David Apgar: Is That a Horse’s Head Under the Sheets or Are You Just Happy to Fleece Me?

By David Apgar, the Director of ApgarPartners LLC, a new business that applies assumption-based metrics to the performance evaluation problems of development organizations, individual corporate executives, and emerging-markets investors, and author of Risk Intelligence (Harvard Business School Press 2006) and Relevance: Hitting Your Goals by Knowing What Matters (Jossey-Bass 2008). He blogs at WhatMatters.

The TARP Subcommittee of the House Committee on Oversight and Government Reform spent two hours on Wednesday asking whether the Dodd-Frank bill has ended the scourge of banks that are too big to fail. The real question is whether anyone has tried to end the scourge of bankers who are too rich for the government to fail them.

The Buttonwood column in this week’s Economist asks the key question why living standards have declined – and well it should, as this is the central economic and political question in the rich world today. The column dismisses several alternative economic explanations and concludes by asking whether international banks are running the financial equivalent of a protection racket right out of The Godfather to keep their bonuses high. It suggests they’re threatening to move offshore if central bankers stop subsidizing them with low, destabilizing interest rates.

The Economist is right about the racket but wrong about the reason, in my view. And if we don’t understand the reason for stagnation and decline in median living standards and the closely related growth in inequality, we won’t be able to do anything about it.

Buttonwood starts off with a heaping helping of appalling statistics. Since the recovery began US wages are up $ 168B while profits are up by more than three times that amount — $ 528B. Nor is the trend limited to the financial crisis – productivity rose 83% from 1983 to 2007 while median male wages rose just 5%. (Women did better but were in the midst of a huge change in workforce participation.) Some of Ed Wolff’s statistics on inequality can round out the picture – the share of US income of the top 1% has risen by two thirds in one generation from 12.8% in 1982 to 21.3% in 2006.

The column rules out the explanation of British central banker Mervyn King that this is all really a return to a world of stable and balanced economies as rich countries cut back consumption to match production and eliminate their current account deficits. The trouble is that similar trends in living standards and inequality appear in countries like Germany that have long consumed less than they produced. And China – the world champion in over-production and under-consumption – has watched personal income drop from 69.3% to 57.5% while profits rose from 21.2% to 31.3% of GDP between 1996 and 2007. What is happening to the average guy’s and gal’s wage has little to do with global rebalancing.

Maybe it has to do with globalization, though. Many economists have argued that China’s massive success in mobilizing its workforce has created a world labor surplus. Wages will stop stagnating in Cleveland, runs the idea, once workers settle down in Guangdong. Yet these millions of newly mobilized Chinese workers did not suddenly materialize out of a Ming Dynasty cloud. What’s new is a fantastic increase in their productivity. Labor productivity should raise labor’s share of income around the world, however – not lower it. Greater Chinese labor productivity can’t explain lower US standards of living.

Another popular culprit is technology. And yet technology-driven productivity increases were greater in the 1990s than in the decades coming before and after – exactly the opposite of the fast-slow-fast pattern in wage stagnation and accelerating inequality in the US.

Buttonwood wonders whether the decline of unions is to blame. It’s true that unionization has dropped to a paltry 11.9% of the labor force. But it stood at just 20.1% in 1983.

All of which leads the column to point to rich-world central bankers’ stubborn subsidization of banks through low interest rates. Might the subsidy explain both persistently high banker compensation and the financial sector’s disproportionate profits?

Those profits certainly are high – 29% of total US profits in 2010 Q4 even though the Wall Street Journal estimates that the sector produces only 10% of the economy’s value-added. Much of that profit – and by far the highest compensation rates – come from investment banks, however, not commercial banks. Yet low interest rates don’t directly drive investment bank profits. They affect the economy by keeping commercial bank deposit rates low compared to loan rates. Low interest rates are a problem but they look more like a fall-guy than the Godfather behind the decline in western living standards.

For a better explanation go back to an old piece of folk wisdom so well established that economics graduate students get little credit for building regressions for it. Bankers charge a percentage of the value they transfer – be it the value of an acquisition target, a bond offering, or an investment account. The rest of the economy charges for the value they create (lawyers’ contingency fees excluded). And the more value that the economy transfers as a percent of what it creates, the higher the percent of earnings that goes to banks. The financial sector operates quite literally outside the capitalist economy.

How can the financial sector sustain such high rents? Investment banks get investors to pay high brokerage fees by threatening to cut them out of the best investment opportunities. And they gouge issuers by threatening to cut off their access to the best investors. Big commercial banks get companies to pay through the nose for bond offerings by threatening to cut back on their lines of credit.

But no government has the stomach to block financial mergers or even fight the exploitation of hard-to-supervise conflicts of interest that arise from combining investment and commercial banking services. Better consumer protection might seem like a good idea but was politically out of the question during seven years of progressively deteriorating mortgage suitability standards.

So there’s some truth to the Godfather analogy. You’d be right to look for a horse’s head under the sheets. If you find one, though, it’s not a warning to your central banker. It’s a warning to governments that might interfere in any way – through antitrust enforcement, consumer protection, a full return to Glass-Steagall, or compensation caps – with the tremendous luxury of charging for the transfer rather than the creation of value.

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  1. vlade

    The percentage fee is the best thing anyone could come up with if they want to make money.

    It matters not whether the value is added or destroyed – you get paid (short of total destruction). It gives you upside with little downside. It’s leverage for free – the client pays for it.

    Yet it adds little to no value. Managing 1m for one client is not an order or magnitude harder than managing 1k for 100 clients (indeed, you could argue it’s easier).

    I’d add another notch to how they extract the rent – any (professional) investor is scared to invest w/o an investment bank, lest they fail and be blamed for it. Even when they know the advice they get is no better than what they can get in-house (it’s similar with consultants – repackage in-house opinions and all of sudden they get implemented).

  2. Random Lurker

    While chinese worker’s waged decreased as a share of chinese GDP, AFAIK they increased as a share of world GDP.
    We could summarize the trend of the last 20+ years as:
    1) nations suffer from a constant “slack of effective demand” crisis;
    2) some nations (mostly poor developing nations) solve the problem by lowering wages and exporting a lot;
    3) the remaining nations are somehow forced to be net importers and thus suffer an even worse slack of demand, as a consequence resort to demand enhancing policies, as:
    a) increasing state deficits (with a limit when the state goes broke)
    b) encouraging the increase of private debt (with a limit when the marginal debtor cannot pay his interest and the central bank cannot further lower the lending rate).

    1. Random Lurker

      Sorry, the last part of the argument:
      4) the policies described under (3) amount to the state increasing the profit (AKA subsidizing) of “capitalists” in order to stave off recessions, and thus worker’s wages stagnate in proportion.

  3. DownSouth

    Apgar said: “Those profits certainly are high – 29% of total US profits in 2010 Q4 even though the Wall Street Journal estimates that the sector produces only 10% of the economy’s value-added.”

    Here, let me fix that for Apgar:

    Those profits are certainly high – 29% of total US profits in 2010 Q4 even though the sector destroyed 10% of the economy’s value-added.

  4. craazyman

    Just curious what this means “applies assumption-based metrics to the performance evaluation problems of development organizations”. Not sure what assumption-based metrics are.

    Does anyone realize that liquidity creation itself is destabilizing and extractive beyond a certain point. Each market price contains two components — rational expectations and irrational/emotional mania. The y-axis is social utility and x-axis is liquidity. The curve looks like the proverbial bell but it goes negative at a certain point rather than just approaching zero. You start by increasing liquidity out the x axis ans social utility rises. At a certain point though it starts to fall because the liquidity has already lubricated the rational part of pricing and begins to lubricates the irrational/emotional mania aspect of pricing and foments volatility (which you can model on the z-axis if you can think three dimensionally). Then social utility goes negative at a certain point where liquidity provision promotes totally extractive volatility and negative social utility. The banksters suck on this like a vampire.

    It’s like the cash machine at 3 am when you re-load with another 200 bucks to hit the last calls. You should go home. Liquidity and negative social utility and extractive rents from 4 more beers. Sometimes those 4 beers pay off, because there’s something about irrational/emotional experiences that speak to a deep aspect of the human condition. As the poet says “The road to excess leads to the palace of wisdom” but usually not. Believe me. I know. bwoahahahahahah

    1. DownSouth

      craazyman said: “Each market price contains two components — rational expectations and irrational/emotional mania.”

      This is part and parcel of the Cartesian dichotomy, the intellectual scaffolding upon which Modernism is built.

      It is, nonetheless, a presupposition which has little basis in reality.

      No one who accepts Bacon’s views about how new ideas about nature gain a basis in experience could regard it as empirical: it is far too general and unqualified, sweeping and doctrinal, for this description.

      1. craazyman

        south every formal mental construct used to organize the infinite sensations of reality is by definition an abstraction and invalid as a form of ultimate truth.

        thats because the universe is 16 equations with 19 unknowns. and the three residual unknowns are never knowable, only projectable. and they take their validity only by virtue of their fruits — ie. “by their fruits ye shall know them.” And even then, the fruits are knowable only by revelation and not reason or logic.

        and so I play my little mind game and I try to stab at the fruits and bring out a little juice every once and a while. :)

        Maybe I’m answering my own question about what “assumption based metrics are”. I assume the one and the zero and that 3 is 1 and 1 and 1. But nothing in nature is ever 1. It’s always blending in to something next to it. So even 1 is an assumption based metric.

        1. craazyman

          and sometimes I worry about you down there in Mexico. i sure as hell hope the Azetcs don’t take over the whole place again because Now they’re killing Texas Rangers. I think this could get even uglier than it already is but I’m not sure what the heck would come next. Maybe an agrarian utopia after Quezequatal returns. I see they have lots of UFOs down there and I saw a video of witch/demon levitating and floating like a baloon over some mountains down there (it might have been a puppet on a string but it looked real to me). It’s a strange place.

          1. Cedric Regula

            I wouldn’t worry so much about the floating witch/demon. That was eventually identified as the giant pig balloon that got away at that Pink Floyd Animals concert.

            The UFOs are real, of course.

            For more info on Aztec civilization, I recommend Gary Jennings’ excellent novel, “Aztec”. Aztec civilization had its pros & cons, methinks. The sex was good. And hookers only charged 5 cocoa beans for an entire night. Try that in NYC (LOL). Cortes was certainly a nasty guy, and introducing leprosy and smallpox into the population didn’t help much. But at any rate, Quetzalcoatl was a real piece of work too.

            I get what you’re saying about how liquidity can drive us nuts. It certainly has been working as far as I can tell.

            I kind of wonder what “assumption metrics” means too. One possible example that pops into mind is the Taylor Rule.

            Taylor invented the Taylor Rule by taking historical, empirical data about how the Fed adjusts short term interest rates in response to “output gap” (“output gap” is kind of like the “1” you speak of). Taylor did this so he could figure out how the Fed acts. The Fed thought this was such a good idea that they began using the Taylor Rule in monetary policy decisions so they are reassured that they act like the Fed is expected to act.

            With notably rare exceptions, of course. Taylor pointed out Greenspan departed from the Taylor Rule during the housing bubble, and undershot the suggested interest rate!

            Current economic thinking is that since we are at the zero bound on interest rates, and all good Cartesian graphs have a negative x-axis (where we find our empirically graphed negative interest rates), then the obvious way to get the y-axis output gap pumped back to 1, is to do QE and increase the amount of money by a factor of 3 and the interest rate, being the Fed cost of short term funds, remains at zero.

            So this would be your case where 3 (being quantity of money) = 1 (a totally filled output gap).

            Get it?

        2. DownSouth

          craazyman said: “every formal mental construct used to organize the infinite sensations of reality is by definition an abstraction and invalid as a form of ultimate truth”

          So are you arguing that half a loaf of bread is the same as no bread?

          I am asserting that half a loaf is better than no bread, and half a loaf is certainly better than a full loaf laced with cyanide.

          Let me explain the ground rules of this little game called “rationality,” cooked up by none other than Plato et al.

          Rule 1: What a rich person thinks is logical, rational and reasonable.

          Rule 2: What a poor or working person thinks is illogical, irrational and unreasonable.

          Of course the logical operations of both rich and poor are questionable. That’s why, as you say, “by their fruits ye shall know them.” That’s where Bacon—-empiricism—-comes in.

          But when you claim that “the fruits are knowable only by revelation and not reason or logic,” you wander off into the land of irrationality, either that or psychopathology. After all, there is a difference between this and this, at least to most people.

          1. craazyman

            South, TJ himself wrote “we hold these truths to be self-evident, that all men are created equal . . . etc.”

            Nothing is self-evident through logic or reason, but only through revelation. I think you’re being a little hard on Plato. Remember it was the Athenian mob that killed Socrates.

            I was taking a piss a few hours ago in the mensroom my office and I was staring at the urinal. It was not clear just where the reality of the wall and the pipes becomes a “urinal” by any form of logic or reason. ha ha ha. Anybody can do this trick at home too. Just stare at the toilet and try to say exactly where the toilet begins and the floor ends or where the pipe to the toilet becomes a toilet. The toilet is a form of thinking, not a discontinuous aspect of reality.

            Anyway, we digress from capitalism . . . my apologies.

          2. Doug Terpstra

            Good one: “we hold these truths to be self-evident, that all men are created equal . . . ” declared the blind founding slaveholder.

            “Just stare at the toilet and try to say exactly where the toilet begins and the floor ends…[or dammit just sit down on it if your aim is that bad]”.

            DownSouth, your links to the fruits of men are illustrative and repugnant; the latter is especially heartbreaking. Note that photojournalist Carter committed committed suicide shortly after receiving a prize for that photo.

            Images like these, and American boys grinning vacantly over their civilian trophies of war are a shock to the system that goes beyond words. As CS quotes Billy Blake, “The eye sees more than the heart knows”. This is why the PTB are so adamant about squelching the images of their wars. Obama did the same with Abu Ghraib, breaking one of many of his crossed-finger promises. Who knows what lies now buried in Guantanamo?

            Speaking of eerie photos, here’s a creepy morph of President Barack Bush (not a suitable antidote):


            As evil rises to a crescendo, another quote bears meditation: “Be not therefore anxious for the morrow, for the morrow shall be anxious for its own things; sufficient for the day is the evil of it.”

          3. DownSouth


            “Self-evident” and “ultimate truth” are things that fundamentalist preachers and rationalists believe in, not scientists, or at least not scientists in the Western tradition.

            And you may very well believe that the road to “ultimate truth” is through revelation, but the rationalists believe the path is through logic.

            In the Western tradition, the advance of mankind, or of any single individual, is an endless process in which truth is constantly approached closer and closer without ever being finished or reached. The same idea about the unfolding of truth is at the foundation of Western science. It assumes that science is never static or fully achieved, but pursues a constantly receding goal to which we approach closer and closer from the competition-cooperation of individual scientists, each of whom offers his experiments and theories to be critically reexamined and debated by his fellow scientist in a joint effort to reach a higher (and temporary) consensus.

            Science is largely a way to ensure accountability for factual claims. Trust requires accountability. No one can be trusted on the basis of their job title—-not scientist, politicians, priests, or self-righteous intellectuals. An effective government, religion, or scientific culture must include mechanisms that make everyone accountable.

        3. monday1929

          “one and one and one are three
          got to be good looking cause he’s so hard to see……”

          There is your assumption.

        1. DownSouth

          One would expect no less from Blake, an outspoken rebel against class power and conventional religion (but certainly not against the liberationist Gospels of Jesus).

          And science has been more than kind to him, vindicating his critique of Cartesian-Newtonian rationality, and the class bias built into it. As the evolutionary psychologist Jonathan Haidt wrote in The Happiness Hypothesis:

          The importance of the orbitofrontal cortex for emotion has been further demonstrated by research on brain damage. The neurologist Antonio Damasio has studied people who, because of a stroke, tumor, or blow to the head, have lost various parts of their frontal cortex. In the 1990s, Damasio found that when certain parts of the orbitofrontal cortex are damaged, patients lose most of their emotional lives. They report that when they ought to feel emotion, they feel nothing, and studies of their autonomic reactions (such as those used in lie detector tests) confirm that they lack the normal flashes of bodily reaction that the rest of us experience when observing scenes of horror or beauty. Yet their reasoning and logical abilities are intact. They perform normally on tests of intelligence and knowledge of social rules and moral principles.

          So what happens when these people go out into the world? Now that they are free of the distractions of emotion, do they become hyperlogical, able to see through the haze of feelings that blinds the rest of us to the path of perfect rationality? Just the opposite. They find themselves unable to make simple decisions or to set goals, and their lives fall apart. When they look out at the world and think, “What should I do now?” they see dozens of choices but lack immediate internal feelings of like or dislike. They must examine the pros and cons of every choice with their reasoning, but in the absence of feeling they see little reason to pick one or the other. When the rest of us look out at the world, our emotional brains have instantly and automatically appreciated the possibilities. One possibility usually jumps out at us as the obvious best one. We need only use reason to weigh the pros and cons when two or three possibilities seem equally good.

          Human rationality depends critically on sophisticated emotionality. It is only because our emotional brain works so well that our reasoning can work at all. Plato’s image of reason as charioteer controlling the dumb beasts of passion may overstate not only the wisdom but also the power of the charioteer. The metaphor of a rider on an elephant fits Damasio’s findings more closely: Reason and emotion must both work together to create intelligent behavior, but emotion (a major part of the elephant) does most of the work. When the neocortex came along, it made the rider possible, but it made the elephant much smarter, too.

          Perhaps Blake’s rebellion against the straightjacket of Cartesian-Newtonian rationalism and the class power bias that inheres within it is made more explicit in this poem:

          I turn my eyes to the Schools & Universities of Europe
          And there behold the Loom of Locke whose Woof rages dire
          Washd by the Water-wheels of Newton. black the cloth
          In heavy wreathes folds over every Nation; cruel Works
          Of many Wheels I view, wheel without wheel, with cogs tyrannic
          Moving by compulsion each other: not as those in Eden: which
          Wheel within Wheel in freedom revolve in harmony & peace.

          1. craazyman

            I can’t resist observing that Blake’s hatred for Newtonian rationalism was due to its destruction of holistic form in favor of the alleged components that make up the form. The grinding downward reductivism that destroys the visionary perception of the Entire Thing. Or the way the mills broke craft down into component stages that destroyed the individual craftsman’s possession of his or her own craft. (to the extent he wasn’t talking about the British universities, which is another angle).

            And did the Countenance Divine,
            Shine forth upon our clouded hills?
            And was Jerusalem builded here,
            Among these dark Satanic Mills?

            Bring me my Bow of burning gold;
            Bring me my Arrows of desire:
            Bring me my Spear: O clouds unfold!
            Bring me my Chariot of fire!

            I guess you can make this mean anything you want. But to me it’s a call for a return to navigating the world through visionary states of artistic consciousness that understand Holistic Formal Perception through Imagination as the chariot of fire of the mind and the royal road to human divinity.

          2. craazyman

            and it’s clear Blake would not have been a fan of contemporary finance and its lust for what it calls “efficiency”, which it can neither define or explain with any coherent line of thinking.

          3. Cedric Regula


            That’s of course the same thing we always say about UFOs, but that’s just because we don’t understand UFOs. So artistic holistic projection is as good as anything else, is probably more fun, and certainly less dangerous as Plato liked to point out when contemplating the havoc that will be bestowed upon Athens by the metaphysical, fireball hurling, catapult machines.

          4. hermanas

            I love the poetry and think this is exactly the kind of thinking we will not be testing for.

  5. steve from virginia

    From the ‘Buttonwood Be Damned’ department: here is more analysis that leaves energy input costs out of all the equations: rising input costs effect productivity in unforeseen/unintended ways.

    Final demand is constrained even as finance — which exists to amplify final demand by way of the credit mechanism — seeks to increase what remains. This is finance’s claim but not its reality. The ‘gap’ is in spread between what finance is still able to offer and what role energy constraints will leave for finance to occupy.

    I’m personally sanguine. Enough energy consumption and the poor will start eating the financiers: not because they taste good, either.

    Finance offers a false hope, that it can hedge rising input costs and their effect on final demand: this is the folly of the MENA revolutions. Credit cannot help an Egyptian buy a new SUV which is the reason he revolted in the first place.

    He needs a job but job growth in an industrial setting requires energy growth, all the loans in the world are of no use without the job and the energy growth.

    Comic book fantasy meets reality, modernity is resource constrained and it going to get a lot worse (and will never get better). Our choice is to get used to or to get used to it.

    1. Random Lurker

      He needs a job but job growth in an industrial setting requires energy growth
      Why? I don’t see the connection.

      1. Justicia


        Here’s a thought experiment for you: name one sector of the economy that does not require energy inputs to expand. And remember info technology still needs computer terminals and electricity to function.

      2. readerOfTeaLeaves

        It’s absolutely fundamental.
        Why did Alcoa build aluminum processing factories in the Pacific NW? The energy required to fuel those processing plants is huge, and the hydropower supplied by Columbia River dams ‘fueled’ the energy required to process aluminum.

        Any type of manufacturing process that involves chemical or electrical processes requires energy. Factories are huge consumers of energy, and the cost of the energy source is critical to a whole lot of other decisions. In addition, once the goods are created, they have to be transported, which requires other kinds of fuels for the engines and motors that form the distribution system.

        (Hope that I understood your question correctly…)

  6. Nathanael

    Nice analysis of the current round of financial disaster. It has been evident to anyone who looked that increased extraction of money by the major banks was at the root of our problems.

    I’m waiting for someone to figure out how to bypass them. They are obviously not good for anyone, investors, depositors, or borrowers, and they don’t have a natural monopoly, merely a monopoly constructed artificially, so it should be possible for market forces to whack them.

    Who wants to start a bank? Qualify for FDIC insurance and Fed discount window lending, offer better deposit rates and better loan rates to better businesses and individuals.

    Also, how about setting up a shop for “discount fee” stock IPOs, just doing the legal legwork and running auctions, to bypass the criminals in the investment banks who seize 50% of the income and steer the stock to their buddies? Should be popular among venture capitalists. Google already bypassed the investment banks, and good for them.

    Et cetera.

  7. Francois T

    “But no government has the stomach to block financial mergers or even fight the exploitation of hard-to-supervise conflicts of interest that arise from combining investment and commercial banking services.”


    Go tell that to the Canadian banksters who in turn, threatened, cajoled, pleaded the Minister of Finances for the permission to “expand in new markets”. (read: all these incredible follies of the UK and US banks engaged in)

    “Safety and prudence first and foremost Ladies & Gentlemen!” was, (and still is, AFAIK) the motto of the government.

    Of course, this is a continuous bruise to the egos of those poor whiners who bitterly complained of this intolerable assault to their financial manhood.

    Isn’t it so sad? Cdn banksters don’t have the permission to go play in the bigger sandbox with the cool and richer dudes.

    That ought to HURT…so bad!

  8. KnotRP

    Apgar fails to draw the obvious connection between technology (communications tech in particular) going from zero to internet (a dot he manages to fill in, but fails to connect to anything and simply discards because two dimensions is apparently beyond him) and the 2 billion (million?…wtf is he being so stingy with the size of his dots?) Chinese and Indian workers brought into the developed world fold via those same communications. A good portion of that 2 billion is highly educated…more than enough to put a squeeze in the US work force population.

    So this analysis is professional grade? Dude needs to
    get out of his silo…

  9. Patrick

    I could almost stomach the fee scam if the very same people who create no value were not busy telling everyone else in the real economy that they need to create more value: as in shareholder value, value for money in government, etc. The pontificating from investment analysts and the like is all the more galling when we know how they really make their money. In today’s capitalist economy apparently those that can’t become bankers.

    1. readerOfTeaLeaves

      Agree that the bankers’ hypocrisy is nauseating. But this:

      Bankers charge a percentage of the value they transfer – be it the value of an acquisition target, a bond offering, or an investment account. The rest of the economy charges for the value they create (lawyers’ contingency fees excluded). And the more value that the economy transfers as a percent of what it creates, the higher the percent of earnings that goes to banks. The financial sector operates quite literally outside the capitalist economy.

      One of the finest explanations that I’ve encountered of the legally sanctioned extortion the banks are currently foisting on those of use working our butts off to try and *create* value.

      1. Cedric Regula

        Welcome to fee based finance. It works crappy for owners of capital(or money) too.

  10. Jim


    Loved the exchange (crazyman and DownSouth).

    Let me ask you both a question. What type of political/economic structure is consistent with your respective philosophic positions?

    Many of the commetariat on this sight seem content with the hope of some type of magical New Deal (i.e. the continual call for a real Left or real Democratic party) where a new breed of public servant somehow magically begins to take into consideration the actual wants and needs of the American people without the necessity of any major structural/cultural transformation.

    Yet your respective metaphysical speculations, appear to me
    much more philosophically radical (i.e. you both seem more comfortable with accepting the mysteries and uncertainties of experience).

    Or both of you seem comfortable with not translating into substance what can remain only process.

    Or put still another way both of your seem comfortable with “ultimate truth” as an ongoing process.

    What stucture of Government( and in particular what form of State) is consistent with such a philosophic stance?

    1. DownSouth


      I’m certainly no innovator, and believe innovation is for people who think and do, and not persons like myself, as much of innovation comes about by trial and error. However, it seems like a government accountable to the people would include something like the sections of the Paris Commune that Hannah Arendt speaks of in this passage:

      What for the American people had been a pre-revolutionary experience and hence seemed not to stand in need of formal recognition and foundations [which never occurred] was in France the unexpected and largely spontaneous outcome of the Revolution itself. The famous forty-eight sections of the Parisian Commune had their origin in the lack of duly constituted popular bodies to elect representatives and to send delegates to the National Assembly. These sections, however, constituted themselves immediately as self-governing bodies, and they elected from their midst no delegates to the National Assembly, but formed the revolutionary municipal council, the Commune of Paris, which was to play such a decisive role in the course of the Revolution. Moreover, side by side with these municipal bodies, and without being influenced by them, we find a great number of spontaneously formed clubs and societies—-the sociétés populaires—-whose origin cannot be traced at all to the task of representation, of sending duly accredited delegates to the National Assembly, but whose sole aims were, in the words of Robespierre, ‘to instruct, to enlighten their fellow citizens on the true principles of the constitution, and to spread a light without which the constitution will not be able to survive’; for the survival of the constitution depended upon ‘the public spirit’, which, in its turn, existed only in ‘assemblies where the citizens [could] occupy themselves in common with these [public] matters, with the dearest interests of their fatherland’. To Robespierre, speaking in September 1791 before the National Assembly, to prevent the delegates from curtailing the political power of clubs and societies, this public spirit was identical with the revolutionary spirit. For the assumption of the Assembly then was that the Revolution had come to its end, that the societies which the Revolution had brought forward were no longer needed, that ‘it was time to break the instrument which had served so well’. Not that Robespierre denied this assumption, although he added he did not quite understand what the Assembly wanted to affirm with it; for if they assumed, as he himself did, that the end of the revolution was ‘the conquest and the conservation of freedom’, then, he insisted, the clubs and societies were the only places in the country where this freedom could actually show itself and be exercised by the citizens. Hence, they were the true ‘pillars of the constitution’, not merely because from their midst had come ‘a very great number of men who once will replace us’, but also because they constituted the very ‘foundations of freedom’; whoever interfered with their meeting was guilty of ‘attacking freedom’, and among the crimes against the Revolution, ‘the greatest was the persecution of the societies’. However, no sooner had Robespierre risen to power and become the political head of the new revolutionary government—-which happened in the summer of 1793, a matter of weeks, not even months, after he had uttered some of the comments which I have just quoted—-than he reversed his position completely. Now it was he who fought relentlessly against what he chose to name ‘the so-called popular societies’ and invoked against them ‘the great popular Society of the whole French people’, one and indivisible… The only exception he now was ready to make was in favour of the Jacobins, and this not merely because their club belonged to his own party but, even more importantly, because it never had been a ‘popular’ club or society; it had developed in 1789 out of the original meeting of the States-General, and it had been a club for deputies ever since.

      Pre-revolutionary America had something very similar to the sections of the Paris Communes, as Arendt explains:

      The only remedies against the misuse of public power by private individuals lie in the public realm itself, in the light which exhibits each deed enacted within its boundaries, in the very visibility to which it exposes all those who enter it. Jefferson, though the secret vote was still unknown at the time, had at least a foreboding of how dangerous it might be to allow the people a share in public power without providing them at the same time with more public space than the ballot box and with more opportunity to make their voices heard in public than election day. What he perceived to be the mortal danger to the republic was that the Constitution had given all power to the citizens, without giving them the opportunity of being republicans and of acting as citizens. In other words, the danger was that all power had been given to the people in their private capacity and that there was no space established for them in their capacity of being citizens. When, at the end of his life, he summed up what to him clearly was the gist of private and public morality, ‘Love your neighbour as yourself, and your country more than yourself,” he knew that this maxim remained an empty exhortation unless the ‘country’ could be made as present to the ‘love’ of its citizens as the ‘neighbour’ was to the love of his fellow men. For just as there could not be much substance to neighbourly love if one’s neighbour should make a brief apparition once every two years, so there could not be much substance to the admonition to love one’s country more than oneself unless the country was a living presence in the midst of its citizens.

      Hence, according to Jefferson, it was the very principle of republican government to demand ‘the subdivision of the counties into wards’, namely, the creation of ‘small republics’ through which ‘every man in the State’ could become ‘an acting member of the Common government, transacting in person a great portion of its rights and duties, subordinate indeed, yet important, and entirely within his competence’. It was ‘these little republics [that] would be the main strength of the great one’; for inasmuch as the republican government of the Union was based on the assumption that the scat of power was in the people, the very condition for its proper functioning lay in a scheme ‘to divide [government] among the many, distributing to every one exactly the functions he [was] competent to’. Without this, the very principle of republican government could never be actualized, and the government of the United States would be republican in name only.

      Thinking in terms of the safety of the republic, the question was how to prevent ‘the degeneracy of our government’, and Jefferson called every government degenerate in which all powers were concentrated ‘in the hands of the one, the few, the well-born or the many’. Hence, the ward system was not meant to strengthen the power of the many but the power of ‘every one’ within the limits of his competence; and only by breaking up ‘the many’ into assemblies where every one could count and be counted upon ‘shall we be as republican as a large society can be’. In terms of the safety of the citizens of the republic, the question was how to make everybody feel ‘that he is a participator in the government of affairs, not merely at an election one day in the year, but every day; when there shall not be a man in the State who will not be a member of some one of its councils, great or small, he will let the heart be torn out of his body sooner than his power wrested from him by a Caesar or a Bonaparte’…..

      [T]he afterthought in which he clarified and gave substance to his most cherished recollections from the Revolution in fact concerned a new form of government rather than a mere reform of it or a mere supplement to the existing institutions.

      Jefferson evidently came to the realization late in life that once the dirty deed had been done, it had been done, and making government accountable to the people was going to be no easy undertaking.

      Here’s Arendt again:

      On the American scene, no one has perceived this seeming inevitable flaw in the structure of the republic with greater clarity and more passionate preoccupation than Jefferson. His occasional, and sometimes violent, antagonism against the Constitution and particularly against those who ‘look at constitutions with sanctimonious reverence, and deem them like the ark of the covenant, too sacred to be touched’, was motivated by a feeling of outrage about the injustice that only his generation should have it in their power ‘to begin the world over again’; for him, as for Paine, it was plain ‘vanity and presumption [to govern] beyond the grave’; it was, moreover, the ‘most ridiculous and insolent of all tyrannies’. When he said, ‘We have not yet so far perfected our constitutions as to venture to make them unchangeable’, he added at once, clearly in fear of such possible perfection, ‘Can they be made unchangeable? I think not’; for, in conclusion: ‘Nothing is unchangeable but the inherent and unalienable rights of man’, among which he counted the rights of rebellion and revolution. When the news of Shay’s rebellion in Massachusetts reached him while he was in Paris, he was not in the least alarmed, although he conceded that its motives were ‘founded in ignorance’, but greeted it with enthusiasm: ‘God forbid we should ever be twenty years without such a rebellion.’ The very fact that the people had taken it upon themselves to rise and act was enough for him, regardless of the rights or wrongs of their case. For ‘the tree of liberty must be refreshed, from time to time, with the blood of patriots and tyrants. It6 is its natural nature.’


      No doubt only great perplexity and real calamity can explain that Jefferson—-so conscious of his common sense and so famous for his practical turn of mind—-should have proposed these schemes of recurring revolutions. Eve in their least extreme form, recommended as the remedy against ‘the endless circle of oppression, rebellion, reformation’, they would either have thrown the whole body politic out of gear periodically or, more likely, have debased the act of foundation to a mere routine performance, in which case even the memory of what he most ardently wished to save—-‘to the end of time, if anything human can so endure’—-would have been lost. But the reason Jefferson, throughout his long life, was carried away by such impracticabilities was that he knew, however dimly, that the Revolution, while it had given freedom to the people, had failed to provide a space where this freedom could be exercised. Only the representatives of the people, not the people themselves, had an opportunity to engage in those activities of ‘expressing, discussing, and deciding’ which in a positive sense are the activities of freedom. And since the state and federal governments, the proudest results of revolution, through sheer weight of their proper business were bound to overshadow in political importance the townships and their meeting halls—-until what Emerson still considered to be ‘the unit of the Republic’ and ‘the school of the people’ in political matters had withered away—-one might even come to the conclusion that there was less opportunity for the exercise of public freedom and the enjoyment of public happiness in the republic of the United States than there had existed in the colonies of British America. Lewis Mumford recently pointed out how the political importance of the township was never grasped by the founders, and that the failure to incorporate it into either the federal or the state constitutions was ‘one of the tragic oversights of post-revolutionary political development’. Only Jefferson among the founders had a clear premonition of this tragedy, for his greatest fear was indeed lest ‘the abstract political system of democracy lacked concrete organs’.

    2. DownSouth

      Science may also offer a way forward. Or it may not.

      Religion, philosophy and politics have, thus far at least, proven to be all too easily co-opted. And science hasn’t proven much better. Or has it?

      Francois Haas posits the pivotal question. Does politics determine science? Or does science determine politics? Here’s Haas:

      Central to Nazi philosophy was the paradigm—broadly accepted as fact by scientists and community—that the Nordic race was not only superior to the “lower” races, notably Blacks and Jews, but involved in a terminal struggle with them for survival of the fittest. It is little recognized that this scientific framework did not rise de novo with the Nazis but had evolved over the previous 80 years from the related notions of eugenics and Social Darwinism. It had already legitimized Germany’s earlier racial policy in South West Africa during their Colonial period, and was the founding core of Nazi racial hygiene. It was formalized by making physicians officially responsible for carrying out this policy, culminating in implementation of the “Final Solution.”

      Leo Alexander, in his 1949 article “Medical Science Under Dictatorship” (NEJM), suggested that, “Science under dictatorship becomes subordinated to the guiding philosophy of the dictatorship (28) .” I am proposing the inverse, that Politics under Science becomes subordinated to the guiding philosophy of that Science. This article also touches on a potentially dangerous relationship between science and society that we tend not to recognize. As Ludwick Fleck noted in 1935 in Genesis and Development of a Scientific Fact, “This social character inherent in the very nature of scientific activity is not without its substantive consequences. Words which formerly were simple terms become slogans; sentences which once were simple statements become calls to battle. This completely alters their socio-cognitive value. They no longer influence the mind through their logical meaning—indeed, they often act against it—but rather they acquire a magical power and exert a mental influence simply by being used (29) .”

      So if we could get the science right, could we then get the politics and economics right? Of course the discipline of economics, as it is practiced in the world today, is about the farthest thing from science as one could possibly imagine.

      1. Cedric Regula

        I think Germans have blamed all German wars on Prussians, but that is neither here nor there as far as I can tell, since the Prussians invaded Germany centuries ago and have rigged the popular vote ever since.

        But to get science right and politics and economics will follow, sounds hopelessly backwards to me as long as scientists do whatever they get paid to do and politics and economics are the source of money. More of a chance the other way around, methinks.

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