Wednesday, February 27, 2008

More on Hamiltonian Government

Governments face three problems that place limitation on what they can do. First, governments have a problem with incentives. The intention behind many government programs and policies tend to be good and praiseworthy. Most of the people that work for a government are honorable and well-meaning individuals. The problem is aligning objectives with incentives so as to achieve and continue to achieve the goals that the programs or policies are attempting to achieve. Appropriate incentives are often difficult to set anywhere, but in government, where there are so many things that people want to accomplish, incentives are not always clearly defined or clearly understood. It is easy in the business world to say that the goal of a business is to maximize shareholder wealth. It is not so easy to define such specific goals in the world of government. Furthermore, objectives may change over time. Many agencies set up by the government, say, to regulate an industry, often become advocates for the industry over time.

Second, governments don’t come close to having all of the information they need in order to resolve the problems that the proponents of government would like them to solve. Friedrich Hayek pointed this fact out many years ago. For example, a large amount of the information needed to execute a government program or policy is ‘local’ information and is present only in the dispersed locations of those affected. Gathering information is costly and the costs of obtaining more and more information are generally not linear. Thus, to get the appropriate information to a centralized location so that a decision can be made, return the decision to the local authorities and then execute the decision at the local level is both expensive and time consuming.

Third, governments are less and less able to keep up with the speed at which the world is changing. Today, even businesses have trouble keeping up with the pace at which change is taking place. The problem is right there from the start of a program or a policy. Programs and policies never seem to be developed in anticipation of something happening. Most politicians don’t want to go out on a limb and introduce legislation for a problem that doesn’t exist. First of all, no one else will be interested in the legislation because it is not a pressing need and in the second place, there are too many other things a politician has to respond to that tend to grab his/her attention. The response in the U. S. Congress to the problems in housing is a case in point. The problem has occurred. Congress is trying to respond to the pain.

The difficulty with this is that by the time the programs or policies are enacted, staffed and execution attempted, the world has moved on. Governments, both bureaucrats and politicians, are, in a real sense, always fighting the last war. And, with events occurring within shorter and shorter time intervals, this difficulty is going to get worse not better.

The conclusion one reaches from considering these three factors is that governments have difficulties getting people to do the things they want done, don’t usually have the information they need to make the decisions that need to be made, and tend to be behind the curve in terms of executing and administering the programs or policies it does put into place. Any one of these difficulties can reduce the effectiveness of a program or a policy. If all three of them are working the hopes for the successful delivery of a program or policy can only be wishful thinking. If this is a realistic description of the environment that a government works within then the programs and policies that the government does enact and administer should take these factors into account.

Let’s discuss these issues a little further. In terms of information, I believe that the government should encourage and support the spread of information throughout a society. And, improving the flow of information should be a goal of the government itself. That is, a government should encourage as much openness and transparency of its operations as possible. It is interesting and important to me that someone like former Treasury Secretary Robert Rubin in his book “In an Uncertain World: Tough Choices from Wall Street to Washington” argued very strongly for openness and transparency in his efforts to resolve important issues that impacted not only his Treasury Department, but the whole of the U. S. Government, foreign governments, and the world. In an uncertain world, restricting or limiting information is not helpful and we should err on the side of too much information rather than too little. I will say more on this in another post.

Government programs and policies affecting the private sector should be aimed at setting up and achieving process; not outcomes. What I mean by this is that a government should set up the rules of the game and then oversee the maintenance of this process. Establishing and maintaining private property and the rule of law are major components of a government that wants to support a free and open capitalistic society. What is important here is that the government facilitates the operation of the society, it does not dictate the results of the society. Incentives can then be established relative to the creation and establishment of the process and not toward specific output goals and objectives. This is important in an uncertain world.

Finally, government programs and policies must transcend the need to be real time orientated. The problems and difficulties of a society should be attacked by the problem solving and decision making capabilities of those within the society itself. Not only are the individuals directly impacted by these problems and difficulties immediately involved with what is going on, they are the first line of defense in the society to resolve them in a timely fashion. What the government needs to create are programs and policies that provide the people and organizations within the society with the tools and information sources they need in order to operate as efficiently and effectively as possible. It is the private sector that must adjust to changing situations, not the government.

In terms of this last point, one cannot say enough about governmental programs and policies that support education and the education system in the society. Not only does a first-class education system provide positive externalities within a society like a highly educated and networked work force, it also creates problem solving skills and the ability to find information and use information in the best ways possible. The support of programs and policies for a superior education system transcends the ‘real time’ problem faced by those programs and policies of a government aimed at responding to a current crisis. The educational system will help to create individuals and organizations that are present and capable, and have the tools to handle these situations in a smoother, timelier, and more incremental way.

This brings us back to two major issues of modern society: change and the ability to meet change. A highly educated and networked society is going to be causing change to take place. Learning takes place by absorbing new information, relating that information to what is already known, and then using this relationship to solve more complex problems and make better decisions. But, solving more complex problems and making better decisions moves the society along: it creates change. The ability to meet change comes from the same process. People must not be afraid of new information. It is the fear of the new, fear of new information that creates a resistance to change. A highly educated and networked society learn that new information, if smoothly incorporated into the society’s base of knowledge, is not a threat. The change that accompanies the spread of new information should be viewed as an opportunity, not an enemy.

Wednesday, February 20, 2008

The Role of Government

What role should government play in a society? The Libertarian right away says that the role of government in a free society should be minimal and limited to just those things that the private sector cannot do for itself. The socialist, on the other hand, argues that property and the distribution of wealth should be controlled by a central organization within the society, one such organization being a governmental body.

I argue that each of these extremes is a child of academic/intellectual mental gymnastics and promise very little to us in the way of practical application. Neither works when tried! A purely unfettered capitalistic market system can result in behavior that many would say is uncivil and unfair. Incentives are the hallmark of a capitalist system (see “Feakonomics” by Leavitt and Dubner) but, in unregulated markets there are strong incentives to cheat as well as to perform morally. Libertarians tend to cover this problem by saying that a free society does have to have a basic moral system (where does it come from…religion?), private property, the rule of law, and an infrastructure (roads and police protection?).

Can a socialist society succeed? It seems that the history of the last twenty years provides many examples of socialistic societies that have left their people impoverished, uneducated, and backward in terms of the advancements of the modern world. Those still defending socialist systems contend that these experiments really were not ‘pure’ and hence are not representative of what could be achieved in a ‘real’ socialist society. They argue that these societies had individuals that worked against “the people” and this tended to derail the honest attempts to bring the socialist ideal into practice. Of course, those societies, which included Russia, China…and Cuba, attempted to severely repress the ‘disruptive elements’ and these efforts resulted in large scale imprisonments and executions.

In reality, governments exist and they are going to exist. But, these governments are not going to be small and minimal relative to the society as a whole, and they cannot attempt to exercise control over major areas of the lives of people that make up the society. It was argued in the post of February 13 that a society needs to achieve an appropriate ‘balance’ between competing ends. Liberty needs to be a major part of a society, but, liberty also needs to be tempered by behavior that creates positive externalities for society as a whole.

Externalities arise when individuals or organizations are positively or negatively affected by the decisions of other individuals or organizations, but the party causing the externality does not receive a benefit, in the case of positive externalities, or bear a cost, in the case of negative externalities. An educational system can create a positive externality for a society because having an educated workforce tends to benefit the society as a whole and not just the individuals that are educated. The basic example of a negative externality is the organization that creates pollution that affects other parts of the environment.

David Brooks, a columnist for the New York Times, has suggested that we need to assume a more Hamiltonian (after the first Secretary of the Treasury, Alexander Hamilton) approach to what the government does. He defines a Hamiltonian policy as one that supports free market capitalism but helps the people get the tools that they need to compete in it. These policies can include the rights and privileges associated with private property, the rule of law, and the security and protection to conduct business and enjoy life as well as a well functioning financial system, the encouragement of enterprise, and education. These policies can also include unemployment insurance, a more universal health insurance and other programs that can help people in transitional or disruptive situations.
For a representative sample of his writing in this area see the following articles:;; and

Where do I come out on this? Let’s go back to basic assumptions. The Libertarian begins with the assumption, coming from the Enlightenment, that human beings were originally ‘free’ and ‘at liberty.’ Since this was the natural state of the human being, society should be set up to provide the members of a society with as much freedom as possible. The Socialist contends that positions of power exist within a society and unless the powerful are controlled by a benevolent body excessive poverty and inequality will result in that society. These assumptions, in one way or another, are foundational to the different approaches to defining the role of government within a society.

I believe that neither of these assumptions are a realistic foundation for the determination of the role of government in society. My basic assumption about human beings is that humans are problem solvers. All life, to some extent, is composed of problem solvers, but the human species represents the highest development of this talent. The evolution of this skill to its current level has allowed humans to far outstrip the capabilities of any other species that we know of. And what is the goal of human problem solving? It is to allow humans to make better and better decisions and solve more and more difficult problems.

Since individual humans are limited in their ability to solve problems, they found that they can augment their individual problem solving skills by organizing. Families, groups, communities, and governments are ways that humans organize to make better decisions and solve more difficult problems. People are different…they bring different skills and knowledge to the table. Organization succeeds by combining the specialized skills and knowledge of diverse people so as to leverage their differences in order to achieve more than just what the individual can do. Organizing people that are all exactly alike in their skills and knowledge gains little or nothing in terms of the ability to solve problems. Thus, my basic assumption is that human beings are problem solvers and this is based on biological science, not utopian thinking.

The government, therefore, is just another organization set up to help humans make better decisions and solve more difficult problems. But, for a government to work effectively it must access the different skills and knowledge and diversity that exists within a society...all of the society. Since the government represents all of a society, the members of the society have a vested interest in the decisions that the government makes. Thus, to fully access what people bring to the society, the government must be open and transparent to the individuals that make up the society and must allow for debate, discussion, and dialogue on all the issues confronting the government. Modern society and the spread of information have made this more and more necessary. Every day we see that governments that don’t recognize this fact face severe problems and tend to be on the defensive!

What does this have to do with the idea proposed by Brooks that emphasizes Hamiltonian policies for government? To me, Hamiltonian programs and policies create positive externalities that can be achieved through governmental organization: these cannot be obtained through private means. For example, some situations or issues exist in which there are conflicting interests that can only be resolved by bringing together the different members of the society. Here negotiations, rules and regulations and laws are important. Positive externalities are gained by reaching a balance that everyone can work with. There are some situations or issues in which everyone has an interest and can be solved by creating programs or institutions that benefit both individuals and society. Here positive externalities can be achieved by the creation of an educational system, an interstate highway system, unemployment insurance and so forth. Thus, we are looking for government to find ways, policies and programs, that allow human beings to do what they do best…solve problems. More on this next week!

Wednesday, February 13, 2008

Politics as the Art of Maintaining 'Balance'

Democracy is a system that achieves and maintains balance in a society as well or better than any other system around. By achieving balance I mean that a democracy is able to take all the competing ends that exist within a society and craft a solution that weighs as well as possible all of these ends. And, a democracy can maintain some form of balance over time at least as well as any other system of governance. Now, this doesn’t mean that it always gets the balance ‘spot on’ or that the balance doesn’t change over time, requiring a modification. All that is meant here is that it seems to be the ‘best’ of the imperfect systems that are available to us.

An example can be found in the tradeoff between personal liberty and security that was brought into focus in the United States after the 9/11 tragedy in 2001. Before the events of that day, the United States had achieved and maintained one ‘balance’ of these two items, but after the attack the ‘balance’ moved more toward the goal of achieving security and protection from terrorism and away from personal liberty. In all probability, exactly where this ‘balance’ resides in five years (or in ten years) will be someplace different than it is today.

The crucial element in all of this is that where a society decides to be at any one time changes and the society must be able to adapt as smoothly as possible when these changes are required. Nothing stands still and nothing creates more problems for a society than being ‘locked’ into a certain tradeoff when, in fact, the people desire another tradeoff. But, science changes, technology changes, the composition of a society changes in many ways, in terms of gender, ethnicity, religion, age, and so forth. For example, the advent of cars changed things as did the introduction of television, contraceptives, and stem cell research. These changes affect a lot of different people in a lot of different ways and adjustments must be made, compromises accepted, and relationships maintained for society to go on. And, one could argue that incremental changes are better than discrete jumps.

On the surface, however, a society never really seems to move incrementally. For one, major changes seem to take place in response to specific historical events. The balance of the role government played in the United States was significantly changed during and after the Great Depression. The Second World War cemented these changes or continued the movement toward more governmental involvement in the society. The Cold War had its impact on the location of the ‘balance.’

Another reason why changes seem to be made in leaps is that the people, as a whole, tend to be somewhat conservative in nature. Once a certain balance is achieved, there seems to be a certain reluctance to change what has seemingly worked over time. Only when an imbalance arises and becomes particularly acute does it seem that people move onto a new balance that may be at some distance from where the previous balance had been located.

Yet, there is still a lot of change in the balance of society that does take place incrementally. These are the changes that do not gain so much publicity or that do not raise the emotions of people to the level that other issues do. These kinds of changes add up over time and lead one to reflect, from time-to-time, on the question of ‘How did we get here?’ And, many of these changes are not so much ideologically driven as they just happen to make things work better.

Then there are the efforts that are ideologically driven. In recent years, as the political parties in the United States have become more polarized, these attempts to move the ‘balance’ that exists in different areas to a new location, seem to have gained more prominence in what candidates for office seem to offer. Not only do these candidates promise to change the tradeoffs that exist in certain areas, they promise to do it immediately upon entering office. In a real sense, the timing of these changes are driven by the election cycle in that the candidates believe that they only have about 100 days in which to make major adjustments. After this ‘honeymoon’ period, the politicians move out of the ‘grace’ period the electorate has given them and all chance to innovate is gone. The philosophy is to present all of your major changes early on and then administer the ‘new balance’ in the remaining time that you are in office.

I have two concerns with this attitude toward governance. First, those that are elected tend to take their election as a ‘mandate.’ Even if they have only won with, say, 51% of the votes, they declare that they have a mandate for change. The people have told them that they are to make major changes in where the tradeoffs in the existing ‘balance’ of things are located. So, we the people, see a new President take office and then we observe a frenzied effort to put the new ‘balance’ into place. Then in four or eight years we see another new President do the same thing, attempting to return to the previous ‘balance’.

The second concern I have relates to the ‘game playing’ that is connected with this type of behavior. For example, consider the efforts of a new President to change particular ‘balances’ in society. If this President can move things far enough to change ‘balances’ so as to actually create ‘imbalances’, then even though when this administration goes out of office, the next new administration will have to work out these ‘imbalances’ and not be able to inject a lot of its priorities. If the same party can be continuously in office for an extended period of time, these ‘imbalances’ can even be allowed to grow and this creates tremendous problems for any new President that wants to ‘change directions.’ For a good review of some of the constraints that exist in the current situation see the editorial of David Brooks, “When Reality Bites”: (

There are times when the imbalances leave an irreconcilable dilemma as is the current situation with respect to economic policy. At present it appears as if the American economy is going into a recession. To lessen the severity of recession the government can execute a combination of monetary and fiscal actions. In early 2008 we see the Federal Reserve lowering the target interest rate it uses to conduct monetary policy and the Bush Administration and Congress creating a fiscal stimulus package. The Federal Reserve has had to lower its interest rate target because of dislocations in the financial markets. The fiscal stimulus package resulted from the game playing of the President and Congress, both of whom could not do ‘nothing’ in fear of facing massive criticism in upcoming elections. The dilemma is that these policies are exactly the opposite needed in order to stop the decline in the value of the dollar which has been declining for over five years. The decline in the value of the dollar can be attributed to the deficits created by the tax cuts enacted early-on by the Bush Administration and low interest rate policy followed for two years by the Greenspan led Federal Reserve.

Is this ‘game playing’ a direct result of the electoral process resulting from a democratic form of government? Perhaps this indicates that some ‘balance’ needs to be achieved between the game playing that goes on within a government and the electoral process and the ‘balance’ that is needed within a society in order to function efficiently and effectively.

Wednesday, February 6, 2008

Conservative and Liberal...Liberal and Conservative

These words are really meaningless to me except in the sense that they represent the titles that we place on people. We say, “You are a Conservative!” But, what does that mean? I am just labeling someone much as I name something a “Hummer.” “You are a Hummer.” What does that mean? Calling someone a Liberal now means something different than calling someone a Liberal in the 1950s or calling someone a Liberal in the 1910s. And you hear people call themselves “Classical Liberals.” It is a name with varied meanings and when you start modifying the label you know that the title has lost any specific meaning.

A conservative person, to me, is someone that either tends to hold on to what is, or, is someone that doesn’t like to take risks. Conversely, a liberal person is one that is open to many different ideas or is more willing to take risks than is a ‘conservative person’. But, a conservative person or a liberal person is not a platform or a dogma or an ideology. When we move these terms into the realm of titles everything becomes confusing.

I have worked with a lot of people in the world of Information Technology, both in teaching at a major university and in working with young entrepreneurs that are attempting to develop the next “big” thing. In this area, people have gotten away from the terms conservative and liberal and use such terms as adaptive and innovative. These terms possess similar meanings, but get away from some of the baggage of the other terms. A person that is conservative seems to be holding onto the past whereas a person that is adaptive knows that change must take place but wants the change to be slower, moving only when there is real justification for the change. A person that is liberal seems to be open to many different possibilities whereas a person that is innovative is someone that attempts to put a new idea into practice. From this we can see that with this terminology it is easier to discuss a continuum of behavioral tendencies running from adaptive to innovative than to just speak of the two extremes. Thus, it is better to say that individuals are more adaptive than others, or, less innovative. It is not appropriate to say that individuals are either adaptive or they are innovative.

Clayton Christensen, who has written a great deal on technological innovation, has distinguished between innovations that are sustaining and innovations that are disruptive. Here the idea is that all change is innovative in nature. However, a sustaining innovation is one that tends to improve the performance of what exists. It can be ‘discontinuous or radical in nature’ or just ‘incremental’, but, the key factor is that sustaining innovation is change that remains within the existing paradigm. A disruptive innovation, on the other hand, is one that changes how things are done rather than just improves them. A disruptive innovation is a change that introduces a different paradigm. Within this framework it can also be seen that one innovation might be more sustaining than another innovation…or more disruptive. We have once again gotten away from the extremes and have established a continuum.

Why do we need to move away from the liberal/conservative labels? We need to move beyond the liberal/conservative labels because they are very, very misleading. For example, to say that someone is conservative may be something entirely different than to call someone Conservative. And, this is true of the distinction between liberal and Liberal. Why?

For one thing, I don’t believe that most of today’s Conservatives are conservative! In many cases, I find that leading conservatives are more innovative than they are adaptive and that many of the programs that they are presenting or are promoting tend to be more disruptive than they are sustaining. The same thing can be said of Liberals and the programs that they are presenting and promoting.

An example comes to mind. In the early history of the United States, Washington’s first term in office, we see the break occurring between Alexander Hamilton and his supporters and Thomas Jefferson and James Madison and their supporters. The former group was labeled Federalists while the latter group, who later became the Democratic-Republican Party, was originally called the Anti-Federalists. The rivalry between the two parties became rancorous and bitter. The difference was not, in my mind, between conservatives and liberals, but was between different pictures of the world that were more innovative than adaptive and were more disruptive than they were sustaining. This is why the divisions between the two parties were so great.

In the early stages of the battle, Jefferson and Madison attempted to link the Federalists with England and with monarchy. Since the Federalists were attempting to create a stronger central government that overcame the difficulties experienced in the original confederation of states, it seemed a natural defense of the more decentralized confederation to accuse the Federalists of wanting to return to the English model of government and even to create a monarchy. Hence, the Federalists were conservatives as opposed to the more liberal Anti-Federalists. Since a war had recently been fought for independence, these were fighting words…and so the battle was engaged. Emotions ran high.

The Federalists, however, were not conservative…they did not really want to return to the English model. As Benjamin Franklin said, something new had been created. But, there were two visions of what this ‘new’ should be. The Federalists saw a world that included finance and manufacturing and trade (international as well as domestic) and in such a world they believed that there needed to be more power lodged in a centralized, national government because there were just some things that a loose confederation of states could not handle. The Anti-Federalists saw a world of farmers and small businesses that were free and independent of these less civil pursuits. They believed that a more decentralized government would better serve the people. Thus, there was a battle of two world-views.

I believe that the same type of situation exists today. I don’t believe that either the Conservatives or the Liberals want to keep the existing structure. The United States is going through a period of transition and there exists (at least) two world-views as to what the future should look like, and it is not the America now in existence or the America of the past. In this sense, what the Conservatives and the Liberals want, in their own way, is innovative and disruptive in nature. The Conservatives do not want to conserve and the Liberals are not liberal in the sense of being ‘open-minded’ about what should take place. They both have a vision and their visions diverge rather than converge…hence the rancor and bitterness of some of the debate.

Where does this leave us? If we take the earlier experience as a guide we can conclude that this division will not be resolved soon. In my interpretation of past events, the Federalists had an immediate victory and a relatively strong, centralized government was formed, much to the benefit of the United States. However, the Democratic-Republican Party controlled the Presidency and the Congress for a lengthy period of time beginning in 1800 and won many battles in the 19th century. We still, as a nation, from time-to-time, long for the idyllic America, the one composed of small farms and small businesses. The heritage of this past still lingers with us. Yet, one can argue that the United States that evolved is really more ‘Hamiltonian’ (see New York Times columnist David Brooks) than it is anything else.

If this is the case and the conflicting world-views continue to do battle we must adjust our mindsets and perceive the situation as it is and not as a battle to conserve or liberate the country, but as one in which there are (at least) two perceptions of how the government should be structured. I, personally, don’t have any suggestions at the moment as to what these world-views should be called. All I know for sure is that they should not be called Conservative and Liberal.