Sunday, October 31, 2010

Deregulation versus Growth

   If you wish to read a quick article on how deregulation has undermined the American economy, check out Alan Guebert's column this week.

Saturday, October 30, 2010

Russia Most Corrupt Nation?

   According to an article in the Washington Post,  Transparency International has just rated Russia as the most corrupt major country in the world, and 154th in honesty among all 178 nations.  Well, my Rusky friends, enjoy your number one status while you can—but in the end, Yankee ingenuity will beat you, and you will have to settle for being number two.  It will be just like the space race.  You will assume a commanding early lead which will inspire awe and fear throughout the world.  But the U. S will rise to the challenge. 
            In the space race, it was a visionary president, John F. Kennedy, who challenged the country to put a man on the moon in ten years—and turned the tide in our favor.  But this time, it is not a president but another of our fine American institutions, the Supreme Court (same fine folks who brought you the Dred Scott Decision) which will allow us to become the clear world leader in corruption. The court made the ingenious discovery that corporations, as “corporate persons,” have First Amendment Rights-- and are therefore are allowed to spend unlimited amounts of corporate money to influence the outcome of elections.  And if they do it right, they can do it anonymously. 
            Anyone with an IQ higher than his sock size comprehends that in any country, the cause of all corruption is the mixing of public power and private wealth.  We have always known this and have passed a few feeble laws trying to limit the political effect of corporate wealth.  We have always understood that to make government more transparent and more answerable to the people, our task was to pass stronger and more effective laws in this direction.  Now, in the Citizens United decision, the court not only forbids this but wipes out the few feeble laws we still had.  But all corruption starts at the top.  Who appointed these judges—and what was their agenda?
            Enjoy your number one status while you can, Ruskies!   Once the floodgate of corporate wealth is unleashed against Congress, our economic elites will have enough control over the people from whom they steal as to make the Russian oligarchs look like a convention of Boy Scouts.    And remember that though we are coming from behind in this race, we are not really all that far behind.  The Governor of Illinois tried to openly sell a senate seat to the highest bidder, and a jury failed to convict him of any wrong-doing.  You may protest that in the matter of Governor Blagojevich, we are cheating.  He is not really a Yankee, but a Slav.  We are bringing in a “ringer,” an outside expert.  But remember, if he were really an expert, he would not have been caught.  We have others who do the same sort of thing every day and never come to trial.  And what about financial fraud?  It took 25 years to catch Bernie Madoff, and he stole more money than the GDP of most countries.  Yet the government regulators investigated him every year--and could never seem to find anything wrong.
            We have many natural advantages in this area, and we are not so far behind you as you may think.  But if these advantages should prove insufficient, we have other options.   We could allow a tax deduction for bribes paid to Congressmen.  But wait—I think we already do this.  What, after all, is a “lobbying expense?”  Well, if worse comes to worst, we can bring in foreign experts.  We can hire corporate ethics panels comprised of Italian pickpockets.

Tuesday, October 26, 2010

TARP Bailout Revisited

            About two years ago, as the Wall Street Collapse was unfolding, an old friend said that her European friend had asked why the U.S. financial collapse should cause the Dollar to appreciate against the Euro.  One would think it should cause the Dollar to fall.  I wrote a response, but before I mailed it I showed it to a few close friends who had been asking the same question.  They all said, “This is what you should be posting on your blog!”  I explained that I didn’t have a blog.  In fact, in the rural area in which I live, no high speed internet connection was available then.  This spring, air cards became available, and I began a blog, mostly in response to urging by friends who had read this opus.  This analysis is now two years old, but viewing it in retrospect, it holds up pretty well.  Keep in mind when reading this that it was written while the crisis was still unfolding—while Henry Paulsen was still trying to persuade Congress to pass the TARP bailout.                                                                       
                             ******WRITTEN  Oct 7, 2008:*****

Dear Jane, (Her name isn’t really Jane, but I try to protect the confidentiality of my friends.)
            Yesterday, you said your European friend was puzzled that the U.S. Dollar should be rising against the Euro, when it is our financial house that seems to be collapsing.  I gave you a brief, almost flippant answer at the moment.   Having thought about it, I believe it is a question that deserves an “in depth” answer, and I will try to provide one.
            Although it seems counter-intuitive, there are three main reasons why this happens:  the collapse of liquidity, the sell-off of commodities in exchange for Dollars, and the tendency to retreat to safe havens in times of trouble.  To wit:
·         The collapse of liquidity:  During the Great Depression of the 1930s, what puzzled most people was that no one could explain where all the money suddenly went.   In the 1920s, the country had been awash with Dollars—yet suddenly no one had any Dollars. Where did they go? Most people assumed that a few rich people still had all the Dollars, but were keeping them hidden in their mattresses, and were not spending them.  While such things actually happened, what mostly happened is that this money had simply, and instantly, ceased to exist.  Only about 5% of the money in circulation at any time is actually issued by the government.  Most of the money on which the country operates exists in the form of “commercial paper.”  This term refers to the IOUs which banks give to other banks.  These are various instruments of debt; they may be corporate bonds, bundles of mortgages, negotiable debentures, or may take many other forms.  But they are all really IOUs.  If you and I both owned banks, and my bank owed your bank 10 million dollars, I could repay this debt by delivering a suitcase containing $10 million worth of this commercial paper.   Your accountants would sort through it all, and then issue a receipt for “paid in full.” When instruments of debt are circulated as a form of cash, this process is called “monetizing debt.” It is how most money is created. The Fed makes a great pretense of controlling the money supply.  But any large corporation can add to the money supply by issuing debt, and these companies are completely beyond the ambit of the Fed.  But is this stuff really money?  It is as long as someone will accept it for payment of debts.  That is the litmus test.  A dollar bill says, “legal tender for all debts, public and private”--everyone has to accept dollar bills. And when times are good, most banks will cheerfully accept most commercial paper, in fact they prefer it. Dollar bills don’t yield interest—but these IOUs do.  A liquidity collapse occurs when some of these debt instruments, (i.e. sub-prime mortgages) become suspect, and serious doubt arises as to whether they will all be redeemed.  When this happens, then a bank which holds these instruments finds that no other bank will accept them, so they have a problem.  This drop in liquidity undermines their balance sheets so much that other banks become skeptical of the IOUs issued by any bank which holds such questionable assets. At this point, any bank which has loaned money to banks holding these questionable mortgages now has a problem on its own balance sheet, as does any insurance company who insures banks against default.  So as the problem spreads, the questionable loans undermine the credibility of all other classes of loans. Banks are supposed to keep cash reserves to offset losses from bad loans.  My own brokerage, Stiffel-Nicholas, has one dollar in cash for every three held in speculative assets.  But Merrill had a ratio of only one to thirty.  They were way over-leveraged.  But to get back to how the crisis can cause the Dollar to appreciate:  Everything Roosevelt did was aimed at trying to put more dollars back into circulation, and that is what Paulsen is trying to do.  One would think that an announcement that the U.S. was preparing to print 7 hundred billion more dollars would erode the value of the Dollar.  But remember that this amount is issued to partially compensate for the fact that a much larger amount, about 4 trillion, has just ceased to exist.  So Paulsen proposes to place into circulation only seven dollars for every 40 dollars which have just removed themselves from circulation.  The net effect is that U.S. Dollars are about to become much harder to obtain than was only recently the case. Therefore, a Dollar will buy much more.  This is already starting to occur with oil.  Since dollars are becoming scarce, the U.S is starting to enter a recession.  Americans will spend less, so any country exporting to the U.S. will find the U.S. Dollar harder to obtain, even though the new exchange rate, which values the Dollar higher, would ordinarily make it easier to export to the U.S.
·         The sell-off of commodities.  Between July 1 and Oct 1, the U.S. stock market, (S&P 500 index) fell 13%.  In the same period, commodities declined an average of 25%.  Deutsche Bank calls this commodity crash “the most aggressive sell off ….in recorded history.” Corn is down $3.00, (from $7.00 per bushel to $4.00)  a decline of 38%;  wheat is down 26%, soybeans 36%, cotton 27%.  Oil, copper, and other commodities have also dropped precipitously. As mentioned earlier, all the large Wall Street investment Banks were dangerously over-leveraged.  So when the crisis began, they all had to sell assets in exchange for cash, to improve their ratio of cash to speculative assets. But what can be sold quickly? Certainly not real estate mortgages, not even the good ones. But corn (maize) and wheat, or oil can always find buyer. So the banks all dumped their commodities futures contracts. The effect on this region could be disastrous. At $7.00 per bushel, corn was selling for well above the cost of production. Farmers were making record profits, and were aggressively buying John Deere tractors, which is what we manufacture here in Waterloo, Iowa.  But a price of $4.00 per bushel is slightly below the cost of production, even without considering land costs. What farmer will buy new equipment when he is losing money?  And it all happened overnight. The day that The House of Representatives rejected the first bailout bill, the stock market lost 700 points on the Dow Jones average. But corn fell from $5.50, (still a profitable level) to $4.00, a much steeper drop.   In one day, American farmers went from having the brightest future they had ever known, to having none whatsoever. (I’m reminded of Rudolfo’s air in La Boheme, where he laments, “En Un Coupe.”)  Besides the disastrous effect which this grand sell-off has on those who earn their living from producing commodities, there are another couple of effects. One is that cheaper prices of oil, wheat and corn in Dollars means the Dollar will buy more--therefore the Dollar is worth more, and will command a higher price. The other effect is that as banks frantically sold these assets for cash, they took in tens of billions of Dollars, effectively removing these Dollars from circulation. They are not going to spend this cash; they will hold it in reserve, since low cash reserve is at the heart of the problem.  And this removal of Dollars from circulation will make Dollars even harder to obtain, which will also raise the price which bidders will pay for them.
·         The retreat to “safe havens” in times of crisis.  In about 1924, my mother’s family barn was struck by lightning, was immediately engulfed in flame, and burned to the ground.  The horses were outside the barn when the lightning struck, and the barn door was open.  They were frightened, and they did what frightened horses always do—they ran into the barn—where they died. The U.S. Dollar and its economy is the great barn of the world, and it’s where everyone runs when they are frightened. Are those who are now buying dollars behaving as irrationally as the horses—running into a barn which is burning? Perhaps they are; Perhaps not.  While it is probably true that the current crisis began in the financial sector of the U.S., the smaller economies of Europe, to which it is now spreading may be less able to cope with it. In 200 years, the Dollar is the only major currency that has never become completely worthless. Its value will fluctuate, but it will always be there.  When you consider the large trade deficit which we routinely run, and the large budget deficit, you’d think foreigners would shun our currency.  But as Warren Buffett, who has been the most outspoken critic of these deficits points out, they really don’t.   When the treasury offered $40 billion in short term notes last week, all 40 billion were snapped up in 20 minutes. The bidding was so aggressive that the last few bidders were accepting interest rates lower than 1/20th of 1% per annum.  Considering inflation, this is a very negative interest rate.  The U.S. can still instantly borrow whatever amount it chooses, in its own currency, at a negative interest rate.  The reason, as Buffett points out, is that our deficits are still not large compared to the massive size of our economy.  Although, every day, we consume 2 billion dollars more in goods than we produce, we still export 17% of our GDP, and produce products that are in demand all over the world. If we were to shrink our consumption a mere 2 billion dollars per day, we could have a trade surplus.  According to Buffet, we could do this at any time, and everyone knows this. Also, even the modest tax reforms of the Clinton administration ended the budget deficit and produced a surplus. We could do this at any time also. We allow other countries to sell more to us than they buy because we have been willing to be the “buyer of last resort” for the world.  We probably do this because somebody has to do it, and we have the only economy large enough to withstand that kind of strain.  There is a little hypocrisy here.  Many of the foreign governments who publicly criticize our profligacy, our irresponsibility in running these deficits, are privately trembling in fear of what will happen if we ever stop. To sum up, for all its problems, the U.S. is still the safest place to put money.  The largest banks in the world and many foreign governments still aggressively bid for our treasury notes, even at zero interest.

Sunday, October 24, 2010

Climate Change and Fall Leaf Color

   Can the Decline in the Diversity of Fall Leaf Colors be a Proxy for Climate Change?
            In the high latitudes, the effects of climate change are not subtle.  A friend of mine who has lived in Valdez Alaska for forty years says that the changes there since he moved to Alaska have been so stark that Valdez doesn’t even seem like the same place that he knew when he first came there.  But at the lower latitudes, here in the upper Mississippi Valley at 42-43 degrees, the changes so far are too subtle to positively establish much change, except for one thing:  We don’t get much fall leaf color anymore.  My daughter, born about 35 years ago, is not quite old enough to remember a good year for fall leaf color.
            This was not always the case.  My wife and I were married in the fall of 1971 and in that year and every year for the first ten years of our marriage, we would take a half day off work every October, so that we could drive up to a stretch of the Mississippi between Dubuque and Prairie Du Chien to see the glorious leaf show. The first frost would come about Oct 5th and a week later the leaf color would be at its peak.  For Iowans in the 1940s, 50s, 60s, and 70s, this was an annual ritual.  The car traffic on the roads along the river would be a bumper to bumper gridlock for a hundred miles.  And the newspapers and TV stations would compete in giving advice as to the exact day when the leaf color would be at its peak.  But few people bother to do this anymore.  The last few times we took our leaf trip, we didn’t even take the camera out of the case—there was nothing to see.  Sometime after 1980, it all changed.
            To have a diverse palate of fall leaf color requires an exact confluence of events. You need a warm enough and moist enough August and September so that when the frost comes, the trees are still fully foliated, and the leaves are all healthy and turgid. Then you need a single, sharp frost.  The temperature must drop to about 26 degrees F and stay there for 5 or 6 hours. And then the weather must warm back up to a pleasant and sunny 65 or 70 degrees Fahrenheit, and stay that way for a few days.  When all this happens, the chemical changes which occur in the leaves of deciduous hardwoods will show a maximum diversity of colors.  But for maximum effect, all these elements must fit together like the parts of a watch. The slightest change in this pattern of inputs will show a dramatic change in outputs; and perhaps this could give us a sensitive instrument of climate measurement--if we knew how to use it.  
            In the years when leaf color was good, what made it exceptionally good was the fact that this river valley is a zone of extreme diversity in species and sub-species of temperate hardwoods. Some years ago, a study found over 40 kinds of oak in just a two acre plot.  And that was just the oak.  There were also many different kinds of maple, birch, ash, hickory, elm, walnut, chestnut, poplar, sumac, cottonwood, box elder, and dozens of others.  And each species responds slightly differently to frost, yielding a slightly different color.   And in the river gorges cut by small streams flowing into the Mississippi, there are steep hillsides; and different elevations respond to frost differently. The tops of the highest trees will be colored slightly differently than the trees down in the valley, even if they are the same species. But we still have this same diversity of species, and the same topography.  The only thing that could have changed is the climate. 
            The photo shown above was included, not to show an example of diverse leaf color, but an example of the lack of it. The picture was taken on Oct 20 of this year, at Backbone State Park.  This is one of the places I used to go, 40 years ago, to take pictures of fall leaf color. It’s a pretty little place.  But 40 years ago, at that time of year, there would have been a brilliant splash of color—bright crimsons and golds, almost fluorescent chartreuse, and almost every conceivable color except blue, which was amply supplied by the renaissance blue of the October sky reflected in the waters. I still enjoy going there, but as you can see, half the trees have already lost their leaves, and what is left has little color. 
            I suppose that if we were to use this effect to detect climate change, then it would be required that in the decades of bright leaf color, this color would have to have been documented in some systematic way.  Did anyone do this?  No; not that I know of.  We all took pictures, but not in any systematic way.  We easily could have.  But how were we to know that a phenomenon which we had always taken for granted was about to disappear forever?

Thursday, October 21, 2010

GM Bailout Predicted in 1968


                  We live in a strange time. In the late 1960s, at the absolute apogee of leftist political ambitions, if someone had told me that I would live to see the day that our government would take over Wall Street (meaning, take over any of our major investment banks,) I would have thought this most unlikely. And if that someone had said that this takeover would occur under the direction of the most conservative Republican administration in recent history--that a Republican Secretary of the Treasury would be begging a reluctant Democratic Congress to take over Wall Street--I would have wondered what kind of hallucinogenic drugs they were using. Yet in 1968, I had already read Galbraith’s The New Industrial State, which offered a vague premonition of this turn of events to those who understood what he was saying. I‘ll return to that point shortly.
                  A couple years ago I read a piece about the work of the late economist Hyman Minsky,  who spent his life developing models proving that capitalism (the “free market system,” if you prefer) is inherently unstable.  According to Minsky, market based systems have to be tightly regulated, and even when very tightly regulated, they occasionally crash and have to be bailed out anyway. There is no avoiding it—it’s in the nature of the beast.  If there were any justice in the world, Minsky would still be alive today.  He would find it quite gratifying to hear former FED chairman Allen Greenspan testify that he was “shocked and dismayed that simple self-interest did not prevent the bankers from acting foolishly.”  But Minsky was not alone in his opinions; he was simply a Keynesian.
                  John Kenneth Galbraith, certainly a more famous Keynesian, maintained to the end that capitalism was systemically unstable, but didn’t waste his time trying to prove it. Having begun his career in the Great Depression, he would have considered this effort equivalent to proving that water is wet.  And if there were any justice, Galbraith would also be alive today, and so would Milton Freedman.  But alas, Galbraith spent his last years seeing Freedman accept a Nobel Prize for showing that markets were self-regulating, (and if government didn’t get in the way, everything would work perfectly.)  If the two men were both alive today, I’m sure Galbraith would derive a certain well-deserved schadenfreud at seeing Freedman testify before Senator Henry Waxman’s committee, trying to explain why the ideas that had won him a Nobel Prize didn’t actually work.
                  Yet, though the government bailout of the finance industry was astounding, the event I find more interesting was the bailout of the auto industry. Oh, they argued about it and wrung their hands over it for a while, but eventually, congress passed this bailout.  There really wasn’t any choice. The barriers to entry in auto manufacturing are so absurdly high that, once gone, the American auto industry would be gone forever. The American public would then be dependent on foreigners not just for fuel, but for cars as well. We would spend the next century sending dollars overseas for cars that could as easily have been made by American workers.  Some will tell you that we would still have American-made cars—just produced by Toyota and Honda.  I beg to differ. What we would have is American assembled cars.  And the foreign companies owning these factories would pay no American taxes, because by manipulating the price paid to themselves for component parts, they could insure that no profit was ever made in this country.  And in any economic downturn, when faced with a choice between laying off American workers or Japanese workers, what do you think they would choose? It is true that for a long time, Japanese companies provided us high quality cars at a competitive price. But  this was part of a long-term strategy to put the Big Three out of business. Once this was accomplished, we would get whatever quality they chose to supply at whatever price they chose to charge.  
                  In The New Industrial State, at the height of the cold war, Galbraith argued that if you were to tour a new factory in the Soviet Union and one making the same product in the West, you wouldn’t notice much difference. We both used almost the same technology. Yet every technology has its own requirements as to what kind of political, social, and economic structures it needs to support its continued function.  A good example of this would be ancient Egypt. At one time, the Egyptians had little or no government at all.  Five hundred years later, they had pharaohs with god-like power.  The pharaohs used that power to build great monuments, but that’s not how they got their power.  What happened is that the climate dried out, and they needed massive irrigation works to survive.  One man with one shovel cannot divert the course of the Nile. But a million men and a million shovels can—if they all work under a single authority. So the Egyptians made a radical change in social systems because that’s what was needed for the change in technology. Technology trumps ideology. So today, when East and West both adopt the same technologies, then they are both destined to move in the same direction in many other ways as well.
                  Galbraith pointed out there is not, and never has been, any such thing as a pure market economy, or a purely socialist economy.  Every economy is a mixed economy, employing several aspects of capitalism and socialism. We, and the Soviets, he argued, had a wide range of choices as to what kind of mix of systems we wanted.  But as technology evolves and makes more demands, the range of choices must become narrower for us both. As we both adopt the same technology, then we both end up moving toward the same point in social and economic systems as well.  He predicted that ideological purists on both sides would be loath to accept some of the coming changes. But their objections would be over-ruled.  Technology will trump ideology.
                  Twenty years ago, when the Soviets made an attempt to make a massive shift to market-based economics, it was done because the kind of classic socialist incentives and Marxist industrial organization in use no longer supported the modern industry they were trying to build. But they completely over-shot the mark. The result was a disaster. The Russians are now re-trenching, moving to a system that is about half-way between where we were and where the Soviets were in 1968. This is about what Galbraith would have assumed. But technology put limits on us too, as well as it did for the Soviets.
                  As to how technology places constraints on social systems, Galbraith gave the following explanation: If a large corporation (he cited General Motors as an example) decides to launch a new product, the lead time may be 3 to 4 years, and the sunken investment is enormous.  In 1910, there were 200 car companies, and new ones coming into existence every year.  Barriers to entry were minimal, and only a few months of lead time was needed to market a new product, and capital investment was modest.
                  But now (writing in 1968) Galbraith says, just designing the car will take over a year and tens of millions of dollars. In fact, even the alloys of sheet steel used may need to be custom designed to accommodate the specific draw-dies used to make stampings for a particular design. And after the patterns and tooling are made, another multi-million dollar campaign is needed to sell the product.  And even if a product is successful, it may take at least a three year production run to return capital costs. So when deciding to launch a product, a company is building for a market seven or eight years into the future.  Once it has committed this capital, what if the future it has prepared for doesn’t happen?
                  What happens is that the company goes broke.  But what if the company is too big to be allowed to fail?  In 1910, a dozen car manufacturers went broke every year, and this loss rarely affected anyone except the investors who owned them.  And even when Studebaker went down, it only trashed South Bend, Indiana. But if GM goes down, this would affect over 50 host communities, hundreds of suppliers all over the country, millions of workers, and trillions of dollars in stranded assets—it would be a national disaster. No country is rich enough to write off that big a loss. So there would have to be a bailout. But bailouts of this magnitude are also too big for any country to afford very many of them.
                  So what has to happen?  What has to happen is that once the money for a new product for a future market is committed, government has to ensure that this future actually happens, if it can do so. But what if it can’t.? Well, the other thing that has to happen is that there must be sufficient oversight by government to see that any business plans used by very large corporations fall within the range of futures which government can deliver.  (i.e., if a product requires cheap oil, and government isn’t sure it can deliver such a future, then it must veto any plan to build 8 mpg SUVs.)  Also, if taxpayer money is to be promised for any bailouts that may become necessary, then executive perks and total compensation must be well within limits which typical taxpayers would regard as reasonable.
                   It appears that in certain industries, we will end up with a quasi-public, quasi-private, industrial landscape that looks very much like what Galbraith saw in 1968.  And no one of any political stripe is going to like it—and Galbraith saw that too. 


Saturday, October 16, 2010

Peak Phosphorous; Another Resource War

     Farm columnist Alan Guebert said in his September 30th column that our next strategic problem might be phosphorous.  He quotes C. Robert Taylor of Auburn University, who says that the global phosphorus market is, "the gravest strategic issue facing the United States that you've never heard of."
    At current usage rates, the U.S. supply will be exhausted in 15 to 20 years.   After that, who owns and controls the remaining world supply of phosphorous may matter more than who controls the remaining oil.  China and Morocco together hold 60% of the world supply, and the U.S., South Africa,  and Jordan hold the rest.   China imposes a 100 to 175% tax on phosphorous exports.  And trade in phosphorous is dominated by just three corporations:  Cargill,  Potash of Saskatchewan, and a private Moroccan monopoly.  Which raises the question that perhaps BHP's real reason for wanting control of Potash of Saskatchewan--is for its phosphorous.

Sunday, October 3, 2010

Picking Lockes

                                The Ideas of John Locke in the Twenty-first Century

            As I concluded my comments on Iceland, its history, and its politics, I considered the following question:  Every society must find a balance between individual liberties and the rights of the state; between the right of private property, and the security of that part of the natural environment still held in common; and between personal responsibility and social responsibility.  It seems that Iceland has struck a balance that not only differs from the U.S., but also differs slightly from the rest of Western Europe.  Yet Iceland also differs from other Western democracies in one other way: they did not rely on the philosophy of John Locke as a founding principle.   Their democracy was founded in 930 AD, centuries before Locke was born.  While Iceland is the world’s oldest democracy, the second oldest is surely the federation of Six Iroquois Nations, whose parliament began about 1150, and still functions today.  (Originally, it was just the five nations—the Tuscarora did not join until 1742.)   The Iroquois took nothing from Locke, yet Locke, quite knowingly, took a great deal from the Iroquois.   And the Iroquois also took a different view of these issues, being different from the heirs of Locke in some of the same ways that Iceland is different.  Could there be a connection?

            I declined to write about this until I had the opportunity to think it through, and until I could re-read Locke’s Second Treatise of Government.  Having now done this, I can assure you that there is a connection.  If you have not yet read the series of posts on Iceland, it might be useful to do so before beginning this opus.  To read them in order, they are entitled: “Iceland, Day one”;  “Iceland, Day 2&3”;  “Iceland, Day four”;  “Iceland, Day 5&6”;  “A view of Iceland”; “Iceland, Early History”; and “Iceland, Recent History.”   You must page back into “older posts,” to find the first.
            First, let me explain that this is in no way an attack on John Locke. Locke is called the father of Liberalism, and as a lifelong Liberal, I would no more wish to attack Locke than the Delhi Lama would wish to attack the Buddha.  Locke was the first to articulate the universal right to self determination, self government, and individual freedom.   The basic ideas found in our own Declaration of Independence:  “….that all men are created equal, and that they are endowed by their creator with certain inalienable rights, and that among these are the right to life, liberty, and the pursuit of happiness; and that it is to secure these rights that governments are instituted among men, deriving their just powers from the consent of the governed…...” are a summary of Locke’s most central ideas.  (Except that Locke speaks of the pursuit of property, not happiness.)
            Locke not only provided a theoretical framework for self government based on consent of the governed, he also provided a theory for the origins of government, of private property, and of basic human rights.   He theorized that when man was in “a natural state,” he was utterly free and independent, and that all were equal, and that no man had the right to give orders to another.  What evidence did he offer?  He had carefully studied all information available to him about American Indians, especially the Iroquois.   He knew that the Iroquois claimed such rights, and he assumed that these people were “man in the natural state.”
            Locke says that while all men were originally free, they weren’t very secure, since if someone were to violate their freedom or seize their property, there might not be anyone to defend them.  They had a natural right to defend themselves, but that might not be effective. So in practice, men in the natural state might enjoy few rights at all, if their rights were routinely trampled by whichever bully wished to do so.  Locke felt that most men in the natural state would respect each other’s rights, but there would always be a few who did not. So men might bind together in groups and defend their rights collectively, and form some sort of government, with each man transferring to the government some of his right to use force in his own defense.  But, Locke emphasized, this transfer of rights to some state entity could be revoked if abused. People have the right to form governments—and the right to change them.
            Charles C. Mann, in his book, 1491—America before Columbus, reminds us how much Locke took from the Iroquois.  My own review of this book is in the archives of this blog.  Let me quote from it:
            The political institutions of the Indians were often as sophisticated as their agriculture. The Six Iroquois Nations had an elected parliament which dates back to about 1150 AD and which still functions today.  It is the second oldest representative democratic body on the planet, second only to Iceland.   The pre-Columbian Indians did not practice slavery, and their women enjoyed a status much closer to gender equality than European women at the time.  When English and French settlers first encountered the Iroquois, they were dumbfounded by their “outrageous” ideas, such as the belief that all men were by nature free—that no man could be owned by another—and that every man had an equal right to a voice in the governing of his country.  
            Europeans saw these “na├»ve and silly” ideas as proof that the Indians would always be “ungovernable savages.”  They also found such ideas so amusing that they were quickly reported back to Europe.  But not all Europeans were amused.  The philosophers of the Enlightenment took these ideas seriously and argued about them for the next hundred years. John Locke was particularly impressed.  He saw the Indians as “man in the natural state.”  So he assumed that Iroquois concepts of individual freedom and equality must be the natural rights of man.  Jefferson and the other framers of the American constitution were familiar with the writings of Locke.  They also had direct personal knowledge of Iroquois democracy, and knew that it actually worked.  Democracy is not an invention that can be patented, but if it were, the Iroquois may have the prior claim.  In any case, Western democratic institutions and ideas of freedom and equality probably owe more to the Iroquois than to the Magna Charta.
            Locke builds on this individual freedom to create a right of private property.  He asserts that before civil government, all property was held in common, but that individuals could appropriate to themselves a portion of the common store of resources to the extent that they required these things to live.  And they did not need the advance consent of the other stakeholders to do this, because they needed these things to live, and everyone has a basic right to life. The way in which common resources can become individual property is as follows:  all persons already have personal property in the form of their own bodies and the labor of their own bodies.  Every man owns his own labor. If, in extracting nature’s bounty, I have invested some of my own labor, then the useful outcome becomes mine alone.  Apples growing in the wilderness belong to everyone.  But if I invest labor into finding them, picking them, and carrying them back to the village, then they are not the apples of all mankind—they’re mine.  The apples represent the bounty of nature, and nature belongs to everyone.  But by the time they sit in a basket in front of my hut, they also represent an amount of labor—my labor.  And since the two values, natural value and labor value, are by then inseparably co-mingled, I may claim exclusive ownership, since if anyone else claimed a share of it, they would be confiscating some of my labor.  That’s where private property comes from—the mingling of one person’s labor with goods previously held in common.   The fish in the ocean belong to everyone—until some individual goes to the trouble of catching some of them.  The same applies to land.  If I find a piece of wilderness land that no one is using, it’s mine to use if I wish to use it.  And if I make “improvements,” such as clearing off trees,   ploughing and planting, and building fences,  then not only does the produce become mine, but the land itself,  since by then the overwhelming majority of its value owes to improvements wrought by my labor—not to the original value of some worthless piece of wilderness land.  The land, according to Locke, was in and of itself nearly worthless. Only my labor made it worth something, because only since my investment does it produce anything useful to humans.  He believed that God gave the planet to humans, and only to humans, and He intended that humans use it for their needs.  So for Locke, the only measure of the worth of anything is what it produces that is useful to humans.  (I should point out that in 1689, there were few in Europe who would have disputed this point.  The wilderness which we today define as priceless was in Locke’s time deemed worthless.  And the Bible, which Locke quotes and which Europeans did not then doubt, clearly says that God gave man total dominion over the earth and all its creatures.)  Locke gave two reasons why undeveloped land was nearly worthless:  Firstly, it produced nearly nothing, and secondly, there was a limitless supply of it.  He conceded that in some areas, such as most of Europe, most of the arable land was taken.  But he claimed that worldwide, even considering the whole earth’s population, if one were to consider the Americas, there was at least twice as much land as the human race could ever use.
            Did Europeans have the right to take American land?  Locke claimed that they did.  Why?  Because the Indians were not really using it.  Locke totally misunderstood how the Indians used the land.   He assumed since the Indians did not enclose or plough the land, or build permanent structures, they were just occupying the land, not actively using it. As Dan McGovern points out in his excellent book, The Campo Indian Landfill War, prior to the coming of the white man, Indians used fire to actively manage their environment, and did so more effectively than it has ever been managed since.  Charles C. Mann makes the same point in 1491—America before Columbus (Reviewed in these pages—see archive.)   But Locke argued that since the Indians were not “using” the land, any European farmer could rightly seize and use as much as he could personally farm, and by “improving it,” the land became his own. Thomas Jefferson understood how the Indians used land, but felt that they did not use it very efficiently. He argued that any European farmer could feed thirty times as many people on the same quantity of land, so in a world of hungry people, long term survival of the “savage” way of life was difficult to justify.  All throughout the colonization of America, the Locke principle of taking from nature as much land as you could personally use, and making it your own by improving it was the operating principle. Even the Homestead Act would give anyone 160 acres, but only if he lived on the land, worked the land, and “improved” the land.
             So Locke’s first major flaw is that his theory, by misunderstanding how Indians used the land, allowed us to appropriate Indian land with an easy conscience. But with Europe bursting at the seams, we surely would have taken this land anyway, and somehow justified this taking.  Any society that can justify slavery can justify anything.  And even John Locke could justify slavery.  He said that although all men were born free, it was possible for a person to act so as to lose that freedom; (e.g. if a person did something to deserve a death penalty, and his judges were merciful and sentenced him to a life of slavery instead, he should have no complaint, because if he thought slavery was worse than death, he could always provoke his master to kill him.)  Well, in practice, it doesn’t work out that way.  What percentage of slaves shipped out of west Africa were convicted murderers?  And what about those born into slavery, a situation which had already become legal in the colonies at the time he was writing?
            While Locke only briefly mentions slavery, (3 paragraphs) he devotes a full 26 paragraphs to defending private property, including the acquisition and hoarding of unlimited amounts of private wealth.  He says that originally, when man was in the natural state, everyone was allowed to take from nature as much as he could use. If a man took a dozen fish from the lake and he and his family ate them all before any of them spoiled, that was fair.  But if he caught more than he could use and some of them spoiled, this was a crime against all others who might have wanted those fish.  This limitation of not taking more than you could use kept everyone fairly equal.
            But, says Locke, all that changes with the invention of money.  Gold is not actually useful.  You can’t eat it, burn it, or ride it. But at some point, civilized men, by common assent, agreed to accept gold and silver in exchange for things that are useful—for food, fuel, and fiber, etc.  And with the rise of commerce, it happened that some men accumulated more gold and silver than others.  But this is no crime, since gold does not spoil and nothing is wasted.  If I catch twice as many fish as I can eat and trade the excess for shiny metal, all of the fish are still eaten and nothing spoils.  So by hoarding gold, I am keeping gold out of circulation and depriving others from having it, but gold is not useful.  And nothing that is useful is withheld from anyone.
            Why would Locke take such pains to construct such an ingenious defense of unlimited private wealth?  He was not a disinterested party.  By 1689, he had become extremely wealthy, and so were most of his friends. And why would an essay which is mainly about freedom use such convoluted logic attempting to defend slavery?  Locke had made his money from stock in many British companies, and they all in some way profited from slavery.
            Locke was personally conflicted, but no more so than any other affluent Englishman of his age.  Yet he established the right to self government, to personal freedom, and to private property.  These are of great value. He built a great house, and we all live in it.  I have no desire to burn it down.  The trouble is that some of the foundation blocks he used in building this house were badly cracked and have now begun to crumple.  Our task should be to carefully remove and replace these flawed blocks, while preserving the house.
            So, which of Locke’s foundation blocks would I replace? Three mainly—and I’ll list them in ascending order of importance:  That the only measure of value of anything is in the goods it can provide for humans; that wilderness land, (“unimproved” land) is nearly worthless; and that these undeveloped lands are available in unlimited abundance.
            Locke may be forgiven for his first error.  In thinking that the only measure of value was what could be directly used by humans, he failed to understand that almost every species on the planet indirectly affects humans.  We breathe oxygen from leaves in the upper Amazon, wild insects pollinate our crops, phytoplankton sustains our fisheries etc.  We can forgive him for not knowing this, because until after WWII, few people anywhere knew it.  In fact, we are only now beginning to understand the complex ways in which all life is intertwined.
            For his second error, he should have known better.  If you think an acre of untilled land has no value, let me ask you this:  Have you ever tried to make an acre of dirt?  One of the first official government actions in the United States to recognize the importance of unexploited land was probably the creation of Adirondack State Park in NY in 1892. Larger than all U.S. national parks combined, this area was set aside by New Yorkers--who had already seen what “development” had done to the Hudson Valley, some parts of which were by then an open sewer. Though it had once been the most beautiful river in the East, by the mid nineteenth century, much of the Hudson was ruined.  They feared that if the same logging were done in the Adirondacks, it would destroy needed watershed, silt up the Erie Canal and the Hudson, and leave an area so eroded as to look like the surface of the moon. In 1894, a constitutional change provided that Adirondack Park must never be developed—must remain “forever wild.”
            But for Locke’s last error--his claim that unused land would always be available in limitless abundance-- it is difficult to see how such a logical man could say something that outrageous.  The only explanation may be that Locke and his contemporaries, amazed by the vastness of the New World, were in the same position as a pack of feral Chihuahuas who stumble onto the carcass of a beached whale.  While a feral Chihuahua might understand intellectually that a very large whale is not at all the same as a “limitless” whale, from his standpoint it might as well be.   So when was it first appreciated that the New World lands were not unlimited?  Probably by 1798, the year Thomas Malthus published; and certainly by 1823, the year of the Monroe Doctrine.  The next milestone was 1890, when the Superintendant of the Census announced the closing of the American frontier. Many at the time worried that this closing would profoundly alter American society. They felt that the frontier had been central to the development of the American character, and without it, things would be radically different.  And they were right, though the expected change was not immediate, but slow and gradual.  The frontier had always been a social safety valve.  If wages in your eastern factory job were appallingly low, your boss could always say, “So, if you’re not happy, go west, get some free land, and make your own deal.”  If rent for a tenant farmer in the east was too high, the remedy was the same--- “Go get your own land.”  At least for free men, there was no problem that 160 acres of free or cheap land could not address. But with the frontier closed, then all of the old problems would have to be re-examined, and eventually fixed.  The widespread belief that there will always be enough resources for everyone allows a society to defer necessary social investments; and this is true whether this belief is grounded in actual historical experience of resource abundance or simply in a blind faith in John Locke’s promise. Yet once you admit that the things that sustain life are limited, and that everyone has a right to live, then a winner-take-all society can’t work.   Germany may have been the first to see this, as they established an old age pension plan in 1870. 
            Locke claimed that for one man to have vastly more than an average store of goods did not make his neighbors poorer.  This was true, he said, because the rich man was richer only because he worked harder, not because he controlled more resources. Undeveloped resources were in limitless abundance; hard work was the only missing ingredient.  Of course, if he was wrong about the unlimited resources, then he would be wrong about whether one man having more goods condemned another to have less.  And this would explain why free market conservatives have hung on so tenaciously to the idea of limitless resources, even if it’s a mathematical impossibility.
            We should expect that the degree to which a society demands and accepts redistributive economic policies should vary inversely with the persistence of the myth of a limitless resource base.  The United States has both a direct connection to Locke, and actual historical experience with free land, and therefore the strongest acceptance of this myth.  England has a direct connection to Locke, but no free land experience.  Continental Europe has only an indirect connection with Locke, and no free land experience, and Iceland has none of the above.  Iceland was founded in 930 AD, centuries before Locke; and even at that time, most of the usable land had been claimed.
            At this point, you may expect that I will launch into a detailed analysis of Icelandic law and social programs. No, that would take five years of research and produce a 900 page tome that I do not propose to write and that you would not care to read. Suffice it to say that modern Icelanders are more willing than most to admit that there are hard limits to what can be produced, and also more willing to submit to redistribution of that which is produced.  And the two go together.  If you’ve read my post on Iceland, then you are aware that their entire food and fiber base rests on a fishery and a narrow strip of coastal land. Imagine trying to convince an Icelander that good farm land is infinitely abundant.    Imagine trying to convince the Iroquois, who had fought many bloody wars over land, that land is infinitely abundant. They would see the falsity immediately. Though our situation is more complex, the falsity can be seen here as well, unless we try very hard not to see it.