Trump or No Trump?

Or How Not to (Play) Bridge

The title of this essay alludes to the card game of Bridge. My parents played Bridge; my grandparents played Bridge; I have no clue how to play Bridge. I suppose it’s becoming a lost art, kind of like playing piano in the parlor. Forsaken pianos have become a nice piece of furniture in a well-appointed house (disclosure: I have a grand piano, I love it, I play it, but I’m no pianist). One thing I did find fascinating about Bridge are those terms “trump” and “no trump.”  I have no idea what they mean in Bridge, but in the political context I do, and it’s not good.

I’m one of those many squeezed between the Trump and No-Trump political tribes. I often end up arguing points of difference with both. Back in 2016 I was a No-Trumper, mostly because I thought he was completely inexperienced as a political leader and suspected his campaign was mostly a publicity stunt. I was no fan of Hillary Clinton either and voted for neither. I was as surprised as anyone when Trump actually won. (And yes, he did win. The national voting data showed that Trump won convincingly across the broad landscape of the country. Russian bot interference was not in any way determinant.)

However, I found the craziness that ensued after Trump’s election rather troubling. As a long-time student of US politics, I knew Trump was a symptom, not the cause of our national political dysfunction. But the No-Trumpers had convinced themselves that he was the cause of all our national chaos and therefore needed to be removed at all costs. I suspect this thinking follows from the Great Man (Person?) perspective on history. The prime example of this school of thought is that if there had been no Hitler there would have been no Second World War and no Holocaust. I have never found this approach a convincing way of understanding history. Did Hitler create Mussolini? Stalin? Mao? The Japanese military machine? Single personalities certainly do shape the contours of history, but I truly doubt they are the singular or dominant cause of what transpires on a grand scale. If Putin or Xi had not arisen, someone similar would have taken control of these authoritarian regimes.

The past six years of national political disorder promoted by the No-Trump left and right has convinced me that perhaps we need to continue to disrupt the political status-quo. After all, who were the great disrupters in 2016? Not Hillary Clinton or Jeb Bush. No, the disrupters were Bernie Sanders and Donald Trump. The DNC kneecapped Sanders in the primaries, so we the people elected the Chief Disrupter. And who were the disrupters in 2020? Again, it was Sanders and Trump, certainly not Biden. Biden looks more and more like a placeholder for the Democratic liberal left.

The different voters’ responses of the Democratic left and Republican right to party dysfunction are worth noting. Leading up to the 2016 Republican primaries, Republican voters had already dismissed the Republican vanguard that failed to represent their interests. John Boehner, Eric Cantor, Jeb Bush, John Kasich, John McCain, Mitt Romney, all had been pushed to the sidelines by primary voters. On the Democrat side,  despite the populist and popular criticisms by Bernie Sanders, nothing of the sort happened, as establishment Democrats were rewarded with re-election. The biggest surprise was probably the election of a few political novices, like Alexandria Ocasio-Cortez and Ilhan Omar, but they hardly represented the concerted voices of disaffected Democratic voters.

This dichotomy among partisan voters is likely driven by the behavioral predilections of right-leaning conservatives vs. left-leaning liberals. Conservatives believe in small, decentralized government and individualism, whereas liberals see centralization and collectivism as the solutions to national problems. It is much more difficult for the Republican party to get its voters to march in lockstep, while it comes rather naturally for liberal Democrats. There was almost no objection to the DNC sidelining Sanders, who proceeded to endorse his primary opponents Hillary Clinton and Joe Biden. On the other hand, Republican voters ended up going all in for the anti-establishment candidate who might disrupt ‘politics as usual.’ So, disruption is coming from only one side of the political aisle, while the other stands pat trying to hold onto power.

But if Trump is a symptom, then all the anti-Trump rhetoric is a dangerous sideshow. It maintains the illusory center of attention through the megaphones of the media and establishment political parties. But in no way am I able to condone removing our institutional constraints in order to delegitimize a presidential administration, no matter how much I disagree with the policies of that administration. But while institutional constraints have been applied in total against Trump’s indiscretions and miscues, there has been no institutional constraint on the anti-Trump side. This has led to a double-standard of justice that serves politics, not justice.

Like I said, all this craziness has convinced me that going back to the establishment of Clinton, Biden, Bush, Obama, McConnell, Schumer, and Boehner is a non-starter. I argued this reasoning for the re-election of Donald Trump in 2020. The J6 protest was another symptom of the disruptive forces in our politics. Trump was imprudent to stand pat when the protest turned riotous and he has suffered politically for that mistake ever since. It was not smart politics, as he seemed to be driven by his ego.

So let me be clear on what I’m arguing. The disruption we need is not to destroy the institutions of our democracy, but to replace the political class that is failing to uphold the interests of the voters it claims to represent. This means that incumbent politicians and their party apparatus need to be challenged by voters and I suspect most of this challenge is coming from the right. And their standard-bearer is, for better or worse, Donald Trump. While this might sound like an endorsement of Trump to those No-Trumpers out there, it’s really a decrying of the politics-as-usual status quo that seems to be dividing this nation into two camps. As they say, “Throw all the bums out!”

I find it ironic that the No-Trumpers are arguing that such populist rhetoric now threatens our democracy. (Yes, it seems only right populism is the threat, left populism is, well, the voice of the people?) But isn’t populism the distilled essence of democracy? But, they say, Hitler was elected by a democracy. Technically true, but the institutional constraints had collapsed and Hitler amassed an army of supporters under the Nazi Party with the SS and Gestapo. Trump has certainly not enjoyed any such support from the US military or the FBI or CIA. On the contrary, all these bureaucratic enforcement elites appear to have been vociferously opposed to POTUS Trump. 

So, isn’t the real threat the politicization and corruption of our institutions? From what I see, Trump has been constrained by thousands, if not millions, of bureaucratic Lilliputians, while the institutions of the Justice Department, the FBI, the CIA, the military, and the Fourth Estate all seem to be doing the bidding of a political party. These institutions have worked for us in the past because they have not done the work of politics, but rather the work of the Constitution. If so disfavored, Trump, or Biden, or whoever, should be removed by the electoral process. To prevent this happening through fair elections is the real threat to democracy.

I don’t have a lot of hope for bridging our national politics coming up to 2024, because nothing is resolved. Biden offers a sclerotic and incompetent response and Trump a chaotic one. The Rich Men North of Richmond appear to be losing total control and the natives are restless. Perhaps it will take a crisis for disruption to really take hold. One can only wonder how it will all turn out. I don’t have the answer, but I do know one thing with almost complete certainty: Trump or No Trump? is not the question. Pray for a miracle.

The Progressive Paradox

Psychological studies show that people naturally resist change, largely because change is disruptive, increasing uncertainty and the risk of loss. Resisting change is a manifestation of our survival instincts. This individual psychology is reflected at the societal level: all societies naturally favor time-tested traditions that have helped them survive through evolutionary development. This means the natural bias of any society favors the stasis of the status quo.

…

Thus, we have the Progressive Paradox: the constant need to push against the natural conservative tendency of a free democratic society. Like Sisyphus, progressives must constantly push against the boulder of institutional inertia in an uphill battle. Then, whenever they take a brief respite, the boulder rolls back down to erase most of their gains. It becomes a frantic race against time and the expenditure of energy.

Article on Substack…

Article on Medium…

Was Quantitative Easing the Father of Millennial Socialism?

If you’ve been reading these pages for the past 8 years you know that central bank policy has been a constant refrain. The financial policies of the Fed for the past generation under both Greenspan and Bernanke have created a historic asset bubble with cheap credit. This has greatly aggravated wealth inequality and invited greater risks of both economic catastrophe and political chaos. We’re still experiencing where it leads. The eventual correction will likely be more painful than the original problem…

From the Financial Times:

Is Ben Bernanke the father of Alexandria Ocasio-Cortez? Not in the literal sense, obviously, but in the philosophical and political sense.

As we mark the 10th anniversary of the bull market, it is worth considering whether the efforts of the US Federal Reserve, under Mr Bernanke’s leadership, to avoid 1930s-style debt deflation ended up spawning a new generation of socialists, such as the freshman Congresswoman Ms Ocasio-Cortez, in the home of global capitalism.

Mr Bernanke’s unorthodox “cash for trash” scheme, otherwise known as quantitative easing, drove up asset prices and bailed out baby boomers at the profound political cost of pricing out millennials from that most divisive of asset markets, property. This has left the former comfortable, but the latter with a fragile stake in the society they are supposed to build. As we look towards the 2020 US presidential election, could Ms Ocasio-Cortez’s leftwing politics become the anthem of choice for America’s millennials?

But before we look forward, it is worth going back a bit. The 2008 crash itself didn’t destroy wealth, but rather revealed how much wealth had already been destroyed by poor decisions taken in the boom. This underscored the truism that the worst of investments are often taken in the best of times. Mr Bernanke, a keen student of the 1930s, understood that a “balance sheet recession” must be combated by reflating assets. By exchanging old bad loans on the banks’ balance sheets with good new money, underpinned by negative interest rates, the Fed drove asset prices skywards. Higher valuations fixed balance sheets and ultimately coaxed more spending and investment. [A sharp correction and reflation of solvent banks would have given asset speculators the correct lesson for their imprudent risks. Prudent investors would have had access to capital to purchase those assets at rational prices. Instead, we rewarded the profligate borrowers and punished the prudent.]

However, such “hyper-trickle-down” economics also meant that wealth inequality was not the unintended consequence, but the objective, of policy. Soaring asset prices, particularly property prices, drive a wedge between those who depend on wages for their income and those who depend on rents and dividends. This wages versus rents-and-dividends game plays out generationally, because the young tend to be asset-poor and the old and the middle-aged tend to be asset-rich. Unorthodox monetary policy, therefore, penalizes the young and subsidizes the old. When asset prices rise much faster than wages, the average person falls further behind. Their stake in society weakens. The faster this new asset-fuelled economy grows, the greater the gap between the insiders with a stake and outsiders without. This threatens a social contract based on the notion that the faster the economy grows, the better off everyone becomes. What then? Well, politics shifts.

Notwithstanding Winston Churchill’s observation about a 20-year-old who isn’t a socialist not having a heart, and a 40-year-old who isn’t a capitalist having no head, polling indicates a significant shift in attitudes compared with prior generations. According to the Pew Research Center, American millennials (defined as those born between 1981 and 1996) are the only generation in which a majority (57 per cent) hold “mostly/consistently liberal” political views, with a mere 12 per cent holding more conservative beliefs. Fifty-eight per cent of millennials express a clear preference for big government. Seventy-nine per cent of millennials believe immigrants strengthen the US, compared to just 56 per cent of baby boomers. On foreign policy, millennials (77 per cent) are far more likely than boomers (52 per cent) to believe that peace is best ensured by good diplomacy rather than military strength. Sixty-seven per cent want the state to provide universal healthcare, and 57 per cent want higher public spending and the provision of more public services, compared with 43 per cent of baby boomers. Sixty-six per cent of millennials believe that the system unfairly favors powerful interests.

One battleground for the new politics is the urban property market. While average hourly earnings have risen in the US by just 22 per cent over the past 9 years, property prices have surged across US metropolitan areas. Prices have risen by 34 per cent in Boston, 55 per cent in Houston, 67 per cent in Los Angeles and a whopping 96 per cent in San Francisco. The young are locked out.

Similar developments in the UK have produced comparable political generational divides. If only the votes of the under-25s were counted in the last UK general election, not a single Conservative would have won a seat. Ten years ago, faced with the real prospect of another Great Depression, Mr Bernanke launched QE to avoid mass default. Implicitly, he was underwriting the wealth of his own generation, the baby boomers. Now the division of that wealth has become a key battleground for the next election with people such as Ms Ocasio-Cortez arguing that very high incomes should be taxed at 70 per cent.

For the purist, capitalism without default is a bit like Catholicism without hell. But we have confession for a reason. Everyone needs absolution. QE was capitalism’s confessional. But what if the day of reckoning was only postponed? What if a policy designed to protect the balance sheets of the wealthy has unleashed forces that may lead to the mass appropriation of those assets in the years ahead?

Listen. Time for New Thinking.

One thing I have noticed in this political environment is that people do not listen to political views that diverge from their own. They believe what they believe, and that’s the end of it. Then they project bad intentions on anyone who disagrees. It makes for useless, though necessary, conversations.

This writer makes a good case for some rational reasoning through the imperative of listening to our politics rather than shouting them. We need to chart the correct path forward and it’s not by turning to the recent or distant past. Those mostly provide warning signs for the consequences of foolish mistakes.

History tells us that populist waves can lead to disaster or to reform…So how might we tilt the odds from disaster to reform? First, listen.

It’s Time for New Economic Thinking Based on the Best Science Available, Not Ideology

A new narrative for a complex age

By Eric Beinhocker 

If 2008 was the year of the financial crash, 2016 was the year of the political crash. In that year we witnessed the collapse of the last of the four major economic-political ideologies that dominated the 20^th century: nationalism; Keynesian Pragmatism; socialism; and neoliberalism. In the 1970s and 80s the center right in many countries abandoned Keynesianism and adopted neoliberalism. In the 1980s and 90s the center left followed, largely abandoning democratic socialism and adopting a softer version of neoliberalism.

For a few decades we thought the end of history had arrived and political battles in most OECD countries were between centre-right and centre-left parties arguing in a narrow political spectrum, but largely agreeing on issues such as free trade, the benefits of immigration, the need for flexible efficient markets, and the positive role of global finance. This consensus was reinforced by international institutions such as the IMF, World Bank, and OECD, and the Davos political and business elite.

In 2008 that consensus was rocked, last year it crumbled. Some will cling on to the idea that the consensus can be revived. They will say we just need to defend it more vigorously, the facts will eventually prevail, the populist wave is exaggerated, it’s really just about immigration, Brexit will be a compromise, Clinton won more votes than Trump, and so on. But this is wishful thinking. Large swathes of the electorate have lost faith in the neoliberal consensus, the political parties that backed it, and the institutions that promoted it. This has created an ideological vacuum being filled by bad old ideas, most notably a revival of nationalism in the US and a number of European countries, as well as a revival of the hard socialist left in some countries.

History tells us that populist waves can lead to disaster or to reform. Disaster is certainly a realistic scenario now with potential for an unravelling of international cooperation, geopolitical conflict, and very bad economic policy. But we can also look back in history and see how, for example, in the US at the beginning of the 20th century Teddy Roosevelt harnessed populist discontent to create a period of major reform and progress.

So how might we tilt the odds from disaster to reform? First, listen. The populist movements do contain some racists, xenophobes, genuinely crazy people, and others whom we should absolutely condemn. But they also contain many normal people who are fed up with a system that doesn’t work for them. People who have seen their living standards stagnate or decline, who live precarious lives one paycheque at a time, who think their children will do worse than they have. And their issues aren’t just economic, they are also social and psychological. They have lost dignity and respect, and crave a sense of identity and belonging.

They feel – rightly or wrongly – that they played by the rules, but others in society haven’t, and those others have been rewarded. They also feel that their political leaders and institutions are profoundly out of touch, untrustworthy, and self-serving. And finally, they feel at the mercy of big impersonal forces – globalization, technology change, rootless banks and large faceless corporations. The most effective populist slogan has been “take back control”.

After we listen we then have to give new answers. New narratives and policies about how people’s lives can be made better and more secure, how they can fairly share in their nation’s prosperity, how they can have more control over their lives, how they can live with dignity and respect, how everyone will play by the same rules and the social contract will be restored, how openness and international cooperation benefits them not just an elite, and how governments, corporations, and banks will serve their interests, and not the other way around.

This is why we need new economic thinking. This is why the NAEC initiative is so important. The OECD has been taking economic inequality and stagnation seriously for longer than most and has some of the best data and analysis of these issues around. It has done leading work on alternative metrics other than GDP to give insight into how people are really doing, on well-being. It is working hard to articulate new models of growth that are inclusive and environmentally sustainable. It has leading initiatives on education, health, cities, productivity, trade, and numerous other topics that are critical to a new narrative.

But there are gaps too. Rational economic models are of little help on these issues, and a deeper understanding of psychology, sociology, political science, anthropology, and history is required. Likewise, communications is critical – thick reports are important for government ministries, but stories, narratives, visuals, and memes are needed to shift the media and public thinking.

So what might such a new narrative look like? My hope is that even in this post-truth age it will be based on the best facts and science available. I believe it will contain four stories:

• A new story of growth [see this post]
• A new story of inclusion [see this post]
• A new social contract
• A new idealism

This last point doesn’t get discussed enough. Periods of progress are usually characterized by idealism, common projects we can all aspire to. Populism is a zero-sum mentality – the populist leader will help me get more of a fixed pie. Idealism is a positive-sum mentality – we can do great things together. Idealism is the most powerful antidote to populism.

Finally, economics has painted itself as a detached amoral science, but humans are moral creatures. We must bring morality back into the center of economics in order for people to relate to and trust it. All of the science shows that deeply ingrained, reciprocal moral behaviors are the glue that holds society together. Understanding the economy as not just an amoral machine that provides incentives and distributes resources, but rather as a human moral construct is essential, not just for creating a more just economy, but also for understanding how the economy actually creates prosperity.

In short, it is time to forge a new vision that puts people back at the center of our economy. To paraphrase Abraham Lincoln, it is time to create an economy that is “of the people, by the people, for the people.” We are truly at a fluid point in history. It could be a great step backward or a great step forwards. We must all push forwards together.

Based on remarks originally delivered to the OECD New Approaches to Economic Challenges workshop, December 14, 2016, Paris.

The Degeneration of Political Discourse

If there’s one thing I’ve learned this election season, it is the increasing degeneration of political discourse in our society. Probably everyone in America these past few months has experienced this phenomenon, and either jumped into the mudpit or turned away in disgust. Unfortunately, there is nowhere to turn.

Democracy, as an institution of social choice and self-governance through voting, relies on compromise to resolve divergent interests. This compromise, or middle ground, is often depicted as serving the interests of the “median voter” in election models. Our electoral system seeks to reward candidates or parties who can appeal to this median “center.” The idea of the centrist is one who moves away from the extremes to find common ground. The problem is that we have obliterated the center in our national politics.

How did this happen?

Some have blamed the two-party system that has divided us into red vs. blue and subsequently conquered us as we squabble over ideological trivia. Others have decried our lack of choice between the parties of Tweedle-Dee and Tweedle-Dum, sometimes using the catch-all term the Republicrats for the political class. Still others blame the systemic bias of the media in their desperate bid to remain politically and economically relevant in the digital world.

All of these factors have contributed to our political degeneration. However, I would say the problem is less about only having two parties than about how the parties abuse the system to divide us. I’ve written repeatedly about how the parties and the media benefit from our dysfunction and promote it every chance they get. It is true of Obama, as it is true of Congressional leaders of both parties. It is true of the mainstream media as it is of FOX News and Talk Radio. If we’re looking for relief, it won’t come from these sources.

It will come from us, and there’s the rub.

My own experience as a political commentator illustrates my point. A few weeks ago I wrote that I will vote Neither…Nor in this presidential election for reasons explained here.

Immediately I was accosted by partisans of both sides claiming I was really favoring the opposing candidate. So Democrat liberals accused me of essentially supporting Trump and Trump Republicans of putting Clinton into office. Obviously both can’t be true, but that seems beside the point.

What’s going on here is the desire to paint the issue in black and white and castigate one for joining the wrong side. Identity politics, the growing cancer on democracy, almost forces this dynamic. The tactic is truly the last resort of dirty, rotten scoundrels, but let me explain. What I’m referring to is a typical debating tactic of winning the debate by delegitimizing your opponent (not the argument, but the person). This tactic can take several different forms.

The most extreme way is to simply condemn your opponent’s moral character: a racist, a bigot, a crook. A related way is to impugn your opponent’s motivations: greedy, power monger, predator. Next up is to question one’s intelligence: ignorant, uneducated, low IQ. A more subtle, less aggressive method is to accuse one of being a willing victim of misinformation and propaganda. Sometimes this can be accurate in this corrupted media world, but it’s often used as a blanket dismissal of opinions, views, or facts one disagrees with: I see, you listen to FOX News or read the New York Times.

So, I call this the last redoubt of a scoundrel because it is a feint away from the issue that must be resolved or compromised, and the scoundrel merely realizes that the just compromise with the stronger rationale is not the one they favor. Hence the desire to intimidate and throw one’s opponent on the defensive in order to win an argument. It tosses  democratic compromise into the lion’s pit of do or die.

I’ve written here how this silly finite game of winning an election is overwhelming the more important infinite game of democracy founded on the principles of liberty and justice. Scoundrels do damage to justice and to liberty. Yet too many of us have succumbed to the emotional appeal of winning at all costs. Unless we stop this and start to legitimize our fellow citizens’ preferences (we’re really not debate opponents), our discourse will continue to degenerate and lead to ever increasing dysfunction with disastrous results.

The politicians won’t do this for us. Heaven help us on November 9, because this election is merely the canary in the coal mine.

 

 

 

The Future of History

Can Liberal Democracy Survive the Decline of the Middle Class?

Stagnating wages and growing inequality will soon threaten the stability of contemporary liberal democracies and dethrone democratic ideology as it is now understood. What is needed is a new populist ideology that offers a realistic path to healthy middle-class societies and robust democracies.

By Francis Fukuyama

Thought-provoking essay by Fukuyama, author of The End of History and the Last Man, published in Foreign Affairs journal. Link back here.

This essay is now a year old, but I’ll comment because ideas about “the future of history ” are not really time-sensitive. I’d agree with Mr. Fukuyama’s analysis of the failure of ideology at both ends of the spectrum. In particular, he is correct that:

1. The Left is intellectually bankrupt, with state corporatism, postmodernism, and social welfare statism all running into their inevitable limitations, intellectually and economically.
2. The Right has succeeded temporarily due to the failures of the Left combined with a simple return to pro-growth market-driven economic policies. But with imbalances created by globalization and technology, these policies are limited in effectiveness, with neoclassical growth policy merely perpetuating and amplifying the business cycle. Efforts to avoid the consequences of downturns have led to the explosion of public debt as the new policy norm.
3. Inequality is being driven primarily by technology and globalization, which are symbiotic. Just take a look at the progression of baseball salaries. A world market driven by technology with increasing returns to scale has created a Winner-Take-All market-driven society, leading to economic imbalances and concentrations of power that have rendered existing paradigms ineffective and promoted political cronyism. Capital has enjoyed an increase in market power relative to labor.
4. The answer to Mr. Fukuyama’s question “Can Liberal Democracy Survive the Decline of the Middle Class” is probably “No.” The adage is correct: “No bourgeois, no democracy.” The irony of the Obama administration’s state corporatism redux is its antipathy to the bourgeois—small business and entrepreneurs—with policies that reward big business, big labor, and big government and conflict with the aspirations of free people under free markets.

In closing his essay, Mr. Fukuyama suggests the need for a new ideology to deal with these failures but is less definitive on its features. In considering the trends cited above and the choices we must make, I think it helpful to first identify the true ideological differences between the Left and Right. The trade-off comes between freedom or security, meaning a society that enhances individual autonomy and the range of choices for its citizens versus a society that tries to insure their physical and economic security. The state cannot effectively deliver both. For example, the promise of universal entitlements means nobody gets to opt out, so it constrains the alternatives that free citizens might choose. Given the entitlement crises, it’s questionable whether the state can deliver true economic security at all.

Ideologues of the Right are strongly biased toward freedom, while those of the Left prioritize security in the form of social solidarity. But any new ideology will have to optimize the opportunities for both freedom and security, as both fulfill our emotional human needs to find meaning in our lives. We need to hope for the extraordinary that lies outside the boundaries of the norm, and we need to manage our fears of failure, uncertainty, and loss in order to venture out of our comfort zones.

There is a workable ideology, and it lies right under our noses. Economic markets and political democracy can deliver both freedom and security if we can think outside the dominant political and economic paradigms. To start, the policy challenges we face can best be classified as distributional. Income and wealth inequality, hunger, pollution, educational access, etc., are all distributional failures – our sciences have taught us how to maximize the production of goods, but not how to distribute them to insure market sustainability. Nature has solved this problem with its delicate balance, but man still struggles with skewed social outcomes. But there is a natural logic to the distributional effects of economic and political markets. To achieve sustainability and stability, policy must harness this logic rather than oppose it.

Finance and economics adheres to the ironclad law of risk and return to determine the natural distribution of returns. Those who assume the risks reap the rewards or the losses. Violating this law disrupts the risk-taking, wealth-creating activity on which a free society depends. Political cronyism that favors clients of the state, or tax and redistribution that is politically motivated, contradict the law of risk and return. To illustrate, one can consider the insidious immorality of “heads we win, tails you lose” as a stark example of the violation of natural distributive justice.

To fulfill this promise of a new ideology, we will need to pursue policies that promote the decentralization and diversification of power, both political and economic. (This need not impede the scale of enterprise.) In a capitalist society, the ownership and control of capital is key to participation in the system. The predominant focus on labor, an input cost to the production process, is misguided. Wage labor should be seen as a low risk, low return strategy whereby the worker sells his labor for a pre-determined wage, while the risk of business failure is assumed by the owners as residual claimants to profits. In a globalized world with an oversupply of labor and mobile capital, the relative shares of production strongly favor capital. The owners/managers of enterprises that outsource production increase their incomes, while those who rely solely on labor incomes suffer. The solution is not to restrict productive activity by punishing outsourcing, but to broaden ownership participation in capitalist enterprise.

Policywise, it is a mistake to superimpose capital and labor on citizens. Labor and capital should not be conceptualized as workers and capitalists, these are merely productive factors, like land and equipment. Any one of us can enjoy the returns to any of these factors through ownership and control. The ownership of free labor is obvious, but the ownership and control of capital is more determinant of the final distribution of returns. As the enterprise grows, owners receive greater returns, but workers get the pre-determined wage (plus a small bonus?). Stock options on equity capital is the cause of outsized management compensation where CEO pay is 400 times that of the average worker.

Now comes the kicker: The accumulation of capital also allows for the greater diversification of risk across different asset classes. For example, my labor is concentrated in my person, while my capital is diversified across the world economy. This helps diversify my risk of loss, while also enhancing my potential returns. The broad distribution of the ownership and control of productive assets is the only way to achieve the individual and social objective of freedom and economic security.

As Fukuyama explains, the main hurdle to any new ideological paradigm is political because the existing concentrations of power are self-reinforcing. We will not get policies that reinforce the bourgeois without grassroots mobilization for change. We need reforms of capital markets, corporate governance, the tax code, entitlements, public spending, campaign finance, electoral rules, etc. but existing power bases will vigorously defend the status quo. The only way to dislodge concentrations of power, short of a revolution, is through the power of numbers. Those who oppose change know this very well and expend most of their political energies on divide-and-conquer strategies that target ideological identities. Thus, the Tea Party and Occupy Wall Street were pitted against each other, even though they had compatible interests. Breaking out of this pattern at the grassroots level will take seemingly impossible effort, but the alternative will be recurrent crises and failure.