Thursday Theory: Say's Law of Markets

Say's Law of Markets states that there can be no demand without supply. The law is named for French economist Jean-Baptiste Say, who lived 1767-1832. Say was a classical liberal, who believed in free market, laissez-faire economics. The basic idea is that recessions occur when there is a lack of supply, not a lack of demand, and conversely, prosperity occurs when production is increased. Modern economists such as Thomas Sowell and Arthur Laffer, who developed Supply-Side economics, have advocated Say's Law.

It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J.B. Say, 1803: p.138-9) ^[1]

He also wrote:

It is not the abundance of money but the abundance of other products in general that facilitates sales... Money performs no more than the role of a conduit in this double exchange. When the exchanges have been completed, it will be found that one has paid for products with products.

Say's Law is in stark contradiction of Keynesian Economics, which believes that demand is more important than supply. John Maynard Keynes believed that government intervention was needed to smooth out the severity of boom and bust cycles by using fiscal and monetary policy to control the demand for products. However, advocates of Say's Law would say that without products to sell, no amount of government intervention will stop a recession. In fact, they argue further that such intervention will actually cause a recession by "crowding out" the private sector (through government purchases of goods, raising taxes which will increase costs, or increasing the money supply which will cause inflation). Therefore, Say's Law is a key to understanding laissez-faire economics, as well as supply-side economics (which is merely a restatement of laissez-faire).

Thursday Theory: Critical Realignment Theory and the 2008 Election

Critical Realignment Theory is a much debated theory in the field of political science regarding party politics. The basic theory states that there is a major shift in United States political party ideology, issues and coalitions about every 30 years.

V.O. Key first developed the notion of "critical elections," in his 1955 article, "A Theory of Critical Elections." Key proposed that certain presidential elections were more important than others, in that they had a larger impact on future elections than others. In addition, he noted that American electoral patterns remained stable for a period of time before a critical election took place.

Over the next 50 years, several other academics studied the idea of critical elections, notably E.E. Schattschneider, James L. Sundquist, Walter Dean Burnham and Paul Kleppner. Here, the idea of realignment was developed. Realignment is the manner in which a critical election "realigns" tradition party coalitions and creates a new era of party politics. The cycle of realignment usually takes 30-40 years, or roughly one generation. Basically, a critical election establishes a party system with a set of issues and ideas that politicians address. Since political parties will stick with what has worked in the past, their platforms remain relatively unchanged. As time goes on, new issues and ideas emerge that go unaddressed by political parties (ie. In today's system: Illegal Immigration). This creates a large pool of voters who are ignored and marginalized. Soon, this pool of candidates finds a candidate with new ideas and new ways of addressing old issues. This candidate is then elected in a critical election, that realigns the issues, ideology, and coalitions of political parties for another generation.

I have summarized the traditionally cited eras below:

1800 - Thomas Jefferson wins against John Adams
The Jefferson Era solidified the party system in the United States, and began a generation of Democratic-Republican control and the demise of the Federalist Party.

1826 - Andrew Jackson wins against John Quincy Adams
The Jackson Era continued the dominance of the Democratic-Republican party, and introduced the spoils system, which changed the nature of party influence on political offices and the voters. The Jackson Era is often cited as the period in American history when political parties had the most influence.

1860 - Abraham Lincoln
The Lincoln Era saw the emergence of the Republican Party, with a shift in voting coalitions to North vs. South, with the major issue of the day being slavery.

1896 - William McKinley wins against William Jennings Bryan
The McKinley election is sometimes disputed as a realigning election. However, the change in party politics is clearly evident as a result of the election. William McKinley and the Republicans were able to hold together and strengthen a coalition of businessmen, professionals, skilled workers and farmers. Williams Jennings Bryan however, failed to realign party coalition along class lines, ie. rich vs. poor. As a result, the Republicans began a 30 year era of dominance that lasted until FDR. In addition, the McKinley Era saw the rise of Progressivism in the Republican Party, which was a change from the Classical Liberalism that had previously dominated the party.

1932 - Franklin Delano Roosevelt wins against Herbert Hoover
The Roosevelt Era saw the creation of the Modern Liberal ideology, that government can solve social problems. In addition, the Democrat and Republican coalitions came to rest upon class lines, as Williams Jennings Bryan had attempted, with the Democrats representing the interests of the poor and the Republicans representing the interests of the rich.

Some would argue that the 1932 election was the last realigning election. One school of thought claims that the rise of the modern media supplanted the need for party politics and somehow ended the cycle of realignment. However, changed in media may poke holes in this theory. The rise of talk radio in the 1980s and the rise of the internet today have already had a profound effect on political campaigns and party politics. Other academics hold with a de-alignment theory, which believes that party politics had been declining since the Jackson Era and that the Roosevelt Era represents it's ultimate demise. Usually, these are liberal academics who do not want to give credit to modern Republicans or cannot see the accomplishments of presidents such as Reagan and Nixon. I would argue that there was a sixth realignment.

1968/1980 - Richard Nixon and Ronald Reagan
These two presidents advanced the new conservative ideology that had been developed by people like Barry Goldwater and William F. Buckley. Richard Nixon was the first president to be elected who voiced conservative ideas during his 1968 campaign. The conservative movement was hurt by the Watergate Scandal, but later advanced and solidified by Ronald Reagan. If you think about it, modern Republicans still measure themselves against Ronald Reagan, calling themselves "Reagan Republicans." Moreover, the party coalitions shifted as well. After World War II and the construction of the interstate system, America saw the rise of the suburbs. As people moved out of the city, a new constituency was created. The elections of 1968-1980 created a Republican coalition based on rural voters, while the Democrat coalition became that of the city. We still see today that cities vote overwhelmingly Democrat, more rural areas vote Republican, and the suburbs stand as a battleground between the two.

An you can see, we are due for another realigning election soon. Some would argue that 2004 or 2006 was a realigning election. I would disagree. In both elections, traditional Republican and Democrat ideologies remained the same. Both parties retained their traditional coalitions. And, many issues continue to go unaddressed: immigration, social security reform, the nature of education funding, taxation, etc...

I believe that 2008 will be a realigning election primarily because there will be no incumbents running for president. As a result, both parties have the opportunity to reshape their message, address new issues, present new solutions to national problems, and reach out to voting blocks that were traditionally out of their grasp. For example, many Democrats have the opportunity to build and solidify a coalition of statists, who advocate massive government spending and power. Senator Barack Obama's "Third Way" may represent the beginnings of a new Democrat ideology as well, although it is doubtful at the present time. The Republicans also offer several changes from the past. Mayor Rudy Giuliani's stance on gay marriage and abortion may break off the Christian element of the party and exchange it for greater support from gays and women. Senator John McCain also represents a shift in Republican ideology to a more moderate form, while retaining strength on foreign policy issues. Fred Thompson's ideological conservatism may strengthen the existing Republican coalition, much in the same way the election of William McKinley did. Either way, there is a great diversity of opinions in the mix right now. Additionally, turn out should be high, given the issues at stake. Whether 2008 will be a realigning election is up for debate. But, as the time draws closer we will be better able to tell for sure.

Thursday Theory: The Speaker's Law

The field of Political Science, because it describes the actions of people, does not have a lot of "laws" in the traditional sense. For example, while the physical sciences have revolutionized the world with the discovery of the Law of Gravity, the political sciences have given us Duverger's Law.

Well, I would like to make a contribution to the political sciences, with the "Speaker's Law":

"A person cannot successfully be the Speaker, or will not long be the Speaker, of the United States House of Representatives unless they are overweight."

Let's look at the facts:

The first Speaker of the House was Pennsylvania Congressman Frederick Muhlenberg. Muhlenberg was a Lutheran pastor by profession, was a member of the Continental Congress in 1779 and 1780, and served as Speaker of the Pennsylvania State House in 1780. He served as Speaker of the United States House of Representatives during the 1st and 3rd Congresses, 1789-1791 and 1793-1795 respectively, as both Pro- and Anti-Administration. I have included his portrait to the left. He clearly has some extra pounds on him.

The Speaker of the House to serve the longest consecutive term, was Massachusetts Congressman Thomas "Tip" O'Neill. He served ten years from 1977 to 1987 in the Democrat controlled House. He worked to implement the policies of President Jimmy Carter, worked for Peace in Northern Ireland, and criticized President Ronald Reagan as being "Herbert Hoover with a smile." He also coined the phrase "All Politics are Local." His portrait is included to the right. Tip O'Neill had a reputation as being a "big" guy.

Texas Congressman Sam Rayburn is widely regarded as being the most successful Speaker of the House. He served a total of 17 years, in three terms between 1940 and 1961. He was instrumental in Lyndon B Johnson's rise to power and worked to construct Route 66. Additionally, he was famous for holding his "Board of Education" meetings, where he and committee chairmen would gather to play poker, drink bourbon, and discuss politics. Based on his pictures, he looks as if he may have been carrying a few extra pounds as well.

Another bulky Speaker of the House was Georgia Congressman Newt Gingrich who engineered the Republican Revolution in the House in 1994 after 40 years of Democrat control. He defeated President Clinton's universal health care proposal, held spending in check, and balanced the federal budget. He served between 1994 and 1999. Newt Gingrich is also reputed to have been overweight.

His successor, Illinois Congressman Dennis Hastert was also rather large. Hastert served between 1999 and 2007, presiding over the War on Terror and working with President Bush to advance the Republican Agenda. Dennis Hastert is the longest serving Republican Speaker of the House.

Now, let's look at some of the thinner Speakers of the House.

The Speaker of the House to serve the shortest term was New York Representative Theodore Medad Pomeroy. He served from March 3rd, 1869, upon the resignation of Speaker Schuyler Colfax, until the expiration of his term on March 4th, 1869. This made him Speaker of the House for just 1 day. Even though his party (the Republicans) remained in power for the new Congress, Pomeroy had not won re-election. His picture is shown to the left, and he appears to be in pretty good shape.

Tennessee Congressman John Bell was Speaker of the House from June 1834 to March 1835. Bell had been defeated for the Speakership numerous times before by his rival James K. Polk. Bell also lost a bid for President to Abraham Lincoln in a four way race. During his career, Bell witnessed the collapse of his party (the Whigs) and the secession of his state from the Union. According to Wikipedia, "Bell reluctantly accepted Tennessee's subsequent secession and retired from politics, his spirit broken and in ill health." Bell's picture is given to the right. He appears skinny to me, judging by his face and legs.

More recently was the term of Washington Congressman Tom Foley. He served as Speaker of the House from 1989 to 1995. He took over the position after Speaker Jim Wright stepped down over an ethics scandal. During his tenure, the House Banking Scandal and House Post Office Scandal were brought to light, which ultimately contributed to the Republican Revolution in 1994. As a result of Speaker Foley's poor leadership and opposition to the efforts of his state to impose term limits, he lost reelection in 1994. Speaker Foley is the first sitting Speaker of the House to lose reelection. His picture is featured to the right. As you can see, he is a very thin guy.

Clearly, those Speakers of the House that were overweight were more successful than those that were thin.

Now, let's consider the current Speaker of the House, California Congresswoman Nancy Pelosi. During her "First Hundred Hours," the Democrat-controlled House achieved none of the objectives it had outlined for that period. She failed to disclose her position as a member of a family charity. She violated U.S. Law by visiting Syria, misrepresented the Israeli Prime Minister, and then refused to meet with President Bush to brief him on what happened during her visit to the Middle East. Her statements continue to demonstrate her overall ignorance and arrogance, and are even treasonous at times. I seriously question how long she will be able to remain Speaker with this kind of behavior, since she is not improving the Democrats' chances of future electoral success. And to top it all off, she is rather fit and trim.

So, Democrats, start sending Big Macs and cheesecake to Nancy Pelosi. She's got a lot of weight to gain if she wants to stay Speaker. As for me, I'm going to send her some Dexotrim and a membership to a DC health club.

Thursday Theory: "Economic, Theoretical and Practical Weaknesses in Human Capital Theory"

In "Economics and American Education," Alan DeYoung examines the Human Capital Theory, which proposes that investments in education improve personal and national economic conditions. The point is that by investing in humans, through education and job training, there is a payoff in the overall economy. Human Capital Theory has been used by politicians, including Governor M. Jodi Rell, to support increased state spending on education. DeYoung first lays out the various arguments and analyses used to support the Human Capital Theory. DeYoung then details the methodological and theoretical problems with the theory.

“The economic origins of most contemporary school reform are based now more than ever on arguments that children as human resources are instrumental in the economic development process (120).”

DeYoung outlines three types of arguments relating to the economics of education:

• “Social Demand Approach” refers to the concerns voiced by citizens over the use of federal, state and local tax dollars to fund public education and the economic impact, both benefits and costs, that are associated (121).
• “Manpower-Requirements Approach” uses economic forecasting to guide educational planning.
• In Socialist Countries, economists predict which sectors will need workers and educational policy is adjusted to address those needs (121).
• In Non-Socialist Countries, economic predictions are used by private firms to create scholarships that encourage workers to move into the growing field. Forecasts are also used by the government to determine in which fields they will need to hire and train more teachers (121).
• “Rate of Return Analyses” focus on the economic returns to individuals and society as a function of their educational training (122). There are four general types of Rate of Return Analyses:
• Relationship Analysis Approach and Cash Value Approach: “Attempts to compare differences between large numbers of individuals with differing levels of formal schooling (122).” Makes a general argument that people with more education make more money. Therefore, giving everyone more education will increase salaries economy-wide.
• Cost-Benefit Approach: “Such analysis extends the cash value approach by also attempting to quantify how much financial cost is involved in extended educational preparation programs (123).” What are the opportunity costs of pursuing further education? For every dollar invested in the education system, what are the returns to the overall economy in productivity, market diversity, income...?
• Residual Approach: “Makes the claim that investments in public schooling are systematically linked to national economic productivity and economic growth (123).” After adjusting for other known economic factors, a “residual” amount of economic growth remains unexplained. Economists of this camp argue that the factor involved is worker skill (and education) level. Theodore Schultz calculated that $71 billion in workers’ wage increases cannot be explained by other factors, and is therefore the result of increased skills. Schultz argued that 44% of increases in workers’ wages are due to increased education. Edward Denison argued that “Over 27 percent of the aggregate increase in national income was explained by the educational upgrading of the total U.S. workforce (126).”

DeYoung then goes on to point out the methodological weaknesses in these arguments:

• “Observers like Thomas Green suggest, an inflation in educational credentials is just as likely to bring down the economic value of a high school or college diploma… According to Green, for example, obtaining a high school diploma now is an imperative, not to improve one’s economic position, but merely to survive the onslaught of continuing educational inflation (127-8).”
• “Even within various rate of return analyses there are vast differences between and among classes of educated workers (128).” Ex.: Women & Minorities; Teacher vs. Businessperson.
• “Other factors seem to play a significant role in returns to educational investment (128).” Ex.: Where you go to school, Will to learn, etc…
• “Most rate of return analyses contain an important element of guesswork and are therefore not as methodologically rigorous as they might appear (128).”

DeYoung also points out several theoretical weaknesses:

• Disregard of Curriculum Differences: Conservative critics claim curricula nationwide have been dumbed-down. How can current curriculum be accurately compared with 20 years ago? Moreover, what about difference between natural science and social science tracks? How can these be analyzed statistically?
• Inconsistency with Observed Trends: Falling economic productivity during the 1970s and 1980s coincided with rising educational attainments.
• Unknown Factors: What about the attitude towards work cultivated in schools? What about emphasis on seatwork vs. hands-on work?
• On-The-Job Training and Vocational Schools: These are not counted by human capital models because they can be “explained apart from the effects of formal education (131).”

Overall, DeYoung presents a very common sense and straightforward counterargument to the Human Capital Theory. He presents the assumptions of the theory clearly and returns some significant questions to supporters. Today's politicans should pay careful attention to the concerns raised by DeYoung, before they wantonly advocate more education funding.

DeYoung, A. J. (1989): Chapter 8: Economic, Theoretical and Practical Weaknesses in Human Capital Theory in Alan J. DeYoung, Economics and American Education, New York: Longman.

Alan J. DeYoung is a Professor of Education Policy at the University of Kentucky College of Education.

Thursday Theory: "The Roles of the State in the Economy"

Fred Block's article "The Roles of the State in the Economy" examines the “Old Paradigm” in analyzing the role of the state of the economy and then proposes a “New Paradigm” that attempts to more accurately portray the reality of government and economic interaction.

The "Old Paradigm" is based upon two basic assumptions. First, that "The state and the economy are two analytically separable entities…” Secondly, that "One can place any actual or imagined society on a single continuum” from socialist to free market. Given these assumptions, Block proposes five "ideal type" models of state invervention in the economy:

1. Public Goods State: “The state must provide only public goods that the market cannot produce by itself.”
2. Macroeconomic Stabilization State: The role of the state is to make the business cycle of boom and bust less severe.
3. Social Rights State: “The expansion of the state’s role in the economy can be understood as a deepening of the meaning of citizenship.”
4. The Developmental State: “Theorists of the developmental state argued for an active state role in creating tariffs, building infrastructure, and providing financing to private firms.”
5. Socialist State: “The state’s economic role must be expanded in order to overcome the injustices produced by market allocation of resources.”

Block argues the "Old Paradigm" is problematic because it assumes either that the state is “parasitical and wasteful” or that there are inherent injustices in the market system. However, the single continuum ignores many variations in state intervention. As a result, there are more exceptions to the rule than examples. This makes comparison and study difficult.

Instead, Block proposes a "New Paradigm," which assumes that “state action always plays a major role in constituting economies.” States are needed to perform certain functions critical to the existence of the market. These actions are as follows:

1. The Control of Productive Assets (Property Rights)
2. The Structure of Recurring Relations
3. Means of Payment: Money and Currency
4. Managing the International Boundary (Defense and Trade)

Block's work has been extremely influential in political science circles and is required reading at many universities. In many ways I agree with the "New Paradigm." The Capitalist System requires stability and a rule of law in order to function. There is a legitimate function for government in the economy. For example, contracts must be enforced and property must be protected. If you look at the Index of Economic Freedom, produced by the Heritage Foundation and the Wall Street Journal, you can see that they rank the economic freedom of nations using similar criteria as those outlined by Block. Yet, I still think it is necessary to compare nations on the capitalism vs. socialism scale, if even just for a simple reference. It is important not to lose sight of how far we have come in the fight for economic freedom, and how far we still have left to go.

Block, Fred. The Roles of the State in the Economy. ed. Neil Smelser and Richard Swedberg. The Handbook of Economic Sociology. Princeton, NJ: Princeton U. Press and New York, NY: Russell Sage Foundation, 1994. pp 691-710

Thursday Theory: Measuring Freedom

This week's Thursday Theory features two very interesting reports that measure the amount of freedom in the world.

The first is by FreedomHouse.org, a non-profit organization dedicated to the advancement of freedom throughout the world. Their reports, Freedom in the World, has been a staple of political science for years. The report uses a complex methodology to quantify the amount of civil liberties and political rights in a country. Published annually, the report compares freedom from country to country as well as historically. The data is used to create a "Map of Freedom" as well as many other charts, graphs and special reports. The United States has consistently received the highest rating, (1,1), as one of the world's most free nations. Overall, the data is encourging when you consider that only 200 years ago there were only a handful of free, democratic governments. I encourage you to check out this great resource.

Another great resource is the Index of Economic Freedom, produced by the Heritage Foundation and the Wall Street Journal. The Index evaluates countries based on ten types of economic freedom. The country rankings and profiles are available free on the website. For 2007, the top five nations are Hong Kong, Singapore, Australia, United States and New Zealand. The most economically oppressed countries are North Korea, Cuba, Libya, Zimbabwe and Burma. The following map further illustrates the state of economic freedom in the world.


I find both of these websites fascinating and hope that you will take some time to explore them.

Thursday Theory: Freedom to Oppose

This week's theory is a summary of Louis Hartz's work in the first chapter of his book, "The Liberal Tradition in America" (See link on sidebar). Hartz argues that within a socialist system it is nearly impossible to advocate for a capitalist system. However, under a capitalist system, it is not only possible, but fairly simple.

Assume you are an average citizen living in a socialist society and you want to advocate for change. How would you do this? Presumably by publishing pamphlets, holding meetings, and bringing public pressure (or revolution) to bear on your government officials. Well, since the government owns all property and you are advocating against it, they will most likely not allow you any space to hold meetings. But let's say you meet in secret. If you're meetings are secret, then how can you spread your ideas to people not "in the know?" You would have to publish some literature (in print or electronic form) and distribute it. Since all industries are state controlled, including the media and the publishing industry, it is also safe to say that the government will not be too supportive of this either. But, lets say by a chance of luck that you can find a printer sympathetic to your cause who is willing to help you in secret. Where will you raise the money to support this media campaign? Since the government owns all assets, you would have to scrape together what assets you could from the general population. This would have to be a substantial number since each would only be able to contribue the small amount they have hidden from the government. Yet, if you are able to find enough people willing to donate money to support your campaign, then you never needed to convince them in the first place. Hartz conlcudes that in this way, the opponents of a socialist regime will not be able to freely advocate for capitalism from within.

By contrast, it is relatively easy to advocate socialism from within a capitalist system. Since property, industries, media and assets are privately controlled, the state cannot interfere with your campaign. You can find a printer will not care what he is printing, so long as he is paid. Similarly, you can rent a space to hold meetings, or even hold them on your own property. In order to finance your campaign for socialism, you need only to find one or two wealthy people. You do not even need to convince them of your cause, only that their contribution is an investment from which they will profit. So you see, socialists can easily advocate their ideals in a capitalist system. The irony is that they are using the very tools of that system to advocate its destruction.

Hartz's argument boils down to this: If you are free, you can choose to be enslaved. If you are enslaved you cannot choose to be free. Hartz brilliantly shows how socialism represses its own people by its very nature, enslaving them to the state. By contrast, capitalism represents freedom, even for those who call for an end to the system. It is therefore our job as capitalists to use our freedom to defend and advocate for capitalism, so that our political, economic and social freedoms can be passed on to future generations.

Thursday Theory: Who Wants More Pie?

Capitalists and Socialists will always disagree on pie. Not the apple kind, but the "resource" pie.

Socialists see the amount of resources in the world as finite and of fixed value. It is almost like a poker game. Each player starts the game with the same amount of poker chips. However, during the course of the game players win or lose chips based on their innate skills and a bit of luck. Since the amount of poker chips never changes, one player has to lose chips in order for another to gain them. Extending the metaphor to the real world, in order for one person to become rich another person has to become poor. Similarly, if one country is wealthy, they must have taken resources from another country. Well, the socialists just don't think this is fair! Instead they seek to redistribute all resources equally, usually using the power of the state to forcefully do so. Returning to the poker game, a socialist would stop the game periodically and “redistribute” the poker chips from the players who have the most to the players who have the least. So, it all comes down to how the resource pie is cut up. It all comes down to distribution.

Capitalists know that the "whole is greater than the sum of its parts." Imagine a lightbulb. Individually the components are not very valuable. But when combined they create a commodity that is extremely useful and desirable. This makes the light bulb valuable, in fact more valuable than the glass, tungsten, and labor that went into it. That higher value of the finished product represents wealth that has been CREATED. Since wealth can be created, it is possible to increase your own wealth without reducing the wealth of others. Capitalists know that the resources of the world, though finite, can be infinitly combined and can vary in value. This means that the resource pie can be expanded or contracted, as well as divided. It isn't just distribution that matters, but production!

One result of an expanding resource pie is an increased standard of living for the poor. Although the poor may receive a very small piece of the the resource pie, the actual value of their piece continues to grow as the pie expands. That is why the poor in America have televisions, cars, and indoor plumbing, while the poor in socialist North Korea are lucky if they get one small meal a day. So, just remember, while socialists will finish their pie without even being able to have seconds, capitalists will have plenty of pie to go around.