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More About: Philosophy: Libertarianism

Tarred and Feathered for Economic Heresy

Would free-market libertarians and conservatives tar and feather someone—figuratively speaking, that is—for the heresy of agreeing about economics with the president of half-socialist France?

This commentary will be a trial balloon.

French President Emmanuel Macron, a former investment banker, is a fan of the famous economist Joseph Schumpeter, whose concept of creative destruction says that prosperity and societal wealth come about as old business models, processes, products, and even entire industries are killed off and replaced by improved ones.

It's not heresy to agree with Macron on this.  But it is heresy to agree with what Macron goes on to say. 

Macron goes on to say that creative destruction has gone too far and morphed into a Darwinian survival of the fittest that has benefited transnational elites at the expense of too many domestic working stiffs and their local communities in developed countries.

This trend has been accelerated by globalism, by such transnational organizations as the World Trade Organization, by the rise of China and its industrial planning, and by the groupthink among most Western intellectuals and political leaders who believe that their nations will be left behind unless they let domestic concerns take a backseat to international trade, cross-border capital flows, and corporate outsourcing.

Of course, Macron's perspective is influenced by the domestic situation in France, a country that is handicapped by a legacy of stifling labor laws, costly business and environmental regulations, high taxes, unsustainable social-welfare programs, and an influx of unskilled immigrants from its former North African colonies.  This leads him to conclude—wrongly, in my opinion—that an antidote too much creative destruction is for the European Union to be more united in standing up for the domestic interests of its member countries against the juggernauts of China and the USA.

This misguided solution does not mean that his diagnosis is wrong.  In fact, the election of Donald Trump suggests that his diagnosis is right—namely, that too many working stiffs and their local communities have been left behind and cavalierly written off by economists (aka mathematicians without a heart) and eggheads (aka intellectuals without real-world experience).   Understandably, the disaffected would probably have voted for a reincarnation of Attila the Hun if they had thought he would at least acknowledge their plight, regardless of whether his policies would do them any good.

Economists and eggheads (E&Es) not only failed to acknowledge their plight but also spouted the coldhearted notion that those who have seen their lives and communities upended by globalism and creative destruction are actually better off than they would have been.  They're better off, the E&Es say, because China has chosen to beggar its own people by industrial policies that favor exports over domestic consumption.  As a result, Americans who have lost well-paid manufacturing jobs and fallen out of the middle class can now make up for this setback by buying imported goods at cheaper prices at Walmart or Dollar General or Amazon.   

Speaking of Amazon, to digress for a minute, the American media are surprised that Amazon's core business ranks low in a ranking of employee pay.  What did they expect with what is essentially a distribution business; that is, a business that stacks goods in a warehouse to be later picked, boxed and shipped?  There is not much added value in that kind of business, especially for the workers who stack, pick, box and ship.  Most of the added value is from the software coders and engineers who design automated warehouse equipment and slick fulfillment and customer order systems—and who command higher pay as a result.  

The E&Es go on to say that creative destruction and globalism are pulling hundreds of millions of people out of poverty in third-world countries.  They're correct.  But citing this fact in an attempt to mollify Americans who have fallen out of the middle class is like a physician telling a patient with cancer to accept his fate and go without treatment because medical care is improving in other countries.

The E&Es might not be this coldhearted if they were to get out of their echo chambers and spend time in communities devastated by creative destruction.  They'd see broken families, obesity and its associated medical problems, substance abuse, welfare dependency, dilapidated houses, empty storefronts, and aimless adults and children wandering about.

But the E&Es stay in their echo chambers and continue to show a lack of empathy.  For example, they say that with the current low unemployment rate in the USA, those hurt by creative destruction only have to pack up and move to a locale with better prospects.  Yeah, right, they should get a U-Haul and hit the road, even though they can't sell their biggest asset, their house, even though they might lose welfare benefits if they move to another state, even though they now have an arrest record for drug possession or domestic violence and can't get a job, and even though they have to leave ageing parents or dependents behind.  How easy this looks from the economics department at the University of Chicago or from a think tank in D.C.

The E&Es don't even have to go to the deindustrialized heartland to see the effects of creative destruction.  Even prosperous cities have homeless encampments, beggars at major intersections, drug dealers galore, and trash and abandoned shopping carts littering public places.  What kind of society looks the other way and doesn't do something about this?

There is a huge unaccounted social cost resulting from these problems, a cost that is not reflected in corporate balance sheets or in balance of trade accounting.  In a very real sense, companies that have moved operations overseas have socialized the unseen costs of closing domestic operations.  Sure, they paid considerable taxes and wages while operating locally, but when these payments stopped, the rest of society picked up the increased costs for welfare, feigned and real disabilities, crime, law enforcement, special education, and the unmeasurable consequences of people losing hope and industriousness.

Libertarians say that such costs wouldn't be socialized if there were not a welfare state that taxpayers are coerced into supporting.  They're right about that, but considerable social problems would still exist in the absence of a welfare state and spill over into society at large. Self-interest alone is enough reason to do something about the problems.  Left unaddressed, the social upheaval from creative destruction can lead to the election of socialists, nationalists, and demagogues.  In any event, good luck in ending the welfare state.  To end the welfare state, one would have to replace democracy with another form of government or no government, so that citizens could no longer vote for government help. 

The left's solution is to give people more free stuff with no strings attached, which is a form of cruelty, as it goes against the human need for accomplishment, self-reliance, self-respect, and being a part of something larger than oneself.  The new idea of a guaranteed income for everyone is just a different version of the same cruelty, as it disconnects income from work and doesn't consider the psychic cost of getting a handout with nothing expected in return.

The right's solution is to let market forces eventually turn the downsides of creative destruction into upsides.  As with libertarians, they must envision a different form of government, one in which people can't vote for government help while they wait for their fortunes to change.  

So, what is the solution?

As a libertarian, I like to fantasize, so I'll begin with a fantasy.

The fantasy is that economics departments and think tanks would relocate to towns that have suffered from creative destruction, so that economists can grow a heart and eggheads can experience the real world.  A side benefit of them relocating would be that lousy public schools, medical facilities, and public infrastructure in those towns would quickly improve, as the E&Es wouldn't tolerate what the natives have had to tolerate.

A companion fantasy is that Congress would force federal agencies to relocate from D.C. to the same towns.  Poetic justice would be the result.  Real estate prices would plummet in D.C. and skyrocket in the hinterlands, thus enabling the native population to sell their homes and pack up the U-Haul.  

Enough fantasy. 

So, what are real solutions?  How can the benefits of creative destruction be retained while addressing its ill-effects?  How can this very complex conundrum be solved?

Sorry, but I don't have a PhD in sociology, behavioral psychology, political science, or economics.  But many others do.  Isn't all of this brainpower capable of coming up with real solutions?  If no, then what is the value of a PhD?

On second thought, forget the PhDs.  Just put a bunch of non-ideological, nonpartisan common folk in a room and ask them to come up with some ideas. Heck, even this occupant of the middle of the bell curve can come up with a couple of ideas, as follows.

One idea is to revise accounting standards for corporate and national accounting so that the hidden social costs of plant closures, outsourcing, and other creative destructions are reflected on balance sheets as a liability and thus become a factor in business and political decisions. Accounting for such externalities might show that moving an operation overseas or to another state is not as profitable as it might seem.   CPAs can work out the details.

Before you guffaw too hard, consider that companies take local societal factors into consideration when deciding where to locate an operation in the States.  I know, because I've been on site-selection committees.  They consider crime statistics, the quality of local schools, the condition of roads and other infrastructure, cultural attractions, tax incentives, and the availability of public monies for job training.  They also consider the cost of relocating key personnel to the new location and helping them with housing costs.  Amazon's search for a second headquarters city is an example of the painstaking analysis that is done in selecting a new location. There is no reason why this couldn't work in reverse—that is, for estimates to be made of the social costs resulting from closing and moving an operation.

The idea is not to have the companies reimburse the community for these costs, as that would be fraught with political shenanigans and unintended consequences.  It is simply to make the social costs explicit and thus perhaps influence decisions and change the way that people look at the issue. 

On the other hand, it is tempting to mandate that companies not leave vacated factories, mills, shipyards, and other abandoned facilities behind for the community to deal with.  Not only is it un-neighborly to do so, but these eyesores become symbols of decay and a warning sign that the town is not a good place to locate a new business. 

Take Bethlehem, Penn., the home of Lehigh Univ., which has an excellent engineering school.  The town center is in the shadows of one of the largest industrial ruins in the country:  the huge hulk of an abandoned steel mill.  It is doubtful that Amazon or Google or Facebook or the Heritage Foundation or the Cato Institute would move to downtown Bethlehem.  Nor would college-educated millennials who pretend to care about social justice and the collective good.  Nor would this supreme hypocrite.

Or drive the city route of I-95 through East Philadelphia, along the miles and miles of slums and abandoned shipyards, factories and warehouses.  On a grey winter day, you'll be tempted to suck on your exhaust pipe in despair.

One way of stopping companies from leaving their messes behind would be to require them to establish a reserve on their balance sheets or to take out surety bonds to cover the cost of tearing down or rehabilitating vacated facilities.   But even such a fair-minded measure would have complications, the biggest of which would be that it would serve as a disincentive for companies to locate new operations in locales with such a measure and would encourage them to move offshore to locales without such measures, such as India. 

Speaking of India, if you want to see what American workers are up against, watch the 71-minute documentary "Machines." Shot in an enormous textile and dye factory in Gujarat, India, it shows the Dickensian conditions that the workers endure for 12 hours a day.  Wearing sandals or going barefoot, the workers have no safety gear—no bump hats, no steel-toed shoes, no respiratory equipment, no rubber gloves.  The floors are covered in grease and dangerous chemicals, the air is thick with smoke and fumes, and dangerous machines have no safety guards, kill switches, or lock-out mechanisms.  The astonishing amount of untreated effluent generated by the plant flows onto neighboring land, where impoverished children search through the goo for something of value.   

The E&Es see something good in this.  They see it as the first step in India and other developing economies climbing the productivity ladder and slowly becoming prosperous.  As these countries attract capital from investors and exports, investments can be made in technology, automation, education, safety, and environmental safeguards.  Eventually, they won't have to rely on cheap labor to compete with developed countries and can compete on other comparative advantages.  Left unanswered is what happens to the concept of comparative advantage when social, economic, and technological factors become equal between countries.    

My second idea is an old one that has never fully materialized—namely, to end the cruelty of welfare dependency by requiring the able-bodied and able-minded to work in return for public assistance.

Actually, the idea did materialize during the Great Depression, when unemployed Americans worked for the Works Progress Administration and built infrastructure across the country that still stands today.  Was there typical government waste and incompetence in the process?  Of course.  But the waste was far less than what it would've been if the unemployed were given handouts without expecting anything in return.  Also, there were psychic benefits to the work that can't be measured.

Could something similar be organized for people and communities negatively affected by creative destruction?  Could people be put to work for some limited period in making their towns more attractive, in joining neighbors in a community effort, and in otherwise accomplishing something meaningful?  Are there enough leaders who can organize such efforts and inspire the participants?  Are there enough reporters, pundits, ministers, and social workers who will laud their efforts and make them feel special?  Is it even politically possible to reform and consolidate the many existing welfare programs that are disconnected from work and thus self-esteem?

If no, that's a sad and sobering commentary on the state of the USA.

Final question:  Can someone mention the downsides of creative destruction without being tarred and feathered as a heretic by doctrinaire free-market libertarians and conservatives?

I have to run now.  The smell of boiling tar is in the air.   

 

    

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