The Problem of the Liberal Elites Part 1

As I pointed out in this post, conservative elites have completely lost their minds. But liberal elites have problems as well. The problem is more complex with liberals, and it will take several posts of reasonable length to get into it. To make things concrete, I’m going to begin with the liberal approach to trade, which gives me an opportunity to tie together several ideas I’ve raised based on books I’ve discussed here and at Firedoglake:

1. Karl Polanyi’s argument in The Great Transformation that societies can only handle a certain amount of change before they revolt and demand protection. Social changes will come, but the pace of change dictates how much misery will be inflicted on the losers.

2. The absence of a clear definition of market in standard economics.

3. The failure of economic theory to incorporate the impact of raw economic power, including fraud and corruption.

The text for this post is a 1993 article in Foreign Policy by Paul Krugman titled The Uncomfortable Truth about NAFTA: It’s the Foreign Policy Stupid.

Krugman begins by insulting the anti-NAFTA people.

It is as hopeless to try to argue with many of NAFTA’s opponents as it would have been to try to convince William Jennings Bryan’s followers that free silver was not the answer to farmers’ problems.

Indeed, the parallel is quite close. The populism of the 1890s represented a desperate attempt to defend agricultural America against deep economic forces that were changing it into an industrial nation. The choice of a monetary standard had very little to do with the real problems of the farm sector; a burst of inflation might have given some highly indebted farmers a brief respite, but it would have done nothing to reverse or even materially slow the industrializing trend.

Well, as I remember my high school history and related reading, that’s just wrong. My sophomore history teacher, a woman whose name I sadly have forgotten, encouraged us to read the muckrakers, and I chose Frank Norris’ The Octopus and The Pit. They tell an entirely different story, one that revolves around fraudulent financial schemes of a railroad company and traders in the pits of the Chicago Mercantile Exchange. Things haven’t changed much.

Norris’ stories fit better with this analysis published by a site operated by the Economic History Association, The Economics of American Farm Unrest, 1865-1900, written by James I. Stewart of Reed College. He explains that farmers “perceived” that their political and economic status was deteriorating. According to Stewart, farmers had three main complaints: a) farm prices were falling, decreasing their incomes, which they thought was the result of overproduction; b) monopolistic railroads and grain elevators were gouging them; and c) financial conditions, including usury by lenders, an inadequate supply of money and deflation which forced them to repay loans with more expensive dollars. They were not able to get government help for these problems because the legislatures were dominated by financial interests including banks and railroads, the oligarchs and monopolists of the day.

Stewart says that these claims do not match the statistical testing done by economic historians. For what it’s worth, I think his explanations are weak, but I’m no expert, and perhaps those silly farmers didn’t understand their lived situation as clearly as economic historians reading aggregated data decades later. Perhaps, for example, there were no usurious loans in that mix that resulted in mortgage loans averaging 2-3% above the norm in New England. After reciting the contents of several studies, Stewart explains that the real issue facing farmers was a massive increase in uncertainty and risk. As he puts it, farmers might experience one or more of the problems he discusses, or they knew someone who was affected by them, and this increased their concerns.

What were the sources of risk? First, agriculture had become more commercial after the Civil War (Mayhew, 1972). Formerly self-sufficient farmers were now dependent on creditors, merchants, and railroads for their livelihoods. These relationships created opportunities for economic gain but also obligations, hardships, and risks that many farmers did not welcome. Second, world grain markets were becoming ever more integrated, creating competition in markets abroad once dominated by U.S. producers and greater price uncertainty (North, 1974). Third, agriculture was now occurring in the semi-arid region of the United States. In Kansas, Nebraska, and the Dakotas, farmers encountered unfamiliar and adverse growing conditions. Recurring but unpredictable droughts caused economic hardship for many Plains farmers. Their plights were made worse because of the greater price elasticity (responsiveness) of world agricultural supply (North, 1974). Drought-stricken farmers with diminished harvests could no longer count on higher domestic prices for their crops.

Stewart uses the passive voice throughout this passage. But except for growing conditions each of the causes he lists is the direct result of the intentional act of specific human beings either in government or business. In particular, the section on railroads makes it clear that managers took every advantage of their monopoly status, as did the owners of grain silos. There is no doubt that the same is true of bankers and merchants in many places. The deepening involvement of the US in international grain dealings was another opportunity to hurt farmers. In bad years, some of the losses from low harvests were made up from higher prices, until the “integration” world markets. In combination, these efforts of government and business effectively dumped all the risk of bad harvests on tens of thousands of farmers, while increasing the profits of a few shippers, grain merchants and speculators.

In other words, the effect of the policies chosen by the rich and powerful was to make the lives of an important segment of the population worse. Or in Stewart’s bloodless words:

Uncertainty or risk can be thought of as an economic force that reduces welfare

In Krugman’s world, the forces facing these farmers would have been unstoppable. In the real world, as Stewart reports, the farmers organized themselves and forced legislative changes at the State and Federal level that protected them and enabled them to stay in business, the socially important business of growing food for their fellow citizens. They were able to transform the conditions of the markets they faced, using the power of government. They were able to slow the pace of change to a level that didn’t ruin their lives despite the best effort of the powerful. It’s a neat demonstration of Polanyi’s idea about people demanding protection from violent social change.

There were massive changes in the markets facing farmers as they moved from subsistence farming to commercial farming at the local and state and then federal levels, and then into the world market. There were changes in the markets from lenders, railroad companies and other vendors. There was constant change in the terms of the markets during this period, to the point that it would be unreasonable to compare the grain market in 1865 with the grain market in 1895. And Stewart says nothing about mechanization during that period. Economic historians treat the price of wheat as the outcome of market activity without apparently looking at the changes in the nature of the markets. But, as Stewart points out, the regulation of these markets changed steadily over this period, and the outcomes to farmers were improved by those changes.

Third, the central part of Stewart’s story is international trade in grain. The impetus for that change came from the powerful and wealthy shipowners, railroads, merchants and grain speculators, and not from the farmers. The roles of the people who operate railroad and overseas shipping lines, the merchants who import and export grain, and the grain speculators in Chicago is not even touched by Stewart’s account. He does not even discuss the fraud and corruption that dominated the lives of those farmers and all of society. He and other economists neatly hide the power structures that created the problems of farmers and the forces the farmers beat down to protect themselves.

That pattern is repeated over and over in the story of trade.

Index to prior posts in this series.

The Great Transformation Part 3: Neoliberalism Before It Got Its New Name

Previous posts in this series:

The Great Transformation: Mainstream Economics and an Introduction to a New Series

The Great Transformation Part 1: The Market

The Great Transformation Part 2: More on Markets

The text for this post is Chapter 12 of The Great Transformation, which begins:

Economic liberalism was the organizing principle of society engaged in creating a market system. Born as a mere penchant for nonbureaucratic methods, it evolved into a veritable faith in man’s secular salvation through a self-regulating market. Such fanaticism was the result of the sudden aggravation of the task it found itself committed to: the magnitude of the sufferings that had to be inflicted on innocent persons as well as the vast scope of the interlocking changes involved in the establishment of the new order. The liberal creed assumed its evangelical fervor only in response to the needs of a fully deployed market economy. P. 141

In Chapters 7-9, Polanyi gives a description of the grim state of the working people of England prior to 1832. Forcing people to change from peasants into reliable industrial workers was brutal, but at least most people were able to eat thanks to the Speenhamland system of poor relief. The economic liberals of the day argued against these laws, on the grounds that the best way to force people to become good little robots was starvation. Polanyi discusses at length Joseph Townsend’s 1786 Dissertation on the Poor Laws, which reads like the comments of your average jackass Republican congressional or hack economist at the Cato Institute:

But in this day it often happens that the industrious firmer [I think this is the equivalent of a small businessman] is oprest with poverty. He rises early, and it is late before he can retire to his rest; he works hard and fares hard; yet with all his labour and his care he can scarce provide subsistence for his numerous family. He would feed them better, but the prodigal must first be fed. He would purchase warmer cloathing for them, but the children of the prostitute must first be cloathed. The little which remains after the profligate have been cloathed and fed, is all that he can give to those, who in nature have the first claims upon a father.

The only way to insure that this terrible event does not occur is to starve the beneficiaries of the Poor Laws.

In general it is only hunger which can spur and goad [the poor] on to labour; yet our laws have said, they shall never hunger. The laws, it must be confessed, have likewise said that they shall be compelled to work. But then legal constraint is attended with too much trouble, violence, and noise; creates ill will, and never can be productive of good and acceptable service: whereas hunger is not only a peaceable, silent, unremitted pressure, but, as the most natural motive to industry and labour, it calls forth the most powerful exertions; and, when satisfied by the free bounty of another, lays a lasting and sure foundation for good will and gratitude.

… The wisest legislator will never be able to devise a more equitable, a more effectual, or in any respect a more suitable punishment, than hunger is for a disobedient servant. Hunger will tame the fiercest animals, it will teach decency and civility, obedience and subjection, to the most brutish, the most obstinate, and the most perverse.

Hunger was a tool to make the poor work for survival for the benefit of the more delicate members of society, like the English Country Squire or the capitalists behind the cotton mills. This theory was taken up by the utilitarian Jeremy Bentham.

Bentham believed that poverty was part of plenty. “In the highest stage of social prosperity,” he said, “the great mass of the citizens will most probably possess few other resources than their daily labour, and consequently will always be near to indigence.…” Hence he recommended that “a regular contribution should be established for the wants of indigence,” though thereby “in theory want is decreased and thus industry hit,” as he regretfully added, since from the utilitarian point of view the task of the government was to increase want in order to make the physical sanction of hunger effective. P. 122-3.

These views were much appreciated by the voters, which at that time included none of those poor people, only people of property, owners of manufacturing, merchants and country squires, along with the aristocracy. When these believers triumphed in the elections of 1832, they abolished the entire structure of poor laws, and loosed the miseries of the self-regulating market on those people who depended for their lives on their ability to sell their labor.

But this free market in labor is just one leg of the liberal economic project. The other two legs, the fiercely enforced gold standard, and the absolute commitment to free international trade, had to be forced into existence at the same time, or, as Polanyi explains, the entire project would collapse. And so it came to pass. England bound itself to the gold standard, and used its military to enforce free trade, especially in grain. That meant the end of England’s ability to feed itself, and meant that international fluctuations in the price of gold influenced the starvation wages paid to workers.

The upheaval of these massive social changes was immense, and was thoroughly justified by the liberal economists of the day, including the Englishman William Stanley Jevons, writing in the 1870s, who based his theories on Bentham’s calculus of pain and pleasure. Those theories are still the driving force of mainstream economists. It’s an article of faith that free trade is just the best, that a sound currency is just the best, that the self-regulating market is just the best, all things on which today’s neoliberal economists would agree.

But those same myths affect even today’s “liberal” economists. They too supported NAFTA, especially Paul Krugman, on grounds that would be familiar to Bentham. Krugman was sure NAFTA would bring benefits to the US. Here’s William Greider writing in The Nation on free trade deals:

_ Like Krugman, governing elites dismissed critics and simply stated that free trade will be good for America because US energies and endless creativity are sure to prevail, as they always have in the past. Opponents like organized labor were typically ridiculed as backward Luddites, promoting what Krugman called “disguised protectionism.”

Compare that with Polanyi’s description of the economists of the 1840s on trade:

… the English nation would face the prospects of continuous industrial dislocations in the firm belief in its superior inventive and productive ability. However, it was believed that if only the grain of all the world could flow freely to Britain, then her factories would be able to undersell all the world. P. 144.

England slashed its agriculture sector, and when the First World War started, it was importing 80% of its wheat and 40% of its meat. After German U-boats started their campaign against merchant vessels, the government forced land into grain production, enabling the country to survive with the help of rationing. In the wake of the war, the elites tried to reinstate the pre-war golden age, by reestablishing free trade, the gold standard and self-regulating markets. The Great Depression followed hard on the heels of the crash of financial markets. Regulations piled up on those self-regulating markets. Nations left the gold standard, But free trade was untouchable. At the start of WWII, England was importing “… more than 50% of its meat, 70% of its cheese and sugar, nearly 80% of fruits and about 70% of cereals and fats”, and Germany again tried to destroy shipping. The war ended in May, 1945, but rationing was not suspended until 1954.

NAFTA didn’t bring benefits either to US or Mexican workers, but it was great for stockholders of multinational corporations.

Both Polanyi and John Maynard Keynes predicted the end of this kind of liberalism in economic thinking. Both have been proven wrong. We just fight the same old battles under new names. This time it’s neoliberalism. In each case, the result is the enrichment of the rich.