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Ralston Saul: Nonsense from an anti-market ideologue
Gerard Jackson
To the delight of our ill-informed journalists John Ralston Saul has flittered back into town. It says much about the media’s intellectual standards that they take this poseur seriously and expect the rest of us to do likewise. Unfortunately this is not the first time this enemy of capitalism has tainted Australia’s shores. He visited us in early 1997 and spewed out, with the support of a adoring media, the usual leftist anti-market nonsense.
Proving that leftists never learn, this brilliant commentator his pushing his book The Collapse of Globalism. Revealing a staggering ignorance of economic theory and the history of economic thought, this dilettante tells us that the world needs new theories to replace the 19th century theories of economics that sustained globalism.
These theories, of which he is completely ignorant, did nothing of the kind. What they did was to explain the benefits of free trade in particular and free markets in general. There is nothing stopping the ever so clever Ralston from trying, for example. to refute the theory of free trade. So why doesn’t he? Because he cannot. That is why resorts to baseless attacks
Unfortunately the more ill-informed the attack on free market theory the more support it will receive from lefty journalists. That is how it was with Richard Yallop of The Australian. During Ralston’s last visit the sycophantic Yallop reported that Saul had said that the people of the West are no longer living in democracies but are the “slaves of the economic market place”. This is the kind of smart-aleck comment that our journalists mistake for wisdom
Saul is also the author of The Unconscious Civilisation which was apparently inspired by anxiety provoked by Canada’s alleged adoption of “the corporate state and economic rationalist ideology”. (Yallop’s words). Saul asserted that embracing corporatism had placed self-interest above the public good; that corporatism had failed to solve the problems of high unemployment, war and poverty. He also insinuated that in 1997 the incomes of 77 million Americans had fallen below their 1966 level, and that corporatist policies had driven18 per cent of Americans below the poverty line.
Although these claims were unadulterated hogwash our doting media lapped them up. Market economics (sneeringly and mischievously called rationalist ideology by new class intellectuals) is a branch of the social sciences devoted to the study of human action. Calling it an ideology is just a vicious attempt by anti-market intellectuals and their media allies to destroy its reputation. Totally unable to refute the power of economic reasoning, they turn instead to the weapons of slander, libel, propaganda and confusion to destroy its credibility.
Saul’s use of the term corporatism as a synonym for free-market economics is a typical example of a lefty intellectual deliberately causing confusion in the public’s mind by exploiting its ignorance. How many know that corporatism is the antithesis of market economics. How many even know that the popular name for corporatism in the 1920s and 1930s was fascism. Mussolini’s economic policy was to create a network of planning agencies called “corporations” that would organise production in each branch of industry.
The policy was grandly labelled stato corporativo, or corporatism.university chairs of economics were renamed chairs of economia politica e corporativa; books and thousands of pamphlets were produced explaining the “new way” (what social democrats call the third way) and its superiority over capitalism, a superiority that The Economist acidly exposed as intellectual posturing (27 July 1935).
Fundamental to corporatist ideology, a form of guild socialism, is a deep rooted hostility to free-market economics. Yet we had the so-called erudite Saul claiming they were one and the same! Not only that, but corporatism claimed to put the public interest first, unlike capitalism.
It was the Nazis who coined the slogan Gemeinnutz geht vor Eigennutz; roughly translated, the public good above private profit, the very thing Mr Saul and his disciples promotes. (Whenever I hear an intellectual preaching the common good, I never know whether to look to my wallet first or my liberty).
Not only was his description of the West as corporatist a grotesque caricature of reality but his statistics were outrageously inaccurate. His claim that 18 per cent of Americans were below the poverty line was wildly misleading. The figure for 1982 was 15 per cent which had fallen to 13 per cent by 1988. The 1997 figure was about 14 per cent. Even if his claim were true it would still be deceptive because the poverty line has been rising relative to other incomes.
Meaning, for instance, that if the 1950 poverty line had been maintained there would have been no poverty in the US in 1997. Making international comparisons can also be revealing regarding poverty levels. In the early 1960s it was calculated that 44 per cent of America’s non-white population were below the poverty line of $3000. But by the same measure 75 per cent of the UK was also in poverty. What counts, therefore, is not relative poverty in this respect but relative purchasing power.
Saul’s assertion that the incomes of 77 million Americans had fallen below their 1966 level was not only questionable it was patently absurd. The figure was equal to about 28 per cent of the population and about 64 per cent of the workforce. Despite Saul’s claims to the contrary, real incomes had risen considerably during the previous 30 years.
In a study commissioned by the New York Times, Leonard Nakamura calculated that real wages rose by 35 per cent during the period 1976-96. So who is Saul talking about? If there were 77 million pensioners in the US he still cannot mean them as indexed pensions had also risen in real terms. How could it be otherwise once we realise that social spending had increased (in 1990 dollars) from $US143.725 billion in 1960 to about $US1000 billion in 1997?
This brings us to another one of his blatantly false claims, and that is free markets had not solved the problem of unemployment. What this deep thinker had not grasped, and still hasn’t, is that unemployment is not a market problem but a statist problem. Let us start with the US and Europe. The much maligned Reagan years — maligned by the likes of Saul and his media groupies, that is — created over 18 million new jobs.
In fact, the Reagan presidency was a period of sustained employment growth for blacks: it saw the black labour force participation rate hit a record 64 per cent, the percentage of low-income black families’ fall while the proportion of those blacks earning more than $50,000 a year jumped from 7.9 per cent to 13.8 per cent.
Despite anti-Reagan propaganda, about 82 per cent of the newly created jobs were in higher-paying, higher-skilled occupations. Only 12 per cent were in the lowest-paid, low-skilled service occupations, such as retailing and fast-food outlets.
So much for the left's Macjobs myth. The Bureau of Labour Statistics calculated that in Reagan’s first term 48.7 percent of new jobs were actually in the best-paid managerial and professional category. In addition to this, the top 1 per cent of earners saw their share of income taxes grow from 17.6 per cent to 24.6 per cent during the 1980s.
And America’s incredible job-creating machine continued to perform during the 1990s. For example, from June 1992 to June 1996 non-farm payrolls rose by 11.1 million, 10.2 million of these were in the private sector. Nationally, unemployment fell to 4.9 per cent in 2000, while in some states it ranged from 2 to 3 per cent. Compare this astounding performance with Western Europe’s miserable record.
Between 1970 and 1984 she suffered a net loss of 3 to 4 million jobs while America created something like 28 million jobs in the same period; in 1970 she had 20 million more jobs than the US, by 1984 she had nearly 10 million less.
Moreover, 97 per cent of all new civilian jobs created in the European Union from 1981 to 1997 were in the government sector while her average level of unemployment still exceeded 12 per cent. During the 1982-1997 period the US economy created over 35 million new jobs. So who did Saul think he was kidding, apart from the lefty idiots who interviewed him?
Widespread persistent unemployment is a curse created by overpricing labour. Unemployment was high in Europe, and still is, because she adopted the kind of anti-market social democratic policies that Saul and his leftist fans support. These policies forced labour costs above their market clearing levels.
Politicians did this, irrespective of what Saul would have the public believe. It is plain to see that those countries with the most fettered labour markets are the ones that suffer the highest unemployment rates. So how in heavens name could Saul claim that market economics had not “solved the problem of unemployment” when the example of America, and Hong Hong, provided irrefutable proof to the contrary? The answer is ideological bigotry, plain and simple.
Saul’s ignorance and prejudices were also highlighted by his reported comments about corporations and their taxes. This was amply driven home by his assertion that reducing corporate taxation is one of the reasons governments have been forced to chase gambling revenue. To lend support to this ridiculous view he claimed that corporate taxes provide about 50 per cent of Canada’s tax revenue in the 1950s but that it had dropped to single figures by 1997.
Well, Canada must have had an extremely low level of government spending if what Saul said is true. Now I do not know anything about the size of Canadian corporate profits relative to the national income but I would hazard a guess that it was not all that different from the US, of which I do know something. Post-tax profits per dollar of sales for US manufacturing corporations averaged about 5 cents in the dollar during the 50-year period 1947-1997; net corporate profits for 1996 were approximately 7 per cent of GNP while net cash flow was around 11 per cent of GNP.
These figures clearly show that Saul’s nasty insinuation that higher corporate taxes could significantly fund government spending and still reduce the tax burden on his “middle classes” and “lower middle classes” to be utterly absurd. The reason governments were forced to chase more tax dollars had nothing to do with cutting corporate taxes and everything to do with reckless political promises.
Fortunately, economic history (for which he also seems to have little respect) provides us with an abundance of graphic evidence to show what happens when governments treat corporate profits with the contempt that Saul apparently believes they deserve. In 1929 US employees received 81.6 per cent and shareholders 18.4 per cent of that part of the corporations’gross income available to employees and shareholders. In 1933 employees share had rocketed to 99.4 per cent while the shareholder share plummeted to 0.6 per cent.
Obviously corporate profits had been wiped out. The result — paradoxically to some — was that payrolls dropped from their 1929 level of $US32.3 billion to $US16.7 billion in 1933. Any wonder when we consider that net corporate profits plunged from $7,300 billion in 1929 to $US100 million in 1933.
Of course, Saul was not suggesting that corporate profits should be eliminated, only that they should be savaged a little. The 1970s provides another interesting example of what happens when corporate profits are attacked, even inadvertently. In that period the real after return to equity fell from 10 per cent to less than 5 per cent but, because of inflation, the effective tax rate on real income leapt by 70 per cent, even exceeding 100 per cent in some cases.
Out of pre-tax earnings of $US39 billion in 1977, $US28 billion went to taxes (72 per cent tax rate), $US10 billion in dividends (which were taxed again) and only $US1 billion for reinvestment. Put another way: for every dollar of investment (savings) these firms had to set aside $28 for taxes. This is a ratio of 28:1; the ratio in 1967 was 3:1. By the following year net profits had collapsed to 4.4 per cent of the national income. George Terborgh, an economist, was chillingly correct when he stated that real profits had been devastated.
The results were all too predictable. Collapsing corporate profits were followed by collapsing investment which in turn brought about a severe productivity slowdown. In its 1979 Economic Report, the Council of Economic Advisors calculated that between 1948 and 1955 productivity increased by 3.4 per cent a year. From 1965 to 1973 this had fallen to 2.3 per cent and from 1973 to 1977 it fell further to 1 per cent. The period 1977 to 1978 saw productivity shrink to a miserable 0.4 per cent.
On these figures living standards went from doubling every 20 years to doubling every 175 years. Even though statistical revisions now indicate that inflation was overstated, thus exaggerating the decline in the rate of increase in real incomes, there is no escaping the fact that a significant fall in productivity occurred during those years. There was not the slightest indication from Saul that he has even a nodding acquaintance with these facts or even cares about them.
What eluded Saul and his doting press was that corporations cannot pay taxes, only people can do that. And when you tax away the means and the incentive to invest you also tax away future living standards. This is what happened in the 1970s. Yet Saul carries on, like some new class oracle, blissfully ignorant of past events and totally indifferent if not actually hostile to contrary evidence, totally at peace with his own dogma, impervious to the logic of economics and the lessons of economic history. A true ideologue.
Saul’s deep hostility to corporations was brought into sharper focus by his accusations that they have nothing to do with capitalism, that they inefficient, slow and irrelevant to the market place and risk. To argue, as he does, that they have nothing to do with capitalism is bizarre. The essence of capitalism is free exchange and that can only exist in the market place. ‘Giant’ corporations are voluntary organisations that pool and put to work the savings of millions of people.
If this is not capitalistic, I'll be damned if I know what is. The refusal of many, if not most, intellectuals to recognise the legitimacy of the corporation spring from their failure to recognise the market place as a process, a spontaneous order. That something can emerge that seems to exist without direct ownership or, in their view, even accountability. No: whether Saul likes it or not, the corporation is part and parcel of capitalism.
That corporations are inefficient per se, as he claimed, is just plain silly. First and foremost, corporations are firms and, as professor Coase explained (The Firm, The Market Place and The Law): “. . . firms arise voluntarily because they represent a more efficient method of organisation. In a competitive system, there is an ‘optimum’ amount of planning”!
The free market determines the optimum size of the firm (and that means corporations): that is, the size where the firm’s distribution of activities is such that any deviation from them results in factors being employed in less valued activities. (Obviously, the optimum is always shifting). But this means that factors are being allocated to the margin — and only the market can do that. Therefore, in an unhampered market firms will tend to expand up to a point where the costs of further expansion would exceed the benefits.
To suggest, as Saul does, that corporations can enjoy financial success in the market place while being inefficient and unresponsive to consumers’ preferences is contradicted by experience and theory. The view, which he evidently holds, that corporations can defy the market and violate consumer sovereignty with impunity is Galbraithian nonsense. For example, by 1988 of Fortune’s original top 500 companies only 285 remained 20 years later; 50 had either gone bankrupt or shrunk and 6 could not even be classified.
The market deals severely with inefficient companies, i.e., companies that fail to satisfy consumers. The mobility of corporations, which he condemns, has enhanced comparative advantage and forced governments to compete and review their own policies. All of this has greatly benefited consumers.
In his attack on privatisation, Saul turned to the alleged spirit, not the wisdom, of Adam Smith and argued that Smith would, if alive, oppose the denationalisation of electricity generation. Rather than pretend to divine what the long-dead Adam Smith would have to say on state ownership if he were here today, let us look at what he actually wrote:
. . . the last duty of the sovereign or commonwealth is that of erecting and maintaining those publick institutions and those publick works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small numbers of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals should erect or maintain. (The Wealth of Nations, LibertyClassics, 1978, Vol II, p. 723).
Electricity generation clearly did not fall into Smith’s category of “publick works” that could not be undertaken by the market place. Electricity generation was a market place activity that was nationalised by ignorant politicians. What Smith would attack, I venture to suggest, is the argument for state ownership of these facilities. I think it is abundantly clear that our Mr Saul has never read, let alone understood, Adam Smith.
Saul tried to reinforce his pro-state-ownership arguments by claiming that privatising, for instance, power stations drained investment from the private sector. His tacit assumption being that ownership is irrelevant to cost, revenue and decision-making. This is sheer nonsense. Even when operating in competitive environments, state ‘companies’ do not face the same range of constantly changing opportunities that private companies face as well as create.
This is because the decision-making scope of state managers is not only more limited than that of managers in private companies it also operates on different levels. It is ownership that makes this difference because it is ownership that affects choice.
That ownership is the heart of the matter is amply supported by numerous worldwide examples of how privatisation demonstrated that the real market value of so-called state enterprises can exceed their value under state ownership. Which is another way of saying that they were inefficiently managed. Moreover, government guaranteed borrowings by state ‘enterprises’ distorts lenders’ decision-making by altering their opportunity costs in a way that investment no longer reflects them, which means sub-optimum investment decisions are made.
This exposes the fallacy that government borrowing does not distort investment decisions and even, on reflection, demolishes the equally fallacious view that governments can really borrow below the market rate.
It says little for the intellectual climate of our times when the kind of patent anti-market drivel that the likes of Saul peddle can be taken seriously and virtually without question by the media, sections of academia and a great many politicians. Saul is an anti-market ideologue who has declared war on the discipline of economics and whose economic illiteracy is made self-evident with every utterance.
Another of his assertions is that economics had failed from 1972 onwards. What failed was Keynesian economics, just as the Austrian school predicted it would. However, the application of market economics (even in a hampered form) has been a roaring success. Compare America’s state employment rate with that of Europe’s and Australia’s. And that is just one example.
Saul is just another of a long line of anti-market corporate-baiters with a slick intellectual patter masquerading as serious thought but having no substance. It is the kind of patter that easily impresses feebleminded journalists and smug, ignorant left-wing politicians who know even less economic history and economic theory than Saul.
The man is an anti-market ideologue who speaks with an authority that he has not earned. His intellectual shallowness was exposed by his silly assertion that a truly intelligent person never uses words like inevitable, fact or truth (sic). Apart from the fact that this view raises some questions about his own existence as well as the contents of his books as well as his public statements, it also reveals a third-rate undergraduate approach to philosophy that can, I think, be best described as total scepticism (no wonder journalists love him) as well as totally useless.
That Saul can peddle his anti-market propaganda in Australia with apparent intellectual impunity is a disgrace that tells us much about the state of our own so-called free-market intellectuals.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 29 August 2005