Friday, May 31, 2013

Consuming Our Capital

It must be admitted that there is a degree of instability which is inconsistent with civilization. But, on the whole, the great ages have been unstable ones.
—Alfred North Whitehead

A sure-fire sign of a business enterprise in decline is when it begins using its invested capital to pay operating expenses. Such signs of ill-health are not confined to the world of commerce and industry, but can exhibit themselves in the life of any system. We are witnessing the practice in the collapse of Western Civilization, as we scurry to meet short-term demands by sacrificing the foundations upon which our culture has long been grounded.

Neither the Industrial Revolution nor the emergence of the factory system were sufficient to account for the greatness of Western culture. There were numerous practices, attitudes, ideas, and other factors that provided the necessary conditions for this culture to flourish. It has been the preoccupation with the material benefits of our civilization—accompanied by an increasing belief in the irrelevance of its intangible foundations—that has contributed so much to the collapse of Western society. Because of the centrality of institutionalism in our lives, it can safely be said of our culture that whatever is nonmaterial has become immaterial. Whatever does not contribute to institutional purposes in our modern world is regarded, at best, as a harmless diversion or, at worst, an interference to be enjoined. But the cost of maintaining institutional primacy often becomes a weakening—or even destruction—of the conditions that allowed creative energies to produce the civilization.

Western culture is not to be praised only because it allowed creative geniuses to produce what they have, but because it has allowed all of us to live better lives than would otherwise have been available to us. Even the poorest among us enjoy technologies beyond the powers of monarchs of old to command: central heating and air conditioning, electric light and appliances, automobiles, telephones, television and computers, to name just a few of the more familiar examples. Contrary to the lingering complaints and economic ignorance of socialists, mankind has learned how to produce and distribute wealth without having recourse to looting and other forms of violence. While many continue to employ political coercion as a means of disrupting the peaceful and voluntary systems that have done so much to benefit and humanize mankind, the knowledge for how life-enhancing ends are accomplished remain available to all thoughtful minds.

What are the intangible qualities upon which a prolific society is based? As suggested earlier, they seem to include the importance of conditions such as individual liberty, the inviolability of private property, and respect for contractual obligations: factors that must exist if self-interest-driven pursuits are to be energized. While no civilization has yet to embrace these values with consistency—the powerful sentiments of the Declaration of Independence, for instance, did not extend to slaves or American Indians—the creative well-being of any society can be measured by the degree of their influence. The collapse of the Soviet Union was occasioned by its continuing war against the self-directed nature of life.

While the works of creative individuals make up so much of the substance of our culture, their efforts depended upon conditions that encouraged—or at least did not discourage—their efforts. The marketplace system of voluntary transactions facilitated exchanges that allowed people to benefit exponentially from one another’s efforts. To the degree respect for the principles of property ownership prevailed, men and women enjoyed the means for acting freely within the world. The importance of liberty and the distrust of power led to efforts (e.g., constitutionalism) it was thought could restrain political systems. A focused interplay of the intellectual and spiritual dimensions of our minds provided a base from which to analyze and evaluate human action.

It has been this underlying social environment, wherein the self-interest motivations of individuals are able to express their autonomous and spontaneous energies, that represents the capital of a healthy civilization. The products of such a culture—as much as they contribute to human well-being—are of far lesser import than the respect for intrinsic principles that allow for the production of creative works. For the same reason that erosion of the capital structure of a firm can hasten its demise, sacrificing the fundamental values of a civilization can bring about its death.

It is difficult for rational minds to look at our present societal plight and see it as only a temporary downturn. We are close enough in time to the “Great Depression” that plagued America for more than a decade, that many of us imagine that, like this earlier period, there will be a full recovery to both our economic and other social systems. We might think of our current problems as akin to a bad case of the flu that our immune system will soon subdue. Perhaps a hangover from an evening of self-indulgence provides a more comforting metaphor.
Whatever analogy we choose, our current cultural decline runs to much deeper explanations than what confronted us some eight decades ago. The hangover of prior generations has advanced to cirrhosis of the liver, and rather than facing the need for a change in lifestyle, we look for an organ donor to absorb the costs of our profligacy. Our illness, in other words, is of terminal dimensions; our erstwhile immune system—made up of those personal and social attributes that sustain a healthy organism—has been depleted through decades of ignorant and unfocused dissipation.

The creative well-being of a civilization depends upon individuals enjoying the liberty to pursue their respective self-interests. Protecting this process involves a continuing struggle against the efforts of collectives to promote their interests by coercively restraining the autonomous behavior of others. In our case, the institutionalized collective, backed by the power of the state, has often found the most expedient course of action to be found in consuming the capital upon which Western Civilization has long thrived. Like a spendthrift heir to an estate—whose upbringing has provided him with little sense of responsible behavior—far too many of us have been eager to scuttle the values that have kept us relatively free and prosperous. Being willing to play the political game of accepting short-term benefits in exchange for long-term costs—particularly if such are to be borne by others—we have helped to destroy the capital of our basic social system.

The principles of the marketplace no longer discipline economic behavior as they once did. Firms that lack the creativity and competence to withstand the rigors of competition, now call upon the government to bestow gifts of billions of dollars upon them. Just as the state has long subsidized its failures (e.g., government schools, police protection, military defense), major businesses will have their failures subsidized. They are also able to take advantage of the state’s powers of eminent domain—a practice inconsistent with the principle of private property—to force others to incur the costs of building factories, shopping malls, apartment complexes, and sports stadia. Following the invention of the automobile, there have been close to two-thousand car manufacturers in America who succumbed to the disciplines of the marketplace and became defunct. There was a time when it was understood that the opportunity to succeed in the marketplace carried with it the risk of failure. Today, firms plead for government funding under the rationale that they are “too big to fail.”

While the Constitution neither limited government power nor guaranteed individual liberty, there was a time when most people shared the illusion that it did—or, at least, that its language ought to be so interpreted. Today, the Constitution no longer has any definitive meaning: presidents can declare wars on their own initiative, or appoint “czars” to regulate whatever sectors of society they choose; legislation need not be completely drafted before being enacted into law; Bill of Rights requirements for public trials, habeas corpus, restraints on searches and seizures, are routinely violated whenever it suits government officials to do so. Administrations now openly admit to their authority to assassinate Americans whom they unilaterally select for extermination. The chief offense at the Nuremberg war-crimes trials involved the starting of a war; today, such an act is a cause for celebration among patriotic Americans. The Constitution neither protects individuals, nor empowers government: state power is now grounded in pure usurpation.

Truth-telling; respect for the obligations of contracts; stable currencies; and a willingness to overcome immediate time preferences—all of which are necessary for longer-term investments—are qualities in decline in our world. The lies that precipitated wars in Afghanistan and Iraq no longer trouble most Americans, who seem prepared to accept a new set of official falsehoods about Iran; courts have long been willing to rewrite—or refuse to enforce—contracts they deem “unfair” to one of the parties; while inflationary monetary policies encourage short-term time preferences among both investors and consumers.

Such phenomena reflect the dysfunctional and destructive attributes often associated with organizational size. In his important book, The Breakdown of Nations, Leopold Kohr identified what he called “the size theory of social misery;” that “whenever something is wrong, something is too big.”1 As Gabriel Kolko observed in The Triumph of Conservatism,2 large business organizations have a tendency to become too bureaucratic and rigidified to retain the resilience necessary to make adaptations to changes in their world. Complexity feeds upon itself, producing more complex situations for which additional rules and procedures are adopted in an effort to stabilize the system. While having resort to state power is not an inevitable consequence of an organization’s enhanced size, any reduced capacity to adapt to changing conditions increases the pressures to pursue such an option.

Because of the inconstancies and uncertainties inherent in our world, a tension is generated between creative persons who seek to take advantage of the processes of change, and those with established interests to protect. The latter group responds to the specter of change with conservative, moderating proposals. The sense of security associated with permanency—particularly as to systems and practices that have proven beneficial in the past—fosters tendencies for restraint and regularity and opposition to liberty and spontaneity. Such preservationist efforts add to the complexity with which people must contend in their actions. To the degree human action interferes with such regularizing purposes, more rules and bureaucratic procedures are introduced, creating more stabilizing complexity. In the words of George Orwell’s Emmanuel Goldstein, such dynamics create “the persistence of a certain world-view and a certain way of life. . . . Who wields power is not important, provided that the hierarchical structure remains always the same.”

It must be noted that there is nothing intrinsic about size or complexity that necessarily devitalizes an organization. The benefits arising from economies of scale and the specialization of labor are well-established. Business historian Alfred Chandler has analyzed the economic advantages size played in such developing industries as electricity, automobile manufacturing, and other industries. In his view, a combination of technological innovations and organizational changes contributed to the development of large, nationally organized industries. On the other hand, the general failure of both voluntary cartels and the merger movement to stabilize prices and other competitive conditions in industries5 helps to refute intuitive notions about inherent powers associated with size. The 165 million years in which dinosaurs dominated the earth—compared to the 1–2 million years of humans—should make us reluctant to assume that great size is necessarily dysfunctional. It is simplistic to conclude that organizational size and preferences for maintaining the status quo make collapse inevitable. 
Nonetheless, the history of business organizations as well as civilizations demonstrates how size tends to foster conservative, less resilient, bureaucratic, and stabilizing practices that make a system less able to make creative responses to change. The observations of one student, Joseph Tainter, help to explain Carroll Quigley’s views:
Sociopolitical organizations constantly encounter problems that require increased investment merely to preserve the status quo. This investment comes in such forms as increasing size of bureaucracies, increasing specialization of bureaucracies, cumulative organizational solutions, increasing costs of legitimizing activities, and increasing costs of internal control and external defense. . . . As the number and costliness of organizational investments increases, the proportion of a society’s budget available for investment in future economic growth must decline.

When “continued investment in complexity” produces a decline in marginal returns, “a complex society reaches the phase where it becomes increasingly vulnerable to collapse.’”

Neither is there anything in social organization that mandates institutional arrangements. As Kohr and others have observed, there are forces associated with size that increase the pressures for institutionalization. One such influence has been the movement from what Joseph Schumpeter identified as owner-controlled to manager-controlled business firms. This transformation produces a shift in perspective from longer-term to shorter-term considerations in decision-making. I encountered this tendency when, in law practice, I witnessed owners of businesses considering the impact their actions might have on their children and grandchildren who might one day own their enterprises; while managers—whom Schumpeter correctly characterized as having the mindset of employees—tended to focus the scope of their actions only upon immediate concerns. Politicians and bureaucrats typify such thinking, looking only to the next election or their own retirement to define their time-frames.

This should remind us that social organizations, like religions, ideologies, or other belief systems, are the products of our minds. Why do so many mergers and consolidations continue to take place when the empirical record so often attests to their ineffectiveness in increasing market shares, profits, or growth for the firm?9 Part of the answer may lie in Schumpeter’s analysis, which triggers an explanation grounded in the concept of property, in which “ownership” and “control” are severed from one another, creating differing motivations for each. Two students of the subject have offered an explanation for the phenomenon that goes more to psychological and ego satisfaction: “managers prefer to control larger enterprises, because social prestige, salary and perquisites increase with the size of the enterprise managed.”10 Doesn’t this separation of ownership and control underlie all of politics, as men and women seek to exercise control over what they do not own?

As I have developed elsewhere,11 an institutionalizing imperative begins to dominate our thinking; we learn to identify ourselves with and attach ourselves to organizations that produce the values upon which we believe our well-being depends. At this point, the organizations become transformed into institutions; they become a doppelganger, a shadowy counterpart of ourselves; we transfer to them the fears of our own mortality; they become “too large to fail.”

What we fail to understand when we elevate the products of our actions above the free and creative processes that generated them, is how the vibrancy that defines life itself gets diminished, taking our culture with it. If we were to take our children or grandchildren to a taxidermist to have them forever preserved in the cuteness of their infancy, we would at once see that it is their life-sustaining energy we want to perpetuate, not some momentary form in which such dynamism finds expression.

To relate such distinctions to current political behavior, the creative health of the American economy would be fostered by allowing Detroit auto manufacturers to go out of business, rather than having their insufficiencies subsidized by the state. Did the auto industry really suffer when the Brush, the Omaha, the Stanley Steamer, the Moon, the Maxwell, or the Eldredge Runabout failed to survive? Were such enterprises regarded as so significant as to be bailed out by the government? Certainly, the deadly virus of institutionalism had already infected that industry when, by the late 1940s, established firms were able to call upon the federal government to thwart the competition from Preston Tucker’s innovative car.

Historians have warned us of the threats to a civilization arising from treating its productive institutions as ends-in-themselves, whose interests are to be stabilized through standardization and the structuring of the conduct of others. It is through resiliency and adaptability—not the preservation of established forms and practices—that a culture can remain productive. Can we learn, from history, to see through the destructive and debilitating nature of our attachments, and to focus our thinking upon fostering the endless processes of liberty which, alone, make for a creative society? Or, shall we continue mouthing our institution-serving catechisms that tell us how major industries are “too big to fail;” that state and local governments are “too big to fail;” or, that the American Empire is “too big to fail”? At what point do we begin to understand that the printing of money does not create wealth?

After the illusory nature of money no longer sustains even short-term political thinking, and the political establishment intensifies its perpetual war upon human beings, will we continue to allow our gullibility to be exploited? When we are then told that “Western Civilization is too big to fail,” to whom will we look for a bailout? Having consumed the capital upon which our civilization was grounded, what printing presses, or military forces, or legislative enactments, will the state have at its disposal to restore what has been destroyed?

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