This weekend saw the release of a biopic of the life of Ronald Reagan starring Dennis Quaid. The movie includes the perspective of a KGB agent assigned to track the former President. When Reagan is asked what he sees as the “issue of our time,” he responds, “No question about it: communism and the Soviet Union.”
The conventional wisdom is that the West won the Cold War by bringing on the demise of the Soviet Union. The iron will of Reagan, Thatcher, Walesa, and John Paul II, we are told, led the West to triumph.
But did we win?
Putin is the despotic leader of an impoverished Russia with delusions of relevance, acting as a regional aggressor to put the band back together, even if the people in Poland, the Baltic Republics, Georgia, Moldova, and Ukraine have other ideas. Cuba continues to penetrate Latin America, with Venezuela as its most successful proxy. Cuba flooded Florida with criminals and patients from its insane asylums in the 1980s. Is today’s Venezuelan pattern any different?
China is firmly in the grip of a belligerent Chinese Communist Party that, when it’s not acting as a regional hegemon, is engaged in unfair trade practices and a massive military buildup. There is an axis of countries including Russia, China, Iran, and North Korea aligned to oppose Western interests and to destabilize the Pax Americana, sponsoring terror on a global basis. Israel is the canary in the coalmine in what some have called Cold War 2.0.
Perhaps it’s not Cold War 2.0. Maybe it has been the same Cold War all along. Conflicts wax hot and cold. The Koreas have not signed a peace treaty; they exist in an uneasy armistice, a ceasefire without the blessing of permanence. Maybe we just enjoyed an armistice of our own during which the ostensibly losing sides re-armed and replenished, while the would-be winners cashed out delusional peace dividends.
In the global competition between the Reds and the West that followed World War II, there was a sense that we needed to change the way we organized ourselves. A large part of this was a technology race. It demanded scale and centralization. We needed to protect strategic industries from competition so that they could have the resources to be able to innovate. And if it worked in defense, then it must work in other fields, too, right?
Here's President Eisenhower in his final speech:
‘Crises there will continue to be. In meeting them, whether foreign or domestic, great or small, there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties. A huge increase in newer elements of our defense; development of unrealistic programs to cure every ill in agriculture; a dramatic expansion in basic and applied research-these and many other possibilities, each possibly promising in itself, may be suggested as the only way to the road we wish to travel.
‘But each proposal must be weighed in the light of a broader consideration: the need to maintain balance in and among national programs-balance between the private and the public economy, balance between cost and hoped for advantage-balance between the clearly necessary and the comfortably desirable; balance between our essential requirements as a nation and the duties imposed by the nation upon the individual; balance between action of the moment and the national welfare of the future. Good judgment seeks balance and progress; lack of it eventually finds imbalance and frustration.’
Balance implies tradeoffs. As the economist Thomas Sowell said, “there are no solutions, only tradeoffs.”
The irony of the man who commanded the largest and most consequential invasion force in human history descrying the forces of consolidation and scale is not trivial. He knew precisely what he was highlighting. He called it the military-industrial complex. His words echo loudly.
‘This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence-economic, political, even spiritual-is felt in every city, every state house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.
‘In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.
‘We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.
‘Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.
‘In this revolution, research has become central; it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government.
‘Today, the solitary inventor, tinkering in his shop, has been over shadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.
‘The prospect of domination of the nation's scholars by Federal employment, project allocations, and the power of money is ever present and is gravely to be regarded.’
It’s easy to focus on the phrase “military-industrial complex” and assume that it is not a pervasive phenomenon. That’s the traditional, glib interpretation. I suspect he had a broader indictment in mind.
He wrote those words in January 1961. He underestimated how this would evolve. As just one example, today, we see government battling large organizations in the antitrust sphere not for the protection of the consumer; such an orientation is deemed in intellectually fashionable circles to be as archaic as sleeve garters or spats. Agencies like the FTC and the DOJ today want to limit the power of large companies like Microsoft, Amazon, Twitter, and Google to act independently. This is a battle for control over what people see, what people read, what people think, and what people feel.
If anything, regulations favor the large, pliant organization. We wrote about it here.
‘Regulation stifles volatility. That might be its principal aim. In doing so, the shakeups from competitive disruption become less likely. This might be the ultimate protection for the incumbent. But the barriers to competition that regulation put into place and the way in which the big influence the development and application of policy reinforce the power of incumbency. For the regulator, Big Is Beautiful.’
However, there are limits to this benevolent detachment.
You can get big, either because you fly under the government radar with a product people want to buy or earn rents with the government’s wind behind your back until you obtain some sort of influence that the government either thinks threatens their own reach or requires their direct control. Get big enough that you have billions of visitors a month and you just might find that the regulators are telling you what to censor. Of course, keep in mind that the government didn’t do anything; it was your company that decided, of your own free will, to impair access to that content. You were independent. There was no threat of enforcement. That would be an abuse of power. That’s the official story and we’re sticking to it.
Stop making me hit you.
What would Eisenhower think of Presidents whose administrations put in place rules that cost US citizens trillions of dollars?
So much of what we have written here at Closest Point of Approach is about defining bureaucracy. People use terms like this loosely to the point of meaninglessness. Everyone has their own conception of it. At some point, when I think we’ve nailed all the dimensions of the problem, I’ll write a definition, but I think there are more heads on this hydra.
The same is true of terms like capitalism or socialism. The words have lost all meaning. That’s not exactly true. The words have become the canvass on which people project whatever they think. For some people, capitalism epitomizes what is bad or wrong with their own lives or with the society they see around them; socialism is a panacea the merit of which is true by definition. Socialism is the cure for all of our problems because, we are told, socialism is the smart plan to address these problems. Only socialists are neighborly. That kind of thinking. These terms become a sort of Cliffs Notes for hipster doctrinaires.
Let’s start with definitions that we might find sensible. Capitalism is a moral structure for organizing a society in which the principal virtue resolves around individuals, acting in what they perceive to be their self-interest, negotiating with other persons and institutions to exchange value and interact for mutual gain. Everyone brings different preferences, skills, and resources to the table. These are changing all the time. It’s a complex, adaptive system evolving with few, if any, distortions to prevent dynamic adjustment. Regulators are umpires, not players. It’s a level playing field.
To the extent that some believe that their personal self-interest will be advanced by seeing others do well or by volunteering to work for the betterment of a group or the group, then capitalism can promote the whole as these people exercise these individual freedoms. Many people are driven by an urge to serve the public good.
The importance of Eisenhower’s speech is that it came at an inflection point for the United States and the West, more broadly. It shone a light on a transition that had started with the New Deal, one which a man born in the 19th century had witnessed up close from some of the most powerful seats in the house.
Eisenhower called out the change from capitalism to corporatism. He must have known that the train had left the station.
What is corporatism?
‘What is corporatism? In many ways, it looks like capitalism, so the ill-informed are easily fooled and the malevolent can use these similarities to their advantage. Both systems are characterized by private property rights and the domination of the economy by private enterprises. However, that is where their similarities end. Corporatism is capitalism’s evil twin – identical in its external form, but the polar opposite in its internal beliefs and underlying principles.
‘There is one fundamental principle that illustrates this black-and-white distinction. The core tenet of capitalism is “free markets and free entry”. This has been true at least since Adam Smith’s famous first exposition of the “invisible hand” in The Wealth of Nations way back in 1776. Corporatism, on the other hand, draws its inspiration from the Keynesian welfare systems, Fordist industrial organization, and the intricate networks of organized interest representation and industrial relations systems, with large firms having quasi-public status and being key actors in macro policy decisions.’
The atomic unit of the corporatist society is the group. There is a natural bias towards the large. Groups pursue their own interests, engaging with other large corporate entities, instead of individuals dealing with individuals. It is this fundamental distortion that is the original sin.
‘Thus, the corporatist evil twin world arises from the capitalist one only if the policymaker accepts the assumption that “bigger is better” in terms of innovation processes, and acts accordingly by erecting entry barriers. But is this assumption true? Examining the hotbeds of innovation in the U.S. like Silicon Valley and Boston, there seems to be little to support this position. It appears that most innovation, especially radical innovation, comes from smaller firms. And this is precisely the prediction of evolutionary theory. This theory argues that large firms tend to be good at the “bureaucratized” processes of incremental innovation, while it is small firms that excel at the “search” processes of radical and breakthrough innovation.
‘There are powerful forces that drive the dynamics of the corporatist world, and these arise from rent-seeking (see the Figure). Powerful oligopolies spend large sums on lobbying governments to gain regulations that erect barriers to entry and protect them from competition. The result is that the observed entry rate of entrepreneurial firms is suboptimal, and the efficiency of the economy is far lower. The worst ills arise under “pure” corporatism (sometimes called “crony capitalism”) – no innovation, little dynamism, and increasing inequality often accompanied by violence. The Suharto regime in Indonesia and the Peronist regimes in Argentina are salient examples.’
Before the Pandemic, U.S. new business formation fell significantly. This has improved over the past several years, but is it persistent? Are we even at the optimal level?
‘Between 2007 and the first half of 2019, applications to form businesses that would likely hire workers fell 16%. Though the pace of applications picked up somewhat after 2012, it dipped again this year despite President Donald Trump’s assertion that his tax cuts and deregulatory drive would benefit smaller companies and their workers. Applications are down 2.6% so far this year compared with the same period last year.’
Bureaucracy is not part of the capitalist construct. In a capitalist world, agencies are small and fulfill specific purposes with governing mechanisms to ensure limits to their growth. There is no monotonic expansion of rules and regulations. Small businesses thrive because they are delivered from all but the necessary costs of compliance. This is not a system designed to concentrate resources and power but to promote the continuous generation of new smaller entities breathing life into the organic whole.
Bureaucracy is part of the DNA of the corporatist structure. The rules and regulations exist not to optimize outcomes or to level the playing field; the bureaucracy has obtained independent life.
There can be no sustainable deregulation without addressing the corporatist impulse. Any prediction of large-scale deregulation implies a political shift in this direction.
Is it feasible or is the West beyond the point of no return?