George Lodge

Lodge

76 Challenge/March–April 2010

Challenge, vol. 53, no. 2, March/April 2010, pp. 76–89.© 2010 M.E. Sharpe, Inc. All rights reserved.

ISSN 0577–5132 / 2010 $9.50 + 0.00.DOI: 10.2753/0577–5132530205

GeorGe LodGe is professor emeritus at Harvard Business School, having been on the HBS faculty since 1963. Before joining the Harvard faculty, he was assistant secretary of labor for international affairs in the Eisenhower and Kennedy administrations.

The Need for Ideological ConsciousnessGeorge Lodge

The author has been writing about the consequences of political ideology for well over a generation now. As America faces a changed world, he believes it fails to recognize the pull and push of its own ideological tendencies. Unless it begins to understand the power of ideology, it will not be able to cope with the changed world, he argues.

EvEry so oftEn in AmEricAn history, a crisis comes along that requires us to inspect cherished assumptions and to act in a way that many find ideologically repulsive. Although our leaders insist

that such actions are pragmatic—the only sensible way to deal with the crisis—those pragmatic acts evoke or imply an ideology that obstructs their implementation. Furthermore, if, in the name of pragmatism, the ideological aspects of the actions are ignored or suppressed, the full implications of the actions may not be seen.

I am talking about such ideas as the role of government: do we be-lieve in the active planning state or the limited state—the least of it the better? How do we define the good community? Is it by competition among self-interested business managers to satisfy consumer desires, or is it necessary for the community itself to define its needs and to regulate business so that they are fulfilled?

The Need for Ideological Consciousness

Challenge/March–April 2010 77

A Historical Review–The Economy

Treasury Secretary Alexander Hamilton, confronting the enormous debt owed by the states to foreigners at the end of the American Revo-lution, adopted a policy under which the federal government assumed the debt and sold it quite successfully in the form of bonds. He also favored a governmental industrial policy, infrastructure development, and protective tariffs. Thomas Jefferson and his supporters bitterly opposed Hamilton, calling him every name in the book, largely for ideological reasons: Hamilton viewed the role of the federal govern-ment to be that of a problem-solver. For Jefferson, whose idea of America was a land of individualistic yeomen, government—especially the federal government—was a necessary evil that should be kept as small as possible. It must be said that Jefferson was nothing if not flexible. A few years later, as president, his view of the role of gov-ernment had obviously expanded when he negotiated the Louisiana Purchase with France, the biggest land grab in history. He was also a staunch advocate of government regulations over the sale and price of property.

Lincoln fought the Civil War to destroy once and for all the cher-ished ideas that states had a right to secede from the union and that slave-holding was protected by property rights. He was, of course, vili-fied as a tyrant who had abrogated to the federal executive unheard-of powers.

In the 1930s, Franklin Roosevelt, like Barack Obama, inherited a sea of economic problems. In 1933, the Dow Jones was down to the 50s from a high of 381 in 1929, and 25 percent of the American work force were unemployed.1 The government set out to stimulate as well as regulate the economy. The Banking Act of 1933, otherwise known as Glass-Steagall, created the Federal Deposit Insurance Corporation (FDIC) to protect bank depositors and force the separation of com-mercial banking from investment banking, thereby reducing bankers’ ability to speculate with “other people’s money,” as FDR called it.2 In the same year the Securities Act required all companies issuing new stocks and bonds to disclose hitherto secret information. It was followed in 1934 by the Securities Exchange Act, which created the

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Securities and Exchange Commission (SEC) to enforce the new laws and to regulate the stock market. The ideological message of these actions was that the free market did not work by itself. Competition to satisfy consumer desires in the marketplace did not automatically ensure community need. FDR was branded a socialist and an abuser of presidential power.

Between 1933 and 1980, Harvard Business School historian Thomas McCraw tells us, the U.S. economy enjoyed largely stable growth, free of financial disasters. Then an ideological countercurrent set in. Promising to “get government off our backs” and restore “the free market,” President Reagan, aided and abetted by many of the country’s leading economists, began thirty years of deregulation. One scandal followed another: the savings and loan debacle of the late 1980s; the collapse of Long Term Capital Management in 1998 followed by a government orchestrated bailout; the failure of Enron in 2001; the unregulated growth of the real-estate bubble; the invention of increas-ingly complex and unregulated derivatives—mortgage securities and credit default swaps; the Bernard Madoff affair, directly attributable to an antiregulatory climate in the SEC; and, finally, the meltdown of the entire financial system in 2008.

In his inaugural address Reagan had set the climate: “Government is not the solution to our problem; government is the problem.” Even in the Clinton administration, the Glass-Steagall Act was repealed, and in 2000 credit-default swaps were exempted from any regulatory oversight at all.

“While all this deregulation was going on,” says McCraw, “the financial services industry had found even more ways to circumvent transparency. An unregulated shadow banking system arose, through hedge funds, private-equity funds, off-balance-sheet operations, off-shore tax havens, and the widespread trading by money managers in completely opaque instruments, especially credit default swaps.”3

In 2009 we find ourselves in an economic depression not seen since the 1930s, with a badly crippled financial industry and in debt to foreign governments for $4 trillion. Shouts about greed and irre-sponsibility cannot hide the fact that the cause of the crisis is more



systemic, involving fundamental ideas about the roles of government and markets. Federal appeals court judge and law professor Rich-ard Posner, described by the New York Times as the nation’s “most independent-minded public intellectual,”4 put it well: “The mistakes were systemic—the product of the nature of the banking business in an environment shaped by low interest rates and deregulation rather than the antics of crooks and fools. . . . We are learning that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails.”5

The debate is not so much about what the roles of government and markets should be as it is about what the real world is forcing them to be. A new ideological lurch is at hand. One can sense it in the reforms proposed by President Obama, drafted in part by my HBS colleague David Moss.6 They include new and comprehensive oversight of all firms that pose a “systemic risk” to the economy—that are too big to fail. The majority of financial firms whose failure poses no systemic risk would be regulated lightly to encourage them to innovate and experiment.

Industrial and Environmental Policy

Before going on to look more closely at these contrasting ideolo-gies, we should recognize from history how noneconomic crises have also forced ideological change, especially in how we view the roles of government and markets. In the early 1960s after the Soviets had launched Sputnik into space, the United States was surprised to find itself technologically behind. President Kennedy created the Defense Advanced Research Projects Agency (DARPA) to make sure we were never surprised again. Working closely with American companies such as IBM and AT&T, as well as the electronics, aerospace, and venture capital industries, DARPA kept the country on the frontier of electronics and communication technology for thirty years. Among other things, it invented the Internet.

When the cold war ended, DARPA languished. “Industrial policy,” by which government determined the critical technologies and manu-

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facturing capabilities that should be kept in the United States, became ideologically unacceptable to the Reagan and subsequent Republican administrations. The free market was supposed to determine such questions.

The environmental crisis, which emerged in the late 1960s after the publication of Rachel Carson’s Silent Spring (1962), resulted in another form of government planning and the creation of the Environmental Protection Agency to carry it out. President Reagan tried unsuccess-fully to stamp it out.

Ideology Versus the Truth

The pattern is obvious. The United States has a preferred ideology, which I shall call individualism. It first came to America in the eigh-teenth century, having been set down in seventeenth-century England by John Locke, among others. The ideas found fertile soil in the vast underpopulated wilderness of America. Although individualism has been buffeted, eroded, and in many ways replaced by communitarian practices, particularly in times of crisis, the ideas continue as a kind of religion. In the words of the late Samuel Huntington, “They are at the very core of our national identity. Americans cannot abandon them without ceasing to be American in the most meaningful sense of the word—without in short becoming un-American.”7

So we face a problem: We do not practice what we preach, and we find it awkward to preach what we practice. I encountered this diffi-culty many years ago when I was a lad of thirty-two doing government work in India. It was 1959, the height of the cold war, in which India was a perennial battleground. I found myself on a radio program with Ashok Mehta, the distinguished leader of India’s socialist party.

As we drove through Delhi’s crowded streets to the radio station, I asked my embassy guide what I was supposed to talk about. He said the subject was “the American economic system.” Having majored in history and literature at Harvard College, I knew nothing about economics. So we made a quick detour and stopped by the embassy to get me some briefing material, which I perused as we bounced



along. The American economic system, said the embassy brief, was capitalist, characterized by staunch adherence to the principles of free trade, free markets, and private enterprise. It was based on respect for the individual and self-reliance. The familiar echoes of Ralph Waldo Emerson comforted me, so I proceeded confidently to the confronta-tion with Mr. Mehta.

Asked to describe the American economic system, I spoke with gusto, parroting the briefing sheet. Mr. Mehta, a kindly old man with a short beard and penetrating eyes, then proceeded to question me. Why had I not mentioned social security, minimum wage, the Ten-nessee Valley Authority, the vast U.S. agricultural subsidies and trade restrictions, rural electrification, or unemployment insurance? Were these somehow un-American? Good point, I allowed. Do you know, he asked me, what percentage of the gross national product is dis-posed of by government in the United States? I had only the vaguest notion of what he was talking about and no idea what the answer to his question might be. Twenty-one percent, he said, and then with a smile he asked me what percentage of India’s gross national product was disposed of by government. I was on the ropes. Twelve percent, he told me, following up with: “Now you are the capitalist country. Right?” “Right,” said I. “And we are the socialist country. Right?” I was silent.

“My point is this,” he said. “You in the United States call yourselves capitalist, not realizing that most everyone listening to this program identifies capitalism with the loan shark, the money lender, the im-perialist, the racist. In short, with everything bad. For them socialism means only a system in which government cares about the welfare of the people. In fact, of course, you are more socialist than we are. That’s why I love America.”

Two Ideological Prototypes

Shortly after I became a professor at Harvard Business School forty years ago, I wrote an article for Fortune magazine called “Why an Outmoded Ideology Thwarts the New Business Conscience.” It was

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reprinted in the Harvard Business Review under the title “Top Pri-ority: Renovating Our Ideology.”8 I listed the five components of our preferred ideology—individualism—and the five counterparts toward which we were inevitably drifting—communitarianism. Here is individualism:

1. Individualism. This is the atomistic notion that the community is no more than the sum of the individuals in it. Fulfillment lies in an essentially lonely struggle in what amounts to a wilderness where the fit survive—and where, if you don’t survive, you are somehow unfit. The idea of equality as in equality of opportunity is closely tied to individualism, as is the idea of contract, the inviolate device by which individuals are connected to one another as employers and employees, buyers and sellers, and in the old days husbands and wives. In the U.S. political order, interest-group pluralism evolved out of individualism to become the preferred means of directing society.

2. Property rights. Traditionally, the best guarantee of individual rights lay in the sanctity of property rights. By virtue of this concept, the individual—and the corporation as well—were assured freedom from the predatory powers of the sovereign, and from this notion, the corporate manager derived the authority to manage. From it also came the purpose of the corporation: to satisfy the owners, i.e., the shareholders.

3. Marketplace competition. Adam Smith most eloquently articulated the idea that the uses of property are best controlled by each individual proprietor competing in an open market to satisfy consumer desires. It is explicit in U.S. antitrust law and practice.

4. Limited state. In reaction to the powerful hierarchies of the me-dieval world, the conviction grew that the least government was best. Americans in general are concerned about the ever-growing size and influence of government, but they are even more antagonistic to the idea of government planning even though planning may be the only way to reduce its size and influence, not to mention enhance its ef-ficiency. We like to keep it checked and balanced. Let it be responsive to crisis, but do not let it look over the desk edge and see what’s com-ing next. Let it be responsive to interest groups: whoever pays the



price can call the tune. Says Huntington: “Because of the inherently antigovernment character of the American Creed, government that is strong is illegitimate; government that is legitimate is weak.”9

5. Scientific specialization. This is the corruption of Newtonian mechanics, which says that if we attend to the parts, as experts, specialists—and academics—the whole will take care of itself.

From its inception as a nation, America has departed from these ideas to cope with reality—wars, depressions, competing global sys-tems, urban concentration, ecological disasters, and, more recently, terrorism. Nevertheless, the old ideas have great resilience. They con-stitute indeed what most people mean by capitalism. This means that departures from them are retarded by the taint of illegitimacy. And yet departures occur. Corporations and government have radically departed from the old ideas in the name of efficiency, economies of scale, productivity, human rights and welfare, the environment, and national security, but the ideology that justifies the new ways has been left unstated, obscure, and unpopular. I call it communitarianism. Its five components are:

1. The community is more than the sum of the individuals in it. It has special and urgent needs as a community. The survival and self-respect of individuals in it depends on the recognition of those needs. If the community, be it the workplace, the neighborhood, the nation, or the world, is well designed, its members will have a sense of identity with it. They will be able to make maximum use of their capacities. If it is poorly designed, they will be alienated and frustrated.

Some forty years ago Congress found that the old idea of equality of opportunity was not working satisfactorily. “Affirmative action” was required to produce equality of results. I remember well the concern and confusion when this idea hit AT&T, which at the time was the nation’s largest employer. The company, proud of its personnel poli-cies, was shocked to be told it was guilty of “systemic discrimination” because it had all women telephone operators, men vice presidents, and minority group members at the bottom of the pay scale. It told the government: Women like to be telephone operators. Men like to be vice presidents. And minorities are happy to have any job at all.

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The government replied it had no interest in what individuals might like. It wanted to see a different overall company profile: men tele-phone operators, women vice presidents, and minorities spread up and down the pay scale in proportion to their numbers in the surrounding community—which was the United States.

Contracts, of course, still exist, but in many relationships, such as buyers and sellers, employers and employees, and even husbands and wives, the idea of consensus has become a more efficient and reliable way of proceeding. Labor relations are but one example with workers, including unions, participating in management as never before; e.g., a United Auto Workers representative sits on General Motors’ board.

2. Property rights, of course, continue to exist, but they have lost their sacred status, becoming one of a number of rights of membership—rights, for example, to income, health, and a job, which for many are more important than what they may own. Escalating rights have strained the ability of government to pay for them and emphasized the fact that if the community ensures rights, it must impose duties. If I smoke, why should you pay for my cancer? The welfare mother must work. We sense the controversy. Who decides an individual’s duty? In Asian countries, traditional ideology dictates that the community impose10 duties and that they generally weigh more heavily than rights. In the West, “liberals” and “conservatives” alike generally have been inclined to leave the definition of duty to the individual, but the in-exorabilities of global competition are forcing a more communitarian drift. And if the duties of the poor and the weak are to be made more explicit, it seems likely that those of the rich and powerful—corporate executives, for example—will need to be clarified.

It is not only the proliferation of rights of membership that has weakened property rights; it is also ecological pressures and short-ages of resources such as water. And the corporation itself, which has derived its legitimacy from property rights, is finding it a thin reed on which to lean. If the corporation is property, the shareholders must be the owners, but what does ownership mean? Control, responsibility, direction? If so, shareholders are not really owners at all. They are not, and furthermore in most cases they do not want to be. They are



investors pure and simple, and if returns are not what they expect, they leave.Theoretically, the shareholders select the management, but in most cases this is far from the reality. Management picks the board of directors, and the board blesses the management. The procedure works quite well, but it is of questionable legitimacy, and issues of corporate governance are becoming more controversial. What, after all, is the purpose of business? To satisfy shareholders is the old idea, but is that valid in the real world of today when corporations are expected to fulfill a variety of community needs?

3. Community need. The old idea was that competition to satisfy consumer desires among self-interested proprietors would produce the good community, but unfortunately the sum of consumer desires may not equal community needs. The United States today finds itself imperiled by unsustainable foreign debt, much of which comes from borrowing to buy what we cannot afford. Furthermore, consumer desires in the marketplace do not ensure clean air, pure water, or energy independence. So we have come to see that government must pay more attention to the definition of community needs and the enactment of policies that achieve them.

Here arises the question of what is the relevant community for the consideration of needs. It may be Detroit or Michigan or the nation as a whole. Increasingly, however, it is the world. Consider the govern-ment’s bailout of General Motors and Chrysler. Part of the reason for the rescue was the maintenance of America’s eroding manufacturing base. But where is that base? Much of it is in Japan, South Korea, China, Mexico, and Canada. If it is in our national interest to expand our manufacturing base—and I believe fervently that it is—we must ask two questions: First, what sort of a manufacturing base are we talking about? The technologies of tomorrow or of yesterday? The United States requires an industrial policy and a DARPA-type agency to imple-ment it. In the 1980s we were behind the Japanese in semiconductor design and manufacturing capability. Under DARPA’s leadership, a coordinated effort by business and government provided the boost required to create many of the technological breakthroughs of the past thirty years and to provide good jobs at high wages for millions.

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We need the same today to make the United States competitive in electric battery and solar energy technology.

And the second question is: How do we make such a program, designed to promote the interests of the United States, acceptable in a world in which poverty reduction is a crying need? As in the past, national economic systems will compete with one another, and mar-kets will determine the winner. The most competitive—those with the lowest costs and the highest education, productivity, and efficiency—will prosper. But such competition is not without rules. The World Trade Organization, embattled as it may be, is designed to define world community needs and ensure that national competitive strategies are fair. The WTO deserves all the support we can give it.

4. The active, planning state. Eventually, perhaps, we will have world government, but in the meantime it is the task of the national government to think coherently about community needs and to plan for their fulfillment, leaving to the marketplace all those decisions that it can do best.

This is not a partisan question. In spite of their rhetoric, the Re-publican presidents of the last thirty years have regularly every year increased the power, reach, and cost of government. In the first three years of the Bush administration, for example, federal spending in-creased 21 percent. The old ideology has tended to make this an ad hoc affair, offering the promise that when normality returns, thankfully government can be reduced. Also, there has been steadfast opposition to the idea of government planning, an odious phrase. The result has been lots of government intervention but little planning, a recipe for incoherence and visionless flailing.

When President Truman declared in 1947 that every American has “a right to the best possible health care,” we ignored the ideological implications. Inevitably government would need to intervene. The old individualistic doctor-patient relationship would not die easily. Delay in seeing the new reality would be costly.

5. Holism. Finally, and perhaps most fundamentally, the old idea of scientific specialization that has been the bedrock of our educational establishment has given way to a new consciousness of the interrelat-



edness of all things. Humpty Dumpty on the wall is more than the sum of the molecules left after he falls. Economists are beginning to see that the intensity of their specialization may have blinded them to reality. The old disciplines—experts finding ways to talk to one another in the face of a new reality—are breaking down. While experts are essential, wise managers are finding that to understand reality, they must look at their environment as a whole, seeing the interrelation-ships between the economic, political, social, cultural, and other old categories within which we compartmentalized knowledge.

Concluding Thoughts

Old ideologies do not die. Individualism will live forever, but as his-tory shows, it has been merged—often reluctantly–with a communi-tarian amalgam. The crises we now face reflect a failure to manage the transition.

No ideology has a monopoly on virtue. The two ideological pro-totypes described here have justified both good and evil. Slavery rested on property rights for legitimacy, and while Mother Teresa was a communitarian, so was Hitler. This is why ideological conscious-ness is important. We must know what we are doing. Ironically, to be truly pragmatic, we must realize the ideological implications of what we are doing. Communitarian rights, which are politically noncon-troversial, entail communitarian duties, the imposition of which is often highly controversial. And we do not want to throw out the baby with the bathwater: government intervention threatens the efficiency of the marketplace.

Ideological consciousness helps us to be realistic, to see more clearly. Old words such as “liberal,” “conservative,” “left,” and “right” and old names such as “capitalism,” “socialism,” and “communism” lose their meaning. As institutions like government and business depart from an old ideology, there is a legitimacy gap. People sing the old hymns and have trouble coming up with new ones to justify what is actually happening. China today is a particularly good example of this phenomenon. Whatever the Chinese economic system is, it is

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certainly not communist—but neither is it capitalist. The words have lost their meaning. To understand reality, we must look precisely at what is happening and derive an ideology accordingly.

I believe that all of the world’s varied ideologies are becoming dif-ferent manifestations of communitarianism. If true, this is important, because it means that convergence and thus consensus is possible. We know the variables with which we have to work as we tackle the challenges of climate change, financial and economic relationships, and violent conflict. We know what may someday become the basis for global rules respected by everyone.

Our symbiotic if precarious relationship with China is a good ex-ample of why global consensus is urgent. In the first quarter of 2009, China held $2.5 trillion in its reserves. It was our largest creditor. We depended on China to finance not only our $1.7 trillion government annual deficit but also our $680 billion 2009 trade deficit. If China were to decide to put its dollars elsewhere, the value of the dollar would plunge. We would have to raise interest rates. Depression and inflation would follow. Happily, our collapse is not in China’s inter-est. China wants us to recover, maintain the value of the dollar, of which they hold so many, and import her products. And the prime minister has been generous with advice: the U.S. government should improve its supervision of the financial sector. Here is a nice example of convergence around a common communitarian idea.

We should be thankful that we have a president in the White House who understands all this better than most.

Notes1. Thomas K. McCraw, “Regulate, Baby, Regulate,” New Republic, March 18,

2009, 1.2. Ibid.3. Ibid., 3.4. Jonathan Rauch, “Capitalism’s Fault Lines,” New York Times Book Review,

June 19, 2009, 11.5. Richard A. Posner, A Failure of Capitalism: The Crisis of ’08 and the Descent

into Depression (Cambridge: Harvard University Press, 2009).6. David Moss, “An Ounce of Prevention: The Power of Public Risk Manage-



ment in Stabilizing the Financial System” (Harvard Business School, working paper 09–087, January 5, 2009).

7. Samuel Huntington, American Politics: The Promise of Disharmony (Cambridge: Harvard University Press, 1981), 63.

8. George C. Lodge, “Why an Outmoded Ideology Thwarts the New Business Conscience,” Fortune (October 1970); reprinted as “Top Priority: Renovating Our Ideology,” Harvard Business Review (September–October 1970).

9. Huntington, American Politics, 63.10. Posner, A Failure of Capitalism.

To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535.

George Lodge

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