “a great passion—a perfect rage—for the ‘new.’”6

What made innovating so powerful in these economies was that it was not limited to elites. It permeated society from the less advantaged parts of the population on up. People of ordinary background might be involved in innovations, large and small. Stephenson was illiterate, Deere a blacksmith, Singer a machinist, Edison of humble origins. People of ordinary ability could also have innovative ideas. As I wrote in Mass Flourishing, “Even people with few and modest talents…were given the experience of using their minds: to seize an opportunity, to solve a problem, and think of a new way or a new thing.”

The experience of working in these dynamic economies was evidently good for most people—far better than the previous economies were, at any rate. Diaries of the period contradict the old familiar tune that the rural life of mercantile times, with its routine and isolation, was preferred to modern life in businesses and cities.7

It may be that some other economies lacked (and still lack) the wages for large numbers of ordinary people to afford to pursue careers in which they could prosper or flourish; or they lacked enough jobs for large numbers of people to have those opportunities. High-enough wages, low-enough unemployment, and wide-enough access to engaging work are necessary for a “good-enough” economy—though far from sufficient. The material possibilities of the economy must be adequate for the nonmaterial possibilities to be widespread—the satisfactions of prospering and of flourishing through adventurous, creative, and even imaginative work.

Some economists maintain that nations do not need dynamism to be happy. The French and Italians seem to find it perfectly acceptable that their economies have been almost devoid of indigenous innovation for nearly two decades. They are content with an economy unable to do more than simply let global market forces—including advances in science at home and abroad—pull up the going level of wage rates and prop up the market rates of return on wealth. (In fact, little upward movement of real wages has been occurring of late in the advanced economies.) But from my perspective, such an economy is pitiful next to an economy with significant prospering and flourishing—let alone the economies of heady innovation in the West’s past. Oddly, this pitiful sort of economy is very much like the theoretical models of classical economics.

In the classical models I have been describing, no one is trying to think up something new (except perhaps new profitable investments) and no one is attempting to create it. There is no conception of human agency, only responses to wages, interest rates, and wealth. The economy is mechanical, robotic. The crops may be growing, but there is no personal growth. In the classical canon, Bentham, with his “sum of utilities,” portrays individuals like machines working to contribute their share to the general welfare. Joseph Schumpeter portrays “innovation” as produced by hard-driving entrepreneurs who make “obvious” applications of discoveries occurring outside the nation’s economy—as if the economy’s central participants possessed no imagination whatever.

Such classical models are basic to today’s standard economics. This economics, despite its sophistication in some respects, makes no room for economies in which people are imagining new products and using their creativity to build them. What is most fundamentally “wrong with economics” is that it takes such an economy to be the norm—to be “as good as it gets.” The cost is that elements of the Western economies are becoming products of this basically classical economics, which has little place for creativity and imagination.

Since around 1970, or earlier in some cases, most of the continental Western European economies have come to resemble more completely the mechanical model of standard economics. Most companies are highly efficient. Households, apart from the very low-paid or unemployed, have gone on saving, each year pushing up their wealth to higher levels, spectacular levels in Italy and France—far higher than in America, leaving aside the super-rich. And with the rise of household wealth contracting the supply of labor, workweeks and labor force participation have been shrinking.

One could argue that the continental economies are marching—D.H. Lawrence’s “everlasting slog” comes to mind—along a path of ever-increasing wealth like that derived mathematically by Frank Ramsey long ago. That study inspired John Maynard Keynes’s influential essay in which he praised the decline of work as liberating the human spirit.8 Keynes seemed to think that ordinary people are incapable of prospering or flourishing. Even now, many Europeans seem not to have grasped that, while comparatively rich in wealth and spare time, they are poor in the conditions for the good life: an economy conducive to flourishing and prospering. The causes of this decline are clear.

In most of Western Europe, economic dynamism is now at lows not seen, I would judge, since the advent of dynamism in the nineteenth century. Imagining and creating new products has almost disappeared from the continent—a continent that had been a major wellspring of new industries and new ways of living. Growth there has stopped, and econometric estimates of the rate of homegrown innovation are generally small. The near disappearance of imaginative and creative activity has reduced indigenous innovation, contracted investment activity, and depressed the demand for labor.

The bleak levels of both unemployment and job satisfaction in Europe are testimony to its dreary economies. Polls can produce simplistic responses to questions about complex feelings; but it should not be puzzling that a recent survey of household attitudes found that, in “happiness,” the median scores in Spain (54), France (51), Italy (48), and Greece (37) are all below those in the upper half of the nations labeled “emerging”—Mexico (79), Venezuela (74), Brazil (73), Argentina (66), Vietnam (64), Colombia (64), China (59), Indonesia (58), Chile (58), and Malaysia (56).9 As I wrote in a commentary on western continental Europe, “the economy is failing society.”10

The US economy is not much better. Two economists, Stanley Fischer and Assar Lindbeck, wrote of a “Great Productivity Slowdown,” which they saw as beginning in the late 1960s.11 The slowdown in the growth of capital and labor combined—what is called “total factor productivity”—is stark and, with the exception of the years of the Internet boom, between 1996 and 2004, it has not let up; it has only gotten slower since the 1960s. In my analysis, the slowdown is the source of the deep decline in wage growth, labor force participation, and, on some evidence, in job satisfaction. Markedly fewer lead the good life. (As in continental Europe, the slowing of productivity growth caused wage growth to slow, and many households kept adding to their wealth through savings, all of which has been dragging participation down. Yet America’s productivity slowdown started earlier, so the cumulative damage to participation has been greater than Europe’s to date.)

What is the mechanism of the slowdown in productivity? Many commentators and laymen suppose that the dramatic rise of innovation in Silicon Valley has displaced labor and slowed the rise of wages at the low end and the middle. We have all observed the disappearance of bookstores, record stores, and many other kinds of stores, as well as newsprint. But if innovation in the aggregate were up, it would be hard to explain why growth of aggregate total factor productivity is so unmistakably down. As Alvin Hansen said many decades ago, it is the “cessation of growth,” or, as he implied, the slowdown of aggregate innovation, “which is disastrous.”12

The plausible explanation of the syndrome in America—the productivity slowdown and the decline of job satisfaction, among other things—is a critical loss of indigenous innovation in the established industries like traditional manufacturing and services that was not nearly offset by the innovation that flowered in a few new industries—digital, media, and financial. In the vast heartland of America, the loss of dynamism is almost palpable—and not just in the oft-cited education and health care industries. Companies like Google and Facebook may offer jobs allowing or requiring imagination and creativity, but the whole of Silicon Valley accounts for only 3 percent of national income and a smaller percentage of national employment. Once European economies ran out of American innovations they could copy, the syndrome of low productivity growth hit them too—France and Italy in the late 1990s, Germany and Britain by 2005 or so. That most European economies appear to be in worse condition than the American in labor force participation and job satisfaction can be laid to America’s noticeable edge in innovation. That has kept America a step ahead.

What then caused this narrowing of innovation? No single explanation is persuasive. Yet two classes of explanations have the ring of truth. One points to suppression of innovation by vested interests. Their power has risen enormously in Western Europe and finally America over the postwar decades. Invoking corporatist notions of economic control and social contract originating in the corporazioni of ancient Rome, some professions, such as those in education and medicine, have instituted regulation and licensing to curb experimentation and change, thus dampening innovation.

Invoking the corporatist notion of solidarity, companies hurt by innovators—as GM was hurt by BMW and Toyota—have been able to obtain federal government bailouts to help them regain their positions. As a result, fleeting innovators—BMW and Toyota in my example—often lose money in their attempts. So would-be innovators will think twice before trying again to innovate in America’s automobile market.

Invoking the corporatist tenet of social protection, established corporations—their owners and stakeholders—and entire industries, using their lobbyists, have obtained regulations and patents that make it harder for new firms to gain entry into the market and to compete with incumbents. A result is that the outsiders have been stifled—though some entered new industries before those too could put up barriers. And some insiders, now protected from new entrants, feel it is safe to drop whatever defensive innovation they used to do. We can see dramatic examples of how these barriers protect insiders in the pharmaceutical and the medical device industries, where the FDA approvals process has blocked new entry and slowed innovation to a crawl. Insiders feel free to raise their markups, thus increasing profits and wealth inequality.

We can test this theory. Bureau of Labor Statistics data on the US nonfarm business sector show labor’s share of income falling from 66 percent at its twin peaks in the mid-1970s to 61 percent in the 1990s and around 58 percent more recently. OECD data on business sectors show a rise in capital’s share from 32.5 percent in 1971–1981 to 34.5 percent in 1995–1997 in the US and from 33.3 percent to 38.5 percent in the European Union.13

The second explanation points to a new repression of potential innovators by families and schools. As the corporatist values of control, solidarity, and protection are invoked to prohibit innovation, traditional values of conservatism and materialism are often invoked to inhibit a young person from undertaking an innovation. Schools are doing less to expose the young to the great books of adventure and personal development. Parents teach their children from infancy to be careful and stay close to the family. There is discussion now of the overprotected child: the need for a return to “free range” children who are allowed to explore, to try things and take chances.14 Parents urge their children upon graduating to take a secure job with high pay, not a job at a startup. Many universities are now teaching courses in “responsible investing” but nothing on venturesome investing.

How might Western nations gain—or regain—widespread prospering and flourishing? Taking concrete actions will not help much without fresh thinking: people must first grasp that standard economics is not a guide to flourishing—it is a tool only for efficiency. Widespread flourishing in a nation requires an economy energized by its own homegrown innovation from the grassroots on up. For such innovation a nation must possess the dynamism to imagine and create the new—economic freedoms are not sufficient. And dynamism needs to be nourished with strong human values.

Of the concrete steps that would help to widen flourishing, a reform of education stands out. The problem here is not a perceived mismatch between skills taught and skills in demand. (Experts have urged greater education in STEM subjects—science, technology, engineering, and mathematics—but when Europe created specialized universities in these subjects, no innovation was observed.) The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.

It will also be essential that high schools and colleges expose students to the human values expressed in the masterpieces of Western literature, so that young people will want to seek economies offering imaginative and creative careers. Education systems must put students in touch with the humanities in order to fuel the human desire to conceive the new and perchance to achieve innovations. This reorientation of general education will have to be supported by a similar reorientation of economic education.

We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life.

  1. An early work of Atkinson’s is Economics of Inequality (Oxford University Press, 1975); for a review of his most recent book, Inequality: What Can Be Done? (Harvard University Press, 2015), see Thomas Piketty, The New York Review, June 25, 2015. I was struck by a presentation by Atkinson, “The Social Marginal Valuation of Income,” at the conference celebrating the seventieth birthday of Sir James Mirrlees, Clare College, Cambridge, July 28, 2006. 
  2. A Theory of Justice (Harvard University Press, 1971). The book sees a society’s economy as central to the people, arguing that they are drawn together by their desire for mutual gains from collaborating in its economy. 
  3. Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise (Harvard University Press, 1997) and Designing Inclusion: How to Raise Low-End Pay and Employment in Private Enterprise (Cambridge University Press, 2003). 
  4. Kabir Sehgal, Coined: The Rich Life of Money and How Its History Has Shaped Us (Grand Central, 2015). 
  5. Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change (Princeton University Press, 2013). 
  6. Abraham Lincoln, “Discoveries and Inventions,” Young Men’s Association, Bloomington, Illinois, April 6, 1858. 
  7. See Emma Griffin, Liberty’s Dawn: A People’s History of the Industrial Revolution (Yale University Press, 2013). Her current work, as yet unpublished, has reached farther into the nineteenth century, where some of the findings are equally or more striking. 
  8. See F.P. Ramsey, “A Mathematical Theory of Saving,” The Economic Journal (1928), and J. M. Keynes, “The Economic Possibilities for Our Grandchildren,” The Nation and the Athenaeum (1930, in two parts). 
  9. “People in Emerging Markets Catch Up to Advanced Economies in Life Satisfaction,” Pew Research Center, October 2014. (Performing better were the UK at 58, Germany at 60, and the US at 65.) 
  10. “Europe Is a Continent That Has Run Out of Ideas,” Financial Times, March 3, 2015. 
  11. See Assar Lindbeck, “The Recent Slowdown of Productivity Growth,” The Economic Journal, Vol. 93, No. 369 (March 1983), and Stanley Fischer, “Symposium on the Slowdown in Productivity Growth,” Journal of Economic Perspectives, Vol. 2, No. 4 (Fall 1988). Lindbeck begins, “The growth slowdown that began in the late 1960s or early 1970s is the most significant macroeconomic development of the last two decades.” 
  12. Alvin H. Hansen, “Economic Progress and Declining Population Growth,” The American Economic Review, Vol. 29, No. 1 (March 1939). 
  13. OECD, Economic Outlook, December 1998. 
  14. See Hanna Rosin, “The Overprotected Kid,” The Atlantic, April 2014, and Lenore Skenazy, Free-Range Kids: How to Raise Safe, Self-Reliant Children (Without Going Nuts with Worry), (Jossey-Bass, 2009). 

God Bless the Child

Billie

Them that’s got shall have,
Them that’s not shall lose,
So the Bible said and it still is news.
Mama may have, Papa may have,
But God bless the child that’s got his own,
That’s got his own.

            – Billie Holiday, God Bless the Child

See post: Why Ownership Matters

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