The End of Capitalism
and the Triumph of the Market Economy
by James C. Bennett

an excerpt from
Network Commonwealth: The Future of Nations in the Internet Era

Copyright © 1998, 1999 by James C. Bennett

Right to reproduce in whole, without alteration, and with attribution, for private discussion is granted. Not for publication without permission of author.

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A funny thing happened on the way to the Third Millennium. Capitalism ended. At least, capitalism as defined by the man who coined the term. It is a peculiarity of socio-economic systems that they are typically known by the names that others give to them. The knights and princes of the Middle Ages never knew that they lived under feudalism; this name was invented only in the modern era.

Our current era is a particular case of these peculiarities. We call our economic system capitalism, and our political system one of democratic nation-states. Yet the term capitalism comes from Karl Marx, who thought that the era of market-economy nation-states was, in the middle of the 19th Century, on the verge of being replaced by a world state with a centralized command economy, which he termed scientific socialism. He was wrong about the inevitability of the transition to a command economy, as well as the desirability of that transition. These facts have finally been generally accepted. Yet we continue to accept his term of capitalism, and for the most part his definition of that system, and think of the market economy and capitalism as being synonymous. This is sloppy thinking.

Marx saw capitalism as a step on the road to centralization of society, economy, and the State. In his system, the relation of individuals to the means of production of material goods and services was the fundamental tool for analyzing society. In his system, land was the principal means of production under feudalism, at a time when agriculture was the principal productive activity, and the fact that land was owned by feudal lords made them the ruling class of feudal society. He saw capitalism as being the system of the industrial revolution, in which industry replaced agriculture as the principal productive activity. The means of production — the industrial plants and tooling — were large, expensive machine installations, and were owned by the shareholders of the corporations that arose to build them. Thus the class of shareholders became the ruling class of industrial society. Because ownership of capital — liquid, investable wealth, and the industrial plants it paid for — was the characteristic of this class, he called the system capitalism.

Over the past three decades, however, an enormous transition has taken place. Industrial manufacture has declined as the dominant and characteristic activity of the economy, and has been replaced by the production, organization, and manipulation of information. The means of producing and processing information have become the principal economic activity, and the tools used in those processes — computers and information networks — have become the principal means of production. At first, this seemed to not matter to Marxists, and others who saw the ownership of capital and thereby of the means of production to be the salient feature of the economy. The production and manipulation of information seemed to require large, capital-intensive tools — computers, communications networks, and broadcasting systems — and it seemed as if large corporations could dominate this field by the control of the massive capital needed to create and operate these tools.

The rise of Microsoft to dominance seemed to validate this model. Employing thousands of Microserfs, using its massive capital to amass software patents and enforce them, maintaining battalions of lawyers to wear down the competition, and using its capital throw-weight to establish new products through brute-force control of advertising and distribution, Microsoft seemed to be the Standard Oil of the new industry. Yet just as Microsoft seemed to be guaranteeing the predominance of the capitalist model into the new era, several significant things were happening which suggested that, rather than being the first corporation of the new era, Microsoft was the last corporation of the passing one.

The first thing was that the falling price of computers crossed the line to the point where the average programmer could afford to own a computer capable of producing the code he typically produced. This meant that, for the first time since the beginning of the Industrial Revolution, the ownership of the most critical tool of production of the most critical industry of the worlds leading economy became readily affordable by the individual worker. Throughout the first three decades of the Information Age, the individual worker was still as dependent on his employer for his means of production as was any textile worker in Manchester or Lawrence in 1840. Suddenly, this changed. Now, it is as if a steelworker could afford his own blast-furnace or rolling-mill; an automobile worker his own assembly line. By strict Marxist definitions, capitalism ended some time in the early 1990s. I have nowhere seen this fact brought to the attention of the world.

The second thing which has changed is the rise of the Internet. This is taking the control of the communication networks, and ultimately of the communications media, out of the hands of the large corporations which have always controlled them. It is creating the basis for a heterogeneous, worldwide, real-time market in which packages of communications capability, and content, will be bought and sold as commodities, and in which small players will likely hold the advantage over big ones. The Internet, the computer, and broadcasting capabilities will just be arbitrary divisions within a wider uniform medium. The cost of a facility for Webcasting is far less than the cost of a facility for television broadcasting; in a few years the quality of the Webcast will be as good, if not better, than that of broadcast television, and the cost of a Webcasting facility for high-quality production will readily be in the range of many individuals. Just as the individually-owned computer capable of producing first-rate software is revolutionizing the work relations of software, the individually-owned Webcasting facility will change the nature of the media.

It is also changing the dynamics of production. Even though the tools of production can now be owned by the workers, individually and severally, there still seemed to be a need to bring programmers together in one place and put them under the control of management. Although this is still the case in most instances, the rise of Linux and other open-source products has provided another paradigm, and one which will soon grow to become the principal model of production in the principal industry of the leading economies of the planet.

The open-source software world is unlike anything described by Marx, either as present reality or future possibility. Let us consider the world of Linux, the most famous open-source product. Software code is produced without direct cash compensation by a wide collection of individuals, voluntarily coordinating themselves over the Internet. Consensus is the primary decision-making mode. Expertise and renown are then used as a platform for marketing individuals services as employees and as members of entrepreneurial teams in for-profit companies (such as Red Hat) which take the basic open-source code (which is available to all, free on the Internet), and turn it into commercial variants which are sold and supported by those companies. The Linux world runs what amounts to a parallel economy paying in reputation, rather than cash, linked loosely to the cash economy. It is a one-way linkage; reputation can be turned into cash, but cash cannot be turned into reputation. It is remarkably free from regulation and confiscation; no government agency can take reputation away from one participant and give it to another.

The closest analogy to the Linux model of production may be that of the live theater industry. There would-be actors perform for free or for minuscule reward to demonstrate their talents. Eventually they are accepted in a profit-making enterprise, or band together with other would-be entrants to form a new company. Once a certain breakthrough is made, the reputation of the actor becomes a reliable meal-ticket, and often a means to wealth. The difference between the theater model and the Linux model is that whereas the demand for theatrical entertainment is capped, and is relatively inelastic, the demand for good software is enormous and will continue to grow, as more and more of the functions of society become suffused with and dependent upon computation.

The process of producing Linux seems like Marx’s ultimate communism, after the supposed withering away of the socialist state — from each according to his ability would be a fair way of describing the production side. But the distribution side is entirely different. The product is given away not to each according to his need, but automatically and universally. The only thing the producers get is reputation, and that is awarded on an utterly ruthless basis of merit. Meanwhile, within the larger Linux universe, a sub-universe of pure laissez-faire market relations plays out, with entrepreneurial companies acting in accordance with pure market theory.

The real evidence that this model is not a fluke, but rather a harbinger of a new economic model, is that open-source products compete very well against the products of traditional capitalist corporations. Apache, an open-source product, has established itself firmly in the server marketplace. Linux as a server operating system is gaining market share daily against Windows NT, a traditionally-produced, traditionally-supported, and traditionally-marketed product. It is particularly noteworthy that the server market is commercial: more demanding and more quality-conscious than the client market, where Windows products still hold sway, for now, with less-demanding, less quality-conscious consumers. Linux beats Windows NT because it is more reliable and more robust than the Microsoft product. This is extraordinary. Imagine if a type of aircraft developed by amateur homebuilders and produced by small entrepreneurial companies were to be bought by airlines in preference to the aircraft of Boeing or Airbus, who in turn could only compete in the private pilot markets! Yet this is the exact parallel to the situation in server software today.

The Linux model will not become the sole model for software production or sales, particularly on the consumer side, where branding will remain important. However, it, or what it evolves into over time, will be an important model for software, and one of the dominant modes of production. It is also important to understand that software will come to encompass the bulk of the value of any manufactured product, as integrated design-to-automated production systems become the norm in industry. As I have discussed elsewhere in this book, flexible, automated, computer-controlled fabrication facilities, ultimately quite small and decentralized, will become the normal means of fabrication of goods. Time on such machines will become a commodity, which the market will force down to the lowest possible margin. What will be valuable will be the software that describes the good and commands its manufacture. There is no reason to believe that such software, and therefore the design of most goods, could not be produced on the Linux model. Given the stability and reliability of open-source software compared to closed-source, it will probably be preferred for applications where reliability is important. The example of a homebuilt aircraft being preferred by airlines over Boeing products was fanciful; however, in the world where industrial goods are mostly software by value, an open-source aircraft design might be a reality.

At the same time that Marx’s capitalism becomes obsolete as an economic category, it is clear that the new economy is a market economy — and likely to become a purer market economy than ever before seen. What we are witnessing is the triumph of F. A. Hayek over Marx, not just in the political realm, but in the realm of social science as well. Hayek, the Nobel laureate Austrian economist, offered an understanding of the market economy which will be the underpinning of the economics and social science of the Internet Era. Hayek understood that the essence of the market economy is not the ownership of the means of production, but the exchange process itself. The Linux model confounds Marx’s rules completely, but is entirely consistent with a Hayekian, or market-process understanding. So long as the exchange of values is freely taken by a wide range of actors, and the final product is the result of those exchanges creating an emergent understanding of the relative value of the items exchanged, it is a market process. The fact that the Linux model values the original inputs by the volunteer hackers only in reputation, rather than cash, does not mean that it is not a market process. Hayek’s theory explains the Linux world as readily as it did the corporate world of the mid-Twentieth Century in which it was formulated.

The Linux model has profound consequences for the fate of corporations, as does the Internet Era for the existing, centralized nation-states. Nobel economics laureate Ronald Coase posited his Theory of the Firm, which demonstrated that corporations offered an advantage in the marketplace because their size allowed essential internal functions to be performed with lower transaction costs than a comparable-sized network of individual actors. The Linux world is an example of what happens when the easy communications of Internet, and the substitution of reputation payments for cash payments, lowers the transaction costs of working in an open-source network to below those of the competing firm. Only the small, entrepreneurial firms working within the Linux world (such as Red Hat) preserve the advantages of the corporate form as they interface with the cash-economy world. Cash- and reputation-based economies mesh readily in an overall framework of free exchange. In this new medium, a new Theory of the Network is needed to supplement Coase’s Theory of the Firm.

This understanding has been largely absent from the debate over the post-nation-state future which I have summarized previously. Many observers seem to have the expectation that, while the Internet economy would undercut the power of the nation-state, it would leave the great corporations not only intact, but essentially omnipotent in the economy of the future. This is as naïve as the assumption that the collapse of the independence of the nobility at the end of the Middle Ages would leave kings omnipotent. Although this did happen in some places for some periods of time, in general the consequence of the collapse of baronial power was ultimately to empower new actors: the new trading and manufacturing classes in the maritime states, and civil and military bureaucrats in the continental states.

Corporations and the established wealthy have relied heavily on the power of nation-states to protect them from competition, and most importantly, from the instability of technological change (Schumpeter’s creative destruction). One of the most successful public-relations triumphs of the Twentieth Century was the selling of the idea that social democracy was forced on the unwilling rich for the benefit of the poor and working classes. Rather, social democracy has been a device to stabilize society and limit opportunities for upward mobility to narrow, state-administered meritocratic channels.

Massive taxes on new income hurt new startups and upwardly mobile entrepreneurs far more than established wealthy families and corporations. Heavy financial and product regulations cripple new competition and protect established firms. State-mandated labor union rights and lavish mandated employee benefits also present a formidable barrier to entry to new companies. Existing family wealth can usually be sheltered in offshore trusts or other wealth-preservation devices available to those with the large existing fortunes needed to justify the transaction costs of these mechanisms.

Thus, it is no wonder that established wealthy families and their corporate empires have often supported social-democratic politics. The Rockefellers in the US, the Wallenbergs in Sweden, and the entire Tory wet class in Britain have spent much of the Twentieth Century supporting the genteel politics of regulated capitalism and tax-supported redistribution of (some) wealth. They would have preferred that politics be a debate between their parties (the Rockefeller Republicans in the US, the Christian Democrats on the Continent, and the pre-Thatcher Tories, exemplified by Rab Butler, in England) and the more moderate socialists and social-democrats of the Left (Humphrey Democrats, the Social Democratic parties of the Continent, Hugh Gaitskell’s Labour in the UK).

It is also little wonder that the political classes, overwhelmingly dependent on large bureaucratic institutions for their incomes, viewed voices outside this consensus with horror. Barry Goldwater, Ronald Reagan, and Margaret Thatcher in the political arena, and Milton Friedman and F.A. Hayek in the sphere of professional economics all encountered ferocious ridicule and criticism far out of proportion to the impact of the actual policies they advocated or implemented. What sparked intense opposition was their threat to a reigning consensus.

The changes introduced by the Thatcher and Reagan governments were more important as indicators of direction than for the scope of changes accomplished in themselves. More important was the wave of deregulation, decontrol, and privatizations introduced worldwide in the 1980s and 1990s by conservatives, liberals, and socialists alike, which resulted in substantial shakeups to the existing corporate structures. Many established, change-resistant bureaucracies either reformed or adapted, or vanished from the scene. This process is far from finished, but one can now see a delayered, downsized, leaner and meaner corporation, more network-like in its internal structure, and more flexible in its response to the marketplace. Gone are many of the characteristics of the mid-century corporation, including the expectation of lifelong loyalty in either direction.

It is tempting, then, to see the new corporation as the endpoint of this transition process. But the logic of the end of capitalism, as described, argues that the transition is far from complete, and the endpoint is not even necessarily visible today. The stock markets are today dazzled by companies such as Netscape, which began with a product produced by two college students in their dormitories in the early Nineties, for a system, the WorldWideWeb, created as an as open-source phenomenon. They have not really begun to understand true open-source companies such as Red Hat. And Red Hat and its like are not the endpoint of this evolution either.

There will still be a role for corporations, including large corporations, in the network economy of the Internet Era. Their economic weight and established brand names will continue to be valuable assets. However, their relation to the whole system will be very different from the role of corporations in the economy now passing. The network economy of free exchange will be the matrix; individuals, small groups, and open networks (like the Linux community) will interact with corporations without subservience. In this very open and fluid environment, which we might dub the Network Marketplace, opportunities will abound for the astute.

The political question is, what will be the relationship between the state forms and the marketplace forms? I have argued that the world political system of large, centralized nation-states is transitioning to one of smaller, more coherent regional states linked in loose confederal forms on civilizational lines, the Network Commonwealths. These will interact with a fluid network economy in which much-changed corporations, largely links between financing and research centers, will interact with a host of smaller actors in a market-economy matrix. Government intervention, as I discuss elsewhere, will be much more local and limited — specific interventions for limited ends. The world of helpless individuals squeezed between large, powerful states and large, powerful corporations will be a dim historical memory — neither will survive in their historical, Twentieth Century essence, although the forms will still likely be there. Fears of corporate domination of the Network world are misplaced. In fact, as the power of big corporations dwindle, it will likely be left-wing nostalgics who mourn them the most.

The new understanding of the market is essential to comprehend the Network Economy. The Marxist concept of capitalism has long outlived its usefulness, if ever it had any. At most, it was a tool for understanding power relationships in the early Industrial revolution era; as a tool for understanding corporations, it was readily superseded by Coase’s theory of the firm. Capitalism is dead. Let us move on to examine the emerging world of the Network Economy and the Network Commonwealth.

Charlemagne

Unity is strength

There are reasons why European countries find it hard to unite against Russia

THE European Union will be heeded by Russia only when it speaks with one voice. That was the universal battle cry in Brussels as EU officials and diplomats hurried back from their summer holidays to prepare for an emergency EU summit on the Georgian crisis, called by the current French presidency for September 1st. And faced with the sobering sight of tanks trundling around Europe’s backyard, there was equally loud agreement among national politicians that their usual squabbling over the right attitude towards Russia harms the common interests of the 27-member union.

Yet the rhetoric seems largely empty. The summit will certainly see a lot of joint finger-wagging over Russia’s recognition of the breakaway Georgian territories of Abkhazia and South Ossetia. There may be more talk of an EU civilian mission to monitor the situation in Georgia (though the idea of an EU military force has been shelved, at least for the moment). But when it comes to the stated purpose of the meeting—to re-examine EU-Russia relations—the 27 leaders will remain divided into several overlapping camps. These include: those who think Russia can and must be engaged as a partner; those who think Russia needs containing; and a larger group of fatalists who think that Russia “has us over a barrel”, as one diplomat punningly puts it. The summit is not expected to agree to make any big changes to the status quo, for the simple reason that the various leaders do not agree over whether that would be a good idea or counter-productive.

Does disunity towards Russia hurt the common EU interest? Probably. A November “power audit” by the European Council on Foreign Relations (ECFR), a think-tank, argued that Europe was throwing away what should be its considerable leverage over Russia. After all, the EU’s population is more than three times that of Russia, and its wealth more than a dozen times greater. The EU depends heavily on Russian energy, but the flipside is that it is Russia’s biggest market for gas (indeed, for all Russian exports). If the 27 EU countries dealt with Russia as one, they would surely have less to fear from Moscow hawks.

The problem is that the ECFR’s argument is both true and beside the point, because it is so far removed from the way that individual countries act and think (reminiscent, in this respect, of the French statement issued after the Olympics proclaiming that the EU had collectively won, with a total of 280 medals). The cold calculation of national interests is a complex business, as any student of game theory can tell you. Disunity would be irrational if EU members always saw their common interests as paramount. But they do not, certainly when it comes to dealing with big third countries, from Russia to China to America.

In Europe, it is rarely enough to show that the union, in aggregate, will gain from a given policy. One must also show that the overall European gain manifestly outweighs individual national interests. This may seem a shabby calculation, but it has democratic roots. The EU is not a single country, whose most senior leaders are elected by a single electorate. In its highest decision-making body, the European Council, the 27 heads of state and government remain accountable to 27 different sets of voters.

Europeans do not even agree on what unity means. Countries such as Germany, which come closer than most to believing in a common European interest, tend to talk of it in terms of the interests of a majority of EU countries, not the interests of all. In recent disputes that pitted Russia against such countries as Poland or Estonia, a favourite line of German diplomats or politicians was to complain that individual countries had no right to take the wider EU’s good relations with Russia “hostage”.

Nor do the costs of disunity fall equally. Take energy. It must be in the EU’s interests to diversify away from the block’s dependence on Russian gas—which is why it supports pipeline projects that would bring in gas from elsewhere. But in each individual EU country the voters expect to have the heating on this winter and the lights on all year as cheaply as possible (nor would they easily tolerate sharing their energy with neighbouring countries in the event of rationed supplies). In recent years, countries from Germany and Italy to Bulgaria and Greece have signed deals that increase the EU’s dependence on Russia, and undercut alternative routes. From the perspective of those individual countries, such selfishness probably felt quite rational.

I’m all right, Jacques

American officials often wonder why they seem to take European energy security more seriously than the Europeans themselves. One answer is that not every country has to worry about energy security. Russia may shut off oil or gas deliveries to smaller ex-communist countries for spurious “technical” reasons from time to time. But it has never turned off the taps to Germany or Italy. And plenty of EU countries, from Sweden to Portugal, barely consume any Russian energy.

Will the benefits of European unity ever trump the pursuit of national interests when it comes to Russia? Optimists like those in the ECFR say that a more united Europe still has the chance to prod Russia into being a more reliable partner, wedded to the rule of law, international norms and other virtues. Pessimists say that the EU is unlikely to show much grit and unity until Russian behaviour becomes a lot more threatening.

If Russia starts to act even more recklessly—perhaps by stirring up trouble in Ukraine, which has millions of ethnic Russians, or among Russian minorities in EU countries like Estonia and Latvia—EU members may decide that their individual national interest is to stand up together. Even the largest EU country would not wish to be in a club that cannot look after its own. But that won’t happen unless Russia throws its weight around a lot more. Meanwhile weakness, selfishness and division will continue, however many fingers wag in Brussels on September 1st.

Russia and Georgia

Put out even more flags

Russia’s recognition of South Ossetia and Abkhazia will reverberate for a long time—not least at home

A FEW months ago Dmitry Medvedev, Russia’s new president, did not think he would be recognising the independence of two separatist regions of Georgia and heading into direct confrontation with the West. When he met Georgia’s president, Mikheil Saakashvili, in St Petersburg in June, both seemed happy. War did not feature in Mr Medvedev’s plans; he was even considering an early visit to Tbilisi. But when the two leaders met again in early July, the temperature was far chillier. The night before, South Ossetian and Georgian forces had exchanged fire. Mr Medvedev never made it to Tbilisi: instead Russian tanks poured into Georgia.

Did Russia’s security chiefs fear that the two presidents might agree on something that would spoil their long-planned conflict? Did Vladimir Putin, Mr Medvedev’s patron and prime minister, crave a small, victorious war? Or did Mr Saakashvili think Mr Medvedev was too soft to respond to Georgia’s attempt to regain control over South Ossetia? The answer may never be known. But after barely 100 days in office, the soft-spoken Mr Medvedev was cast in the unlikely role of war leader.

His initial job appeared to be as Mr Putin’s spokesman. But he quickly got a taste for war. This former lawyer may have been overcompensating for his civilian background. At any rate, on August 26th he stood beneath the two-headed Russian eagle and solemnly announced the Kremlin’s decision to recognise the independence of Abkhazia and South Ossetia. A day earlier the Russian parliament had demanded that Mr Medvedev do just that.

Mr Medvedev said he had no choice and had to protect human lives. The decision, he argued, was forced on him by Georgia’s aggression and “genocide” against South Ossetia. But the argument is spurious. It is true that, in the early 1990s, when Georgia was barely a state, its nationalistic leaders (one military commander is still hiding in Russia) committed atrocities in South Ossetia and Abkhazia. But it is also true that more than 200,000 Georgians were driven out of Abkhazia in a burst of ethnic cleansing, and that Russia backed Abkhazia militarily.

Abkhazia had the trappings of a nascent state, but South Ossetia was a chessboard of villages (Georgian and Ossetian) which suffered under a Moscow-sponsored, thuggish and corrupt regime whose main job seemed to be to provoke Georgia. Mr Saakashvili made mistakes: he was in too much of a rush to take back the enclaves and did too little to disown Georgia’s nationalist past. His worst mistake (which he does not admit to) was to order the shelling of Tskhinvali, South Ossetia’s capital, on August 7th. But this was not, as Russia claimed, genocide; the death toll was fewer than 200. Moreover, the ethnic cleansing of Georgians in South Ossetia is all too evident: Georgian villages have been destroyed and thousands of Georgians displaced by South Ossetian militia under Russia’s watch.

If Russia had really wanted to resolve the separatist conflicts in Georgia, it had opportunities. It might have begun by not handing out Russian passports and then claiming a purported need to defend its “citizens”. It might also have avoided unleashing anti-Georgian and anti-Western hysteria in the Russian media.

And although the latest conflict was triggered by Georgia, the deeper roots of Russia’s invasion lie in domestic events that go back as far as 2003-04: the destruction of the Yukos oil company, and Russia’s perception of the colour revolutions in Georgia and Ukraine as a Western plot to undermine its sovereignty. Mr Saakashvili’s support for Ukraine’s orange revolution particularly irked Mr Putin.

Lilia Shevtsova of the Carnegie Moscow Centre argues that the political system built by Mr Putin requires the images of an enemy and a besieged fortress. “This war is not about South Ossetia, Abkhazia or Georgia,” she says. “It is about the matrix of the Russian state and its survival. The beast needs feeding.” Konstantin Zatulin, a Duma deputy handling relations with former Soviet republics, is more belligerent. “The time when we needed Western applause is over,” he says. “Mikhail Gorbachev made military and political concessions to the West: he agreed to the unification of Germany and the liquidation of the Warsaw Pact but a few years later the country where he was president fell apart.”

After years of cultivating xenophobic sentiment and persuading Russians that they face an enemy, the Kremlin had prepared the population psychologically for war. That, says Boris Dubin, a sociologist, is why Russia’s propaganda fell on fertile ground. In the public mind, he claims, the cause of the war is to be found in “America’s expansionist plans and desire to establish control over Russia’s neighbours.”

In practice, Russia’s recognition of the two territories may not change much. Russia already had almost full control over South Ossetia and Abkhazia and dealt openly with its self-proclaimed presidents. Few countries will follow Russia’s recognition. With its troops still in Georgia, Russia has also made a mockery of the French-negotiated ceasefire that demanded their withdrawal to pre-war positions and an international discussion about the enclaves. But overall the war has cemented the victory of isolationist ideology in Russia, which will shape both domestic politics and foreign relations for years to come.

The partition of Georgia may cause a long-term confrontation between Russia and the West, with echoes of the cold war. Too bad, Mr Medvedev said this week: “Nothing scares us, including the prospect of a cold war…we have lived in different situations and we will survive.” (“If it’s only cold, that’s not a problem,” Bernard Kouchner, the French foreign minister retorted.) Russia’s elite is convinced that the West is weak and will swallow Russia’s decision. “When you cross the road you have to check for dangers,” declares Mr Zatulin. “The West can apply psychological pressure. But Europe cannot afford to turn down our gas and America needs our help with Afghanistan and Iran.”

The fallout may be felt most inside Russia itself. Hopes for liberalisation and modernisation under Mr Medvedev have evaporated. In the past few days the Kremlin has rejected Mikhail Khodorkovsky’s parole application, refused to grant Russian citizenship to an investigative Moldovan journalist from Russia and briefly detained protesters in Red Square who held a banner “For Your Freedom and Ours” in a repeat of a protest against the invasion of Czechoslovakia staged by dissidents 40 years ago. Views once considered extreme are creeping into the mainstream. For example, Alexander Dugin, a nationalist ideologue, greeted events in Georgia by celebrating the removal of the previous “masks”. “We are at war,” he proclaimed. “Now the country should fight not only against its external enemies but also with the fifth column. Pro-Western liberals …should be interned. War is war. The time of patriots is coming: the time for revenge for all the humiliation from these people that we have been suffering for years.”

Mr Medvedev’s recognition of Abkhazia and South Ossetia may also have unpredictable consequences for Russia’s north Caucasus. Russia has bolstered separatism in Georgia but crushed it brutally in Chechnya. “Talking about the right for independence, about genocide and the war crimes of Mr Saakashvili, Russia’s leaders are perhaps forgetting about the tens of thousands of civilians who were killed by Russia’s bombardment of Grozny and who were executed, cleansed and tortured by the Russian military in Chechnya,” says Ekaterina Sokiryanskaya of Memorial, a human-rights group.

Indeed, Russia’s recognition of South Ossetia and Abkhazia could easily reignite separatist sentiment in the north Caucasus. Chechnya may be too exhausted to fight another war with Russia at present, but in ten years’ time “the question of independence of Chechnya will arise again,” says Ms Sokiryanskaya. Russia maintains stability in the Caucasus by military force and fear. Even as Russia was “liberating” South Ossetia, its security services were intimidating human-rights activists in Ingushetia and Dagestan. The methods they use differ little from those of the separatists and terrorists they are fighting. Inevitably, this leads to further radicalisation of the population, says Magomet Mutsolgov, a human-rights activist in Ingushetia.

Mr Mutsolgov says the war in Georgia found little support in Ingushetia, not long ago engaged in a bitter ethnic conflict with North Ossetia. Rather, Russia’s actions in Georgia have created a general sense of injustice, says Mr Mutsolgov. “What about the thousands of Ingush who have been forced out of their homes by Ossetians?” Many Ingush refused to fight in Georgia. “People here say ‘it is not our war’ ”. The seeds of many conflicts in the Caucasus, as of Russia’s own problems, were planted by Stalin’s ruthless nationalist policies in the 1930s and 1940s. Today’s Russia is planting new ones.

American banks

When sorrows come

Commercial banks prepare, reluctantly, to take centre stage

EVERY episode in the credit crunch has had its dramatic flourish. There were the defenestrations at Citigroup and Merrill Lynch late last year; then, in March, the Bear Stearns fiasco; the humbling of UBS; and now Fannie Mae and Freddie Mac, a tale of hubris that might impress Shakespeare himself. What next?

With the tragedy of the mortgage giants still unfolding, another dark drama is entering its second act, and it has rather a lot of players. It concerns America’s commercial banks. “Pretty dismal” was the frank description of their recent performance offered on August 26th by Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC). That was just after announcing a rise in the number of banks on its danger list, from 90 to 117.

Nine banks have failed so far this year, felled by shoddy lending to homeowners and developers—six more than in the previous three years combined. The trajectory is steep: Institutional Risk Analytics, which monitors the health of banks, expects more than 100 lenders—most, but by no means all, tiddlers—to fold over the next year alone. Alarmingly, the ratio of loan-loss provisions to duff credit is at its lowest level in 15 years.

The FDIC will soon have to replenish its deposit-insurance fund, which collects premiums from banks and stood at around $53 billion before the downturn. One of this year’s failures, IndyMac, has alone depleted the fund’s coffers by one-sixth—and it was no giant. This has pushed the fund’s holdings below a trigger point that requires the FDIC to craft a “restoration” plan within 90 days.

Ms Bair has indicated that banks with risky profiles—which already pay up to ten times more than the typical five cents per $100 insured—will be asked to “step up to the plate” with even higher premiums. This would ensure that safer banks are not unfairly burdened. But it will heap yet more financial pressure on strugglers. Bankers’ groups have already started to protest loudly.

How much will be needed? Possibly far more than the FDIC is letting on, reckons Joseph Mason of Louisiana State University. Extrapolating from the savings and loan crisis of the early 1990s, and allowing for the growth in bank assets, he puts the possible cost at $143 billion.

That would force the FDIC to go cap-in-hand to the Treasury. The need to do so could become even more pressing if nervous savers began to move even insured deposits (those under $100,000) away from banks they perceived to be at risk—which no longer looks fanciful given the squeeze on the fund. Ms Bair’s admission, in an interview with the Wall Street Journal, that the FDIC might have to tap the public purse, albeit only for “short-term liquidity purposes”, will have done little to calm nerves.

It is also sure to reinforce a growing sense that the financial-market crisis has a lot further to run. Risk-aversion, measured by spreads on corporate debt, fell sharply after the sale of Bear Stearns in March but has leapt back in recent weeks as the spectre of systemic meltdown resurfaced. Sentiment towards spicier assets is astonishingly grim: prices of junk bonds and home-equity loans imply a default rate consistent with unemployment of around 20%, points out Torsten Slok, an economist at Deutsche Bank.

Measure for measure

Banks continue to tighten credit, and their own belts—Citigroup has even restricted colour photocopying. What liquidity they have is being jealously hoarded, partly out of distrust of one another, but mostly in anticipation of refinancing requirements on bonds that they issued with abandon in the credit boom. The spread over expected central-bank rates that they charge one another for short-term cash has risen to three times the level that it was in January. Worse, derivatives markets point to a further increase. Another measure of trust, or lack of it, the index of the “counterparty” risk that derivatives dealers pose, is creeping back towards its March peak.

Nor have investors grown any more confident about their ability to price the banks’ toxic mortgage-backed assets: Merrill Lynch’s cut-price sale of collateralised-debt obligations in July has had few imitators. Lehman Brothers has tried unsuccessfully to sell a pile of iffy securities backed by commercial mortgages all summer.

The woes of Fannie Mae and Freddie Mac weigh on these efforts. Bankers feel obliged to advise clients against snapping up distressed securitised assets until the mortgage giants are put on a firmer footing, says one. And banks themselves are exposed: paper issued by the mortgage agencies accounts for roughly half of their total securities portfolios, estimates CreditSights, a research firm. American banks own much of the preferred stock (a hybrid of debt and equity) that the two firms issued. They were attracted by the preference shares’ combination of a low risk weighting and decent yield, says Ira Jersey of Credit Suisse, but have seen their prices tumble on fears that they will be wiped out if the government moves to prop the agencies up. Although only a few regional lenders would be seriously hurt by this, it would add to the pain of many. JPMorgan Chase has just become the first bank to write down its holdings, saying it may lose $600m, or half the value it had put on them. That may start a trend.

Worse, banks have come to rely on issuing their own preference shares to raise capital, and will find that harder if holders of Fannie’s and Freddie’s paper suffer losses. Banks have raised a total of $265 billion of capital since last summer, says UBS. With much of that issuance underwater, investors are understandably wary of throwing good money after bad.

Contagion also spreads through the market for credit-default swaps. Banks have busily written such insurance contracts on Fannie’s and Freddie’s $20 billion of subordinated debt, which sits below senior debt in their capital structures. If the debt’s holders suffer losses in a bail-out, triggering a “credit event”, banks that had sold the swaps would face huge payouts. The amounts involved are “impossible to calculate but far from trivial”, says one sombre analyst. As the bard wrote: “When sorrows come, they come not single spies, but in battalions.”

Historical Capitalism vs. The Free Market
<!– put author name below, before tag –> <!– put date below, after comma, before tag –> by Richard M. Ebeling

During the dark days of Nazi collectivism in Europe, the German economist Wilhelm Röpke used the haven of neutral Switzerland for continuing to write and lecture on the moral and economic principles of the free society. “Collectivism,” he warned, was “the fundamental and moral danger of the West.” The triumph of collectivism meant “nothing less than political and economic tyranny, regimentation, centralization of every department of life, the destruction of personality, totalitarianism and the rigid mechanization of human society.”

If the Western world was to be saved, Röpke said, it would require a “renaissance of [classical] Liberalism” springing “from an elementary longing for freedom and for the resuscitation of human individuality.” At the same time, such a renaissance was inseparable from the establishing of a capitalist economy. But what is capitalism? “Now here at once we are faced with a difficulty,” Röpke lamented, because “capitalism contains so many ambiguities that it is becoming ever less adapted for an honest spiritual currency.”

As a solution, Röpke suggested that we “make a sharp distinction between the principle of a market economy as such … and the actual development which during the nineteenth and twentieth centuries has led to the historical foundation of market economy…. If the word “Capitalism” is to be used at all this should be with due reserve and then at most only to designate this historical form of market economy… . Only in this way we are safe from the danger … of making the principle of the market economy responsible for things which are to be attributed to the whole historical combination … of economic, social, legal, moral and cultural elements . . . in which it [capitalism) appeared in the nineteenth century.”

Röpke’s distinction between the principle of a capitalist or market economy and the historical forms in which capitalism has manifested itself in various times is as important now in the post-Soviet socialist era of the 1990s as when he presented his argument during the zenith of Nazi socialism in the 1940s.

In the face of the collapse of communism as an ideology and as a practical economic system, the market economy is being hailed by some and reluctantly conceded by others to be the only decent and viable economic order. The Eastern European countries declare their desire to construct capitalist economics on the ruins of their socialist past. In increasing parts of Asia and South America, liberalized markets and privatization of state enterprises are said to be among the goals of governmental policy. And in both Western Europe and the United States, all the major political parties insist that they are “pro-market” for purposes of generating economic growth, increased employment and technological innovations.

Capitalism stands triumphant. But what is “capitalism”? The fact is that the market economy has evolved both in Europe and the United States during the last two hundred years in the historical context of the following: conflicting cultures and world views, contradictory political philosophies, special-interest intrigues in the face of economic and institutional changes, and ideological wars both on and off the battlefields of the world.

As a consequence, even before all of the implications and requirements for a free-market economy could be fully appreciated and implemented in the 19th century, it was being opposed and subverted by the residues of feudal privilege and mercantilist ideology. And even as the proponents of the market economy were proclaiming their victory over oppressive and intrusive government in the middle of the 19th century, now forces of collectivist reaction were arising in the form of socialism and communism. Three ideas in particular undermined the principle of the market economy, and, as a result, historical capitalism has contained within it the seeds of its own destruction.

1. The Idea of the National Interest and the Rationale for “Public Policy.” In the 17th and 18th centuries, the emergence of the nation-state in Western Europe produced the idea of a “national interest” superior to the interests of the individual subject and to which he was subservient. The purpose of public policy was to define what served the interests of the state and to confine and direct the actions of individuals into those channels and forms that served this national interest.

In spite of the demise of the divine right of kings and the rise of rights of man, and in spite of the refutation of mercantilism by the free-trade economists of the late 18th and 19th centuries, democratic governments continued to retain the notion of a national interest. But instead of being defined as serving the interests of the king, it was now postulated as serving “the people” of the nation as a whole. In the 20th century, public policy came to be assigned the tasks of guaranteeing full employment, generating economic growth, and directing investment and resources into those activities considered to foster the economic development considered most advantageous to “the nation.”

Capitalism, therefore, has come to be viewed as compatible with and indeed even requiring activist government: a government that manipulates investment patterns through fiscal policy, regulates production, supervises competition through licensing and antitrust laws, stimulates exports by use of subsidies, and controls the purchase of imports with tariffs and quotas. The interventionist state, in the evolution of historical capitalism, has come to be considered the prerequisite for the maintenance of the market economy.

2. Monetary Central Planning and the Rationale of Central Banking. Whether in Europe or the United States, the application and practice of the principles of the market economy were subverted from the start with the existence of monetary central planning in the form of central banking. First seen as a device for assuring a steady flow of cheap money to finance the operations of government in excess of what those governments could extract from their subjects directly through taxation, monopolistic central banks were soon rationalized as the essential monetary institutions for economic stability. But as the German economist Gustav Stolper clearly explained in 1942 in his book, This Age of Fable,

“Hardly ever do the advocates of free capitalism realize how utterly their ideal was frustrated at the moment the state assumed control of the monetary system…. A ‘fire’ capitalism with governmental responsibility for money and credit has lost its innocence. From that point on it is no longer a matter of principle but one of expediency how far one wishes or permits government interference to go. Money control is the supreme and most comprehensive of all governmental controls short of expropriation.”

Once government controls the supply of money, it has the capacity to redistribute wealth; create inflations and cause industrial depressions; distort the structure of relative prices; generate misallocations of labor and capital throughout the economy; rationalize new governmental interventions in the face of the market “instability” that has actually been caused by the state’s mismanagement of the money supply; manipulate the patterns of and the profits from international trade; and confiscate the income and wealth of millions through the hidden tax of rising prices arising from inflation.

3. The “Cruelty” of Capitalism and the Rationale for the Welfare State. The privileged classes of pre-capitalist society hated the market. The individual was freed from subservience and obedience to the nobility, the aristocracy, and the landed interests. And for these privileged groups, the market meant loss of cheap labor, the disappearance of “proper respect” from their inferiors, and the economic uncertainty of changing market-generated circumstances. And for the socialists of the 19th century, capitalism was seen as the source of exploitation and economic insecurity for “the working class,” who were dependent for their livelihood upon the apparent whims of the “capitalist class.”

The welfare state became the solution to capitalism’s supposed cruelty, a solution that created a vast and bloated welfare bureaucracy, made millions perpetual wards of a paternalistic state and drained society of the idea that freedom meant self-responsibility and mutual help through voluntary association.

The ideal and the principle of the market economy was never fulfilled. What is called capitalism today is a distorted, twisted and deformed system of increasingly limited market relationships as well as market processes hampered and repressed by state controls and regulations. And overlaying this entire system are the ideologies of 18th-century mercantilism, 19th-century socialism, and 20th-century welfare statism.

In this perverse development and evolution of “historical capitalism,” the institutions necessary for a truly free-market economy have been either undermined or prevented from emerging. And the principles and actual meaning of a free-market economy have become increasingly misunderstood and lost. But it is the principles and the meaning of a free-market economy that must be rediscovered if liberty is to be saved and the burden of historical capitalism is to be overcome.

Professor Ebeling is the Ludwig von Mises professor of Economics at Hillsdale College, Hillsdale, Michigan, and serves as vice president of academic affairs for The Future of Freedom Foundation.

Changes in Politics

by Thomas Sowell

One of the few political cliches that makes sense is that “In politics, overnight is a lifetime.”

Less than a year ago, the big question was whether Rudolph Giuliani could beat Hillary Clinton in this year’s presidential election. Less than two months ago, Barack Obama had a huge lead over John McCain in the polls. Less than a week ago, the smart money was saying that Mitt Romney would be McCain’s choice for vice president.

We don’t need Barack Obama to create “change.” Things change in politics, in the economy, and elsewhere in American society, without waiting for a political messiah to lead us into the promised land.

Who would have thought that Obama’s big speech at the Democratic convention would disappoint expectations, while McCain’s speech electrified his audience when he announced his choice of Governor Sarah Palin for his running mate?

Some people were surprised that his choice was a woman. What is more surprising is that she is an articulate Republican. How many of those have you seen?

Despite the incessantly repeated mantra of “change,” Barack Obama’s politics is as old as the New Deal and he is behind the curve when it comes to today’s economy.

Senator Obama’s statement that “our economy is in turmoil” is standard stuff on the left and in the mainstream media, which has been dying to use the word “recession.”

Not only has the economic slowdown failed to reach the definition of a recession, the most recent data show the U.S. economy growing at a rate exceeding 3 percent– a rate that many European economies would die for, despite our being constantly urged to imitate those countries whose end results are not as good as ours.

Barack Obama’s “change” is a recycling of the kinds of policies and rhetoric of the New Deal that prolonged the Great Depression of the 1930s far beyond the duration of any depression before or since.

These are the same kinds of liberal policies that led to double-digit inflation, double-digit interest rates and rising unemployment during the Carter administration. These are “back to the future” changes to economic disasters that need repeating.

Make no mistake, the political rhetoric of FDR was great. For those who admire political rhetoric, as so many of Barack Obama’s supporters seem to, FDR was tops. For those who go by actual results, FDR’s track record was abysmal.

Although the Great Depression of the 1930s began under Herbert Hoover, unemployment during Hoover’s last year in office was not as high as it became during each of the first five years under FDR.

During the eight years of FDR’s first two terms as president, there were only two years in which unemployment was lower than it had been under Herbert Hoover– and not by much.

World War II has been credited by some with getting the United States out of the Great Depression. What the war did was put an end to the New Deal, as national survival became the top priority and replaced FDR’s anti-business and class warfare rhetoric.

Senator Obama’s rhetoric today is the anti-business and class warfare rhetoric that worked so brilliantly in a political sense for FDR in the 1930s. But Obama is following an opposite course from FDR when it comes to recognizing threats to American national security.

Senator Obama has repeatedly tried to deal with national security threats with rhetoric. He tried to dismiss the threat of a nuclear Iran with because Iran is “a small nation”– even though it is larger than Japan, which launched a devastating attack against the United States at Pearl Harbor.

FDR had the good sense to begin urging greater military preparedness in 1940, more than a year before the United States was attacked. He said, “If you wait until you see the whites of their eyes, you will never know what hit you.”

Cutting the military budget and taking foreign policy problems to the United Nations are Obama’s version of “change.”

That is change that we dare not believe in. It is the audacity of hype.

The Joan of Arc of Alaska politics

Gov. Sarah Palin: A biography

By TOM KIZZIA

Sarah Palin was a hockey mom, small-town mayor and rising young Republican star in Alaska in 2003 when she ran afoul of her party’s establishment as a whistleblower and was cast into the political wilderness.

But she came charging back as an ethics crusader to win the governor’s office in 2006 (including a landslide primary victory over incumbent Republican governor Frank Murkowski) and has remained one of the most popular local politicians in America even as she continued to take on such powerful figures as the oil companies and the leaders of her own state party.

Palin, 44, has been the Joan of Arc of Alaska politics, marching into battle against long odds on such big local issues as oil taxes and construction of a natural gas pipeline only to see her opposition crumble. Days after her 2006 primary victory, an FBI investigation into political corruption involving the oil industry and Republican legislators burst into view with surprise raids of legislative offices. Criminal indictments and convictions followed, often just in time for the headlines to help her win another contest in Juneau.

Though fearless in choosing the outsider’s path in politics, she remains relatively untested as a campaigner, a politician and as a governor who has held office less than two years. And even as she drew increasing attention nationally as a potential vice presidential nominee in recent months, she has come under withering criticism at home from business-minded Republicans who consider her a misguided populist and an intellectual lightweight.

Her criticism of congressional earmarks, for instance, seemed out-of-touch to Alaska political veterans who saw them as essential to getting money to a small-population state. But her rejection of Ketchikan’s “Bridge to Nowhere” funding was one of the first thing’s John McCain mentioned Friday.

In one-on-one settings, Palin’s relaxed, no-bull manner has contributed to her popularity in a state of 670,000 residents, where such contacts are not only possible but essential for political success. Voters here also warmed to the outlines of her all-Alaska biography.

THE HOOPS HERO

She was born in Idaho and came to Alaska when she was 3 months old. She grew up in Wasilla, where her father, Chuck Heath, was a teacher and coach, her mother, Sally, a school secretary. One of her most formative experiences, she has said, was helping to lead her high school basketball team to the 1982 state championship. Palin played point guard and got the nickname from her teammates of Sarah Barracuda.

Palin went on to study journalism and political science in college, graduating from the University of Idaho in 1987. Along the way she competed in the Miss Alaska contest after being chosen Miss Wasilla 1984. In both contests, she played the flute and won the title of Miss Congeniality. As runner-up in the state contest, she lost to the first African-American Miss Alaska, Marilyne Blackburn.

She grew up hunting with her father, whose living room wall is densely populated with trophies and antlers. Her favorite meal, she said during her gubernatorial race, is moose meat stew after a day of snowmachining.

She eloped in 1988 with her high school sweetheart, Todd Palin, who expands the family biography considerably. He is a commercial fisherman, an oil field worker, a member of the United Steelworkers and an Alaska Native. Todd’s grandmother grew up in a traditional Yup’ik Eskimo house in Bristol Bay and accompanied Sarah in her race for governor as she sought support from Alaska Native voters. Sarah Palin has joined her family in fishing a commercial setnet site on the Nushagak River in Bristol Bay every summer.

Todd Palin has worked 20 years on Alaska’s North Slope for BP, where he has continued to work as a production operator. He is also a four-time winner of the Iron Dog, the 2,000-mile snowmachine race from Big Lake to Nome along the Iditarod Trail and then on to Fairbanks. Since Sarah was elected governor, Todd has remained in the background as a close political confidante and “First Dude,” an expression his wife sometimes uses.

Sarah Palin made her way into local politics on the Wasilla City Council in 1992 and then ran for mayor as an agent of change. Though she established a reputation as a tax fighter, she actually increased the budget and spending on roads and sewers, reducing property taxes at the same time thanks to a huge increase in sales tax revenues coming to the booming commercial hub. She’s had the same luck as governor — a fiscal conservative in charge of a wealthy government, this time because of high oil prices.

BUILDING AN ETHICS BASE

Palin finished a strong second in the 2002 primary for lieutenant governor and was being groomed by the party for higher office when she clashed with state Republican Party chairman Randy Ruederich. They both had seats on the Alaska Oil and Gas Conservation Commission, appointed by Gov. Frank Murkowski, the Republican she would later depose. She accused Ruederich of misusing the job for political chicanery and eventually resigned in frustration. Ruederich was forced to resign the job as well, though he remains head of the state party.

Palin later took on Murkowski’s attorney general in a conflict-of-interest scandal that forced his resignation. And when state Sen. Ben Stevens, the son of U.S. Sen. Ted Stevens, was caught making a dismissive remark about the Wasilla area, Palin appeared in a rebuttal ad wearing a “Valley Trash” T-shirt.

In 2006, she knocked off Murkowski and then Democratic former Gov. Tony Knowles in a campaign that drew on grassroots support, relying on neighbors and friends for staff rather than the party and veterans of big-time campaigns.

She had strong support from social conservatives and often speaks of her religious faith. The Palins have five children, including their first-born, Track, who enlisted in the Army on Sept. 11, 2007. Track Palin is 19 and stationed at Fort Wainwright with the Stryker Brigade, preparing for a deployment to Iraq in September. The Palins also have three daughters: Bristol, Willow and Piper.

The newest member of the family, a son, Trig, was born in April ago after a pregnancy that Palin managed to keep secret for seven months. Trig was born with Down syndrome, which the Palins had discovered through testing.

But as governor, she has not pushed any big-agenda items of social conservatives. She spoke favorably in her campaign of schools teaching the creationism debate with evolution, but lived up to her pledge to do nothing as governor to push the idea. Her first veto was of a bill that would have denied benefits to employees in same-sex relationships — she said she supported the idea but accepted legal advice that it was unconstitutional. This year, she declined to call a legislative special session on two abortion bills because they would have interfered with her top priority, a measure promoting a new natural gas pipeline.

OIL AND GAS ISSUES

Her focus has been on raising oil taxes — long suppressed by oil-friendly legislators, the taxes seemed ridiculously low once oil prices started rising — and on launching construction of a $40 billion gasline from North Slope oil fields. Palin took on the oil producers, especially Exxon Mobil, saying they had been dragging their feet on a gasline. She persuaded the Legislature to pass a bill authorizing an independent company to build the line with state subsidy.

The ongoing corruption scandal in the Legislature over influence of the former oil field services company Veco helped Palin force change in the Juneau state capitol. That scandal has spread to include Alaska’s two longtime powers in Congress, Ted Stevens and Rep. Don Young. Palin has kept distance between herself and those Republican icons and backed ethics reform measures that passed the Legislature.

Palin’s clean image has lately taken a shot, however, over charges that she tried to use her office to get rid of an Alaska state trooper who had gone through a messy divorce with one of Palin’s sisters. Palin denied any involvement but has conceded a staff member made inappropriate calls. The Legislature has hired a special investigator, with the strongest criticism coming from Republicans antagonized by Palin during the oil and gas battles of the past two years.

She was already under steady criticism from some quarters, including conservative radio talk show hosts in Anchorage and rental car executive Andrew Halcro, a former state representative who ran as an independent in the last governor’s race and features almost-daily criticism of her on his blog. Critics call her naive, a panderer in her economic populism and reckless in her dealing with the vital oil industry.

But at a time when state coffers are spilling over with new oil revenues, Palin has remained popular with voters, recently pushing through a $1,200 per person “rebate” to help with high fuel costs.

Who is Prepared to be President? Nobody

By Richard Reeves

DENVER — Is Barack Obama prepared to be president? No. Neither is John McCain.

I have written about 12 pounds of books on the presidency over the past 22 years, three long studies that focused on the day-to-day work of John F. Kennedy, Richard Nixon and Ronald Reagan. This is the most important thing I learned in doing that, a paragraph at the end of the introduction to “President Kennedy: Profile of Power”:

“John F. Kennedy was one of only 42 men who truly knew what it is like to be president. He was not prepared for it, but I doubt that anyone ever was or ever will be. The job is sui generis. The presidency is an act of faith.”

The Kennedy book was published during the presidency of Bill Clinton, so now 43 men know. Obama, as I said, is obviously not one of them. But in praise of his acceptance speech here after winning the Democratic nomination, I did think the senator from Illinois, four years older than Kennedy was when he was inaugurated, showed he had a clue when he said:

“We need a president who can face the threats of the future, not keep grasping at the ideas of the past.”

That is not a particularly graceful or articulate line, but it is the most important fact about being president. The toughest job in the world is essentially reactive. The president does not run the country and is not paid by the hour. He is there to respond to events unanticipated: bizarre attacks on New York City, the blockade of a European city occupied by American troops, the rising of young black men and women against legal segregation, civil wars and genocides in places we never knew existed, the shelling of an American fort off South Carolina by other Americans.

Presidents are alone, facing the unknown. The job is not about running the country; it is about leading the nation in unexpected crisis or danger. No one remembers whether Lincoln balanced the budget.

Obama touched on what we anticipate will be the issues faced by the next president, as McCain will this week: a fading economy and place in the world, terrorism, health care, climate change. All important, critical, even, but no one knows what will be the issue that defines the next president. John Kennedy and Richard Nixon debated about defending Quemoy and Matsu, two islands off what we then called “Red China,” but Kennedy’s presidency was defined by surprising events in the Cold War against communism, and by civil rights and a civil war in what was called French Indo-China.

And if you are interested in what being president is like, look at the day 45 years ago, Aug. 28, 1963, when Martin Luther King Jr. gave his “I Have a Dream” speech on the steps of the Lincoln Memorial. That made Kennedy realize that his historical destiny would be to put the government on the side of a minority, no small thing in a democracy of majority rule. Until that day, Kennedy had never allowed himself to be photographed with King, who was seen, rather suspiciously, as a man of the left.

That day, he invited the black minister to the White House. Waiting for King to arrive, Kennedy met with the National Security Council and signed off on a plot to depose President Ngo Dinh Diem of South Vietnam, an action that turned that far country into an American military colony — an action that led to disaster.

That is what it was like to president. No one, least of all Kennedy, knew. In the end, we choose a president on our own sense of character and judgment. In the end, it is not about the candidate; it is about the character and judgment of the American people. We decide. It is a great gamble. Then, the president’s real job is to bring out the best in us.