Donald Johnston and his Hairy Twin, Donald Trump

Donald Johnston and his Hairy Twin, Donald Trump

by

Howard Adelman

Donald J. Johnston (2017) Missing the Tide: Global Governments in Retreat, McGill-Queens University Press.

The evening before last, I attended a book launch at Massey College of Donald J. Johnston’s new book chastising the international community for missing the opportunities over the last quarter of a century and for failing to take advantage of unprecedented opportunities to significantly advance both global social and economic progress. The book is a lamentation with a very loud wail. For there were many opportunities, Johnston argued. ALL were missed. It is also a paean, not so much to freedom from the classical laws of economics, but a cri de coeur to impose an ethical regime in control of the economic realm.

That regime required offsetting any rise of a monolithic dominant state in favour of a newborn vision of a balance of power among states using the leverage of international institutions, but without any international agreed-upon economic standard, such as the now ancient international gold standard. The “self-regulating market” with its unprecedented record of wealth creation had to be wedded to national and international political regulation which had produced “unheard-of material welfare.”  Johnston want to update the moral economics of Karl Polanyi, but with a full acceptance of the market without its neo-classical lack of moral boundaries.

For Johnston, global free trade is in retreat and, with it, the chance to extend increased prosperity to the developing world. Further, since both economic growth and social cohesion rest on a foundation of proper respect for mother earth that provides the wherewithal for both prosperity and social cohesion, the failure to adequately reduce the dangers of climate change may be the most serious missed opportunity.

Thus, the wreckage is economic. The wreckage is social. And the wreckage is environmental. But Donald Johnston is both a small “l” and a large “L” liberal and Liberal. If you do not know who he is, chances are that you have not yet reached your sixtieth birthday. In 2008, the Honourable Donald J. Johnston could add OC after his name for he was made an Officer of the Order of Canada, both for his contributions to public service within in Canada and as the first non-European secretary general of the Organization for Economic Cooperation and Development (OECD), a position he held for ten years from 1996 to 2006, just before the great economic crash of 2007-08. He not only played a signal role in those so-called missed opportunities, but had a bird’s eye view of what happened in that fateful decade.

Further, he came to that position with enormous accomplishments behind him – as a gold medalist in law from McGill in 1958, as a founding partner of the legal firm, Heenan Blaikie, in 1964, where he worked alongside my next door neighbour, also a tax and business law specialist. Johnston was first elected to the Canadian Parliament in 1978 and quickly assumed a place in the sun as President of the Treasury Board, Minister of State for Science and Technology and subsequently for Economic and Regional Development. In addition to these positions between 1980 and 1984 in the Trudeau government, he was named Minister of Justice and Attorney General in the short-lived Turner Liberal government. For, if you are old enough, you might best remember him as the candidate who ran third in the leadership race behind John Turner and Jean Chrétien in 1984 and then broke ranks when his friend and colleague, John Turner, then leader of the opposition, opposed Brian Mulroney on free trade, specifically the Canada-U.S. free trade agreement, but supported the PCs on the Meech Lake Accord. Johnston supported free trade and opposed Meech; he resigned from caucus and became an independent Liberal.

However, it is for his term as OECD Secretary-General that he will be best known. What a bird’s eye view! What an opportunity to influence the direction of history! But if you are looking for an account of his failure, forget it. For the failures were not his. They were the international community’s. There was George W. Bush’s misbegotten invasion of Iraq which initiated the undermining of the U.S. as the world’s leader with the initiation of positions and policies that were frugal on truth, disrespectful of science, expansive on pride and hubris, and thoroughly permeated by corruption and a disrespect for the small “l” liberal values of human rights.

From reading Johnston’s book, the politics of salesmanship, once slick versus the current display of vulgarity, the economics of favouring the 1% and ignoring the well-being of the remainder, promoting the military and foreign adventurism while undermining the welfare needed to hold society together, began much earlier than the ascension of Donald Trump as President. If the slick version of chicanery missed the opportunity to make Russia a full partner in liberal progress, the contemporary much crasser version is nostalgic with its outreach to a kleptocratic and autocratic Russia.

In the nineteenth century, the poor were severed both from the land and their access to charity. Trump will strip them of any possibility of realizing the dream of home ownership and, at the same time, of any right to access state welfare while promising the opposite.  In contrast, for Johnston, good governance on both the national and international level was and remains needed as an offset of once vibrant communities of reciprocity.

What happened? The U.S. was only ostensibly a proponent of free trade, but actually promoted bilateral trade and investment agreements, the forerunner of Trump’s policies without his frank openness. Why did this happen? Because the U.S. was a behemoth which operated to promote its own advantage. (p. 11) Why take on the Lilliputians collectively when you could pick them off one at a time? However, if that is the explanation – the inevitability of the exercise of uneven power – why declaim opportunities missed? If that norm was truly a universal law of behaviour, then there were really no opportunities. It was all a chimera.

Therein lies the contradiction. Forces are at work that overwhelm the liberal agenda of uniting economic growth and wealth creation with policies promoting social stability and cohesion through good governance at the top and a respect for nature at the base. The laws of “power corrupts and absolute power corrupts absolutely” were reinforced by national predispositions. “Americans would never (my italics) accept the taxation levels of many European countries where there is a cultural tolerance for higher taxation to support public funding for education, health, and social safety nets.” (p. 14) But that meant the trajectory in the U.S. would always favour the rich at the expense of the middle and under class and would need foreign adventures to distract the populace through patriotic appeals and circuses.

The book is permeated with various versions of this contradiction between the inevitable power of social forces and the faith in choice and taking advantage of opportunities to forge what my son, the Henry Charles Lea Professor of History and Director of the Global History Lab at Princeton University, calls the doctrine of moral economics, which he identifies with Karl Polanyi. (See Jeremy Adelman, “Polanyi, the Failed Prophet of Moral Economics,” Boston Review, 30 May 2017.) The connection need not be inferred. It is totally evident in the accomplishments at the OECD for which Johnston is lauded: establishing the world standard for the Principles of Corporate Governance, the revised Guidelines for Multinational Enterprises enunciating the norms of corporate social responsibility,  correcting harmful international tax practices; the international harmonization of competition policy, fostering sustainable development, and, as well, establishing the Education Directorate and the Program of International Student Assessment (PISA) for assessing educational comparisons. For unlike Karl Polanyi, an intellectual father, Johnston strove to institutionalize morality and not leave it as a moral cloud haunting the economic market.

Without apology or any self-critical analysis, Johnston was and remains a champion of one version of Polanyi’s moral economics and moral norms, that in both their moral and institutionalized iterations proved to be as weak a barrier to the floods produced by raw capitalism as the levees that promised to hold back the waters of the Gulf of Mexico in Hurricane Katrina from drowning New Orleans. For a number of years, I used Karl Polanyi’s classic, The Great Transformation: The Political and Economic Origins of Our Times (1944) in the general education courses that I taught at York University. As it turned out, it was my marked-up copy that Jeremy used in writing his article.

As Jeremy writes, Polanyi’s book is a “sacred text” for liberals unable to stomach the laws of inevitability espoused by both Marxists, on the one hand, and the worshippers of untrammeled markets and the invisible hand, on the other hand. Could liberalism counter “the iron broom of the classical economists”? He wrote a sacred text against a background when capitalism met its most profound economic crisis of the twentieth century, the Great Depression, and its most horrific political crisis, the rise of populist Nazism with its accompanying antisemitism in Europe.

Like Polanyi, Johnston is an “ethical stepchild of nineteenth-century liberalism, quick to condemn its shortfalls and determined to create a new moral order without the odor of Marxist class conflict.” However, unlike Polanyi, Johnston wanted to embed economic moralism in international institutions, for he accepted rather than rejected the globalization of consumption. Polanyi was a Puritan; Johnston is an Anglican or Episcopalian, at least in the secular economic religion. The market was not just a source of plutocratic enrichment at the expense of workers. It was the arena for creating wealth and it had to be tamed by rules and umpires and not treated as a circus for distraction.

Thus, Johnston’s book is timely and is part of a revivalist movement to beat back “the era of walls, visas, Eurofatigue, and slumping global trade.” He offers a moral counterpoint. Johnston writes about using good (my italics) governance to ensure the transfer of the benefits of growth to society as a whole. Could the OECD serve as an offset to the cult of stable money which was administered by states under a doctrine of state sovereignty, but where the forces at work lay “outside national boundaries, beyond the reach of community regulators”? Polanyi argued that markets had to be “embedded” within social norms to ensure the benefits served communal purposes.

I have written previously about the role of assimilated Jews who tried to address current economic and political issues with the moral lessons of the Torah, but where the Torah was only a silken thread connecting these modern “protestants” to their historic roots. Today is Shavuot that celebrates God’s giving of the Torah on Mount Sinai. Since I did not stay up this year to study Torah all night, it is convenient to refer to Julie Nathan’s essay, “The Gift of the Law: Civilisation, Shavuot and the Hatred of the Jews” (Religion and Ethics, 29 May 2017) Nathan wrote that the Jewish nation, which has had a lasting influence and impact on the human heart and mind rather than its institutions, unlike the great civilizations of the ancient world that grew up along major waterways,  “did not develop along a major river or amid lush vegetation, but was born in an arid desert, in a no-man’s land, and was founded not by kings and conquerors but by pastoral nomads and runaway slaves.” Polanyi may have left his shtetl Judaism behind, but he carried forward its emphasis on ideas, on values, on ethics and on laws to serve as a vision for humanity, but in a Christian form.

Look at Polanyi’s norms: human brotherhood, the sanctity of life, respect for individual dignity, the role of conscience, the upholding of social responsibility, respect for human rights, equality before the law, and a vision of the world guided by justice in pursuit of peace. Jeremy was named after Jeremiah, the prophet of peace.  Nations “shall beat their swords into ploughshares and their spears into pruning hooks. Nation shall not take up sword against nation. They shall never again know war” (Isaiah 2:4). More generally, “Justice, justice shall you pursue” (Deuteronomy 16:20) and, “Love your neighbour [and] the stranger as yourself” (Leviticus 19:18, 19:34)

These were the values of Karl Polanyi. These remain the basic values of Donald Johnston. For Nathan, “Jews are targeted because they are the bearers of these values, the living affirmation of a universal message of a humanitarian and ethical world. Will Donald Johnston also be reproved for trying to revive this ancient message? Or will he be ignored and his analysis relegated to the dust heap of history because it fails to engage self-critically to truly understand why those norms could not succeed against the forces of Mammon?

Assimilated Jews cast adrift from their moral bearings, tried to resurrect and concretize them in international institutions. Donald Johnston, an archetypal WASP and visionary Canadian, emerges as an honorary Jew. As Larry Zolf used to say, “When you are in love, the whole world is Jewish.” Alternatively, one could be Jewish like Polanyi who eschewed knowledge of his origins and opted for resurrection without history. Polanyi claimed that Jews “were guilty, not for the death of Jesus, but for ‘rejecting the teachings of 4520885018036092Jesus, which are superior’.” Polanyi championed a new Christian unity superimposed on free markets and expressing the importance of a political balance, in the Aristotelian sense, set in place by these overarching values.

This is self-evidently a romantic view of Judaism and of the world. Polanyi was an heir to that romanticism. Whereas, both are proselytizers of a sacred secular economic and political religion wherein liberals in a confessional mode flagellate themselves for the failures of their liberalism, Johnston is an Orthodox rabbi in comparison. But both were blind to the real dangers of populist nationalism. “Now, will the Trump administration correct this crumbling once-great democracy or will it, like others, be seduced by the extraordinary wealth of some Americans instead of being motivated to address the poverty and disillusionment of millions who supported Trump?” (p. 16) To even pose this as a question, to even ask whether Trump and Trumpism will be seduced by money, to even hold out the possibility that Trump will convert to the religion of economic moralism, is to expose the emptiness of this economic dream world and suggest why it stood powerless in the face of opposing forces.

Further, there is a failure to grasp Trump’s policies of railing against currency manipulation, implicitly favouring managed currencies, his national protectionism opposed to globalized economic forces, and make-work in industries such as coal mining. All these policies merely demonstrate that Trump, rather than Johnston, was not the usurper of Johnston’s birthright, but rather the true wished-for heir of the small “l” liberal tradition, Jacob (Johnston) longed to steal the birthright of Esau (Bush/Trump), but without Jacob’s mother’s wile. Polanyi was Johnston’s intellectual father, but Trump was the natural heir, not moral economic globalism embedded in institutions.

Johnston ends with this assertion, “I think it will happen.” It reveals the triumph of hope over reality, belief over facts, faith over skepticism, in fact, the very same foundation of charlatan Trumpism’s cynical evangelism based on faith rather than truth, founded on a lavish lifestyle, the Benny Hinn of American secularism. As Jeremy asked, is the search for the middle but a cover for the intellectual, economic and political misery of a muddle?

Lamentations focus on the gore of history. Charlatans nostalgically appeal to past glory. But both were conceived in the same womb.

To be continued.

With the help of Alex Zisman

 

 

A Historical Economic Overview

An Overall Sketch of the Economy: Part I A Historical Overview

by

Howard Adelman

This is my most ambitious blog series ever. I plan to do four things. First, I will offer a potted history of the global economy during the twentieth and twenty-first centuries. That alone might seem totally daunting, but, in fact, it will be a summary of an already potted history published by my eldest son, Jeremy, in an essay in Foreign Policy in this past Sunday’s issue (20 November 2016). His article is entitled, “Donald Trump Is Declaring Bankruptcy On The Post-War World Order,” and subtitled “The global system of peace and prosperity was already on life support before the U.S. president-elect decided to pull the plug.”

The article is well worth reading in its entirety and can be found online at http://foreignpolicy.com/author/jeremy-adelman/. Jeremy is a professor of history at Princeton University where he chaired the department for about a decade and now directs the Global History Lab there. He is an economic historian who holds the Charles Lee Chair as well as the Walter Samuel Carpenter III Professorship of Spanish Civilization and Culture. You might also want to read his essay in the May/June issue of Foreign Affairs entitled, “What Caused Capitalism.” If you are much more ambitious, you might also want to read his book, Worldly Philosopher: The Odyssey of Albert O. Hirschman which I reviewed over a number of blogs last year and which can be found under my name online at wordpress (https://howardadelman.com/).

The second goal I have is to offer a distillation of the current state of the global and the American-led economy, largely drawing on my reading on this issue over the past months and my attendance at two seminars on the current state of the economy. Third, drawing from those two sources, from Donald Trump’s economic pronouncements, promises and performance thus far, and from the general economic behaviour of most populists, I will try to adumbrate the effects of the latter on the current economy. Fourth, I will offer my personal plan for dealing with these expectations.
Jeremy’s essay starts off with a reference to Robert Graves (Good-Bye To All That) and the efforts after WWI to make Britain great again by restoring a bygone economic era of imperialism and British economic leadership through “throwing up trade barriers, turning currency into weapons, plunging the world into depression, and then deporting, or later exterminating, foreigners as well as their own citizens.” If it seems reminiscent of the situation we are now in, that is no accident. Donald Trump is on the verge of turning the post-WWII economic order in which the U.S. was the great stabilizer (generally) on its head; the U.S. is about to become the great destabilizer. Of course, the ground had been well prepared for Donald Trump as America’s role as the chief economic hegemon has faded.

That role began after WWII when the U.S. economy at the end of WWII was larger than the economies of Britain, and the rest of Europe, of Japan and the USSR combined. America was the postwar Leviathan, but a very liberal one that operated not primarily through coercion but through its intellectual and material influence. But Donald Trump has given voice to those nostalgic for this old role of leadership in a context where it is no longer possible. Nostalgia is perhaps the worst foundation upon which to construct an economic policy.

After WWII, America laid the foundations for the economic order that would rule the world over the following seventy years based on global cooperation versus the protectionism that led to the Great Depression combined. This international economic leadership combined with national policies that created safety nets for those negatively affected by the enormous economic dislocations of a co-operative international economic order. The latter half was intended to manage risks and shelter castaways though educational and welfare nets that caught the human byproducts of the enormous institutional, commercial and technological changes underway. The first half of that order depended on agreed upon norms, principles and rules for free trade. As Jeremy wrote, “The result was a boom. From 1950 to 1973, world per capita incomes grew by 3 percent per year — powered by a trade explosion of 8 percent per year. Cooperation triumphed; interdependence brought prosperity.” Borders were not only opened for goods and services, but for the movement of people as well.

According to Jeremy, both pillars of the new economic order gradually started to crumble and eventually collapse altogether. Trumpism is merely the wake following that collapse with all the dislocations and sorrow that such a tsunami will bring. The most significant victims are an era of tolerance and relative stability. The catalyst has been the decline in America’s leverage to allocate resources, co-ordinate the management of currencies, dismantling traded barriers and setting the standards for the post-WWII economic order. But success undermined that leadership role as competitors rose and America’s percentage of world activity fell. China today is responsible for 10% of world trade and has replaced America as the leading trade country. One of the consequences has been a trade imbalance in which the U.S. imports far more than it exports.

The 1979 recession was the first major blow to the system. But the deregulation of the banks with the consequent enormous increase in credit based on very inventive mechanisms for providing credit, offered a new lifeline. When combined with relatively cheap fossil fuels, the global economy received an enormous shot in the arm. But not in the feet. The upper torso would become too enormous for the spindly legs to support it. The most serious effects were the repercussions on this planet; the environment could not sustain the enormous growth. Further, no global system was in place to manage and offer a new foundation for badly needed leadership. The U.S. was not only no longer an economic hegemon, but was the repository of the largest number of climate change deniers in the world. What is worse, many of them occupied positions of power and the Trump election meant that they have reached the zenith of that power.

Why and How? The problem was not only the incapacity of the planet nor the system in place to manage a fossil fuel monetized economic order, but the welfare state had disintegrated alongside this development. As one protection after another fell for those negatively affected, as a whole class of citizens had their expectations and hopes crushed at the same time as the rug of security was snatched from under their feet, a large populist pool of discontent and barely simmering rage had been developed, one that could and would focus on the greatest symbol of the new immigration, the rising tide of minorities and the decline in the hegemony of white working class males.

The effort to continue to free up markets, the ability to coordinate various aspects of this economic system by the Reagan and Thatcher administrations came at great cost to the working class, which subsequently experienced 35 years of economic stagnation and, even more, a seeming indifference to this state of affairs by the political leadership of this new era of “greed is good.” The deregulators and privatizers had given a second boost to the new economic order, but it came with an enormous sacrifice by the working class. The social contract had been shredded. As Jeremy put it, “Public services and protections softened market risks before 1973; in the decades afterward they were replaced by the private comforts of combustion and monthly credit card bills.”

The carbon and credit economy got a further boost with the disintegration of its collectivist rival, the U.S.S.R., in 1989. America was once again the global hegemon. Instead of doubling down, deregulation under Clinton was accelerated. Then, under the Bush regime, America’s economic and moral leadership were sacrificed in the endless warfare in the Middle East. These events paved the way for a bankrupt casino operator coming into power. Barack Obama was merely a hapless intervener trying to hold back the tides of change and disintegration while assaulted within by a Republican-controlled Congress and challenged externally by the diminution of America’s role in the world.

The ground had been prepared for America to shift from a role as the great stabilizer to that of the great destabilizer. “The long cycle of integration and relative tolerance forged by U.S. leadership since World War II is now headed in reverse.”

With the help of Alex Zisman

Strategies vs Theory and Causes

Worldly Philosopher: The Odyssey of Albert O. Hirschman by Jeremy Adelman

Conversation – Strategies vs Theory and Causes

Chapter 11. Following My Truth                                                                

                                               

by

 

Howard Adelman

 

Why did Jeremy call the U.S. 1952 election in which Adlai Stevenson ran against General Eisenhower for president “one of the most appalling in modern American history”? (p. 325) Was it because Eisenhower’s Vice-Presidential running mate, Richard Nixon, ran such a dirty anti-communist crusade? Was it because Dwight Eisenhower himself in his famous Wisconsin election speech not only did not defend his old colleague, Secretary of State George Marshall, against Senator Joseph McCarthy’s rants against Marshall as part of a communist conspiracy, but himself engaged in outlandish anti-communist rhetoric, picking up McCarthy’s line that communists had infiltrated the nations schools, unions, media and government? In Jeremy’s biography, the depiction merely set the stage to explain why it was not a propitious time for AH to return to America.

 

Suddenly, without plans or forethought, an unexpected invitation arrived four years later inviting AH to become a research professor at YaleUniversity for all or part of the 1956-7 academic year. “As Machiavelli instructed his prince, it is equally important to seize opportunities and align the forces of virtŭ and fortuna on one’s side in order to convert an opportunity into achievement. It was with this Machiavellian esprit that Hirschman relocated once more.” (p. 327) As a research professor, he was not expected to teach but he was expected to use his time to write a book.  He wrote The Strategy of Economic Development (1958). Further, when unable to finish the book within the year – a dubious proposition to begin with aside from his decision to engage in extensive re-writes after attending a conference in Brazil – he managed to get a Rockefeller grant to extend his appointment for an extra year.

 

Jeremy sets this against the backdrop of the new North American orthodoxy of development theory that I discussed in the last blog – balanced growth designed both to offset chokepoints to insure against over-production with too little demand as well as infuse capital that would be strategically distributed to ensure there were no shortages in countries with surplus labour and severe capital shortages. In contrast, Latin American economists (Roberto Campos and Alexandre Kafka) argued that growth itself produced disequilibrium and imbalances spawning both greater inequalities and inflation. Change was the problem, not inertia. These influences on AH, supplemented by Edmund Burke and Friedrich von Hayek, pushed a thesis about disequilibrium as central and the possibility of strategies to manage that disequilibrium rather than chimerical theories to do away with it. AH also picked up the notions of frustration, aggression and anxiety from Erich Fromm to add a psychological dimension to his analysis.

 

His methodological approach matched what he saw as the approach of agents in history – in particular, entrepreneurs – who tackled problems, not events, who dreamt up ways of overcoming obstacles rather than envisioning the absence of any obstacles whatsoever. Stress and tension were healthy as long as they were used to transform a situation into a creative solution rather than simply being allowed to eat away at oneself. Once again, the cunning of reason worked through paradoxes and problems to unleash new contradictions and new problems. More practically, do not start with large megaprojects like dams and ports to eliminate bottlenecks before the demand had even sufficiently developed. Rather invest in industries and agriculture, in entrepreneurs and businesses. Invest in productive people and not plans and planners. The key was creative decision making – the same creativity that invented money itself in the first place.

 

Piecemeal planning was offered in opposition to comprehensive and coherent general plans. What Jane Jacobs would offer to urban planners three years later with her classic (1961) The Death and Life of Great American Cities, Albert Hirschman was offering to the theorists of economic development on a larger scale. The same premises were at work. Instead of big planners of dams and ports, Jacobs had to contend with big planners of roads, such as Robert Moses, and huge housing estates with no eyes on the ground at street level to keep the passageways safe through the many eyes looking about.

 

In the sixties, the zeitgeist favoured writers like Hirschman and Jacobs and the revolt against liberal master builders. In the sixties, Ike might not have been given the opportunity that he had in the fifties to build his system of interstate highways that allowed the creation of suburban America, the car culture that paradoxically facilitated the eventual destruction of Detroit as a city.

 

Why was AH’s answer inadequate as Jeremy suggests through the criticisms of Amartya Sen and others at the end of the chapter? I want to use an example from a related field much more au courant today than development theory or urban planning – resource economics and the unintentional spoliation of the commons. More particularly, I want to examine Elinor Ostrom’s book, Governing the Commons, that came out just over three decades after AH wrote The Strategy of Economic Development. Ostrom’s book helped her earn her 2009 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, the Economics Nobel Prize.

 

Like AH, Ostrom loved case studies. She also loved paradoxes. Though suspicious of theory based on an inadequate collection of empirical data, she did not have a knee-jerk antithetical approach to theory in the sense of abstract modelling. Further, she suspected metaphors as dangerous. Her book begins with an explication of the tragedy of the commons as illustrated by the total depletion of the fishery off the Grand Banks (her resource, my location). State regulation not only did not prevent its destruction but exacerbated it. Would it have been destroyed without state control? Undoubtedly! The tragedy of the commons and the free rider problem illustrate that if individuals are left to pursue their own best self-interest in the use of the commons where the long term delayed costs are deterioration which is against each individual’s longer term self interest, the propensity will be to effectively destroy the commons.

This example can be illustrated all over the world and reaches tragic proportions in cases where the depletion of natural resources is exacerbated by climate change, such as in the desertification of the Sahara region. In Darfur, the human population exploded by 500% over a century and the animal population by almost double that amount at the same time as the resources to support the nomadic populations shrunk. The clash with the settled agriculturalists with whom the nomads had lived in a symbiotic relationship previously was almost inevitable. The result could not have been worse – the ethnic cleaning (sometimes misnamed a genocide) of the non-Arabic agricultural tribes to the south, the Fur, Zaghawa and Massalit tribes through an alliance of Arab nomads and the state government of Sudan.

 

Everyone’s property becomes no one’s property and the cost is the private property of others. As the users exceed the capacity of the commons to support them, the resources withdrawn will be larger than those needed to renew them. It is but an illustration of the prisoner’s dilemma where individual rational strategies lead to collective irrational outcomes that betray those same individual interests. Why? Because there will always be individuals who cannot be excluded from the general benefits available to everyone who will choose to withdraw more and contribute less. They are free riders whether they are sharing a bathroom with other students (my very mundane example in my book, The Beds of Academe arguing why domestic washrooms were preferable and much cheaper to build in residences than institutional washrooms) or sharing a huge grazing and agricultural field the size of France.

 

So the question arises of governance – how to manage a commons? The two dominant models have been state control (governance by the Leviathan) versus assigning the management to private enterprise as in the case of keeping the commons clean through waste management. There is a third model based on joint collective management by the users themselves, a cooperative versus private or state models, but it easily breaks down when subjected to strong external pressures (climate change and corrupt central governments) and internal pressures (population growth).

 

AH’s answer, as was also Ostrom’s, – the solution is situation specific. The state option presumes the state has complete or at least adequately comprehensive information, can fairly assign capacities, monitor use and has an effective justice system for sanctioning non-compliance to generate an optimum equilibrium. This utopian premise was at the heart of the weakness of balanced growth economic development theories. As AH showed, a serious error in information, unfair assignations, inadequate monitoring or meting out justice, let alone a combination of them, inevitably led to disastrous consequences, sometimes (or often) worse than if the individuals were allowed to operate in a strictly laissez-faire way.

 

What about those who say that the answer is to convert the commons to private ownership. How can this take place with grazing land already used by an excessive number of herders let alone when applied to water or fisheries? Ostrom illustrated through a number of cases how cooperative solutions often worked much better than either the laissez-faire or the state governing model. AH concurred. Better solutions were often developed through the initiatives of the users themselves based on the recognition that the information available was far from optimum, continued decisions re assigning capacity would have to be made, continuing monitoring conducted and penalties enforced for non-compliance. However, one of the problems of the cooperative model is that over time it tended to develop either into a quasi-state with all its problems (the Canadian Wheat Board for marketing Canadian wheat) or a private corporation (such as Sunkist Oranges).

 

The reality is that the solutions vary over different situations and, as situations change over time, the model solution applicable may change as the institution changes and adapts. No one type of solution is universally applicable. I recall when Fidel Castro, before he had fallen out with the United States by openly advocating communism, made a speech to the association of cooperative farmers in Cuba in 1959. In a speech that lasted almost four hours he explained how members of cooperatives are inherently selfish since they are only concerned with the well-being of the members of the cooperative and not with everyone in the country. Since the state had a shortage of seeds, he would have to allocate those seeds to state owned farms that had everyone’s interest at heart. The cooperatives voted to convert to state owned farms and, miraculously, all state farms, including the former cooperatives, were able to get seeds. Ideologues, particularly communist ideologues, are blind to their own self-contradictory positions and the evidence that falsifies their own convictions – in this case, the ability of state owned farms to adequately satisfy demand.

 

Ostram provided reams of evidence to suggest that self-organizing and self-governing forms of collective action, based on empirical findings, could, in some situations at some times, offer a more effective answer to governance of the commons. AH offered a more general thesis on the same topic about the category of development itself. Yet he never received the Nobel Prize for Economics.

An Orthogonal Development Theory

Worldly Philosopher: The Odyssey of Albert O. Hirschman by Jeremy Adelman

Conversation – Instalment 12: An Orthogonal Development Theory

Chapter 10. Columbia Years                                                                       

                                               

by

 

Howard Adelman

                                                                         A

 

 

 

 

 

 

 

 

 

 

 

                                                           

 

   C                                                                    B                                                             D

The lines AB and CD are orthogonal to one another.

If CB and BD represent two oppositional development theories, then AB, at right angles to both theories and illustrated as perpendicular to both, makes the third theory mathematically orthogonically related to the other two theories. On p. 322, Jeremy describes AH’s thinking as so “orthogonal”. (p. 322) By explicating and clarifying the key characteristics of AH’s development “theory”, I want to show that it is indeed a theory –contrary to Hirschman’s (and Jeremy’s) protests otherwise. As Jeremy put it, AH “began to think about development in Columbia from the ground up – with a style but with no theory.” (p. 303) As AH worded it, “I looked at ‘reality’ without theoretical preconceptions of any kind.” (p. 297)

This is correct if “theory” is exclusively restricted to sets of statements or principles which are abstract and in terms of which events or actions are explained and even can be predicted. But theory also applies to principles that guide action or a set of practices by means of which judgments can be made. So although AH never had a theory of development in terms of a general abstract model, he certainly did have a theory about interpreting the phenomenal world of experience.

The problem goes back to the Greeks, and Aristotle in particular, where theoria was contrasted and seen as wholly other than practice. This is one reason his theory of health and the humours was so messed up and his theory of humours was so misleading for health practitioners for centuries. Diagnosis of disease begins with identifying four sets of key variables: a set of symptoms or indicators, anatomical location, physiological functions and an interpretation of the aetiology of the disease. The theoretical designation of a disease is then modified in each of these categories in accordance with experience and actual practice. There is no abstract model of the disease. AH developed a theory of development in precisely these terms.

Beginning with a quote from Franz Kafka as usual, Jeremy begins his chapter on Hirschman’s work in Columbia, the country to which he went when his career in Washington was still encountering roadblocks. “You can hold yourself back from the sufferings of the world, that is something you are free to do and it accords with your nature, but perhaps this very holding back is the one suffering that you could avoid.” (p. 295) The quotes from Kafka are always very pointed, but this one I found to be particularly poignant. When Jeremy was still in high school during the seventies, he took a year off to serve as a volunteer with Canada World Youth and served that year in a very remote part of Columbia living with a poor peasant family and assisting them while, at the same time, he gained his mastery of Spanish, albeit with a Colombian accent.

While Jeremy was with the family, the mother gave birth. When the infant was very young, he contacted me from this remote part of Colombia. The infant was very ill. The family lacked the resources to travel some distance and take the infant to the nearest nursing station or infirmary. He felt helpless because the ideology of Canada World Youth ran on a doctrine of non-interference in the local situation other than providing volunteers. Infusions of wealth from outside would deform the local economy, introduce distortions and such interventions were actively prohibited by volunteers. Jeremy wanted to ask me for the money to help out but was conflicted since he felt bound by the principles he had accepted when joining Canada World Youth. He was deeply torn. The issue was clearly not the amount since it would have been a relative pittance even if the health fees were added to the travel costs. Instead of insisting on sending him the money and persuading Jeremy that, “To save one child is to save the world,” I also practiced non-intervention and did nothing. I felt terrible. He felt very much worse as he watched the infant die in front of him. I am convinced that we both acted improperly at the time. I believe, to this day, that this event scarred Jeremy, though I believe it instilled in him his first suspicions of abstract doctrine and his attraction to dealing with the present and the immediate demands of the moment. The event certainly scarred me.

Development theory has very direct consequences on the lives of ordinary families. AH arrived in a country torn by civil war (La Violencia). Jeremy characterizes AH’s years in Colombia as the best of his and Sarah’s lives, a place of adventure and cultural stimulation where Albert was intellectually reborn. The World Bank had already reinvented itself in the aftermath of the Marshall Plan as the vehicle to save the Third World from communism and ultra-ambitious state planning. Colombia was to be its first test case. AH brought a scepticism of abstract ideological formulations, an attraction to direct observation of small things and routine practices combined with the opportunity and continuity over time to make those observations, and a belief in learning by doing reinforced by Eugenio Colorni and his readings of Montaigne.

The World Bank formed a survey mission led by the Canadian-born economist from Nova Scotia, Lauchlin Currie, whom I met briefly at SimonFraserUniversity in the late sixties when I participated in developing a plan for student housing for the university. I regret that I never got to know him, especially since, in retrospect, he had developed, I believe, the theory of money similar and far more profound than the one I espoused. He also showed that he had an intimate acquaintance with cooperatives. He had attended St. of X (FrancisXavierUniversity) where he was undoubtedly infused with its Catholic teachings of social service and cooperation. Currie went to LSE and then earned his PhD at Harvard writing his thesis on banking and the money supply. He was an ardent Keynsian New Dealer adviser to FDR during WWII, a close adviser to Harry Dexter White at Bretton Woods and had been involved in the secret VENONA Project decrypting Soviet cables where he (inadvertently?) became a source to Soviet intelligence. He ran the World Bank Colombian Survey Mission from 1949 to 1953 and stayed on in Colombia when the USA refused to renew his U.S. passport.

For Currie, the object of economic planning was to raise the standard of living in Colombia and directly tackle the problem of poverty.  In one year, starting in July 1949, a team had been assembled, a comprehensive plan developed and a National Planning Institute initiated to implement the plan, The Basis of a Development Program for Colombia. The plan envisioned “aggressive and coordinated improvements on all fronts simultaneously to avoid distortions, bottlenecks, and lags.” (p. 300) The plan was based on the developmental conception of “balanced growth” and the “big push” only to have the grandiose expectations crash against “inconvenient realities”.

One of those very inconvenient realities was the clash of personalities and approaches. AH was hired as advisor to the National Planning Council. Currie, through the machinations of Emilio Toro, the Colombian member of the Board of Executive Directors of the World Bank, returned as an “adviser” to the Council so the Council now had two advisors though Hirschman was the one charged with overseeing implementation but, unlike Currie, did not have a Board member in his pocket to push his views. AH had left Washington’s skulduggery for Bogota’s. “Currie liked big plans, especially when they made administrative reform the condition for everything else; Hirschman preferred projects, even big ones – but the more specific, the better. Aligned with the Liberals, Currie tended to create animosity between the Council and the Conservative government; Hirschman eschewed partisanship and wanted to focus on problem solving.” (p. 301)

If Hirschman was burdened with the Currie-Toro duo undermining his authority and ability to act, the Council hired another outside economic adviser from Belgium, Jacques Torfs, who approached the problem of development from his own idiosyncratic abstract esoteric theory of minimizing capital-to-output ratios. In addition to rival abstract theorists posing problems, AH took seriously the principle of being an adviser to facilitate and advance local expertise and authority, while Currie believed that detachment as well as true expertise gave foreigners an advantage. AH did not have the same reverence for detachment. He preferred experience and close observation. He wanted to concentrate on what the country was doing right and not its grand pathologies. However, his proposed study on successful businesses and successful entrepreneurs and managers and their methods and means of financing never took place.

When General Rojas Pinilla’s military coup in June of 1953 quickly developed into the usual predatory military capitalism compounded by a slide in coffee prices, Colombia’s economy slipped quickly down hill. At the same time, austerism, the other end of the abstract theoretical economic spectrum, took command. Currie went off to raise prize Holstein cattle. AH determined he was now impotent. He resigned just when Senator Joseph McCarthy was at the pinnacle of his power heading the Senate Permanent Subcommittee on Investigations in 1953 and 1954. Prudently, AH went into private practice as an economic consultant in Bogota to help investors identify opportunities and solutions to problems. Opportunism (AB) had been developed as a counterpoint to both Keynesian master large scale planning and stimulus for a broad approach to balanced growth (BD) as opposed to austerism (BC), a policy advocating restrictions on money supply and reductions in deficits just when a country needed a stimulus.

Opportunism focussed on the openings for entrepreneurs, focussed on civil society initiatives rather than grand government policy of either the austerists or the Keynesians. The theory, in the second sense I specified at the beginning, stressed initiatives from the bottom rather than grand views from the top. This was precisely when Walt Whitman Rostow’s The Stages of Economic Growth: A Non-Communist Manifesto was published by Cambridge University Press and became must reading when I was an undergraduate. In spite of all Rostow’s bended intellectual knee to the uniqueness of each nation’s experience and the somewhat arbitrariness of the stages-of-growth and its limitations, his book offered a very positive law-like approach to understanding economic development that built on and went beyond Croce’s Historical Materialism and the Economics of Karl Marx in providing both a grand theory of economic development as well as a grand theory of history in terms of dialectics without Marx’s romantic revolutionary spirit. Rostow had proposed a grand theory of modernization depicting the worship of sustained long-term economic growth itself as a central part of the doctrine and the key determining forces at each stage of economic development.

Rostow’s treatise would soon be followed by Max Millikan’s 1963 volume, The Political Case for Economic Development and his 1966 even more influential book as far as I was concerned, Equity versus Productivity in Economic Development. Liberals had their antidote to Marxism and their own romantic versions of how to rescue impoverished countries from the debilitation of stagnant economic circumstances.

To a conference in October 1954 on the new theories and their implications for policy, AH brought the message that the emperor was naked and that the empirical date behind the theories were almost entirely lacking. The abstraction of balanced and comprehensive planning hit the shoals not only of a complete lack of sufficient evidence and too high a degree of abstraction, but a belief that the future was predictable and could be managed whereas AH had been too deeply steeped in the Hegelian dictum that we can only understand by looking backward. As Hegel wrote in the Preface to the Philosophy of Right, “One more word about giving instruction as to what the world ought to be. Philosophy in any case always comes on the scene too late to give it… When philosophy paints its gloomy picture then a form of life has grown old. It cannot be rejuvenated by the gloomy picture, but only understood. Only when the dusk starts to fall does the owl of Minerva spread its wings and fly.”

During this period in the philosophy of history, two major theories were in contention,. One was the positivist views inherited from Benedetto Croce of Carl Hempel who was then at Princeton. For Hempel, history should be akin to a science and explain events and actions by subsuming them under general laws that could be verified by their predictability. Opposed to the grand theories of the positivists were the theories of the verstehen school then led by the University of Toronto philosopher, William Dray, who thought that history was about re-enacting the thought processes of historical agents and, as I wrote in my PhD thesis, subsuming decisions about which actions to take under more general hypothetical imperatives to guide human conduct. Was history a subject matter for pure scientific reasoning or for hypothetical imperatives and practical normative reasoning? I, like Albert Hirschman, opted for neither. Both theories never even met the conditions of satisfying the cases each side cited. We do not explain historical actions by subsuming them under general scientific laws or subsuming them under normative imperatives. Further, we do not even explain actions or events; rather, we explain incongruencies. We deal with puzzles that face us and focus on problems not on actions abstracted from the context of the inquirer.  

Why do I call this orthogonal approach a theory when it so stridently disavows abstract modeling? Because it does not! It only disavows extending any generalization into the future without irrefutable solid evidence. In the interim, analysis can reveal patterns of contradictions and ways of resolving them, but the dialectical pattern revealed cannot be applied to futurology for the very essential dynamic of the model depends on innovation and re-inventing itself thereby creating new but unpredictable opportunities that will be taken advantage of on the ground while those actual innovations are entirely missed by the theorists rooted as they are in extrapolations from the past.

In sum, AH did have a theory of development, one not based on either supposedly scientific laws of explanation and prediction nor on empathetic re-enactment to reveal the moral imperatives governing agent’s choices and actions. The theory, loosely referred to as Opportunism or, more awkwardly, Possibilism, had the following characteristics.

1. Focus on problems or incongruencies;

2. Use detailed case studies and focus on acute observation of fine details and distinctions;

3. Establish concrete and routine practices that can be continued over time to test efficaciousness – learn by doing;

4. Try to locate and identify initiatives that will be game changers;

5. Bureaucracy, whether in a state or a private firm, inherently wears blinders;

6. Evaluations of development projects should not simply be about cost-effect studies but about assumptions, capacities, priorities and unintended as well as intended effects.

Both right wing monetarism and the stress on entrepreneurs, and left wing or liberal Keynesians stressing wide scale government economic interventions in bad economic time, are both correct, but monetarism must give up its vision of an ideal balancing point in a system at equilibrium, when, by its nature as an innovative enterprise, it is inherently unstable, and Keynesians must not allow stimulus and intervention to be transmogrified into “permanent revolution” and continuing governance (as distinct from regulation). AH provided the most important antidote to the excesses of both theories when applied to development.  

McCarthyism and Mindblindness – Chapter 9. The Biography of a File

Worldly Philosopher: The Odyssey of Albert O. Hirschman by Jeremy Adelman

Conversation – Instalment 11: McCarthyism and Mondblindness

Chapter 9. The Biography of a File                                                                                                       

by

Howard Adelman

The question for Albert Hirschman was NOT to be or not to be, but to know or not to know. The story of Plato’s cave begins with the shadows on the cave wall. The shadow is the darkened area where the light from a source behind a living person tied to a log in a fixed position is then projected on the wall of a cave. The person in Plato’s story takes those shadows produced by the obstruction of the real person to be themselves real. Note the following. The person on the log is opaque; the light does not pass through him or her as he or she blocks the light. The shadow we see is the light that is blocked but we do not see either the person blocking the light and certainly not into the person.  

This is the realm of spooks. This is the realm of images taken to be real. This is the realm of opinion taken to be as valuable as truth. This is the realm of rumours and gossip and half and quarter-truths. This is the realm of the FBI file that haunted Hirschman but which Hirschman only barely recognized as possibly existing and inhibiting his employment in any significant role in the OSS during WWII and in Washington after the war. The difference was that Hirschman was not chained to the log. He could have turned around. He could have sought out the source of the beam of light shining upon him and radically distorting who he was. As Jeremy writes:

From 1943 to 1966, a shadow trailed Albert Hirschman. But unlike most shadows, this was one he never saw. Hirschman did suspect that some invisible force was at work; some things in his life were too unfathomable. He did not understand why the OSS did not make more of his intelligence skills and preferred to employ him as a mere interpreter; he tended to explain this away as the bureaucratic ineptitude of armies or large organizations., in part because he had less and less affection for them. But there were times when his career ran into inexplicable roadblocks. 

I want to suggest a different description than the one Jeremy offers. The shadow was not behind him but in front of him. He could see the shadow that seemed to precede him wherever he went in those years. The blockage was NOT invisible but he preferred to account for it in terms of bureaucracy rather than assigning it to the malignant forces apparent everywhere in America in those years. McCarthyism was the BIG STORY, certainly by the early fifties though it had already reared its ugly head in the FBI and during WWII. Why would he believe himself to be immune? What was occurring was not at all unfathomable and was not simply seen clearly only in hindsight. The seemingly inexplicable was explicable if only he dared to look, inquire and investigate. There were plenty of clues.

Was it the fear of the insecure stateless person that inhibited him? Did Albert Hirschman and Hannah Arendt share a kind of mindblindness, an unwillingness to attribute deliberate beliefs, desires and intentions, in Albert’s case, to American officials, in Hannah Arendt’s case, to Adolph Eichmann? Why would they want or be willing to make pervasive evil, though certainly of very different and incomparable degrees, banal? Did the reasons have the same general source because both always remained deeply loyal to German culture even as they severed their loyalty to the German state? Both had developed a new loyalty to America but had not developed a deep passion for the culture of America. Neither could read its whimsical variations.

Jeremy goes in an opposite direction than I would and gives an inanimate bureaucratic file a life of its own “independent of the person about whom it purportedly reported, in part because it was so inaccurate, a likeness of someone else.” (p. 285) Jeremy opined: “The file remains nonetheless a sad portrait about the power of innuendo and paranoia that governed some people’s lives for many years.” But it wasn’t just the power of innuendo. It was the power of deliberate and conscious malevolence. And, in Albert’s case certainly, it was not a matter of too much paranoia, but too little following up on suspicion. And if we are talking about the McCarthyites, there is a big difference between manipulating paranoia for political purposes – which both Hitler and McCarthy did – and irrationally feeling persecuted. There is a difference between feeding and capitalizing on a paranoia you helped develop about the omnipresence of communists as you transgressed every single constitutional protection versus crediting paranoia with the reason for Hirschman’s ill-treatment. 

I had, and probably still have, a very thick file of information on my activities when I was young collected by the RCMP. I know of the information because I could watch as it was collected by unmistakeable RCMP officers at demonstrations and marches in which I participated as a youthful activist. I also know of the file because, when I was an undergraduate, Professor McCurdy in the Philosophy Department invited me in to his office to speak to him. He told me in confidence that he had been asked to come down to the offices of the RCMP and was queried about me and my beliefs. He told me that the file on me that the RCMP had opened on their desk was at least 5-6 inches thick. Later, I was one of the organizers of the Praxis Corporation, a research institute concerned with spreading democracy beyond politics and into civil society. The offices were raided, the building was torched and copies of material in the files appeared on the desk of Peter Worthington, the editor of The Sun. In the McDonald Inquiry into the activities of the RCMP, we learned that the Mounties had broken into our offices and burned down our building. (Cf. pt. 5, C/Superintendant S.V.P. Chisolm to A/Commissioner M.S. Sexsmith, 27 June 1977; ibid, ‘Praxis Corp.,’ 26 February 1971; ibid, pt. 2, ‘Praxis Corporation,’ 15 April 1971; ibid., ‘Praxis Corporation – Toronto,’ Memorandum of Sergeant W. Ormshaw, 8 June 1971.) 

We too had not been suspicious enough of the misbehaviour of government agencies. To this day I have no reason to believe my life was misdirected for periods because of it as had been the case with Albert Hirschman. On the other hand, I do recognize that a similar tendency to read the best into government activities did blind me to a degree to the ill use that officials could make with collected material. I, in fact, used to joke all the time that if I was ever worthy of a biography – which I am not – at least the RCMP would have done the work of accumulating the needed research material for some future scholar. Perhaps there is a correlation between AH’s recognition of his own potential importance and the added degree that he contributed to his own mindblindness. Further, AH was important enough that he needed a security clearance; I never reached that status.   

Jeremy is to be credited with getting and studying the file and showing how, even though the overwhelming evidence clearly pointed against either fascist or communist sympathies, activism alone and its extent in Germany, Spain and Italy was sufficient to set off alarms. And one did not even have to be an activist. One merely had to be active – in the case of Harry Dexter White – in believing (correctly or incorrectly) one could work with mutual benefit with the USSR. One could have the wrong beliefs, the wrong contacts, the wrong actions. Witch hunts do not require evidence, only suspicions, even if those suspicions were based on actions and activism in cooperation with ardent anti-fascists and anti-communists like Eugenio Colorni. Action and activism as well as reasoned conviction were all grounds for suspicion. It did not help that the investigators were so ignorant or so error prone with regard to local politics that they would confuse anti-communist socialists with their enemies, the communists. Allegations and suspicions were sufficient to taint a career.  Finally, in 1966, AH was allowed to have his own voice to answer these unchallenged allegations, but even then, Jeremy reveals, he left out of his account his actions in Spain. This suggests that he did indeed have a strong sense of the source of a stain on his file. Only then, with the added testimonials on his behalf, was AH finally given a clean bill of political health and no longer regarded as a potentially contagious agent. 

Chapter 8. Worldly Philosopher – The Anthill: Repressed versus Joyful Capital

Worldly Philosopher: The Odyssey of Albert O. Hirschman by Jeremy Adelman
Conversation – Instalment 9B: The Paradoxes of Economic Recovery
Chapter 8. The Anthill: Repressed versus Joyful Capital
Part II

by

Howard Adelman

My own theory of money began with my graduate course on political theory that I took with C.B. Macpherson. Brough’s book on Possessive Individualism had just appeared. In it he had argued that there was a contradiction between the state of nature as depicted in The Second Treatise on Government which was all peaceful and without conflict and the subsequent state of conflict depicted afterwards as the precursor for the social contract. After money was invented, hoarding, scarcity and conflict resulted and turned the state of nature into a state of war necessitating developing a social contract.

In my first paper for Brough, I argued that he had misread John Locke. The invention of money was not something like a deus ex machina that took place at the beginning of his story (rather than the end of the book) that turned humans into accumulators and protectors of their property. In Locke, men were possessive individualists from the get go. The world was peaceful and the laws of the state of nature dictated there was enough and sufficient for all because there was no mechanism for creating shortages. However, the drive to accumulate private property was so great that it impelled the creation of money. Suddenly, the products of one’s labours could be represented by a token that meant wealth could be accumulated. Humans were not restricted to hunting and gathering only what they could consume. The result – wealth accumulation, scarcity and a war of all against all – at least, according to John Locke – had been made possible.

The paper not only criticized Brough for imposing a contradiction on Locke when there was none. It argued that the primary doctrine in economics and politics was not the labour theory of value wherein humans inserted their labour into nature and what was given in nature combined with the labour to extract it and convert what is given into an artefact gave value to what was produced. Money was supposed to represent that value. Marx would inherit the same flawed idea of a labour theory of value via Ricardo and John Stuart Mill and add the theory of expropriation and exploitation of the worker. Instead, my paper suggested that value was not a product of mixing raw labour with the given material universe and converting it into artefacts, but was only present when it could be symbolized by abstract tokens – money – to which the collectivity directly or indirectly agreed to assign a value.

Beyond re-reading Locke in this light as not being self-contradictory, this implied the following:
a) possessive individualism in Locke was inherent and not a by-product of the invention of money;
b) value was itself a by-product of convention of the group and not an arithmetic calculation of labour expenditure invested into the natural world;
c) Two simultaneous and somewhat paradoxical actions had to take place to lead to a social contract: i) the desire to use one’s labour to change the given world; and ii) a society among whom agreement could be made how to represent the value of those goods through an abstraction deemed to be money.

Further, analysis suggested that Milton Friedman’s monetarism was correct in emphasizing the importance of the government as representing the social contract in governing the money supply as the most crucial input that could influence economic productivity over time. Setting aside his right wing economic ideology and his belief in “equilibrium” between growth in productivity and demand as the key measure for determining the money supply, the recognition that an abstraction, like money, was absolutely crucial to economic growth was foundational. The problem that remained was twofold. First, what was being measured was difficult since entrepreneurs with their ingenuity kept creating new debt instruments that effectively expanded the money supply when the government was not yet in a position to count it let alone regulate it. This happened with the last financial crisis in 2007 with the innovations of swaps, credit-defaults, securitization and tranching with respect to residential mortgage securities.

Without both the individual self-interest and the communal concurrence to create a convention, there would be no economic development. A social contract was a precondition of any economic system and not a product of violent conflict because of the absence of a social contract. What was the nature of that money and how did one determine its value? The nature of money could be any token – beads, gold, a national currency, personal debt, derivatives, future values of the sale of tulip bulbs. Societies did not determine the value of money through governments alone; markets, trade, exchanges were crucial contributors. But on what basis?

I was asked to give a paper at the John F. Kennedy School at Harvard at the beginning of the seventies. They wanted to use the techniques we used to develop student co-op housing to rebuild the slums in the northern cities then overwhelmingly occupied by the American Black population. From Halifax to Los Angeles we had shown how student housing could be built – mostly co-ops – without an initial infusion of capital by the owners. At the time, we built a total of about $100 million worth of student housing over a 3-4 year period (about $200 billion in value in today’s property values).

When I arrived at Harvard, I entered an overflowing room with graduate students and very renowned economists and faculty members. I was overwhelmed as I gave a talk called, “Joyful Capital”. The talk itself was a total bust – no one was in the least interested in my weird economic theory. The audience wanted to know technically how what we had done had been accomplished and became very animated in the question period. They ended up enthused. I left depressed.

The theory was not complicated. It argued that the token used for money was an abstraction based not primarily on past production where money supply had to be balanced with productivity but much more on an estimate of future possibility. Value was rooted more in hope and possibilities than in actualities, though a past record could enhance the strength given to that hope. The issue was one of faith – faith in what you could do and not primarily in what you had done. Never did this become as clear as in the .com revolution where enormous values were given to companies with relatively little track record. It was subsequently repeated in the American housing bubble of the twenty-first century based on the forms of mortgage derivatives and tranches in the United States and in the European state debt crisis. (My explanation for that crisis based on a fuller elaboration of this theory of money can be found in a paper that I gave in Scotland in 2009 and that was published in an edited collection the following year: “Trust and Transparency: The Need for Early Warning,” in Iain MacNeil and Justin O’Brien (eds.) The Future of Financial Regulation, Oxford: Hart Publishing, Ch. 18, 322-336.)

Let me recapitulate the theory.

First, on value, instead of emphasizing labour as the crucial input, stress was placed on technology and innovation through not only improving efficiencies, productivity and quality, but the most fundamental innovation of all, creating tools to represent future risk, that is, innovations that expand the money supply well beyond the amount of money printed or regulated by the state. That does not mean the value is independent of anything underlying it in the tradition of the theories of Thorstein Veblen and Jacques Ellul and that there is no reality referent whatsoever and that appearances alone determine value whereby an elite consciously distracts the public with endless superficial entertainments in a compelling cornucopia of illusory visions complemented by a plausible simulacrum of justice, equality of opportunity and good governance to foster a sense of identity in a celebrity consuming culture where outward appearance is seen as providing meaning in wearing the right labels and driving a “cool” car.

Thus, while rejecting the labour theory of value and the concept of money as an artifact that represents the value of labour beneath and past accumulated productivity, on one end of the spectrum, and the concept of money as the ultimate simulacrum, the tool in terms of which the values of all other simulacrums are denominated freed up from any connection to past productivity but representing only the degree of faith in the amount of future wealth that can and will be created, I have held the view that money is a force in its own right when it is freed up from any natural measure, such as a gold standard, and is, in fact, the most fundamental innovation of all connecting past accumulated value with future faith in the preservation and enhancement of that value. That is why any effort to balance the money supply with productivity gains is doomed to failure and why the money supply will continually be indirectly expanded to facilitate those productivity gains.
Joseph Schumpeter was an advocate of Werner Sombart’s thesis of creative destruction (Cf. Schumpeter, J.A. (1911; 1961 The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle. See also Alan Greenspan (2007) The Age of Turbulence: Adventures of a New World and Thomas K. McCraw (2007) Prophet of Innovation: Joseph Schumpeter and Creative Destruction), that is, that radical innovation is the essence of capitalism that transforms and leaves behind the old order. Thus, the key player is the entrepreneur and innovator, in German, the Unternehmergeist, the entrepreneurial spirit that AH celebrated. Innovation is the key in the formula of the creative destructive process of capitalism. For innovation not only adds new wealth but has to make up for the diminishing returns of capital and labour invested in nature to produce artifacts. Capital (diminishing returns) + Labour (diminishing returns) + Innovation (greater than the diminishing returns of capital and labour) together produce a positive sum game.

This is the theory of Joyful Capital with the destructive aspect bracketed. Money in its various forms is thus the object of eminent possession given universality for its omnipotence as the ultimate pimp, the procurer between real needs and imagined ones mediating not only between one’s personal aspirations and real circumstances but relations with others. The last crisis was not, as Alan Greenberg, former head of the Federal Reserve, opined, a savings crisis – too much money chasing too few opportunities. Nor was it a debt crisis and a failure to prime the pump in a timely fashion through increased government spending. The sages from both ends of the spectrum said that the problem that turned a crisis into a catastrophe was not too much debt or not enough debt fostered by an increase in the money supply to prevent the crisis from spinning out of control.

Paul Krugman and Robin Wells (“Our Giant Banking Crisis – What to Expect, LVII:8, 13 May 2010, 113) provided another answer. The issue is not the amount of debt but the ability to repay it. The problem was not the rate of increase in debt but the slow rate of growth to repay the debt. Debt had to be aligned with productivity. Greed facilitated by creativity develops new instruments for expanding credit beyond the established instruments and regulations provided the foundation for the financial crisis that exploded.

Lack of regulation played a role in the financial crisis, not because the capitalist system is intolerant of regulation, but because the system of regulation is always playing catch up with the new creative forms of abstractly representing wealth and credit. In other words, the reason the risks are not recognized is because we currently rely on regulatory mechanisms that are designed for what has happened in the past. These mechanisms can only catch up to the destructive potential of creativity when the damage is done and the dangers recognized. Further, regulatory mechanisms are inherently incapable of recognizing systemic problems especially when we are increasingly incapable of measuring productivity gains.

For example, examine the productivity benefits of computers; they are grossly overestimated. Computers may perform a variety of tasks, but only do the old tasks faster rather than in any particularly new or efficient manner. That advantage is often offset by the fact that the mastery of computers requires time, the scarcest complementary human input. Further, the ´´productivity-revenues´´ are hidden by data; the ratios for input and output, and, therefore, the revenue benefits, are almost impossible to parse, particularly in the service sector. The net benefit of the incorporation of computers into the productivity process may not even be noticeable because their introduction will accelerate the diminishing returns of capital and labour resulting in losses in other divisions/departments of the company. The mis-measurement and displacement factors are compounded by a third element – the time lag. Productivity gains of computers are realized only after a lag period because complementary forms of capital investment must be developed to allow computers to be used to their full potential. For even if computers increase productivity by 50%, in the time lag for their introduction, the capital input may offset the benefit in the short run. Finally, even several decades into the information revolution, we do not have the data to either confirm or falsify any of these hypotheses. So it is not surprising that, in this “veil of ignorance”, managers mis-manage and cannot determine when and where to invest capital in communications technology. In the end, there may be a systemic problem: we lack the measures for calculating the increases in productivity due to computers, especially if the productivity gains are reflected in quality changes and new products.

This was at its simplest the basis for the last financial crisis. The specifics are just an elaboration. The first step was put in place in the early eighties with the institutionalizing of the “swap” by Salmon Brothers that involved trading obligations and rewards without the necessity to transfer the underlying security itself. When Jamie Dimon, CEO of J.P. Morgan, held his intense brainstorming session in 1994 with his “mafia” beside a pool in Boca Raton, swaps had grown into a twelve trillion dollar business. In their quest for new tools and new sources of profit in what had become a highly competitive business, the team came up with the idea of swapping the risk rather than the interest rate obligations of loans. Instead of arranging a loan to secure the debt, secure the risk itself requiring a fraction of the amount of the loan itself thereby drastically reducing the cash that needed to be held in reserve and enormously increasing the credit supply. The mechanism came to be known as the “credit-default swap”.

The third step in the development of this new mechanism of increasing the money-supply and the amount of credit available was based on securitization, bundling together different debts and, based on the law of averages, selling the risk of the bundled securities rather than that of a single loan, thereby ostensibly reducing the risk if a single loan failed. The fourth invention involved “tranching,” that is dividing the bundled securities into different slices and paying interest according to the degree of risk of that slice of the bundled securities. Safer tranches paid less interest and highly risky tranches paid higher interest. In this fourth step, an offshore company, a “Special Purposes Vehicle” to handle all the transactions involved in the tranching of these credit-default swaps, was created. The fifth step involved getting the rating agencies to go along with the risk analysis of this new mechanism called CDOs, synthetic “collateralized debt obligations”, which Moodys did for J.P. Morgan in 1997. However, the real large profits could only come when the whole process was streamlined and industrialized. This was the sixth and absolutely necessary step accomplished when a simple algorithm was created to calculate the risk.

Felix Salmon in 2009 branded this as the “Recipe for Disaster: The Formula that Killed Wall Street”. (Wired Magazine, 23 February 2009) David Li was the creator of applying the Gaussian copula function to financial risk applications.

Based on his research work at the University of Waterloo on loss modelling applied to insurance (after he graduated and when he was already a partner in J.P. Morgan’s Risk Metrics unit), he adapted the formula in 2000 to enable a new generation of risk-based securities to be leveraged. (See David Li (2000 “On Default Correlation: A Copula Function Approach,” The Journal of Fixed Income, March 2000, 43-51.) As Cathal Kelly wrote in The Toronto Star (“Meet the Canadian whose big idea felled Wall Street,” 18 March, A01, A17), “Li’s model sidestepped the problem of trying to correlate all the variables that determine risk. Instead it based its assumptions of the historic dips and swells of the market itself. In essence, Li used the past to map the future.” (My bold)

In the formula, the correlation “P” of disparate variants, where each variant has a maximum correlation of 100% or >1, is a multiple standard normal cumulative distribution function multiplied by these variable risks combined in a common formula, but one not based on independent assessments of risk but on historical patterns. The algorithm linked and correlated different disparate risks, that is, formulated a multivariant distribution (a copula) representing different degrees of interconnectedness to estimate probabilities of future occurrences of a bundled group of separate risk items based on traditional patterns. The bundling was supposed to reduce risk because of linking different degrees of risk. The formula explicitly did not reduce risk of any single occurrence and was not applicable where risks were systemic and applied to the whole system. By 2005, Li warned that the model was limited in its application for it could not predict what would happen in extreme economic environments. (Mark Whitehouse, “Slice of Risk,” Wall Street Journal, 12 September 2005) Nor did it predict that the formula itself was a crucial component in creating that extreme environment.

When Jamie Dimon and his “mafia” invented the “credit-default swap” in 1993, Felix Rohatyn warned derivatives were “financial hydrogen bombs built on personal computers by 26-year-olds with MBAs”. Ten years later, an economist at the bank for International Settlement, Claudio Borio, assisted by the acute analysis of data of Bill White, challenged the belief that financial innovation was an unadulterated good. Ignoring these warnings and the accumulating black clouds, the European Securitisation Forum at its annual meeting entitled, “Global Asset Backed Securitisation: Towards a New Dawn!” on 11 June 2007 in Barcelona celebrated the most profitable year in history for investment banks. The next day, Bear Stearns began to unravel and was eventually bought at a bargain price by JP Morgan Chase. Jamie Dimon, the CEO, fifteen years after the pool party where his team came up with the idea of the credit-default swap, held another party at the World Economic Forum in Davos, Switzerland, not to celebrate the fifteenth anniversary of that revolutionary innovation, but to hail the hundredth anniversary of J. Pierpont Morgan as the savior of the financial system in 1907.
I have argued since the sixties that entrepreneurship depends on playful creativity to try to see how to use existing rules in new ways to provide for future capital growth and accumulation rooted in our creative playful imagination. But the system has to be managed in terms of a recognizable set of rules so outsiders can trust the players. After a bubble of confidence bursts, the key and central problem remains how to restore faith in our material god, in this case, the very lifeblood and circulatory basis of the system itself, the financial sector. As Albert Hirschman argued, the core rules may be simple but their application to specific situations at specific times and places varies. The propensity of any entrepreneur will be to adapt the rules to favour his or her own style of play. When the mathematical model developed is a positivist one based on extending past experience into the future without taking into account the fact that the new model itself, let alone other new factors, confront principles of indeterminacy and the effects of cumulative chance factors to alter or even inverse previous patterns, we challenge fate.

A system had been created with an enormous range but one which did not and could not take into account systemic failure when batches of credit default swaps could themselves be combined into collateralized debt obligations (CDOs) without the necessity of purchasing bonds at all. Based on historic patterns, investors were betting on a group of players winning at a casino and banks were selling and trading these CDOs and significantly increasing their sources of profit. The insurance system had been turned into a lottery and the lottery became an item for investment, but an item that did not include the possibility of the casino burning down or the workers in the casino going on strike. Further, rating companies no longer had to do their homework but began to rely on the formula.

Thus, there is an inherent tension between the referee obligated to uphold the existing rules and the entrepreneur driven to adapt and alter rules to facilitate play. There never will be or can be a stable set of fixed rules, for the very nature of entrepreneurship as creative play will mean challenging and adapting the rules themselves. There will always be a tension between ensuring the rules are not utilized for either nefarious purposes or for products and ideas that are beyond the elasticity of the system to handle. But there is also a need to adjust rules to allow for creativity and new situations.

Instalment 9: The Paradoxes of Economic Recovery

Worldly Philosopher: The Odyssey of Albert O. Hirschman by Jeremy Adelman

Conversation – Instalment 9: The Paradoxes of Economic Recovery

Chapter 8. The Anthill: Repressed versus Joyful Capital                        

Part I

                                               

by

 

Howard Adelman

 

Back to economics, seeking a job and onto Washington. AH had just served in the OSS, even if not given any significant assignments. His book, National Power and the Structure of Foreign Trade, had just been published. There was a dire need for economists with experience in international trade. Why would he not be snapped up? The World Bank, the IMF, the work on the Marshall Plan for the Department of Trade, the OSS and the State Department all needed his intelligence and experience. Further, Albert still had the rest of his leave from his Rockefeller grant to tide him over.

 

As Jeremy records the tale, as he relocated from California with hep from Sarah’s parents, Albert’s skills as a superb networker were of no avail. Promises and warm receptions were followed by terse rejections, long silences or lame excuses at the same time as he was trying to help the rest of his family in Europe with “care packages”. George Jaszi, his close friend from LSE days who was then working for Averell Harriman at the Commerce Department, emerged as his saviour. But the Clearing Office for Foreign Transactions was dull routine work with little in the way of intellectual rewards. He was saved a second time by his colleague from California, Alexander (Shura) Gerschenkron, who offered Albert a research job in the Federal Reserve Board.

 

It did not take long for Albert to make his mark. He covered Western Europe and showed how the French economy was in a bind. Robert Schuman, the French Minister of Finance, could not devalue to improve France’s gaping trade deficit for that would make imports more expensive and heighten the pressures on inflation. This paradox stood in stark contrast to the economic religious belief that markets were self-correcting. Then the Republicans took office just when the European economic crisis took a further nose dive compounded by the coldest and snowiest winter since 1813-14 that began its unremitting grip in the second week of January 1947. At the time, I was nine years old. I recall being in grade five. Miss Chapman was my teacher in KingEdwardPublic School. My memory is that we spent a good deal of our class time collecting items and knitting woollen gloves and socks (yes, I learned to knit) to ship to the people in Britain.

 

Hirschman was asked to write a report on the crisis for the Federal Reserve Bulletin. After collecting data on rationing, price controls, the banking collapse (familiar?), mounting inflation, falling production and deteriorating trade balances, he showed how the policies that France, Britain and Italy were adopting – quotas, tariffs, foreign exchange controls and protection measures – were only making the crisis worse. They could not import what they needed and could not export to earn the monies to pay for imports. Interventions by Paris and Rome only accelerated inflation and compounded the problem. The left led strikes that further paralyzed the economy.

 

Thus the title of the chapter and the reference to AH’s metaphor of the disrupted anthill where the ameliorative effects of rebuilding infrastructure had been exhausted without any further elasticity to give the economy lift off so that the ants were left idle. The crisis was one of trade needed to stimulate production but autarky and bilateral deals had replaced the efforts to move trade towards a more open system. Perhaps the creativity had to be exerted on the system itself.

 

AH provided a landmark report. Ease the bottlenecks to trade and the path to recovery was open. AH had provided the hidden hand behind the Marshall Plan.  But the Washington bureaucracy was itself an anthill with underemployed and misemployed and misdirected workers. Meanwhile, the communists were threatening takeovers in Czechoslovakia, Italy and Paris through the ballot box. Hirschman hoped that the crisis was deep enough to provoke change without being so deep that the system collapsed.

 

The new initiative came from the top with the European Recovery Program better known as the Marshall Plan which Secretary of State George Marshall put in place in April 1948 with bipartisan support and the leadership of George Kennan and William Clayton from the State Department. When the austerists prevailed – as in Italy – matters only became worse.  The American plan launched Europe away from the brink of disaster towards recovery. In preparing the draft for Congressional approval, AH was drafted to join the MIT economist, Richard Bissell, who at been at LSE just before AH and who was born, incidentally, in Mark Twain’s old home in Hartford, Connecticut, giving him by osmosis a spirit of adventure rather than a propensity to tie down the hatches and take cover. Inject working capital and watch the paralyzed financial sector throw off its lethargy and tackle the chronic balance of payments problem. A more open trade system would accompany and follow the change. The domestic plan of 2008 in the USA was not fundamentally different.

 

However, to work it required European initiatives to lift exchange controls and bilateral barter deals and accords in favour of regional cooperation. The Organization for European Economic Cooperation (OEEC) became the institutional tool. Though Hirschman’s plan for a central bank and a unified currency was prophetic, it was also politically well ahead of its time as a measure to tackle the immediate convertibility crisis. The foremost initiative was to make the European currencies transferable and convertible thereby establishing the foundations of regionalism and multilateralism that would form the foundation for the European Economic Community and eventually the Euro. This was accomplished through the 1950 European Payments Union (EPU), effectively, a federally controlled common clearing system. (See James Ransom “‘A Little Marshall Plan’: Britain and the Formation of the European Payments Union,” The International History Review 32:3, Sept. 2010, 437-454. I will later return to why I believe this monetary reform was the crucial key and not the trade regime established, however important that was as well.) Europe, however, was ready for a trading federation based on a monetary proto quasi-union. The revolution was as significant as the overthrow of mercantilism in Europe.

 

The political window was, however, closing with the rise of the Republicans to power, the rise of the Communists in China, the consolidation of communist controls in Eastern Europe and a plethora of Soviet spies flushed out into the daylight. Paranoia would once again rule the roost fostering defensive rather than creative responses. The North Koreans were on the march. The brains trust that had been assembled began to desert the ship of state now caught in an ice jam with respect to development policy.   

 

The result sparked an even greater depression than the one that AH had suffered in Algeria and in Italy. He could not stand being an under-utilized ant and crept back to his classic books and self-isolation. One catalyst was the death by heart attack of Harry Dexter White, one of the standard bearers of Bretton Woods (see Benn Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order), who had been the founding director of the IMF. He died three days after being summoned before HUAC to face charges of passing secrets to the Soviet Union. (See R. Bruce Craig’s book, Treasonable Doubts.) The political and economic repressives had retaken the citadels of power and influence. Arthur Marger, with his orthodox economic doctrines, became the new head of The Fed. AH’s ideas could not even get a hearing.  When he sought to go elsewhere in Washington, it was now apparent that some item in his file blocked all movement there. When he sought to go to Paris, a review of his security clearance was initiated. He learned that the Loyalty Review Board of the Civil Service Commission would not approve his transfer on security grounds and he was advised to leave the civil service voluntarily. He was now without a paycheque.

 

In the next blog I will deal with the haunting security file and AH’s opting to go to Colombia. In part 2 of this blog, I want to discuss a theory of money and why the EPU was so important.