Failures in Progressive Thinking

I was reading an essay in Foreign Affairs magazine recently entitled The Broken Bargain. It was about the multifarious populist and nationalist revolts among Western electorates over the last few years. Written by a professor of international relations at Columbia University, Jack Snyder,  the essay took note of how most Western elites consider the populist revolts to be wrong-headed and self-defeating. These elites almost uniformly do not acknowledge any errors on their own part about the so-called “liberal international order.” This constitutes a profound failure in dirigiste thought. In the United States, dirigiste elites are usually called “progressives.” Failures in progressive thinking mirror those of their Western brethren.

The Liberal International Order

Paraphrasing the famous quip by Voltaire about the Holy Roman Empire, we should note the Liberal International Order is neither liberal, nor an order, and outside of most of the West it is not international. So what is it?

As originally constructed after World War II, the liberal international order was an understanding among Western countries and some associated non-Western countries. This understanding — reified in treaties and in international organizations like the United Nations, the World Bank, the International Monetary Fund, and the World Health Organization — counteracted the tension between each country’s national sovereignty and the international rules required for free-market commerce between the nations. As Prof. Snyder writes,

As originally intended, this postwar system, which included the precursor to the EU, the European Economic Community, as well as the Bretton Woods institutions, was designed not to supersede national states but to allow them to cooperate while retaining policy autonomy. Crucially, leading democracies such as France, the United Kingdom, the United States, and West Germany decided to share some of their sovereignty in international organizations, which made their nation-states stronger rather than weaker. 

This coordination among states, what Snyder following the political scientist John Ruggie calls “embedded liberalism”, was liberal in that it allowed states the autonomy to preserve their citizens’ individual rights as well as free-market institutions. The flexibility to follow liberal policies in any state was embedded in the treaties and international/supranational organizations constituting the liberal international order.

The foregoing begs the question of what exactly is meant by the word “liberalism.” This is an important term that is much abused in the United States. In the United States, it is most often used to label the belief government should be given the power to solve the welfare problems of individuals. However, if liberalism has any meaning, it is as a doctrine that individuals’ rights must be protected from the predation of government. To accomplish that, the powers of governments must be strictly limited. Over time, progressives have completely lost the right to call themselves liberals. More on this later.

The Fall from Grace of the Liberal International Order

For the first two-and-a-half decades or so, the liberal international order worked fairly well. After World War II, Europe was rescued from economic devastation by the Marshall Plan and trade with the U.S. The American economy itself grew rapidly with the wealth of most citizens improving. The security of Western Europe was guaranteed by the North Atlantic Treaty Organization (NATO). However, beginning sometime in the 1970s, the liberal international order began to unravel. Its embedded liberalism became disembedded.

To begin, the liberal international order became considerably less liberal. This happened as international and supra-national organizations accumulated increasing power over member states and their citizens. In particular, examples of this are provided by the World Trade Organization (WTO) and the World Bank, which are international organizations, and the European Union (EU), a supranational organization. In addition, with the COVID-19 epidemic, one could argue the World Health Organization has contributed greatly to the dysfunction of the international order.

A liberal order would increase the protections individual human beings have from governmental oppression, whether from individual countries or from international and supranational organizations. Oppression occurs when governmental organizations reduce individual choices/freedoms without the consensus of those individuals. Yet, this has consistently happened since the 1970s.

A very good example of an international organization that takes away freedoms and well-being from the peoples of its member states is the WTO. The World Trade Organization was created to enforce trade rules to facilitate free-trade. Its main function is to adjudicate trade disputes between member states, particularly about tariffs and non-tariff barriers to trade.

While the WTO has done much to enable growing international trade for the benefit of all, it has also enabled mercantilist policies for any country that wishes to declare itself a developing economy. If the WTO accepts any such declaration, the country making the declaration is allowed to receive  “special and differential treatment” from other countries. Examples of this special treatment include limiting access to their markets, and delayed implementation of WTO agreements and commitments. China has labeled itself a developing economy. For a long time, it has used all of the privileges of that status to wrest manufacturing away from the West and to institute discriminating tariffs on imports from the West.  Yet, it is questionable if China should still be considered a developing country. And even if it is, should it be allowed to rob the West by using the rules to require Western companies to surrender intellectual property to enter China? China’s use of WTO rules has lessened the economic security of every country in the West.

Another excellent example is the European Union. In the name of European harmony, the EU has famously overregulated European businesses. To a large extent, this has been the cause of long-term European economic stagnation. In addition, to serve the multicultural ideals of Europe’s dirigiste elites, the EU allowed (for a while at least) unrestrained immigration from the MENA (Middle East and North Africa) states. This immigration provided a pool of cheap labor that is pleasing to corporate elites and binds corporate leaders to the dirigiste political elites.

Yet, the clash of cultures with unassimilated immigrants and the loss of jobs from native inhabitants to the immigrants have lead to much unrest and anxiety among the EU’s citizens. These general factors were exacerbated by two others. The first is the Schengen Agreement that ultimately erased internal borders between almost all of the EU member states. Once a refugee made his or her way to Europe, he/she could travel without hindrance to almost any EU state. (There were a few opt-outs.) The second factor was a period of ISIS terrorist attacks. These killed many Europeans, as ISIS infiltrated their agents into Europe among the MENA immigrants.

These errors by European dirigiste elites — caused by multicultural ideals and views about the role of governments in solving social and economic problems — are almost exactly mirrored by their American counterparts. Progressives of the Democratic Party are influenced by the same multicultural values and the same view that the state should solve or ameliorate all social and economic problems. These beliefs have led Democrats to almost uniformly resist federal control of the border and to advocate open borders. Their beliefs also lead them to resist transforming the U.S. economy into more of a free-market.

Other Failures of Progressive Thinking

All of the failures of progressive thinking in particular and dirigiste thinking in general stem from three (at least) foundational mistakes. These errors are:

1. Free-market capitalism always must be guided, i.e. regulated, by the state to blunt its predatory instincts.
2. Governments have the capacity and competence to solve, or at least ameliorate, all social and economic problems. In addition, they have the moral duty to do so.
3. Most of the electorate lack the knowledge and temperament to rule without the guidance of technocratic experts. They must be guided by the administrative state.

Ever since they arose in the late nineteenth century, American progressives have never met a corporation they could not thoroughly hate. Progressives have seldom (if ever) valued a company for the wealth it produced or the wealth it distributed to workers through salaries and wages. Instead, they have focused on the wealth it directed to already wealthy investors, the so-called “evil” 1%.

The Progressive Administrative State

At least initially in the late nineteenth century, progressives might have had a point. When corporations were able to form monopolies and fix prices, they could subvert free-markets to the detriment of everyone. However, even in the modern age when these practices have been outlawed, the American Left continues this fixation.

Progressives began to separate themselves from liberalism in earnest during the administration of Woodrow Wilson, almost exactly a century ago. Wilson was convinced the average American citizen lacked the knowledge and temperament to govern himself, much less to influence the governing of the country. Instead, he believed the country should be governed by knowledgable technocrats. The administrative state began to build rapidly with the creation of the Federal Reserve, the Federal Trade Commission, a War Industries Board, and the United States Food Administration. The buildup of the administrative state was given additional impetus during the Franklin D. Roosevelt administration in response to the Great Depression. His administration created the Social Security Administration, the National Recovery Administration (declared unconstitutional in 1935 by the Supreme Court), the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation.

The administrative state (aka the regulatory state) consists of independent government agencies. Their hallmark is they are to a greater or lesser degree insulated from the political branches, the executive branch and the Congress. Progressives believe they must be insulated from the political branches because politicians themselves have limited knowledge, and because politicians can be influenced by the votes of the great unwashed electorate. Technically, they are a part of the executive branch, but the President has only limited control of them. These agencies are typically governed by boards or commissions, whose members are appointed by the President subject to Senate confirmation. Usually, the President can only remove a board or commission member for cause; that is, when the board or commission member has done something illegal, neglects his duties, or is not able to continue his duties. For a few agencies, such as for the head of the Environmental Protection Agency, members serve at “the pleasure of the President” and can be removed without cause.

Another danger posed by the regulatory state is that Congress often delegates legislative powers to an agency in the guise of rule-making. This allows that agency to have legislative, executive, and judicial powers in its field of authority. The agency can “legislate” rules that unless a person or company behaves in a prescripted way, then he/she or it must be penalized. Executive powers come from the supervision of the citizens and companies subject to the agency; judicial powers are arrogated when the agency decides whether or not the subject has observed the rules. That progressives should desire such a combination of all three major governmental powers in a single agency is not surprising. They have been at war with the Constitution’s separation of powers for a very long time.

A particular and horrific example of how bad and authoritarian the regulatory state can be is provided by the Consumer Financial Protection Bureau (CFPB), spawned by the Dodd-Frank Act. Unlike other independent government agencies, it did not have a commission or a board. It was headed only by a director who originally could be removed only for cause. (A federal court later ruled that because of the immense power wielded by the CFPB, the director must serve at the pleasure of the President.) You can read more about this horrible example in the posts A Big Trump Success: Deconstruction of the Regulatory State and An Out-of-Control Government Agency.

The regulatory state championed by progressives is then shown to be a profound failure of progressive thinking in at least one respect. It leads to authoritarian rule by destroying the separation of basic governmental powers, even while the agencies are insulated from the political branches. The checks and balances of power introduced by the U.S. Constitution have magically disappeared.

How Competent Is Government To Solve Social and Economic Problems?

But perhaps the decisions of these all-but-unaccountable bureaucrats will be good ones that will enhance the well-being of society? This question leads to the second foundational progressive error in the list above. Do governments have the capacity and competence to solve, or at least ameliorate, all social and economic problems?

The empirical and historical evidence irrefutably shouts no. For the historical evidence, consult the following posts:

• Historical Lessons on Economics and Politics
• More Historical Lessons From Europe
• Lessons From The Developing World

A really elegant demonstration that increased government spending does very bad things to a country’s economic growth is provided by the Rahn Curve. This idea started as a mere model about economic growth, but using empirical data we can show that every developed country in the world is on the descending branch of that curve. The economist Richard Rahn asked what would happen if we plotted a country’s economic growth rate versus government spending as a percent of GDP. He reasoned the resulting curve would look something like the plot below.

If there were no government spending and therefore no government at all, we would be living in Thomas Hobbes’ state of nature, with a “war of all against all.” In Hobbes’ famous words, our lives would be “solitary, poor, nasty, brutish and short.”  When the government spends less than the optimal amount, increasing the spending on domestic and foreign security, commonly accessed infrastructure, and other necessities improves our ability to cooperate with each other to create wealth.

The postulate that there is an optimal size of government assumes that beyond some point government can not competently and efficiently allocate capital. But is this speculation true? Below we show a scatter plot of GDP growth rates for developed OECD nations in 2013 as a function of their government expenditures as a percent of GDP.

The blue arrow is the linear trend, which obviously has negative slope. The fact that the data points are scattered about the trend line indicates there are other factors (almost certainly a great many of them) other than government expenditures that help determine GDP growth. The fact any trend line at all with nonzero slope can be found is a testament to how strong a negative factor increasing government expenditures are.

From this plot we can see that developed OECD nations have government expenditures greater than the optimal level for GDP growth. The plot also shows that that optimal level is less than 30 percent of GDP. How much less we cannot tell. We should also note that for each country the OECD statistics include government spending at all levels of government. This result shows us yet another failure in progressive thinking.

Not only is technocratic rule by the administrative state a danger to our freedoms, but governments spending above the optimal level do not have the competence to efficiently allocate capital beyond that level. The larger the number of costly programs governments create to “solve” social and economic problems, the more they misallocate and waste scarce capital. Then GDP growth falls.

We can say that the empirically verified Rahn’s Curve is a proof of that proposition. Can we find a self-consistent theory that explains what we observe? Empirical data combined with a self-consistent theory that explains that data is, potentially at least, a marriage that gives the empirical data a much greater predictive power. We can point to physics and the hard sciences for inspiration. In the process of developing that theory, we can spotlight the errors in progressive thinking.

And, in fact, physics provides us an almost exact analog for complex social systems. Physicists call such systems fluid systems, but systems of this nature outside of physics are usually called chaotic systems. I shall use the terms fluid system and chaotic system as exact synonyms.

To be concrete, I will take the planetary atmosphere as the prototypical fluid system. Again for concreteness, I will use the economy as the prototypical chaotic social system. I explored the similarities of the two systems in the post How Is the Weather Like a Country’s Economy? and the implications of those similarities in the post Chaotic Economies and Adam Smith’s Invisible Hand. I will restate those two posts here.

First, I must explain what it means to say a system is chaotic. If one introduces either a local or global perturbation in a chaotic system, that perturbation can either grow or decay and propagate throughout the system in unpredictable ways.

A planetary atmosphere and a country’s economy are both chaotic for exactly the same reasons. Both kinds of systems are composed of a huge number of components. In the case of the atmosphere, the components are molecules of various species, and in the case of an economy, the components are human beings and organizations of cooperating human beings. And in both systems, each component has a number of degrees of freedom. A degree of freedom is an attribute of the component that can change with interactions between the components.

In the atmosphere, the degrees of freedom of a molecule must include, at a minimum, three components of position and three components of momentum or velocity. Other degrees of freedom that might be important are internal energy states of the molecules,

Among the human components of a social system, degrees of freedom would include prices they would be willing to pay for goods and services. They would also include preferences for government policies. If you give a little thought about it, you can easily persuade yourself of the following fact. The number of degrees of freedom of an individual human being or an organization of human beings is astoundingly larger than the degrees of freedom of an atmospheric molecule.

The values of the degrees of freedom for all system components form a state space for the system. Knowing all these values for all the system components means you totally know the state of the system.

Another property of physical and human systems that contributes to their chaotic behavior is the following: The interactions between system components tend to be local in the system’s state space. What that means for the atmosphere is component molecules tend to interact almost entirely through collisions between pairs of molecules. In a social system, the human and human organization components interact mostly between pairs of humans, between a human individual and an organization, or between pairs of human organizations. That is, the possible interactions are between any pair-combinations of people, companies, and governments.

The importance of these properties of a chaotic system is that the interactions between system components cause a change in the trajectories of those components in the state space. Atmospheric molecules after a collision are directed toward collisions with other molecules. In a social system, high prices demanded by one company for goods and services might cause a customer to buy from another company. Differential wages and salaries between companies might cause an employee to accept a job with another company. Changes in political policies might cause a voter to switch parties. Because of the complexity of the social state space, changes in trajectories of people, companies, and governments are almost unlimited in their variety. This means that perturbations on the system caused by changes in government policy are often virtually unpredictable in their effects.

These observations explain why all developed economies in the OECD are on the declining branch of the Rahn Curve. As government bureaucrats and politicians direct the allocation of an increasing fraction of a country’s GDP, unpredictable secondary effects grow. These side effects then destroy the ability of some parts of the economy to grow. If those parts produce intermediate products or services needed by other parts of the economy, the decreased ability of those additional companies to produce wealth further degrades economic growth.

In this context, it is instructive to note that the biggest economic crises we have experienced have never been due to failures of free-market capitalism. For example, during the Great Depression of the 1930s, it was commonly believed the cause of the depression was cut-throat competition, a failure of capitalism. Yet, in 1963 the economist Milton Friedman and his colleague Anna Schwartz showed the Great Depression was created by a change in the Federal Reserve’s monetary policy in 1928. Called a real bills doctrine, this change predicated monetary growth or contraction on the value of economic transactions. As economic activity increased the money supply was increased to keep pace; when the value of all transactions fell, i.e. when the GDP fell, the money supply was decreased.

The unseen error in this new Federal Reserve policy was that it reduced liquidity, particularly for the banks, at a time of economic contraction. When the stock markets crashed in 1929, as it periodically does, the economic contraction caused the Federal Reserve to reduce the money supply. The studies by Friedman and Schwartz showed the money supply dropped by about one-third between 1929 and 1933. Not only was fractional reserve banking destroying banks’ liquidity, but so was the contraction in the nation’s money supply. Eventually, many banks could not pay out demands on accounts and they failed. The consequent failure of the banking system in 1932 was the real beginning of the Great Depression. It was not caused by a failure of capitalism, but by a policy change by an independent government agency.

Similarly, the Great Recession of 2008-2009 was a government creation. Progressives would have you believe the 2007-2008 U.S. financial crisis that preceded and directly caused the Great Recession was caused by the greed of evil bankers. The progressive narrative is that the banks lent out sub-standard mortgage loans to poorer people, who desperately wanted their own house. Then (so-goes the narrative), when after several mortgage payments the holders of the sub-standard mortgages inevitably defaulted, the evil banks repossessed the properties. The banks profited by the amount of mortgage payments they had received.

What the American Left will not tell you is the banks were virtually ordered to issue those sub-standard mortgages by the federal government. In the early part of the first Clinton administration (during which the Democratic Party controlled both houses of Congress), the Community Redevelopment Act of 1977 was amended to mandate that Fannie Mae and Freddie Mac ensure that at least 30% of mortgages purchased from originating banks be made to people at or below the median income level in their communities. This goal was subsequently increased to 56% by the Department of Housing and Urban Development (See reference [E4, chapter 1]).  The only way banks could achieve these federally set goals was to issue sub-standard loans.

This puts an entirely different light on what caused the “Great Recession”. Private banks did indeed originate almost all of the subprime loans, but it was not just greed that drove them. Fear of what the federal government could do to them if they did not toe the line was just as big a motivation. I personally know a lady who is an officer of a community bank in Florida. She told me her bank emphatically did not want to issue the mandated substandard mortgages. They were entirely too risky. However, an inspector from the Federal Reserve told her that if her bank did not issue the mandated subprime mortgages, the bank’s federal reserve charter would be revoked. That would have been a death sentence for her bank.

So once again, an economic crisis blamed on capitalism by progressives is traced back to the requirements of the federal government.

The Future of Progressive Thought

One would expect progressive and dirigiste thought would adapt to changing knowledge and experience. To have any hope to retain political power, they must satisfy their rebelling electorates. To accomplish that, the elites’ policies must be somewhat responsive to social reality. Yet all we can see of progressive reactions in the U.S. to populist revolts, or dirigiste reactions in Europe, is a doubling down on past positions.

In the United States, much of what passes for progressive argument is really nothing but name-calling. If Trump and Republicans do not agree with Democrat’s old, statist positions, it must be because they are all fascists, racists, misogynists, xenophobes, and all-around stupid people. It should be needless to say that all of these accusations are false for almost all neoliberal Republicans.

The insult that Republicans backing Trump are fascists is particularly puzzling. It displays a profound ignorance about what fascism actually is. Many have remarked that the sloppy and erroneous use of language reflects muddled thought. More than that, the sloppy use of language can create erroneous thinking.

Not only are the progressive assertions concerning Republicans insulting and false, but their picture of social reality is similarly faulty. As discussed in all the paragraphs above, progressive mental models of social reality are substantially contradicted by a vast amount of historical and empirical evidence. These failures in progressive thinking will eventually become apparent to all.

The following posts are related to this essay:

• The Lies Progressives Tell (Especially to Themselves!)
• More Lies Progressives Tell To Themselves
• Even More Lies Progressives Tell To Themselves!

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