Friday, October 16, 2009

Diminished Authority and Increased Fear

The U.S. government is engaged in a policy of increasing control over the economy, starting with the banking system and major industries first and proceeding, as it inevitably must, to total control. The unprecedented takeover within the past year of major banks and General Motors, once upon a time the world’s largest corporation, has been followed by the establishment of a “pay czar” (currently Treasury Department official Kenneth Feinberg) who makes arbitrary ex post facto decisions about the compensation packages of major corporation executives.

Ludwig von Mises explained in many of his books and articles that government intervention leads to an ever expanding need for further intervention. Take price controls, for example, of which executive pay is but one small element in that government dictates what business may pay for certain services, the services of its chief executive being merely the most visible and public of the services it purchases. The Wall Street Journal reported on Friday, October 16, 2009 that “Mr. Feinberg is reviewing pay for the 175 most highly compensated employees at the firms under his purview, and he has been wielding his power extensively. He recently persuaded Citigroup to unload its energy-trading unit to defuse a potential showdown over a $100 million pay package slated for a star trader.” So, first government tackles CEO compensation and then brow beats business to renege on its promise to give star employees the incentive pay that they had been promised. Apparently contracts, even if only implied contracts, have no standing when a government bureaucrat makes a decision.

Earlier in the article the Journal reported that Mr. Feinberg’s duties were making him highly unpopular: “Government officials have acknowledged privately and publicly that the pay czar is likely to upset both those who think his actions are too intrusive and those who think he hasn't done enough. Mr. Feinberg himself has said he'll need to move to Pluto when his job is over.” Is it not ever so when property rights have been violated? Those who fear the implications of the loss of the rule of law are matched in number by those who desire a complete breakdown in the rule of law and despise the half measures taken by those whom they perceive to be weak in the execution of their extraordinary powers. No one is happy and rightly so.

There is no logical stopping point once the process of economic control by government has begun. Ethically there is no more reason to refrain from setting the compensation package of the lowest position in a business than from refraining to rule upon the same thing for its CEO. Practicality reinforces this tendency. If the CEO’s compensation can come under government review, why not the compensation of his immediate subordinates, the senior vice presidents? And if the government reviews the compensation of the senior vice presidents, why not the vice presidents, as so forth on down the chain of command to the lowest position in the company?

Furthermore, the whole idea of a “pay czar” or any other kind of czar to rule over an important element of our economy suffers from a profound error in understanding how an economy operates. The genius of the free market is that it coordinates massive amounts of diffuse knowledge that no single person or committee could possibly comprehend even with the most sophisticated computers. And it does this coordination of diffusely held knowledge effortlessly, timely, and without coercion of any kind. This is why almost any conceivable good or service is readily available in a free market and why command economies suffer from shortages even of essentials. Command economies lack the coordination of diffuse knowledge that exists in a free market. It is important to note that it is the price system itself that is the medium by which local knowledge is diffused throughout the entire economy. And it is the price system which government action interrupts and perverts. It is as if our body could not differentiate between a hot surface and a cold one. We would not know that we had placed our hand on a hot burner until blisters appeared and the damage was done. The longer we hold our hand on the hot burner, the worse damage we do to our bodies. Likewise, the longer and more pervasive are government’s perversion of the price system, whether perverting the prices business pays its employees or some other price fixing intervention such as farm price supports, the more damage government does to the capital structure of the nation, reducing its ability to meet the real needs of its citizens.

Mr. Feinberg is right to be concerned about whether anyone will be satisfied with his pay reviews, for I saw something similar occur almost forty years ago in Britain, where I served in Uncle Sam’s armed forces during the Cold War. Britain had nationalized shipbuilding at the end of World War II. A number of separate and highly militant trade unions worked in the shipyards. One or more of these unions were constantly on strike, paralyzing shipbuilding because no union member from the other unions would cross another’s picket line. The reason for almost all the strikes was pay, of course. No one ever thought that his pay was just, especially in comparison with the pay of some other union worker in the shipyards. But instead of learning a new trade that was more highly regarded in the marketplace, the union members learned that they could get higher pay simply by going on strike. So union A would strike for higher wages and, since the government owned the shipyards and work would stop in all of the nation’s yards, they eventually would get it. But, this set off a series of similar strikes by the other unions to regain their “differentials”, meaning the pay difference that union A had established, either higher or lower, with all the other unions. So if union A got paid another fifty pence per hour, all the other unions would strike for the same or slightly greater increase. Then if the government eventually granted all the unions their increases as desired, union A would be dissatisfied because others had shared its sacrifices. So…you guessed it…union A would walk off the job again, and the vicious cycle would start all over again. Needless to say, Britain today is not the shipbuilding powerhouse that it once was.

The same dynamic will plague Mr. Feinberg and his staff. It may take a few years, but once labor learns how to play the game, it will constantly seek advantages through political power rather than through self-help, market oriented efforts. One group of workers will demand greater pay, setting off a cycle of work stoppages while all the other groups scramble to regain their relative position in the compensation hierarchy.

This slippery slope to total economic control is described so chillingly by German businessman Gunter Reimann in his 1939 book The Vampire Economy: Doing Business Under Fascism. Mind you, this book was written BEFORE the war, and yet Herr Reimann chillingly describes the chaos of Nazi control over prices and production a mere half-decade after the first Nazi price decrees. Corruption was rampant, because that was the only way business could obtain raw materials; petty (and not so petty) Nazi bureaucrats learned how to exploit their tremendously powerful positions in the ever more centrally controlled economy. Naturally, the Nazi government proscribed suitable punishments for those who did not abide by its price dictates and who engaged in bribery of public officials. Nevertheless, corruption increased because, as Herr Reimann explains, economic laws still existed and corruption was the only outlet left before bankruptcy. Thus, the citizen’s view of the government changed radically. Now anyone could become a criminal, from a top industrialist to a small shopkeeper, just because he did what was necessary to stay in business.

Herr Reimann makes the following revelation, which is not something that we in the Allied camp ever considered about the Nazi regime: “This has the effect of lowering the authority of the State; on the other hand, it also makes the State authorities more feared, for no businessman knows when he may be severely penalized.”

Increased fear and lowered authority—does this not describe the current state of government in America? On the one hand we fear the long arm of government at all levels. On the other hand, our regard for the state—what Reimann calls its authority—ever diminishes. This is the fertile ground for radicalism, something that we have never experienced in America to any great extent. But when its own overreaching causes economic chaos, government’s authority diminishes among all economic classes and radicalism becomes a possibility. This is not something we would wish to live through. Our Founding Fathers fought for the only radical change that we should ever desire. And they provided a system of republican government for the GRADUAL changes that the citizens may deem necessary over the years, decades, and centuries to come. But a weakening of the state’s authority, despite the increased fear that it engenders, increases the possibility of radicalism. Seldom in the history of the world has a more benign and liberal (in the classical sense) government emerged following radical change.

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