-Caveat Lector- from: www.rsvlonline.net/futurecasts <A HREF="http://www.rsvlonline.net/futurecasts/20th_century_absurdities.html"> Untitled Document</A> ----- 20TH CENTURY FUTURECASTING ABSURDITIES: YES, THEY REALLY SAID THAT! Absurd contentions and absurd futurecasts concerning economic policy: ? One of the most interesting phenomena of modern life, and one that it is well to keep in mind as we enter the 21st century, is the many times that the most authoritative and respected intellectuals and professionals have voiced the most absurd contentions, and confidently provided us with the most absurd predictions, about the nation's economic policies. ? This is a cautionary tale for those intellectuals and other authoritative individuals who are tempted to eschew analytical objectivity in favor of ideological or professional commitment. The rapid pace of modern developments starkly reveals such absurdities, often before the ink is dry on the page proofs. ? There are way too many examples to cover in a short essay, but I thought it useful to set forth my list of the grossest of these absurdities. However, additions to the list are welcome, so readers are invited to send their recommendations. For the love of socialism: Lincoln Steffens I have seen the future, and it works! Early in the century, in 1919, we had a classic. Lincoln Steffens, returning from a visit to Bolshevist Russia, pronounced: "I have seen the future, and it works!" ? Several accounts of this incident assert that Steffens had composed the statement even before entering Russia. In short, he was wearing ideological blinders. He was determined to see only what he wanted to see. This type of intellectual commitment and suspension of objectivity is a continuing characteristic of such absurdities. The automation scare: Paul A. Samuelson "One pretty machine does the work of 100 pretty girls." "It is perfectly clear that this will produce an unemployment situation, in comparison with which the present recession and even the depression of the thirties will seem a pleasant joke." ? One would have thought it well neigh impossible for any century to contain another classic like the Steffens absurdity, but MIT Prof. Paul A. Samuelson actually managed to top it. What tips the scales in favor of the Samuelson absurdity is the fact that it was published in his widely used textbook, was apparently accepted without question by a vast number of the economics professors who used his textbook, and constitutes the kind of error that can only be made by someone who, regardless of vast learning of economic theory, really doesn't understand the dynamics of capitalist markets. ? Samuelson fell prey to the "automation scare." The myth that automation is going to wipe out more jobs than it creates is a derivative of Marxist propaganda mythology. Marxists believe that capitalism is inherently unstable, and will ultimately become so productive that its markets will not be able to absorb all its produce, leading to crisis and unemployment that is chronic and disastrous. ? Incredibly, there are actually many intellectuals who persist in taking some of the Marxist absurdities seriously (as does Samuelson). They have long awaited this crisis, even viewing the Great Depression as proof of the concept's validity. ? In the 1950s, Samuelson and some of his buddies thought they saw the automation handwriting on the wall. In his 1961 textbook, referring to the likelihood that computers would eliminate the office secretary, he expressed alarm that: "One pretty machine does the work of 100 pretty girls." He explained his fears with a quote from an MIT mathematician, Norber Weiner, who asserted in 1950: ? "The factory of the future . . . will be controlled by something like a modern high-speed computing machine . . . We can expect an abrupt and final cessation of the demand for the type of factory labor performing repetitive tasks . . . an intermediate transition period of disastrous confusion . . . Industry will be flooded with the new tools to the extent that they appear to yield immediate profits, irrespective of what long-time damage they can do . . . It is perfectly clear that this will produce an unemployment situation, in comparison with which the present recession and even the depression of the thirties will seem a pleasant joke." ? It's true that stenographers no longer take dictation while sitting on your lap (more's the pity), but modern secretaries have hardly disappeared. Instead, they now perform myriad other tasks with those computers, many of which were simply not economically feasible without computers. (We are also still waiting for the paperless office.) And, of course, the computer industry itself has turned out to be one of the greatest job creating industries worldwide of the 20th century. ? The automation scare demonstrates a fundamental lack of understanding on the part of these Luddites. It is impossible for automation to cause a loss of jobs for any flexible capitalist economy as a whole. Any increase in efficiency MUST permit an economy to provide new and additional goods and services that could not previously be economically provided. ? That academics and central planners have not a clue as to what those new and additional goods and services might be should hardly be surprising. It is just one of many reasons why no centrally planned economy can keep pace with modern capitalist economic systems. The confidence game: My son and I have for some days been purchasing sound common stocks. The fundamental business of this country . . . is on a sound and prosperous basis. Frankly, if I had any money, I'd buy stocks right now. The "Confidence Game" is a rich source of absurdities played by authoritative figures whenever some crisis seems imminent. It is frequently continued with equal vigor after a crisis begins. Of course, the stock market crash of 1929 brought forth some fine examples. ? Soon after the crash: ? John D. Rockefeller: "My son and I have for some days been purchasing sound common stocks." ? Pres. Herbert Hoover: "The fundamental business of this country . . . is on a sound and prosperous basis." ? Within six months of the crash, the stock market seemed to take perverse pleasure by having its worst sell offs on the day following any such pronouncements by Hoover or by his cabinet chiefs. ? Nevertheless, in the early 1970s, at the beginning of a 12 year period of declining common stock values (in inflation adjusted terms), Pres. Richard Nixon advised: "Frankly, if I had any money, I'd buy stocks right now." ? Obviously, whenever we hear words of calm reassurance from such authoritative voices, it's time to make sure that your economic storm cellar is well provisioned. However, such absurdities are normal and to be expected. To be a classic, an absurdity must come from a source with some colorable pretense of knowledgeability and objectivity. My favorites are two sources of economic wisdom, Yale economics Prof. Irving Fisher, and the analysts at the New York Times, who began to play the confidence game prior to the crash and then persisted for some months afterwards. an exceptionally brilliant twelve month period the most remarkable year Stock prices are not too high and Wall Street will not experience anything in the nature of a crash. The market itself will furnish the best clue as to its future course, and will give warnings of its culmination in plenty of time for the average trader to protect himself when necessary. The year will be one of the best, from an industrial and commercial standpoint, in the nation's history. In July of 1929, with reports of dire conditions developing all over the world, came this breathless masterpiece from the New York Times: ? "When the financial and business history of 1929 is finally written, developments of the past fortnight will occupy a prominent place in what will doubtless be the chronicle of an exceptionally brilliant twelve month period." ? And, in August of 1929: ? "It becomes increasingly evident that, in many respects, 1929 will be written into the commercial history of the country as the most remarkable year since the World War in point of sustained demand for goods and services." ? By the beginning of September, 1929, a sense of unease, accompanied by extreme market volatility, had been initiated when statistician Roger Babson provided a remarkably prescient prediction of the mechanism and extent of the coming collapse. However, the prominent Prof. Irving Fisher was quickly brought in to calm the multitudes: ? "Stock prices are not too high and Wall Street will not experience anything in the nature of a crash." ? Again, on October 22, 1929, as the market gyrated wildly at levels below its September high, Fisher provided calming assurances that market prices were not too high, and indeed had not yet reached their true value. ? In early September, 1929, the New York Times also earnestly pursued the game, advising: ? "We would not be stampeded into selling stocks because of a gratuitous forecast of a bad break in the market by a statistician. The market has been advancing for three years, in spite of bearish utterances of such authorities. . . The market itself will furnish the best clue as to its future course, and will give warnings of its culmination in plenty of time for the average trader to protect himself when necessary. . ." ? And, again, in mid September, 1929, from the New York Times: ? "[T]he final quarter of 1929 is approached with the confidence that, taken as a whole, the year will be one of the best, from an industrial and commercial standpoint, in the nation's history." A wild and abnormal chapter in financial history has been definitely closed and a new chapter of financial sanity opened. No economic depression was foreseen, interest rates were plummeting and money was plentiful, and everyone was congratulating themselves that business that spring remained so strong. The worst had already occurred and a slow but sure recovery was imminent. The New York Times began the second phase of The Confidence Game, on November 1, after the crash, providing assurances to one and all. Noting the massive fall in margin loans, and continuing to ignore the worsening storm in the world around us, it stated confidently: ? "[A] wild and abnormal chapter in financial history has been definitely closed and a new chapter of financial sanity opened." ? In the months after the crash, The Confidence Game continued, with participants from business. labor, government, and the financial and academic community chipping in. In mid February, 1930, Prof. Fisher called the stock break "unreasoning," and firmly predicted that business would soon recover. The market crash would have only a temporary effect. The New York Times reported that brokers were "mystified" by continued waves of heavy selling, and of course provided the ever popular assurance that the market was now at "bargain" levels. No economic depression was foreseen, interest rates were plummeting and money was plentiful, and everyone was congratulating themselves that business that spring remained so strong. ? As late as January, 1931, a New York Times editorial oozed quiet confidence that the worst had already occurred and that a slow but sure recovery was imminent. However, the news sections of the paper now frequently carried major articles about other prominent economists and financial leaders, urgently calling for the elimination of the war debts, reparations obligations, and tariffs that were burdening the world's economic system and thus were preventing recovery. The Confidence Game didn't just fool some ordinary investors. Over 50 percent of industrial companies listed on the New York Stock Exchange bought in their own shares at the "low" prices available in 1930. However, among those who rejected The Confidence Game, and foresaw a l ong depression (lasting from two - to - five years from April, 1931), was an economist, John Maynard Keynes. ? A preternatural trust in government economic management: ? Since the end of WW II, the competition between capitalism and socialism has been a feature of intellectual discourse and the ideological foundation of the Cold War. Capitalism is not an utopian system and does not promise utopian results. The economic freedom of capitalism provides a rich, creative, but messy brew which many intellectuals find disquieting. In their desire to find a better, kinder, more orderly way, they inevitably fall prey to concepts that would substitute government economic management for the management mechanisms of capitalist markets. ? To sustain their ideology, they must turn a blind eye to the obvious inherent limitations of government management. This they often do with commendable wit and style, influencing the credulous, but ultimately suffering from the perverse refusal of events to conform to their expectations. Galbraith: Harvard economics Prof. John Kenneth Galbraith's efforts to disparage capitalism and boost socialism have produced a steady flow of absurdities that, accumulating over the course of about half a century, can now fill an entire library shelf. He has pursued his ideological agenda with great intelligence and style, and an acerbic wit with which he unsparingly skewers his ideological rivals. ? Humility is not one of his intellectual traits. Nor does he ever seem unduly disturbed that events persist in refuting his logic and moving in the exact opposite direction of most of his predictions. In 1967: Large, vertically integrated and conglomerated corporations control their markets and eliminate uncertainty. The evolution of the free enterprise system will lead it to resemble socialism. Stockholders are "anomalous" and should be dispensed with. Equity markets play no role in the guidance and productive efficiency of the modern industrial system. Contention: Large, vertically integrated and conglomerated corporations have decisive advantages that allow them to control sources of supply and, through advertising, to control their markets and eliminate uncertainty. (Except for a select few, like GE, which has som ehow been able to maintain entrepreneurial vigor in all its myriad profit centers, most large corporations have been forced by market pressures to out source their supplies and shed profit centers outside their core competencies.) ? Contention: "Technology and companion commitments of capital and time have forced the firm to emancipate itself from the uncertainties of the market." (Only those corporations that have responded effectively to market pressures have since that time continued to prosper.) ? Prediction: The evolution of the free enterprise system is in a direction that will lead it to resemble socialism. (The wishful thinking of a committed ideologue! The whole world persists in moving towards capitalism, towards privatization and market mechanisms, despite political reluctance to surrender economic power.) ? Prediction: "Increasingly, it will be recognized that the mature corporation, as it develops, becomes part of the larger administrative complex associated with the state. In time, the line between the two will disappear. Men will look back in amusement at the pretense that once caused people to refer to General Dynamics and North American Aviation and AT&T as private business." (It's actually amusing how energetically these, and so many other similar, "powerful" corporations have had to hustle under the lash of competition, or have succumbed to market pressures, since Galbraith wrote these words.) ? Contention: Stockholders are "anomalous" and should be dispensed with. Equity markets play no role in the guidance and productive efficiency of the modern industrial system. Investment gains involve no work and little risk. ( He's bought the Marxist propaganda myth! A few years after this statement was written, American equity markets entered a 12 year period of stagflation, with substantial losses in equity values in inflation adjusted terms.) In 1992, after the fall of communism and the worldwide retreat from socialism: The high real interest rates of the 1980s discourage investment for improved economic performance and for housing construction. In the longer run, less efficient, less competitive industry, a shortage of housing, and homelessness, are (and have been) the inevitable result. Corporate bureaucracies will grow relentlessly. The ladder of upward mobility is now broken. The military establishment, public and private, will continue on its own authority to resist substantial reduction. American manufacturing industry and the economy generally will concede to superior economic performance of other nations, principally Japan, Germany and the other countries of the Pacific Rim. ? Prediction: The high real interest rates of the 1980s, "discourage investment for improved economic performance and for housing construction. In the longer run, less efficient, less competitive industry, a shortage of housing, and homelessness, are (and have been) the inevitable result." (Why don't events work the way he expects them too? Could Galbraith actually be wrong in his understanding of capitalist economics? Somehow, those high real interest rates successfully reduced inflation rates in spite of vast budget deficits.) ? (During the 1990s, real interest rates have stayed high, and: �inflation has accordingly disappeared; �investment has boomed; �the American economy has regained its position as the standard for economic competitiveness; �home ownership has reached all time highs; and, �inexpensive apartments are available wherever the market is not encumbered with rent controls or restrictive zoning and permitting laws.) ? (Apparently, Galbraith doesn't understand the obvious fact that the only monetary way to move interest rates down is to push them up, and the surest way to suffer from high interest rates is to push them down. In the end, the market ALWAYS wins, and always punishes those who push it around.) ? Contention: The corporate bureaucracy "is relentlessly dynamic in the multiplication of personnel." There is "an intrinsic dynamic acting to increase what, by definition, is called managerial personnel." (This contention was being proven wrong before the ink dried on his page proofs. The downsizing and restructuring movement of the 1990s was already well under way.) ? (Parkinson's Law does indeed work, in both government and private bureaucracies, but there are never any market checks to limit or force the reversal of government bureaucratic growth. Contrary to Galbraith, the government appropriations system is simply nowhere near as effective as the markets he persists in maligning.) ? Prediction: The "underclass" in inner cities is now permanent. The ladder of upward mobility is now broken. When this is realized, there will be riots in the streets again. (He's trying to scare society into greater welfare expenditures, just when society is, correctly, about to move in the exact opposite direction. Upward mobility, of course, remains a spectacular feature of America's capitalist economic system, and continues to attract immigrants from around the world.) ? Prediction: "That the military establishment, public and private, will continue on its own authority [my emphasis] to claim a large share of its past financial support is not, however, seriously in doubt." (He contends that the "military - industrial complex" problem will continue even after the elimination of the military threat. The U.S. has ALWAYS disarmed after conflicts, and now is no different. Defense outlays as a percent of GDP have fallen to pre-WW II levels, numerous defense contractors have left the business, and preparedness levels in all but elite units are falling precipitously, in a still dangerous world.) ? Prediction: Galbraith's "higher probability" forecast for the U.S. economy after 1992 is not extended depression or even extended recession, but "more gradual but more definitive stasis. This is already well under way as American manufacturing industry and the economy generally concede to superior economic performance of other nations, principally Japan, Germany and the other countries of the Pacific Rim.. . [I]n the economically more aggressive countries [macroeconomic policies] serve business investment more positively. . . [O]ver all, [in those countries], there are attitudes and policies that serve aspirations as opposed to contentment." ? (Galbraith actually believed that our vibrant and driven economy had fallen into a malaise of middle class contentment. Again, events perversely refused to conform to Galbraith's expectations. It is Japan and Germany whose policies caused economic malaise, while the Asian Tigers proceeded on their debt-fueled boom and bust trajectory.) Wage and price controls: Keynesian economic policies are inherently inflationary, and they must lead to rates of inflation that will be politically unacceptable. Galbraith has gotten one point spectacularly right, but predictably drew the wrong conclusion from it. He was one of the first Keynesian economists to recognize and publicly admit that Keynesian economic policies are inherently inflationary, and that they must lead to rates of inflation that will be politically unacceptable. However, rather than abandon these remedies, he proposes price and wage controls instead. He insists that they worked during wartime and would work for indefinite periods during peacetime, too. ? Of course, they didn't work all that well even during wartime, as everyone that acquired things "under the counter" well knew. And the longer they lasted, the worse they worked. ? As we have since found out from our experiences with rent control, and with energy price controls, wage and price controls serve only to allocate scarcity, and they don't even do that very well. Only market mechanisms provide the abundance that the American electorate rightfully expects. Only market economies provide the abundance that permits Galbraith to write about "The Affluent Society," and "The Culture of Contentment." Socialist megalomania: A public planning authority of adequate power Individuals will have to surrender to the goals of the organization. All surface transportation should reside in one monopoly entity covering the entire Eastern Seaboard. ? Like Karl Marx, Galbraith loves large economic entities. It is easier to envision centralized control of individual large economic entities than of myriads of lesser entities. In 1967 he offered the following proposals: ? Proposal: A public"planning authority of adequate power" should be developed to make livable the modern city and its surroundings by buying up all land wherever it considers market influences "palpably adverse." It would be responsible for the provision of adequate housing, health care, and transportation, as well as current city services. ? "[I]ndividuals will have to surrender to the goals of the organization." (An amazing revival of the "benevolent despotism" arguement!) ? This authority would have complete autonomy over its own staffing, plans and budget. Writing ten years later, he figured that this chore would require that about 50 percent of the area's GDP be taxed away or otherwise appropriated. (After regular federal and state taxes, individuals might actually be allowed to keep a few shekels for themselves. Of course, such a proposal would be very popular with any electorate.) ? Proposal: All surface transportation should reside in one monopoly entity for each of the large regions of the nation, such as the entire Eastern Seaboard east of the Allegheny Mountains. Galbraith pointed out that the nation's telecommunications system was best provided by the AT&T monopoly, which had total control over its market. ? (This last point is very instructive, since, indeed, the AT&T monopoly had given us the best telecommunications system, by some margin, of any major nation (and perhaps of any nation) in the world. Nevertheless, when a little bit of competition, still grossly "imperfect," was introduced into the telecommunications market, old Ma Bell was forced to pick up her skirts and really hustle, providing substantially lower rates for consumers and a flood of innovative technology and new services.) ? (The same experience occurred when some admittedly far from perfect competition was permitted in retail stock brokerage, airlines, trucking, and other heavily regulated basic industries. These huge corporations obviously had some influence over their markets, but if they actually control their markets as Galbraith asserts, recent economic history is impossible.) ? (It has become apparent that even grossly imperfect market mechanisms can provide a cornucopia of benefits for consumers and the economy, over and above what is provided by even the best monopolies, such as that of AT&T before deregulation.) However, the most absurd of Galbraith's many absurdities, a true classic, is his prediction concerning "convergence." What separates it from his other absurdities, and makes it a classic, is the favorable response that it received amongst a substantial number of supposedly intelligent and learned economists and other intellectuals. The prediction was, of course, patently irrational and could only be seriously entertained by those who didn't really understand what makes capitalism work. Convergence: The shareholder in the modern large corporation is without power and without function. Government should pay off such functionless stockholders in bonds and have the dividends and capital gains accrue to the public. It is illogical, part of a peculiar technocratic secular religion, that CEOs and other corporate officials routinely work six day, 60 hour weeks for the benefit of such powerless, useless shareholders. The role of "shareholder value." The role of "profit centers." ? Galbraith strongly asserted that socialist and capitalist systems were inevitably converging with respect to their larger and most important economic entities. In 1972, he asserted that shareholders and even the top management of the larger and most important capitalist corporations had lost effective control. ? "The shareholder in the modern large corporation is without power and without function." ? With this view, Galbraith advocated that government "pay off such functionless stockholders in bonds and have the dividends and capital gains accrue to the public." ? This is a faithful restatement of the Marxist view that, once capitalism had developed a nation's productive assets, they could be managed just as well without the capitalists, and the profits could be allocated for the general welfare. He apparently agrees with the Marxist propaganda myth that: "All profit is theft." ? Galbraith argued that the modern large corporation is governed by its wide array of technocrats, who collectively have the information and skills needed for problem solving and decision making. Their rewards and incentives flow from advancement and job security within their organization rather than from the profits of the corporation, which go mainly to those "functionless" shareholders. As long as those profits are adequate and show some modest growth, the technocrat's real interests in job security and advancement are taken care of. ? He finds it illogical, part of a peculiar technocratic secular religion, that CEOs and other corporate officials routinely work six day, 60 hour weeks for the benefit of such powerless, useless shareholders. Either corporate officers and technicians are too crazy to understand their own interests, or Galbraith is wrong. Galbraith would never even consider the possibility that it is he who might be wrong. ? Galbraith is aware that shareholders can always vote with their feet, by selling their shares. However, he never goes further into the implications of that power. Successful management concern for "shareholder value" is rewarded by rising share prices, high price/earnings multiples, safety against takeover threats, and enhanced financial powers for acquisitions and expansion. Failure to enhance shareholder value leads to low share prices, low price/earnings multiples, a loss of financial power, and vulnerability to takeovers. ? Lack of concern for shareholder value has been widely identified as a primary cause for myriad economic ills in the economic systems of Europe and Asia. The equity capital provided by shareholders through the equity markets provides financial stability, especially in times of recession. An over reliance on debt capital is another primary cause for the myriad economic ills in the economic systems of Asia and Latin America, and is a problem even in Europe. ? Also, Galbraith never mentions "profit centers," the key organizational factor that permits large capitalist entities to organize efficiently and retain entrepreneurial vigor. Every technocrat either reports to, or provides services to, profit center managers, whose careers hang on the performance of their sales charts and profit and loss statements. Organization by profit center exists because it serves shareholder interests, and it doesn't exist where there is no private ownership interest. ? Thus, Galbraith's expectations have not come to pass. He must be amazed at the worldwide rush to develop equity markets, and the spread of concern for shareholder value as a guiding principal for corporate governance, and the continuing tendency for large foreign corporations to strive to qualify for listing on America's securities markets. Why would all this be happening if Galbraith's analysis was correct? If Galbraith is right, the rest of the commercial world must be crazy. But that is not all. Galbraith has delusions of grandeur for himself and his fellow academic intellectuals. ? Galbraith has many good things to say about the propaganda myth created by Karl Marx, treating much of it as profound economic truth. His strongest criticism of Marx is that Communism is not the end of the line of economic evolution. ? Since the technocracy is dependent on educators and scientists for the training of additional technocrats and the provision of scientific advances, Galbraith expected the academic and scientific community to unite and eventually wrest substantial economic control from shareholders in the capitalist nations, and from the government apparatchiks in the Soviet Union. This development would thus provide a "convergence" in the further development of the two economic systems. ? INTELLECTUALS OF THE WORLD UNITE! YOU HAVE NOTHING TO LOSE BUT YOUR UTOPIAN FRUSTRATIONS. The hand that grants the academic degree will rule the economic world! ? Of course, like other interest groups, intellectual groups continue to occasionally influence legislation of commercial significance. However, Galbraith's expectation that intellectual interests will displace shareholder interests as the controlling factor in corporate policy is yet another of his unfulfilled expectations. Ideological blinders: Soviet socialism worked "very well" for basic industries. ? However, even today, Galbraith refuses total surrender. ? In 1992, with socialist systems crumbling all over the world, he provided a petulant, one sentence concession that socialism had indeed failed for the diverse mass of rapidly changing consumer industries, but insisted that it had worked "very well" in the Soviet Union for basic industries such as steel, transportation, electric utilities, weapons, and space exploration. ? Galbraith doesn't tell us what he thinks of: �the way those Soviet electric utilities managed their nuclear power plants; �why the Soviet oil industry couldn't maintain production from its rich oil fields, or maintain its leaky pipelines; �why Moscow housing projects became known as "instant slums;" �why Soviet industry failed to substitute lighter, more efficient modern materials for steel; �why even the Soviet defense and space efforts failed to keep up with modern technology; �why the Russian people don't have a decent road net or automobile industry; �why Soviet industry couldn't provide spare parts for the cars it did make, or for its thousands of tractors; �and, why all of its basic industries failed to meet even the most rudimentary environmental standards. These are just the highlights. There is much more absurdity than this in Galbraith's prolific writing career. ? But we must leave room for Harvard economics Prof. Lester C. Thurow. ? In 1980, Thurow, in a string of authoritative books, directed his ideological passions towards support for government "industrial policy." He expressed very favorable views of those industries nationalized or otherwise controlled by foreign governments that could thereby be directed to fulfill various societal needs. ? Thurow's intent was clearly to achieve the same results through his industrial policy program. The privatization movement must have come as a shock to Thurow. Here's a breathless example of his reasoning: ? "[J]ust as an army can move only as fast as its slowest unit, so the economy can only be as good as its poorest motivated, least cooperative component." Clearly, if Thurow were a general, his tactics would be as disastrous as his proposed economic policies. ? Unlike Galbraith, Thurow did accept market mechanisms, albeit suitably altered by all-knowing, all-wise government policies. His elaboration on the methods and content of his industrial policy program produced a string of classic absurdities. The pace of events by the end of the 20th century highlighted these absurdities with distressing rapidity. ? Among his most absurd futurecasts and contentions: Thurow: Volcker's tight money policies will fail to cure inflation. Industrial policies in Europe and Japan will assure the superior performance of those economic systems, as compared to the United States. The willingness of Japanese firms to ignore immediate profits in efforts to gain market share will earn them monopoly profits after competitors are driven out. We will suffer for lack of engineers. We will suffer for lack of enough savings. Government policy should be directed at supporting our largest corporations, even at the expense of smaller competitors. Banks should take ownership interests in their major borrowers and allocate credit accordingly. Dividends are a capitalist rip-off. Profits should not be the primary objective of the corporation. Corporate employees should have tenure and seniority based wages. Since labor costs cannot be readily reduced, the economy will remain biased towards high unemployment or inflation. Prediction: Monetary policy at the Federal Reserve Bank went wrong in 1979 (when Paul Volcker started to reign in monetary expansion). Tight money alone will fail to cure inflation. (But, of course, it did cure inflation, despite huge budget deficits, and while accompanied by a solid two decades of economic expansion.) The fight against inflation will be too painful for the public to tolerate. (The public would tolerate quite a bit, and be suitably grateful, to escape from the double digit miseries of the Carter Administration stagflation.) ? Prediction: Industrial policies in Europe and Japan will assure the superior performance of those economic systems, as compared to the United States, during the 1990s. (Here, again, events have perversely refused to conform to ideological expectations.) ? Prediction: The willingness of Japanese firms to ignore immediate profits in efforts to gain market share will earn them monopoly profits after competitors are driven out. (Unfortunately, by ignoring profits, Japanese corporations expanded unwisely, enmeshing themselves in low profit, overcapacity industries in desperate competition with other Asian corporations that made the same mistake.) ? Prediction: The greater number of engineers being produced in Japan will put us at a competitive disadvantage. (Ten years earlier, it was the greater number of engineers being produced in the Soviet Union that was viewed as the problem. However, it's not the number of engineers or other talented people that matters, it's the ability of the economic system to make efficient use of them that counts. Here, our entrepreneurial capitalist system excels.) ? Prediction: Our low savings rate will put us at a competitive disadvantage. (Here, too, it's the efficiency of use, rather than the absolute amount, that counts. Here, again, we excel.) ? Contention: We should accept the elimination of small business as a major factor in the American economy. It is "far better that small business be crushed by big American companies than that they be crushed by big foreign companies." (Social engineers, like socialists, prefer dealing with large corporations that can more readily be regulated or controlled by government. However, Thurow thus demonstrates total ignorance of the flexibility and creativity of small business, and the importance of small business in the expansion of job opportunities.) ? Contention: Banks in the United States should have equity ties with their corporate borrowers, just like they do in Europe and Asia. (So why are the banks in Europe and Asia slowly trying to untangle themselves from their equity ties with their corporate borrowers? This policy would induce American banks to get into the same trouble as the Asian and European banks have with bad and under performing loans, and increase the difficulties that our vibrant small businesses have in obtaining financing.) ? Contention: Dividends are "a capitalist rip-off," and are unnecessary. (Another Harvard economist who has bought into the Marxist propaganda myth. What's going on up there at Harvard, anyway? Dividends are a COST of equity capital, like capital gains, and like interest payments for debt capital. If our tax policies were at all logical, dividends would be deductible as a cost, just like interest expense. They provide economic justification for the raising and maintenance of the vital equity capital that gives corporations their basic financial strength and stability.) ? Contention: Corporations should not be evaluated by their profitability, but by their "value added" efforts. (Yet another derivative of Marxist propaganda mythology. Obviously, if you're going to encourage and support huge, monopolistic entities, efficiency becomes unnecessary, and the higher their costs, the more "value-added" they can claim.) ? Contention: Workers should be entitled to tenure and wages based on seniority instead of merit. (Great! Then our most important economic entities would be as efficient as our civil service.) ? Prediction: Since labor costs cannot be readily reduced, the economy will remain biased towards high unemployment or inflation. (Again, the market outsmarts the brilliant academic. He, of course, could never foresee the development of all the recent creative ways of regaining labor market flexibility, such as downsizing, the aggressive use of temporary employees, and out sourcing. Government "industrial policy:" ? However, once again, it's when a substantial number of supposedly knowledgeable people accept an absurdity that it becomes a true classic. Thurow achieved this with his vigorous advocacy for "industrial policy." ? And what type of foresight and wisdom does Thurow believe such "industrial policy" would provide us? ? Industrial policy would: Adam Smith was wrong. Mercantilist policies are best. The government knows best which corporations should be the winners and which the losers. We should reject the "just in time" inventory management practices that modern technology makes possible. We must buy enough oil at 1980 prices to fill our oil reserves. Government knows best about union and management practices. We should expend our resources in subsidy trade wars. The independence of the Federal Reserve Bank should be eliminated and its decisions politicized. Mimic the results of Japanese industrial policy. Thurow asserts that Japan has changed the rules of international commerce, and their rules are superior. "Japan may go on to rule the waves for the next 25 years or longer." (Thurow judges the success of Japan's mercantilist policies by their effect on the industries that they favor, while ignoring their impact on the rest of the economy. Japan, and other Asian economies, are burdened by agricultural subsidies, overstaffed industries, inflexible megafirms, and all the sins of crony capitalism and mercantilist trade policies. Of course, our government is not exactly free from these sins, either.) ? Encourage the establishment of huge, increasingly formalized and stable economic entities. (How perverse of our markets to force restructuring in the opposite direction since that time. We have, in fact, accepted those Japanese management techniques that made sense, but the markets have dictated downsizing and increased flexibility. Our "industrial policy" has stressed deregulation and the breakup of utility monopolies wherever possible. I guess this has all been some terrible mistake.) ? Concentrate resources on our industry leaders. "The industries that are going to be important players in the next two decades are already here." (Thank goodness that Bill Gates and the other Silicon Valley geeks didn't learn their economics from Thurow.) ? Require the maintenance of ample inventories, and make sure we have a full oil reserve. "Every inventory control model shows that if one tries to run a business without inventories the result is very erratic prices and occasional shortages." (Thurow believes that econometric models actually reflect reality. Here he chooses to ignore Japanese "just in time" inventory management practices.) ? (How perverse of those maligned and ineffectual capitalist markets. They actually somehow found the strength to apply competitive pressures and force substantial reductions in the expense of carrying large inventories. After they were released from energy price controls, the energy markets were somehow able to overwhelm OPEC and flood us with an abundance of oil at constantly declining prices, much to the surprise and amazement of the government's energy warriors.) ? Eliminate management and union practices and organizations that aren't working. "The current social organizations don't work and aren't going to automatically collapse simply because they don't work." (But, of course, they did. The ruthless destruction of economic entities that don't work is exactly what free markets do, and they do it automatically, without Rube Goldberg government procedures and politically slanted government policies.) ? Equal the worst subsidy practices of any nation that our firms compete with. (The United States should pour resources into the competition for the markets of perennially low-profit, surplus capacity industries Of course, to some extent our government does this, for such industries as sugar and textiles.) ? Require the Federal Reserve Bank to respond to political pressures and sustain economic growth despite inflation. Thurow believed that the deceleration of inflation between 1979 and 1983 was just "luck." He predicted that it would be unsustainable, and would surge again, accompanied by an interest rate surge back to double digit levels, as soon as the recession of that period ended. (Of course, events again perversely failed to conform to his expectations, and our independent central bank went on to slay inflation and provide the monetary basis for sustained prosperity.) The Rube Goldberg of social engineers: ? It's when Thurow starts to explain his system for government "industrial planning" that we get a good idea why we must never allow Government, with or without the assistance of intellectuals like Thurow, to direct economic development. He advocates a Rube Goldberg reorganization of U.S. business organizations and commercial arrangements. Government banks to allocate credit: Government Restructuring Board to influence corporate restructuring decisions: Industrial Policy Board to establish industrial policy: Proposal: There should be Government banks to allocate credit. (Government should pick the winners and losers among competitive business entities, just like in Asia.) ? Proposal: There should be a Government Restructuring Board, which would "negotiate" with firms as to which facilities they would be permitted to close down, and which should be restructured. (The application of political imperatives, bureaucratic imperatives, and a due process decision-making process would make our economy even less flexible than that of India.) ? Proposal: There should be an Industrial Policy Board to direct broad economic policies. (And Lester Thurow or similar intellectuals should be placed in control, of course.) Ideological scholarship: ? As the pace of events continues to accelerate during the 21st century, events will deal with such ideological scholarship with increasing brutality. Events will not be kind to those who sell their intellectual souls for a mess of ideological pottage. ? This is my list of 20th century economic policy absurdities. Please let me know of any additions you might think worthy of this list. ? Please return to our Homepage and e-mail your name, e-mail address and comments. Copyright 1998 Daniel Blatt ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. 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