Capacity
Society drives the economy, not the other way around
Money aside, do we have the capacity to build up, to restore and expand on the country’s infrastructure and our individual and collective capabilities? Do we have the people, the raw materials, the equipment to carry out such a transformation? Could we get them? Can we sustain the people with regard to food, clothing, shelter, and health care while they get the work done?
I am not asking if we have the money. That comes later. The question is, collectively, do we have the fundamental resources to do the things that need to be done? In a condition of low unemployment, there is the question of the availability of the people, but that measure suffers from two fundamental problems. One is that unemployment as defined and measured, omits important factors, such as that many choose not to be employed or they give up on their prospects, rendering themselves outside of the measure. Thus, the unemployment figure as a measure of capacity has diminished meaning.
Another problem results from very poor matching of people with their natural abilities by the educational system and catastrophic disconnects between educational organizations and employment sectors. Most young people emerge from schools having a very clear understanding of many things that they are not good at but little clue as to their talents and innate prospects. Most unlucky is the nascent NFL quarterback in a poor family of migrant workers or the mathematical whiz in an intellectual ghetto. Who is going to identify and nurture them in ways that unleash their true gifts in contexts that can and will appreciate and reward them?
The same concept has societal implications. Capacity itself is powerful thing if it can be unleashed. How is this to be done?
Capacity. Does it exist sufficient to meet the need? Is this a moot point? There are those that would say that capacity can be irrelevant in conditions of complexity and competition. This brings to mind the famous ‘collective action problem’. It does not matter, following such a way of thinking, that everyone would benefit from some such development. A few recalcitrant ones can hold progress back when their small interests outweigh their perceived benefit from more substantive, but widely distributed ones. They may see the situation as a profit-making opportunity — speaking here about money and its unintended, even antisocial effects.
It is important to understand a few things about the 20th century other than that it was tantamount to an extended series of train wrecks — with some notable exceptions. Here are three stories to be understood when sorting out what the capacity of people in a nation is and how that matters. Although they are 20th century stories, they have important 21st century implications. They represent aspects of our history, the short and the long of it, that are not generally known.
First is the question of Russia and what happened there in the early and mid periods within the century. It was hoped by many that Russia would be a testing point for the ideas of Karl Marx. It wasn’t. The ideas of Marx occurred in reaction to the failure of the Lockean Heartland (LH) as inflicted on the world by the English after their failed 17th century civil wars with the encouragement and support of the Dutch. As indicated by Joseph Schumpeter, it was obvious by 1847 that LH adventurism and its associated extremes would not succeed — could not succeed. Marx considered implications of this in some depth. It is interesting that critics of Marx could not hold a candle to that man in terms of understanding of commerce and development, and the emergence extreme capitalism. The point is what extreme capitalism does to choke off and ultimately destroy commerce and social conditions that deteriorate in the process.
When most people say they are in support of capitalism, they largely mean that they support commerce. It is commerce that does the magic; capitalism is a subset of this, a specialized area of how money may be made available — or not — to financing needs of enterprises. Extreme financial capitalism is what happens when markets get mature and enterprises are turned on their heads so that their owners can squeeze the last bit of juice (that is, money) out of them before they go under. In the process, markets are corrupted, politics is bent in decidedly undemocratic ways, and risks emerge that compromise society’s underpinnings.
I learned these lessons early on in my career as a venture capitalist. I took steps to organize a venture capital fund in Southern California with two partners. In the process of doing so, I had a wake-up call in Sacramento. With others from the Newport Beach Chamber of Commerce, I went to Sacramento in 1982 to testify against plant closure legislation that was under consideration. My point was that businesses needed carrots, not sticks, to be in the state. Any cutoff numbers on plant closure in California would set limits of exposure in the state rather than build up capacity there.
I made this case to the open state assembly in a packed crowd. I represented myself as a venture capitalist. Willie Brown was there as was Maxine Waters. After my introductory statement, one representative went after me as a venture capitalist, how they famously take peoples’ companies from them and leave them sitting on a curb (my phrase). I vociferously denied this, but my subsequent experience bore out what he said. In our own fund in the following years we replaced management in eleven of our fourteen companies. The others were special friends of my senior partner, who had engineered the ousters in concert with partners of other funds, who clearly delighted in such acts. Having learned this, I quit the field in a very messy separation. It followed a theme, as they turned to treat me the way they treated entrepreneurs in general.
Venture capital has another pernicious effect. Using large amounts of money, it sponsors programs that are socially suspect. Just because something can be used to generate money doesn’t mean that its effects are beneficial. Think of the problems with the so-called testing company Theranos and its Steve Jobs impersonator-founder Elizabeth Holmes. What they tried to do in health and medicine, rejected by nature’s requirements and complexities, is what they routinely do in information technology in self-serving co-optation of public attention. Whoever vetted this? This is like the famous desktop metaphor which they used to sell their expensive boxes. Whoever vetted those for security? Hackers and ransomers succeed simply by sweeping up crumbs off the floor. Those aren’t things of concern to the money people. They create problems and then make more money by appearing to resolve them.
It is commerce that grants opportunity; commerce provides the magic the comes from trade and initiative and sharing the best of what is provided in the market. LH’s failure was obvious in the 19th century, made so by England’s inability to feed its people, but they kept right on going, inflicting injury and ruin on many peoples in Asia, Africa, the Middle East, and elsewhere. There was monumental loss of life; many cultures succumbed.
One main reason the world was a tinderbox in the early 20th century, making wars likely if not inevitable, was that those acts of the 19th century and earlier created great imbalances. After ravaging the cultures and peoples of the world, England itself was in a weakened state. That bad experiment was further propped up in the 20th century, contributing to added chaos and want. There is a through-line from that time until now in the form of Brexit and its implications.
As to Russia, the country was taken over by thugs — more to the point, a certain thug in the name of Josef Stalin, who was able to negotiate others into doing his bad deeds for him. Marx and his writings had provided nothing of substance to Lenin and his followers once the revolution had succeeded. Russia didn’t have an industrial country to reform, but a medieval, agricultural one.
It took them fourteen years to decide what to do. There were two highly-trained debaters that led the chace. One was Yevgeni Preobrazhensky, the other was Nicolai Bukharin. Preobrazhensky argued that Russia needed to emphasize industrial capacity. He indicated that agriculture needed to serve this priority as a means of building industrial infrastructure and national power. The point was to build up an industrial nation to compete with established industrialized countries. Bukharin took the position that a strong agricultural sector itself should be the target as a way of assuring that the needs of the people were met. By building up Russia’s strength from within, Russia as a national would be strong and the collective goals of their primary program would be reinforced.
There was already a longstanding tradition in Russia of the Bukharin ilk. This was the rural agricultural tradition of the Russian mir. Yes, this is ironically the same name as the famous space station. I haven’t seen any commentary on that fact, which cannot be wholly coincidental. The tradition of the mir is essentially the same — theme with variations to be sure — as can be seen in indigenous and traditional cultures the world over.
Division of the land for farm work was to take place periodically, with individual oversight and responsibility agreed to unanimously within the community in formal meetings. If one family had more working capacity than another, they got more land — they had to make that case. Certain things were to be handled by all. In some cases, this was to be carried out through corvee labor, which was not directly compensated for in most cases. In some cases, they could be rewarded in food, clothing, or other goods and services at the behest of the community. There were traditions in programs of this kind the world over for community stores of staples, typically in the form of grain.
When Lenin and his army took over Russia, they did it in partnership with the mir across the country. They had mutual interests. Almost a decade-and-a-half later, when Stalin made his dastardly choice, he eliminated both Bukarhin and Preobrazhenski (ultimately fatally) and carried out Preobrazhenski’s plan far more aggressively and brutally than had been anticipated by anyone. The history states that he collectivized the country. That is true, in the process he destroyed the many mir across the land. Thus, if anything is to be said about Stalin and Russia and communal living, it was that it was destroyed in that country, not reinforced in any meaningful way.
They loved using that inflammatory “c” word that is used to describe all of this because it really sets people off — people on our side of the world, that is. It is like the incipient monarchy that we see in North Korea. Such countries were established under the famous socialist rubric because in large part it served as a distraction. This works with China as well. Has anyone noticed that Chinese in particular are really good at commerce? It reminds me of the story of trumpeter Arturo Sandoval about how he and his fellow musicians snuck jazz into Cuba by putting congas in front of their bands. Similarly, nobody notices how good they are at commerce in China in particular because we are all lost in arcane concepts surrounding the “c” word and the “s” word.
Second is a story about a Harvard professor that few outside of academia have heard of. His work lies at the heart of much of what is known about societies and cultures. His name is Talcott Parsons. He started out his academic life as an economist. His uncle had paid for him to spend a year in European universities just to study and he used the opportunity to spread his wings, ultimately getting his degrees there. He then spent many years at Harvard without seeming to progress very much, but he studied and taught a great deal and wrote a lot of papers.
I remember taking a class in 1972 in political theory based on his writings. None of it made sense to me then — I recognized the words, but their meanings together were beyond my grasp. Thirty years later, when I was engaged with my own dissertation, they made great sense.
What is important in this case is an experience that he related about his career. As a young academic at Harvard, he was approached by Joseph Schumpeter, who was in the last years of his own career. Schumpeter was world-famous and highly influential. He approached young Parsons and gave him a career-making proposal. They would found an economics project at Harvard together with money that Schumpeter would bring together and Parsons would lead out in.
What could be better than that? Well, there was a problem. Parsons had experienced a change of heart with regard to public affairs. He no longer shared the sense of priority shared by economists, that economics was preeminent to society and societal affairs. In our context, an economist could rightfully say, “We can’t engage in infrastructure development unless we can find money for it.” That makes no sense from a Parsonian and social perspective. Infrastructure projects are to be justified based on a society’s capacity to sustain the risks and stresses of such projects. Money in this sense is a marker — important, but not determinative.
Knowing that this was how he thought and felt, Parsons did not want to have an uncomfortable confrontation with Schumpeter on the matter, so he did not respond in any way. That must have made for some uncomfortable strolls around the ‘Havad yaad’.
The Schumpeter view is pre-eminent still. To be fair, he was more socially-responsible than most, but clearly with economics in the position of priority. This is what is taught in the schools and lies at the heart of policy considerations generally, although critical needs of many during the Covid pandemic have brought requirements to be the ultimate source of support for the people to the forefront. We see many late model vehicles lines up to pick up food. It is not good that it needed to happen; it is a testament to good governance that it could.
This has to do with more than subsistence. A dependable program as to providing the basics allows young adults to get their feet on the ground so that they can be highly productive throughout their careers. It supports the mental health needs of all of the people. It allows people to focus attention on talents and careers that take patience and time to carry out.
It isn’t just about not contributing — which is important. It is about the dangerous need in conventional programs to depend on chimeric markets and other conditions, many of which are out of one’s control. Gaining the basics in life, with as much safety and security as possible, is what policy is all about. Could there be an environment in which people could show up and contribute without the need to compete, to gain the basics if all else fails? Perhaps in some cases, people might prefer to direct their efforts in areas other than the competitive market? Could it be possible that they could control such factors as they see the need? If there is no such place, all are impoverished and life is unduly risky.
Third is a story about an American banker in Utah in the early 1930s. According to his memoirs, he saw in great detail the collapse of the regional and national economies around him as the Great Depression set in. He was a defacto central banker because of his own banking system. He and his brother had invented the multi-bank holding company concept and they had established scores of banks in the region.
In the early 1930s, he was distraught at what he saw happening. He had money, but it was largely leveraged and he couldn’t just give money out until it was gone. He came to the conclusion that only government could solve the problems associated with the general collapse. He came up with a plan as to how government could do so.
In his mind, there was plenty of productive capacity — that wasn’t the problem. Things needed to get basic and very direct: The government needed to recruit talented craftsmen and laborers to build up infrastructure with the specific purpose of meeting the peoples’ irreversible needs. They would spend the money thus gained, generating demand for companies to fulfill on. This would serve to resuscitate the economy just as application of a defibrillator might bring an ailing person back to life.
The man was Marriner Eccles, who went on to join government service in Washington DC and ultimately served as Governor of the Federal Reserve under FDR and later helped to pass those ideas on in the international realm after the war. This led to the formation of the World Bank, the International Monetary Fund, and the Marshall Plan. He was the main person to sign off on the lend-lease transactions that allowed Britain to survive the war. He understood that accounting should not stand in the way of societal capacity.
My grandfather, Rol Madsen, organized a project on a smaller scale with similar goals in the Utah town of Brigham City. This happened after the Great Depression started, before federal programs were initiated. The economy had ground to a halt. City leadership came to him because he had a reputation for organizing work and workers. They said they had a few thousand dollars that wouldn’t last long. They asked if he had any ideas.
Once he had thought it through, he responded with a plan. Crews of workers would be recruited to cut trees for firewood. The city was about seventy years old and there was a significant stand of trees in town. The workers would be paid in firewood — important through the winter — and with food, which the city would purchase directly through local stores. The program lasted as long as the trees did and the money held out — it bought the people of the town a couple of years’ stability until the federal programs took shape. After that, my grandfather oversaw the redevelopment of the local cemetery under federal norms.
Capacity is it what you make it. Nothing should stand in the way of this — certainly not policies based on misunderstanding and backward thinking. What matters is what truly matters.