The Commanding Heights: A Book Review 1

As you'd expect in the land of the Almighty Dollar, voters' economic concerns are playing a significant role in the 2016 presidential campaign.

In our stagnant Obama Depression economy, it's a sorry fact that most people aren't any better off than they were ten years ago.  In fact, working-class wages haven't risen since the 1970s when adjusted for inflation.  Socialist Sen. Bernie Sanders' message is that this stagnation is because "the rich" are being selfish and that government must force them to pay more taxes so that the government can take better care of the less fortunate.

The argument that the government should do whatever is required to ensure financial equality goes back to the Fabian Society, founded in England in 1895 "for the betterment of society."  Fabian writers and their Marxist cousins influenced the leaders of many developing countries who believed that government had to own the "commanding heights" of the economy to ensure economic justice.

To this day, most third-world countries have a vast mass of poor people and a handful of hugely rich folks who are politically connected and control the "national champion" companies that, through monopoly powers granted by the government, are one of the few paths to fortune amidst the teeming masses of poor people.

The Fabian phrase provided the title of the book The Commanding Heights: The Battle for the World Economy (TCH) written by Daniel Yergin and Joseph Stanislaw.

Getting Ahead: the Human Condition

The authors note that people often seek to better their economic situations through political means.  Politicians, responding to voter unrest, have written laws which seek to reward people for voting for them.  Mr. Sanders' battle cry is that "the 1%" have enjoyed an "unfair" share of national income and that government, like Robin Hood, must take from "the rich" and give to "the poor."

A competing group of politicians say that government ought to focus on increasing the size of the economy so that there would be more national wealth to redistribute.  The economic history of our times represents the battle between those who favor increased government control of the economy versus groups who want to grant more economic freedom to help the economy grow.

The authors describe economic policies which have been followed by economically significant nations over the past 60 years.  Unlike many such writers, they do not make recommendations.  Instead, they explain how different countries managed their economies and show how these policies turned out, letting readers draw their own conclusions.  This is both fascinating and informative.

To oversimplify, government involvement can help a relatively simple economy grow, provided that government employees are competent and genuinely try to serve the public.  Once the economy becomes too complicated, however, governments are no better able to choose which companies to support than venture capitalists can be certain which ventures to fund.  At that point, government must set the economy free so that businesses stand or fall on their ability to please customers instead of relying on a bureaucrat's ability to pry money out of taxpayers.

A market economy is an effective growth engine because, if the rules are set up properly, a business cannot prosper without persuading customers to choose to spend their own money to buy its products instead of buying from a competitor.  The problem is that, as George Schultz put it, "Markets are relentless."

As competition becomes more intense, there is no respite from its pressures.  People turn to government to provide shelter from the constant demands of the market.  The move [from government control] to the market may bring a higher standard of living, better services, and more choice.  But it also brings new insecurities - about unemployment, about the durability of jobs and the stress of the workplace, about the loss of protection from the vicissitudes of life...

TCH p 404

Government control of a business cannot guarantee growth or even break-even.  Experience shows that government employees are as greedy as businessmen and often exploit whatever power they have to enrich themselves at public expense.  Being backed by the power of government, such businesses are a lot harder for more competent rivals to challenge.  The disadvantages of excess costs which result from government control become evident in times of economic crisis when the government doesn't have enough money to cover the losses.

The difficulties for state companies had already begun to emerge in the 1970s, and indeed, one of the losers from the crisis of the 1970s was confidence in state-owned companies. ...

Coordination had turned into unwieldy control; allocation had turned into distortion; government taxes and revenues had turned into subsidies and obstacles to growth.  Political intervention was a chronic ailment.  They suffered from inflexibility and inefficiency; they were forced to misallocate resources; and they became an increasing drag on the nations' finances.  Public corporations now came to be seen as big contributors to the overall economic crisis that nations faced.

TCH p 116

Government power and regulations can also support private sector inefficiencies.  Private businesses hate competition and try to encourage governments to write regulations that kneecap their competitors.  Without the spur of competition, there is no incentive for any business to innovate or to seek efficiencies to reduce what customers have to pay.

As Dominique Strauss-Khan, finance minister of France explained,

"The private sector can generally manage better than the public sector, that is certain.  But my real criterion is: is each franc levied from the taxpayer well spent or not?  I am not a believer in either a public-sector or a private-sector religion."

TCH p 333

Economic Policy, A Recent Issue

In terms of human history, dividing the economic pie is a recent concern compared with more urgent matters like famine, plague, or invasion.  To see why, consider the "tithe stone," which was used to show illiterate peasants how much of their crop they were expected to deliver to their Liege Lord.

During the Middle Ages, the land owner received 1/10 of the crop and the farmer received 9/10.  The tax rate was 10%, which would be regarded as taxpayer nirvana today.

Taxes were low not because landowners were generous, but because experience had shown that farmers starved if the local baron took more than 10% of the food.  The fact that dead men pay no taxes and that a "tithe" was the maximum sustainable tax had been known since Biblical times.

In muscle-powered agricultural communities, the idea that anyone could benefit from taxing "the rich" was absurd.  Eliminating "the rich" entirely would have increased farmers' incomes by 10% at most, and without armed barons, who would fight off invaders or bandits?

The Industrial Revolution

The Industrial Revolution substituted fossil energy for human or animal muscle.  There had always been wind-powered ships and wind or water-powered grinding mills, but a vastly more potent energy source was needed for garment manufacturing which was the first major use of the new energy sources.

As industrial production increased, growing crops was no longer the sole source of wealth.  Farming was still the only way to get anything to eat, but factories making clothes, shoes, sewer pipe, and other societal necessities created a brand-new source of wealth which bypassed the traditional wealth of nobility - inheriting vast agricultural estates.

The Industrial Revolution started in England, a cohesive island with a fairly stable long-term government as such things go.  At the beginning, the idea of a "corporation," or limited-liability company, was unknown.  An entrepreneur had to get and keep a royal charter to be allowed to start a business, so the British started with total government control of the economy.  Over time, starting a business became easier as monarchs realized that there was more money to be made in taxing new businesses than in selling charters.

The American system was always more individualistic if only because the colonial governments did not have nearly as much economic power as the British government.  In America, it was easy to start a new venture a bit further away from government as long as you were prepared to defend it from hostile natives.  Not all Americans availed themselves of this option, but the fact that it existed put a significant limit on the government intrusiveness.  We can't help noticing the accelerating growth of government since the end of the Frontier made it much harder to move beyond the reach of the tax and regulatory authorities.

So what changed to drive governments all over the world to be larger and larger than ever before?  The next article discusses the economic effects of globalization.