Tuesday, April 24, 2012

A Look at Public University Education

A Look at Public University Education

A genius is precisely a man who defies all schools and rules, who deviates from the traditional roads of routine and opens up new paths through land inaccessible before.  A genius is always a teacher, never a pupil; he is always self-made.  (Mises, Bureaucracy 2007, 11). 

The first and most popular complaint that I received when teaching undergraduate students was that of ‘too much reading.’  One might dismiss such complaints by attributing them to laziness.  Maybe students have developed the expectation that they can coast through university, do minimal to no academic work, while still receive high grades.  In other words, maybe they have adopted the ‘something for nothing’ mindset.  Possibly, they have become too comfortable with the convenience of PowerPoint slides that free them from having to read books.  Maybe the students have no time for readings because their schedules have been filled already with socializing, sports games, beer pong tournaments, and video game playing.   

It is easy for a teacher to blame the students.  They are young, sometimes immature, and subjected to plenty of peer pressure.  If I were a university administrator, my automatic response would be to blame the teacher.  It must be something the teacher did wrong.  Maybe the teacher has not ‘engaged’ the students enough.  Maybe the teacher has used the incorrect ‘learning style.’  Maybe Johnny is a visual learner rather than an audio learner. 

The purpose of this paper is to attempt to answer two questions that I had often posed to myself.  Why did I feel as if I were teaching junior high school students in university, and why did nobody in authority seem to care?  To try to answer these questions I did two things.  I reported on some of the complaints that I received and on some of my observations.  I then created a model as an attempt to explain my historical observations and experiences.  My thesis is that university students, generally speaking, are academically unprepared for a rigorous education because they are victims of the whole-word method of reading instruction.  The whole-word method created a crisis of vocabulary.  The vocabulary crisis made books inaccessible to students, which then necessitated a drop in content knowledge levels.  This lack of content knowledge made expecting students to think critically and independently an impossibility.  The system then created a number of ways to cover up this problem.           

I began this paper by mentioning one of my favorite complaints, namely, ‘too much reading.’  This complaint applied to not only books but also test scripts.  To expect students to come to class with the assigned readings done ahead of time was to expect a miracle.   Moreover, I noticed that I could use vocabulary as a rule-of-thumb for spotting plagiarism.  If a word looked somewhat complicated, then it probably was not the student’s word.  A simple Google search of a phrase was sufficient to demonstrate this.  I was accused of being ‘condescending’ for using ‘big’ words.  How to explain Keynesian economics without mentioning ‘desired aggregate expenditure’ or ‘the multiplier effect’ in order to use a ‘non-condescending’ vocabulary was a mystery to me.  Another popular complaint was the insolent demand ‘just tell me the answer.’  This complaint usually arose if I did not tell them directly the answer but rather posed questions to them.  Assigning written case studies to students was invariably a bad idea.  As a case in point, students were given a 40-page business plan that must have been deliberately designed to be a disaster.  Yet, the same style of responses would appear repeatedly semester after semester with hardly anybody actually writing a legitimate critique of the plan.  In addition, I was amazed that I could easily confuse students with high school level mathematics.  Another disturbing observation that I made was the tendency to water-down textbooks.  To summarize, Hamlet needs revision.  Something is rotten not only in the state of Denmark but also in the modern public university.

How could I explain this combination of symptoms and observations?  I decided to begin my model-building investigation with the issue of reading itself.  The reason was because I read a number of stories on the Internet that went something like this:  Sally was an ‘A’ student in high school, valedictorian, breezed by all of her courses, and then nearly flunked out of university because she could not do the readings.  These anecdotes got me thinking.  Maybe the problem was that most of the students in university could not read at university level; hence, the complaint of ‘too much reading’ was really a complaint of ‘I can’t read these books.’  I surmised that the reading problem then caused all the other symptoms that I observed.      

Moreover, learning to read independently was supposed to be the first goal of primary education; hence, reading seemed to be the most natural place to start.  When I was in grade one, I had a red phonics textbook and had lessons that taught sounds, for example, the ‘ch’ sound accompanied by examples such as ‘child’ or ‘church.’  However, the whole-word method taught students to guess at words not to actually read them.  This paralyzed the rest of their primary and secondary educations.  Primary and secondary schools failed to build vocabulary and content knowledge levels.  Then, when high schools sent these graduates off to university, the recent graduates were unable to engage in critical thinking.  Since trying to fix the underlying problem would be rather difficult, the universities chose the expedient solution of dumbing everything down.  In the final analysis, the bureaucratic system won at the expense of both students and taxpayers.  The danger of this expedient system for civilization is that by producing unscientific minds, civilization is now much more likely to adopt non-economic ways of thinking.  Economics is a system for the harmonious and voluntary cooperation of individuals.  Without economics, civilization retrogresses back to social disharmony and war. 

My model is as follows:       

Hypothesis 1:

Increased exposure to whole-word reading instruction (equivalently, a decreased exposure to phonics-first instruction) will cause a decrease in student vocabulary levels. 

John Taylor Gatto, citing Dr. Seuss, concisely summarized the basic differences between the phonics method and the whole-word method.   Unfortunately, my version of Gatto’s Underground History is so underground that it does not even have page numbers!  My PDF reader has it at 71/304.

That was due to the Dewey revolt in the twenties, in which they threw out phonics reading and went to a word recognition as if you’re reading a Chinese pictograph instead of blending sounds or different letters.  I think killing phonics was one of the greatest causes of illiteracy in the country.

Mises, in an essay originally published on April 3, 1962, corroborated Dr. Seuss’s claim that Dewey was responsible for the change in reading instructional methods.  Mises wrote in this 1962 essay entitled A Dangerous Recommendation for High School Economics that: 

The modern American high school, reformed according to the principles of John Dewey, has failed lamentably, as all competent experts agree, in the teaching of mathematics, physics, languages, and history.  If the plans of the authors of this report materialize, it will add the teaching of economics to its other failings, and will also add to the curriculum indoctrination in very bad economics.

Mises mentioned the resulting indoctrination produced by Dewey’s system.  Being an automaton that waits to be told what to do is not supposed to be the objective of education in a free society. 

Unfortunately, the indoctrination of students is only one problem resulting from Dewey’s system.  Another major problem is that Dewey’s system decimates student vocabulary levels.  The most important quote from Gatto’s Underground History that supports the idea that the observed collapse in vocabulary can be attributed to the use of the whole-word method is found on what my PDF reader calls 66/304.

By the end of the fourth grade, phonics-trained students are at ease with an estimated 24,000 words.  Whole-word trained students have memorized about 1,600 words and can successfully guess at some thousands more, but also unsuccessfully guess at thousands, too.  One reigning whole-word expert has called reading a “psycholinguistic guessing game” in which the reader is not extracting the writer’s meaning but constructing a meaning of his own.

A reader trained in statistics could fault Gatto for failing to report the sample sizes and the standard deviations.  In other words, Gatto should have checked to see whether the difference between these two sample means was statistically significant.  Nevertheless, assuming these numerical results are representative of what to expect in the future from each method, the practical significance is that the whole-word method will prevent a student from building a vocabulary. 

Gatto’s numbers pertain to fourth grade students.  During the span of time from fourth grade to university attendance, the whole-word trained student might be able to pick up a larger vocabulary.  Unfortunately, at the time of writing, I was unable to find a study of freshmen university students that compared current vocabulary levels across the two groups, i.e., that compared the vocabulary level of freshmen university students originally taught reading with phonics with that of freshmen originally taught with the whole-word method.  Even so, Maureen Stout, in her book The Feel-Good Curriculum pages 134-135 wrote that the reading problem is not isolated to lower-level grades but continues into higher grade levels.

Children are not learning to read unassisted but are still struggling with the basics in the fifth and sixth grades and even later.  At Fern Bacon Basic Middle School, for example, in Sacramento, California, where 80 percent of students read at fourth-grade level or below, teachers are using flashcards to teach thirteen- and fourteen-year-olds basic English.

Therefore, it seems possible that these whole-word trained students in fourth-grade have fallen behind and stay behind their phonics-trained peers.  A fourteen-year old learning basic English is a grade 9 student in trouble.  This student only has four years to now master the language and then head off to university.  The phonics-trained student mastered the basics in grade one and so has seven additional years (i.e., grades 2 through 8) to develop his or her English skills.  In other words, it appears as if university freshmen originally trained with the whole-word method will be seven years behind freshmen originally trained with the phonics method.  In other words, the average university freshman is still at a grade 6 English reading level.   Therefore, I am not surprised that I read stories of freshmen being unable to read at a university level.

Hypothesis 2:

Decreased student vocabulary will cause decreased levels of knowledge. 

Charlotte Iserbyt, in her book Deliberate Dumbing Down, pages 105-106, discussed the link between vocabulary level and level of student knowledge. 

Gaston nodded solemnly:  “Young people know fewer words than their fathers.  That makes them know less.”  He fixed me with a foreboding eye:  “Can you imagine what a drop in knowledge of 1 per cent a year for 30 years could do to our civilization?”

Iserbyt did not mention the process by which lower vocabulary caused knowledge levels to fall.  This probably was because her source was referring to correlation studies.  My hypothesis is that with low vocabulary levels, books become inaccessible to students.  The student will be sitting there with a page open and will not know most of the words because the student has not previously memorized them.  The student will be frustrated because each attempt to read a serious book fails.  The teacher then has to tell the students the course content orally probably using bullet point PowerPoint slides.  In other words, the students will have to be ‘spoon-fed’ the course content orally.  ‘Spoon-feeding’ is an inefficient way to put knowledge into a student’s mind.  Much more content could be covered if the students were to be assigned serious books to read.  Therefore, low vocabulary levels will be associated with low content knowledge levels. 

Hypothesis 3:

Decreased student knowledge will cause decreased levels of critical thinking. 

Maureen Stout, on page 28 of her book The Feel-Good Curriculum, pinpointed the link between content knowledge and ability to engage in critical thinking.  According to Stout, the failure to develop content knowledge makes critical thinking impossible.  The students will never be able to think for themselves rendering them vulnerable to demagogic manipulation.

Whether that development takes place primarily in the school or in the home, the development of logical and analytical reasoning—critical thinking—is essential.  But of course we don’t just think in a vacuum (ever try to think about nothing?); we need something to think about; some subject matter to chew over; some body of knowledge that will put our brains to work.  Critical thinking is like reading and writing:  you can talk about it all day, but in the end you learn to do it by just doing it.  So fourth, we need to learn some body of knowledge.

Hypothesis 4:

Decreased ability to think critically will cause increased acceptance of non-scientific ideas.

In the foreword to the book Global Warming in a Politically Correct Climate, Dr. Zbigniew Jaworwski noticed a trend toward irrational thinking when it comes to the issue of global warming.

Mankind is sometimes described as “anthroponemia,” or the “cancer of the biosphere.”  This is caused by a number of modern irrational myths, which seem to have replaced the ghosts, haunted houses and witches of past generations.

Jaworwski’s description sounds as if it were a dream come true for Marxists.  Mises described the basic mindset of the Marxists as follows in Theory and History: An Interpretation of Social and Economic Evolution, page 75.  Notice the similar invocation to a ghost-like or divine-like being in order to make the theory work.  The Marxist phantom goes by the name ‘material productive forces.’  

We may summarize the Marxian doctrine in this way:  In the beginning there are the “material productive forces,” i.e., the technological equipment of human productive efforts, the tools and machines.  No question concerning their origin is permitted; they are, that is all; we must assume that they are dropped from heaven. 

In The Ultimate Foundation of Economic Science: An Essay on Method, page 6, Mises explicitly stated that this appeal to a ghost, phantom, or god is not science but rather metaphysics.  Mises wrote: 

The endeavors of the metaphysical discipline commonly called philosophy of history to reveal in the flux of historical events the hidden plans of God or some mythical agency (as, for instance, in the scheme of Marx, the material productive forces) are not science. 

Hypothesis 5:

Non-scientific minds will facilitate the destruction of Western civilization.

Mises wrote in his introduction to Human Action:  A Treatise on Economics page 10 that, “It is true that economics is a theoretical science and as such abstains from any judgment of value.”  In other words, a world full of people unable to think scientifically will also be a world unable to grasp economics.

A world unable to grasp economics is a world unable to maintain civilization.  Mises continued on page 10:

This civilization was able to spring into existence because the peoples were dominated by ideas which were the application of the teachings of economics to the problems of economic policy.  It will and must perish if the nations continue to pursue the course which they entered upon under the spell of doctrines rejecting economic thinking.

For example, the Zeitgeist movement would have us return to a non-monetary society.  Without money, how do they expect exchanges to happen?  Of course, in their scheme, exchanges are superfluous because somehow they have overcome the problem scarcity.  Many socialists have made this claim before.  The most basic question that a critical mind should ask is ‘why this time?  Why should we believe you now when you have been wrong so many times before?’  Then, a critical mind might say, ‘Show me how you have overcome scarcity.’  Would not technological progress lead to people demanding more goods and different goods than they had before?  Would not the desires of people always far exceed the ability of a production process to keep up?   

As Hayek wrote in The Road to Serfdom, page 131 regarding the claim of ‘abolishing scarcity’:

In their wishful belief that there is really no longer an economic problem people have been confirmed by irresponsible talk about “potential plenty”—which, if it were a fact, would indeed mean that there is no economic problem which makes the choice inevitable.  But although this snare has served socialist propaganda under various names as long as socialism has existed, it is still as palpably untrue as it was when it was first used over a hundred years ago. 

The population of the world will collapse if the world’s economy is subjected to both scarcity and no monetary exchange.  Monetary exchange facilitates the division of labor, and the division of labor facilitates higher levels of output that can then support larger populations.  In other words, the implementation of the Zeitgeist movement’s agenda will result in a large reduction of the world’s population.  Yet, this movement is quite popular at least on Facebook. 

In addition to helping promote socialist ideology, unscientific minds help advance the destructionist policy of inflation.  In Socialism: An Economic and Sociological Analysis, page 449, Mises mentioned, back in 1922 that inflation is a tool for destroying civilization.  Mises wrote:

The destructionist policy of interventionism and Socialism has plunged the world into great misery.  Politicians are helpless in the face of the crisis they have conjured up.  They cannot recommend any way out except more inflation or, as they call it now, reflation.  Economic life is to be “cranked up again” by new bank credits (that is, by additional “circulation” credit) as the moderates demand, or by the issue of fresh government paper money, which is the more radical programme.

The solution to this destructionist problem, according to Mises, is to educate the population about the difference between free markets and interventionist policies.  In Economic Freedom in the Present-Day World, page 278, Mises wrote:

Therefore nothing is more important today that to enlighten public opinion about the basic differences between genuine liberalism, which advocates the free market economy, and the various interventionist parties which are advocating government interference with prices, wages, the rate of interest, profits and investment, confiscatory taxation, tariffs and other protectionist measures, huge government spending, and finally, inflation.

However, how can one educate the population on this difference if most of the population has had their ability to think paralyzed by state-funded education?  The odds are definitely stacked against Mises’s proposals; he was completely aware of this problem when he wrote on page 277 of the same essay:

These two doctrines are today taught at schools, expounded in books, magazines, and newspapers, professed by political parties, and practiced by governments.  There are socialist schools, books, periodicals, parties, and governments, and there are interventionist schools, books, periodicals, parties, and governments. 

Where are the state-subsidized laissez-faire capitalist free market schools?  I attended two separate universities in Ontario, and I received two separate degrees in business.  Yet, I never learned laissez-faire in either of them.  So if business schools do not teach laissez-faire then who will?  Certainly, no one is naïve enough to assume that the political science professors who obsess over Karl Marx will present a fair and balanced treatment of laissez faire.  Will the history professors who disparage men such as Thomas Jefferson because he held slaves now extol the Jeffersonian virtues of minimal government and no central bank?  Will the women’s studies professors stand in favor of the ‘bourgeois’ ideas of private property and the division of labor?  Will they denounce unions, labor laws, and affirmative action hiring as forms of discrimination against the non-union members and against the non-victim group members?              

If most people could actually think through the problems of economics, they would realize that political leaders are worse than useless.  Political leaders are destructive because they keep adopting interventionist policies.   If most people could actually think through the problems of economics, they would realize that the entire system is rigged to benefit the connected at the expense of the masses.  They would see that institutions such as the Federal Reserve were deliberately set up to substitute a technocratic approach for a sovereign citizens approach.  This ability to think independently would be revolutionary; it would threaten the whole existing social order.  This explains why the current system is hostile to critical and independent thinking.    

Summarizing Hypotheses 1 through 5:

The whole-word method of instruction destroys the vocabulary level of students in the early elementary school grades.  They will then be deficient in terms of reading and vocabulary for the rest of their lives.  They will not catch up later on in their academic studies.  Trying to save fourteen-year olds by teaching them basic English is not a feasible way of running a school system.  The collapsed vocabulary level will then force teachers to ‘spoon-feed’ content because books can no longer function as the means of transmitting information.  The ‘spoon-feeding’ of content will result in less content coverage.  The body of knowledge inside a student’s brain will be lower than what it would have been had the student been able to access a library of books.  The lower content knowledge will then force schools to abandon any attempt at developing students’ critical thinking skills.  The student, lacking a sufficient knowledge base, simply cannot be asked to think critically.  These uncritical students will be easy targets for irrational and unscientific theories and ideas; hence, they will not be able to grasp economic thinking.  This will ultimately accelerate the collapse of the Western civilization.

Hypothesis 6:

The inability to engage in critical thinking will force schools to dumb down everything.

I noticed when I was in graduate school a bias in favor of the lowest common denominator.  I remember reading a while ago an online source that called this the cotton candy versus broccoli problem.  Broccoli students want to learn; broccoli students want real substance.   Cotton candy students, on the other hand, want to substitute entertainment and fun for academics.  Cotton candy students want fluff.  I had a graduate school examination in business research methods that consisted of the following.  The teacher posted online the lecture slides, naturally in PowerPoint.  The students then memorized the content of these slides, thus making the reading of the textbook a superfluous activity.  The test consisted of filling in the blanks from the same PowerPoint slides.  In other words, students did not need to analyze critically anything.  Moreover, they did not even need to understand any of the content.  Effectively, they were asked to demonstrate their ability to memorize PowerPoint slides.  This test, although attempting to be cotton candy oriented, was sub-optimal.  The teacher made a mistake by expecting students to write out what they memorized in answer books using a pen or a pencil.  One complaint that I received was that I caused a student to have a ‘wrist injury’ for making him write out his own lecture notes.  Therefore, a better teacher would have used Scantron multiple-choice format with four, not five, possible answer choices because five choices would constitute ‘too much reading.’  A five-star teacher would have used the ‘true-false’ format because this format not only minimizes reading but also ensures a fifty percent chance of guessing correctly.  Moreover, the ‘effective’ teacher should bring pencils and erasers to class because expecting students to come prepared would be asking too much of them.   

 Hypothesis 7:

Dumbed down courses cause students to spend less time on academics and more time on non-academic pursuits.

Since students have been absolved of all their academic responsibilities, i.e., they do not have to read, to write, to attend class, or to think, what then will they be doing with all of their spare time?  They might have to grudgingly spend a few hours memorizing a bunch of PowerPoint slides before a test, but what will they be doing during all the rest of their time?  I remember receiving complaints that I made students have to study on a weekend.  Apparently, their other ‘effective’ teachers designed things so that they would not have to study for more than three hours for a final examination.  I guess the lesson learned here is:  do not interfere with fun time.  Sadly, we may have reached the point where fun time is now all the time. 

Skipping and walking out are all too common, except immediately before a test or examination.  The rate of absence can be as high as 80%, if class time is a Thursday night or if the topic is mathematics.  I doubt that students who are absent habitually are actually engaged in autodidactic learning.  

Should teachers at a university do something about this attendance problem?  Should they try to force students to spend more time on academics?  A few months ago, I posted on Facebook a story about how Buffalo, New York was planning to hire back a small army of truancy officers.  A friend of mine, who has taught high school, thought that this was a great idea because he also experienced the absentee problem.  I used to think this way.  However, I changed my mind.  Forcing students to attend lectures against their will was counterproductive.  All this produced was a chorus of complaints.  Every ten minutes the forced to attend students will interrupt with the complaint of ‘will that be on the test?’  To use a phrase from the movie A Beautiful Mind, I was surrounded by the “young, eager minds of tomorrow.”  Another popular complaint was to shout out, ‘but that’s not my major!’  Actually, both students and administrators will use this excuse.  If the teacher mentioned something involving numbers then the student can claim, ‘but I’m not a math major.’  If the teacher criticized the student’s essay then the student can claim, ‘but I’m not an English major.’  I labeled this way of thinking the ‘hermetically sealed box’ problem.  The student has boxed his or her mind into one and only one area of interest.  An extension of the ‘hermetically sealed box’ problem is to apply it to temporal issues.  For example, many students erroneously view each class as a ‘self-contained’ unit.  A student should never be expected to integrate material from previous courses.  I had students who boldly declared, ‘after the exam, I will forget it all anyway.’  Therefore, from a practical perspective, forced attendance does not work. 

The other major mistake was to subject the broccoli students to the cotton candy students.  By forcing attendance, everybody lost.  The broccoli students were held back academically because of the incessant interruptions coming from the cotton candy students.   Moreover, to make the class ‘accessible,’ the teacher must set the academic standard at the cotton candy level.  The cotton candy students were obviously not happy because they were forced to do something against their wills.  The taxpayers should be furious that they are paying for an education that is not happening.  The taxpayers should demand a refund, but realistically that will never happen under a state-funded model.

The practical teaching solution is to let the cotton candy crowd skip.  In fact, the easiest way to drive the cotton candy students out is to begin the first class with a high school mathematics lesson.  For the rest of the semester, I only had to teach the 20% of the students who were broccoli type.  This made my teaching experience much more meaningful because now I did not have to listen to all the complaints from the cotton candy crowd.  I could actually teach; I did not have to self-censor or coddle.  I did not have to worry about ‘using big words.’  I could raise my academic standards.  I could get students to ask questions, to dig deeper, and to want to learn more.  Students would come prepared.  It was great!  To deal with the cotton candy crowd, simply email them enough canned questions and answers so that they can pass the exams.  For example, if you want to engineer a class average of roughly 60% and you have a multiple-choice test worth 100 points, then send them maybe 50 of the questions and answers ahead of time.  Since the cotton candy crowd will only memorize and regurgitate what you send them, they will all score around 50%.  Your broccoli students will score on average around 80%.  The weighted average is then (80% of the students * 50 points) + (20% of the students * 80 points) = 56 points on average.        

The sad truth seems to be that cotton candy students want to be dealt with as if they were Pavlov’s dogs as opposed to human beings.  They want to be trained not educated.  They do not want to understand.  They do not want to think.  Just tell me the answer!  This is exactly what the Scanton memorize and regurgitate process encourages.  If you ring a bell (stimulus), Pavlov’s dog salivates (automatic response).  If you give your student the appropriate question stem (stimulus), they will give you exactly what they have memorized (automatic response).  This is exactly the thought process I went through when I concocted my scheme for multiple-choice tests above.  I surmised that even if my students could not read my canned questions and letter answers they could at least do some sort of ‘picture’ recognition.  They could look at the question as if it were a picture.  Then, when they saw the same ‘picture’ on the actual exam they would automatically fill in the appropriate Scantron bubble.   In other words, the examination is not about academics but really about the teacher’s ability to ‘effectively’ condition student responses.  By controlling the number of conditioned responses, the teacher can then pretty much engineer whatever grade average the teacher wants to see.  This works because the cotton candy students will answer the non-conditioned questions incorrectly.

Hypothesis 8:

The combination of dumbing everything down with most time spent on non-academics results in higher enrolment.

Dumbing down protects the ‘retention-based’ funding model.  This model says that students are ‘customers’ or sources of revenue.  Failing plenty of students means less revenue; hence, it is in the best financial interests (at least in the short-run) to keep these students around for as long as possible, assuming of course that their checks keep clearing.  In the long-run, this method is self-defeating because it will destroy the credibility of the institution’s degree.   

The problem is further exacerbated when the current students lets their friends know about how much fun they are having in their dumbed down university.  This encourages even more young people to sign-up for the university party.

Hypothesis 9:

Higher enrolment leads to increased budgets and bigger budgets lead to a bigger army of bureaucrats.

John Taylor Gatto, in his book Dumbing us Down, on page 58 pointed out that “Nearly a century ago a French sociologist wrote that every institution’s unstated first goal is to survive and grow, not to undertake the mission it has nominally staked out for itself” (emphasis in the original).  In other words, one should expect that education is not the goal of the university.  The real goal is institutional survival. 

Take for example, this bizarre obsession with grades.  Bureaucrats will obsess about grades.   They monitor grades under the assumption that they actually measure something meaningful.  It would be unfair to give one section more A’s than another section!  The perverse notion seems to be that a teacher is a distributor of a scarce resource called ‘high grades.’  If one class receives more of these scarce resources than another does then an injustice of unequal distribution of grades has occurred.  This is a serious issue worthy of bureaucratic response.  This happened to me; I was accused of being ‘unfair’ to one section for ‘giving’ them fewer A’s than I ‘gave’ to another section.  (As an aside, what ever happened to ‘earning’ one’s grade?)

This equal grade distribution obsession exposes the complete bankruptcy of the ‘student as customer’ phrase. Part of the reason for why one often hears the use of the term ‘customer’ in education is to imply that profit-seeking individuals have hijacked the university.  In other words, capitalism with its profit-orientation has destroyed education.  Capitalism has robbed her of her noble pursuit of truth by sullying her with base monetary considerations.  The specter of greed now haunts the hallowed hallways of higher learning.  This portrayal is made by Craig Brandon.  Brandon’s book is quite accurate in its portrayal of the modern university.  However, his indictment of capitalism is wrong.  In his book, The Five-Year Party, on page 9 he wrote,  “The takeover of American colleges by these new CEO-wannabe administrators with their eyes firmly focused on the bottom line completely changed the power structure of higher education.”  On page 8 he wrote of the greed-obsessed university administrators, “These new administrators had more in common with Gordon Gekko than they did with Aristotle.”  However, if the modern university were a capitalist institution, i.e., a laissez-faire institution run by CEO wannabes, then why is there this obviously communistic obsession with equal distribution of grades?  Surely, no one will argue that capitalism or laissez-faire is a system designed to ensure equal distribution of scarce resources.  Yet, this supposedly Gordon Gekko run institution is also worried about the equal distribution of the scarce resource called ‘high grades.’ 

The problem here is that students are not customers and university administrators are not CEOs.  These terms make a false comparison.  At best, students are ‘second-class’ customers because they only buy part of their education.  Milton and Rose Friedman, in Free to Choose, page 175 wrote:

At government institutions at which tuition fees are low, students are second-class customers.  They are objects of charity partly supported at the expense of the taxpayer.

Of course, students who receive state subsidies are not paying the full-price of their tuition.  It is misleading to call them charity cases.  Charity implies a choice.  I can give money or not to a charity recipient.  Paying taxes is not charity; it is coerced behavior.  These ‘second-class customers’ are objects not of charity but of some state imposing its value system as the only acceptable value system.  This negates the value systems of the individual taxpayers.  The taxpayer as consumer is not permitted to consume what he or she values.         

A better characterization might begin by claiming that administrators are ‘political entrepreneurs,’ to use Thomas DiLorenzo’s phrase (2004, 111), and students are simply the prize that all ‘political entrepreneurs’ seek, namely, subsidized government handouts.  Public funding of state-universities has nothing to do with capitalism (laissez-faire) but rather has everything to do with mercantilism.  Using DiLorenzo’s approach, the confusion is caused by failing to distinguish between ‘political’ and ‘market’ entrepreneurs.  ‘Political’ entrepreneurs receive state subsidies and function in an environment rigged by government in their favor.   A ‘market’ entrepreneur functions in an environment without government favoritism.   A ‘market’ entrepreneur has to convince the customer to engage in a voluntary exchange.  A ‘political entrepreneur’ does not convince the taxpayer of anything because the taxpayer is forced to pay.

In addition, one can easily see a historical pattern of misrepresenting government interventionism as if it were free market economics.  Mises wrote on pages 277-278 of Economic Freedom in the Present-Day World:

How could they realize this, when there are so many groups eager to represent a policy of interventionism as a policy for the preservation of economic freedom and the market economy?

This is what the public universities are doing.  They represent a policy of interventionism as a policy for the preservation of free markets.  They speak of ‘customer satisfaction’ but are really beneficiaries of government protectionism (i.e., a type of intervention).  There certainly is not free entry into the university industry.  If there were, then many of these public universities would be in trouble.  Far too often courses consist of presenting to students pre-packaged PowerPoint slides, pre-packaged test banks, and pre-packaged videos.  In other words, public universities are selling a ‘canned’ solution or a homogenous product.  If the market were free in the sense of free entry, then entrepreneurs would rush in to undercut the public universities.  Instead, of having armies of bureaucrats, physical lecture halls, security forces, cleaning staff, parking lots etc., an entrepreneur could easily take the pre-packaged ‘canned’ solution, deliver it over the Internet, and charge a much lower price.  The entrepreneur could easily provide price competition while rending the existing university business model obsolete.        

Another reason demonstrating why CEOs are not running public universities is that they oppose innovation.  I remember being laughed at by administrators for trying out different innovations.  They laughed at my YouTube 10 minute clips idea.  I thought it was a brilliant idea because I had found a solution for getting around the reading problem.  Using my system, students could watch clips whenever watching was convenient for them to do so.  Effectively, I had created an audio book.  Of course, by giving my video clips away free, I created ‘unfair’ competition for the bookstore.  What was I thinking!  The fact of the matter is that this hostility toward innovation is not characteristic of a CEO functioning as a ‘market’ entrepreneur.  It is however, characteristic of bureaucratic management.  As Mises wrote in Bureaucracy, page 84:

No bureaucratic system can achieve anything else.  But it is precisely this adamant conservatism that makes bureaucratic methods utterly inadequate for the conduct of social and economic affairs.  Bureaucratization is necessarily rigid because it involves the observation of established rules and practices.

A CEO functioning as a ‘market’ entrepreneur has to innovate.  Not innovating means death to an organization.  Therefore, our university administrators are not CEOs because they are living in some sort of fairytale world that allows them to survive without innovating.  Gabriel Kolko, in his book The Triumph of Conservatism:  A Reinterpretation of American History, 1900-1916, provided a case study of what happened in a market to a firm that failed to innovate.

Kolko on page 42 succinctly summarized the factors that caused Standard Oil to lose market share. 

In this area the independent oil companies led the field, pioneering in gas stations in the same way that they had surpassed Standard in developing improved tank cars and trucks as well as most of the major innovations in petroleum chemistry.  In a spiraling market for oil such as existed from the turn of the century on, Standard, conservative and technologically uncreative, was no match for the aggressive new competitors.  The dissolution decree of 1911 tended to knock Standard out of its lethargy […]

The internal ideological conformity of the university guarantees that innovation will never happen.  Grass-roots initiatives on the part of teachers are unlikely, maybe even impossible.  To innovate, one has to challenge the existing order.  In fact, as Mises pointed out in Liberalism: The Classical Tradition, page 32:

All mankind’s progress has been achieved as a result of the initiative of a small minority that began to deviate from the ideas and customs of the majority until their example finally moved the others to accept the innovation themselves. 

The university has a culture hostile to anyone deviating from the approved customs and teachings.  I remember that I was told explicitly not to innovate.  After all, innovation implies that differences will appear across teaching sections in direct violation of the ‘equality’ and ‘fairness’ provisions of our pseudo-CEOs.  Much of this problem stems from the one-sidedness of the hiring process.  By hiring people that all share the same perspective, the university guarantees that nobody will challenge the status quo.  Mises mentioned this problem in an essay entitled Economic Teaching at the Universities, reprinted in Planning for Freedom, page 162:

The mischief is rather to be seen in the fact that the statements of these teachers are not challenged by any criticism in the academic sphere.  The pseudo-liberals monopolize the teaching jobs at many universities.  Only men who agree with them are appointed as teachers and instructors of the social sciences, and only textbooks supporting their ideas are used.      

Mises was not alone in his observation that hiring processes often discriminate against the innovators.  William Greider, in his book Secrets of the Temple, page 285 observed that the Federal Reserve System, at its inception, deliberately discriminated against original thinkers.

The System’s many research departments did not, as a rule, hire eccentric thinkers who produced grand new theories of economics that might disrupt conventional thinking.

Therefore, it is erroneous to suggest that university administrators have anything in common with a business CEO.  They are bureaucratic ‘political’ entrepreneurs not ‘market’ entrepreneurs.  They function in a conservative environment not in a dynamic one.  As Mises argued in Liberalism:  The Classical Tradition, page 74, “No private enterprise, whatever its size, can ever become bureaucratic as long as it is entirely and solely operated on a profit basis.”

Hypothesis 10:

To maintain the army of bureaucrats, new policies must be invented to protect the system from outside scrutiny.  The bureaucrats will dream up additional ways to dumb the system down while pretending that their interventions are beneficial.  Hence, retention-based funding will lead to the outcomes predicted by the theory of bureaucratic displacement. 

Milton and Rose Friedman, in their book entitled Free to Choose: A Personal Statement, wrote on page 155 (emphasis in original):

We referred to the Theory of Bureaucratic Displacement that Dr. Max Gammon had developed after studying the British National Health Service:  in his words, in “a bureaucratic system…increase in expenditure will be matched by fall in production… Such systems will act rather like ‘black holes’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of ‘emitted’ production.”

One effective tool in this regard is the utilization of student evaluation scores to determine hiring and firing decisions of faculty.  Not only does this ensure that academic standards have to collapse but this also creates the illusion that the army of bureaucrats is hard at work protecting students from ‘ineffective’ faculty.  Moreover, this becomes the tool for measuring student satisfaction, which then is advertised to attract more students.  I remember when I had some students shout out in class something along the lines of:  ‘Well, Professor (name withheld) let’s us out early, sometimes one-and-a-half hours early all the time and we get great grades.’  This is exactly what the student evaluation process produces, professors who have to encourage skipping and high grades for no academic effort.  Student evaluations guarantee the slackers paradise.  Seventeen-year olds now run universities.  What more proof does one need of the insanity of this entire system?  This is why the army of bureaucrats monitors student evaluation scores, and it could care less about plagiarism, skipping, cheating, and all the other academic deficiency problems. 


This paper highlights the fact that too many students in university today display all the signs of being grossly unprepared for the rigors of a university education.  Not all students are deficient; one can find roughly 20% of a class that wants to learn and deserves admission to a university.  My paper focused on the remaining 80%.  Maybe future research could show that the former group was mainly trained in phonics while the latter group was trained mainly in the whole-word method.  My paper tried to show that these university students were academically damaged in their lowest-grade levels.  They were not taught how to read properly and this deficiency became a life-long handicap.  The whole-word method created a vocabulary deficiency handicap, thus making it impossible for students to read serious academic books.  This forced the teachers to have to rely upon a ‘spoon-feeder’ approach that necessitated less content knowledge coverage.  The lack of content knowledge made it impossible for students to think critically.  To cover-up all the failure, everything was dumbed down and the theory of bureaucratic displacement took over.  More and more money was thrown at education not to solve the underlying problem but rather to hide the problem from everyone. 


Brandon, Craig.  2010.  The five-year party:  How colleges have given up on educating your child and what you can do about it.  Dallas:  BenBella Books.

DiLorenzo, Thomas J.  2004.  How capitalism saved America:  The untold history of our country, from the pilgrims to the present.  New York:  Three Rivers Press.

Friedman, Milton, and Rose Friedman.  1990.  Free to choose:  A personal statement.  San Diego:  Harcourt Brace. 

Gatto, John Taylor.  2008.  Dumbing us down:  The hidden curriculum of compulsory schooling.  Gabriola Island:  New Society Publishers.

---.  The underground history of American education:  A schoolteacher’s intimate investigation into the problem of modern schooling.

Greider, William.  1987.  Secrets of the temple:  How the Federal Reserve runs the country.  New York:  Simon & Schuster Paperbacks.

Hayek, F. A. 2007.  The road to serfdom:  Text and documents.  Vol. 2 of The collected works of F. A. Hayek.  Chicago:  University of Chicago Press.

Iserbyt, Charlotte Thomson.  1999.  The deliberate dumbing down of America:  A chronological paper trail.  Ravenna, OH:  Conscience Press.

Jaworwski, Zbigniew.  2004.  Foreword to Global warming in a politically correct climate:  How truth became controversial, by M. Mihkel Mathiesen.  Lincoln, NE:  iUniverse Star.

Kolko, Gabriel.  1977.  The triumph of conservatism:  A reinterpretation of American history, 1900-1916.  New York:  The Free Press.

Mises, Ludwig von.  1974.  Economic teaching at the universities.  In Planning for freedom:  And twelve other essays and addresses, 161-172.  Memorial ed.  South Holland, IL:  Libertarian Press. 

---.  1981.  Socialism:  An economic and sociological analysis.  Trans.  J. Kahane.  Indianapolis:  Liberty Fund. 

---.  2005.  Liberalism:  The classical tradition.  Ed.  Bettina Bien Greaves.  Indianapolis:  Liberty Fund. 

---.  2005.  Theory and history:  An interpretation of social and economic evolution.  Ed.  Bettina Bien Greaves.  Indianapolis:  Liberty Fund. 

---.  2006.  A dangerous recommendation for high school economics.  In Economic freedom and interventionism:  An anthology of articles and essays, ed. Bettina Bien Greaves, 192-196.  Indianapolis:  Liberty Fund.

---.  2006.  Economic freedom in the present-day world.  In Economic freedom and interventionism:  An anthology of articles and essays, ed. Bettina Bien Greaves, 268-278.  Indianapolis:  Liberty Fund.

---.  2006.  The Ultimate Foundation of Economic Science:  An Essay on Method.  Ed. Bettina Bien Greaves.  Indianapolis:  Liberty Fund.

---.  2007.  Bureaucracy.  Ed. Bettina Bien Greaves.  Indianapolis:  Liberty Fund.

---.  2007.  Human action:  A treatise on economics.  Ed. Bettina Bien Greaves.  4 vols.  Indianapolis:  Liberty Fund.

Stout, Maureen.  2000.  The feel-good curriculum:  The dumbing down of America’s kids in the name of self-esteem.  Cambridge, MA:  Da Capo Press.

Wednesday, April 11, 2012

The Fatal Conceit

The conception of a self-organising structure began to dawn upon mankind, and has since become the basis of our understanding of all those complex orders which had, until then, appeared as miracles that could be brought about only by some super-human version of what man knew as his own mind.  --F. A. Hayek, The Fatal Conceit (emphasis mine)

Professor Hayek proposes a dichotomy between a self-organizing system and a directed system with the directed system functioning as though God himself were giving the orders from heaven to mankind.  Hayek stresses that this distinction is the primary concern of his book, The Fatal Conceit:  The Errors of Socialism, when he explicitly states that he is addressing the distinction between the 

advocates of the spontaneous extended human order created by a competitive market, and on the other hand those who demand a deliberate arrangement of human interaction by central authority based on collective command over available resources.  (7)
First, I want to go over some of the "key quotes" that popped into my mind after reading these two quotations from F. A. Hayek.  These quotations remind me of not only Ludwig von Mises's discussions of both the materialistic philosophy and the philosophies of history but also Gustave de Molinari's discussions of the divine right of kings theory of government.  Then, I want to apply the concepts from the discussion to a real world example, namely, the story of the creation of the Federal Reserve System.

 Some Germane Quotations That Popped into my Head

When F. A. Hayek mentions the "super-human" mind and "miracles," he is suggesting a much bigger problem that embraces "supernatural" interventions into the affairs of mankind.  The theme here seems to be that some "exogenous" [i.e., originating from OUTSIDE] force is at work directing and guiding the affairs of mankind.  

I want to begin with Mises's Theory and History and his discussion on the "theme of the philosophy of history."  This is a term that probably most of you have never heard of before!  I have heard of it used before mainly in discussions of economic history.  Mises describes "philosophies of history" as being equivalent to Biblical prophecies.  They are at the level of "divine revelations," which pertain to the course of mankind's future--what will happen has already been written down in the book and so the future is inevitable.  Mises writes that "In pre-Marxian ages it was not customary to call philosophies of history scientific.  Nobody ever applied the term 'science' to the prophecies of Daniel, the Revelation of St. John, or the writings of Joachim of Flora" (104).

Philosophies of history often set up the "leader" as the "representative" of God himself.  God tells the "leader" what to do; the "leader" then relays these orders to the masses of the people, who are expected to obey the "leader" because the "leader" is God's representative on earth.  The "leader" must guide and direct the affairs of the masses because they are simply too stupid to run their own lives.  Mises writes about this version of the philosophy of history that 

the first group contends that Providence [i.e.,  God, especially when conceived as omnisciently directing the universe and the affairs of humankind with wise benevolence] elected some mortal men as special instruments for the execution of its plan.  In the charismatic leader superhuman powers are vested.  He [The leader] is the plenipotentiary [a diplomatic agent possessing full power and authority] of Providence [God] whose office it is to guide the ignorant populace the right way. (109)

In a similar vein, Mises discusses how this "superhuman" director of human affairs once again plays an integral role when one tries to apply a "materialistic philosophy" in the real world of running a government.  By "materialistic philosophy," Mises is referring to a doctrine that claims that "all human thoughts, ideas, judgments of value, and volitions [i.e., a choice or decision made by the will] are the product of physical, chemical and physiological processes going on in the human body" (Theory and History, 63).  Usually, a materialistic philosophy "declares that the only factors producing change are those that are accessible to investigation by the methods of the natural sciences (The Ultimate Foundation of Economic Science, 25).   Mises spends most of his time addressing a "quasi-materialistic doctrine" called the "Marxian dialectical materialism" (The Ultimate Foundation of Economic Science, 26).  The difference between a "pure" materialistic philosophy and the Marxian quasi-materialistic philosophy is over what we ascribe thinking, ideas, judgments of values, and volitions to.  In the pure materialistic philosophy, they are ascribed to physical, chemical and physiological processes.  In the Marxian version, "action and volition are ascribed to the material productive forces" (The Ultimate Foundation of Economic Science, 27).  What this means is that men do not think, do not form judgments of value, and do not act.  It means that "the production relations, the necessary effect of the prevailing stage of the material productive forces, are determining their ideas, volitions, and actions" (ibid).

For Mises, all of these materialistic and quasi-materialistic metaphysics involve creating a "God" (or a phantom as he calls it) who functions as a super-human entity.  This super-human entity ends up making all the choices, doing all the thinking, and performing all the acting.  Man no longer exists; he is being manipulated by something.  Man seems to be more like a puppet in these doctrines; someone or something is pulling all of the strings of the "puppet-man."  These metaphysical doctrines

must imply converting an inanimate factor into a quasi man and ascribing to it the power to think, to pass judgments of value, to choose ends, and to resort to means for the attainment of the ends chosen.  It must shift the specifically human faculty of acting to a nonhuman entity that it implicitly endows with human intelligence and discernment.  There is no way to eliminate from an analysis of the universe any reference to the mind.  Those who try it merely substitute a phantom of their own invention for reality.  (The Ultimate Foundation of Economic Science, 28)
And we are back to the "divine" or "super-human" entity once again trying to directing the course of human affairs.  Mises goes so far as to argue that the logical conclusion of this arrangement is tyranny.  It is the creation of a situation in which some men know the will of God while others do not.  If those who do not know the will of God do not conform they must be liquidated.  Mises writes that, under this doctrinal approach

the only way it can avoid a radical skepticism that does not have any means of sifting truth from falsehood in ideas is by distinguishing between "good" men, i.e., those who are equipped with the faculty of judging in conformity with the mysterious superhuman power that directs all affairs of the universe, and "bad" men, who lack this faculty.  It must consider as hopeless any attempts to change the opinions of the "bad" men by discursive reasoning and persuasion.  The only means to bring to an end the conflict of antagonistic ideas is to exterminate the "bad" men, i.e., the carriers of ideas that are different from those of the "good" men.  Thus, materialism ultimately engenders the same methods of dealing with dissent that tyrants used always and everywhere.  (The Ultimate Foundation of Economic Science, 29, emphasis mine)
What all of this sounds like to me is this:  X has idea A and Y has idea B, and idea A conflicts with idea B.  But how can this be?  How can our super-human force, our material productive forces, give off conflicting ideas?  If these material productive forces do all the thinking and acting then how can we have these conflicting ideas?  Shouldn't X have idea A and Y have idea A too?  Shouldn't our super-human force be consistent when it comes to implanting ideas into the minds of men?  Is X the "God-sent prophet" revealing to use the truth?  Is Y the "hell-born tempter" sent to deceive mankind?  Who is the legitimate leader and who is the devil incarnate  (Theory and History,109)?  All of this seems to boil down to one person claiming to have correctly discerned the message and therefore everybody else must either be a liar or must not have heard from our super-human force.  The person who does hear from the super-human force must then be telling the truth, and this person must be the legitimate leader.

From Mises's Theory and History and from his Ultimate Foundation of Economic Science, we have seen the operation of some sort of super-human entity or some sort of divinely-appointed leader who gets to direct the course of human affairs and gets to direct each and every individual.  Each human "being" seems to be reduced to the status of "puppet," i.e., a non-acting, non-thinking, non-choosing entity.  As you can tell, Mises's discussion is very abstract.  To bring this discussion a bit closer to the "concrete" level, I will take a look at Gustave de Molinari's treatment of this issue, which is found in his book The Production of Security.  I will then complete this blog with a very "concrete" look at the history of the Federal Reserve System.

Molinari, writing in 1849 France, discusses what he calls the Regime of Terror.  There are two variations on this theme:  the Divine Right of Kings and the Divine Right of Majorities.  

Mises's discussion above about philosophies of history and the materialistic philosophies seems to relate to the divine right of kings discussion found in Molinari's work.  Both involve invoking appeal to a mystical being that is going to direct and guide society and mankind.  Molinari speaks of how divine Providence (using the same language that Mises used) has appointed his representatives on earth to run society for him.

[Legislators] being the continuators of Providence on earth, they would have to be regarded as almost equal to God.... If you succeed in persuading the multitude that God himself has chosen certain men or certain races to give laws to society and to govern it, no one will dream of revolting against these appointees of Providence, and everything the government does will be accepted.  (The Production of Security, Chapter 9)

It seems to me that based on Mises and Molinari, we have somebody or some small group claiming to have heard the voice of God, the voice of Providence, the voice of the material productive forces, or whatever and nobody else is allowed to question this voice.  The voice has spoken.  The rest of you masses have only one function:  obey the leader.  The advantage here is simple:  how can anybody question the leader?  I object!  You are wrong Mr. Leader!  How do I go and investigate God?  Will God answer me from heaven with an answer?  Will the material productive forces shout out from heaven, "Neil, you are wrong?"  I don't think so.  There is no absolutely no way to verify what the leader says!  The leader could simply be making all of this stuff up!!!  And, in fact, this train of thought actually did happen.  According to Molinari (emphasis mine)

one fine day they took it into their heads to question and to reason, and in questioning, in reasoning, they discovered that their governors governed them no better than they, simple mortals out of communication with Providence, could have done themselves.  It was free inquiry that demonetized the fiction of divine right.  (The Production of Security, Chapter 9)
When the mystical divine right approach to directing society fell apart (i.e., obey use or be killed as a heretic), according to Molinari, the communist version of popular sovereignty was then tried.  This is the Divine Right of Majorities approach.  According to Molinari, the decisions of the majority must become the law; "the minority is obliged to submit to it."  "If there is no unanimity, if there is still dissension after the debate, the majority is in the right."  Just as the materialistic philosophy ends with the liquidation of all dissenters, so too the sovereignty of the "people" ends with death to all non-conformists.  Molinari writes in chapter 10 of how the Regime of Terror  unleashed by the "sovereign people" leads to the guillotine (emphasis mine):

If anyone does not recognize the authority of those chosen by the people, say the theoreticians of the school of Rousseau, if he resists any decision whatsoever of the majority, let him be punished as an enemy of the sovereign people, let the guillotine perform justice.
In summary, we see various approaches to justify why a leader should be allowed to "direct" society.  The philosophy of history approach basically says:  the book of prophecy says that things will be this way.  What you see right now is inevitable; therefore, there is no reason for you to rebel.  The materialistic philosophies say to the people:  you can't think; you can't act; you can't choose.  Something else is doing all of that for us.  I the leader am the only one who hears the voice of this super-human force or I am the only one who can interpret it correctly.  Therefore, all the rest of you should obey my commands.  I am necessarily right; the masses are necessarily wrong.  Finally, the divine right of majorities is saying, the majority is right, because the majority is capable of discovering the "right laws."  All dissenters must obey.  In sum:  the leader is right because whatever he is doing was preordained.  The leader is right because he is following the material productive forces; these forces told him what to do.  The leader is right because he has the majority votes behind him.

Justifying the "Directing" of Society:  The Case of the Federal Reserve

One book that looks at the history of the Federal Reserve is called Secrets of the Temple:  How the Federal Reserve Runs the Country.  I find the title to be revealing.  The Federal Reserve is viewed as a "temple," which implies that maybe something similar to the "divine right of kings" is at work.  Except instead of calling themselves kings, the leaders of the Federal Reserve "temple" are all technocratic bureaucrats.  

The people, the masses of ordinary citizens "were incompetent to govern" (Secrets of the Temple 285) and so "a new ethic was born--faith in the technocratic approach to government" (ibid).  "Decisions on great public issues that were once left to politics should be consigned to disinterested experts, bureaucratic technicians who had specialized training" (284).  Notice how the "divine right of the majority" is no longer at work with our Federal Reserve System; the framers of this system do not want any public input at all--at least not directly into the operation of the Fed itself.  It seems as if what has happened here is that the technocratic bureaucrats are just emulating the old divine right of kings approach in order to justify why they get to make all the decisions.  Or, to be even more arrogant, to make the "right decisions" for society.  "The managers must occasionally ignore public opinion in order to make correct decisions" (Secrets of the Temple 284).  Instead of hearing the "voice of God" or the "voice of the material productive forces" or "read the prophecies of fortune," these temple-dwelling technocrats have heard the "voice of banking and business data" (ibid, 285).  The book of prophecy that was at the heart of the "philosophy of history" is now the collection of statistical data, i.e., the business and economic statistics filling up computer databases.  The masses are now supposed to worship the "divine right of the statistical model," i.e., the interpretation of the database interpreted by our "high priests" a.k.a. the technocratic bureaucrats at the Federal Reserve.  The "high priests" are no longer interpreting the book of prophecy; they are now interpreting the statistical models that come out of the databases.  Just as one is not supposed to question the representatives of God, so too one is not supposed to question the representatives of the divine statistical model.

These technocratic bureaucrats at the Federal Reserve--the modern day high priests--played an important role in helping out "God," i.e., the power elite masters.  Rothbard summarized all of this so brilliantly when he writes (emphasis mine)

To achieve a regime of big government and government control, power elites [our modern day Gods; "the Prophecy," "Providence," "the material productive forces"] cannot achieve their goal of privilege through statism without the vital legitimizing support of the supposedly disinterested experts and the professoriat [the representatives of God on earth; God's ambassadors; the high priests; the Federal Reserve technocratic bureaucrats].  (The Origins of the Federal Reserve, Section 10)

Concluding Remarks

I called this blog "The Fatal Conceit" and started with Hayek's book by the same name because I wanted to say that the idea that anyone can direct society has got to be the most "fanciful notion" ever conceived.  What I wanted to say is that every time some leader comes along and says:  here I am to direct society--do what I say, he has to always come up with some sort of "fanciful notion" in order to justify what he is doing.  Do what I say because it is written in the prophecy--yeah, the prophecy that the "leader" wrote up the night before, which conveniently makes him the leader!  I, your leader am the only one who knows how to properly  judge in accordance with the will of the material productive forces.  I have no way of knowing what is going on inside the minds of the masses, but that is irrelevant!  I am a "good" person; you are all "bad" people.  I am right; you are wrong.  If you don't obey me, you will die!  My technocratic bureaucrats have figured out the "right" answer, so you must submit to my technical expertise.  In all of these situations we see the same thing over and over again:  the masses are too stupid to make any decisions; I the leader will do all the thinking for you.  I think; you obey or die.  In order to get the masses to go along with this tyranny, the leader then has to invent some ridiculous story in order to justify what is happening.  These ridiculous stories are what I consider to be "the fatal conceit."

Tuesday, April 10, 2012

The Function of the Capitalist

In the Introduction to the Second edition of Murray N. Rothbard's Man, Economy, and State with Power and Market, a brief description is given of the vital role played by the capitalist in overcoming the temporal [time] issue raised by having a multi-state production process.

Let's begin with the quotation (all emphasis is mine):

The function of the capitalist is to relieve the factor owners [i.e., the land owners and the labor owners] of the burden of waiting for income, as he advances them present money payments from his accumulated savings for the joint product of their labor and land services.  In exchange for the present wages and rents, the capitalist receives an interest return on his invested funds, which is based on time preference and reflects the value discount of the anticipated future monetary revenues he will be receiving relative to the present money payments he expends on the factor services.
Conversely, the factor owners [the land owners and the labor owners] agree to this deduction from the full-sale proceeds of their product that is embodied in their discounted wage and rent payments from the capitalist, because the present payments unshackle them from the temporal dimension of the production process.  
When I first read this yesterday, it reminded me of a typical time-value of money problem that would be taught to undergraduates in an introductory-level finance course.  So let me first interpret the quotation above in light of elementary undergraduate business finance.  Then I will try to answer the "so what does all of this mean" question, i.e., what is the importance or relevance of having capitalists in an economy.

Basically, in the first part I will provide a mathematical or technical explanation of what I think is going on here.  Then, I will give a verbal or qualitative explanation of what I think is going on in the quotation above.  I think that the latter explanation will be more meaningful to most of my readers.

Let us pretend that we are analyzing this problem from the point of view of the capitalist.  Normally, in finance we use positive numbers in order to denote the receipt of cash.  Conversely, we use negative numbers in order to denote the payment of cash.  Let us further assume that the production process begins today, at time 0, and that the production process ends at time 1, i.e., with the sale of the final end product to the consumer.  Let's assume that the gap of time between 0 and 1 conveniently works out to 1 year in time.

What this problem seems to boil down to is a situation in which the net present value of the "project" equals 0.  I suppose we could conclude, from a technical perspective, that the function of the capitalist is to set up and see through to completion this zero net present value project.

The production process begins today, at time 0.  Let's say that the capitalist pays the land owners $50, and let's say that the capitalist pays the laborers $40.  In other words, the capitalist pays out $90 today in order to buy these productive services.  This would be, for the capitalist, viewed as -$90 since it is a cash outflow today, at time 0.  Obviously, I am oversimplifying here.  Normally, labor would be paid weekly or bi-weekly, not in one big gigantic lump sum at the beginning of the project, i.e., one big annual payment at the start of the year.  I do this in order to simplify the mathematics.  One could, of course, set this up with weekly cash payments to the labor and land owners if one wanted to.  Then there would be 52 payments that would have to be discounted.  Moreover, there is a formulaic way of solving this problem; however, I am trying to avoid this computational issue.

Now, one year later, at time 1, the production process is finished.  What this means is that we have transformed the labor and land factors into a final consumer good.  So for example, we have transformed the labor services of authors and the land services of tree harvesters and paper producers into a book.  The book is sold, and the capitalist receives the cash inflow of +$100.

To summarize, the capitalist (the saver really) advanced $90 to the labor and land owners today, at time 0.  The capitalist then receives $100 one year from now, when the book is sold to the final consumer, at time 1.

Such an arrangement seems to imply that the interest rate is 11.11%.  I solved for the implicit interest rate by setting up the following equation:

90*(1 + i) = 100
And I solved for i, the interest rate.

The cash flows then are as follows (again, from the point of view of the capitalist):

Time 0:  -$90 to the land and labor owners
Time 1:  +$100 from the consumer who purchased the book (the final consumer good)

However, if we take the +$100 at time 1 and discount it back to time 0, it will become, because the rate of interest is 11.11%, +$90.

So, we now have, at time 0, -$90 (the payment to the land and labor owners) and a +$90 from the discounted value of the book sale (the actual book sale happens one year from now but I have discounted that cash flow back to time 0).  The -$90 and +$90 at time 0 obviously "wash out" to zero (i.e., cash inflow of $90 and cash outflow of $90 leaves one with $0).  This would imply a net present value of zero for this project.

This is how I have interpreted this introductory explanation from Rothbard's Second Edition of Man, Economy, and State with Power and Market.  As I read more of the book, I will be able to see if I have interpreted the introduction correctly or incorrectly.  Maybe I have missed something, which would allow for a more nuanced explanation in the future.  Regardless of what happens, I have tried to be faithful in my presentation of Rothbard's work (technically this introduction was written by Joseph T. Salerno).

This leads us to the ultimate question:  what then is the function of the capitalist?  From the above, we could answer using very textbook like language:  the capitalist's function is to initiate a zero net present value project.  The capitalist is just breaking even on his investment project, in this case, his book producing and selling business venture.  By advancing his savings today to the land and labor owners, the capitalist is effectively initiating the entire production process.  Now the labor and land owners can buy food and shelter (and other things) in order to stay alive!  This is obviously advantageous for the labor and land owners because now they don't have to sit around for one year slowly starving to death while waiting for the book to be produced and sold one year from now, at time 1.  Instead, they can eat tonight, at time 0.  This benefits the land and labor owners.  The capitalist's function is to first save money and then to advance those savings to the labor and land owners in order to launch a time consuming production process, in this case a one year long process.  The time consuming production process that the capitalist launches has broader implications for the welfare of society (thinking in terms of the standard of living for the masses of people).  To see this linking of the capitalist/saver, the longer-production process, and the higher standards of living for the masses, a look at the ideas of Eugen von Böhm-Bawerk is in order.

Commenting on the ideas of Eugen von Böhm-Bawerk in 1963 was Ludwig von Mises, in an article entitled The Economic Role of Saving and Capital Goods.  In this paper, Mises stresses that without this "capitalistic" method to production, civilization as we know it would simply not exist.

All material civilization is based upon this "capitalistic" approach to the problems of production.
Mises then stresses why these longer and more complex production processes are so vitally important to the welfare of the average man.  He mentions a term called "roundabout methods of production," which just means the capitalistic means of production, i.e., first we produce capital goods, then with the help of these capital goods, we produce the final consumer goods.  But where do the capital goods come from, the capital goods that get the ball rolling so to speak in our production process?  They capital goods come from saving and the saving comes from the capitalist.  And so, we see again that the capitalist plays an integral role in launching the entire production process.  To elaborate on these observations, Mises writes (all emphasis is mine):

Capital goods come into existence by saving...."Roundabout methods of production," as Böhm-Bawerk called them, are chosen because they generate a higher output per unit of input.  Early man lived from hand to mouth.  Civilized man produces tools and intermediary products [these are more specific examples of capital goods] in the pursuit of long-range designs that finally bring forth results which direct, less time-consuming methods could never have attained, or could have attained only with an incomparably higher expenditure of labor and material factors.

Finally, these longer, more complex production processes brought about initially by the capitalist/saver force the capitalists into the role of servants to the consumers.  The capitalists do NOT control the production process; the final consumer does. This makes sense.  For example, take our mathematical example above.  Suppose the capitalist ignores the consumers.  The consumers want condoms but our capitalist produces books.  What is going to happen?  The capitalist advances $90 to the land and labor owners today, at time 0.  Then, the capitalist brings the books to market one year later, in time 1.  But the consumers don't want these books; the consumers want condoms.  So the price of the books will be very low, let's say +$2 at time 1.  The capitalist then has to discount the +$2 that he receives at time 1 back to time 0 in order to compute the net present value on this project.  Using the 11.11% interest rate, the +$2 becomes +$.1.80 at time 0.  So the net present value at time 0 is -$90 (the land and labor cash outflow) +$1.80 (the discounted revenue from the sale of the unwanted books), which works out to -$88.20.  The capitalist has a negative net present value, which means that he should not be engaged in this project.  He has wasted his savings on this project.  He should have listened to his customers and produced what they wanted--and the consumers signal their desires by offering higher prices for the things they want more urgently.

Continuing with the same paper from Mises (emphasis mine):

In order to attend to the orders received from the consumers, their real bosses, the capitalists must either themselves proceed to investment and the conduct of business or, if they are not prepared for such entrepreneurial activity or distrust their own abilities, hand over their funds to men who they consider as better fitted for such a function.  Whatever alternative they may choose, the supremacy of the consumers remains intact.  
In conclusion, we see that a wealthy civilization with a relatively high standard of living depends upon the existence of long and complex production processes, not simple and direct ones.   To get these longer and more complex production processes, we need capitalists/savers because the savings can then be turned into capital goods, and the capital goods eventually are turned into consumer goods.  The savers/capitalists launch this entire process, which enriches society by producing more consumer goods than could be produced without this process, by advancing funds to the owners of land and to the owners of labor.  These land and labor factors can then be transformed into capital goods and eventually into consumer goods.  The land and labor owners don't have to wait for this entire process to be completed in order to get paid--the capitalist advances them the money before the final consumer good is sold.  The difference between the wages and rent paid today and the future sales price of the final good is the interest return earned by the capitalist.  The most important point here is that more consumer goods are being produced.  This means that overall, the standard of living is rising--and this is a very good thing indeed.