Supply-Side University Economics Lesson #2
Memo To: Students of SSU
From: Jude Wanniski
Re: Thinking on the Margin
As we get further into our studies of the political economy, the term "margin" will come up with more frequency. It is basically an economic term, but it is especially important in its political meaning, which is why we will spend this entire second lesson on the political side learning about "the margin" and how to "think on the margin." It is not the "margin" we hear about in the stock market, where purchases are leveraged by "buying on margin," i.e., putting up $2 to buy $10 worth of stock, which means if the stock falls to $7 you get a "margin call" to cough up another $1 or so.
The broader meaning of "the margin" is that place where change takes place. All change takes place on the margin. The Chinese would say, a trip of a thousand miles begins with a single step. The first step means change, of direction or of motion. It is on the margin. Economics involves a great deal of change, but all of politics involves change, because the world changes every day, and politics is a system of dealing with the new combinations of needs that arise among people with each day or period or season. If there were little or no change, no new combinations, there would be no need for elections every two years for members of Congress or two or four years for state governors or four years for the President. In earlier eras, when time moved more slowly, because news traveled slowly, one king or prime minister might do well enough for a generation or two — assessing the slowly changing needs in slow motion. In today's world, news is practically instantaneous, which means political leaders will fall behind unless they are adept at thinking on the margin, seeing through the places that remain static for the moment and need less attention, to the place where change is about to take place or needs to take place to accommodate the changing world. Time and tide wait for no man.
In a tug-of-war contest, with ten men on one side of a line pulling on a rope, ten men on the other, if one side can pull the man closest to it over the line, it wins the contest. In a political contest or a military campaign (which embodies political stratagems), the tug-of-war is not two-dimensional and linear, but three- and even four-dimensional. If your ten men wish to pull their ten men across the line, you can persuade one or more of them, anywhere in the line, to defect or drop out. The margin is where you will find the most likely defection or soft spot. A Douglas MacArthur or a Napoleon or a U.S. Grant will succeed in military campaigns by thinking on the margin — figuring out how to outflank the opposition rather than coming at a superior force head-on. This does not mean a strategic military or political thinker has to be more intellectual than his counterpart, but he does have to be more industrious. Napoleon did not get to be nationally famous as a military strategist before he was 21 years old because of a high IQ, but because he was motivated to spend his teenage years practically locked in a room studying military and political history. Recall the movie "Patton," when General Patton defeated Field Marshall Rommel in the North Africa campaign. George C. Scott, who played Patton, looks out over the battlefield with enormous satisfaction and says, "I read your book, you sonofabitch!"
The game of chess is built around the idea of change on the margin. Checkers is more linear, with each piece having the same powers until one gets to be "kinged" by moving across the board. Chess takes up where checkers leaves off, with kings, queens, castles, bishops, knights and pawns. The chess player must think in at least three dimensions in pursuit of victory, even be willing at a critical point of the game to sacrifice the queen in order to save the kingdom. In 1991, after President Bush had broken his campaign promise not to raise taxes, I wrote him a letter arguing that he could only salvage himself by firing his Treasury Secretary, Nick Brady, who had talked him into the tax increase. The sacrifice of his best friend would let the voters know how deeply he regretted breaking his "read my lips" promise. Bush stuck by Brady and was defeated. In England, Prime Minister Maggie Thatcher had allowed her finance minister, Nigel Lawson, to talk her into raising the capital gains tax and instituting a poll tax. When she resigned, she pulled Lawson down with her, and the electorate gave the Tories another term in power under John Major.
Ronald Reagan was not a political chess player. He was the King on the chessboard. He had inner convictions that he drew upon in deciding to push ahead in offering policy changes and delivering upon them. The electorate twice elevated Reagan to the highest leadership position they can give by observing those inner convictions displayed in his campaign conduct. There was a constant internal debate among the political experts on whether to let the voters see him as he was ["Let Reagan be Reagan"], or package him with expensive tv commercials, surrounded by American flags and 100-piece orchestras. His success in winning the presidency in 1980 can be attributed to three of those "political experts" who decided to let Reagan be Reagan. One was Tom Ellis of North Carolina, who pulled Reagan back from the precipice in 1976 when it appeared his national political career might be over for good. He scraped together enough money to put a pure Reagan speech on tv a few days before the North Carolina primary that Reagan was sure to lose, but which he won. Another was John Sears, his campaign manager in 1980, who burned the tv commercials showing Reagan surrounded by flags and orchestra, and cut ten "talking head" spots for $1000 each, which won the GOP nomination for Reagan by showing him as he was. The third was James Baker III, who overruled the faint-hearted and argued on behalf of Reagan debating Jimmy Carter. Some of Reagan's closest advisors were afraid the Gipper would blow it. At the margin, it was "let Reagan be Reagan."
Douglas Mac Arthur, general of the U.S. Army, became one of the greatest strategists of military history. As a young officer in WWI, he observed the senseless slaughter of soldiers sent head-on across the trenches of Europe. This was no way to win a tug-of-war. When he became commander of U.S. troops in the Pacific war against Japan, Mac Arthur developed a strategy of island-hopping. The Japanese were always sure he would go from one island to the next, building up their forces accordingly. By circling the heavily defended island and capturing the next one in line, he would cut off the supply lines to the forces leapfrogged. Under his command, a grand total of 25,000 men were killed in action, a number that could go up in smoke in a few afternoons in the trenches of France in WWI. When brought back to lead U.S. forces in the Korean War, he conceived the single most daring and successful military maneuver in the history of modern warfare — the landing at Inchon. Historians tell us that every one of his advisors found reason to recommend against the landing of troops on the east coast of Korea at Inchon, where the tides were the second highest in the world. Unless the troops could get in with almost no room for error, the landing would be disastrous. "Councils of war breed timidity and defeatism," MacArthur would say, an aphorism conveyed to him by his father, who was also a general of the army. This was chess playing at its finest. This was thinking on the margin.
In The Way the World Works, I discussed the concept of marginality at the most basic level:
The concept of marginality is crucial to an understanding of economic behavior. Everyone knows about "the straw that broke the camel's back." It is always that "last straw" that causes a change in the situation, the marginal straw, even though it weighs exactly the same as each of the other 10,000. But it is one thing to see that change occurs on the margin and quite another to understand that each straw is equally to blame for the breaking of the camel's back. Very few people think on the margin, but everyone acts on the margin, which is why it is so hard to see that the electorate, as a whole, understands economics.
To get our meaning, consider the camel again. He does not blame the last straw for breaking his back, but all 10,001. If straws could think, though, each of the first 10,000 would not blame themselves for doing in the camel, but would blame the last. The last straw, seeing clearly that his addition caused the camel to break down, would be the only one of the 10,001 to both act and think on the margin. If the straws were replaced by an equivalent weight contained in one log, which had a single mind, that log would both break the camel's back and understand that it had caused the event....
Individuals who can think on the margin always have an advantage over those who cannot. In suffering less illusion, they have greater control over their lives. Parents more often think on the margin than do their children. Successful parents think on the margin more than unsuccessful parents. Mother sees father, for what appears to be little reason, yelling at the children. If she does think on the margin, she will probe to find out what is bothering him, thereby removing from his back not the 10,001st straw, but several down in the rest of the bundle. A woman may suffer in silence a steady accumulation of grievances against her husband, only to "boil over" as a result of some slight her husband considers trivial, and he will bark back at her for her seemingly irrational behavior. But if he can think on the margin, he will be able to replay in his mind the grievances she has accumulated against him and let her "blow off steam."
The same is true of managers, politicians, economists. The most successful are not necessarily those with the greatest raw intelligence, but those with the widest life experience feeding an ability to think on the margin. A character in Anthony Powell's Dance to the Music of Time observes that, "The smallest alteration in a poem, or a novel, can change its whole emphasis, whole meaning. The same is true of any given situation in life too, though few are aware of that."
A successful businessman knows he cannot simply put his son through Harvard Business School and then hand him the keys to the vice-president's office. The youth will be at a disadvantage unless he spends time working his way up, from the mail room to the shipping room through the shop floor, etc., if only for a few weeks each. The experience gives the youth a feel and sense of the whole enterprise that allows him a crucial, marginal advantage over competitors who do not have that simple, accumulated picture in their minds.
After discussing this concept of marginality at the most basic level, I telescoped it back to the highest levels of the political universe, quoting the late Sir Isaiah Berlin in his classic essay, "The Hedgehog and the Fox":
Aquinas is praised by Maistre not for being a better mathematician than d' Alembert or Monge; Kutuzov's virtue does not, according to Tolstoy, consist in his being a better, more scientific theorist of war than Pfuel or Paulucci. These great men are wiser, not more knowledgeable; it is not their deductive or inductive reasoning that makes them masters; their vision is "profounder," they see something the others fail to see; they see the way the world goes, what goes with what and what never will be brought together; they see what can be and what cannot; how men live and to what ends, what they do and suffer, and how and why they act, and should act, thus and not otherwise. This "seeing" purveys, in a sense, no fresh information about the universe; it is an awareness of the interplay of the imponderable with the ponderable, of the "shape" of things in general or of a specific situation, or of a particular character...
What Isaiah Berlin is describing here is someone who thinks on the margin, those who may have lesser powers of reasoning than their most celebrated contemporaries, but who nevertheless can defeat them in the chess game of life. How does someone get this kind of wisdom? I chose the above quote because I somehow knew twenty years ago that I had already developed a wisdom rare among men younger than 55 or 60. I identified with those who "see something the others fail to see... the way the world goes, what goes with what and what never will be brought together." My secret? I simply lived faster than most people live. Most of this living was the product of historical accident — because of the age into which I had been born, and the family that reared me. But from an early age I pushed myself against the envelope of experience, always fearful of not being on the margin, of wasting my time and my life. My father taught me to read by the time I was four, and family and teachers assured me as I was growing up that if I applied myself I would be capable of great things.
My mother's father, John, and my father, Michael, were not more knowledgeable. My grandfather John never spent a day in school in his life. My father went to the sixth grade before his father sent him into the coal mines of Pennsylvania. Still, they were wise enough to know and to teach me that if there are a million things to learn about anything, you can learn the first 500,000 in a month, the next 100,000 in a year, the next 100,000 in five years, the next 100,000 in ten years, the next 100,000 in 25 years, and you can never learn the last 100,000. In the simplest example, you can learn myriad things about a person at first glance, myriad things about the same person by spending an hour in conversation with him/her, myriad things in the first days by learning about how they live, what kinds of friends they have. In the first month, you can learn half of everything there is to know about a person, but the most important things might take another year or two. This is why long engagements are preferred to love-at-first-sight marriages. Albert Einstein once observed that the lifespan of a man is not long enough for him to learn from the experience enough to benefit from it.
Well, I believe you can if you push yourself beyond your biological age. If you can learn a half million things in a month of a something that contains a million, why hang around after a month? Move on to something else in the second month, and the third, and if you keep it up, you will know half of everything there is to know. Okay, you are a Jack of all Trades, Master of None. But if you have been serious about learning half of everything, you will know more about everything than all those who hung around learning more about some things and had no time to learn anything about others. The world may not have need for many such people. In this complex age of specialization, there is still a need for the general practitioner, for example, but the medical profession requires such intense study in so many areas that a lifetime is too short a period to learn all million things about one specialty.
In politics, too, there are specialties that require concentrated study over long periods of time. Richard Nixon prepared himself for the presidency and lost the 1960 election to John Kennedy by a tiny number in the popular vote. He came back and won handily in 1968, because it was clearer that he was better prepared for the problems facing the nation in Vietnam and China. In between, Nixon ran for the governorship of California and lost badly. The California electorate sized him up as a man who really would not make a very good governor, which requires a different kind of preparation than that which Nixon had experienced. They suspected Nixon was merely interested in the statehouse to mark time before running for President again. In 1945, after Winston Churchill was celebrated for his leadership in defeating the Nazis, the people of Great Britain kicked him out of office in favor of the Labor Party and Clement Atlee. In early 1987, New York Gov. Mario Cuomo told me he had decided not to seek the presidency because he felt he was not prepared for the job, which he said now required an understanding of global commerce, money and banking that he said was beyond him. "I'm an old-school Democrat," he told me. "I can barely figure out how Albany works."
The Eastern Establishment did not take Ronald Reagan seriously in 1979-80 because he seemed so shallow, so unpresidential, a right-wing movie actor who wanted to bomb Moscow and throw welfare queens and orphans into President, though, not at any old time, but exactly when he was needed for the experience he had. Born in 1910, to a family of limited means, he came into political awareness as most of us do, when we are 12-to-14 years old, in the midst of the Roaring Twenties. It was an age of optimism in can-do America, which had just won the Great War, and Reagan lifted himself by his bootstraps. He was an average student at Eureka College, but by chance studied economics. At the time, classical economics — which is really what supply-side economics is all about — was in the curriculum. His "C" average in supply-side gave him a much better background in economics than did the higher grades scored by George Bush at Yale in 1948, when he got his B.A. in the new Keynesian economics.
Reagan came out of college into the Great Depression, a New Deal Democrat who voted for FDR, who managed to become well-to-do by connecting with Hollywood. The bottom-up experience gave him an appreciation of both sides of the tracks — which silver-spoon Republicans can never appreciate. His high-income years as a movie actor also taught him the destructiveness of high marginal income-tax rates. His interest in fairness led him to the presidency of the Screen Actors Guild, and there he learned the insidiousness of the communist idea and influence on culture. But it was not abstract. He could put a face on it because of the many people he knew who were on the far left. The experience propelled him out of the Democratic Party for all the right reasons and led him to the governorship of California for all the right reasons. In 1980, the people of the United States needed someone to be President who understood the basics of supply-side economics and would stand by their principles of low tax rates and sound money. They also needed a President who would understand the evils of big government, but not be too hard-nosed in cutting it back before economic growth could resume. They also needed a President who would fight the Evil Empire, not as an abstraction, but as something born of good intentions, which could be wrestled down by the right mix of carrot and stick. If a computer search in 1980 ran through all 225 million Americans looking for a President, the only file it could possibly have turned out was that of the Gipper.
Why do I relate this in a political lesson on the margin? If we were to go back to Plato and Aristotle to begin a study of politics, we would find them thinking about the ideal state and how it might work. In Lesson #1. we made brief mention that in Plato's Statesman, one of his Socratic dialogues, the nation is compared to a family, the ideal ruler is one who guides by his wisdom and leaves the execution of governance to others. The wise king is a balance of courage and caution in equal measure. His skills are such, Plato assures us, that no society can afford to produce more than a very few of them, "...it's quite out of the question for a large number of people — never mind who they are — to acquire this knowledge andthe snow. Reagan was born to be so govern with intelligence. No, if we're to discover the one and only perfect political system we've been talking about, we have to think in terms of scarceness, rarity — uniqueness, even." Twenty-four hundred years ago, Plato described the system that elected Ronald Reagan to the presidency in 1980. Reagan's unique collection of talents that he collected in his life experience could not have been tapped in other countries at other times, but our particular system of constitutional democracy — flawed that it remains — enabled the blend of republicanism at the heart of Plato's elite ruler with the democracy to which Aristotle bent his theoretical ideal. The computer would not have pulled up Reagan's name in 1976 or 1968, as the presidential assignments in those years required a different scarceness, rarity, uniqueness of talent and skill. We will develop this political tension in our next Lesson, involving chickens, ducks and parrots.
The Reagan example also serves to remind you that all change takes place at the margin. Every point of change in your life will lead to a different point of change in the future. Only a few of you alive today will serve as President of the United States, but quite a few who take these lessons seriously will wind up in important political assignments, those that your countrymen will need to fill with your particular skills — at federal, state or local levels, in elected or appointed positions. If you are conscious of how much change you are experiencing, you might decide to speed up or slow down, but you will at least be in more control in the shifting of gears in one direction or another. If you can see this in your own life, you can see it in the life of your family, of your community, of your state, the nation and the world. As I promised above, we will return to the margin again and again in this semester of political lessons. You could help understand the dynamic by thinking back on your own life, and the people you knew who caused you to change, or the books you read or the movies you saw. Write them down in order. The accumulation of change on the margin will add up to a life, a long life, or a very long life.
If you have the time and inclination, students, I recommend you read the Plato dialogue, The Statesman , the full text of which is available at http://classics.mit.edu/Plato/stateman.html. You should definitely make a bookmark at the home page of this www.classics.mit.edu website, which contains the complete texts of a small library of classics. You can actually dispense with the first half of the dialogue, in which Socrates and the Stranger are basically clearing their throats, before getting on with a discussion of the idea state. If you scroll a bit more than halfway down the dialogue, you will find the following paragraph, which opens the most relevant part of the work. "Str." stands for the Stranger, who we take to be Plato himself. From this point on, you will begin to recognize the elements ofyin andyang discussed last week, and how the "mean" in a political leader of the highest rank requires a balance of courage and composure. As you read, try to relate it to the political process we have seen unfolding since the end of the Cold War, especially the Republicans getting control of Congress in order to downsize the government:
Str. The art of the king has been separated from the similar at arts of shepherds, and, indeed, from all those which have to do with herds at all. There still remain, however, of the causal and co-operative arts those which are immediately concerned with States, and which must first be distinguished from one another.