Monday, February 25, 2013

Why the rich act the way they do

The past week I have seen a welcome development on progressive blogs: attacks on the rich for their unremitting war to shape public opinion in favor of austerity. On DailyKos, jamess directly targeted Peter Peterson for fomenting a fear of deficits as a means of gutting Medicare, Medicaid, and Social Security. A day later, Ray Pensador posted How Billionaires-Funded Propaganda is Unraveling The Country.

What the rich want to do is simply safeguard their investments made over previous years, or even previous generations. This is quite understandable: we all do it. We "sink money" into a house, or a vehicle, so we decide to "make it last a little longer." The problem for the rest of us arises from the fact that the rich largely control society's flows of credit and money. They will not invest in new technologies and new economic potential unless they know they can control those new things. So, this results in what economists call rent seeking behavior (tip o' the hat to maddagg, for what I consider one of the most important DailyKos diaries, ever. No exaggeration).

Michael Hudson has done extraordinary work explaining how the rich, over the past century, have deliberately corrupted the profession of economics to eradicate the concept of economic rent. For example, see Hudson's Simon Patten on Public Infrastructure and Economic Rent Capture.

America differed from England, as did Germany and other countries confronting British industrial competition. Free-trade policy was not appropriate for conditions that called for steering economic evolution along the most productive lines. And what British economists treated as universal actually reflected its class structure, especially its hereditary groundrent stemming from the Norman invasion. Free-trade economists attributed America’s high wage levels to the nation’s vast backwoods of available land on which to settle as an alternative to working in factories. Like other protectionists, Patten found this explanation insufficient.

American industrial labor had to be sufficiently productive to sustain higher living standards. This required investment in capital, which in turn required protective tariffs and public infrastructure investment. Patten recognized that rising productivity, public investment, and wage levels went together. That is what enabled well-fed, well-trained, and well-housed American labor to undersell “pauper labor.” American free traders who followed the lead of British economists in urging governments to stand aside bought the idea that market forces by themselves would produce the most efficient outcomes. But what are markets, reformers asked, if not carefully constructed arrangements shaped by tax laws, land and property tenure, government subsidies and price regulation, educational systems, and infrastructure? Would not a market without regulation or public services become “free” for predators?

he institutional and sociological economists who emerged from the American protectionist tradition and German Historical School were almost alone in retaining from classical political economic thought the concept of economic rent (the excess of market price over intrinsic cost-value) as unearned income. Defenders of property and opponents of tax reform found this focus on rentier revenue disturbing, above all its application to land ownership, and the monopolies and trusts created by Wall Street. These vested interests applauded the free-market marginalists who took property relations for granted, and especially endorsed John Bates Clark’s rationalization of property income as “earned.”

To call what the rich do a conspiracy - well, it is, but it misses the more important dynamic. I think the great religious texts, such as the Christian Bible, capture the essence of that dynamic when those texts discuss how an entire society is corrupted and destroyed by its own selfishness and hardheartedness - beginning with the people at the top of society, the rich and the powerful. The elites. Thorstein Veblen had, I believe, a more accurate analysis of this process than Karl Marx, when Veblen wrote about the effects of pecuniary culture.

This is the process the founders of our republic found, when the steeped themselves in the history of the ancient republics of Greece, Rome, Florence, Venice, Switzerland, and the Hanseatic city-states, for the express purpose of discovering and understanding what caused these republics to fail. What they found was that republics are most often destroyed, from within, by cabals of the wealthiest citizens. (Outside pressures, such as military invasions, only serve to kick in an already rotted door.) As Gordon Wood writes, in his magnificent 1969 tome The Creation of the American Republic 1776-1787, quoting from newspaper commentaries in 1775 and 1776:
History, as written by Sallust and Plutarch, only too grimly showed the fate of empires grown too fat with riches. While the Romans, for example, maintained their love of virtue, their simplicity of manners, their recognition of true merit, they raised their state to heights of glory. But they stretched their conquests too far and their Asiatic wars brought them luxuries they had never before known. “From a People accustomed to the Toils of War, and Agriculture, they became a People who no longer piqued themselves on any other Merit than a pretended fine Taste for all the Refinements of a voluptuous Life. They became obsessed with the “Grandeur and Magnificence in Buildings, of Sumptuousness and Delicacy in their Tables, of Richness and Pomp in their Dress, of Variety and Singularity in their Furniture.” That corruption “which always begins amongst the Rich and Great,” soon descended to the common people, leaving them “enfeebled and their souls depraved.” The gap between rich and poor widened and the society was torn by extortion and violence.” “It was no longer virtue that raised men up to the first employments of the state, but the chance of birth and the caprice of fortune.”
In the Federalist Paper "Number 10," James Madison warned that most political factions are caused by economic interests. In the notes he made as he prepared for the Constitutional Convention, Madison  wrote: “If the minority happen to include all such as possess … the great pecuniary resources, one third only may conquer the remaining two thirds.

In other words, the founders understood that the rich can be as much as threat to republican self-government as a standing army.

Having pored over such books the past two years, trying to determine what economic policies were intended at the beginning of the republic, I have come to consider the left's typical dismissal of the founders as just a cabal of rich white men, intent on protecting their wealth and property from a democratic rabble, as a crippling mistake. It forfeits to the wrong-wing any claim to be acting in or motivated by the spirit of the founders and their Revolution. This erroneous view of the founders separates us from the truly remarkable radical effect of the American Revolution, an effect that is so powerful, its historical reverberations so enduring, that the United States today is still widely admired and emulated around the world despite over a century of acting like another empire, instead of a republic. As Lincoln warned, "We shall nobly save, or meanly lose, the last best hope of earth." 

To fully understand Lincoln here, I think it useful to follow with this quote from Jefferson, from one of his last letters, to Roger C. Weightman, on 24 June 1826:
All eyes are opened, or opening, to the rights of man. The general spread of the light of science has already laid open to every view the palpable truth, that the mass of mankind has not been born with saddles on their backs, nor a favored few booted and spurred, ready to ride them legitimately, by the grace of God. 
To which Jefferson added, "These are grounds of hope for others." I.e., the last best hope of earth. Volunteers in the Union Amy fighting against the British-backed southern oligarchs who tried to destroy the Union understood this. From James M. McPherson emotionally powerful 1995 book, What They Fought For, 1861-1865, a masterful survey and summary of private correspondence  from Civil War soldiers and officers:
"I do feel that the liberty of the world is placed in our hands to defend," wrote a Massachusetts private to his wife in 1862, "and if we are overcome then farewell to freedom." If "traitors be allowed to overthrow and break asunder ties most sacred - costing our forefathers long years of blood and toil," agreed a Connecticut enlisted man in 1863, then "all the hope and confidence of the world in the capacity of men for self government will be lost. . . and perhaps be followed by a long night of tyranny." In 1863 on the second anniversary of his enlistment, a thirty-three-year-old Ohio private wrote in his diary that he had not expected the war to go on so long, but no matter how much longer it took it must be prosecuted "for the great principles of liberty and self government at stake, for should we fail, the onward march of Liberty in the Old World will be retarded at least a century, and Monarchs, Kings and Aristocrats will be more powerful against their subjects than ever." After Lee's surrender at Appomattox, a fifty-one-year-old New Jersey colonel who had fought the entire four years wrote to his wife that "we [can] return to our homes with the proud satisfaction that it has been our privilege to live and take part in the struggle that has decided for all time to come that Republics are not a failure."

Keeping in mind the torrents of blood required to save the republic from the oligarchs of the mid-nineteenth century, let us now look at another excerpt from Hudson's Simon Patten on Public Infrastructure and Economic Rent Capture:
The rise of socialist reformers in the wake of Europe’s 1848 revolutions defined labor/capital relations as exploitative and called for nationalization of the means of production. As Patten observed, “If this new group of thinkers called themselves sociologists or historians they might be disregarded.” But the social reformers “openly claim to be economists, and the worst of the matter is, they have . . . the mass of the older economists on their side. Nothing pleases a socialist or a single taxer better than to quote authorities and to use the well-known economic theories to prove his case (Patten 1908a, in 1924: 219).

Meanwhile, the analysis of economic rent paid to owners of land, mineral resources, and natural monopolies—using the labor theory of value to isolate such rent as “empty” pricing that did not reflect production cost—flowered into a political movement to tax or nationalize and socialize land and monopolies outright. The vested property interests felt duly threatened. The new generation of economists, friendlier to the vested interests, “soon realized that their favorite authors were not so perfect as they supposed, and that economic doctrine must be recast” to exclude logic that implied an exploitative character of the “unearned increment” that landowners obtained in the form of rent and rising property prices, and even industrial profit as surplus value (employing labor to sell its products at as large a markup as possible).

Reacting to the policies of Marx and Henry George that urged nationalization or full taxation of land and natural resources, a post-classical orthodoxy arose to divert attention away from the analysis of economic rent as unearned income (prices and income without cost value). Clark in America and a marginal utility school in Europe tried to base their view of the economic system on consumer psychology, while treating all income as reflecting—by definition—the recipient’s contribution to production. The result was a circular reasoning to confirm their desired outcome and starting viewpoint: If all income was “earned,” there was no such thing as a free lunch. Wages were rising, paid out of productivity gains. Describing America as reflecting the dynamic of future evolution to a “pleasure surplus” economy, Patten showed how a growing surplus was available not just to landlords and owners of capital as in Ricardian theory, but also to workers in the form of rising wages and living standards. This means that rentier income is taken at the expense of labor’s high wage levels as well as industrial profits.
We went back to Hudson to see how the rich, the "vested interests," needed to corrupt economics. Note this is a very clever and insidious form of cultural warfare by the rich, or, to be as precise and deadly in our accuracy as possible, epistemological warfare. The rich, who extract economic rent, thus get a "free lunch." But, the rich have had their whores in the academy teach, for a century or more, that in economics there is no free lunch. This epistemological warfare has been so successful that "there is no free lunch" is now a cliche, even, god help us, the very foundation of movement conservatism economic beliefs. (If I had a dollar for every time I heard a wrong-wing talking head say "there is no such thing as a free lunch"....) If you begin with the firmly inculcated belief that "all income... reflect[s]—by definition—the recipient’s contribution to production," you are never, ever, going to start sniffing around for the "free lunch" of rent seeking behavior.

And that observation about the rich and their cultural warfare against the concept of economic rent, dear reader, brings us back to how the left makes a massive error in dismissing the Founders and forfeiting any claim to the heritage, and more importantly, the meaning, of the American Revolution and the formation of the United States as a self-governing republic. Professor James L. Huston argues that the founders developed a political economy of aristocracy, as he explains in "The American Revolutionaries, the Political Economy of Aristocracy, and the American Concept of the Distribution of Wealth, 1765-19000" (The American Historical Review, Vol. 98, No. 4 (Oct., 1993), pp. 1079-1105):
The revolutionaries’ concern over the distribution of wealth was prompted by a tenet in the broad and vague political philosophy of republicanism. In contrast to nations in which monarchs and aristocrats dominate the state, republics embodied the ideal of equality among citizens in political affairs, the equality taking the form of citizen participation in the election of officials who formulated the laws. Drawing largely on the work of seventeenth-century republican theorist James Harrington, Americans believed that if property were concentrated in the hands of a few in a republic, those few would use their wealth to control other citizens, seize political power, and warp the republic into an oligarchy. Thus to avoid descent into despotism or oligarchy, republics had to possess an equitable distribution of wealth....

The answer to how the social system of aristocracy generated wealth inequality was easily found. American political leaders applied the labor theory of property or value; an unjust distribution resulted when a few were able to transfer the fruits of other persons’ labor to themselves. Aristocrats (non-workers and therefore non-producers) stole the fruits of labor from the masses of toilers (laborers and therefore producers). Aristocrats effected the transference by political means. It was control of politics that enabled aristocrats to steal the fruits of labor, to enrich themselves and pauperize the multitudes. By the time of the writing of the Constitution, literate Americans had clearly voiced the idea that a misdistribution of wealth was almost entirely a political act.

(I have been injecting these ideas into the Wikipedia entry on U.S. economic history. I have rewritten most of the section entitled "New nation." This section includes a number of footnotes, referencing some of the books I've been studying. In case anyone is interested in pursuing this matter....)

What Peter Peterson does when he gives hundreds of millions of dollars to fund propaganda against the earned benefit programs of Social Security, Medicare, and Medicaid; what Charles and David Koch does when they give billions of dollars to fund propaganda against government support for clean energy technologies; what Sheldon Adelson does when he gives tens of millions of dollars to Republican presidential candidates Newt Gingrich and Mitt Romney, U.S. Senate Minority Leader Mitch McConnell (R-KY); U.S. House Speaker John Boehner (R-OH); U.S. Senator Dean Heller (R-NV); U.S. Congressman Mark Amodei (R-NV); U.S. Congressman Joe Heck (R-NV) and former Florida House Speaker Adam Hasner, is what the rich have always done throughout all of recorded human history: buy political influence and power in order to impose their own will on a formerly self-governing republic. And thus destroy it from within.

In the Hall of Lilies (Sala dei Gigli), in the Palazzo Vecchio, Florence: 
Donatello's Judith, celebrating the overthrow of tyrants.

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