The Return to Realism

Recently, banks and mortgage companies have made some bad loans. Quite a few of them, actually. In any sane economy, this would not really be a matter of much concern, expect to the people involved. The banks would have taken their losses; the borrowers would have lost their homes, and the rest of us would have said “tsk, tsk,” and gone about our business. But in fact, these bad loans have affected all of us and will certainly slow down the economy, if not collapse it outright. How could such a thing happen? How could the vast majority be damaged by a small minority? In a sane—and realistic—economy, the connection between the loan, the lender, and the asset is clear, and the effects of the arrangement, good or bad, are limited to the parties involved; the bank takes the risks seriously and the borrower evaluates the costs cautiously. But for the last 10 years, this has not been the case in the housing market. The banks were not really interested in making a loan, but in getting a marketable security which they could then turn around and sell to someone else; they were less concerned with real risk because they intended from the first to pass that risk along by understating the real dangers of the loan. The connection between lender and borrower was broken, as the loans were broken up into more and more abstract and complex securities which were then sold, re-sold, re-packaged and re-sold again, each time at a higher and higher level of abstraction, and at a further remoteness from the actual borrower and the home upon which the loan was based. The result is that the virus of bad loans spreads throughout the financial system, and people who thought they had little connection with the sub-prime market find their portfolios larded with risks they did not know they had. Pensions funds, money-market funds, stocks of all kinds, bonds, hedge funds, banks and brokerage funds and other investment vehicles are shown to have more risks

But as bewildering (and dangerous) as the process of financial intermediation is, what is more amazing is that the people who engage in it are generally labeled “realists.” The farther their works take them from the real world, the more they seem to be regarded as realists; the more remote the economy is from real things, the more its sages are regarded as “hard-headed realists.” Whatever one might think of an economy built on such abstractions, one can at least protest the semantic corruption of labeling a thing with its opposite. The first step to accurate thinking is to accurately name things. And when one sees (as we are all now seeing) how much abstraction is involved in current economic arrangements, how far “money” is removed from the things that money ought to represent, one is justified is labeling such an economy “idealism” or even “romanticism,” even if one doesn't regard hedge funds as particularly romantic.

A realistic economy is based on the production of real things, and has as its realistic goal the adequate support of real families. Without a realistic appreciation of the connections between things and money, between production and rewards, between man as a producer and as a consumer, between man and his social and natural environments, no realistic thinking about the economy—or anything else—can take place.

All of this serves to introduce a book about realism in economics, Allan C. Carlson's Third Ways: How Bulgarian Greens, Swedish Housewives, and Beer-swilling Englishmen created Family-centered Economies—and Why they Disappeared. And since it is a book about realism, it begins with a fairy tale, or at least a theory too easily labeled as a fairy tale, namely the Distributism of G. K. Chesterton and Hilaire Belloc. Of course, it is precisely the fabricators of the exotic fairy tale known is the current economy that apply this label, but Prof. Carlson presents Distributism in all its realism, and details for us the real and practical program advanced by the “Chesterbelloc” and its real legacy and influence in the world between the two world wars, and even after.

One of its great legacies was the movement towards a family wage, that is, a wage sufficient to support a man and his family without putting his wife and children to work. This wage was a reality for a long time. But a combination of forces—feminism, socialism, and capitalism—conspired to kill it. Now, my only problem with “feminism” is that it is far too anti-feminine and far too pro-capitalist. The feminists would have us believe that it was a patriarchal conspiracy by the capitalists that kept them in the home and out of the factory. But the facts are otherwise, as Prof. Carlson shows. The National Association of Manufacturers, as early as 1903, supported “equal pay” for women, and wished to abandon all reference to families in the construction of pay scales. Indeed, getting women into the labor market served two goals for them: it lowered the cost of labor (by increasing the supply) and it allowed them to commodify the work previously done in the home, thereby creating new industries to (inefficiently) replace the things that mothers used to do. Eventually, the successes of the family wage movement were overturned, and women were “liberated” to work in the factory. The odd result is that wages over-all declined to the point where the economic survival of the family required women to work in the market-place; what was once a matter of “liberation” has now become a matter of necessity. But if the “economic” viability of the family depends on multiple wage-earners, its social success must, at the same time, decline. For the family produces the most important and most indispensable economic quantity, the fully socialized and educated human person. Despite the ambitions of the capitalists, socialists, and well-meaning statists like Hillary Clinton, the functions of the family cannot be taken over by the state-supported day-care center. In this case (as in so many) what is good for big business and big bureaucrats is bad for the family and society. And even, as it turns out, bad for the economy. Without realistically recognizing the unique role of the family, which means recognizing the unique role of women, no economy can be stable. Indeed, healthy families (rather than the building of great fortunes) is the whole point of any economy, and without recognizing this, the economy becomes pointless.

Carlson walks us through the great movements associated with realism in economics: the political success of the peasant movements in Eastern Europe (until they were killed by the fascists), the early attempt to build a agrarian-based economy in the early Soviet Union (until the peasants were crushed by Stalin), the Christian Democratic movement (until it was subverted by corruption), and many other movements built on economic realism. The book is a good read, well written, able to make what might be a dry topic exciting, almost adventurous.

However, there is a problem. All of the examples that Prof. Carlson cites were, in the long-term, failures; a combination of factors, political, military, and cultural, conspired to overthrow the real successes. But such a view gives entirely the wrong impression. Distributism and agrarianism have had, and continue to have, great successes. The Mondragón Cooperative Corporation, the “Land to the Tiller” program of Taiwan (which catapulted a backward society into an industrial powerhouse in only one generation), the distributive economy of Emilia-Romagna (Bologna, Italy, where 40% of the GDP is from cooperatives), ESOPs, mutual banks and insurance companies, and hundreds of other examples. Indeed, Distributist enterprises consistently exhibit competitive and social advantages over more capitalistic firms. Without understanding this, the book might give the wrong impression, the impression of a series of romantic failures. (I might (im)modestly offer my own book as a corrective on this point.)

That having been said, this is an enjoyable and informative read, and anyone interested in building—or rebuilding—a economy based on realism will find it useful. I believe that the usefulness of this book will increase as we come to realize the increasing unreality (and weaknesses) of the current economy. Eventually, reasonable men will want answers, practical answers, to the hard questions that will soon overtake us. This book is a good start towards giving those answers.


papabear Friday, November 30, 2007 at 1:20:00 AM CST  

Prof. Médaille, what books would you suggest that give a good picture of what is going on with respect to globalization? (particularly the negative aspects, but positive as well, if there are any)

John Médaille Friday, November 30, 2007 at 11:27:00 AM CST  

For any understanding of trade in general, I would start with Jane Jacobs' Cities and the Wealth of Nations. For the particulars of the trading system I use Joseph Stiglitz's Globalization and Its Discontents. Also useful, if somewhat out-of-date are David Korten's When Corporations Rule the World and Edward Luttwak's Turbo-Capitalism. But the most interesting recent volume might be Naomi Klein's No Logo. She also has a recent book out called Shock Capitalism, but I have not yet read it.

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