The United States is facing a very difficult situation currently due to the economic policies the Bush Administration has followed over the past seven years or so. To begin with, the Bush Administration came into office with the Federal budget in surplus and with the Federal Reserve following a relatively disciplined monetary policy. In a sense, the fiscal and monetary house of the United States government was in order.
Basically, the new administration decided to go it alone. That is, it would conduct its economic policy independently of the rest of the world. This was not inconsistent with what the administration was doing in other areas, such as foreign policy. Its first major economic policy action was to construct and then get Congress to pass a substantial tax cut. This, of course, would throw the Federal budget into a deficit, but, the feeling was that this tax cut would stimulate the economy and create sufficient revenues in the future to reduce the deficit and make it manageable. Also, there was some talk about slowing down the growth, or even eliminating some expenditure programs and this would further help to eliminate the deficit. The tax bill was passed.
In devising its fiscal plans, the administration did not anticipate the events of September 11, 2001 and its aftermath. Not only did these events precipitate a ‘war of terror’, they also resulted in one war in Afghanistan and another in Iraq. The expenditure side of the budget grew very rapidly. Furthermore, all three ‘wars’ left open a future commitment to an unpaid bill that was enormous. Occurring at about the same time all this was happening, the Federal Reserve was setting its operating target for the Federal Funds rate at 2% or below for a period of over 3 years. Given the rate of inflation during this time, this meant that the real rate of interest on these short term loans was negative.
The value of the United States dollar began to drop in 2002. World markets were concerned about how the Bush Administration was acting independently of the rest of the world and that they were not playing by the ‘rules’ of international finance. The most basic rule of international finance is that one country cannot ‘inflate’ its economy for its own purposes without a consequent decline in the value of its own currency in foreign exchange markets. This is just a fundamental result of how markets work. But, in the past, the United States being as big and powerful as it was, could get away from acting independently of these rules. This is no longer the case.
As the value of the dollar declined in foreign exchange markets, the Bush Administration gave lip service to the fact that the dollar was falling in value, but did nothing about it. As a consequence, the dollar continued to decline, falling by about 7% a year against the Euro between 2001 and 2007. It also fell by over 5.5% per year against the British Pound. The day of reckoning has finally appeared.
Historically, all countries that once had significant economic and financial positions in the world, except the United States, faced a transition from being able to act relatively independently of the rest of the world and having to abide by the workings of international markets. As countries moved from the former position of relative independence to disciplined cooperation, they went through a period of learning. During this period, the country in question would find that as it attempted to act independently of world markets through the creation of budget deficits that were eventually monetized by its central bank, ‘international bankers,’ an ambiguous and anonymous clandestine group of money managers, would start selling their currency until the drop in value became significant enough that the government had to back off its fiscal and monetary policies and establish a sound and disciplined program going forward.
The United States now seems to be in this transition position. The world has changed and it is no longer the world power it used to be. Yes, it is still powerful and important but due to globalization and the reliance of the world on oil it is not as important as it once was. As a consequence, the rest of the world is now showing the United States that it must join the club, it must humble itself enough to be realize that it must work with others and not just act as it wishes.
This is the background of the point I would like to make about the working of governments. The Bush Administration constructed its economic policy on the basis of an ideology. This ideology came from the presidential administration of Ronald Reagan. It is founded upon the premise that it is always good to cut taxes. In the past, this premise was presented along with the idea that programs should be cut as well in order to maintain fiscal discipline and reduce the size of the government. However, this latter component fell to the wayside when the proponents of ‘small government’ found that it was not practical or feasible to cut programs from the budget. Thus, only the first part of the ideology remained. Cutting taxes is good!
‘Conservatives’ and the Bush Administration stuck to the ideology. It brought in people to work in the administration that were loyal to the ideology. And, they enacted their tax cut and everybody was happy…on the ‘conservative’ side of the aisle. Discipline was rampant, but the discipline was to enforce adherence to the ideology regardless of the consequences of the impact of its execution. Furthermore, we see this imposed discipline carrying through to the campaign to become the Republican nominee for President in the 2008 election. Candidates went through unbelievable loops to sound convincing that they would continue the Reagan policy of cutting taxes if they were elected President. All seemed intent on becoming the next Ronald Reagan and they fought over who was the most representative of the Reagan tradition.
The problem is that the times have changed. The fundamentals are different now than they were 15 years ago let alone 28 years ago. The United States is not in the position it once was and must respond to the new fundamentals. The market imposes discipline upon those that operate within the market system. There is now enough wealth and power held outside the United States so that the United States must respond to this discipline and impose the discipline upon itself. This is all a part of being just one among many. One must pay attention to the wishes and needs of others. Within such an environment one must conform to the rules and become a good citizen.
This insight applies more than just to the ‘most powerful nation in the world.’ It also applies to those who hold power locally or regionally. Yes, the United States has been arrogant in attempting to impose its will on the world, but others have also been arrogant in attempting to impose their will on their ‘limited’ worlds. The attempt to impose an ‘ideology’ on others and the discipline that is applied to establish or maintain an ‘ideology’ on others is doomed to failure over the longer run. The problem is that the attempt to enforce the ‘ideology’ in the short run can have many dire consequences. The ‘ideology’ of the Bush Administration was related to tax cuts. The ‘ideology’ of others relates to ‘political correctness.’ The ‘ideology’ of others relates to Islamic fundamentalism. And, we can go on, if needed, to identify many more ‘ideologies’ that are alive in the world today.
What I am more interested in is the discipline that is necessary to be aware of and respond to the ‘fundamentals’ that exist in the world. I am not a post modernist. I do not believe that any worldview works and it is just a matter of who is in power. In the case of the economic policy of the United States and the decline in the value of the dollar…markets do work, some better than others, but, they do work. As a consequence, people, governments, and other organizations must operate within the boundaries and limits of being in a world with other people, governments and other organizations. This takes discipline, but it is a discipline that responds to and operates within the ‘fundamentals’ of the world. Some things, some models, some worldviews do work better than others. We must discipline ourselves to achieve the goals and objectives that are dear to us but we must do this in concert with the way the world works.
Wednesday, March 19, 2008
Wednesday, March 12, 2008
The Purpose of Government--2
In the post of March 5, 2008, I took a look at a definition of the purpose of government attributed to the economist John Maynard Keynes. I focused on this definition because the work of Keynes has been the backbone and rationale for many of the programs and policies of the ‘Liberal’ intellectual in the latter half of the twentieth century, spilling over into the twenty-first century. His biographer, Robert Skidelsky presented the definition in this way: “The purpose of government is to secure the contentment of the people as constrained by the principle of equity.” (John Maynard Keynes, Volume 2, The Economist as Savior, 1920-1837 published by Viking Adult in 1994, page 62.) Skidelsky goes on to explain that by ‘contentment’ Keynes meant ‘physical calm’ and ‘material comfort.’ He also states that ‘equity’ can be defined as “the absence in law or policy of ‘artificial’ discrimination in regards to individuals or to classes.”
Last week I wrote about the first part of this statement of purpose, the securing of “the contentment of the people” as an objective of government. I argued that this concerned itself with outcomes and not processes. I further stated that the Hamiltonian approach to government focuses more on processes rather than outcomes because in a world of incomplete information one does not always succeed in obtaining the outcomes one wants. By focusing upon processes, the government helps to create the systems of a society (the rules and regulations of the society) and also helps the members of the society to obtain the skills and knowledge necessary to operate successfully within such these systems.
This week, I would like to discuss the second part of the definition, the part that deals with “the principle of equity.” Keynes was particularly concerned with this element because of his connection with the Bloomsbury group of artists and intellectuals who were, socially and culturally, on the fringe of English society at the beginning of the twentieth century. This group included individuals like Virginia Woolf, Vanessa Bell, Duncan Grant, E. M. Forster, Lytton Strachey, as well as Keynes, himself. It is apparent in Skidelsky’s biography of Keynes that Keynes was very concerned with protecting this group because of their ‘advanced’ ideas on such things as feminism, pacifism, and sexuality.
Historically, in the nineteenth century, as well as in the twentieth century, Europe and Great Britain were experiencing movements in society that resulted in the formation of more and more ‘little societies’ like the Bloomsbury group. Historians have linked these individuals and groups together within the framework of what is called “Modernism”, a movement they contend succeeded the Enlightenment and which served as the forerunner of “Post-Modernism.” To me, the Enlightenment and Modernism were a part of one whole and just represented an extension of how human beings, once they took on an attitude of skepticism towards authority and once they started exploring things inductively, began to extend knowledge and behavior in many different directions.
This development, I believe, can be related to the spread of information which really began in earnest following the evolution of printing that occurred in the fifteenth century. And, this spread of information continues today at an ever accelerating pace, leading to almost continuous change within the world as well as almost continuous resistance in some areas, the middle east for example. New information is threatening and causes change. Some individuals that receive new information, in whatever form, end up, sooner or later, comparing this new information with the old information generated by the models and schema currently used to solve problems and make decisions. If the new information conflicts with the old information, the seemingly natural thing for a person to do is to try and find out why the difference exists and then modify their models or schema so as to be able to make better predictions in order to solve more difficult problems or make better decisions.
New information is threatening in the sense that the modified models and schema may not be consistent with the assumptions behind the existing models and schema. These conflicts can be observed in religion, politics, culture, and other areas of society that have established belief systems. These existing systems maintain themselves through indoctrination, training, repression, power, and other forms of control and reductionism. Every society, organization, or group exerts such efforts in order to maintain the coherence and stability of their society, organization, or group. Some, however, have processes by which change can be accommodated from within, such as by means of a democratic process. Others require revolution to achieve change, but there are all grades of means between these two extremes.
Earlier in history, societies tended to be more homogeneous in their makeup. Thus, they did not face the threat of alternative world views as much as we do in the modern world. If alternative world views did arise, the individuals involved were either disposed of or, if innocuous, were ignored. However, as information began to spread more rapidly and the number of alternative world views grew, societies began to experience the presence of a real threat. This movement really accelerated during the period referred to as the Reformation and became even more prevalent during the Enlightenment. In the Reformation we saw many religious sects develop and this resulted in a massive, violent at times, change in society. In the Enlightenment, more and more was challenged and, of especial importance, Copernicus, Galileo, Francis Bacon and others developed the methodology and process of science.
Modernism, it seems to me, is just an extension of the inductive method applied to other areas of human interest, like those we would call the humanities, areas like art, literature, music, and architecture. What differentiates these areas from the areas discussed earlier? It is not the methodology of approach or the process of investigation. To me it is that the subject matter under review is much more complex and is much less capable of being isolated through experiment or reductive study. Whereas in science, the models or schema used can be the result of a reductive exercise that isolates the process being studied, allows it to be studied through tightly controlled experiment, and then presented in a formal, many times a mathematical, way. The models and schema used in art, literature, and so forth, often come in the form of stories and narratives, fables, proverbs, folk lore, and so forth. This is because of the complexity of the situations being studied, that is the process being studied cannot be reduced to just a few important variables, and because the models and schema cannot be tested by means of tightly controlled experiments which result in a rejection or confirmation of the proposition being examined. Dealing with human issues is a more difficult thing to do and is subject to much more questioning and debate.
Peter Gay, in his most recent work “Modernism: The Lure of Heresy” writes that “The creative individual was little regarded until the age of the Enlightenment.” But, the emphasis on the work of the individual grew and “The claim of being first and alone in the field became a central feature in the competitive modernist enterprise, which conjured up the figure of the inventive spirit who neither wants nor needs ancestors or company…” (pages 42-43) The Bloomsbury group evolved out of this new, modern attitude.
But, Keynes feared for his friends. Bloomsbury was different and it was not only threatening to the existing social structure, it directly challenged it. Keynes was concerned that Bloomsbury, and other similar movements, would be subject to ‘artificial discrimination’ because of their beliefs and living arrangements. Thus, he argued that a government should not create laws or policies that would be harmful to such groups. Of course, these groups should not harm the ‘physical calm’ or ‘material comfort’ of others, but he would argue strenuously that those, like the Bloomsbury group, would do no such thing.
The Hamiltonian approach to government, I believe, should be a strong advocate of this constraint on government. The spread of information is going to take place on an even larger scale in the future. Likewise, new groups and sects are going to evolve out of this spread in a similar way. A society that places a high premium on innovation and change in science and technology is going to have to accept the pressure for innovation and change in other areas of the society. These other individuals and groups should not be subject to ‘artificial discrimination.’ They are all responding to the same incentives.
Last week I wrote about the first part of this statement of purpose, the securing of “the contentment of the people” as an objective of government. I argued that this concerned itself with outcomes and not processes. I further stated that the Hamiltonian approach to government focuses more on processes rather than outcomes because in a world of incomplete information one does not always succeed in obtaining the outcomes one wants. By focusing upon processes, the government helps to create the systems of a society (the rules and regulations of the society) and also helps the members of the society to obtain the skills and knowledge necessary to operate successfully within such these systems.
This week, I would like to discuss the second part of the definition, the part that deals with “the principle of equity.” Keynes was particularly concerned with this element because of his connection with the Bloomsbury group of artists and intellectuals who were, socially and culturally, on the fringe of English society at the beginning of the twentieth century. This group included individuals like Virginia Woolf, Vanessa Bell, Duncan Grant, E. M. Forster, Lytton Strachey, as well as Keynes, himself. It is apparent in Skidelsky’s biography of Keynes that Keynes was very concerned with protecting this group because of their ‘advanced’ ideas on such things as feminism, pacifism, and sexuality.
Historically, in the nineteenth century, as well as in the twentieth century, Europe and Great Britain were experiencing movements in society that resulted in the formation of more and more ‘little societies’ like the Bloomsbury group. Historians have linked these individuals and groups together within the framework of what is called “Modernism”, a movement they contend succeeded the Enlightenment and which served as the forerunner of “Post-Modernism.” To me, the Enlightenment and Modernism were a part of one whole and just represented an extension of how human beings, once they took on an attitude of skepticism towards authority and once they started exploring things inductively, began to extend knowledge and behavior in many different directions.
This development, I believe, can be related to the spread of information which really began in earnest following the evolution of printing that occurred in the fifteenth century. And, this spread of information continues today at an ever accelerating pace, leading to almost continuous change within the world as well as almost continuous resistance in some areas, the middle east for example. New information is threatening and causes change. Some individuals that receive new information, in whatever form, end up, sooner or later, comparing this new information with the old information generated by the models and schema currently used to solve problems and make decisions. If the new information conflicts with the old information, the seemingly natural thing for a person to do is to try and find out why the difference exists and then modify their models or schema so as to be able to make better predictions in order to solve more difficult problems or make better decisions.
New information is threatening in the sense that the modified models and schema may not be consistent with the assumptions behind the existing models and schema. These conflicts can be observed in religion, politics, culture, and other areas of society that have established belief systems. These existing systems maintain themselves through indoctrination, training, repression, power, and other forms of control and reductionism. Every society, organization, or group exerts such efforts in order to maintain the coherence and stability of their society, organization, or group. Some, however, have processes by which change can be accommodated from within, such as by means of a democratic process. Others require revolution to achieve change, but there are all grades of means between these two extremes.
Earlier in history, societies tended to be more homogeneous in their makeup. Thus, they did not face the threat of alternative world views as much as we do in the modern world. If alternative world views did arise, the individuals involved were either disposed of or, if innocuous, were ignored. However, as information began to spread more rapidly and the number of alternative world views grew, societies began to experience the presence of a real threat. This movement really accelerated during the period referred to as the Reformation and became even more prevalent during the Enlightenment. In the Reformation we saw many religious sects develop and this resulted in a massive, violent at times, change in society. In the Enlightenment, more and more was challenged and, of especial importance, Copernicus, Galileo, Francis Bacon and others developed the methodology and process of science.
Modernism, it seems to me, is just an extension of the inductive method applied to other areas of human interest, like those we would call the humanities, areas like art, literature, music, and architecture. What differentiates these areas from the areas discussed earlier? It is not the methodology of approach or the process of investigation. To me it is that the subject matter under review is much more complex and is much less capable of being isolated through experiment or reductive study. Whereas in science, the models or schema used can be the result of a reductive exercise that isolates the process being studied, allows it to be studied through tightly controlled experiment, and then presented in a formal, many times a mathematical, way. The models and schema used in art, literature, and so forth, often come in the form of stories and narratives, fables, proverbs, folk lore, and so forth. This is because of the complexity of the situations being studied, that is the process being studied cannot be reduced to just a few important variables, and because the models and schema cannot be tested by means of tightly controlled experiments which result in a rejection or confirmation of the proposition being examined. Dealing with human issues is a more difficult thing to do and is subject to much more questioning and debate.
Peter Gay, in his most recent work “Modernism: The Lure of Heresy” writes that “The creative individual was little regarded until the age of the Enlightenment.” But, the emphasis on the work of the individual grew and “The claim of being first and alone in the field became a central feature in the competitive modernist enterprise, which conjured up the figure of the inventive spirit who neither wants nor needs ancestors or company…” (pages 42-43) The Bloomsbury group evolved out of this new, modern attitude.
But, Keynes feared for his friends. Bloomsbury was different and it was not only threatening to the existing social structure, it directly challenged it. Keynes was concerned that Bloomsbury, and other similar movements, would be subject to ‘artificial discrimination’ because of their beliefs and living arrangements. Thus, he argued that a government should not create laws or policies that would be harmful to such groups. Of course, these groups should not harm the ‘physical calm’ or ‘material comfort’ of others, but he would argue strenuously that those, like the Bloomsbury group, would do no such thing.
The Hamiltonian approach to government, I believe, should be a strong advocate of this constraint on government. The spread of information is going to take place on an even larger scale in the future. Likewise, new groups and sects are going to evolve out of this spread in a similar way. A society that places a high premium on innovation and change in science and technology is going to have to accept the pressure for innovation and change in other areas of the society. These other individuals and groups should not be subject to ‘artificial discrimination.’ They are all responding to the same incentives.
Wednesday, March 5, 2008
The Purpose of Government
Recently, I have been reading the magnificent biography of John Maynard Keynes written, in three volumes, by Robert J. A. Skidelsky. In both Volume 1 and Volume 2 of the trilogy, Skidelsky spends some time discussing how Keynes viewed the purpose of government and related his concept back to an essay that Keynes had written on Edmund Burke. This, of course, is very interesting in itself because Keynes is seen as one of the founding fathers of the ‘Liberal’ approach to how government can be used to maneuver the macro-economy and Burke is one of the reigning gods in the ‘Conservative’ pantheon of revelation. What I would like to start off discussing, however, is not the relationship between Keynes and Burke, but the purpose for government that Keynes supports intellectually.
Skidelsky reduces ideas of Keynes to this general statement: “The purpose of government is to secure the contentment of the people as constrained by the principle of equity.” (John Maynard Keynes, Volume 2, The Economist as Savior, 1920-1837 published by Viking Adult in 1994, page 62.) Skidelsky goes on to explain that by ‘contentment’ Keynes meant ‘physical calm’ and ‘material comfort.’ He also defines that ‘equity’ can be defined as “the absence in law or policy of ‘artificial’ discrimination in regards to individuals or to classes.” (page 62)
In other words, the purpose of government is to provide an environment in which individuals can achieve ‘good states of mind’ where one is allowed to achieve whatever ‘good state’ that he or she seeks. This is consistent with the philosophical atmosphere that Keynes was a part of coming from the work of G. E. Moore at Cambridge University (who wrote Principia Ethica (1903; revised edition, Cambridge University Press, 1993) and the Bloomsbury set of intellectuals (Virginia Woolf, Duncan Grant, E. M. Forster, Lytton Strachey and others) located in London. What Keynes was proposing was that everyone should be sufficiently well off and free of economic worries so that they could live the life they wanted, regardless of what others thought of that life.
Keynes, of course, is well known for his efforts to see that societies, especially ones like Great Britain, could attain the ‘physical calm’ and ‘material comfort’ needed for the achievement of such a goal. He was specifically interested in the ‘equity’ issue because his friends in Bloomsbury represented a leading avant garde community that exhibited advanced modern attitudes towards such things as feminism, pacifism, and sexuality. The Bloomsbury group, itself, was relatively well off as far as wealth was concerned and was also assisted over time by the financial support of Keynes; so that the first component of the ‘purpose of government’ was not a concern of theirs. However, Keynes recognized that the condition of ‘material comfort’ and ‘physical calm’ was necessary for the group to pursue its desired lifestyle. Thus, if others were to attain ‘good states of mind’ it was necessary for them to also experience ‘material comfort’ and ‘physical calm’. Hence, government needed to do something to achieve this end.
There was another matter that was important to Keynes in the 1920s and 1930s that fit into his definition of the ‘purpose of government.’ He was very concerned that if many in the country did not experience ‘physical calm’ and ‘material comfort’ they would revolt against the existing democratic governments that supported economic systems that were basically capitalistic in nature. Of course, there was the immediate experience of the Russian Revolution. This worry, however, permeated the Paris Peace talks that followed the Great War and carried over into the 1920s and beyond as real concern was expressed that the ‘masses’ might rise up if they were in a depressed state economically. Thus, a strong, vibrant economy was necessary, it was felt, in order that people could be free to follow the own path to achieving ‘good states of mind.’ The concern here related to the potential breakdown of the capitalistic system.
It is important to address this concept of ‘the purpose of government’ from the Hamiltonian point of view that we have been discussing in previous weeks. One cannot argue from the Hamiltonian standpoint that the goals set out by Keynes are undesirable. We cannot argue that ‘physical calm’ and ‘material comfort’ are good things and are good things for everyone in a society. Also, one cannot argue that there should not be discrimination about the choice of lifestyles, let alone discrimination based on race or any other physical distinction between people.
What one can disagree with this stated purpose from the Hamiltonian point of view is the ability of government to directly achieve specific outcomes. The problem, as I see it, is that this purpose is concerned with outcomes and not processes, a distinction that has been discussed in previous weeks. Outcomes are all fine and good, we argued in the last post, but it is next to impossible for a government to obtain the information necessary to create programs that will achieve the outcomes desired; it is next to impossible to create an incentive system that will accomplish such goal; and it is next to impossible to implement and then execute such programs and policies in a timely manner. In other words, attempting to achieve specific outcomes is a very, very hard thing to do.
It is difficult enough for people to achieve the results that they set out to reach and if they focus only on current specific outcomes they can easily despair. If it is that hard for an individual to achieve what they set out to do, just think how much harder it is for a government to achieve specific outcomes. Furthermore, setting up programs and policies to gain specific ends can become counterproductive in that the programs and policies create other outcomes that are not helpful. And, once programs and policies have been created they are almost never eliminated so that they eventually come to serve other purposes. This is why it is argued that individuals, as well as organizations and governments, should focus on setting up processes that can succeed over time and that provide the tools needed to succeed.
Life is uncertain and an individual or an organization is not going to succeed in every instance. That is why the focus on specific outcomes is not that productive. In baseball, a good hitter will get a hit in 1 out of every 3 times at bat. Or, that batter does not get a hit 2 times out of every three at bats. If we focus on the times the hitter does not get a hit, things look pretty bad. Yet if this person has developed a process, a technique that allows him, on average, to get a hit 1 out of 3 at bats, that person is going to be one of the better hitters in baseball. One is not locked into outcomes when one focuses on processes.
Governmental policies and programs that initiate processes can be leveraged by individuals and organizations to achieve desirable outcomes far beyond the scope and scale of what the government can achieve by itself. In terms of education, the government can support the creation and maintenance of an educational system that results in tremendous positive externalities throughout the society. In this way, the government is helping its citizens attain the tools that are of great benefit to individuals as well as to the society. In terms of capital markets, the government can provide the rules by which capital markets can work and the policing of these markets to oversee ‘fair play’ within the operation of the markets. In terms of a banking system, again the government can provide the rules by which the banking system operates; regulate the system to minimize the amount of abuse taking place; and then support a check clearing system and central banking facilities to support the efficient functioning of the banks.
In all these cases, the government is focusing more on enhancing the infrastructure of the society rather than on achieving specific outcomes. Yes, outcomes are going to vary over time, but even the existing infrastructure should be aimed at smoothing the variation in the outcomes and not offsetting them. Nothing is being said here about the size of government. In a modern, well-functioning capitalistic society, it is my feeling that a fairly sizeable government will be necessary. What is crucial, however, is not the size that the government achieves, but the role the government plays in letting the society determine itself. To me, Keynes was idealistic and not realistic about what a government could do.
Skidelsky reduces ideas of Keynes to this general statement: “The purpose of government is to secure the contentment of the people as constrained by the principle of equity.” (John Maynard Keynes, Volume 2, The Economist as Savior, 1920-1837 published by Viking Adult in 1994, page 62.) Skidelsky goes on to explain that by ‘contentment’ Keynes meant ‘physical calm’ and ‘material comfort.’ He also defines that ‘equity’ can be defined as “the absence in law or policy of ‘artificial’ discrimination in regards to individuals or to classes.” (page 62)
In other words, the purpose of government is to provide an environment in which individuals can achieve ‘good states of mind’ where one is allowed to achieve whatever ‘good state’ that he or she seeks. This is consistent with the philosophical atmosphere that Keynes was a part of coming from the work of G. E. Moore at Cambridge University (who wrote Principia Ethica (1903; revised edition, Cambridge University Press, 1993) and the Bloomsbury set of intellectuals (Virginia Woolf, Duncan Grant, E. M. Forster, Lytton Strachey and others) located in London. What Keynes was proposing was that everyone should be sufficiently well off and free of economic worries so that they could live the life they wanted, regardless of what others thought of that life.
Keynes, of course, is well known for his efforts to see that societies, especially ones like Great Britain, could attain the ‘physical calm’ and ‘material comfort’ needed for the achievement of such a goal. He was specifically interested in the ‘equity’ issue because his friends in Bloomsbury represented a leading avant garde community that exhibited advanced modern attitudes towards such things as feminism, pacifism, and sexuality. The Bloomsbury group, itself, was relatively well off as far as wealth was concerned and was also assisted over time by the financial support of Keynes; so that the first component of the ‘purpose of government’ was not a concern of theirs. However, Keynes recognized that the condition of ‘material comfort’ and ‘physical calm’ was necessary for the group to pursue its desired lifestyle. Thus, if others were to attain ‘good states of mind’ it was necessary for them to also experience ‘material comfort’ and ‘physical calm’. Hence, government needed to do something to achieve this end.
There was another matter that was important to Keynes in the 1920s and 1930s that fit into his definition of the ‘purpose of government.’ He was very concerned that if many in the country did not experience ‘physical calm’ and ‘material comfort’ they would revolt against the existing democratic governments that supported economic systems that were basically capitalistic in nature. Of course, there was the immediate experience of the Russian Revolution. This worry, however, permeated the Paris Peace talks that followed the Great War and carried over into the 1920s and beyond as real concern was expressed that the ‘masses’ might rise up if they were in a depressed state economically. Thus, a strong, vibrant economy was necessary, it was felt, in order that people could be free to follow the own path to achieving ‘good states of mind.’ The concern here related to the potential breakdown of the capitalistic system.
It is important to address this concept of ‘the purpose of government’ from the Hamiltonian point of view that we have been discussing in previous weeks. One cannot argue from the Hamiltonian standpoint that the goals set out by Keynes are undesirable. We cannot argue that ‘physical calm’ and ‘material comfort’ are good things and are good things for everyone in a society. Also, one cannot argue that there should not be discrimination about the choice of lifestyles, let alone discrimination based on race or any other physical distinction between people.
What one can disagree with this stated purpose from the Hamiltonian point of view is the ability of government to directly achieve specific outcomes. The problem, as I see it, is that this purpose is concerned with outcomes and not processes, a distinction that has been discussed in previous weeks. Outcomes are all fine and good, we argued in the last post, but it is next to impossible for a government to obtain the information necessary to create programs that will achieve the outcomes desired; it is next to impossible to create an incentive system that will accomplish such goal; and it is next to impossible to implement and then execute such programs and policies in a timely manner. In other words, attempting to achieve specific outcomes is a very, very hard thing to do.
It is difficult enough for people to achieve the results that they set out to reach and if they focus only on current specific outcomes they can easily despair. If it is that hard for an individual to achieve what they set out to do, just think how much harder it is for a government to achieve specific outcomes. Furthermore, setting up programs and policies to gain specific ends can become counterproductive in that the programs and policies create other outcomes that are not helpful. And, once programs and policies have been created they are almost never eliminated so that they eventually come to serve other purposes. This is why it is argued that individuals, as well as organizations and governments, should focus on setting up processes that can succeed over time and that provide the tools needed to succeed.
Life is uncertain and an individual or an organization is not going to succeed in every instance. That is why the focus on specific outcomes is not that productive. In baseball, a good hitter will get a hit in 1 out of every 3 times at bat. Or, that batter does not get a hit 2 times out of every three at bats. If we focus on the times the hitter does not get a hit, things look pretty bad. Yet if this person has developed a process, a technique that allows him, on average, to get a hit 1 out of 3 at bats, that person is going to be one of the better hitters in baseball. One is not locked into outcomes when one focuses on processes.
Governmental policies and programs that initiate processes can be leveraged by individuals and organizations to achieve desirable outcomes far beyond the scope and scale of what the government can achieve by itself. In terms of education, the government can support the creation and maintenance of an educational system that results in tremendous positive externalities throughout the society. In this way, the government is helping its citizens attain the tools that are of great benefit to individuals as well as to the society. In terms of capital markets, the government can provide the rules by which capital markets can work and the policing of these markets to oversee ‘fair play’ within the operation of the markets. In terms of a banking system, again the government can provide the rules by which the banking system operates; regulate the system to minimize the amount of abuse taking place; and then support a check clearing system and central banking facilities to support the efficient functioning of the banks.
In all these cases, the government is focusing more on enhancing the infrastructure of the society rather than on achieving specific outcomes. Yes, outcomes are going to vary over time, but even the existing infrastructure should be aimed at smoothing the variation in the outcomes and not offsetting them. Nothing is being said here about the size of government. In a modern, well-functioning capitalistic society, it is my feeling that a fairly sizeable government will be necessary. What is crucial, however, is not the size that the government achieves, but the role the government plays in letting the society determine itself. To me, Keynes was idealistic and not realistic about what a government could do.
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