The Commanding Heights: A Book Review 1

Why do people still opt for socialism when it doesn't work?

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.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Economics.
Reader Comments

You are seriously still talking about the "Obama recession"? Considering that he inherited a major recession and has reduced the size of the government, the economy has been been adding a surprising number jobs since 2010. See here:

In fact, Obama's second term should easily overtake both of Reagan's terms and Clinton's second term as far as new private sector jobs goes.

Not that I think this has much of anything to do with Obama, but apparently you do, so I'm just putting some actual numbers out there.

April 19, 2016 4:24 PM

Jobs in absolute numbers, yes. Wages, though? The new jobs pay like half opof what the old ones did. Yes, that's still a depression if people's incomes are not returning, which they aren't.

April 19, 2016 8:12 PM

As a libertarian, who typically disagrees with Obama's policies, I do think that America is better off now, in many areas, than it was 8 years ago. Yes, I know what I just said. I'm as astounded as the next guy. The numbers, across the board, are just too good to ignore. Bush was not as good nor Obama as bad as conservatives like to pretend. Look at the numbers.

April 19, 2016 8:34 PM

Average wages have been increasing consistently at about 2% per year since 2009. The link you posted is basically a bunch of useless numbers. So there are more new retail jobs than manufacturing? So what? You going to sue manufacturers for automating production?

And don't tell me all the jobs have went to China, the proportion of the US economy in manufacturing has been steady the past 10-15 years.

Anyways, depression is a word that has meaning. You can't just redefine it to mean whatever it is you currently don't like about the economy.

April 20, 2016 2:13 PM

Consumer sentiment has improved quite impressively, even for the lowest earners.

May 3, 2016 5:56 AM

The Economist has struck a blow for the private sector.

To build a vaccine industry, Africa must embrace the private sector
Without a shift in focus, the continent risks always being at the back of the queue

The global vaccination drive has been both inspiring and depressing. Inspiring because a combination of ingenuity, private-sector endeavour and effective government action has led to 4.9bn people around the world receiving at least one jab in one of the largest mobilisations of medical resources in history. Depressing because 3bn people, mainly in poorer countries, have yet to receive a single shot and because the distribution of vaccines has been mired in autarky and bickering.

Of the world's regions, Africa has come out worst: it accounts for just 3.6% of global administered doses, partly because of hesitancy but mainly because it has struggled to get supplies and distribute them. Governments across the continent understandably want to escape from the back of the vaccine queue. Many of them, backed by supporters in the rich world, have focused on chastising pharmaceutical groups and arguing that intellectual property must be compulsorily licensed. That is a bad idea.

The pandemic has prompted a wave of investment in vaccines, which used to be shunned by some investors for being only intermittently profitable. Total global annual manufacturing capacity has risen from 5.7bn doses before the pandemic to 15.4bn, according to Bernstein, a financial firm, and based on current plans could reach 19bn. Capital spending at a panel of ten listed firms that make vaccines, among other things, is forecast to surge by 29% this year compared with 2019, according to Bloomberg data. This boom is welcome. But production sites are regional and therein lies a problem. In normal times vaccines are traded like any other medicine. In a pandemic, when contracts may be broken in the scramble for supplies, places with no factories may lose out.

Africa has 1.3bn people, 17% of the world's total, but less than 1% of its vaccine-making capacity. It is enjoying signs of growth. BioNTech, a pioneer in mrna vaccines, plans a system of modular manufacturing in Africa, and Moderna, a competitor, may build plants there, too. The African Union wants to create five production hubs in the next decade. Senegal's government is planning a $200m covid-19 vaccine facility with the Pasteur Institute, a French non-profit agency. But these projects are unlikely to provide much capacity any time soon. For example, the first phase of the BioNTech project will supply only up to 60m doses a year.

Emerging economies are not doomed to be in a weak position. Together India and China have an annual capacity of over 3bn doses. To do better, African countries need to attract private capital that will boost output and ensure that vaccines reflect the latest global innovations, which are likely to have been created elsewhere. This is best provided by policies that accept the legitimacy of drug firms, intellectual property and the realities of the vaccine business.


Finally, African countries must respect intellectual-property rights. Today too much time is wasted discussing the evils of patents or creating local laws that let them be qualified or suspended. Yet if firms are obliged to surrender their innovations, they will invest less and provide less help in supplying much-needed manufacturing know-how to poorer countries. Covid has shown how invidious Africa's situation is: to escape it countries need to work with drug companies, not around them.

February 19, 2022 12:37 AM
Add Your Comment...
4000 characters remaining
Loading question...