Conversable Economist

For-profit companies are formally responsible to their shareholders–that is, to those who own stock in the company. I emphasize “formally,” because the influence of shareholders is wielded through a board of directors whose members are often nominated by corporate management itself, and there is a long-standing question of just how this supervision process works.

However, formal responsibility to shareholders via a board of directors is quite different from saying that businesses should be responsible to all “stakeholders” affected by their actions, which is a broader group that would include shareholders but also employees, customers, suppliers, as well broader issues and groups like environmental concerns, and the community in which the firm operates.

There is sometimes a tendency to argue that if a company acts with stakeholders in mind, then its shareholders will also benefit, and surely one can some up with some specific cases in which that’s probably true. But if a focus on stakeholders always or usually benefited shareholders, then there would be no reason to argue for a focus on stakeholders. Thus, one can reasonably assume that those who advocate a focus on “stakeholders” believe that such actions would make shareholders worse off, but that this social tradeoff is worthwhile.

There’s a group called the Business Roundtable that represents chief executive officers of large companies. About two years ago in August 2019, 181 of these CEOs signed a pledge that they would lead their companies in the interests of all stakeholders, not just shareholders. These CEOs did not ask their boards of directors for approval before doing this. When a top corporate executive pledges fidelity to “stakeholders” rather than “shareholders,” what does that promise really mean? Here are some possibilities:

• The executive will in the future actually manage the company in a way that will benefit stakeholders, even when it sometimes means lower returns for shareholders.
• The executive is theoretically open to the idea of managing the company in the future in a way that benefits stakeholders, but when push comes to shove and tradeoffs emerge, the executive will revert to focusing on the stock price and shareholders.
• The executive dislikes being responsible to shareholders, who have a tendency to moan and complain about the corporations performance and to blame top executives. By shifting the focus to a support of stakeholders, the executive hopes to get those pesky shareholders to shut up–or at least tone down their criticisms.
• The executive is concerned that government may be thinking about imposing additional laws or rules. Perhaps it will be on worker-related issues like sick leave, family leave layoffs, job training, and other areas. Whatever it is, the executive hopes that promising to support stakeholders will reduce the momentum for these new rules.
• The executive has no intention of actually doing anything different, but it seems like a good public relations move now and then to profess fealty to stakeholders.

Well, it’s been two years since the big promise. What has changed? Lucian A. Bebchuk and Roberto Tallarita follow up and ask the question, “Will Corporations Deliver Value to All Stakeholders?” in an essay forthcoming in the May 2022 issue of the Vanderbilt Law Review, but now available on SSRN. They collected corporate documents, like annual reports to shareholders, that companies have published since signing the Business Roundtable (BRT) stakeholder pledge. Here’s a summary of their findings:

First, examining the almost one-hundred BRT Companies that updated their corporate governance guidelines in the sixteen-month period between the release of the BRT Statement and the end of 2020, we find that they generally did not add any language that improves the status of stakeholders and, indeed, most of them chose to retain in their guidelines a commitment to shareholder primacy;

Second, reviewing all the corporate governance guidelines of BRT Companies that were in place as of the end of 2020, we find that most of them reflected a shareholder primacy approach, and an even larger majority did not include any mention of stakeholders in their discussion of corporate purpose;

Third, examining the over forty shareholder proposals regarding the implementation of the BRT Statement that were submitted to BRT Companies during the 2020 or 2021 proxy season, and the subsequent reactions of these companies, we find that none of these companies accepted that the BRT Statement required any changes to how they treat stakeholders, and most of them explicitly stated that their joining the BRT Statement did not require any such changes.

Fourth, reviewing all the corporate bylaws of the BRT Companies, we find that they generally reflect a shareholder-centered view;

Fifth, reviewing the 2020 proxy statements of the BRT Companies, we find that the great majority of these companies did not even mention their signing of the BRT Statement, and among the minority of companies that did mention it, none indicated that their endorsement required or was expected to result in any changes in the treatment of stakeholders;

Sixth, we find that the BRT Companies continued to pay directors compensation that strongly aligns their interests with shareholder value. Furthermore, we document that the corporate governance guidelines of BRT Companies as of the end of 2020 commonly required such alignment of director compensation with stockholder value and generally avoided any support for linking such compensation to stakeholder interests.

Whether you are a big supporter or a big opponent of a focus on stakeholder rights, the overall message of what has actually happened since the ballyhooed 2019 pledge seems pretty clear. As Bebchuk and Tallarita write: “Overall, our findings support the view that the BRT Statement was mostly for show and that BRT Companies joining it did not intend or expect it to bring about any material changes in how they treat stakeholders.”

For myself, I’m not a fan of the idea that companies should broaden their focus to a somewhat nebulous group of “stakeholders.” Organizations have purposes. We don’t ask, say, the K-12 school system or the public libraries to start new companies. We don’t ask hospitals to collect taxes or fix the environment. We don’t ask universities to carry out defense spending. Companies have a purpose, which is ultimately about providing goods and services that customers want to buy. That goals is not synonymous with pursuing social welfare. But it’s what they are set up to do.

When I hear discussions of how corporations should have a much broader social focus, I tsometimes feel as if the discussants are in the grip of a category confusion, like someone who rinses their vegetables in the shower and then tries to bathe in the kitchen sink. Here’s the confusion as expressed in an October 1990 opinion column by Donald Kaul, who was a prominent op-ed columnist, mainly with the Des Moines Register, from the 1970s through the 1990s. Kaul wrote: 

We have come to rely upon capitalism for justice and the government for economic stimulation, precisely the opposite of what reason would suggest. Capitalism does not produce justice, any more than knife fights do. It produces winners and energy and growth. It is the job of government to channel that energy and growth into socially useful avenues, without stifling what it seeks to channel. That’s the basic problem of our form of government: how to achieve a balance between economic vitality and justice. It is a problem that we increasingly ignore.

When a politician says that corporations should pursue “stakeholder value,” my immediate reaction is that the person should get out of politics–and make room for someone who is interested in actually writing laws rather than giving high-sounding speeches. When I hear corporation executives talk about pursing “stakeholder value,” my immediate reaction is to disbelieve that they actually mean it.

There’s a sort of paradox in the current US labor market. By a standard measure, there is strong demand by employers to hire more workers. By a standard measure, there is strong supply of workers willing to take these jobs. But even with at first glance appears to be strong demand and supply for labor, the number of jobs remains well below pre-pandemic levels. There’s a simple explanation for this which I’m sure is part of the truth, and a more complex explanation that I suspect is a bigger part of the answer.

A standard measure of demand for labor is the number of job openings. Here’s what it looks like based on data from the Job Openings and Labor Turnover Survey done by the Bureau of Labor Statistics.

Here’s a figure from the latest JOLTS data, showing the ratio of unemployed workers to job openings. In the latest data, the ratio is 0.8–that is, there are more job openings than unemployed workers.

A standard measure of the willingness of workers to supply labor, perhaps counterintuitively, is to look at the rate at which workers are quitting their jobs. The pattern here is that when jobs are scarce, workers tend to hang on to their existing jobs; when jobs seem plentiful, workers are more likely to quit an existing job because they are headed for a different job. As the figure shows, the number of quits has also been soaring.

The unemployment rate in August was down to 5.2%, which by conventional standards is pretty good. But to be counted as unemployed, you need to be both out of work and also out looking for a job. This definition has its own logic: after all, it wouldn’t make intuitive sense to say that retired adults or adults who are voluntarily staying home looking after children are “unemployed.” But on the other hand, it raises the possibility that there are people who are out of the labor force, in the sense that they are not looking for work, but who were in the labor force not that long ago and might be willing to be in the labor force again. To see the issue, consider the total number of jobs, which despite what looks like lots of job openings and lots of willingness to take those jobs, has not yet recovered to pre-pandemic levels.

For a vivid illustration of how this combination of patterns represents a break with past labor market patterns, consider what’s called the “Beveridge curve,” which plots the unemployment rate on the horizontal axis and the job openings rate on the vertical axis. The job openings rate is calculated as by dividing the number of job openings by the sum of employment and job openings and multiplying that quotient by 100.

There are two ways to characterize the expected pattern here. One is that it will tend to have a downward slope: that is, more job openings will tend to be associated with lower unemployment, and vice versa. The other pattern is that the Beveridge curve will form a loop over time: in a recession, job openings fall and unemployment rises, so the points in the Beveridge curve tend to move down to the right. Then as the economy expands, job opening start rising and the unemployment rate falls, so the month-by-month data moves back up and to the left. (For a couple of previous explanations of the Beveridge curve, see this and this.)

Here’s the most recent Beveridge curve from the JOLTS data. You can see in the pre-pandemic data the generally downward-sloping shape and the loop, as expected. You can also see how the short, sharp two-month pandemic recession just destroyed these patterns. First unemployment shot up up with very little change in job openings. Since then, the job openings rate has been climbing to very high levels, and while unemployment has declined, the job openings rate is far higher that at other times when the unemployment rate has been in the range of 5.2%.

What’s going on here? Some explanations are fairly obvious. One is that the stimulus of the US economy through fiscal and monetary policy has been plenty strong to encourage employers to hire, as one can see by the level of job openings. Another is that lots of workers received unemployment payments that did not just replace their earlier earnings, but were substantially above their earlier earnings. These high payments are just now phasing out, but while they lasted, people’s incentives to find and accept a job that would pay less than their benefits was surely muted.

But along with these factors, I suspect something bigger is happening, too. Every recession involves a reorganization and restructuring of the economy. In a standard recession, this involves a larger-than-usual number of companies going broke, and workers needing to scramble for different jobs. But the restructuring in the pandemic recession–and in continuing restructuring in the pandemic that has continued even though the pandemic recession ended back in April 2020–is of a different sort. There are new dividing lines across the labor force like who can work from home, and what sectors of the economy have been more affected by the pandemic on an ongoing basis, and whether parents can rely on sending their children physically off to school. There are concerns about what working environments are more or less safe.

These issues are playing out in different ways across major employment sectors of the economy: health care, education, retail sales, manufacturing. entertainment, tourism, and others. The strange mixture of conditions in the labor market has occurred as millions of potential workers hold their collective breath, and decide when or if they are willing to jump back into the labor market.

The US economy has lots of jobs, but many people are looking for something that might be a career–and that’s harder to find. Here’s Claudia Goldin on the difference:

Career is achieved over time, as the etymology of the word — meaning to run a race — would imply. A career generally involves advancement and persistence and is a long-lasting, sought-after employment, the type of work — writer, teacher, doctor, accountant, religious leader — which often shapes one’s identity. A career needn’t begin right after the highest educational degree; it can emerge later in life. A career is different from a job. Jobs generally do not become part of one’s identity or life’s purpose. They are often solely taken for generating income and generally do not have a clear set of milestones..

Goldin’s comment comes in the midst of her lecture “Journey Across a Century of Women” (NBER Reporter, October 2020). I recommend the talk. As she describes it: “My talk will take us on a Journey across a Century of Women — a 120-year odyssey of generations of college-graduate women from a time when they were only able to have either a family or a career (sometimes a job), to now, when they anticipate having both a family and a career. More women than ever before are within striking distance of these goals.”

But on this Labor Day, the broader force of Goldin’s distinction between career and job resonated with me. Some people just want a steady reliable job that pays the bills, offers benefits like vacation and health insurance, and leaves them free to pursue other interests in non-work hours. But for a lot of us, that work-like activity consumes more than 40 hours each week of brain-space. Maybe the best description I know of the human heart of this interaction of self and work is from the poet Marge Piercy, in her 1973 poem “To be of use.” I’ve quoted it once or twice before on Labor Day, but on this year after so many work lives have been disrupted by the pandemic and the related recession, it seems worth quoting again.

“To be of use”

The people I love the best
jump into work head first
without dallying in the shallows
and swim off with sure strokes almost out of sight.
They seem to become natives of that element,
the black sleek heads of seals
bouncing like half submerged balls.

I love people who harness themselves, an ox to a heavy cart,
who pull like water buffalo, with massive patience,
who strain in the mud and the muck to move things forward,
who do what has to be done, again and again.

I want to be with people who submerge
in the task, who go into the fields to harvest
and work in a row and pass the bags along,
who stand in the line and haul in their places,
who are not parlor generals and field deserters
but move in a common rhythm
when the food must come in or the fire be put out.

The work of the world is common as mud.
Botched, it smears the hands, crumbles to dust.
But the thing worth doing well done
has a shape that satisfies, clean and evident.
Greek amphoras for wine or oil,
Hopi vases that held corn, are put in museums
but you know they were made to be used.
The pitcher cries for water to carry
and a person for work that is real.

Marge Piercy (1973)

As the school year gets underway, it seemed a good time to pass along a bit of rhetoric from Horace Mann, the great 19th century advocate of the “Common School” idea that every child should receive a basic education at taxpayer expense. Here’s an excerpt from one of his speeches, “Man: His Mental Power,” as published in Stryker’s Quarterly Register and Magazine (March 1849, p. 206). Mann said:

The cotton mills of Massachusetts will turn out more cloth in one day than could have been manufactured by all the inhabitants of the Eastern continent during the tenth century. … The velocity of winds, the weight of waters, and the rage of steam, are powers; each one of which is infinitely stronger than all the strength of all the nations and races of mankind, were it all gathered into a single arm. And all these energies are given us on one condition–the condition of intelligence–that is of education. Had God intended that the work of the world should be done by human bones and sinews, He would have given us an arm as solid and as strong as the shaft of a steam engine, and enabled us to stand, day and night, and turn the crank of a steamship, while sailing to Liverpool and Calcutta. Had God designed the human muscles to do the work of the world, then, instead of the ingredients of gun-powder or gun-cotton and the expansive force of heat, He would have given us hands which could take a granite quarry and break its solid acres into suitable symmetrical blocks, as easily as we now open an orange. Had he intended us for bearing burdens, he would have given us Atlantean shoulders, by which we could carry the vast freights of rail-car and steamship as a porter carries his pack. He would have given us lungs by which we could blow fleets before us, and wings to sweep over ocean wastes.

But instead of iron arms, and Atlantean shoulders, and the lungs of Boreas, He has given us a mind, a soul, a capacity of knowledge, and thus a power of appropriating all these energies of nature to our own use. Instead of a telegraphic and microscopic eye, he has given us power to invent the telescope and microscope. Instead of ten thousand fingers, he has given us genius inventive of the power-loom and the printing-press. Without a cultivated intellect, man is the weakest of all the dynamical forces of nature: with a cultivated intellect he commands them all.

In some ways, of course, this comment is just an example of florid 19th-century rhetoric. I confess that I am less confident than Mann about the theological implications of why God gave us what capabilities. Mann also skims rather quickly over the fact that most of the “us” to whom he keeps referring do not actually invent the equivalent of the telescope or power-loom, but instead, in our production and consumption, we continually interact with others while making use of the inventions created by others.

But Mann also touches here on a deeper truth. In the modern world, few of us will  not make our living purely by the strength of our backs or the dexterity of our fingers, but by our abilities to learn, to implement what we learn, to mix our effort with the appropriate tools, to communicate with co-workers, and to coordinate our activities. In a broad sense, education represents the well-founded conviction that in life and work, people are so much more than their physical limits.

“Society” is not the only figure of speech that confuses the actual decision-making units and conceals the determining incentives and constraints. “The market” is another such misleading figure of speech. Both the friends and foes of economic decision-making processes refer to “the market” as if it were an institution parallel with, and alternative to, the government as an institution. The government is indeed an institution, but “the market” is nothing more than an option for each individual to choose among numerous existing institutions, or to fashion new arrangements suited to his own situation and tastes.

The government establishes an army or a post office as the answer to a given problem. The market is simply the freedom to choose among many existing or still-to-be-created possibilities. The need for housing can be met through “the market” in a thousand different ways chosen by each person–anything from living in a commune to buying a house, renting rooms, moving in with relatives, living in quarters provided by an employers, etc., etc. The need for food can be met by buying groceries, eating at a restaurant, growing a garden, or letting someone else provide meals in exchange for work, property, or sex. “The market” is no particular set of institutions. Its advantages and disadvantages are due precisely to this fact. Any comparison of market processes and government processes for making a particular set of decisions is a comparison between given institutions, prescribed in advance, and an option to select or create institutions ad hoc. There are of course particular institutions existing in a market as of a given time. But there can be no definitive comparison of market institutions–such as the corporation–and a governmental institution, such as a federal bureaucracy. The corporation may be the predominant way of doing certain things during a particular era, but it will never be the only market mechanism even during that given era, and certainly not for all eras. Partnerships, cooperatives, episodic individual transactions, and long-run contractual agreements all exist as alternatives. The advantages of market institutions over government institutions are not so much in their particular characteristics as institutions but in the fact that people can usually make a better choice out of numerous options than by following a single prescribed process. 

 

The diversity of personal tastes insures that no given institution will become the answer to a human problem in the market. The need for food, housing or other desiderata can be met in a sweeping range of ways. Some of the methods most preferred by some will be the most abhorred by others. Responsiveness to individual diversity means that market processes necessarily produce “chaotic” results from the point of view of any given scale of values. No matter which particular way you think people should be housed or fed (or their other needs met) the market will not do it just that way, because the market is not a particular set of institutions. People who are convinced that their values are best–not only for themselves but for others–must necessarily be offended by many things that happen in a market economy … The diversity of tastes satisfied by a market may be its greatest economic achievement, but it is also its greatest political vulnerability. 

The trustees of the Medicare program have published their annual report, the imposingly titled 2021 Annual Report of the Boards of the Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. The annual report came out considerably later than usual, about five months after the statutory deadline, and I suspect there’s a story there. But here, I’ll focus on the projections themselves. The trustees write:

The Trustees are issuing a determination of projected excess general revenue Medicare funding in this report because the difference between Medicare’s total outlays and its dedicated financing sources is projected to exceed 45 percent of outlays within 7 years. Since this determination was made last year as well, this year’s determination triggers a Medicare funding warning, which (i) requires the President to submit to Congress proposed legislation to respond to the warning within 15 days after the submission of the Fiscal Year 2023 Budget and (ii) requires Congress to consider the legislation on an expedited basis. This is the fifth consecutive year that a determination of excess general revenue Medicare funding has been issued, and the fourth consecutive year that a Medicare funding warning has been issued.

Two points are worth emphasizing here. One is that this “Medicare funding warning” was not created by COVID. As the report notes, the trustees have now been issuing the warning for the last four years. If you did not notice the Trump administration responding with proposed legislation to address the problem, along with Congress taking up such legislation on an expedited basis, that’s because it didn’t happen.

Second, this issue isn’t about COVID. Yes, COVID had lots of short-term effects on Medicare, as the report describes. For example, the drop in employment as a result of the pandemic recession reduced Medicare payroll taxes. But on the expenditure side, the rise one would expect in expenditures related to COVID was actually offset by declining Medicare spending in other areas. The trustees write:

Spending was directly affected by the coverage of testing and treatment of the disease. In addition, several regulatory policies and legislative provisions were enacted during the public health emergency that increased spending; notably, the 3-day inpatient stay requirement to receive skilled nursing facility services was waived, payments for inpatient admission related to COVID-19 were increased by 20 percent, and the use of telehealth was greatly expanded. More than offsetting these additional costs in 2020, spending for non-COVID care declined significantly … This decline was particularly true for elective services.

Medicare’s funding problems were apparent before the series of “Medicare funding warning” alarms started going off a few years ago. To understand the scope of the problem, it’s useful to sketch the structure of the program. Part A is Hospital Insurance. Part B is Supplementary Medical Insurance–that is, all the other non-hospital care. Part C is Medicare Advantage, where Medicare pays a flat annual premium for the recipient to enroll in a private health care plan that can provide hospital, non-hospital, and in some cases prescription drugs as well. In Part A and Part B, Medicare uses fee-for-service payments to providers. Part D is the Prescription Drug Benefit that was enacted in 2006.

As the trustees note: ” In 2020, Medicare covered 62.6 million people: 54.1 million aged 65 and older, and 8.5 million disabled. About 40 percent of these beneficiaries have chosen to enroll in Part C private health plans that contract with Medicare to provide Part A and Part B health services. … Total Medicare expenditures were $926 billion in 2020.” To put that number in perspective, total Social Security spending in 2020 is approaching $1.1 trillion, while total defense spending is a little under $800 billion.”

Of course, none of these parts of Medicare are funded in exactly the same way, which complicates talking about them. For example, Part A has a trust fund that is almost entirely funded by “Hospital Insurance” payroll taxes. Because this is the legislated source of funding for Part A, it’s possible for this trust fund to run out of money, which is currently projected for 2026. Indeed, the trustees have been sounding the alarm that the trust fund has fallen below a standard of short-term financial solvency every year since 2003.

However, the “trust funds” for Part B of Medicare, the Supplementary Medical Insurance, and for Part D, the prescription drug benefit, cannot go bankrupt. The reason is just a matter of bookkeeping–if this “trust fund” falls short, then legally the bills will be paid out of general federal revenues. Indeed, Presto! Bankruptcy for Part B is impossible! In 2020, general federal revenues pay for about 80% of Part B spending, and individual premiums cover most of the rest. For Part D, the prescription drug benefit, general federal revenue covers about 75% of all spending in 2020, with a mixture of individual premiums and state-level contributions covering most of the rest. For Part C, the Medicare Advantage plans, there is no separate source of funding–instead, money is switched over from the payroll taxes, individual premiums, and government payments that support Parts A and B.

A desire to cut through these legislative distinctions and get to the bottom line helps to explain the phrasing of the warning from the trustees: “[T]he difference between Medicare’s total outlays and its dedicated financing sources is projected to exceed 45 percent of outlays within 7 years.” What exactly are the “dedicated funding sources” for Medicare? As the trustees write: “Dedicated financing sources consist of HI payroll taxes, HI share of income taxes on Social Security benefits, Part D State transfers, Part B drug fees, and beneficiary premiums.”

For Medicare, let’s simplify the picture by looking at the entire program, not the separate parts. Under what seems like the inexorable pressures of higher health cares spending, Medicare is evolving in ways that have received little public attention.

Back in 2000, Medicare spending was about 2.2% of GDP. In 2020, total Medicare spending is about 4% of GDP. Looking out 20 years to 2040, total spending is projected at 6% of GDP. It’s worth noting that these projected long-term costs are likely to be conservative. The actuaries who produce the underlying calculations are required to focus on projections under current law. Thus, Congress has for some years been playing a merry game of legislating cost reductions (like lower payments to Medicare physicians) that don’t kick in until five or ten years down the road. These cost reductions don’t actually take place; instead, they keep getting postponed. A cynic might say that their only real purposes is to pretend do so something about future costs.

Back in the year 2000, general federal tax revenues were about 28% of Medicare’s income, while payroll taxes covered 60% and individual premiums covered 9%. Now in 2020, the share of Medicare’s income from payroll taxes has fallen to 34%; to counterbalance that change, the share from individual premiums has risen to 15% and the share from general revenues has risen to almost 47%.

Looking ahead, the share of Medicare income covered by payroll taxes is projected to keep falling to 25%, while the share covered by individual premiums is projected to rise to nearly 20% and the share from general federal revenues will reach about 50%.

In short, just 20 years ago, Medicare was a much smaller program primarily (60%) funded by payroll taxes. Looking ahead 20 years, it is a much larger program, funded primarily by a combination of general revenues (50%) and individual premiums (20%). This shift is really what the “Medicare funding warning” from the trustees is all about.

The working assumption over Medicare’s funding warning seems to be that any shortfalls will just be covered by general fund revenues. For the short-term, this is a workable if inelegant solution. But over longer time horizons, it becomes a problem. Higher general fund spending competes with other budgetary priorities. Higher health insurance premiums for the elderly competes with the rest of their household budget, too.

Continuing to ignore possible solutions is short-sighted. On the issue of climate change, a number of people are strongly in favor of taking near-term and fairly costly steps for a long-run benefit. They offer harsh criticism to anyone who says: “Maybe the underlying assumptions are wrong. And if they are correct, we’ll worry about it later.” But fiscal predictions of the Medicare actuaries are based on much simpler calculations than models of atmospheric climate change and its effects on Earth and the economy. The effects come sooner. And the same basic lesson holds: If you take wait to take action as the long-term problem arrives, the steps needed at that time are going to be substantial or even extreme. Taking actual real steps in the near-term helps to avert the need for extreme steps later.”

Why are young people so often protesting against the conditions they have inherited from the older generation? GK Chesterton offered a hypothesis in an essay in his “Our Note Book” essay written for the Illustrated London News (June 3, 1922): “[T]he old man is always wrong , and the young people are always wrong about what is wrong with him. The practical form it takes is this: that, while the old man may stand by some stupid custom, the young man always attacks it with some theory that turns out to be equally stupid.”

Moreover, Chesterton argues, the young protesters often in practice turn out to be less focused on getting rid of the previous evil than they are on force-feeding their new theory to the older generation. Chesterton writes: “In other words, the young man is not half so eager to get the wicked old man to abolish his wicked old law, because it is wicked, as he is to convince him of the final and infallible truth of some entirely new law, of which the consequences might be equally wicked. The young man is much more interested in ramming his new theory down the old man’s throat than he is in tearing the other infernal infamy out of the old man’s heart.”

Thus, instead of the young protesters focusing on what should be common ground–the past evils that should be overturned–they present to the older generation the juicy target of brand-new theories ripe for debunking. Both older and younger generations can then dispute the new theories, while neither does a very good job of actually coming to grips with the reality of the past evils. Here’s Chesterton:

[I]t is always easy to talk about an old man as if he had always been old, or about young people as if they would always be young. They are no nearer to solving the recurrent riddle of humanity, the family quarrel in so far as it does really run through all history. If the rising generation had always been wise, we should have risen to a great deal more wisdom by this time. But the rising generation very often was wise; and the real interest is in how it could be so foolish when it had been so wise.

I believe what really happens in history is this: the old man is always wrong , and the young people are always wrong about what is wrong with him. The practical form it takes is this: that, while the old man may stand by some stupid custom, the young man always attacks it with some theory that turns out to be equally stupid. This has happened age after age: but to make it quite clear I will take an abstract and artificially simple case. Suppose there was a really barbarous and abominable law at some stage of history. Let us say that a peasant population must be restricted by every sixth child being killed or sold into slavery. I do not remember anything quite so bad as that in the past ; it seems to savour more of the scientific programmes of the future. Some of the eugenists or the experts in birth control might perhaps favour it. But there have been things nearly as bad, things at which our blood boils even in reading about them in a book. We wonder how any old men could be so vile as to defend them; we very rightly applaud the young men who called them indefensible. And we are amazed that anything so indefensible seemed so long to be indestructible. Now the real reason is rather odd.

The curious thing that happens is this. We naturally expect that the protest against that more than usually barbaric form of birth control will be a protest of indignant instinct and the common conscience of men. We expect the infanticide to be called by its own name, which is murder at its worst; not only the brand of Cain but the brand of Herod. We expect the protest to be full of the honour of men, of the memory of mothers, of the natural love of children. But when we look closer, and learn what the rising generation really said against the rotten custom, we find something very queer indeed. We do not find the young revolutionists chiefly concerned to say: “Down with King Herod who murders babies ! “What they are chiefly concerned to say, what they are passionately eager to say, is something like this: “What can be done with an old fool who has not accepted the Law of Melioristic Ultimogeniture ? He has not even read Pooch’s book I Nothing can be done till we have compulsory instruction in the New Biology, which shows that the higher type is not evolved until the sixth child, the previous five being only embryonic experiments.” In other words, the young man is not half so eager to get the wicked old man to abolish his wicked old law, because it is wicked, as he is to convince him of the final and infallible truth of some entirely new law, of which the consequences might be equally wicked. The young man is much more interested in ramming his new theory down the old man’s throat than he is in tearing the other infernal infamy out of the old man’s heart. He is more excited about the book than the baby. For him the bad law is a barbaric impediment that will soon disappear. It is Pooch’s great discovery, of the inevitable superiority of the sixth child, that is important and will remain. Now in fact Pooch’s discovery never does remain. It always disappears after doing one good work–inspiring the young reformer to get rid of the bad and barbarous law against babies. But it cuts both ways ; for it gives the old man, who has seen a good many Pooches pass away in his time, an excuse for calling the whole agitation stuff and nonsense. The old man is half ashamed of defending the old law, but he is not in the least ashamed of jeering at the new theory. And the young man always plays into his hands, by being more anxious to establish the theory than to abolish the law.

Now that has happened in history, century after century. … In short, the young man always insists that his new nostrum and panacea shall be swallowed first, before the old man gives up his bad habits and lives a healthy life. The old man knows the new medicine is a quack medicine, having seen many such quacks; and is only too delighted with an excuse for putting off the hour of repentance, and going his own drunken, dissipated old way. That cross-purpose is largely the story of mankind.

There’s an interesting potential lesson here. Perhaps it is more socially productive to focus pragmatically on addressing social evils and ills directly, rather than getting sidetracked into a desperate desire to ram our theories down the throats of others.

Here are two different ways to see the world. One approach looks at current problems in the context of alternative real-world institutional arrangements, recognizing that all the real-world choices will be flawed in one way or another. The other approach looks at current problems as juxtaposed with ideal outcome. In a 1969 essay, Harold Demsetz critiqued that second approach, calling it the “nirvana viewpoint.” He also argued that economics might be prone to that approach. The Demsetz essay is “Information and Efficiency: Another Viewpoint” (Journal of Law & Economics, April 1969, 12: 1, pp. 1-22). He sets up the problem this way:

The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing “imperfect” institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements. In practice, those who adopt the nirvana viewpoint seek to discover discrepancies between the ideal and the real and if discrepancies are found, they deduce that the real is inefficient. Users of the comparative institution approach attempt to assess which alternative real institutional arrangement seems best able to cope with the economic problem; practitioners of this approach may use an ideal norm to provide standards from which divergences are assessed for all practical alternatives of interest and select as efficient that alternative which seems most likely to minimize the divergence.

The nirvana approach is much more susceptible than is the comparative institution approach to committing three logical fallacies–the grass greener fallacy, the fallacy of the free lunch, and the people could be different fallacy.

Given that economists are not usually accused of being overoptimistic fantasists about the possibilities of solving real-world problems, why does Demsetz fear that they may be prone to the nirvana approach. He argues that a nirvana bias may be built into the arguments commonly used by economists. For example, economists often point to what they call “market failures,” like the negative externalities that lead unfettered free markets to excessive pollution, the positive externalities that unfettered free markets to underinvestment in R&D or education, the common pattern of unequal distributions of income in a market economy, and so on. In economic theory, each of these “market failures” has a potential solution in terms of taxes, subsidies, or redistributions that could address the problem at hand.

But as the non-economists are fond of reminding the economists, real life doesn’t happen inside an economic model. When there are real-world problems, a mixture of government and private institutions often evolve to address them. When government enacts an economic policy, it doesn’t happen inside an economic model, either. Instead, the new policy is enacted via a political process run by self-interested legislators and then implemented by a regulatory process run by self-interested regulators. As Demsetz saw it, the real choices is not between one model and another, but between the set of existing institutional arrangements to address a problem and what the shape would be of a new and untested set of institutional arrangements to address a problem.

Of course, this argument doesn’t suggest that all policies will have poor effects or will be self-defeating. It does suggest that pointing to economic models of a “market failure” and a government-enacted “solution” should only be a starting point for additional discussion of real-world institutions as they exist. More broadly, the Demsetz argument suggests that one should beware of those peddling nirvana–especially because many of making such claims do not even have a basic textbook model to back up the starting point of their argument. They just have a complaint and a promise.

George Bernard Shaw wrote a play called Back to Methuselah, with a scene where the Serpent in the Garden of Eden is trying to persuade Eve to eat the apple, with a promise that it will lead to ever-lasting life. The Serpent says to Eve: “When you and Adam talk, I hear you say ‘Why?’ Always ‘Why?’ You see things; and you say, ‘Why?’ But I dream things that never were; and I say, ‘Why not?’” That statement by the Serpent is the nirvana approach in action.

An ongoing challenge in writing and editing is to avoid either being obsessive about detailed rules of grammar and usage or being proudly ignorant of any such rules. In his 1997 book The King’s English, Kingley Amis framed the choice as one between berks and wankers. He wrote:

Not every reader will immediately understand these two terms as I use them, but most people, most users of English, habitually distinguish between two types of person whose linguistic habits they deplore if not abhor. For  my present purpose, these habits exclude the way people say their vowel sounds, not because these are unimportant but because they are hard to notate and at least as hard to write about. 

Berks are careless, course, crass, gross and what anybody would agree is a lower social class than one’s own. They speak in a slipshod way with dropped Hs, intruded glottal stops, and many mistakes in grammar. Left to them the English language would die of impurity, like late Latin. 

Wankers are prissy, fussy, priggish, prim and of what they would probably misrepresent as a higher social class than one’s own. The speak in an over-precise way with much pedantic insistence on letters not generally sounded, like Hs. Left to them the language would die of purity, like medieval Latin. 

In cold fact, most speakers, like most writers if left to themselves, try to pursue a course between the slipshod and the punctilious, however they might describe the extremes they try to avoid, and this is healthy for them and the language.

In the early decades of the 20th century, the automakers of Detroit–and Henry Ford in particular–exerted a remarkable influence. This economic period had multiple periods of economic instability and world war–and that was even before the catastrophe of the Great Depression. In particular, authoritarian rulers of the 1930s were drawn to a model that seemed to combine large-scale facilities under central control with being at the cutting edge of modern industry. Stefan Link tells the story in his recent book. Forging global Fordism : Nazi Germany, Soviet Russia, and the contest over the industrial order (Princeton University Press, 2021).

When it came to developing fresh principles after the bankruptcy of the old economic order in the global crisis of the 1930s, it was Detroit that drew all modernizers of postliberal persuasion, left and right, Soviets and Nazis, fascists and socialists. To be sure, uncounted engineers and admirers had come to see Ford’s factories since the 1910s, when the old Highland Park, forge of the Model T, was first equipped with an assembly line. Yet in the 1930s Ford’s new factory—the much expanded, vertically integrated River Rouge—became the destination of engineering delegations bent on wholesale technology transfer. Italian, German, Russian, and Japanese specialists traveled to Detroit, spent weeks, months, even years at River Rouge to learn the American secret of mass production. With the Gorky Automobile Factory (Gaz) in central Russia, the Soviet Union opened its own “River Rouge” in 1932. In 1938, Hitler laid the cornerstone of the Volkswagen works. Nor were Nazis and Soviets alone. Toyota began operating its Koromo plant in 1938, and Fiat welcomed Mussolini for the opening ceremony of the brand-new Mirafiori facility in 1939. As is easily seen, these Depression-era exchanges laid the groundwork for the infrastructure of global Fordism after World War II. …

Evidently, both the Nazi and the Soviet self-diagnosis of underdevelopment vis-à-vis the United States was soaked in existential ideological sweat. This diagnosis, however, prescribed a simple and precise course of action: beat America with American methods. Lest Germany become “America’s prey,” it was necessary “to study the means and mechanisms of the Americans,” said Theodor Lüddecke, one of Fordism’s most vocal advocates on the Weimar right. Similarly, Arsenii Mikhailov, one of Fordism’s ardent Soviet champions, argued that the goals of the Five-Year Plan required “a swift and complete
switch to the most advanced American technology.

The making of Gaz, the Gorky “Auto Giant,” resulted from this course of action. Gaz marked an extraordinary attempt to transfer American technology wholesale and to indigenize it in a social and economic environment that seemed hardly ready for it. Soviet workers and engineers indeed struggled mightily to adopt what they took from Detroit. But despite enormous sacrifices and waste, somehow, by decade’s end, a capable motor mass production industry had materialized in central Russia. … Germany could dip into deep homegrown technological capabilities that the Soviet Union lacked and therefore struggled somewhat less to assimilate Fordism. The result was a double reception. The Volkswagen plant echoed the Soviet strategy of comprehensive copying. But the Nazi regime also tried (and largely succeeded) to harness the industrial acumen of Ford and General
Motors, both of which had branches in Germany, to its own ends. Ensnaring the Americans in a web of threats and incentives, the regime achieved pervasive, dollar-subsidized transfers of mass production technology into Germany.

There were attempts by Stalinist Russia and Nazi Germany to cut deals with a number of other leading American firms as well. Japan and Italy sought to import Fordism as well.

In Japan, no automobile industry existed after World War I, and during the Twenties both Ford and General Motors built assembly plants that fully covered the needs of the domestic market. By the mid-Thirties, however, the militarist government began to support fledgling attempts by Japanese industrialists to nurture a homegrown auto production. In 1936, the government passed the notorious Automobile Manufacturing Enterprise Law, a measure that discriminated against the American firms, penalized imports of vehicles, and encouraged Nissan and Toyota—weak and inexpert producers compared to the Americans—to expand investments and update their technologies. These measures eventually forced GM and Ford to exit the Japanese market and allowed Nissan and Toyota to acquire the Americans’ factory machinery and hire their workers and engineers.

In Italy, too, the regime tolerated the presence of American carmakers only for a brief period after World War I. In 1929, Mussolini personally thwarted an attempt by Ford to expand its presence in Italy, declaring that American competition would devastate the domestic automobile industry. Instead, Mussolini decisively backed the Turin-based carmaker Fiat, which benefited not only from the regime’s stifling labor policies but also from its military orders, export promotion schemes, and generous foreign exchange allocations for technology from the United States. Ford and GM eventually left the Italian market, while Fiat built its own brand-new, Rouge-style megaplant. Opened in 1939, Mirafiori was very similar to the Nazi Volkswagen project: a Fascist white elephant, valuable for propaganda purposes but also a monument to how assiduously the regime sought to alter its place in the global industrial pecking order

Link tells the story at book-length, and I certainly won’t attempt to recapitulate it here. But I do want to point out some of the ironies involved.

1. Many people think of giant multinational manufacturing firms as the epitome of capitalism. But for authoritarian, socialist, and communist rulers, it seemed obvious that giant manufacturing firms could operate perfectly well as instruments of state power and control. Indeed, it has often been market-oriented economists who were more skeptical of whether extraordinarily giant firms were really needed for economic efficiency, or whether efficiency and innovation might be better-served with a group of middle-sized firms competitn with each other.
2. For the Soviet Union in particular, the obsession with giant manufacturing firms led to central planning for giant firms all over the country. Indeed, Soviet central planners often seemed to equate sheer size of a factory with technological advancement. The size of the Soviet planned factories often outstripped the capacities of the central planners, leading to grotesque inefficiencies.
3. When teaching intro econ students about economies of scale–that is, the common situation when larger production volumes can drive down average costs–a common question is whether there can be diseconomies of scale. Can there be cases when size gets so large that it average costs rise? In a reasonably competitive market, this won’t be possible, because the very large high-cost firm will go out of business. But if the ultra-large firm is sustained by the government, then yes, diseconomies of scale become possible.
4. Each year, about 5% of global car production happens in the US economy. More broadly, manufacturing jobs have been a declining share of total US jobs for decades–all the job growth has been in service- and information-related industries, instead. not been the the center of the global car industry for a long time. Looking ahead, we seem to be living in a world where a combination of automation, robotics, and information technology may greatly limit the growth of manufacturing jobs anywhere in the world. Whatever the allure and tradeoffs of Fordism in the 20th century as a tool for economic development and government power, the plausible economic models for the 21st century look rather different.