Monday, November 28, 2011

On Recognizing Danger

Ancient Greek authors sometimes relied on the phrase “ship of state” during their commentaries on democratic government. Socrates, for example, advised caution in choosing a captain. When a person is placed in a position of power, any character flaws that had stayed hidden up until then are likely to come out. And Aristotle observed that passengers -- no matter how dearly they may wish for a safe journey – rarely take an interest in how the ship is run.
Everyone on board wants to be delivered safely to their destination. They place their lives in the hands of the captain and, because ocean voyages are such a routine occurrence and mishaps are so uncommon, they do not reflect on the fact that they are entrusting their lives to a stranger. They are comforted by the reasonable assumption that the captain has earned his rank by demonstrating appropriate skills.
Still, there are a variety of mishaps that can befall a ship. It can be torn apart by storms, spring a leak, or catch fire. If voyage takes longer than expected, and in time the food will dwindle away and people will starve. So it is natural that, when the voyage does take longer than expected, passengers will start to grow anxious.
Some people begin to express doubts about the captain. Others quickly rise to his defense. One will say, “The captain grew up in my hometown,” another will say, “We had a corndog together at the State Fair,” or, “We share the same religious faith,” and believe that these are reasons for confidence. No one listens to the doomsayer who claims, “We’ve been sailing south for several days now, when we ought to be sailing west.”
Once the voyage has taken far too long, the passengers grow fearful. Some of them blame the captain for negligence or incompetence. Others experience even greater faith in him than they’d felt before, believing that he is the only person who can save them. They divide into two factions, each giving vent to their emotions, each leveling increasingly absurd accusations against one other. During this time, no attention is paid to the captain and the ship travels farther along its course. And it may happen that both factions are mistaken. As they reach their destination and see that it is a frightening and unfamiliar place, and not the destination that they’d been promised in the brochure. They realize that the captain’s intention all along had been to auction off the cargo and leave the passengers to fend for themselves.
Not too long ago, leaders in government ran away with the ship of state. There had been ominous signs for a long time, but no one could agree on what they meant. Then, one day, people woke up to discover that vast amounts of the nation’s wealth had simply vanished. Stocks that had once held considerable value were worthless. Reputations were ruined. Thousands lost their jobs, their homes, and their life’s savings.
The government’s response, to the surprise of many, consisted of raising taxes on the victims of the disaster. And, not only did the government give public money to the people who had caused the disaster, but it started relying on them for financial advice. I am referring to the crisis that befell Great Britain during the 1720’s.
The British advertising American goods.*
To understand how it happened, one must bear in mind that, at the time, Great Britain and other European powers were all part of a vast mercantile system. Heads of government took a close interest in promoting the economic interests of their countries, by aiding the most profitable domestic industries, obstructing foreign competition, and establishing colonies to supply the raw materials for manufacture. This led to an increase in the general prosperity of the people, but most of the profits either fell into the hands of a few well-placed aristocrats or were re-invested in the business of running an empire. 
To acquire colonies, the European powers engaged in wars of choice. The British people were not eager to volunteer for this interminable warfare, and it was necessary to hire costly mercenaries from obliging German princes. And, as will invariably occur when a nation supports a vast military, defense contractors overcharged for food, horses, wagons, and other necessities of warfare.[1] Expenses quickly mounted. The national debt had grown so large that nearly half of all revenue went toward interest payments. Because the citizens were already straining under a burden of excises, duties, and direct taxes, and their real income was steadily decreasing, the king had to find other sources of revenue.
This historical context is useful when considering the infamous South Sea Bubble. It is regarded as one of the most spectacular examples of a stock price rising far beyond its true value and crashing with cataclysmic effect. The reader may know that the crash threw thousands of previously successful business-owners into bankruptcy, thousands more into abject poverty, and strangled access to credit.
According to popular accounts of the South Sea Bubble, naïve investors succumbed to an irrational “mania,” and bought South Sea Company stock based on rumors and incomplete information. What is often omitted from popular accounts is the fact that the South Sea Company had been asked to promote its stock by the British government, and the earnings were used to pay down the national debt and, in the process, make a few individuals very wealthy. The popular accounts fail to mention that King George I made a well-publicized investment in the stock to convince investors of its value and later joined the company. It is seldom mentioned that, only a year earlier, France had attempted a very similar scheme, and plunged the nation into a state of economic disaster. Before the South Sea venture was approved, members of parliament debated the issue. Some argued that the venture “seemed calculated for enriching of a few and the impoverishing of a great many” and was a “fraudulent” and “pernicious” example of stock-jobbing.[2]
At the time, the incident caused considerable scandal. Yet, in time, people came to be persuaded that the government had had only limited involvement. Britons accepted the premise that, once one begins to dabble in speculative capitalism, accidents such as these are bound to happen.
Thomas Gordon and John Trenchard offered at different perspective. Taking turns writing under the pen name of Cato,[3] they criticized the government’s involvement in promoting South Sea stock. As they saw it, stocks are the same as any good that is of uncertain value, and sold at a higher price than it is worth. Customers know the risk, and if they are wise, they comparison shop, inspect the goods carefully, and seek advice. Still, the seller usually holds the advantage; and some people will pay more than others for the same thing.
Gordon and Trenchard argued that, in economic transactions as well as matters of law, the government should operate in a manner that merits the trust of the people and treat every citizen equally. Liberty only exists when, “government [is] executed for the good of all, and with the consent of all.” At the moment a government begins to take advantage of its people, liberty is endangered. Suppose that leaders in government transfer public money into the hands of a private company even though they are share-holders in that company, or receive campaign contributions from that company, without apology for the obvious conflict of interest. When this occurs, citizens should ask whether their leaders are acting in the interest of every citizen. If the answer to that question is “no,” then it is very likely that a state of tyranny (rule by one despot) or oligarchy (rule by cliques of powerful individuals) exists.
People in England weren’t listening. True, there were some angry headlines for a while. A formal investigation was held. The guilty parties were given stern warnings. Yet, the South Sea Company, now operating in its new capacity as a financial firm, was viewed by the government as too big to fail. The government used public money to bail out the South Sea Company and continued doing business with them for years to come. The British people, in time, accepted that the South Sea Bubble had occurred by accident rather than design.
The American colonists, on the other hand, were very attentive to what Gordon and Trenchard had to say. Even though it had been several years since the South Sea Bubble had occurred, the commentaries – collectively known as Cato’s Lettersenjoyed renewed popularity during the 1760s. Copies made their way through the thirteen colonies and stirred up lively debates at the local taverns and coffee-houses. It inspired George Washington[4] and Alexander Hamilton. Both John Adams and Thomas Jefferson listed Cato’s Letters as recommended reading for all American patriots,[5] and excerpts were reprinted on Benjamin Franklin’s presses.[6]
Cato’s Letters draws heavily from the ideas of John Locke, Algernon Sidney, and other Commonwealth Whigs. The collection of writings stands out because it conveyed Whig principles simply and compellingly to a popular audience. Cato’s Letters may have also been popular owing to the uncanny similarity between the events described in the book and the events of the 1760’s. Great Britain was again faced with an enormous war debt. Instead of the South Sea Company, it was the East India Company that teetered on the brink of bankruptcy. And, once again, the government had declared a private company to be too big to fail.
Cato’s Letters also addressed a question that was of particular interest to American colonists: If ill-conceived or over-reaching decisions are made in every government, how does one tell the difference between errors of judgment (to which every human being is prone) and a tyrannical abuse of power? In the 1760’s, American colonists were divided on this question. For example, Thomas Jefferson believed that the British government was engaged in a systematic campaign to strip the American colonists of their liberties; others dismissed the idea as far-fetched.
For Trenchard and Gordon, the answer revolved around the encroaching nature of power. They wrote that, “power is like fire; it warms, scorches, or destroys, according as it is watched, provoked, or increased. It is as dangerous as useful.” They believed that ambitious individuals are drawn into the sphere of politics; they will seek to advance their private interests by increasing their wealth and power, and are never satisfied with the wealth and power that they have. When people gain influence they will try to increase their influence by swaying elections, buying votes, placing allies in positions of power, and undermining rivals and critics. In this light, power will be abused when it is improperly contained or under careless supervision.
Trenchard and Gordon believed that, ultimately, the public is responsible for maintaining vigilance over its government, and removing politicians who favor private interests over the public good. But they also understood that people are often unable or unwilling to recognize or respond to the threat of tyranny in their own country. It is valuable, then, to have objective standards for identifying tyrants and oligarchs.
First, tyrants and oligarchs “will be ever contriving and forming … dangerous projects, to make the people poor, and themselves rich.” The British government’s complicity in the South Sea Bubble is an example of the kind of “dangerous projects” Trenchard and Gordon had in mind.
Tyrants and oligarchs “engage their country in ridiculous, expensive, fantastical wars, to keep the minds of men in continual hurry and agitation, and under constant fears and alarms; and, by such means, deprive them both of leisure and inclination to look into publick miscarriages.” In this state of heightened emotion, people are “disposed to fall into all measures offered, seemingly, for their defense, and will agree to every wild demand made by those who are betraying them.”
When tyrants and oligarchs “have served their ends by such wars, or have other motives to make peace, they will have no view to the publick interest.” In order to make peace, they will give public money and military advantages to “open enemies, suspected friends, or dangerous neighbours.”
Tyrants and oligarchs will set up two powerful parties and “by playing them [against] each other, will rule both ... they will make themselves the mediums and balance between the two factions; and both factions, in their turns, the props of their authority, and the instruments of their designs.” Displaying a similarly Whiggish sentiment, George Washington said, “The alternate domination of one faction over another, sharpened by the spirit of revenge, natural to party dissension ... is itself a frightful despotism.”[7] As it seems unlikely that political parties are inherently despotic by their very nature, it is reasonable to impose an additional test; one may ask, “Is the party system plagued by gridlock and failure when the goal is to benefit the public interest, and yet able to operate rapidly and efficiently when the goal is to benefit private interests?” If the answer to that question is “yes,” then it is very likely that a state of tyranny or oligarchy exists.

[2] Julian Hoppit, The Myths of the South Sea Bubble. 2002. A “jobber” is someone who sells products or services in a dishonest manner.
[3] The authors chose this name as homage to Cato the Younger; as they describe, Cato said that “he would never prefer private interest or pleasure to that of the publick.” This Cato bears little resemblance to the man as he is portrayed by the Cato Institute.
[4] Ethan Fishman, in George Washington: Foundation of Presidential Leadership and Character. 2002.
[5] Anthony Fellow, American Media History. 2010.
[6] Annie Mitchell, A Liberal-Republican “Cato.” 2004.
[7] Farewell address, 1796.

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