Hypothesis #6—Gridlock: America is in an intellectual and political gridlock between those who support ultra-capitalism and those who are trying to use government to redistribute wealth. This gridlock prevents urgently needed reform of monetary, fiscal, and regulatory policies.
Since the beginning of the American republic, the financial oligarchy has held both economic and political power. During the twentieth century, the Liberal Democrats (collectivists) challenged this concentration of wealth and influence with growing democratic power promoting a poorly designed agenda to help people through a more equitable distribution of wealth. In this process, the American collectivists raised the percentage of the nation’s annual production (GDP) taken in all taxes during the century from 3% to over 30%. They did not, however, reform the economic system, they did not prevent ultra-capitalism from dominating, and they wasted much of the money.
In addition to the impediments from ultra-capitalism described in hypotheses #4 and #5, the free market has been impeded, then, both by “liberal” collectivists as by “conservative” ultra-capitalists. Ultra-capitalism impedes the building of wealth by concentrating it; collectivism impedes the building of wealth in these three ways: Central planning is inefficient; neither the workers nor the recipients of government assistance are motivated; and taxes take wealth from investment in economic growth and waste it in poorly designed government programs. Finance capitalists and the new breed of ultra-capitalists are good at lobbying privileges to make more money on money, whereas the collectivists, pursuing noble goals but limited in their grasp of economics, have not been effective at achieving what they hoped to achieve.
The Liberal Democrats failed to examine and validate hypothesis #1, that social progress depends on movement to a superior economic system; as a consequence, they failed to reform capitalism; instead, they moved towards a collectivist imitation of Socialism and state solutions. The failure of Communism and Socialism, in contrast to the evident success of free markets, has left the collectivists without an agenda, whereas the financial capitalists have the feeling that they have won both more political influence as well as the intellectual argument. The polarized extremes sustain support of their followers by attacking the errors of their opposite, meanwhile leaving true reform unaccomplished in the resulting vacuum.
The present gridlock is a philosophical and political impasse between those who believe, on the one hand, in Social Darwinism and the prerogatives of the rich and powerful to govern the confused masses, and, on the other hand, well-meaning collectivists whose mission is to pass laws to help people and muzzle what they consider to be the animal instincts of generic capitalists. The middle class and the general welfare are ignored in this gridlock between the well-focused supporters of ultra-capitalism, mainly Republicans, and the poorly focused collectivists, mainly Democrats.
This gridlock goes back to the beginning of the Republic when Alexander Hamilton (1757-1804), the first Secretary of the Treasury, won the battle with Thomas Jefferson, the first Secretary of State, over the type of government that the nation was to have. Believing that the elite would know how to govern the masses better than the people could govern themselves, Hamilton favored a strong central government with privileges for the financial establishment.
Jefferson, James Madison (1751-1836), and other Founders had crafted a structure of governance that would give democratic power to many, protect minorities from the tyranny of the majority, and diffuse political power among the legislative, executive, and judicial branches of government. Jefferson ’s governmental structure was intended to diffuse both political and economic power, whereas Hamilton ’s structure was intended to concentrate both. Although Jefferson ’s design for government was a huge leap forward in the human quest for freedom, his political structure, nevertheless, did not prevent the accumulation of non-democratic special privileges for finance capitalists, and his skill as an economic theorist fell behind his capacities as a political thinker. Because Jefferson was weak where Hamilton was strong, Hamilton carried the day on the financial front with President George Washington (1732-1799), whose extraordinary abilities and leadership, like Jefferson ’s, did not include depth in economics and finance.
The core of the debate between Jefferson and Hamilton is their respective perceptions of ordinary people: Hamilton did not trust them to govern themselves, whereas Jefferson did. That is not to say that Jefferson was unaware of the dangers of mob rule, and that is why the government was structured with protection for minorities. Neither did Jefferson believe that the people would necessarily get it right the first time, but he did believe that with universal education, and with leadership by those he called the “aristocracy of talent and virtue,” the people would get it right in the long run. This belief in the extraordinary potential of people, given the proper circumstances, is one that I share with a passion. It is also the humanistic core of the democratic capitalist philosophy.
Despite Jefferson’s and Madison’s intentions, the Hamiltonian financial establishment ever since has dominated the U.S. government’s fiscal and monetary policies, with the result that wealth has been, and continues to be, concentrated. Presidents Jefferson, Madison, Jackson, Lincoln, Johnson, Theodore Roosevelt, Wilson, and Franklin D. Roosevelt all made proclamations about getting control of the “money changers,” and they all failed (see chapter 7, DC, Vol I).
They failed sometimes because their need to finance a war deflected their reforms, often because they and their advisors lacked financial sophistication adequate to reform the large inventory of special privileges lobbied by finance capitalists, and almost always because the peoples’elected representatives in Congress were well treated by Wall Street. Special privileges were the result of “crony capitalism,” American style, according to which some finance capitalists lobbied public figures outright and others served their time in senior government positions before, during, and after which they could directly determine legislation and policies that resulted in a constant flow of special privileges. It has been that way for over 200 years, and it is still that way. Congress, the Executive Branch, the Supreme Court, State legislatures, and the federal and state court systems have all promoted, passed, and interpreted laws that concentrate wealth. In the early nineteenth century, laws upheld by local judges included jail time for labor organizers and strikers.
Aristotle long ago warned of governments controlled by the extremes of the rich and the poor. He proposed, instead, that the middle class was best qualified to structure government for the general welfare. Aristotle’s theory has been confirmed many times, but the middle class in the United States is now underrepresented, over-taxed, and overwhelmed by the lobby power of special interests. The paradox is that the group with the greatest voting power has the least political influence; the shame is that they are neither doing sufficient homework on these critical problems nor using their democratic power for reform.
FriedrichHayek, who shared the 1974 Nobel Prize in Economics and was the recipient of the 1991 American Medal of Freedom, was both a market fundamentalist and a liberal in the original sense of the word. A twentieth-century idealist in the tradition of the Enlightenment, Hayek had a clear view of this double impediment to social progress: concentrated wealth of the conservatives and concentrated political power of the collectivists. His book, The Road to Serfdom (1946), had shocked many in the intellectual community who were, at that time, convinced that the wave of the future, the inevitable replacement for capitalism, was collectivism. Hayek, to the contrary, advocated the benefits of free markets and pointed out that collectivism led to totalitarian government and loss of freedoms.
He described the collectivist and conservative extremes that polarized and gridlocked the political process—then as now—as follows:
Socialists increasingly recognized the incurable economic inefficiency of central planning; collectivists then simply discovered that redistribution through taxation and aimed financial benefits was an easier and quicker method of achieving their aims.
Conservatism, though a necessary element in any stable society, is not a social program; in its paternalistic, nationalistic, and power-adoring tendencies, it is often closer to socialism than true liberalism, and with its traditionalistic, anti-intellectual, and often mystical propensities it will never, except in short periods of disillusionment, appeal to the young and all those others who believe that some changes are desirable if this world is to become a better place.
Although Hayek is often celebrated as a conservative economist, he understood the pathologies of both collectivism and conservatism, and he pointed the way to the system that combines the freedoms of the original liberal philosophy with the economic capabilities of free markets, conditioned by a finance capitalism that is subordinate to the commercial process, and money that is neutral. Hayek added:
A conservative movement, by its very nature, is bound to be a defender of established privilege and to lean on the power of government for the protection of privilege. The essence of the liberal position, however, is the denial of all privilege, if privilege is understood in its proper and original meaning of the state granting and protecting rights to some which are not available on equal terms to others.
Guru of conservative economics to both the American President, Ronald Reagan, and to Great Britain ’s Prime Minister, Margaret Thatcher, Hayek nevertheless qualified the effective coupling of the free-market economic system with the liberal mission of improving lives. Hayek repeated Adam Smith’s advice thatmoney must be neutral, that is, without influence on the process. Unfortunately, as the triumph of ultra-capitalism demonstrates, both the conservatives and collectivists ignored that part of the economic principles of both Hayek and Smith.
Seeking the system that combines the best of the political left and the right is confused even by the terms: Collectivists have stolen the good word liberal for their purposes, even though most of their programs are not based on individual freedom. Conservatives and market fundamentalistshave stolen the good phrase free markets, for they pretendto free the world’s capital markets while they, at the same time, contradict economic freedom through their reliance on federal insurance, subsidies, and bailouts. The suspension of market disciplines is also confused by being termed a moral hazard, a deliberately vague expression.
Resolution of this gridlock between ultra-capitalists, the so-called “market fundamentalists,” and the collectivists, the so-called “liberals,” will determine the direction of history in the twenty-first century. Shall Americans take further strides in history’s greatest democratic experiment and learn how to democratize capitalism, or shall we drift towards economic collapse and more violence? If we are going to be able to take the path to progress, then our venturing forth awaits an epiphany by collectivists in which they discover that their mission of improving the human condition is best accomplished through the material and spiritual benefits of democratic capitalism. The conservatives and market fundamentalists also await an epiphany to discover that the best way to maximize profits is through democratic capitalism, holding finance capitalism subordinate.
A bridge between the collectivistsandconservativeswill not be built on political theory; it will be built by collaborators who examine and validate hypothesis #1, that is, by people who accept Marx’s axiom that social progress depends on movement to a superior economic system. Once this intellectual hurdle is passed, the examination can proceed to hypothesis #2, identification of the superior economic system in our time, and agreement that this system can eliminate material scarcity. The collaboration must continue with examination of the original social ethic of liberalism, in which progress is made toward full human potential by encouraging individual development in an environment of trust and cooperation. This liberalism was the philosophy of the eighteenth-century Enlightenment that informed both Adam Smith’s economic system and the political wisdom of the American Founders. Although impeded, this
economic-political-social-philosophical system has demonstrated in practice over two centuries that it is the means to improve lives around the world.
If the truth-seeking process is of high quality, then the collaboration between the political left and political right that leads to social progress should not be difficult because most components of liberalism are common to both sides, and they include the following elements:
· Economic freedom
· Political freedom
· Religious freedom
· Freedom of expression
· Freedom of assembly
· Individual responsibility
· Rule of law
· Representative government
· Cost efficiency in government
· Equal opportunity
· No non-democratic privileges
· Diffusion of economic power
· Diffusion of political power
· Universal education
· Due process
This examination of the political gridlock raises yet more troubling questions: Why have reformers failed who had the democratic power to restructure government for the general welfare? Why has this failure gone on for so long? Why is this failure so profound that many have lost hope in the democratic process? The answer is that whereas the Enlightenment grounded the ideal and the means on the proper truth-seeking process, successive generations of thinkers and managers have failed because they abandoned the process that is the focus of hypothesis #7.