Monday, April 09, 2012

The fallacy the 'Grand Bargain' Utopias

Thomas L. Friedman reviews David Rothkopf’s Power, Inc.: The Epic Rivalry Between Big Business and Government--and the Reckoning That Lies Ahead in the Hew York Times. HERE

“Capitalism, Version 2012”

“David Rothkopf, the chief executive and editor-at-large of Foreign Policy magazine, has a smart new book out, entitled “Power, Inc.,” about the epic rivalry between big business and government that captures, in many ways, what the 2012 election should be about — and it’s not “contraception,” although the word does begin with a “C.” It’s the future of “capitalism” and whether it will be shaped in America or somewhere else.

Rothkopf argues that while for much of the 20th century the great struggle on the world stage was between capitalism and communism, which capitalism won, the great struggle in the 21st century will be about which version of capitalism will win, which one will prove the most effective at generating growth and become the most emulated.

“Will it be Beijing’s capitalism with Chinese characteristics?” asks Rothkopf. “Will it be the democratic development capitalism of India and Brazil? Will it be entrepreneurial small-state capitalism of Singapore and Israel? Will it be European safety-net capitalism? Or will it be American capitalism?” It is an intriguing question, which raises another: What is American capitalism today, and what will enable it to thrive in the 21st century?

Rothkopf’s view, which I share, is that the thing others have most admired and tried to emulate about American capitalism is precisely what we’ve been ignoring: America’s success for over 200 years was largely due to its healthy, balanced public-private partnership — where government provided the institutions, rules, safety nets, education, research and infrastructure to empower the private sector to innovate, invest and take the risks that promote growth and jobs.

When the private sector overwhelms the public, you get the 2008 subprime crisis. When the public overwhelms the private, you get choking regulations. You need a balance, which is why we have to get past this cartoonish “argument that the choice is either all government or all the market,” argues Rothkopf. The lesson of history, he adds, is that capitalism thrives best when you have this balance, and “when you lose the balance, you get in trouble.” …

… The first is a grand bargain to fix our long-term structural deficit by phasing in $1 in tax increases, via tax reform, for every $3 to $4 in cuts to entitlements and defense over the next decade. If the Republican Party continues to take the view that there must be no tax increases, we’re stuck. Capitalism can’t work without safety nets or fiscal prudence, and we need both in a sustainable balance. …

… Another grand bargain we need is on infrastructure. We have more than a $2 trillion deficit in bridges, roads, airports, ports and bandwidth, and the government doesn’t have the money to make it up. We need a bargain that enables the government to both enlist and partner with the private sector to unleash private investments in infrastructure that will serve the public and offer investors appropriate returns.

Within both education and health care, we need grand bargains that better allocate resources between remediation and prevention. In both health and education, we spend more than anyone else in the world — without better outcomes. We waste too much money treating people for preventable diseases and reteaching students in college what they should have learned in high school. Modern capitalism requires skilled workers and workers with portable health care that allows them to move for any job.

We also need a grand bargain between employers, employees and government — à la Germany — where government provides the incentives for employers to hire, train and retrain labor.

… The “big thing that’s missing” in U.S. politics today, Bill Gates said to me in a recent interview, “is this technocratic understanding of the facts and where things are working and where they’re not working,” so the debate can be driven by data, not ideology.

Capitalism and political systems — like companies — must constantly evolve to stay vital. People are watching how we evolve and whether our version of democratic capitalism can continue to thrive. A lot is at stake here. But if “we continue to treat politics as a reality show played for cheap theatrics,” argues Rothkopf, “we increase the likelihood that the next chapter in the ongoing story of capitalism is going to be written somewhere else.

I reproduce Thomas Friedman’s review of David Rothkopf’s book(follow the link) because the ‘debate’ on the future of capitalism is based on a fallacy – namely that complex social systems are ‘fixed’ by designer’s of ‘better’ systems, either of a moderate variety, consisting of some tinkering in the tax and spend legislation, or of an immoderate variety, requiring a full-scale re-organisation of everything to change everything, including human behaviours, that is a "Grand Bargain".

The fallacy derives from the utopian notion that ‘top down’ reform is decisive. The “next chapter in the ongoing story of capitalism” is already being “written somewhere else", which is is how societies change over time, and how new forms emerge and eventually overwhelm all existing forms. Intentions are not involved

That is how capitalism uintentionally emerged from a process, identified by Daniel Klein in his new book, “Knowledge and Coordination: a liberal interpretation”, 2012, Oxford University Press, as “concatenate coordination”, a less obvious process than its more obvious partner, “mutual coordination”. In concatenate coordination each player does not know, nor need to know, of the details of the other players (as partners need to know in a mutual coordination, such as a waltz or skaters in an ice-rink).

Concatenate coordination emerges without individuals being aware, or needing to be aware, of its affects several links away in the long chains of cause and effect, as in supply chains, etc. R. H. Coase showed in his “Nature of the Firm” (Economica, 1937) that the entrepreneur directs people to coordinate their work but she cannot direct customers to buy her products nor suppliers to sell inputs at her preferred prices.

Outside the firm she is constrained by prices; inside the firm she decides what people do with the inputs she buys. Outside the firm it is concatenate coordination in the market, but inside it is mutual coordination at her command. She instructs her employees in what they do (mutual coordination), but outside changing conditions, new technologies, ever-changing prices, new rivals, new laws and regulations, knock-on effects and events, all appear as concatenate coordinations, of bewildering and unpredictable complexity – and nobody is in charge.

Into this reality steps the utopian with his futile plans to design ‘something better’. aka 'grant bargains. The rest is a pure history of failure, sometimes harmless (nobody take notice of the utopian’s ‘grand plan’, but often disastrous (‘hell’ and ‘good intentions’ – Kymer Rouge, etc.,).

Rothkopf’s focus, shared by Thomas Friedman apparently, is on the next US Presidential election in a single, albeit big player, country. We need read no more. It ain’t going to happen, nor will it for the ‘Occupy Wall Street’ activists.

Our best hope is that it won’t all end in tears for the rest of us.



Blogger airth10 said...


I really don't understand the utopianism you derive from David Rothkopf's article or from Thomas Friedman's analysis of it. They are just expressing the metaphysical nature of capitalism, with the necessary balances that make it successful. That is something you don't seem to appreciate or recognize.

1:30 pm  
Blogger Gavin Kennedy said...

Utopianism is a proclivity to produce grand schemes that solve perceived societal problems, which the practitioners of utopianism assert as a solution, total or partial, which said utopians believe, usually passionately.

Rothkopf's 'grand bargains', together are utopian, because, a) are major changes, b) definitive, and c) will change the world.

I do not know what is meant by the 'metaphysical nature of capitalism'.


2:57 pm  
Blogger airth10 said...


You certainly sound as though you are from the school of Edmund Burke, that one shouldn't try to change the world but let it happen naturally. Well, your hero Adam Smith tried to change the world, so he too must be an utopian. I would say most economists, of all stripes, are utopians in so form or other.

A philosopher explained that the best definition of metaphysics he heard is that it delves into the ultimate reality of things. The 'metaphysical nature of capitalism' is its ultimate reality and what truly makes it work.

I noticed that you didn't respond to Joakim Kromann Rasmussen metaphysical discussion and interpretation of the invisible hand.

3:34 pm  
Blogger Gavin Kennedy said...


I think the evidence suggests that on this issue, Burke was more right than wrong. I note, for instance, that William Wordsworth expressed the opinion in his later years that Burke had been right on the French Revolution and that he, Wordsworth (and his colleagues) had been wrong. Many former communists were bitterly disillusioned by the Soviet experiment. And so on.

However, the nearest I have expressed a view on major social change, was to state, as a student in the late 1960s, that "all attempts to change the world, have made it worse". Change comes from below, not "top-down". Southern Bus riders broke racial discrimination; individual inventors (James Watt) changed more than governments; garage kids made the IT revolution (IBM merely made very large machines while Apple overtook 'Big Blue'), and so on. Think Small and make a difference; Think Big and make misery.

"Ultimate Reality"? That's mysticism... As is utopianism. Smith was never a utopian - he mocked it in Wealth Of Nations; see for example his remarks on Physocratic ideas about the necessity of 'perfect' liberty (Book IV.ix.29. p 674) or "freedom of trade" ever being restored in Britain described as "Utopia" (WN IV.ii.43: p 471).

I have responded to Joakim Kromann Rasmussen by private letter. He is thinking it over.


5:54 pm  
Blogger airth10 said...

"Change comes from below, not 'top-down' ".

The French Revolution came from below, so did the Russian Revolution. What do you think started them? Admittedly, though, that 'below' go hijacked by the 'top' as so often happens. And that's what Burke railed against.

I certainly call Smith's ideas and vision on economics as 'grand bargain', as you accused Obama and Rothkopf of having.

6:16 pm  
Blogger airth10 said...

"Southern Bus riders broke racial discrimination; individual inventors (James Watt) changed more than governments"

But who solidified the change started by those Southern Bus Riders? It was the top-down changers, the lawmakers and the legislation they signed and put in practice, and enforced.

Talk about mysticism, that change, and lasting change, comes from below only. Change is a combined effort, from below and top.

I agree, the bottom is the best place to start when it comes to change. But that doesn't totally change things or the culture that needs changing. That generally has to come from the top and the big guns.

"Think Small and make a difference; Think Big and make misery."

I can see the wisdom in that. Sometimes thinking Big creates 'Titanic' situations.

7:11 pm  
Blogger Gavin Kennedy said...

Smith made suggestions for specific changes that were moderate, not revolutionary. He did not have a grand plan. He did not seek to rock the boat and was careful in his language. He made no public appeals, published his books, spoke privately, and did not have a public affect in his life time. But while he was musing his thoughts, all over the place, untold thousands of individuals were working away unconnected to each other except to those whom they bought from and those they sold to. They were in markets. This led to what we call capitalism. Nobody intended it, nor even knew where it would go. Some stuck with other activities, farmed as they and fathers did always. Others made profits in slavery or the Church,or the King's service, or in prodigality. Nobody designed markets or what became capitalism. Nobody will design where it leads to or what will replace it. All attempts to develop a "Grand Design" will fail.


9:17 pm  
Blogger Gavin Kennedy said...


A further comment on dispersed, unintentional changes that may cumulate to major changes.

The lady who sat at the front of the bus, contrary to law, may never have perceived where it would lead - she just wanted to sit where she chose.

James Watt invention of an improvement to the existing steam engines of his day, was purely technical and insightful in solving the loss of stream heat problem (a condenser). Only later did he commercialise it and make a personal fortune for himself, and the whole new era for society.

People who push their designs for complete changes in society are utopian dreamers. Society is always changing - freer societies change quicker than totalitarian dictatorships. China had been on the verge of an industrial revolution - much technical innovation was in place for centuries before 15th century - but its societies was frozen in lack of freedom for innovators like Watt and many others to find an outlet to commercialise their discoveries.

See Deirdre McCloskey, Bourgeois Dignity.


9:40 am  
Blogger airth10 said...


I couldn't agree with you more on the idea of utopianism and Grand Designs. But sometimes it has to be attempted in order to change and improve culture and attitudes, as in trying to put an end to racism or get people to drive properly.

I think one utopian, Grand Design push we have to applaud is the push in the 18th or 19th century to get doctors to wash their hands before administrating health care. Many doctors thought it was a jock and unnecessary. But in the end it proved to be a worthy effort at social engineering.

11:29 am  
Blogger Gavin Kennedy said...

I welcome your agreement.

I would add that the individual act of persuading fellow doctors and nurses to wash their hands started locally at first. Only later when momentum is achieved does it become established practice. Recently, hospitals advise washing in anti-septic soap before entering a ward or moving from bed-to-bed. That too, started locally with individuals not Grand Design campaigns, which came later.

Similarly, somewhere, individuals discover an improved form of competition and if successful it will spread, bottom up.

Too much of social engineering fails from the top.


7:57 pm  
Blogger airth10 said...

Grand Designs do exist. They evolve. Look at the evolution of the Internet, with its network and feedback systems. Yes, it originally started from below, but soon evolved into a Grand System as though it had no choice, just like democracy and capitalism have.

Capitalism and democracy have come together to form a further Grand Design. It's called 'liberal democracy'. In this world of diverse interests and complexity neither governing system can exist without the other, especially in our developed, mature economies. They counterbalance and reform each other

11:30 am  

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