Preface

Keep it simple. But not too simple.

—Einstein

Pessimism is ubiquitous throughout the Western world today. Whether today’s anxiety stems from the inability of politicians in Washington, DC, to fund the U.S. welfare state, or from the intractable euro crisis in Europe, there is a rising sense of gloom and helplessness on both sides of the Atlantic. I am an optimist, and this book is offered as an antidote to this contagion of gloom. It proposes solutions to many seemingly insoluble problems, for example, the prospect of a Lost Decade, and ballooning U.S. health-care spending. I believe these to be novel solutions, and in arriving at them, I have drawn upon new and quite sophisticated theories that are based upon deductive logic. These are the levers and pulleys that make it possible to identify new policy solutions.

This book has three goals. The first is to identify five important problems confronting the United States that must be addressed and solved. The second goal is to champion the role of deductive as opposed to inductive logic in arriving at solutions to these problems. Deduction yields much better results, particularly in policies that are win-win in nature. By way of review, “deductive logic” in this context is the process of laying down some Basic Assumptions or axioms, and then deducing the desired policies from those axioms—when possible. This process is much less prone to bias than that of “inductive logic,” where policy solutions are sought from the analysis of real-world data.

The third goal is to demonstrate how this discovery of win-win policies makes it possible to tone down today’s Dialogue of the Deaf—that Left-versus-Right shouting match that has resulted in American gridlock. A far greater consensus is possible than is now recognized, and gridlock can be broken on issue after issue. This book should be read at these three different levels of analysis corresponding to these three different goals.

Identifying Five U.S. Challenges

Each of the following challenges confronts the United States now, and will do so for years to come. Resolving them is fundamental to the nation’s future.

1. The Threat of a Lost Decade: There is a very real possibility that the decade of 2011–2020 will be one of slow growth, very high unemployment, rising federal debt of the wrong kind, an accelerating loss of bond market credibility, and an end to U.S. economic leadership for the first time in a century. Can we prevent a Lost Decade of this kind? Yes, we can. There is a unique solution to the nation’s current economic crisis, a particular type of U.S. Marshall Plan. This conclusion is deduced from first principles utilizing a branch of advanced macroeconomic theory that is not familiar to most economists and policy analysts.

2. The Entitlements Crisis: Polls make clear that the American public is finally aware that today’s welfare state is in terminal decline. My favorite indicator of this reality is the poll in which more young Americans under 30 believe they will see flying saucers than believe they will ever receive Social Security checks. Additionally, people are beginning to understand the role that has been played by “phliberals” (phony liberals) in causing this state of affairs. A phliberal is a well-meaning person who blindly endorses a flawed concept of equality between people. “I believe that a woman is equal to a man. That a gay person is equal to a straight person. That a poor person is equal to a rich person. That a white person is equal to a black person. But that an old person today is four times superior to an old person of the next generation, and should therefore receive a return on lifelong Social Security contributions four times greater than will be received by a retiree in the next generation.” A genuine liberal would insist that “an old person today is equal to an old person tomorrow, and both should receive the same return on their contributions.” Phliberalism is to liberalism what the Tea Party is to conservativism: an embarrassment.

Phliberalism must be exposed for what it is, and the welfare state must be rationalized so that tomorrow’s elderly will get a fair shake. In the case of the United States, this implies a complete rethink of ballooning Medicare and Medicaid spending, the heart of the entitlement crisis. At the policy level, might it be possible to significantly increase access to health care for millions while at the same time driving down total health-care spending as a share of GDP? Yes, this is in fact possible, and there is a unique solution to this problem that is deduced from three simple axioms. Regrettably, this solution was not known and was thus never considered during the 2008–2010 debate over U.S. health-care reform.

3. The Risk of Future Financial Market Meltdowns: Capitalism has egg all over its face, largely because of the global financial crisis of 2007–2009. But what exactly was the cause of this? Was capitalism itself to blame? Or was it particular abuses within the mortgage and housing sector? And what about greed and self-dealing on Wall Street? Were these also to blame? While these frequently cited causes certainly exacerbated the Perfect Storm, the true causes ran much deeper. As will be shown utilizing the new theory of “endogenous risk” recently developed at Stanford University, the true culprit was excess leverage legitimized by the U.S. government. And because excess leverage has not been suitably curbed since the crash, there will be future Perfect Financial Storms, even if no one is greedy. These must be prevented, and fortunately they can be.

4. The Need to Learn How to Bargain Effectively with Thugocracies: The rise of China has been one of the biggest stories on Planet Earth since 1980. But was its astonishingly high growth rate legitimate, or did it result from predatory Chinese policies that boosted its own growth rate at the expense of its trading partners? Consider China’s currency manipulation. To listen to commentators and to read the op-ed pages during the past decade, it would seem that China has finally addressed its currency issue after dragging its heels for a long time. After all, its currency has risen against the dollar by about 27 percent since 2005. But this is highly misleading: The dirty little secret here is that, despite this recent increase, the official exchange rate of the yuan/dollar remains nearly 45 percent below what it was back in 1990, incredible as that might seem.

Had China not cheated its way to success by violating almost every norm of free and fair trade, the currency should have at least tripled since 1990 according to economic theory—and should certainly not have been cut in half. Had China been compelled to comply with acceptable international trade policies, millions of Western jobs that were “outsourced” would probably have been saved. But the U.S. government buckled at every stage of the way, always apologizing for China and never forcing that nation to pay any price for its unfair practices. It is time for the U.S. government to stand up for its citizens, earning an A rather than a D in Bargaining Theory 101. Drawing upon groundbreaking work by mathematician John F. Nash Jr. (who is most well known from the book and movie about his life, A Beautiful Mind), we show how this can be achieved.

5. The Need to Salvage Capitalism, and to Confront “Distributive Justice”: What kind of an economic system is the best one, and what exactly does that mean? Today’s debate about the pros and cons of “capitalism” are inevitably muddled, and riddled by confusion about what Adam Smith and his descendants actually believed in. But if the status of capitalism is problematic, consider the plight of anyone attempting to understand the issue of distributive justice, the subject of who should receive how much of the “pie,” and why. This is arguably the most important and least discussed issue in all of public affairs. As the Nobel laureate economist Kenneth Arrow tellingly pointed out in a 1987 interview with the economic historian George Feiwel: “If one asks, ‘What does the economic system produce?,’ the answer is that it produces a distribution of income.” Slam dunk.

Who really does owe how much to whom, and why? Being either for or against “the Bush tax cuts” may be a litmus test of party loyalty in the United States, but having a position on this matter falls far short of possessing a proper theory of distributive justice. Yet Democrats, Republicans, op-ed writers, and bloggers never come clean on this issue. It is politely side-stepped. In contrast, Harvard philosopher Michael Sandel does confront it, and in doing so he has become the global rock star of international academia amongst students worldwide. Maybe the young evince a deeper understanding of what really matters in life than we more cynical older guys do. Given growing outrage over today’s inequality of wealth and income, we must at long last start addressing the thorny issue of fair shares. The final chapter of this book explains how to do so.

Solutions to all five of these problems are proposed in Chapters 2 through 6. These solutions are somewhat original, and this brings me to the second goal of this book.

Finding Win-Win Solutions via Deductive Logic, Not via Data Crunching

One main reason for today’s gridlock is that we do not think correctly about policy problems and how to solve them. Because of this, we end up deadlocked, arguing at cross purposes. In the philosophy of science, we learn that there are two principal routes for arriving at solutions to problems of most any kind. We can utilize the logic of induction (think data crunching), or else the logic of deduction (think reasoning from first principles). The history of science makes clear that most important problems have been solved over the ages by deductive logic. Students first come into contact with this type of thinking when they study Euclid’s geometry. Some 300 years before Christ, Euclid showed how the truths about plane geometry could be deduced as theorems in a step-by-step manner following from precise definitions, and from Basic Assumptions or axioms. This is known as the axiomatic method, and it can be utilized either formally or somewhat informally.

Did you know that this is the same way John F. Nash Jr., solved the problem of how two people bargaining over a pie would reach an agreement on how to split it? Or that this is the way Einstein arrived at his theory of general relativity? Did you know that this is the way Peyton Young arrived at his formula for measuring “to each according to his contribution” in ethics—and proved there could be no other solution? Or that “to each according to his needs” has been clarified in a similar fashion? Did you know that this is the way in which Claude Shannon discovered the true meaning of “information” required for the modern computer revolution? Or that this is also the way the great mathematician John von Neumann discovered the correct way for people to make a rational decision in the face of uncertainty? And finally, did you know that this is the way to determine a solution to the U.S. health-care spending crisis? (See Chapter 3.)

Most people do not understand this point. They incorrectly assume that, with enough data, scientists can “crunch” their way to the truth. In reality, data almost always underdetermine the truth, and that partly because of this reason, inductive logic alone has led to the discovery of very few important scientific truths. This is not to suggest that data are unimportant in scientific discovery, for they certainly are. To begin with, real-world experience and the information we acquire get us thinking about problems, and play a role in suggesting axioms, or first principles. But the solutions to problems that we seek are then deduced from these axioms, with the assistance of little or no data. Information reenters the picture in the final stage of the scientific discovery process known as “confirmation.” Data-gathering experiments are run to test the hypotheses that have been deduced.

Why do I stress this point? A principal reason why is that today’s young people are completely unfamiliar with the logic of deduction, much less aware of its power. Even Euclidean geometry is no longer studied. But should we be surprised? After all, this is the age of the Internet, and we are all inundated with “information” purporting to reveal this or that, but which in reality reveals little. This is the era of spreadsheets, of data mining, of tweets, and of econometrics. Give a smart Ivy League investment banking intern an Excel spreadsheet, give him access to the wealth of data on the Internet, and he will data-mine his way to the truth—or so he thinks.

The first mistaken assumption here is the belief that truth can be identified in this manner. But it almost never can be, as can be shown formally. The second erroneous assumption is that someone is actually interested in discovering the truth from the data. The intern’s boss wants those results by 6 p.m. today, and he wants them to support his view that the deal he is working on is a winner. How interested is he in the truth? What about politicians? Do they and their Left-wing/Right-wing think tanks really want to know the truth about, say, the impact of different tax rates on GDP? Or do they merely wish to bolster their ideological prejudices?

Regrettably, data are increasingly cherry-picked for precisely this purpose. In banking, the intern may be told to identify data lending support to a project his boss already likes. In politics, you need only contrast the op-ed articles in the conservative Wall Street Journal and the liberal New York Times to witness the same phenomenon in spades. Each side searches for and cites facts that support ideological positions arrived at long before—positions that are prejudiced in the true sense of that word: pre -judged.

All this leads to an amplification of today’s Dialogue of the Deaf, in which there is neither an interest in truth nor a logical method for discovering it, if and when it is sought. But this is precisely where the opportunity lies. For the use of deductive logic leads to better and more compelling policy solutions than does today’s bastardized logic of induction. In particular, it leads to win-win solutions that have a much greater chance of gaining bipartisan support than the win-lose policies that dot newspaper headlines. But why is this the case?

The answer is seductively simple. In applying deduction to topics ranging from public policy analysis to pure mathematics, the same two-step process takes place. First, it is necessary to specify a set of Basic Assumptions that, by their very nature, should be “transparently true.” In number theory, we must accept: “For any integer n, there is always a next bigger integer, n + 1.” Seems reasonable to me. Or in plane geometry: “Between any two points on a plane, there will exist one and only one straight line connecting them.” Seems reasonable. Or in health-care reform, “A satisfactory health-care system must first provide universal coverage, and second cause total health-care spending eventually to shrink as a share of GDP.” Don’t these two assumptions seem as desirable as apple pie and motherhood?

Second, solutions to problems can often be deduced from simple axioms of this kind, and when this is the case, disagreement can be quelled. For if simple and compelling axioms logically imply a set of policies consistent with them, then who can disagree with such policies? If there is a health-care system satisfying these two appealing axioms, who would reject it? What remains for the Right and the Left to bicker about? In accepting the axioms, you accept the conclusions. The Dialogue of the Deaf thus can be dampened. Indeed, the conclusions arrived at what seem like lessons from the syllabus of Common Sense 101. Whether mathematics is needed to proceed from axioms to conclusion, or not, makes little difference. What matters is the quality of reasoning involved, and whether the axioms are compelling to any reasonable person, regardless of his or her political leanings.

Can this elegant approach work in the case of the real-world challenges identified previously? Yes—much more so than you might imagine. In this vein, the second goal of this book is to convince you of this by applying deductive logic to our five problems and hopefully deducing better solutions to each than have hitherto been proposed.

Dampening the Dialogue of the Deaf

Reasoned debate about important policy issues has morphed into a shouting match in which there is no recognition that win-win solutions exist. But they do exist, and they are exactly what the doctor ordered. Such policies are needed to build bipartisan support on issues, and thus to terminate gridlock here in America, and gridlock elsewhere for that matter. My third goal is to demonstrate that the win-win solutions I deduce for the five problems analyzed are neither Right wing nor Left wing in nature. Because of this, a genuine consensus becomes possible, one that should help rid the nation of gridlock.

Interestingly, Plato anticipated Euclid’s achievement in his celebrated Socratic Dialogues characterized by their dialectical method. The goal was for everyone to reason his way through to a conclusion. Unlike Euclid who restricted himself to geometry, Plato covered a broad range of philosophical subjects, and utilized an elementary and informal type of deductive logic. In reviewing two of his dialogues for this book, the Crito and the Apologia, I was surprised at how many steps were involved in his logic, and how much hard work was required by the participants in order to reach conclusions. There was a commitment to civilized debate. Sound bites played no role. The ancient philosophers understood much better than we do that issues worth debating are complex, and require multiple steps of logic to reach a solution: chains of deduction, as it were. The idea that an eight-second sound bite from some cable news “expert” could settle some important issue would have struck them as risible. And how right they would have been.

If I had one wish in this regard, it would be that prominent figures in today’s media would assume the role of Platonic critics, and target politicians’ policy illogic more than their sexual and financial peccadilloes. In this vein, I want to help create a new game of “Gotcha” to be played throughout the media community. This game could impart a new dimension to political discourse throughout the media, a dimension that might render deduction-based policy analysis as hip as Michael Sandel at Harvard is rendering moral theory. This too can be done, and I shall sketch how.

Summary of Chapters

Chapter 1 reviews the issues of deductive and inductive logic, and relates them to today’s Dialogue of the Deaf. I stress how there are many different forms of deductive logic relevant to problem solving, and that some of the most useful of these are quite new. These include the logic of game theory, of risk assessment theory, of the economics of uncertainty, of incentive structure theory, and of axiomatic moral theory where issues of justice and fairness are finally being demystified. Today’s growing problem of information overload is also discussed. I argue that this burden can be lifted by a greater reliance on deductive logic—since it usually turns out that very few variables end up mattering in theories that are derived from first principles. In this regard, the phrase “information overload” is a much better descriptor than people realize.

For example, suppose you were attempting to determine a solution to Nash’s celebrated bargaining problem: How will two different players with different tastes and endowments agree to divide a pie? You seek a formula that can predict what the division of the pie will prevail in any situation. Just think of the vast amount of data you might want to crunch to determine which of 40 possible “factors” best explain bargaining behavior. Think of all the experiments you could conduct to discover the dozen or so variables that really matter! In doing so, however, you would never possibly conceive of what Nash discovered via axiomatic deduction: There is only one variable that matters to the outcome—the degree of risk aversion of Player 1 compared to that of Player 2. No information overload here!

Analogously in physics, recall two of the most famous formulas in the history of science: Newton’s F = ma and Einstein’s E = mc2. There are only three variables in each. Surprisingly often in the history of science, the deeper the truth, the fewer the number of variables or “factors” that matter—and the less the information needed. The Good Lord was indeed parsimonious and elegant, as philosophers of science like to say. Who is revealing this to today’s students? Do they understand that the great problem with information lies not in its quantity or quality, as is commonly supposed, but rather in its irrelevance in helping us unearth the truth?

My final and favorite example is the Birthday Paradox from probability theory. Suppose you are at a dinner party of 50 people, and you are asked to bet on the probability that some two people present share a common birthday. What should your betting odds be? Using informal induction, you could survey hundreds of college graduates to arrive at a consensus probability. In doing so, you will discover that there is a 7.5 percent chance of a common birthday. But don’t use this result as it is wrong, and will be bad for your wallet! But how then do you learn the truth? Using more formal inductive logic, you could organize and pay for one hundred similar dinner parties of 50 people, and discover empirically how many times two people share a common birthday. But that would be very expensive. Happily there is an inexpensive shortcut. You simply deduce the answer from the laws of probability theory in a few minutes, starting with the only “information” needed: the odds are 1 in 365 that any person present at the party is born on any given day of the year. In this manner, you learn via deduction that the true probability of a common birthday is 97 percent. Virtually no data were involved, you saved a lot of money, and by making the appropriate bet, you will make a lot of money. You see, better thinking pays.

Chapter 2 focuses on how to salvage the Lost Decade we have entered. I first propose four macroeconomic objectives, namely, more rapid growth, much lower unemployment, much smaller fiscal deficits so as to placate bond markets, and massive infrastructure investment. I then argue that there exists a single macroeconomic solution that is consistent with all four of these goals, and that satisfies an associated set of constraints. This is a Marshall Plan of sorts. In demonstrating that all this is possible, the crucial point is that the word “deficit” as currently used turns out to have no meaning at all. For there are good deficits, and bad deficits, and only the latter trouble the bond markets. Sloppy definitions have always been a problem in theory construction. Recall the fate of the “phlogiston” in chemistry—the alleged source of fire. Once Joseph Priestley discovered oxygen in the eighteenth century, it was realized that there was no phlogiston. The same fate befell the concept of the “ether” in electromagnetic theory once Einstein showed that it did not exist. My own focus will be on dispelling widespread confusion about the term “deficit.”

A principal source of inspiration in this reformulation of the meaning of deficits was the treatise Public Investment, the Rate of Return, and Optimal Fiscal Theory published in 1970 by Kenneth Arrow and Mordecai Kurz at Stanford University. Their work is completely deductive in nature. Regrettably, this book never gained a wide audience, primarily because it was very mathematical. Nonetheless, it never got any better. Given today’s crisis four decades later, the Arrow-Kurz theory encourages a complete rethink of the meaning, the proper role, and the correct size of fiscal deficits. It implicitly suggests that we need a domestic Marshall Plan, one that I flesh out. As is consistent with the third goal of this book, my conclusions about what the United States must do to avoid a Lost Decade are neither Left wing nor Right wing. Rather, they are win-win in nature, should generate consensus, and should thus dampen today’s Dialogue of the Deaf.

Chapter 3 addresses the explosion of future spending on “entitlements.” The chapter principally addresses the gargantuan problem of health-care spending, a funding problem that dwarfs that of Social Security. At the end, I briefly tackle Social Security, if only to demonstrate that this is an easy problem to resolve as many policy analysts already appreciate.

In addressing runaway health-care spending, I start from scratch, utilizing the deductive logic of supply/demand analysis in economics. The basic result is a theorem: Under eminently reasonable assumptions, the United States will see the quantity of health care increased, yet health-care spending decreased as a share of GDP, if and only if the “supply curve” of health-care services shifts outward faster than the “demand curve.” Conversely, I prove that if the reverse occurs, with the demand curve shifting out faster than the supply curve (which under ObamaCare may well shift backwards), the nation will go bankrupt. Additionally, the analysis demonstrates that the kinds of “cost controls” (a term with no meaning, it turns out) fashionable within the Washington Beltway are, in most cases, counterproductive, and end up driving total expenditure higher. These are not my opinions—they are theorems that hold true under reasonable assumptions.

The main results here are proven schematically using simple supply/demand graphs within the text. But because of their crucial importance to the nation’s future, the results are proven formally in Appendix B. Imagine my editors’ shock: “Equations? My God, we must hide these. What will a reader think?” Well, relax, as these equations are hidden at the end of the book, and they are primarily included for the benefit of skeptics who are curious about how such a felicitous health-care outcome is possible. Once again, the health-care solution I arrive at cannot be defined as Left wing or Right wing. Instead, it is win-win in the extreme. This should further dampen today’s Dialogue of the Deaf.

Chapter 4 confronts the issues of Perfect Financial Storms such as the crash of 2007–2009. What really causes such storms, and once this is understood, what can be done to prevent them in the future? In engineering, it is well known that “state” and “control” variables must never be confused. The former are states of the system, for example, the way waves break on the shoreline. The latter are those decision variables that can be manipulated to prevent the waves from doing damage, for example, constructing seawalls. According to legend, King C’nut of Denmark had to make this distinction clear to his courtiers.

In the case of the recent global financial crisis, most explanations feature the role of “irrationality,” “greed,” and “stupidity” in generating Perfect Storms. Excuse me, but aren’t these characteristics of human beings mere state variables? Do we really think we can legislate greed away, or that there is more greed today than ever before? We might as well be so arrogant as to think we can legislate teenager horniness away. Reread your Aristophanes!

The true control variable that is the culprit is excess leverage. Unlike greed, this can and should be controlled much more than it has been. This point is deduced from first principles. In doing so, I utilize a very new form of deductive logic developed at Stanford University in the past 15 years. This is the theory of endogenous risk developed by Mordecai Kurz, the same professor who wrote the book with Kenneth Arrow on fiscal theory mentioned earlier. This new theory represents a true milestone in our understanding of risk, and in particular those “fat tail” risks that Nassim Taleb describes so well, but fails to explain from first principles, in his highly readable book, The Black Swan.

In particular, the theory makes it possible to really understand the sources of Perfect Storms without invoking vacuous concepts such as greed, the phlogiston of financial theory. Because I have benefited from many years of Mordecai Kurz’s assistance in extending his theory to the field of investment management, and thus know it very well, I am able to make his results seem like additional lessons from Common Sense 101. But there is nothing obvious about the difficult chains of deductions that Kurz had to make in order to obtain his results.

Chapter 5 is entitled “Bargaining Theory 101: How Not to Deal with China.” The chapter conveys two quite different messages. In the first half, I argue that the most important domestic and international problems of our time are becoming ever more political. Therefore, it should not be surprising that economists who are not trained in political science and political theory have less and less to say, despite the ubiquity of economic commentators, and the annoying frequency of their pronunciamenta. The lack of serious discussion about the coming collapse of welfare states throughout the West offers a case in point. To be sure, this development has important economic consequences, but not causes. The distinction here is fundamental.

The most fundamental cause—wherein the cure—lies deep within political theory, not economics: The “incentive structure” underlying capitalist democracies encourages politicians seeking election and reelection to continually promise constituents far more benefits than can ever be paid for in the future. The result has been a wholesale mortgaging of the future over many decades. And now the bill is coming due. The late Mancur Olson was a political theorist who developed the kind of logic needed to redress this development. But he is gone, and no one has replaced him, in my opinion. Alas, we do not live in the Age of Mancur Olson as we should, but rather in the Era of Larry Summers. Economists rule supreme, and students flock to economics courses as their meal ticket to a good future. But neither Larry nor his colleagues have said anything of interest about how to redress the incipient collapse of the welfare state. What we need is a veritable rebirth of political theory, a field that has been moribund.

Accordingly, this chapter proposes a strategy whereby political theory and political science can supplant economics as the master discipline. More specifically, my proposal is that the theory of multilateral bargaining developed originally by John Nash and extended by John Harsanyi should be placed at the core of a new discipline of political science. Incidentally, both these scholars won the Nobel Memorial Prize together for their work, along with Reinhard Selten. One reason why political science is often dismissed as “mushy” is that there is no core model underlying it. All we get are a pastiche of unrelated results. It is as if we were to study Econ 101 without ever learning about the law of supply and demand, or the role of perfect competition.

The Nash-Harsanyi theory should play precisely this role in political science and political theory, and I show why at considerable depth. In particular, I show how Harsanyi’s work made possible for the first time a precise meaning of “power” and how to measure it. Doing so presupposed the existence of his bargaining model. Not surprisingly, both Nash’s and Harsanyi’s work is completely deductive, in fact axiomatic in nature. Neither relied upon data to arrive at their theories of bargaining and of power.

In the second half of this chapter, I apply the Nash-Harsanyi theory to China and its trade policies. Utilizing Harsanyi’s concept of relative power, I show how the United States has had far greater power than China along four of the five dimensions of power that Harsanyi isolated. Yet in almost every conflict, we have backed down, and watched China walk away with all the spoils. I conclude that most U.S. administrations have been either risk-averse to a completely inappropriate degree, or else just plain incompetent when bargaining with their antagonist. In either case, it was average Americans who got hurt for no valid reason.

Some readers may find my views here somewhat hawkish. This is partly because I stress the importance of using threat power during negotiations, precisely as the Nash-Harsanyi theory prescribes. In today’s environment, the word threat is politically incorrect in the extreme. But excuse me. Even if you are a full-fledged pacifist, you had better understand what Nash and Harsanyi deduced from first principles: It is precisely the articulation of credible threats that obviates conflict, that motivates cooperation, and that ultimately secures peace. The U.S. Cuban Missile Crisis of the early 1960s is a case in point. Threat power is precisely what defused thermonuclear war. But is anything really new? Didn’t the ancients say, “Si pacem vis, bellum parare,” which translates to, “If you wish for peace, prepare for war.” So once again, my proposals of how to negotiate with the Chinas of the world are neither Left nor Right wing, even if they might appear hawkish on the surface.

Chapter 6, the final chapter, fleshes out the concept of an idealized political economy, and what this concept implies for making life better for us all. With Anglo-Saxon capitalism in the doghouse, and communism discredited everywhere, it is time to ask: What properties do people really want from their resource allocation systems? Is “economic efficiency” enough? What about stability? Privacy? Decentralization? Freedom? And last but not least, distributive justice? I review what classic economic theory has to say about all this, and in particular what the late economist Leonid Hurwicz contributed to the subject. He was a former teacher of mine at Harvard, and the best teacher I ever had. He was a notoriously “big” thinker who extended the criteria for good resource allocation systems to include numerous societal norms other than economic efficiency, norms like freedom and privacy. For this work and for his related theory of mechanism design, he too went on to win the Nobel Memorial Prize.

But what about the norm of distributive justice? Doesn’t this highly “moral” norm lie well outside the province of economics? No, in fact, it does not. A commitment to true Adam Smith capitalism logically entails a serious commitment to redistribution. This point is virtually unknown, and I devote considerable attention to setting the record straight. Ignorance of this reality has permitted self-styled conservatives to believe they can comfortably ignore the troublesome issue of redistribution. But if they are true capitalists, they cannot, as it turns out. In one of the greatest theorems in the history of economic theory established back in 1953, we learned that true capitalism and redistribution from the lucky to the unlucky go hand in hand. They represent two sides of the same coin.

Nonetheless, despite the strong implications of economic theory for distributive justice, economists have largely sidestepped this controversial issue, preferring instead to focus on the noncontroversial norm of economic efficiency. But there was always a moral in addition to an economic case for fair shares. The good news in this regard is that moral theorists have revitalized interest in distributive justice by utilizing new insights from decision theory and game theory. Indeed, during the past half-century, three comprehensive theories of distributive justice have been set forth: one by John Rawls at Harvard, one by utilitarian philosophers including John Harsanyi, and one by myself.

My own contribution was to insist that any satisfactory theory of justice must include two distinct distributive norms: to each according to his needs and to each according to his contribution. Starting with Karl Marx’s Communist Manifesto of 1848, these two norms were usually considered to be incompatible, and a widespread prejudice in the philosophical community emerged favoring needs-justice. Contribution-justice on the other hand has been ignored. But this is not satisfactory. Imagine operating a sports team without an ability to identify and appropriately reward MVPs. In the real world, “fairness” requires paying appropriate respect to both concepts in their respective habitats. A proper theory of justice must respect this.

These three theories are reviewed and contrasted in the final portion of Chapter 6. For once, the moral dimension of fair distribution is squarely confronted, not circumvented. Once again, the solutions arrived at cannot be dismissed as Left wing or Right wing. This is particularly true of my own theory, which integrates the needs-norm associated with liberal redistributionism and the contribution-norm usually associated with capitalism. This final portion of the book is demanding, but it is arguably the most profound and intrinsically interesting part of the book.

Intended Readership

This book has been written for anyone troubled by the decline of the United States, and indeed of the West, for anyone who seeks compelling solutions to today’s policy challenges, and for anyone sick and tired of pessimism and gridlock. No mathematics has been used, except in Appendix B where the health-care spending theorems are proven from first principles. Nonetheless, the arguments are from time to time logically dense, even if clear, and perseverance will be required. No pain, no gain.

It has always been my penchant to talk up to an audience, not down. If a difficult theoretical point arises that is important to an argument, my instinct is to explain it clearly, to assume people want to understand it, and never to gloss over it “because it is too difficult for average people.” For those readers who are more analytical and seek back-up material, extensive endnotes are grouped at the back of the book. I have included these both for the sake of completeness and to encourage younger readers to pursue the topics involved at greater depth.

There is, of course, a risk in writing a book that covers six different topics. The risk is that experts in each field will find many faults with the analysis. The truth is that a book doing full justice to each of the topics would need to be 10 times longer. But I have not attempted definitive analyses. Rather, my more modest goal has been to illustrate how deductive logic can help us identify win-win solutions to problems that must be solved, solutions that dampen the Dialogue of the Deaf and break American gridlock. The substantive policy issues involved are best understood as case studies for the application and appreciation of this logic.

A Personal Odyssey

This book represents the summit of a personal odyssey of sorts, which is one reason I have taken the liberty to use the first person. My interest in “how to think” stemmed from my late father’s insistence that one’s quality of thought is what matters, and not what one knows. He was a pioneer aviator in the 1930s, but he had previously attended Harvard Law School, where he said he learned how to think.

Though influenced by my father, I ended up following my own course. I started reading ancient Greek literature at a very young age, and began writing on various philosophical and political topics as a graduate student at Princeton. Looking back, I now see that by 1985 I had caught the bug that would result in the contents of this book, especially its emphasis on the power of deductive logic in a wide variety of fields. My obsession had become the importance of clear thinking, and my first two publications addressed this topic: one in the “liberal” New York Times, the other in the “conservative” National Review. By way of background, I had passed my undergraduate years at Harvard studying history and economics. I only began to get serious about my studies during a gap year when I went to work in the interior of Papua, New Guinea. There, in the jungle, I began to read mathematics on my own. One thing led to the next, and by the mid-1970s, I completed my PhD thesis at Princeton applying game theory to foundational issues in political and moral theory.

My great good fortune was to have chosen as my thesis topic the problem of distributive justice, that is, the issue of who owes how much to whom, and why. This topic had been moribund for decades until the 1971 publication of the magisterial Theory of Justice by John Rawls. This treatise made the subject red hot, and catalyzed my own interest at the time. But I had a lucky break. I had been exposed to a close circle of mathematical economists under whom I had studied while an applied mathematics graduate student at Harvard, as well as to the great West Coast game theorists Lloyd Shapley at the RAND Corporation and John Harsanyi at the University of California at Berkeley. My involvement with these masters of deduction paid off in three ways.

First, I absorbed their approach to problem solving, and came to understand the power of their way of thinking. I have tried to inculcate this throughout this book, if at a very informal level. Second, I learned how stupid I was by comparison with these scholars. When you have extended discussions over several decades with someone of the stature of Kenneth Arrow, always generous with his time, you are reminded of your own limitations on every visit. Third, I gained a powerful ability to distinguish sound from unsound arguments. This was the greatest payoff, and its legacy runs throughout this text.

Unsound thinking abounds everywhere today, especially among highly prejudiced commentators who take their own views much too seriously. Rigorous thinking based upon first principles and clear definitions has become an endangered species, if not a stegosaurus. My debt of gratitude to my early mentors is very great indeed, as indicated in my dedication of this book. They, of course, bear no responsibility for the numerous mistakes and oversights in this text.

My ability to discuss the wide variety of issues analyzed in this book reflects my personal career during the past two decades. In the mid-1980s, I was invited to found a small research group that would focus on “structural changes” in the United States and the global economy. The structural changes to be analyzed could be demographic, macroeconomic, microeconomic, financial, or whatever. The range of issues was very broad, and this is reflected by the breadth of topics in this book. Since historical data and inductive logic are of limited usefulness in assessing structural changes, I became more reliant than ever upon the use of deductive logic in analyzing sundry developments across the globe.

Coming full circle, I now find that my graduate and postgraduate research on distributive justice is becoming more and more topical. Indeed, an awakening of interest in this topic worldwide may signal a change in our intellectual and moral priorities. All in all, the time seemed ripe for a book reprising all these past and present interests.

I am particularly indebted to Kevin Commins of John Wiley & Sons for approaching me to write this book in late 2009 when I had no intention of doing so, to John O’Leary for invaluable assistance with Appendix B on health care expenditure, and to Eugene Lancaric, Mary Ryan, and Charles La Rosa for indispensable editing.

H. Woody Brock

“Twin Quarries”

Gloucester, Massachusetts