Volume 2, Number 43
24 April 2002

The Commanding Heights

Dear Friends,

When Lenin introduced the New Economic Policy in the Soviet Union in 1921, he declared that the "commanding heights" (large-scale industry, foreign trade, banking, and transport) would be managed by the state. Later on, the USSR brought all business and agricultural enterprises into state ownership. The commanding heights therefore refers to the ability to pull strings (regulations) that tell the economy to act this way or that.

On three Wednesday evenings (April 3, 10, and 17, 2002) Public Broadcasting presented Commanding Heights, an overview of the world economy during the twentieth century. The gist was that early in the century the governments of many countries decided that market principles were not working fast enough to alleviate poverty and to distribute income and wealth well enough. Therefore (in country after country) the government pulled the strings of the economy as if it were running a puppet show. By the end of the century, it became clear to most that manipulating the economy was not working. Economies were devastated and increasing numbers driven into poverty. The Soviet Union and other socialist states, plus India, Chile, Argentina, Bolivia, and Mexico were prime examples. I could add several more where I have had professional experience. The main reason was that governments either did not know enough about the billions of transactions they were trying to control or they became mad for power. Corruption is rampant. Now deregulation is sweeping the world, and free markets are being re-created everywhere.

Whenever the government assumes control of the commanding heights, it pits the power of the politicians against the power of the market. The market is the outcome of decisions made by billions of individuals, each acting in his or her own interest. Every transaction (such as buying and selling) in a free market — without coercion — implies that both parties feel their welfare is improved. Most economists say that this mutual improvement — multiplied billions of times — constitutes the most advantageous society possible. Adam Smith argued (1776) that one cannot act in one's own interest in an uncoerced market without satisfying the interest of someone else. Therefore a free market economy is led by an "invisible hand," which he thought was the hand of God, to produce those goods and services that most satisfy the people, at the lowest cost and saving of resources possible.

Those who would seize the commanding heights declared that this argument was fallacious. Monopolies spoil the opportunities of others. (Smith made the same criticism). While bargaining in the market improves the conditions of both sides, nevertheless the bargainers do not start from positions of equal power. Often they are poor, powerless. Nor does the market prevent depressions, which cause many to be unemployed, some even starving.

Part One of PBS's Commanding Heights dealt with depressions. Before the 1930s economists widely believed that a depression was a temporary imbalance caused by wrong guesses: consumers demanding different goods from those producers had guessed. Once the imbalance was corrected, the economy would straighten out again. Or, they believed that overproduction had produced a glut, and once the excess goods were drawn down full employment would return. As the Great Depression dragged on, an English economist, John Maynard Keynes, proposed that a depression was not necessarily self-correcting. If savers were so discouraged that they would not lend for capital investment, the depression might go on forever. From this, some economists (known as Keynesians) concluded that government expenditures could jump-start an economy. Franklin Roosevelt "bought" this idea with the New Deal.

The first part of Commanding Heights deals with attempts to control the macro-economy by manipulating total government expenditures (borrowing as necessary) and adjusting the interest rate. While watching this, I felt my life being re-run: I was in college from 1937 to 1941, studying economics, when Keynes's book (published in 1936) swept the field. I became a thorough Keynesian and remained so through graduate school. Friedrich Hayek, the Austrian economist who thought Keynes was leading us down "the road to serfdom" (his 1944 book) was a "reactionary devil."

But Commanding Heights shows that deficit spending did not always alleviate depression — not even usually. Furthermore, while Keynesians proposed that the government borrow during depressions and pay back during prosperity, in fact they would not pay back. To no ostensible purpose, government debt continued to mount. Hayek's popularity gained relative to that of Keynes.

Macro-economics — the study of national income, over-all employment, and fiscal and monetary policy — was born with Keynes. It so fascinated me that I wrote my first book on that subject (Economic Accounting, McGraw-Hill 1955). But when stagflation (simultaneous inflation and stagnation) — impossible under Keynesian theory — hit us in the 1970s, I joined many other economists in changing my mind.

After World War II, the temptation to speed up the economic development of poor countries once more led governments to seize the commanding heights. But now they depended more on traditional economics, or micro-economics (the study of which particular goods and services are produced, and how resources are used). By dictating the amounts of consumption and investment, and setting their prices by fiat, economic planning violated the rules of the market, all over the world. We thought that forcing investment would speed development. I became an economic planner, advising governments on how to do it.

Once again I was wrong. The second part of Commanding Heights shows the failure of micro-planning. Instead of responding to the needs of "the people," planners fed their own egos. They passed laws designed to give themselves power to grant licenses and privileges, then they demanded bribes to grant them. Setting up a business became so onerous that many would operate on the "black" or "informal" market, where they constantly broke the law. Had they not done so, many economies would have gone bust (like Argentina today).

These were the conditions in virtually all countries in Latin America, Asia, and Africa. Interest groups (such as labor unions and businesses) would vie for the favor of the government. Among the responses were requirements that a business could not fire a worker without paying up to several years of salary. So businesses found ways not to hire. Many used machines instead of labor. One government enterprise in Mexico shut down but still had to pay its workers. It would bus them in to the factory, where they would sit idly all day, and then bus them home again.

During my career as economic advisor, I gradually came to understand that I was a lacky for the wealthy elite. They rarely communicated with the poor, and their purported interest in the poor was hypocritical. On one occasion, the planning team that I headed up in an African country decided to transfer resources from road-building to small-scale agriculture. The minister who oversaw road-building was furious because he had already let out contracts for five years in excess of what we had proposed. He got his way. On another occasion, high civil servants wanted to keep interest rates low so that they might borrow cheaply from a development bank that they owned, to build a tourist hotel — in a country where agricultural extension services were virtually nil and education grossly underfunded.

Micro-economic planning could not last forever, because governments could not finance all they had planned, and they had planned vast projects the market could not sustain. (One saying among economists was, "Don't plan vast projects with half-vast ideas). Part Two of Commanding Heights tells about its failures in country after country. How the Soviet Union and Argentina collapsed, and how China, Mexico, India, and others are selling off their bloated state enterprises and deregulating their economies. Even the United States is deregulating, slowly. Finally, at the turn of the twenty-first century governments are coming to understand what economists knew in the nineteenth — that the free market provides the greatest employment, the highest wages for workers, and the most egalitarian distributions of income given the resources of the country.

If you criticize the free market — and I encourage you to do so — please do not criticize it in a vacuum. Always tell what your alternative is.

The third part of Commanding Heights takes us up to the present, including the protests against the World Trade Organization, the International Monetary Fund, and the World Bank. The protesters have a message: we have not yet arrived at a fair and equal economic world.

But globalization has brought millions of jobs and higher incomes for the poor all over the world, even though most countries have not yet broken the bonds of poverty. (The poor are getting richer, contrary to much belief; I'll do another TQE on this in the future). Commanding Heights shows how representatives of the Third World have overwhelmingly favored globalization, but they complain (correctly) that the rich countries do not practice what we preach. We and the Europeans still maintain tariffs against Third World products, such as textiles. Toward the end of Commanding Heights, the President of Tanzania is shown declaring that his country would gain much more by selling its textiles to the United States than it does by receiving foreign aid.

Commanding Heights maintains (and I agree): if you are going in the right direction, don't turn around just because you haven't arrived. Globalization and free trade have come a long way toward economic justice, but we still have a long way to go.

If you want a copy of the complete tapes and/or book for Commanding Heights, phone WGBH in Boston at 1-800-255-9425.

Sincerely your friend,

Jack Powelson

Readers' Comments:

Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.

Jerry Frost, retiring head of the Quaker library at Swarthmore and history lecturer, reminded us at a Pendle Hill lecture that Quakers during the 1800s saw free markets as the path to peace. According to Frost, British Friends backed peace groups with free trade agendas but made sure they were led by Church of England types so they wouldn't be negatively branded as tools of Quakerism. It was a lecture on the peace testimony, not economics, but it seems to fit your argument.

— Signe Wilkinson, Chestnut Hill (PA) Friends Meeting.

Your comment that we should ignore the mansions of the multi-billionaires is on target both practically and morally. I see that some of your correspondents have forgotten, or do not care about, the Commandment against coveting. I think that breaking this Commandment has caused more harm than any other. If it had been kept, we would not have had any of the evil communist movements of the last century that brought the death of millions and the misery of hundreds of millions. And we would have a happier, more productive society today.

— Judy Warner, Lutheran, Rohrersville (MD).

P.S. I enjoyed the typo that identified someone as being from a "Fiends Meeting." It gave me a few minutes of amusement imagining what a Fiends Meeting would be like.

This piece is excellent — and it is encouraging that your education and change of perspective continued throughout your life. Alas, too many people I know still have the same ideas and worldview that they had in their 20s — never adjusted, never updated and never truly tested for reality.

— Michael Schefer, Jewish (non-attending), Philadelphia PA, children in Germantown Friends School.

While viewing The Commanding Heights I was struck by the contrast between "that of God in everyone," and "that of control over everyone." TQE #44 introduces "greed." The 20th century champions of greed were the left-wingers. They wanted and got, to varying degrees, something for nothing — redistribution rather than creation. Their systems were unsustainable and collapsed with tremendous economic and human costs. Being coercive and monolithic, they contained no inherent self-correcting mechanisms. In modern capitalist economies most people get something for (almost) nothing, too, but at much less or almost no cost to others because capitalism is largely voluntary and diverse. The East Asian failures, Brazil and Argentina also have great costs, and by not controlling everyone the capacity for self-correction is greater, faster and more humane. Why? Could it have anything to do with "that of God in everyone," a more elevated view of the individual? In any case, we still have some distance to go.

— J.D. Von Pischke, a Friend from Virginia (editorial board member).

Hi, my name is Brandon I am fourteen years old and live in Los Olivos California. I am very interested in politics. I am a big follower of the Republican Party. I heard about you from my neighbor Tom. Los Olivos is in Central California and in Santa Barbara County. I am in the eighth grade. Please tell me what you have done in your life and a little bit more about you.

— Brandon Griffith, Los Olivos, California

Reply: Thank you, Brandon, for your interest in me. If you will send me your snailmail address, I will send you, with my compliments, a copy of my Quakerback book, Seeking Truth Together, which tells about me and what I have done. If you need more information, visit my web page at http://spot.colorado.edu/~powelsoj, where you will find my Vita. If you have any more questions, write again. Jack

The summary of the "commanding heights" seemed to imply that there is nothing more to do in both advanced and developing countries than to let free markets do their thing. This is not correct, as even in theory free markets cannot do many things. First, capable, honest institutions are needed to oversee the markets to set the rules and make sure they are followed--these activities are on the financial pages of our newspapers every day, Enron, Microsoft, Merrill Lynch, etc. Second, we must have monetary institutions and policies that no free market will provide. Third, we must have legislative and fiscal institutions to decide and spend funds on public and merit goods and transfer payments, influence income distribution by determining who bears the tax burden, and decide how much of a deficit or surplus is needed; free markets cannot do any of these things. Fourth, we must have institutions to control the effects of private markets on the public and global commons — air, water, oceans, wildlife, etc. Fifth, we must decide who can immigrate to our country. All these activities are accepted by both political parties in the U.S. and elsewhere, and our newspapers are full every day of controversy on carrying out these activities. Even the most doctrinaire free market Friend can participate in the Friends Committee on National Legislation with a clear conscience.

— Bill Rhoads,Germantown Meeting, Philadelphia. [PA]

I agree with most of that. My major lifetime opus, which took a quarter century to write (Centuries of Economic Endeavor, University of Michigan 1994), is about how and why these institutions were formed in the Western World and Japan, and how and why they developed much less and more slowly in the rest of the world.— Jack

I have recently heard quite a bit about the merits of limiting a CEO's pay. I remain unconvinced. My reasons:

  1. We live in a market economy. That includes labor markets, where people sell their knowledge, skills, and abilities on the open market to the "highest bidder." Isn't this what capitalism is all about?
  2. American culture encourages people to achieve the highest rank possible. By limiting the pay of a CEO, we would be punishing the CEO for being successful.
  3. We aren't Japan or Europe. Our economies and ways of life are different. It's quite possible that the reason American CEO's are paid more is because we value their work more (in an economic sense) than Europe or Japan.

— Beth Stevenson, Friends Meeting of Boulder (CO), now in college in Tulsa (OK).

  1. Why can't we have a vibrant free market and restrain the massive inequality of income by a truly progressive income tax as does Sweden, I believe, so that no one can retain huge earnings? Would that dry up the urge to earn more money? If being the CEO meant earning a top salary much less than what one earns now, would that mean competent people for the job wouldn't seek it?
  2. Who will restrain the free market from actions that help the corporation but harm the general welfare, such as polluting the environment, selling unsafe products, or running an unsafe factory? Doesn't the government have to do that by enforcing regulations?
  3. Does the free market work best for all services, such a medical care? If the government provides some services such as water and roads, why not health care?

— Arthur Rifkin Manhasset (NY) Friends Meeting.


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Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

  • Roger Conant, Mount Toby Meeting, Northampton, MA.
  • Caroline Conzelman, Boulder (CO).
  • Ann Dixon, Boulder (CO) Meeting of Friends.
  • Virginia Flagg, San Diego (CA) Friends Meeting.
  • Merlyn Holmes, Boulder, Colorado.
  • Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA).
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor.
  • J.D. von Pischke, a Friend from Reston, VA.
  • Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

This newsletter was formerly known as The Classic Liberal Quaker.

Copyright © 2002 by Jack Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

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