ductus of the zeitgeist -- 2

“If you people wouldn’t have drunk it,” Dalitz said thickly, “ I wouldn’t have bootlegged it.” Moe Dalitz before the Kefauver Commission on organized crime, explaining why he sold liquor during the prohibition. From “The Money and the Power” by Sally Denton and Roger Morris.

The second mystery – see my Thursday post -- to which I want to point my showman’s cane (see it tremble in my palsied grip) is that of the developmental lag. I think this mystery complicates any simple conclusions we can make from the first mystery, which, if you will remember, is the mystery of how, as we become richer, we become collectively poorer. If there were only one mystery here, then the answer would be pretty simple. We’d just look to the tradition of class conflict for our answers. Unfortunately, the answer isn’t that simple. Instead, our two mysteries are enjambed, intertwined like two dogs in heat. They form a matrix. It would be nice for me to be able to say, well, Reagan was just an upper class stooge, and that’s how the investor class became dominant in America. Alas, it isn’t that simple. In fact, only by looking at both of the mysteries does one understand the brilliance, albeit limited brilliance, of the American response to the crisis of capitalism in the 1980s, and how that has played out to this day. Those mysteries explain a certain unexpected movement in the conservative revolution. Unlike conservatism in the past, this revolution was not wrapped about savings. Just the opposite. This revolution was about creating an economic culture in which the inclination to saving was systematically dissolved.

The mystery I am talking about is at the heart of globalization and the transformation of the welfare state into the guarantor state.

When I try to figure out how to put this in a simple post, I feel rather like I am trying to spoon out the water in pond with a net: the instrument is wrong and the goal is futile. But of course, this is what we do here at LI.

So-- lets get one thing straight right away. The difference between the economist and the non-economist is that the economist can think in terms of parts and aggregates, but never thinks of values in terms of emergent wholes. To put this in terms of an example: an economist can explain why the efficiencies gained by transferring manufacturing to low paying areas from high paying areas – for instance, from Michigan to the Mexican border – make up for the cost of increased unemployment in Michigan. The economist would have an easy time showing this by a sectorial analysis of the U.S. economy. What the economist does not include in the calculus at all are the intangible values in the blue collar culture of Michigan. It has no instrument to quantify that culture, and what economists can’t quantify, they can’t see. They are equipped with visual sensoria as delicate and peculiar as a fly’s – but they aren’t human. Similarly, the culture the emerges around low paying maquilladoras in Juarez is available, to the economist, only in terms of human capital, and not in terms of such emergent wholes that we can look down at the face of another slaughtered girl on the outskirts of Juarez and understand what is happening here (“ You've been with the professors/ And they’ve all liked your looks/ With great lawyers you have discussed lepers and crooks”).The quality of life, that phrase as tasteless as bubble gum foil, the culture that emerges around long term low pay labor intense areas can’t really be analyzed by the economist, even if they can make attempts to distinguish a frontier from a metropolis. But the culture does have an economic impact. In fact, economics, ideally, serves the culture. Marx thought the fact that the culture had come to serve economics was part of the systematic inversion of values in 19th capitalism that had to be inverted in its turn. Be that as it may, to approach the second mystery, one has to have some respect for the constraints under which these mysteries are communicated.

In 1996, Mancur Olson gave a lecture on the stubborn difference between developed and less developed economies entitled “Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor.” Olson pushed an institutionalist view of economics. To make his case, he first attempts to take apart the neo-classical view – and its newest additions, via Robert Lucas, that the famous “residual” to which Solow attributed the major role in growth consists of knowledge which, for various reasons, is not a public good. At the end of Olson’s overview, he writes:

“If the countries of the world were on the frontiers of neoclassical production functions, the marginal product of capital would therefore be many times higher in the low-income than in the high-income countries. Robert Lucas (1990) has calculated, albeit in a somewhat different framework,[11] the marginal product of capital that should be expected in the United States and in India. Lucas estimated that if an Indian worker and an American worker supplied the same quantity and quality of labor, the marginal product of capital in India should be 58 times as great as in the United States. Even when Lucas assumed that it took five Indian workers to supply as much labor as one U.S. worker, the predicted return to capital in India would still be a multiple of the return in the United States.”

That paragraph is a little gritty – but I think that is says something that Balzac put, in the form of a metaphor and a parable, a long time before, in Pere Goriot, when Rastignac is pondering an offer he has had from another character in the book, Vautrin. Vautrin, you’ll recall, wants Rastignac to marry an heiress and turn over part of the fortune to Vautrin. In turn, Vautrin will murder the heiress’ brother – an unknown figure, to Rastignac – so that the heiress will inherit all her father’s fortune.

− Where did you get that serious look? the medical student asked him as he took his arm to go walking on the quad.
− I am tormented by evil ideas.
− Of what type? You know, you can be healed of ideas.
− How ?
− By surrendering to them.
− Ah, you are laughing without knowing what this is about. Have you read Rousseau?
− Yeah.
− Remember that passage where he asks his reader what he would do given a case in which he could enrich himself in killing a Chinaman by a simple act of will, an old mandarin, without budging from Paris
− Yes.
− Well ?
− Bah ! I’m already on my thirty first mandarin!
− This isn ‘t a joking matter. Go on. Let’s say you were convinced it were possible and that all you had to do was nod your head. What would you do?
− Is this mandarin of yours an old man? But hell, young or an old paralytic or in health, my goodness! ... Well, no.
− You are a good boy, Bianchet. But if you love a woman enough to turn your soul inside out, and it was absolutely necessary to get money for her toilette, for her carriage, to cut a long story short, for all of her fantasies?

Olson, like many economists, makes the case that the superior political institutions in the West are what gave rise to the enormous wealth here. The other side of that coin is, possibly, that those superior political institutions are oriented to positively hold down 58 Indian workers and 31 mandarins. And that this held true for the era of the great boom in this country – from 1945 to 1980. In fact, Keynes worked, at Bretton Woods, to assure a place for the possibility that a nation could take autonomous economic action in order to make sure that those who were leading the pack – especially the British – would be able to retain the lead in the face of frontiers of neoclassical production functions. Unsurprisingly, the U.S. didn’t see things this way – in fact, one of the goals of the U.S. negotiators was to make sure that the British were never again able to set up a “sterling zone”, as they did in the thirties, blocking U.S. exports.

Mandarins and Indian workers, in the meantime, kept multiplying, and knowledge kept lowering transaction costs. Eventually, the law of comparative advantage was going to erode the institutions of the welfare state in countries that relied upon manufacturing goods that could be more cheaply manufactured elsewhere and, given the dissolution of trade barriers, shipped back to the richest consumer markets which had accumulated wealth precisely in the era in which their production functions were protected.

This mystery requires another post. Which I’ll put up next week.