Reuven Brenner, Guest Lecturer Jude Wanniski May 2, 1997

Supply-Side Economics Lesson No. 21

Memo To: Web site Students
From: Jude Wanniski
Re: Reuven Brenner, Guest Lecturer

I've mentioned before my belief that the best economist in the world today is Professor Reuven Brenner of McGill University in Montreal. A good friend, Reuven is the foremost expositor of risk-taking as the driving force of economic growth. In that, he carries the torch of the late Frank Knight of the University of Chicago, whose 1921 book, Risk, Uncertainty and Profit first developed the hypothesis. We have previously recommended Reuven's several books to our website students, the most recent of which is Labyrinths of Prosperity, which can be tracked down on the internet bookstore, www.amazon.com. The "lecture" that follows is actually an essay that appeared in the April 28 issue of Asia Times, for which Reuven writes a weekly essay on important matters of political economy. You can check out his earlier contributions at www.asiatimes.com.

The road to equal opportunities is paved with misconceptions
by Reuven Brenner, for Asia Times 28th April 1997

Much has been written on the "social contract" in the United States, of renewing it, of redefining it, of rewriting it. None of it is needed.

What is needed is to return to the initial meaning of the principle that has defined the US, a meaning that the past decades have distorted out of recognition, and covered with layers of double talk and veils of high-sounding terms, bringing both the US and other countries into a maze of error.

The US social contract was based on a simple, but revolutionary idea No matter who one was, who one's parents and grandparents are or were, to which religion or tribe one belonged, if one had the talent or the drive, one could succeed.

Of course, peerage, titles, family line, belonging to some tribes and some religion rather than others, could not but help. But such links and status did not determine one's position in life. The poorer, those in the middle and immigrants, knew that if not them, then their kids had greater chances to succeed in the US than in any other society.

This social contract implied, among other things, "equal opportunity". The term did not mean that everyone had the option of increasing one's wealth at roughly the same rate. Such an option would imply that at whatever rate the economy was growing, everyone would get a proportional share. It would also imply that those starting at the bottom would stay there; that those starting at the top would stay there, and that in absolute terms the gap between the bottom and the top would be increasing.

"Equal opportunity" in the US did not imply a belief in letting everyone maintain one's relative position in society, but the option to leapfrog: The ability to live the rags-to-riches story, and also, for the envious, to enjoy the unfolding of riches-to-rags stories, both being illustrations of the "three generations from sweatshirt to sweatshirt" saying.

Leapfrogging is the phenomenon that characterizes societies where there is equal opportunity. But today the notion of "equal opportunity" has been distorted out of recognition in the US - and, by emulation, in many other countries around the world too. "Equal opportunity" is now viewed as almost a synonym of giving "free" access to education, to health care services, to have one right or another. But that is not at all what "equal opportunity" has meant and it is not the principle that brought success to the US. Indeed, this misinterpretation of "equal opportunity" brings in its wake high taxes, discontent and lack of opportunities.

If adopted, public schools and socialized health care bring about first an abrupt rise in taxes or increased borrowing, or both. And if governments decide to venture into subsidized higher education and R&D too, the result is not only still higher taxation, but worse.

Those more talented and ambitious, who are accepted at the institutions of higher learning, are subsidized to the tune of, say US$100,000, and have the chance to get to the top. However, the less talented, those who dropped out already from schools and never get to universities, do not get the subsidies that their more talented fellow citizens got. These less than fortunate fellows may still harbor hopes for their kids. But meanwhile they will stay at the bottom and pay taxes. The effect is that the more talented, with more "human capital" are subsidized and those with less human capital are penalized.

It gets worse: The very large sums spent on the acquisition and dissemination of knowledge at schools or universities look good in principle but did not work out in practice. The fact that governments have allocated the money meant that inept, corrupt bureaucrats, subject to political pressures came to make decisions on both what and how is being taught and how much and how R&D budgets were spent. Both led to much waste.

We now know that there has been a steady decline in learning at public schools around the world. This was achieved under the veil of extraordinary academic discoveries, disseminated by the educational bureaucracies.

First came the big innovation of not having to teach the kids grammar, or any structured framework. Grammar is difficult, boring. Let the teachers and the kids be happy, let the latter be innovative and let's talk about emotions and self-esteem - said this great academic theory. The kids will not know how to read and write or clearly articulate their thoughts, but they will know how to hug.

Next came the idea of the harmful effects of competition among kids. So why not cancel exams? Many schools did, going so far as preventing participation in science fairs where prizes were awarded.

Never mind that with these two government-sponsored educational innovations the parents could no longer know what to expect; the teachers could no longer be held accountable (how convenient for them); and there was no way to know if the kids learned anything. The next innovation was to abolish punishment.

No wonder that, by now, with these and other innovations sponsored by Canadian provincial education ministries, over the past decades, 25 percent of the people in Canada were found to be "functionally illiterate", and misbehavior in schools became rampant. And yes, since it was the bored boys who, in general, misbehaved, there came the phenomenon of the 1980s and 1990s: The victimized girl in need of special attention - and more educational theorizing and more spending.

One unintended consequence of the imaginary "science" of education, with a ridiculous academic jargon all its own -- "educationalism," for instance -- has been to diminish the equalization of opportunities, rather than increase them. The poorer could do little else but send their kids to schools where students sat but did not learn much of either clear language or hard science. The richer either moved to suburbs where they kept schools' curriculum under greater control, or sent their kids to private schools.

As the old saying goes, the road to Hell is paved with good intentions. Let it be clear: The ability to succeed, and to have "equal opportunity" depends on people being able to develop the "capital" they are born with - their own human capital, their brains, their natural talents. To achieve this, they must have access not to buildings called "schools," not to educational bureaucracies and not to academic jargon, but to people with experience, who have absorbed knowledge.

If governments really want to equalize opportunities, the solution is to give to parents the control over their kids' education, over teachers and over schools' administration, by privatizing the schools. Poorer parents must be given help to spend on education. It is always better to subsidize some customers than the producer. This change in government policy will bring society closer to equalizing opportunities.

The ability to succeed also means having access to monetary capital. People may have the best ideas, the best education in the world. If they cannot have access to capital because government bureaucracies control access to credit, if they cannot experiment because high misplaced taxation prevents them from raising money from potential financial backers, the ideas will stay unexplored. Those with access to credit will stay at the top, even if what they do is not so good and those at the bottom do not get a chance.

Once these two conditions are fulfilled, capital would be "democratized." The democratization of capital is key to equal opportunity and lasting prosperity.

But there is a third thing needed, call it, if you wish, "investing in relationships," in "social capital." Even with these two opportunity-equalizing avenues available, some people can fall on hard times, be it because of bad timing, mistakes they made, unanticipated technological and political changes which made their skills obsolete, bad luck or maybe just no luck at all.

To sustain their hopes for themselves or their children, institutions must exist to give people second and third chances. This is achieved either through taxation and redistribution (be it in the form of a "negative" income tax or other arrangement), or by teaching people to be"good" and help those falling on hard times through a wide variety of voluntary institutions.

Throughout history there have been societies where the resulting customs, frequently practiced unquestioned and unexamined, have succeeded to complement the government's role, and achieve the goal. One may call the resulting investment as one in sustaining "social capital". If it was not sustained and people lost hope, they became dangerous and rebelled.

The Chinese have noted features of their dynastic cycle. The first emperor is a strong-willed general or peasant-rebel who seizes power and imposes far-reaching changes in laws and institutions. He is followed by rulers who are weaker, raise taxes, and under whose rules corrupt and incompetent bureaucracies expand and the empire starts to decline.

The circle restarts when a new leader emerges. The key to prosperity, to equal opportunity, to preventing such cycles from lasting dynasties, is to have institutions in place which prevent the pendulum from becoming stuck either on one side or the other, be it right or left. But the sequence in which institutions are allowed to emerge matter:

One can have institutions guaranteeing free speech, free press, free elections first, but as long as governments control financial markets, allowing them continuous, considerable patronage, none of these institutions brings about lasting prosperity. The lack of the democratization of capital in financial markets ensures that in spite of the freedoms on paper, the same people will stay in positions of power as seems to have happened in Japan, in Mexico and in many other countries around the world, preventing the equalization of opportunities.

A society determined to succeed, and get on the path toward equal opportunity and prosperity must start by first allowing those institutions to emerge which would democratize its capital markets. The rest will follow.