Key Points from Books: The Economist’s View of The World

As the year goes to an end and my book list is getting shorter, I thought I’d share another eye-opening book, for both economist and non-economist alike, written by Steven E. Rhoads. The version I’m reading was published in the middle of 2021, thirty five years after its first edition. In the book, the author discuss many topics that political and economic policy pundits often argue with one another, and the economic perspective of both camp’s argument. One important takeaway from the book is this: the market works, and harnessing the power of market could increase the overall public welfare. In a world that is increasingly felt being more divided, this book provides a light to what rational economic decision making should looks like.

I think it is a must read for both professionals and students. For someone educated in the field and actively read numerous books on the issue, there are many lessons I could pick from this book.

Markets can seem chaotic. Imagine a 12-year-old prodigy being asked to choose between two economic systems: one in which everyone works as much as they want, at whatever they want, while living wherever they want; whereas, in the second, the best minds in the country work together to decide what should be made, who should make it, and where they should make it. The 12-year-old might say, “Hey, that first system sounds neat.” But if he was then asked which system would produce the most economic growth, I think he would choose the second one. He would be badly mistaken. For one thing, in the second system, political sorts would decide who get to be the planners, and they would be more likely to choose those who will keep them in power than the best economic minds in the country. And, besides, most people could not earn a large income, or even a decent one, if the planners ignored market forces.

The economically correct response to steadily declining demand is to continue to operate with existing equipment as long as the firm can cover its variable costs of production. That is, if a company can cover its variable costs, any additional revenue it generates can be used to pay off fixed costs, such as paying off loans, which must be paid whether the firm is operating or not. It should rarely replace old equipment. To modernize equipment with high capital costs would make the firm’s plight worse, because costs would rise in the face of declining demand and prices.

In 1994 a group of economists compared the cost-effectiveness of various lifesaving interventions. Overall, they found that the median medical intervention cost $19,000 per year of life saved; the median injury prevention cost $48,000 per life-year saved; and the median toxin control intervention cost $2.8 million per year of life.38 It seems obvious that shifting funds from some toxic control interventions to injury prevention ones would save lives. Yet, when economists delve into quantifying the lifesaving effects of particular projects, their work often draws controversy. One study tried to put radiation-induced deaths at Chernobyl in the Soviet Union in context by expressing them as a small fraction of the cancers that probably would have occurred in the affected region even without the disastrous 1986 accident. Likewise, the coal-fired plants that nuclear energy would replace cost more lives per year than Chernobyl cost one time only.

polls have shown that 92 percent of Americans support requiring police officers to wear body cameras, but only 55 percent say they would be willing to pay higher taxes in order to outfit their local police department with body cameras.55 Similarly, 48 percent of Americans support a universal basic income program, but, among those who support it, 54 percent would not be willing to pay higher personal taxes to fund the program.56 Even when considering questions of basic health care, the same pattern holds. For example, 77 percent favor a provision of the Affordable Care Act (ACA) that requires insurance companies to cover anyone who applies for insurance, even if they have pre-existing medical conditions, but only 40 percent favor the measure if it means their taxes will increase.57 Politicians are also inclined to neglect opportunity costs, because unusually strong support for particular programs brings them many benefits. Programs important to a politician’s district will, of course, get special emphasis. But, beyond this, politicians will want the electoral support and psychological pleasures that come from standing for something. They want to be introduced amid applause as, say, “Mr. Solar Energy,” “Someone veterans can always count on,” or “A dependable friend of occupational safety.” The legislator who keeps opportunity cost in mind may have to forsake much of that.

Despite the schoolmarmish tone, Charles Schultze (former head of President Jimmy Carter’s Council of Economic Advisers) and Allen Kneese get opportunity costs exactly right when asking their readers to consider the costs of overambitious antipollution goals: These costs are not simply numbers for accountants or economists to ponder. They represent the value of the resources that must be channeled into controlling pollution and that will not be available for meeting the other wants of society. In the long run their principal source will not be the profits of industrial firms, but the higher prices and higher taxes that all of us will have to pay. Environmental goals therefore are not the simple consequence of decisions about how clean we want the air and water to be or how “tough” the government should be with particular industries. Establishing them confronts us, especially at the highest levels of control, with a set of hard choices between environmental quality and other aspects of living standards, in which the more we want of one, the less we can have of the other.

Writing in the eighteenth century, Adam Smith struggled with what came to be called the paradox of value-in-use versus value-in-exchange. To illustrate this paradox, let’s compare water and diamonds. Water is necessary for existence and is of enormous value in use. Diamonds are frivolous and clearly not essential. But the price of diamonds per ounce, their value in exchange, is far higher than that of water. Smith wondered: what accounts for this discrepancy? What troubled Smith is now explained in the first chapters of every college freshman’s introductory economics text; Smith had failed to distinguish between total and marginal utility. The elaboration of this insight transformed economics in the late nineteenth century, and the fruits of the marginalist revolution continue to set the basic framework for microeconomics. Most choices in life, economists argue, are made “at the margin.” You can live without diamonds, but you can’t live without water. Economists would therefore say that the total utility or satisfaction of water exceeds that of diamonds. But rarely do we face such all-or-nothing decisions. All of us, unless we’re dying of thirst, would prefer to win a prize of a one-ounce diamond rather than an ounce of water. In other words, marginal utility depends on how much of each we already have. Although the first units of water we consume are of enormous value to us, the last units are not. The utility of each additional unit – “at the margin” – decreases as we consume more and more.

In some cases, a comparison of the marginal utility and marginal cost of different alternatives may lead us to give priority to a relatively small “total utility” need rather than a relatively large and powerful one even though the latter is not close to being fully satisfied. And, if the costs of meeting needs change sufficiently, choices and behavior can change substantially while basic needs and preferences remain the same.

Indeed, from the patient’s point of view, the potential for entry into the category of need is enormous. Large numbers of people do not feel entirely well. An English study found that 95 percent of the people in one community considered themselves unwell during the 14 days prior to questioning. A survey in Rochester, New York, found that adults suffered from at least one disorder on 20 percent of the 28 days covered.11 In the absence of money costs, queues, or other allocative devices, many of those who are not now seeing doctors would do so. Doctors know that their science is uncertain, and, if there is no cost to them or their patient, many will do something. After all, further tests might find something, and extra days of hospitalization might prevent complications.

According to the economist Robin Hanson, “We see at best only weak aggregate relations between health and medicine, in contrast to apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution, climate, and social status. Cutting half of medical spending would seem to cost little in health, and yet would free up vast resources for other health and utility gains.”13 In an article published in the Journal of the American Medical Association in 2012, the midpoint estimate for waste in the US health system is 34 percent of total spending and the high end is 47 percent.14 The Institute of Medicine puts the level of waste in context by comparing it to total expenditures in other areas: “Unnecessary health care costs and waste exceed the 2009 budget for the Department of Defense by more than $100 billion” and “could pay the salaries of all of the nation’s first response personnel, including firefighters, police officers, and emergency medical technicians, for more than 12 years.”15 In 2008 Oregon decided to expand Medicaid but received far more applications than it could accept. It randomly chose some of the applicants to receive Medicaid coverage. This made possible a powerful natural experiment in which the Medicaid “winners’” medical care usage and health outcomes could be compared to those who were not selected. A leading article in the New England Journal of Medicine found that the “winners” used about 35 percent more medical service than the “losers,” who did not receive Medicaid. Financial strain was reduced for the winners, but there was a very modest difference in health. For example, the study found “no significant effect of Medicaid coverage on the prevalence or diagnosis of hypertension or high cholesterol levels or on the use of medication for these conditions.”

Schultze notes that we have largely ignored an alternative method of collective intervention: market-like incentives, such as taxes and subsidies, that make private interests more congruent with public goals. We acknowledge the power of markets and economic incentives to foster steadily improving private-sector efficiency and a higher standard of living. And “we would laugh if someone suggested that the best way to reduce labor input per unit of production was to set up a government agency to specify labor input in detail for each industry. But that is precisely how we go about trying to reduce environmental damage and industrial accidents.”1

Just as a business looks for ways to minimize what it must pay for electricity or raw materials, so it will look for ways to minimize expenses from dealing with the pollution problem. If it blithely pays the tax and passes the expense on to consumers even though it would be cheaper to clean up, it risks losing business to competitors whose prices can be lower because they behave more efficiently. Furthermore, investors are increasingly considering environmental sustainability when making investment decisions.

In his book What Price Incentives?, Steven Kelman argues that the environmentalists’ “license-to-pollute” retort reflects incompletely developed intuitive concerns that the economists’ responses cannot so quickly dispose of. Kelman notes that environmentalists are quite concerned with developing an environmental ethic. They want to heighten the public’s environmental consciousness. For these reasons, they want to stigmatize polluting behavior and avoid doing anything that might lower the value the public places on clean air and water. But a price for pollution may end the stigma by saying, in effect, “It’s okay to pollute as long as you pay a fee.” And the price itself may make it impossible for us to see unspoiled nature as priceless. 27 Kelman convincingly shows that an extremely strong environmentalist has reasons to have reservations about pollution taxes. Kelman may be wrong, however, to suggest that a pollution tax would remove the stigma from pollution. Although we tax and license many things about which we have positive or neutral feelings (driving, marriage), we do the same for others of which we do not wholly approve (gambling, liquor, cigarettes). It is not likely that people will stop having negative attitudes toward pollution merely because it is taxed. Some environmentalists, however, argue that we do not just tax murder or “rape, pillage and burning,” and some say that they feel the same way about polluting behavior (“crimes against nature”) as they do about these (“one day a courageous district attorney will prosecute these people for murder”).

three separate functions of government in the economy: allocation, distribution, and stabilization. Allocation questions ask whether particular government tax, expenditure, or regulatory programs improve the mix of goods and services produced by the economy. Distribution questions ask who benefits and who is harmed by such policies. Stabilization questions ask what effect all taxes and expenditures, together with monetary policy, have on aggregate employment, output, and prices.

Pareto improvements are those in which a change in resource allocation is preferred by one or more members of society and opposed by no one. It is an extremely strict criterion for improvement, and is almost never met; obviously, such changes are very hard to find. If any single person objects to changing the status quo, then the Pareto improvement criterion gives no unambiguous public policy guidance. The existing situation may be Pareto-optimal. But there are a nearly infinite number of other non-comparable Pareto optimums, and the concept is of little policy use. Economically efficient allocations are always Pareto-optimal allocations. But, if the initial allocation is inefficient, the achievement of economic efficiency does not require that no one be made worse off before a change can be recommended. Economic efficiency requires only that recommended changes use resources in such a way that it would be theoretically possible – assuming costless transfers of income between gainers and losers – to make some better off and no one worse off. Suppose that most people would gain from some change, but some would lose. If the gainers gain enough so that they could fully compensate the losers with money or goods and still have an improved situation themselves, the change meets what some economists call the “potential Pareto” criterion and would improve economic efficiency even if the transfer to the losers does not actually take place.

Free markets, with their flexible prices, provide more than the right information. They also give people an incentive to act on it. Economists find that the desire for wealth is a sufficiently common goal to ensure that resources will shift when financial incentives do. When consumers start to demand more pencils, the price of pencils goes up to ration the limited supply. The higher price induces the least eager (or the poorer) buyers to drop out of the market, or induces pencil buyers to use them less. The higher price also makes retailers quick to want to increase their supply of pencils so they can take advantage of the new demand and high price. They put pressure on their wholesalers, the wholesalers on their manufacturers, their manufacturers on the producers of wood. Each offers to pay more if necessary; they can do so and still increase profits given the higher price for pencils. The wood companies may, in turn, pay overtime to their employees to get an increase in production or cut back sales to other manufacturers whose consumers are less eager to buy and who therefore cannot afford to pay as much. When consumers are especially eager and drive up the price further and faster, businesses are more eager to meet their demand, and they respond more quickly. Firms that thrive do not often respond clumsily to consumers’ demands. Those that waste scarce resources when making their product have difficulty matching the price and quality of firms that do not. Firms with an inefficient scale of operation come under pressure from those of more optimal size. And firms that guess wrongly about whether consumers would prefer a higher pencil price or a smaller eraser lose business to competitors.

government will be needed to correct for market imperfections that prevent the allocation of resources in accord with consumer valuations. These imperfections may include concentrations of market power (monopolies and powerful labor unions), externalities, and public goods.

Assuming that people in political organizations are moved by narrowly selfish motives just as they are in markets, public choice scholars predict that a government bureaucracy will have little interest in efficiency or in satisfying citizen preferences. A federal administrator who spends more money on his program will find this has almost no effect on his tax bill. But it may help him in other ways. His salary, his power, his public reputation, and his perquisites of office (free parking, cheap lunches, etc.) are all likely to be greater if his budget is large and he has a lot of people working for him. What incentive is there then to run a lean and efficient bureau?

Public choice theory would predict greater private-sector efficiency because of competitive pressures and the greater ability of private firms’ managers to reap the rewards of efficient behavior. One of the most systematic of the comparative studies looked at residential refuse collection. The study found that, on average, US cities with over 50,000 residents get roughly 30 percent cheaper service when they hire firms to pick up refuse than when a city agency performs the work. Reasons suggested for the differences included higher municipal employee absentee rates (12 percent versus 6.5 percent); larger municipal crews (3.26 workers versus 2.15); and the longer time it took the municipal crews to service each household (4.35 work-hours per year versus 2.37).

This survey is sufficient to show that industrial policies in the United States have not had significant achievements. Similarly, economists think that the European experience has been “terrible” and “conspicuously unsuccessful.”53 Targeted industries, such as aircraft in the United Kingdom, computers in France, and the nuclear industry in Germany, have done poorly. For a time Japan’s growth rate was clearly superior to ours. But studies by economists found that government investment was not the secret to their success; in any case, Japan’s economic performance over recent decades is clearly inferior to ours.54

For economists, the biggest problem with the “Jobs, jobs, jobs” chorus is that the politicians usually emphasize preserving existing jobs because it is job holders in existing industries who are the voters. Thus, President Trump put a lot of emphasis on coal miners and steelworkers. Economists want us to understand that, if we want to continue to be one of the richest countries in the world, we have to be willing to work at new jobs at cutting-edge companies. Many of the jobs in older industries will inevitably be lost to labor-saving technologies and countries with significantly lower wages. Economists thus worry when they see evidence that workers are less willing to move for better job opportunities than they used to be.

For economists, profits are not an arbitrary decision to give business owners and managers more money – money that might instead have been transferred to workers. Good management emphasizes cost-cutting, creating and improving products, and accurately predicting consumer demand.85 Managers who are lousy at these tasks will not just have lower profits; they are likely to go out of business. Competing firms keep the pressure on for good performance.

We saw above that economists emphasize economic growth. Increased regulation is offered as one of the main factors reducing growth and new business expansion. Since small and large companies alike require staff to document compliance with regulations, regulatory costs, as a percentage of all costs, are higher for small than for large businesses.

Currently some planes have more legroom than others. If airlines think they can get more passengers with still cheaper tickets and still smaller seats, the market will tell them if they are right. And if they are wrong customers will desert them for other airlines. No one complains when restaurant prices are higher for large steaks than for smaller ones. Economists wonder why it should be outrageous if larger seats are priced higher than smaller ones.

Consumers would like products to be well made and cheaper. To accomplish this, businesses must reduce costs. Labor is an important cost. One way to reduce labor costs is to improve business procedures or equipment so as to be able to make the same product with less labor. This may mean firing people, but it need not. For example, some companies that need less labor give large bonuses to longtime employees who agree to take early retirement. And employers can’t completely ignore their workers’ morale, because there is a market for labor, and businesses that do not offer a competitive wage, fringe benefits, and a pleasant working environment will have a hard time attracting and keeping good workers. For example, when a new restaurant opens in Washington, DC, its managers are seen to frequent area restaurants and pass out their business cards to good waitresses and busboys. (It is important that such competition exist; some states have investigated restaurants that may have agreed to a “no poaching” pact.)

The Dodd–Frank law requires many companies to publish their CEO-to-labor salary ratio. In the 2020 campaign, Senator Bernie Sanders proposed a substantial increase in corporate taxes for businesses in which the ratio of CEO pay to median worker pay was very high.4 There may be excellent reasons, however, why company A’s CEO earns 50 times as much as its average worker whereas company B’s CEO earns only ten times as much. Company B may have 100 workers, most of whom are skilled. Company A may have 2000 workers, most of whom are unskilled. Company A’s CEO may be responsible for managing much more capital as well as more workers. His greater responsibility would justify a much larger salary in comparison to his workers than company B’s CEO receives. Moreover, if one thinks the top 1 percent have too much income, why focus on docking hardworking CEOs rather than others in the top 1 percent who don’t work at all? In any case, it would be easy for many CEOs to reduce their pay ratio by outsourcing low-income labor.

the broader forces that produced inequality will not go away: robots will replace labor and “there is the basic truth that technology and globalization give greater scope to those with extraordinary entrepreneurial ability, luck, or managerial skill.

Taxes will likely reduce innovation and investment, and higher taxes will reduce them more. Some potential entrepreneurs will decide the risks are not worth the rewards; they may instead seek a management position in an existing firm. Some engineers contemplating an advanced degree may decide that the high marginal tax on the added income made possible by their higher productivity makes it not worth the cost.29 More important still, with higher marginal tax rates the well off have greater incentives to think of ways to avoid taxes. Liberal and conservative economists agree that high marginal tax rates have a greater effect on the demand for fringe benefits and other untaxed income than on the supply of labor. As the economist Arthur Okun noted, “High tax rates are followed by attempts of ingenious men to beat them as surely as snow is followed by little boys with sleds.”30 One result is more bartering and “pay me in cash” transactions in the underground economy. Another result is businesses providing top executives with expensive tax-deductible cars and conferences in the Caribbean. Still another result is high incomes for lawyers who help the wealthy find tax loopholes.

percent growth rate over ten years raises real (inflation-adjusted) incomes 22 percent; a 4 percent growth rate raises incomes 49 percent. Both liberal and conservative economists think that, historically, economic growth is far more important in explaining the material progress of ordinary people than labor unions or political reform. From the conservative side, Thomas Sowell says: If you read many histories and hear many discussions of social issues, you get the idea that people are no longer in rags or hungry today because various noble reformers refused to accept such conditions and worked to alleviate them. Meanwhile, it was merely coincidental that the gross national product rose by 5 or 6 times over that same span. But if you really want to know why it is that the poor of the nineteenth century were in rags and those of the twentieth century typically are not, it is because a man named Singer perfected the sewing machine, putting factory-made clothing within the reach of great masses of people for the first time in history

survey of top economists found that most thought CEOs were paid more than their marginal contribution to firms’ value. But most mainstream economists think that executives do not have the free rein to boost their pay that economists on the left believe. They point out that, in privately held companies, CEOs are paid even more than they are in public companies. But the owners, usually private equity investors, hire the CEOs and determine their pay themselves.

political liberals usually place a strong emphasis on equality combined with a strong sense of empathy. This leads them to believe that fairness means embracing and championing groups “that seem to be oppressed, victimized, or otherwise dominated by the strong.” In contrast, conservatives think that equality and compassion can be unfair because they often break the link between hard work, self-control, and personal

responsibility, on the one hand, and money, respect, and other rewards, on the other. Conservative notions of fairness focus on proportionality, not equality. “People should reap what they sow. People who work hard should get to keep the fruits of their labor. People who are lazy and irresponsible should suffer the consequences.” Influenced by the anthropologist Christopher Boehm, Haidt believes that the origins of morality were in a “gossipy, punitive, moralistic community…that emerged when language and weaponry made it possible for early humans to take down bullies and replace them with a shared moral matrix.” He also believes that the propensity to punish is the “key to large-scale cooperation.” In experiments people “pay to punish selfish people even though they gain nothing from the punishment.” People pay to punish because it feels good. “We want to see cheaters and slackers ‘get what’s coming to them.’ We want the law of karma to run its course, and we’re willing to help enforce it.”

The reasons we give for policies matter. A welfare state – yes. A redistributive state – no. As Marc Plattner argues, Having government determine the level of people’s income by redistribution can be morally justified only if those who originally earn income have no legitimate right to it. By making the political process rather than the “honest industry” of private individuals the arbiter of each person’s income, redistribution undermines the notion of genuinely private property. […] By making everyone’s income directly dependent on government largesse, a policy of explicit redistribution must necessarily polarize society. In effect, each citizen would become the equivalent of a government grantee or a welfare recipient.75 Explicit redistributive goals would intensify the conflict between rich and poor that the framers sought to minimize. And, as Okun’s thinking shows, the conflict would not just be between rich and poor but between the upper middle class and the lower middle class.

I would guess that the free tuition policy sounds good to many if not most of the public. They probably believe that subsidies that encourage more people to further their education are obviously good for the country. But I doubt that most of the public understand why most economists on the left and the right would oppose free tuition for everyone. Economists, when looking at who benefits and who loses, oppose the policy. Economists are likely to be even more opposed to a proposal by Elizabeth Warren to wipe out up to $50,000 of student debt for those with household incomes under $250,000. The Brookings economist Adam Looney calculates that the Warren proposal would give the top 40 percent of households about 66 percent of the loan forgiveness, whereas the bottom 20 percent of borrowers would get 4 percent of the savings. No one would get additional education, but more well-off borrowers would get most of the money.

many of the distributional consequences of government policies are not what they appear to be on the surface. Often this is because the policies shift incentives in subtle ways. For example, businesses required to pay certain benefits or taxes will adjust so as to shift the real burden elsewhere. Although those in Congress spend much time deciding what proportion of social security and Medicare contributions should be paid by employers and what proportion by employees, their decisions probably have few significant economic effects. As a Brookings Institution study noted, “Economists generally believe that a payroll tax nominally paid by the employer is ultimately borne by the worker in the form of lower wages than he would otherwise receive or in higher prices for what he buys.”99 The shifting of burdens may also occur with the corporate income tax. Although there are economists who dissent, Columbia University’s Glenn Hubbard says “recent studies find that labor bears much of the burden of the corporate income tax.”

There has been a decades-long debate about whether raising minimum wages leads to a reduction in employment of low-skilled workers. All economists agree that there are more workers who gain from minimum wage increases than who lose, but the losers are often losing all their income. The city of Seattle, which began phasing in a $15 minimum in 2015, hired economists at the University of Washington to assess the results of the new policy. The authors of the resulting report introduced methodological improvements over earlier studies by getting data on individual employees. The report found that, on average, low-wage employees lost $125 a month. (A second paper by the authors found the loss to employees was $74 a month, not $125.)105 The losses occurred because employers cut workers’ jobs or hours and put off new hiring.106 Other studies, however, show that jobs lost because of the rise in the minimum wage are fully offset by increases in jobs paying just above the minimum wage

Just as landlords adjust when forced to keep rents low, employers adjust when required to pay low-skilled workers more than a market wage. If they have previously offered workers inexpensive insurance or partial daycare coverage, they can discontinue these nonwage benefits. Perhaps more important, they can discontinue on-the-job training. Jacob Vigdor, one of the University of Washington economists who conducted the Seattle study, worries that, by harming employment opportunities for junior workers, we may be removing the bottom rung of the ladder to future, better-paid jobs.110 Evidence for this process comes from the US construction industry. Many employers there have found it less expensive to hire unskilled workers at low wages and train them on the job. By accepting lower wages in return for training, unskilled workers increase their expected future income

Externalities are the most pervasive kind of market imperfection that may justify government intervention. When economists discuss “the desirable scope of government,” the externality concept is at the center of their analysis.

when a manufacturer harms his competitors by expanding output and thus forcing down prices, the effect on competitors is not inefficient and is thus not an externality. The effect is transmitted through the price system, in the form of lower prices, not outside the price system. If the manufacturer who had expanded production was forced to cut back and raise prices again to take account of the adverse effect his actions had had on rival businesses, customers would lose at least a dollar for every one the rival businesses gained.3 When Henry Ford put buggy whip manufacturers out of business, the effect on them was quite serious, but there was no inefficiency because Ford and his customers gained more than the buggy whip manufacturers lost. Changes in tastes and technology constantly exert both beneficial and harmful effects on employers, employees, stockholders, and even consumers (e.g., when a big, popular chain restaurant with many potential customers buys out a small, struggling eatery with a loyal clientele). Most of these effects are captured by the price system and are not externalities as economists define them.

The owners of chemical firms and their employees do not have precisely the same interests as the rest of us. Many of the chemicals dumped in “our rivers” will end up in other people’s neighborhoods, far from the homes of chemical industry employees. But, even if all the pollution caused by the chemicals remained in the communities surrounding the chemical plants, the plants’ owners and employees would still have different interests from their neighbors. As Ken Ficek notes, everyone would share in the benefits of cleaner water. But the costs of cleaning up would be far higher for owners and employees than for their neighbors. If chemical firms devote major efforts to reducing the pollution resulting from their manufacturing processes, their costs will increase significantly. They will thus have to raise the price of their products, causing demand for those products to fall. Profits in the industry will then fall as well. Some employees will lose their jobs as business declines, and others may lose their raises. If allowed to decide for themselves, the chemical companies may conclude that the costs of certain pollution control efforts – costs borne mainly by their management, stockholders, employees, and customers – exceed the benefits. But the overall benefits of cleaning up would far exceed those enjoyed by chemical industry folks. And these members of the relevant communities would not have cleanup costs to balance against the benefits of the cleaner rivers.

Donald Trump’s first EPA administrator, Scott Pruitt, said that he hoped Congress would end the tax breaks for wind and solar energy. As suggested in Chapter 4, I think most economists would agree with Pruitt that we should do away with production subsidies for first-generation green energy. (They would also strongly support ending tax subsidies for fossil fuels, which totaled $41 billion over ten years.42) Economists are, however, likely to support “green-energy initiatives focused on innovations, making new generations of technology work better and cost less.”43 Setting aside the notable failures of the subsidies discussed in Chapter 4, economists would remind us that the general public does not receive external benefits when, for example, energy is produced by wind power. In fact, it experiences external costs: the huge blades used to capture wind power create unsightly shorelines and dead birds. We don’t want more and more wind power any more than we want lots of interstate travel via railroad; what we want is less power from fossil fuels, which produce pollution. Many ways to accomplish this goal don’t require power of any kind. We could, for example, have more use of GPSs (thus lessening the frequency of wrong turns) and less traveling by cars. The problem with Pruitt’s stewardship of the Environmental Protection Agency was that he seemed uninterested in forcing polluting industries to clean up. He would sometimes suggest that he wanted to be evenhanded: he wanted wind and solar, coal and oil, to compete in the market. But a fair competition would occur only if subsidies for coal and oil disappeared and if polluting industries were forced to pay for the external costs of their pollution.

There are policy areas where the appropriate framework for analysis is not local, state, or national but international. I am thinking of global warming in particular. International organizations have no ability to enforce, whether by regulation or taxes, policies that force reductions in carbon. The free rider problem is pervasive. If we Americans cut carbon substantially, we pay the cost of the reduction, but other nations share in the benefits whether or not they implement carbon reduction policies of their own. Getting other nations to follow through on commitments is an enormous problem.

The real victims of aggressive regulations may be workers (who lose benefits or even jobs), consumers (who pay more for goods, or who may lose access to some goods altogether), or small enterprises (for whom regulation may serve as a stiff tax or even a barrier to entry).

As we have seen, Americans do not agree that people in other countries have as much claim to US taxpayers’ money as they do. They also would not agree that consumers are incapable of making reasonable decisions about which appliances to buy, once having been presented with good information on energy costs.

Despite the many available sources of information, consumers are never perfectly informed. But economists argue that they should not want to be. There are costs in time and money of both producing and consuming information. Imperfectly informed consumers thus seek more information only if they judge that the expected value of the information will exceed the costs of acquiring it. Although competitive pressures induce firms to provide much relevant information, they do not always yield important kinds of safety information.

Much consumer information about products comes from businesses’ advertising. Contemporary economists are qualified supporters of advertising. They find that, although advertising can help create monopoly power, it can also help break down such power. Moreover, heavy advertising for new products can make possible economies of scale in production and distribution, and thus lead to lower prices. Even for mature products, advertising can help medium-sized firms achieve scale economies. There are cases in which advertising seems to raise costs to consumers, such as aspirin, detergents, and breakfast cereals. But many empirical studies have found cases in which it has reduced prices. By “preselling” customers, advertising makes low-service, low-price discount stores possible. When heavy advertising of toys began in the 1970s, retailer prices and profit margins went down as sales increased. A study of eyeglass providers found lower prices where more advertising prevailed.

This section has argued that a man’s behavior does not necessarily indicate his preferences if “preferences” means what he thinks is best for himself or will maximize his well-being. Behavior seen in the market may be even further removed from what the man believes is best for the community.

William Breit points out that malevolence toward the rich could explain desires for redistribution as easily as does pity for the poor. But, although he discusses this and other possible explanations, he seems most attracted to the theory that the middle class want to take from the rich to give to the poor out of a self-interested desire to avoid “rioting, looting, burning and other crimes.”37 Bruce Bolnick points out that philanthropic activity enables one to avoid costs such as social pressures, psychological unpleasantness, and religious pangs of conscience. He thinks the “apparent irrationality” of philanthropy can be seen as an attempt to avoid these sorts of costs.38

In his book The Costs of Economic Growth, Ezra Mishan argues that commercial advertising teases our senses and taps repeatedly at our greed, vanity, and lusts; because business propaganda emphasizes the “mundane and the material,” it should be balanced by noncommercial attempts to influence tastes “for the better.”

Why are economists so defensive when someone suggests that commercial advertising may leave many consumers with an exaggerated opinion of the importance of goods and services to human happiness? There are a number of reasons for this. First, potential professional recruits very quickly learn that, in evaluative economics, the best thing that can be said about a policy is that consumers want it. Most of those who find this worldview uncongenial are likely to choose other professions. Thus, economics has a disproportionately large number of people who subscribe to a consumer sovereignty standard for public policy. Second, those in the profession also learn that, if consumer tastes can be assumed to be stable and real, economists can show themselves to be quite useful to policy makers. On the other hand, if an economist abandons this assumption, he calls into question the value of the competitive market and of many of his own professional tools. If we trust consumer sovereignty, we should be very concerned when economists locate inefficiencies, but, if consumers’ tastes are distorted and unbalanced because of one-sided propaganda, economic efficiency becomes much less important. Indeed, its very meaning becomes ambiguous. Two thoughtful mainstream economists have called the treatment of consumer tastes “the Achilles heel of neoclassical economics.”62 It is thus not surprising that economists protect this weak spot with such vigor. Third, as seen in the chapter on incentives, assuming self-interested behavior can point the way to good public policy. In his book offering sensible ways to reduce pollution, Charles Schultze is right to focus on redirecting economic incentives. In the middle of the book, however, he waxes philosophical, praising economic incentives because they “reduce the need for compassion, patriotism, brotherly love, and cultural solidarity as motivating forces behind social improvement.” Schultze goes on to say, “Harnessing the ‘base’ motive of material self-interest to promote the common good is perhaps the most important social invention mankind has yet achieved.”63 He suggests what Kenneth Arrow has argued, namely that altruism is a scarce resource that society should avoid depleting recklessly.

There are probably very few cultures that don’t have admirable aspects. We can do justice to diversity by calling attention to those aspects. But we don’t have to make believe that “no one culture is intrinsically superior to another.” High school students in my community and all over the country are now being told that “understanding” this “truth” is a measure of successful educational achievement.71 Tell it to the swimmers trying to get here from Cuba or Haiti or the boat people who set out from Vietnam. United States flags were visible in Tiananmen Square in 1989 and in Hong Kong in 2019. A desire for life, liberty, and the pursuit of happiness is not only a Western value.

Robert Frank leads a group of economists who think they can explain the weak association between income and happiness gains. Frank believes that, although Adam Smith was worthy of his reputation, Charles Darwin was worthier still. Indeed, Frank thinks Darwin was the real founder of economics, because he saw that it is relative income and status that bring the good things in life, not absolute income. Frank argues that what’s good for the individual may not be good for the group. Holding a child’s entry into kindergarten until a later age should help him excel in sports. But, if all parents with athletic children do the same, there will be no gain. If one job applicant buys an expensive suit to get a leg-up on competition, the money will be wasted if his top competitors also buy an expensive suit. When we buy a more expensive car to gain the admiration of neighbors, little will be gained if, a year later, our purchase leads our neighbors to trade in their perfectly good cars to buy a later model of our car. If we spend more money on cosmetic surgery so as to look better than our rivals, we will not gain an advantage if they also do the same.

In almost every happiness study done by psychologists, what is central is connection – to friends, spouses, religious institutions, charitable and recreational groups. Harvard’s Dan Gilbert, sometimes called Professor Happiness, says We know that the best predictor of human happiness is human relationships and the amount of time that people spend with family and friends. We know that it’s significantly more important than money and somewhat more important than health. That’s what the data shows.89

Arthur Brooks is one economist who objects more broadly to the idea of a work–leisure trade-off. He provides evidence showing that 89 percent of Americans say they are very satisfied or somewhat satisfied with their jobs. Even 87 percent of people who self-identify as working class say they are very or somewhat satisfied. When asked if they would continue working even if they had enough money to live as comfortably as they would like, 69 percent of Americans say “Yes.” Brooks says: Imagine two workers who are identical in every way – same income, education, age, sex, family situation, religion and politics – but the first is satisfied with his or her job and the second is not. The first person will be 28 percentage points more likely to say that he or she is very happy in life.99 So what makes for a good job? The European Social Survey finds people in well-paying jobs are happier but “a number of other aspects of jobs are strongly predictive of happiness.” When summarizing, the work–life balance was listed first; but the factors that came next were job variety and learning new things.

Learning also enables the pleasures of a job well done. It makes bakers good bakers and air-conditioning repair people good at their job as well. Both occupations yield big smiles from customers, which demonstrate appreciation and admiration. “Earned success” has been found to bring happiness in a host of occupations that don’t pay particularly well. “Americans who feel they are successful at work are twice as likely to say they are very happy overall as people who don’t feel that way.”

Bronfenbrenner recoils from Mill’s argument for favoring higher tastes, accusing Mill of “priggish condescension” and “intellectual snobbery.”115 Mill can be better understood, however, as anticipating today’s happiness researchers. He wanted people to lead more satisfactory lives and believed the main impediments are selfishness and lack of mental cultivation. No wonder so many of today’s economists would side with Bronfenbrenner! They take it as given that selfishness moves humans, and that encouraging higher tastes (learning) would violate their prized stance of scientific neutrality. Economists are wrong on both counts. We have seen that mitigating selfishness and continued learning are both important steps toward happiness. One major indicator that selfish motives do not dominate us is the growing number of investors who give up some economic returns so as to further their political ends. And economic success is by no means the surest route to happiness. Good friends and loving families are.116 Selfishness loses friends and destroys loving families. Acting on altruism and compassion stimulates these virtues further rather than using them up. Aristotle and Smith recommend practicing the virtues so that they become habitual and argue that being praiseworthy is more important than garnering praise.

Marshall’s great contemporary, P. H. Wicksteed, distinguished tastes further by noting that certain kinds of pleasures increased the capacity for future enjoyment. Intellectual, literary, artistic, and scientific enjoyment demand at some point “painful effort and discipline.” But, with greater study, one’s pursuit of these activities increases “hedonistic capacity,” which is not true of most other activities.

Among the important adverse effects of salesmanship and economic rivalry is their tendency to work against the appreciation of the “free goods.” They thus tend to undermine the “fairly established consensus that happiness depends more on spiritual resourcefulness, and a joyous appreciation of the costless things of life, especially affection for one’s fellow creatures, than it does on material satisfaction.”

Previously, some public choice economists suggested that the rational ignorance of voters would be randomly distributed across the policy spectrum, with mistakes canceling each other out until the well-informed voter’s policy preferences were adopted. Caplan claims that ignorance is not random but, instead, biased in certain directions. Because a single vote is almost never decisive, voters suspend their rational analysis – so crucial in consumer markets – and succumb to the charms of their preferred worldview, regardless of its practical implications. In economic terms, the political arena is unique, in that irrational behavior carries a low cost, allowing citizens to entertain, with apparent abandon, delusions and presumptions they would otherwise mute.15 Caplan uses the 1996 Survey of Americans and Economists on the Economy (SAEE) to identify several areas – such as free trade, the inefficiency of price controls, and labor-saving technologies – in which the public routinely rejects the consensus of economists.

James Madison and Alexander Hamilton believed that the true friend of democracy would support representative institutions that could preserve democracy by guarding against its excesses.20 Lincoln, who saw and condemned “wild and furious passions” and “worse than savage mobs,” agreed completely.21 Even Jefferson, though defending the right of the people to instruct their representatives and emphasizing popular control of government, supported nonetheless a government wherein the “natural aristocracy” held office. The people were “competent judges of human character,” capable of electing the “good and wise.” But the representatives’ independent judgment would be essential, for “the mass of individuals composing the society” are “unqualified for the management of affairs requiring intelligence above the common level.”

Widespread participation was not meant to provide an outlet for narrow self-interest but was, rather, a means of tempering it. Municipal government in America provided a way of “interesting the greatest possible number of persons in the Common weal.” It gave people a taste for liberty at the same time as it taught them the art of self-government.

As mentioned earlier, the founders expected elected representatives to be wiser and more virtuous than the average voter. In addition, the powerful offices created by the Constitution, with their fixed and fairly lengthy terms, would appeal to able men, those who “possess most wisdom to discern, and most virtue to pursue the common good of the society.”38 The founders knew, of course, that “enlightened statesmen will not always be at the helm.”39 But they thought that the large commercial republic they established would encourage quite ordinary representatives to behave in a more statesmanlike manner. In small republics there are few factions and interests, and it is easy for a single faction to compose a majority and proceed to oppress the minority. In a large commercial republic, however, even within an individual congressional district, there are a large variety of limited and specific interests. To win an election, candidates must appeal to diverse interests and win wide popular support. The ability to win such an election inclines the successful candidate toward the decent and moderate quality of representation which the system requires. Moreover, representatives from such districts need not be the captive of any one group but rather can find some elbowroom for statesmanship in the very confusion of factions.40 Even a representative from a district dominated by a single faction soon finds that he must cooperate with representatives with different constituencies if he is to obtain even a portion of what he wants. Thus, the large republic’s legislative process encourages temperaments predisposed to consider the needs of others and the “permanent and aggregate interests of the Community.”

Lincoln noted that the principles of the Declaration of Independence required not only government by consent of the governed but also respect for individuals’ unalienable rights to life, liberty, and the pursuit of happiness.51 He said that people outside the territories could not justly remain indifferent about whether citizens in the territories voted for or against slavery. To adopt a stand of moral indifference would be to enshrine in the body politic the pernicious doctrine that “there is no right principle of action but self-interest.”

Sometimes people vote on the basis of a candidate’s (or a party’s) stance on a policy issue important to them, but more often they vote on the basis of their assessment of a candidate’s experience, integrity, judgment, or capacity for leadership.

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Key Points from Book: The Magic Money Tree and Other Economic Tales

by Forni Lorenzo

My primary motivation for writing this book is that, all too often, economic policy seems to do harm and impose unnecessary costs on populations of many different countries. These costs result in the waste of scarce resources, which could have been used more productively – to alleviate the suffering and deprivation of the most vulnerable social groups and, more generally, to contribute to the broader well-being of the entire national community. This damage is almost always due to poor economic policy choices based on distorted beliefs about how national economies work.

politicians tend not to want to respect budgetary constraints. For them, the temptation to spend in order to buy consensus, with no one footing the bill, is strong, and as strong is the temptation to make others pay for their past excesses. The willingness of politicians to meet the growing demands for voter protection pushes them to promise and, sometimes, to implement policies that economists often consider ineffective and unsustainable in the medium to long term.

certain unsustainable policies have been implemented in the attempt to create more wealth and greater well-being, so that voters, as far as possible, are satisfied. However, often, the politicians’ horizon is short – extending to the next elections – and, therefore, they may be interested in supporting the economy only in the short term, without regard to whether the policies adopted are appropriate for the medium to long term. However, and this is a fundamental point, unsustainable macroeconomic policies sooner or later lead to crisis. Crises manifest themselves as more or less long and deep recessions, in which past excesses are corrected and citizens are called on to pay for them. If fiscal policy distributes resources that have not been produced, if a country spends more than it produces, in the end, someone has to pay for it: in short, sooner or later the budgetary constraint takes over. This leaves the question of who should pay, because in the distribution of the burden there is some leeway.

Interestingly this conflict between politicians and economists has often been seen in many developing countries and in dictatorial regimes. In the latter, as we shall see, the conflict is peculiar because dictatorships do not need democratic legitimacy and can therefore afford choices that would not be possible in other countries. But in many emerging countries the conflict has been and is still ongoing. There was a long sequence of economic policy errors in various South American countries that led to public debt crises in the 1980s, just as there were the Asian and Russian crises of the late 1990s. The most emblematic case, with a long history in this regard, is that of Argentina, which within a few years of defaulting on its public debt in 2001, fell back into crisis in 2018 due to excessive foreign borrowing and had to seek help from the international community. All this despite the fact that economists had warned that the policies adopted in the years running up to the crisis risked leading the country into a crisis

Attributing blame, for example, for the poor performance of the economy is less relevant when new candidates run for election, who cannot be held accountable for past performance, and who are free to make generous promises about future economic performance in order to win the voters’ favour. Some voters may not give much credence to unbelievable promises made by politicians, but will still vote for those who make the promises that are most pleasing to them. By doing so, they minimize the probability that the promise of some other politician will be carried through. Should the desired politician then win the election, in the worst-case scenario nothing will happen and in the best case some advantage may be gained.

Some might think that in reality politicians are not really interested in increasing economic growth per se, but only in favouring the social groups that support them or, even worse, their close friends. These different objectives are not in conflict. Of course, if I am a politician I can help my friends, but that will hardly be enough to win national elections. A more delicate question is that of favouring certain social groups over others. This typically happens when a government tries to introduce reforms with the aim of increasing the efficiency of the economic system. In doing so, in most cases, it will harm a few specific groups for the wider benefit of the community as a whole. From an electoral point of view, such a strategy may not pay off, because the groups adversely affected may team up to oppose the reform, while the beneficiaries may be widespread and unorganized and therefore politically less active. An alternative strategy might be to favour only certain social groups in order to build their loyalty to the government in office and to be sure of their support for the elections. The difficult part is doing this without harming other social groups as, for given resources, it simply means redistributing from one social group to another.

That is to say, the introduction of unsustainable policies, that is policies that violate the intertemporal budget constraint, inevitably leads to phenomena that restore its validity, even if in an extremely painful way: recessions and devaluations reduce imports and increase exports, leading to a trade surplus, and therefore help to satisfy the external budget constraint with foreign residents; inflation, often driven by currency devaluations, makes it possible to reduce the real value of public debt, effectively imposing a tax on its holders and helping to stabilize its dynamics;* and default is another way to devalue debts and restore the sustainability of the budget constraint.

Often, arriving at a crisis (of sovereign debt or foreign debt) is much more expensive from a social point of view, but it makes the problems “solve themselves”, in the sense that it requires fewer discretionary choices on the part of policy-makers. Strong devaluation with inflation, for example, could be avoided at times, if the central bank raised interest rates significantly. But to do so would be to admit that an unsustainable policy had been conducted in the past and to attract criticism from voters for the decision to raise interest rates that impose costs on citizens. If, on the other hand, there is an exchange rate crisis, the resulting sharp rise in domestic inflation will achieve much of the correction needed to restore and meet the budgetary constraint. The domestic authorities will be able to say that they are not to blame, in the sense that the devaluation and ensuing inflation are not their choice but the result of the actions of some foreign speculator. History is full of such cases.

Although the budgetary constraint of the state is perhaps the most obvious, another important budgetary constraint is the external one. While the state’s budget constraint measures the relationship between the state and the private sector, in the sense, for example, that a state usually has as creditors both domestic residents and citizens of other countries (a country’s government bonds are typically also sold abroad), a nation’s external budget constraint measures a country’s debt and credit relationship with foreign residents. For example, the external budget constraint measures whether a country’s residents, including the public sector, consume foreign goods – i.e. imports, which need to be paid in foreign currency – to a greater extent than foreigners consume domestic goods – i.e. exports, which are mostly sold in foreign currency and are therefore a source of it. If the two amounts are more or less similar, residents as a whole will be able to use export earnings to pay for imports. If, on the other hand, there is an imbalance, for example, residents import more than they export, the excess of imports would create a shortfall of foreign currency and would have to be paid for either by reducing domestic assets held abroad or by borrowing abroad. That is, a resident citizen can use export earnings to pay for imports, or pay with cash kept in foreign currency (for the sake of simplicity, an import from the United States to be paid in dollars), or finally incur a debt (in this example in dollars) to pay for the excess of imports. If there is a persistent imbalance in the foreign accounts, such that a country accumulates a significant level of foreign debt, this will have to be corrected sooner or later to allow the stabilization or repayment of the foreign debt. This basically means being subject to the external budget constraint.

The central bank is an atypical entity because it has the capability of printing money. This might lead you to think that the budgetary constraint does not apply to the central bank. And apparently, there are people who believe this, namely supporters of modern monetary theory (MMT).* After all, a central bank can print as much money as it wants and therefore there is no reason it will ever have to go into debt. But the point is that a central bank needs to maintain a healthy balance sheet in order to be credible in controlling inflation. If there are upward price tensions, central banks have a limited number of options to deploy. They can mop-up liquidity by selling assets, or by paying a high interest rate on banks reserves (commercial banks’ deposit with the central bank) in order to induce them to increase the liquidity deposited with the central bank. In both cases, the asset side of the central bank balance sheet has to be in the position to allow these operations to be sustained, possibly for a prolonged period of time. This implies that, ideally, the asset side has a monetary value close to the liability side (which is mainly comprised by money issued by the central bank) and that the returns on assets are sufficient to pay the high interests on reserves that may be required.

Easy credit enabled families to spend more than their incomes and to get into debt. Had the interest rates on their loans been less favourable, they would have had to devote more of their income to repaying the interest on the loans. Had they not decided to become indebted, they would have had to use a part of their income to pay rent. In both cases, easy credit allowed them to use more of their income for consumption other than housing. Similarly, easy credit allowed construction companies to create numerous construction sites, which, in turn, created demand for the goods needed for construction activity. Overall, this high level of demand from households and construction companies, exceeded the country’s production capacity. That is, at times, households’ demand for consumer goods and investment in construction could not be satisfied by domestic production. When demand exceeds supply, the balance often is restored through an increase in prices.

if there is excess demand, no rise in domestic goods prices and no increase in domestic supply to satisfy that excess demand, the solution is to increase imports. Indeed, the effects of the imbalance was felt in the foreign accounts. The granting of easy credit created two problems. The first was that productive activity was concentrated in the construction industry, which is a sector that produces non-tradable goods. The second was that, as already mentioned, it allowed families to acquire their own homes at low cost and, therefore, allowed them to devote a substantial part of their income to other purchases.

It should be noted that allowing inflation to correct imbalances is easy politically. The ruling party can put the blame for the crisis on foreign financial “speculators” who seek to weaken the economy and bet against the domestic currency. This avoids national politicians having to take any responsibility. There are, however, alternatives, but politically they are more costly. One can raise interest rates and, thus, reduce credit expansion (in the case of Belarus) or one can compensate the effects of easy credit by imposing restrictive policies such as reducing public spending. For the politician or head of government, this can mean backing down and reversing previous policies – in short, admitting to a mistake.

At the end of the 1990s, the US dollar strengthened accompanied by the Argentinian peso, based on the decision to maintain the one-to-one exchange rate. This led to a contraction in exports and contributed to a deep recession. At this point, the CBA’s lack of credibility and the lack of credibility of the Argentinian economic policy authorities more generally, was re-emphasized and took on a decisive role: the expectation grew among Argentinians and the markets that the authorities would not be able to operationalize the restrictive policies necessary to support the currency board and they would decide on a currency devaluation. This triggered a crisis of historic significance. The banks had frequently extended dollar loans to domestic companies whose revenues were in the domestic currency, leaving them unable to repay these dollar loans once the devaluation actually occurred. Bank savers began to withdraw their dollar deposits, fearing that the banks’ dollar reserves might be exhausted and the banks might fail; this triggered capital flight. In short, those able to grab dollars, even if it meant changing pesos into dollars, did so unhesitatingly. The CBA soon ran out of dollars and was forced to abandon the one-to-one exchange rate and let the currency fluctuate. The peso depreciated sharply and all the debts contracted by Argentinians, including the government, with foreigners in dollars, became impossible to repay. Hence, the 2001 Argentinian default on sovereign debt.

Central banks can print new money and add it to their existing stocks if the demand for money grows. For example, demand for money would increase if prices increased, because more money would need to be in circulation to make the same purchases at these higher prices. Similarly, demand for money grows if real national production grows, because there is a need for more money to pay for the increased sales and purchases accompanying higher levels of production. Demand for money grows when the interest rate is low, as the lower the amount of interest paid on other assets, for example government bonds, the higher the investor’s willingness to hold onto money. It increases also during periods of high uncertainty, as agents want to hold liquid assets as a buffer against unexpected events.

But if the amount of new money created is higher than the increased demand for money, agents will not want to hold it and most likely will exchange it for bonds, increasing bond prices and further compressing interest rates, or for other financial assets, inflating their value. It can also happen that some excess liquidity gets spent in consumption, creating some upward price pressure.

All things being equal, if the value of the central bank’s injection of liquidity, let us say the amount credited to the accounts of private banks, exceeds the increased production enabled by the loans made by banks to the private sector, then inflation of goods and services and/or of assets will likely result. That is, if the increase in the means of payment achieved by the granting of the loan by the private bank does not correspond to at least an equal increase in the goods produced, the effect of the loan will weigh on the economy’s purchasing capacity with no corresponding increase in the supply of products.

John Maynard Keynes (1936) taught us that if the economy is not in full employment and there is not full utilization of production potential, even “donated” money can increase national production because it activates additional demand. However, giving away money is certainly not the most efficient way to support the economy, and Keynes did not back this approach. Moreover, whether or not the economy is close to full employment is not something that politicians usually take into account, more often preoccupied by the need to win the approval of voters.

until the end of 2016, Egypt tried to maintain an exchange rate pegged to the dollar. However, to sustain the exchange rate in a situation of a trade balance deficit and, therefore, with a continuous outflow of US dollars, Egypt’s central bank was obliged to meet the demand for dollars. It had to sell dollars and buy Egyptian pounds continually at the fixed exchange rate. Dollars which were bought by Egyptian importers to buy goods from abroad in order to meet the additional demand caused by the growing fiscal deficit, thus closed the circle initiated by public expenditure in deficit. Indeed, the latter pushed up consumption and imports, and in turn increased the need for dollars to meet those imports and led importers to sell local currency in exchange for dollars, thus generating pressures for a currency devaluation.

The dynamics of these crises are simple. As long as credit or fiscal policy is excessively expansionary, citizens can consume more than they produce. This is facilitated by foreign borrowing, which allows these citizens to acquire those imports that fill the gap between demand for goods and services (high) and domestic supply (limited). However, at a certain point this situation becomes unsustainable; investors and foreign governments are no longer willing to grant further loans, which precipitates two responses: (1) repaying the debts incurred, and (2) not taking on any new debt. The latter translates into reducing the trade deficit, by returning domestic demand back to the level of domestic production. This can be achieved by reducing credit or public spending, for instance, but either way implies a retreat from the previous policies. It can be very difficult, politically, to have to admit to the electorate that it is necessary to suspend subsidies and guaranteed public employment because the money has run out. It is admission of a political failure from which few governments would be likely to recover. Moreover, if debt repayments are involved, it may be necessary to go into a trade surplus with foreign countries, which will require achieving an excess of domestic production over consumption, to enable their repayment. In this case, not only must subsidies be removed (and civil servants dismissed), but taxes must be increased. In short, all consumption that exceeded domestic production must be repaid – and with interest. This is when the budgetary constraint re-emerges.

If public expenditure is highly productive, in the example public investment increases income two-fold, then it might be the case that the increase in expenditure pays for itself and that it does not increase the deficit. This is the position taken recently, for example by the IMF, in support of large public investment programmes as a way to support economies out of the pandemic recession (IMF 2020). However, we must exercise caution, as in normal times multipliers of 2 or more are rarely found and are especially rare if the country is highly indebted. This is because the additional expenditure could lead to a further increase in indebtedness, if later it turns out that the investments made were less productive than expected. And history has plenty of examples of investment pushes by the public sector that were less successful than were hoped for, essentially because they cost more money and were less productive than planned. This uncertainty over the outcome of the public investment programme could lead to increases in the risk premium required by investors to hold government bonds and, therefore, in interest rates, which would probably offset the positive impact of the increased spending.

investing in education does not bring immediate benefits in terms of growth and material well-being. Voters, who, among other things, are no longer in receipt of education, may value this type of expenditure less or feel that it does not provide them with any benefit. Thus, these expenses may not be at the top of the politicians’ agendas. It is not surprising that debate often focuses on increasing transfers (pensions, subsidies) and reducing taxes. Rarely a politician’s main campaign message is a promise to spend more on primary schools, or reduce hydro-geological instability, or invest in research.

When the central bank buys government bonds, their seller is paid with newly printed money, which increases the amount of money held by the private sector. To a certain extent, central bank purchase of government bonds can be achieved without increasing this amount, that is, without any “easing” of the monetary conditions. This can be achieved in various ways. For instance, a central bank might first sell off some holdings on the asset side of its balance sheet to make room for government bonds; however, the amounts of these other assets tend to be limited and can include mainly foreign reserves and gold, which does not allow much scope to increase the bank’s government bond holdings. In addition, selling its reserves depletes the central bank of an important asset and will have effects on the exchange rate, typically leading to an appreciation which may be unwelcome. Another possibility would be to buy more government bonds and then try to absorb this additional liquidity by increasing the interest rate paid on banks’ deposits at the central bank, which would provide an incentive to maintain these deposits with the central bank and not lend their liquidity to the economy. However, this possibility could turn out to be very costly for the central bank and is, therefore, not popular. If the return on the asset side of the central bank balance sheet is lower than the interest paid on banks’ deposits, the central bank will run losses and its capital will be depleted. This situation could be maintained for a time without causing a major problem, but could not go on forever.

the large purchase of government bonds carries a risk that the government becomes overstretched and gradually – or in some cases very rapidly – slips into an unsustainable fiscal position. That is, it reaches a level of debt that, under reasonable assumptions, it will be unable to repay in the future. So, what are the consequences? One obvious consequence is that the central bank could suffer a loss in the value of some of its assets, specifically the government bonds, and – if these losses are sufficiently large – its capital will be wiped out. In this case, it would be left with more liabilities than assets, but still able to print money. Nowadays, money is fiat money. Its value is based not on some real asset, such as gold, but on the fact that it is the legal tender that can be used for payments, including tax payments. So, unless one is concerned about inflation and the value of money, there is no reason for not wanting to hold it even if the central bank has negative capital. In other words, one should hold onto one’s money for as long as there are no expectations of inflation or devaluation that would reduce its real value. This then raises the problem that the central bank’s reduced assets might limit its ability to control inflation. If or when it needs to reduce the liquidity in the system, this might require it to sell some assets in exchange for money. If there are insufficient assets on its balance sheet, the central bank might be unable to guarantee full control of inflation. If it tries to reduce the liquidity by increasing the interest rate paid on reserves (banks’ deposits at the central bank), it will likely be forced to run a loss since the returns on the asset side of the balance sheet may fall short of the interest paid on the liability side. These losses will reduce its capital even further and the central bank will not be able to raise finance by printing money because this would contravene its goal of reducing the amount of money in the system. Therefore, the only solution is to sell some assets, but the amount of these is limited and finite, therefore sooner or later the situation will become unsustainable. In this case, it is likely that the central bank will let monetary conditions run loose and choose not to mop up the extra liquidity, in the hope that the monetary stimulus could bring about higher inflation and an increase in the demand for money and, therefore, profits, thereby reinstating its capital.

The indebted entities must reduce expenditure and increase revenue. If increasing revenue (whether from business sales or taxes) is difficult, then all that can be done is contain expenses. However, this implies reducing consumption and investment and, thus, reducing aggregate demand. A reduction in aggregate demand, inevitably, will be accompanied by a reduction in supply and economic activity. In short, a country that wants to contain (and possibly reduce) debt growth in excess of economic activity must accept a certain level of decreased economic growth. The Chinese authorities are sufficiently far-sighted and politically stable to tackle this problem gradually and resolve it within a few years but they will have to accept lower rates of economic growth.

international trade free of constraints can only bring aggregate benefits for all, because each country is free to concentrate its production where it has higher productivity and can produce at lower costs, and import what is not produced at home. It is a matter, merely, of redistributing these benefits to compensate those damaged by free trade. For example, it would not be worth producing steel in Detroit if it was available, at a lower price, from China. If the United States were to spend less on producing steel by buying it from China, it would have more available to spend for example on education, care for the elderly, etc. What matters is ensuring that the steelworkers in Detroit who have lost their jobs are protected (supported financially, relocated, retrained, etc.). This might seem not to be too difficult, but this social support has not been forthcoming.

imposing tariffs on imports does not mean that only foreign producers pay. The intention is to introduce a wedge (the tariff) to increase the domestic price above the one prevailing on the international market. This implies that imports become more expensive than without the tariff and will diminish; domestic producers can increase their production to compensate for the reduced imports. How much domestic production increases, following the imposition of an import duty, depends on how the domestic producers respond to the import price increase. In the US case, if they were to increase their output to satisfy the domestic demand at a competitive price, then, in theory, the domestic price could remain unchanged at the level prevailing in the international market before the introduction of the tariff and domestic output could increase. However, this could not happen; had domestic producers been able to produce large quantities at low prices, there would have been no need to import steel from China. The fact is that US steel is less competitive than Chinese steel and, therefore, the price of the domestically produced steel has to be higher than the international one. Therefore, an increase in domestic prices due to the tariff is inevitable and will weigh on all activities using the goods on which the duty has been imposed.

A budget adjustment can be achieved by either cutting expenses or increasing taxes. If the adjustment occurs during a recession, the most frequent scenario, raising taxes is difficult because people’s incomes are already weakened. Therefore, the choice, usually, is to cut public spending on pensions, public-sector wages, education and healthcare. Acting on these expenditures contains domestic demand, which might be necessary to reduce the trade deficit without weighing directly on productive activities that are needed to support the potential recovery.

More fundamentally, the evidence suggests that, today, wages and inflation react less strongly to domestic economic activity than in the past.* The retail distribution structure is changing as a result of online trade and more intensive use of technology, so the configuration of the margins is changing; value chains are global, so prices are affected less by domestic cost elements; mechanization is increasing and reducing the share of labour in value added while also decreasing the impact of wage developments on prices; and workers’ preferences are shifting towards more flexible and part-time jobs in exchange for more moderate wages. All these factors have kept inflation low.

If independence were to be reconsidered and the central bank became subject to political power with the aim of printing money to meet politicians’ spending needs, it would not be difficult to predict that inflation would immediately emerge. This applies to the case of many emerging economies. In this scenario, in order to contain inflation, it would be necessary to increase real interest rates continuously and, especially where the central bank has poor credibility – as demonstrated in the case of Argentina – to a point where it would also probably cause a recession. Then, high real interest rates combined with recession would change the assessment of debt sustainability. Higher interest expenditure and lower tax revenues, as a result of the recession, would make debt difficult to sustain, lead to investor flight, an increased risk premium and, ultimately, a probable debt crisis. In short, the budget constraint would again regain the upper hand.

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Key Points from Books: Blowout


by Rachel Maddow

Turns out Putin made mistakes over the past fifteen years—big, fundamental, hard-to-reverse mistakes. That can happen when you try to build your country’s future on the oil and gas industry. Putin’s decisions stripped his country of its ability to compete fairly in the global economy or global politics and limited its strategic options to the unsavory list he and his apparatchiks are ticking down today. His efforts to restore Russia as a world-stage superpower no longer depend on capacity and know-how. They depend on cheating. Putin and his minions cheat at the financial markets. They cheat at the Olympics. They cheat at their own fake democracy. They cheat other people out of their democracies.

As a remedy, the Court ordered Standard to split itself into about three dozen distinct firms that would be forced to compete with one another. Rockefeller, who retained ownership in all the spin-offs, found this arrangement surprisingly salubrious. The separate companies all flourished. John D. wound up a richer man after the breakup than he was before. And even today, more than a hundred years later, the major non-state-run international oil companies we know best—ExxonMobil, Chevron, BP, Marathon—have their roots in Standard Oil and trace their ancestry directly back to Rockefeller. Standard DNA is shot through the oil industry, as are Standard’s dominant traits: a penchant for pinching pennies, an eagerness to devour and expand, a mistrust and even hatred of government regulation, a vaguely delusional sense of higher calling, and a wary respect for innovation. Worth keeping these traits in mind, because they’ve gone on to shape the modern world. They still function as a character sketch—or maybe a psychological profile—of the richest, most powerful, and most destructive industry on the globe.

the Koch family, famous for funding right-wing causes and politicians across the country. Koch Industries today is the second-largest privately held corporation in the United States, encompassing everything from commodities trading to cattle to paper pulp, but the corporation owes its honest-money beginnings to invention, to petroleum engineer Fred Koch’s discovering a better and cheaper method for making gasoline from crude oil, back in the 1920s.

Nuclear stimulation equipment was mothballed at just the moment when Americans were beginning to get good and jittery about the guarantee of an ample and never-ending supply of fuel sources. The dire prophecy of the geologist and futurist M. King Hubbert, who said that oil production would hit its apex in around 1970 and then begin a long despair-inducing decline, seemed to be coming true, at least domestically. “The era of low-cost energy is almost dead,” lamented the U.S. secretary of commerce at the end of 1972. “Popeye is running out of cheap spinach.” This realization was followed by OPEC’s surprise 1973 embargo that nearly tripled the price of oil.

Horizontal drilling allowed well operators to drill straight down, make a right-angle turn at a chosen depth, and then tunnel out thousands of yards or even miles more. Drillers could frack all along the horizontal line, which increased the potential pay zone exponentially. But it also required more slickwater.

The combination of slickwatered hydraulic fracturing and horizontal drilling was the breakthrough the oil and gas industry had been chasing for years. And it wasn’t merely an upheaval of potentially epic commercial proportions; it was a hinge on which modern history has turned. A new genie was out of the bottle. It’s hard to say, even today, if that genie is a friend. But he has had effect. Hydraulic fracking and horizontal drilling have rewritten the whole global energy equation and the future of a whole bunch of countries with it. “It is one of the most extraordinarily important, disruptive, technologically driven changes in the history of energy,” the global head of commodity research at Citigroup said of the fracking boom.

“It is time to stop living according to Lenin!” Khodorkovsky wrote in an essay right around his thirtieth birthday, as quoted by the author Masha Gessen. “Our guiding light is Profit, acquired in a strictly legal way. Our Lord is His Majesty, Money, for it is only He who can lead us to wealth as the norm in life.”

Problem was, in western Siberia, it had been too simple, for too long. Mach found it difficult to get a quick buy-in for Yukos’s new ambitions from the thousands of Yukos drillers and production pros who had grown up in the Soviet system, where managers were always guarding against the mistake of making too many tractors too fast. There was no urgency about the numbers when Mach arrived at Yukos. There was urgency about maintaining full employment, preferably until the end of time. The governing idea in the Yukos-owned oil fields was to drill new wells constantly and milk even the lowest-producing wells for as long as possible. The roughnecks in western Siberia might not eat well, but they would eat for a lifetime. Stoicism and resignation were the dominant traits in the Russian oil fields. “We never expected anything good,” a Yukos employee had once explained to Khodorkovsky. And if nothing good was coming, the priority would be to make sure that what little you had already never went away.

A few months into his new regime, President Putin called them all, including Khodorkovsky, to a meeting at Stalin’s old dacha just outside Moscow, still outfitted with the desk and daybed from which Stalin dreamed up his Great Purge of enemies and elites. With that unsubtle setting as an ambient cue, Putin laid down the new law, or more precisely, the new balance of vlast. They could hold on to their ill-gotten gains, Putin told them, and operate as they had for the last decade, as long as they offered no opposition to the new regime in the Kremlin. If anybody in the room was unclear as to the purport of Putin’s message that day, or the genuine feeling behind it, what soon happened to Mikhail Khodorkovsky ended all confusion. “Khodorkovsky didn’t know the limits,” said the chairman of Yukos’s largest rival, Lukoil. “He didn’t realize that when power went from Yeltsin to Putin, things had changed.”

Putin learned he was negotiating the deal with Lee Raymond and Raymond’s number two, Rex Tillerson, that would give ExxonMobil 30 percent of Yukos—a deal that might one day permit the American company to gain controlling ownership of the most able and impressive company in the single crucial industry in Russia. Russia might not have been a superpower anymore, it might not have had a first-world military or economy or anything else anymore, but by God Russia had oil. And now Russia was supposed to willingly give that up, too? The thought, to Vladimir Putin, must have been somewhere between nauseating and enraging. Khodorkovsky’s great meritocratic free-market ride came to a screeching halt. For my friends, everything; for my enemies, the law.

Team Putin began with a series of audits of Yukos in the weeks after Khodorkovsky’s arrest. By the time the federation’s tax accounting department was done, Yukos had received bills for back taxes—including interest and penalties—totaling $27.5 billion. This would have been a difficult bill to settle in the best of circumstances, but because Putin’s government had also frozen the corporation’s liquid assets and crippled its production operations, Yukos found it impossible to pay. Putin’s Russian Federal Property Fund provided a solution, though. The fund auctioned off Yukos’s key subsidiary, Yuganskneftegaz, which accounted for 60 percent of its annual oil production and an even greater percentage of its $36 billion valuation. The auction, which took place on December 19, 2004, lasted in the neighborhood of six minutes. The winning bid was a highly discounted $9.3 billion. The only real surprise was the successful bidder, a corporation nobody in Moscow had ever heard of—the Baikalfinansgrup. When journalists got hold of the group’s registration documents, they discovered Baikalfinans was just two weeks old and had been incorporated with an initial capitalization of $300. Its “offices” were above a vodka bar in a small building in the remote medieval town of Tver, three hours from Moscow.

Rosneft’s greatest non-Putin abettor in its campaign to devour every last bone and feather of Yukos turned out to be the American investment banking titan Morgan Stanley. Morgan Stanley had been doing business out of its office in Moscow since 1994, when Boris Yeltsin was beginning to goose the pace of privatization. When other Western financial institutions fled Moscow as the Russian economy collapsed, Morgan Stanley held firm. It kept its Moscow office fully staffed and hired a Russian economist named Rair Simonyan to run it. Simonyan’s previous job was vice president of international investment for Rosneft. Among Morgan Stanley’s crucial business operations in Moscow over the next five years was rescuing Rosneft from extinction.

“The world’s most prestigious investment bankers, lawyers and accountants are lining up to embrace the Rosneft offering,” the decorated business columnist Allan Sloan wrote in Newsweek. “But remember that financial markets (and financial professionals) are frequently blinded by money—and there’s enough money here to blind anyone.” J. P. Morgan joined Morgan Stanley as one of the four joint global coordinators and book runners while Goldman Sachs signed on as a senior co–lead manager. To put it bluntly, Rosneft’s IPO campaign ended up making the world complicit in Putin’s theft of Yukos and spread the shame of it around the globe. The markets knew the Russian government had ripped off that company and framed its leader, flat out stealing billions from Yukos shareholders. But Morgan Stanley and the markets and the investors in those markets chose to look the other way because the potential payoff was too enticing.

Tillerson had already managed projects all over the world, from the United States to Africa to the Middle East to Russia, and had taken the measure of various forms of governments and governors. Monarchies and dictatorships clearly presented certain political problems for the subjects of those countries, but from Exxon’s perspective—or for any foreign company wanting to do large-scale work on someone else’s sovereign soil—it was hard to argue with the fact that they could also offer much appreciated certainty and control, at least as long as the monarch or strongman stayed in power. If ExxonMobil needed something in, say, Equatorial Guinea, it knew exactly where to go to get it—which was to say from the good offices of the country’s president for life, the autocrat Teodoro Obiang Nguema Mbasogo. The president for life might have his own quirks and his odd desires, but for a company like Exxon his office was at least one-stop shopping: there was no one else you needed to talk to. Real democracies, where competing ideas and ideologies and other would-be could-be leaders were in a constant tug-of-war that could never be finally won—a mercurial electorate actually swaying outcomes and policies and national preferences back and forth—that was a neat trick for people-powered governance. But it wasn’t necessarily ideal for those concerned with maintaining the steady flow of oil and progress and profit.

ExxonMobil had booked all-time world-record earnings in each of the three years prior to Tillerson’s installation as chairman and chief executive officer. Its gross revenues the year he took over were approximately equivalent to the gross domestic product of Sweden, Switzerland, Indonesia, or Saudi Arabia. And CEO Tillerson had scant cause to worry about malign interference from the political classes, even on his tricky home shores. Like all U.S. oil producers, ExxonMobil (and its investors) continued to enjoy the sorts of subsidies and incentives that had been in the tax codes for almost a century. This kept its annual tax bills low—at times, almost unbelievably low—no matter how high its profits.

But in countries that lack strong, legitimate democratic governance, the discovery of oil generally leads to more trouble and more inequality. Back in 2002, around the time that Equatorial Guinea was being identified as a key potential supplier of U.S. oil imports, Dr. Terry Karl, the American professor at the vanguard of these studies, explained to a group of government officials and oil executives, “Without intervention of some sort,” they should expect “a reduction of the welfare of people in oil exporting countries. It will provoke violence and unrest. It will lead to the violation of rights. It will lead to the destruction of the environment. It will buffer authoritarian rule.”

“It’s occurred to all of us that our traditional sources of oil are not as secure as we once thought they were,” Congressman Ed Royce (R-Calif.) explained to a symposium of oil executives, U.S. government officials, academics, and envoys from several African countries four months after 9/11, in January 2002. “Oil is where you find it. Oil companies cannot always invest in democratically governed countries. It would be ideal if it could be guaranteed that the head of an African country where a U.S. oil company invested was, in fact, an advocate of democracy and always respected human rights. Unfortunately, that is not a realistic expectation.” His colleague Congressman William Jefferson (D-La.) concurred, but he saw possibility: “While there may be strivings and failings in Africa over democracy, in the Middle East there’s not even talk of it. Talk about democracy does not even part the lips of those who are in charge in those countries. So in Africa there’s at least a chance for the kinds of things we talk about here: rule of law, for transparency. There’s a chance for us to overcome some of the issues of bad governance through democratic influences.”

Everywhere they operate on earth, oil and gas companies are incentivized to push as far as they can on extraction (that’s how they make their money) and to escape negative consequences caused by that extraction. That’s the basic math that produces their profit, their market share, their stock price, and the happiness of their shareholders. Because oil and gas are found all over the freaking place, though, oil and gas companies need a rudimentary foreign policy to maximize shareholder happiness by maximizing their ability to produce their product. And it turns out, rationally and understandably, the foreign policy priorities of the oil and gas industry are stability, access, control, simplicity. Countries may come and go, but oil and gas companies need to think bigger than that: they make big expensive investments that cost a ton up front, and they need to be assured they’ll be able to collect the promised payoff after all that work and expense. So, the longer the relevant foreign ruler is in power, the better. And if the local autocrat is happily on the payroll, no one’s going to bother anyone about cleaning up any mess that oil production might cause in his country. And if any of the citizens of that country do step out of line and make a fuss, the ruling family (and its well-paid paramilitary forces and its expensive PR firms) will take care of that, too. And everyone else will look the other way.

As Lugar wrote in an introductory letter to the report, “Too often, oil money that should go to a nation’s poor ends up in the pockets of the rich, or it may be squandered on the trappings of power and massive showcase projects instead of being invested productively and actively.” The Resource Curse, Lugar noted, “affects us as well as producing countries. It exacerbates global poverty which can be a seedbed for terrorism, it dulls the effect of our foreign assistance, it empowers autocrats and dictators, and it can crimp world petroleum supplies by breeding instability.” Lugar’s study took the measure of oil-rich, governance-challenged countries in Africa, Asia, Europe, Latin America, and the Middle East. His solution was elegant and straightforward: transparency. Companies operating in extractive industries (from oil to diamonds) needed to provide the details of their business activities in foreign nations. And the countries needed to be more open about reporting what money came into state accounts and how it was spent. “When oil revenue in a producing country can be easily tracked,” Lugar wrote, “that nation’s elite are more likely to use revenues for the vital needs of their citizens and less likely to squander newfound wealth for self-aggrandizing projects.”

Russia’s great “victory” was not conceded here in the United States. The spies were caught, right, and without much trouble. And yet their story made for a fantastic tale. The saga of these deep-cover agents, spooling out in official legal filings and news accounts, offered tantalizing hints of intrigue, and peril, and old-school spycraft at work. The senior of the key suspects had been trained by the old Soviet KGB; the younger by the KGB’s Russian successor in foreign intelligence, the SVR. But these were not your garden-variety agents; the ten Russians captured in the United States in 2010 were modern inheritors of a long and storied history of Russian Illegals. Among spies, Illegals are a special breed of cat—long known for their “sophistication and flair,” as one Russian counterintelligence expert put it—assiduously prepared for long years on foreign assignment, pretending not to be Russians at all.

Once trained, Illegals were shipped off on assignments around the world, including to the United States, often as married couples, armed with legends—stolen identities and invented backstories—to work the long game. They did not gather foreign intelligence while safely under the guise of factotums at Russian embassies and consulates and trade missions, working in broad daylight, with the promise of diplomatic immunity if they were caught in acts of espionage. They instead lived like locals. As locals. They moved into American communities and made friends, went to graduate school and made new friends, got jobs and made new friends, had children and made new friends.

“Try to single out tidbits unknown publicly but revealed in private by sources close to State department, Government, major think tanks,” was the routine order from on high, as detailed in the U.S. Justice Department’s federal criminal complaint.

Putin was happy to allow the United States to pony up for oil pipelines and tanker-friendly deepwater ports in Russia. He was more than thrilled to have the bankers at Morgan Stanley shake the Western money tree on behalf of Russian companies and quick to boast of the world-beating economic growth that foreign investment engendered in Russia. But the old KGB man would never let go of his suspicion of the United States of America and its insatiable hunger for more. And it wasn’t just paranoia; it was worry borne out of legitimate weakness. Would Wall Street bankers horn in on the claptrap Russian industry that produced the nation’s one economic advantage? Would the United States somehow threaten Russia’s increasing dominance in Europe’s oil and gas markets? Even after the Cold War thaw, by Putin’s reckoning, the American government still seemed committed to eating away at Russia’s already-depleted global standing. America still had an appetite that grew as it was fed. So President Vlad was going to be keeping tabs. And the Illegals rather suddenly found themselves on an uncomfortably tight, and short, leash.

But this is not an entirely closed system (what is, really?), and the various waters can sometimes get away from the operators. Soil and water tests near fracking sites often turn up an unfortunate amount of dangerous chemicals and radioactive material. And that’s not awesome for a rapidly expanding industrial process, even in the abstract, but the nature of the American oil and gas business has meant that modern fracking operations are often sited uncomfortably near residences and pastureland, increasing the chances for human and animal exposure to any dangerous waters mishandled by drilling operators. For a study called “Impacts of Gas Drilling on Human and Animal Health,” veterinarian Michelle Bamberger and professor of molecular medicine Robert Oswald documented the experience of two neighboring families just south of Pittsburgh whose homes were surrounded by twenty-five separate drilling sites. What had been visited on them in 2009 and 2010 was truly awful. Both families noted pets dropping dead two or three days after they drank from open puddles in the street. When one family’s purebred boxer gave birth to fifteen pups, the entire litter was born with either complete or partial absence of fur. Seven were stillborn and the eight others were dead within a day.

More wells were being fracked in the United States than ever before in 2011, and almost six in ten new wells were horizontal. It had been less than one in ten a decade earlier. America muscled past Russia to become the largest producer of natural gas in the world, and the timing couldn’t have been better. The Wall Street–induced Great Recession had thrown the American economy into free fall, but the fracking-driven energy boom was like an unexpected net appearing underneath a doomed trapeze artist, mid-tragedy. Renewable energy might turn out to be an important legacy for Obama and Biden in the long run…but in the short run, the shale gas revolution was crucial.

Except that the industry did not relentlessly pursue improved “best practices” concerning safety, ever. Even old George Mitchell, who had become known as the Father of Modern Fracking, could see that. Mitchell joined with the former New York mayor and current environmentalist Michael Bloomberg to make a public plea for increased regulation in the summer of 2012. “The rapid expansion of fracking has invited legitimate concerns about its impact on water, air and climate,” Mitchell and Bloomberg wrote. “Concerns that industry has attempted to gloss over.” Privately, according to the New Yorker writer Lawrence Wright, Mitchell was less diplomatic. “These damn cowboys will wreck the world in order to get an extra one per cent” of profit, Mitchell told one of his sons-in-law. “You got to sit on ’em.”

State-controlled Russian television cameras were on hand in Sochi to record the signing of the new strategic alliance between ExxonMobil and Rosneft. The agreement, which called for an immediate investment of $3.2 billion to develop the oil and gas in the Kara Sea, was heralded as a partnership of equals, each of whom brought something of real value to the table. Rosneft offered its “unique resource base” (all that oil and gas off Russia’s Arctic coast) and ExxonMobil its “unique technology” (a track record of at least trying to tackle the obstacles of offshore drilling in the Arctic). One Russian official in Sochi complimented Exxon on the fact that its platforms in Canada “can sustain an impact from a one-ton iceberg.”

Putin and Sechin believed their energy industry was about restoring Russian honor, about winning prestige in the eyes of the world, à la the cosmonautical Soviet space program or the Soviet nuclear arsenal. Most of all they were convinced they could use all that Russian oil and gas, à la nuclear warheads and ICBMs, for power and leverage in advancing Putin’s foreign policy aims. Russian oil and gas would be treated as the property of the president, and they could and would be weaponized to serve the president’s purposes.

On New Year’s Day 2006, Putin offered Europe a little demonstration of just how vital was his proposed new pipeline and just how desperate things could get if it went unbuilt. That day, as the frigid season was setting in across Europe, Gazprom made sudden drastic cuts in its supply of gas into Ukraine, which at that time held the only extant pipelines from Russia into the rest of Europe. Ukraine predictably siphoned off the gas it needed from the supply transiting through its landscape into other European countries. Gas deliveries into Austria dropped by a third the next day; gas deliveries to Hungary fell by 40 percent on the day following. Slovakia, also down 40 percent, declared a national emergency. Industrial output in Bulgaria and Romania ground to a stop. While these and other European nations shivered in panic, the Russians pointed the finger at Ukraine for stealing the natural gas bound for them, and insisted Gazprom customers could not rely on Ukraine to play fair with EU-bound gas. By the time the Russians made peace with Ukraine and turned the spigot back on, the new Nord Stream (which bypassed the allegedly pilfering Ukrainians entirely) was the talk of Europe. When Russia hosted the G8 summit in St. Petersburg six months later, Putin’s government chose as its theme international energy security. Russian representatives used the summit to offer the West a deal. It ran like this: We Russians are tired of your constant carping about our human rights and free speech violations. Let’s just put all that to the side and have a proper business relationship. We’ll be your energy supplier. In fact, we will guarantee enough energy for every house and factory in Europe. You’ll never have to worry about that again. All you have to do is pay us for the fuel and stop with the moralizing. Sounded like a pretty fair trade at the time. Much of Europe signed on the dotted line, waving away concerns that it essentially made the Continent beholden to Russia for its productivity as a region on earth.

On the oil side, the Energy Superpower strategy posed even bigger problems. Putin had been gangstering up the Russian oil industry for years. Eschewing competition that might encourage innovation and meritocratic success, Putin instead just smashed and grabbed any homegrown enterprises that proved resourceful or entrepreneurial or attractive to legitimate investors—goodbye, Yukos. He harassed foreign interlopers, too. He invented a dubious environmental violation bill of attainder, to force Shell Oil to hand over controlling interest to Gazprom in a $20 billion project in the far east of Russia. The consequences for Russia could be overlooked when oil prices remained high, but the rotten core problem was pretty clear to anybody who was paying close attention.

On top of all that, a group of Putin’s long-standing and most effective critics in Russia published a detailed report on Vladimir’s spectacular profligacy during the preparations for Sochi. The main author of this report, Boris Nemtsov, was a brilliant Russian physicist and mathematician and a true believer in democracy and government transparency. He had been a rising political star in post-Soviet Russia—even appeared to be Yeltsin’s heir apparent—until the economic crash in 1998 laid waste to the Kremlin hierarchy. Nemtsov watched the rise of Putin from the sidelines after that and was increasingly alarmed by the KGB-trained president’s crackdown on the free press, by the extrajudicial way Putin and Sechin manhandled Yukos and Mikhail Khodorkovsky, among others, and by Putin’s updated and upgraded Grabification 2.0. Nemtsov became one of the president’s most vocal and most popular opponents, and a relentless burr under Putin’s saddle. He co-authored a no-holds-barred study of the Kremlin’s venality and mismanagement in its running of Gazprom in 2008. And in 2012, he publicly praised the Magnitsky Act, which permitted the U.S. Congress to mete out real economic punishment on specific individuals in Russia who committed gross human rights violations. Unlike Carter Page, who decried the Magnitsky Act as latter-day McCarthyism, Nemtsov hailed it as the way to finally nick the “crooks and abusers” among Russian businessmen and officials.

The oblasts in western Ukraine tended to be more culturally European, keen on Ukrainian autonomy, and attached to the Ukrainian language. The eastern oblasts, with their large Russian-speaking populations, maintained greater affinity for all things Russian. So the national allegiance was always sort of in the middle. Ukrainians were hot to get in on Western Europe’s free-market capitalism, but in their wobbly, brand-new democracy they ended up entrusting their political leadership in Kyiv to the old Soviet apparatchiks.

Ukraine had a mammoth appetite for gas—for Russian gas. The country consumed more fuel as a percentage of its GDP than any nation in the world, and its fuel of choice was natural gas. The country bought three-quarters of its supply through Russia’s state-controlled monopoly, Gazprom; it also made money transiting Russian gas through pipelines to Gazprom customers in Europe. So even after the Orange Revolution and the election of Yushchenko, Russia still managed to keep a hold on the reins of Ukraine’s economy, and its politics—which was perfect, as far as Putin was concerned. The infinitely corruptible energy business allowed Putin to pick and choose who would be rich and who would be powerful in Ukraine. He had learned this system well in St. Petersburg and then in Moscow, and it fast became Putin’s strategy for projecting Russian power beyond its borders. The biggest threat he had to keep at bay was the prospect of strong, rich, stable, Western-oriented democracies in Russia’s near abroad. That sort of thing could not only challenge or constrain Russia’s regional power; it could conceivably—the horror—inspire the Russian people themselves, leading them to demand a democratic say in their own government as well.

Ukrainian companies were ratcheting up their own production in the country’s oil and gas fields, signing production deals with the major Western oil companies. They could frack, too! Ukraine had almost 400 million barrels of proven oil reserves, and God only knew how much natural gas once the serious fracking got going. Ukrainian officials were already talking about being able to produce every cubic meter of natural gas the country needed, inside the country. And to be able to export gas to Europe at a profit. This was revolting to Putin, whose lifeblood income came from Russia’s natural gas sales in Europe and whose gravitational pull over countries in his orbit was the control, corruption, and cash that energy supplies afforded him. Putin could at least manage Ukraine’s fractious and corruptible lurches at political independence. He could not countenance the idea of Ukraine’s energy independence, which would certainly lead to Ukraine’s actual independence. Woe be unto the Russian leader who loses control of Ukraine. Especially now.

The ukases from the Kremlin in the days after Yanukovych’s embarrassing flight were swift, and swiftly executed. Some were clearly symbolic. Boris Nemtsov and the recently released Pussy Riot ladies were arrested and jailed again. The most important move was intended to project Russia’s revivified superpower power. We’re done sulking. Putin dispatched a Russian military force (sans uniforms) into Crimea, Ukraine’s southernmost landmass, to take it for Mother Russia, while sending his spokesmen out to deny the presence of any regular Russian soldiers in the area. This was all an impromptu campaign by separatists in Crimea, Kremlin officials explained, who were prodded to action by the terrifying events of the Maidan. Whatever aid came from Moscow was simply to avoid a humanitarian crisis and a slaughter of innocent Russian-speaking people in Crimea by the crazed neo-Nazi Ukrainian nationalists. Startled Western leaders warned the newly formed Ukrainian government not to fight back in Crimea, for fear Russia would use it as an excuse to invade the entire country. In less than three weeks, Putin ripped Crimea from Ukraine and took it for Russia. The “exit of Crimea from Ukraine,” the Kremlin claimed, was the result of “complex international processes.” It was the first time since World War II that one country had rewritten another’s borders by force and seized an entire landmass and its people for itself. Putin had blatantly violated Russia’s vow to respect Ukrainian sovereignty, and he didn’t seem content to stop at Crimea. He was already moving his forces toward other oblasts in the east of Ukraine, which also happened to be the oblasts with promising fields of oil and gas.

European Union leaders were wary about supporting the United States on the new sanctions, because they were scared of backing the volatile Putin into a corner. Not only did EU countries do ten times more trade with Russia than did the United States, but they were dependent on Russia for much of their energy.

Putin “implanted them with a virus of inferiority complex towards the West, the belief that the only thing we can do to amaze the world is use force, violence and aggression….[Putin and his siloviki] operate in accordance with the simple principles of Joseph Goebbels: Play on the emotions; the bigger the lie, the better; lies should be repeated many times….Unfortunately, it works. The hysteria reached unprecedented levels, hence the high level of support for Putin. We need to work as quickly as possible to show the Russians that there is an alternative. That Putin’s policy leads to degradation and suicide of the state. There is less and less time to wake up….You need an alternative vision, a different idea of Russia. Our idea is one of a democratic and open Russia. A country that is not applying bandits’ methods to its own citizens and neighbors.”

“At first we were forced to watch the ‘House of Cards’ in English,” said one of the trolls who worked at IRA in 2015. “It was necessary to know all the main problems of the United States of America. Tax problems, the problem of gays, sexual minorities, weapons. Our goal wasn’t to turn Americans toward Russia. Our goal was to set Americans against their own government. To provoke unrest, provoke dissatisfaction.”

Americans can and do argue whether, absent the big Russian push against the Democratic presidential nominee and for the Republican, Trump would have won his narrow Electoral College victory in 2016. And Americans can and do argue whether the Trump campaign’s many open acts of boosting the efforts of Putin and his military intelligence cybercriminals and his army of Guccifer-descendant trolls at 55 Savushkina Street were provably criminal, or merely contemptible. But what is undeniably true is that Putin succeeded, probably beyond his wildest imaginings, in his highest real aim. The “goal seems to be not domination but chaos,” longtime Moscow correspondent Susan B. Glasser succinctly explained in an essay in Politico a year after the 2016 election. “The objective is not to destroy us, but to weaken and confuse us.”

Russia’s way out of this existential conundrum has had two components: one business, one pleasure. The business part is tidy. With the broken-nosed, no-necked ex-spies perched atop the management structure of Rosneft and Gazprom, Russia’s not exactly running a world-class operation when it comes to the production of its one indispensable commodity. Russia’s economic future therefore depends on Putin making deals with major international oil and gas companies who can be counted on to understand his imperatives and to not care at all about ethics and governance and geopolitical consequences of their cozying up to the Kremlin. Those kinds of deals aren’t just beneficial to the Russian economy; they’re critical necessities for Putin’s one-track plan for twenty-first-century Russia. And it turns out that as long as Putin is honoring the “sanctity of contract” and implementing friendly tax laws, industry leaders from the West have shown little hesitation in making those deals. That’s the business part.

As Special Counsel Mueller and reporters throughout Europe and America have made clear, the Russian Federation ultimately embarked on a deliberate and aggressive campaign to tear apart Western alliances, to rot democracy, and to piss in the punch bowl of free elections all over the civilized world. It continues to this day. And Putin isn’t doing this because of Russia’s strength. Not according to people who have watched the action up close. Russia “gives the impression that I am a lion who walks through the world hitting France with one paw, with the other Britain and America,” says Romanian security expert Dan Dungaciu. “But it is not a lion. It is rather in the role of a hyena, which senses a crisis and goes there and plays on the crisis.” The leaders of actually strong countries who have pushed back against Putin understand too. “I understand why he has to do this—to prove he’s a man,” Germany’s chancellor, Angela Merkel, has said. “He’s afraid of his own weakness. Russia has nothing, no successful politics or economy. All they have is this.”

That’s how we get the twin engines of petroleum-powered governance, which suck the life out of democracies everywhere: corruption, in which the industry effectively owns politicians; and capture, in which the industry effectively owns the whole government. The result is everything the oil and gas producers need to get by and cash in—predictable government that responds to the industry and not to any other stakeholders that might get in its way. And one size doesn’t necessarily fit all; the industry can work as happily with a weak and feckless government as it can with a dictatorial authoritarian regime, as long as it’s at least in cahoots with (if not fully driving) government decisions. This isn’t to say that the oil and gas industry is hell-bent on bad government for some ideological reason; it’s just practical business sense. Democratically responsive government not only turns over whenever its people want change; it also creates the prospect of all these too-hard-to-plan-for X factors, like independent, non-industry-friendly regulations, or a legislature deciding to calculate the full publicly borne costs of oil and gas exploration and production, or a government even deciding to take the expanding costs of global warming out of the hide of the industry that brought it down upon us.

That quiet little boring measure that so thrilled Senator Inhofe—the curtain-raising legislation of the 115th Congress—nullified a provision in the 2010 Dodd-Frank Wall Street reform law that required oil and gas companies listed on the American stock exchange to publicly report all taxes, royalties, licensing fees, dividends, and bonuses paid to foreign governments or foreign government officials with whom they were doing business. This provision in Dodd-Frank, Section 1504, was designed to induce financial transparency for oil and gas industry operations in developing countries like Nigeria, Liberia, Guyana, Azerbaijan, and, Exhibit A, Equatorial Guinea. They were all Resource Curse case studies by then—revenues from oil and gas enriching the lucky few at the tippy-top of the government pyramid structure while the rest of their countrymen festered in worsening indigence and privation.

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Key Summary from Books: Red Roulette


by Desmond Shum

Growing up hungry and alone in Shanghai instilled in my dad a fear of forming deep connections with those around him. He hated owing anyone anything and just wanted to rely on himself. That same outlook was instilled in me, and, even today, I’m still uncomfortable feeling indebted. Only later, after I met the woman who’d become my wife, would I learn how isolating this can be. In the ebb and flow of life, if you’re never beholden to anyone, Whitney would say, no one will ever be beholden to you and you’ll never build deeper relationships. Although I spent years fearing my father, I now see him as a lonely figure who battled the world alone.

My mother’s family didn’t suffer under Communist rule. After the 1949 revolution, the Chinese Communist Party used families like my mother’s as a source for foreign currency and to break the Cold War trade embargo that the United States had slapped on China. The Party called these families “patriotic overseas Chinese,” a signal to authorities inside China to go easy on those relatives who’d stayed behind. At one point, the Communists asked my grandfather to run the Hong Kong subsidiary of China’s state-owned oil company, the China National Petroleum Corporation.

At that same time, from an early age I experienced this yawning gap between the world outside my home, where I was recognized as a leader, a raconteur, an athlete, even a nice person, and the world of our tiny flat, where my parents seemed thoroughly disappointed with me. Perhaps this is common among kids from China, where expectations are high and criticism constant, and where parents believe that children learn by failure, not through success. As I matured, the tension grew between these two worlds.

The Chinese Communist Party divided the world into enemies and allies and, to win support internationally, aggressively cultivated “foreign friends” such as left-wing intellectuals, journalists, and politicians. Each time a group of “foreign friends” showed up at my school, the best math students would be trotted out to perform calculations on the blackboard and the best athletes would be summoned for a gym class—all part of a great Communist Chinese tradition of bamboozling incredulous fellow travelers into acknowledging the brilliance of Chinese Socialism.

My mother returned to Shanghai several times to plead with the authorities to let my dad join us. The cost of those trips all but bankrupted her. Thanks to Deng Xiaoping, the authorities in Shanghai were done prosecuting people for having relatives or living overseas. Still, the Chinese government was loath to allow families to leave together, wanting to maintain leverage over people abroad by making family reunification hard. Finally, after two years, my mom succeeded in nagging so tenaciously that the authorities relented. To this day, she remembers the name of the official who let my dad go. I

It took me years to acknowledge it, but witnessing my parents’ labor in Hong Kong to get us back up the ladder affected me profoundly. We were in desperate straits. For three years, we squatted in someone else’s living room. We had no bathroom of our own. We were barely making ends meet. But my parents both knew what life felt like at the other end of the tunnel. They understood what they had to do to make it through. So they went for it. I learned this lesson at their feet.

Crawling up the class rankings at Queen’s College taught me a lot about my capabilities. I’m not lazy per se, but I do have a tendency to slack off. Once accepted at Queen’s College, I took it easy. I only did what was necessary. But that’s because somewhere inside me, I had this innate belief that when I needed to I could step on the accelerator and get the job done. These traits stayed with me throughout my professional life.

China had enacted heavy duties on imported beer—upward of 40 percent—to protect Chinese breweries. Tait Asia brought beer into Hong Kong and resold it to companies that figured out a way to move it into China duty-free. We didn’t want to know how that happened as long as sales and profits increased. It wasn’t just ChinaVest, of course. Anyone doing business in China did it this way, circumventing the rules in search of profit. I quickly learned that in China all rules were bendable as long as you had what we Chinese called guanxi, or a connection into the system. And given that the state changed the rules all the time, no one gave the rules much weight.

We dated and did fun things like hiking and catching a movie. But what set our relationship apart were our discussions. Aligning our goals constituted her idea of romance. I’d never experienced this approach to a relationship, nor had I ever encountered anyone who was so certain that her way was the right way. Early in 2002, we met at the marble-encased coffee shop of Beijing’s Grand Hyatt and talked for three hours. Whitney grilled me on my approach to marriage. She steered me, in a way no one else had in the past, to look clinically at my personal life. I’d never been much of a ladies’ man, but I was more Western in my outlook toward relationships. If things happened, go with the flow. As Hollywood romances say, follow your heart. Whitney had no truck with that approach. “You,” she announced, “need a better approach.” She and I actually did a SWOT analysis, a checklist used to assess a business. Separately, we broke down the Strengths, Weaknesses, Opportunities, and Threats to our emotional ties. Then we compared notes.

Whitney’s argument appealed to my analytical side. She seemed to have a magic formula for success, which was especially intriguing because my formula had clearly lost its mojo. Whitney’s view of passion, love, and sex was that we could grow into them, but it wouldn’t be the glue that would bind us. What would cement the relationship would be its underlying logic—did our personalities match; did we share values, desire the same ends, and agree on the means? If so, everything else would follow. Early on, we both agreed on the ends. We wanted to leave something behind, to make a mark on China and the world. This had been my goal for years and Whitney shared it. As to the means, Whitney exuded confidence that she’d found the ticket to success. I put myself in her hands.

Whitney gave me a crash course in China’s political system. In the West, political parties only wielded power when they won elections and took control of the government. In China, the Chinese Communist Party had no competition. The Party secretary in a county, city, or province outranked the county chief, mayor, or provincial governor. Even China’s military, the People’s Liberation Army, was legally not the army of the Chinese state. It was the Party’s army.

Like Edward Tian at AsiaInfo, Whitney discovered that to unlock the door to success in China she needed two keys. One was political heft. In China, entrepreneurs only succeeded if they pandered to the interests of the Communist Party. Whether it be a shopkeeper in a corner store or a tech genius in China’s Silicon Valley, everyone needed sponsors inside the system. The second requirement was the ability to execute once an opportunity arose. Only by possessing both keys would success be possible. That’s what Whitney set out to do and how I entered the picture.

Wen’s personality saved him. It’s probably going too far to say that at heart he was a political eunuch. However, he was extraordinarily careful; he never insulted or threatened anyone. He managed up and avoided any association with political factions. More so than most officials, he stayed in his lane. To get to his position, he obviously had to have ambition, but it was a restrained type of ambition that didn’t threaten his comrades at the Party’s heights. When Zhu Rongji was termed out as premier in March 2003, Wen became a natural compromise candidate to replace him.

Wen’s strong suit became a weakness. He did seem to possess a vision for a freer, more open China. After his old boss Zhao Ziyang was muzzled under house arrest, Wen was the only Chinese leader to continue to speak publicly about universal values, such as freedom and democracy. Still, Wen very much hewed to the rules of the Chinese power structure, which strictly limited the jurisdiction of the premier. Wen’s job was to run the government. Only Hu Jintao, the Party general secretary, who outranked Wen, could push for political reform. And he never did.

The financial success of Wen Jiabao’s wife and kids is summed up in the Chinese proverb: “When a man attains enlightenment [or in this case the premiership], even his pets ascend to heaven.” That said, neither Whitney nor I believed that Premier Wen was fully aware until very late that his family members had become billionaires. I believed Wen’s daughter charged foreign companies hefty fees for her connections. Winston was running New Horizon and Auntie Zhang was meeting with scores of people hawking opportunities. Meanwhile, each family member was collecting luxury cars. But the premier seemed to have little idea what it meant. When Auntie Zhang came home with a fat rock on her finger, or a priceless jade bracelet, Wen would admire it with the eye of a geologist, not of a seasoned jeweler. Wen had never spent a day in a commercial enterprise. When he was a lowly official, he went to the government canteen and downed whatever food was put in front of him. At home, he ate whatever the cook prepared and had no conception of the cost. He’d never checked out an Hermès store. The only time he ever visited a mall he brought along an entourage. He had no idea that a handbag could cost $10,000 or more. There was something in him that recalled George H. W. Bush’s 1992 visit to a grocery store and his puzzled reaction to a barcode scanner. The day-to-day lives of average people seemed a mystery to Premier Wen.

Our deals required more work. None were sure bets. You needed judgment on two levels. The first was basic due diligence. That was where I came in. I analyzed the industry and had a good sense of the market. I did the legwork, visiting the site and delving into the details. The second type of judgment was an ability to size up a proposal’s political cost.

Peiying made the arrangements for all of China’s Party pooh-bahs flying into Beijing. Each time a political heavyweight landed, Peiying would be in the room. He used this face time to great advantage. As the top honcho at so many airports, Peiying controlled access to monopoly businesses. He sliced them like cake, doling them out to the relatives of top government officials. He helped the family of China’s president Jiang Zemin secure a license to sell duty-free products in Beijing via a firm called Sunrise. This was a model for the type of business the red aristocracy liked. Sunrise shared the duty-free business at the Beijing airport with a state-owned firm, China Duty Free Group. These duopolies were an emblem of China’s economy, with a red family controlling one firm and a state-run entity controlling the other.

Throughout the airport project, I, like all businessmen in China, paid extremely close attention to the macroeconomic policies and the political whims of the central government. Every time we requested an approval, our application had to show how the project aligned with the shifting political and economic priorities of the Chinese Communist Party.

We played a similar game with a vast array of bureaucrats. Each approval was obtained through connections. Each connection meant an investment in a personal relationship, which meant an awful lot of effort and even more Moutai. Forging personal ties and establishing guanxi was the most difficult part. Guanxi wasn’t a contractual relationship per se: it was a human-to-human connection, built painstakingly over time. You had to show genuine concern for the person. The tough part was that I had so many relationships that needed managing, but I also had a project on my back with a deadline. I had to squeeze all of these interactions into a pipe, and the diameter of the pipe was time. Obviously, I had to delegate, but the more I got directly involved in relationship building the more approvals we received.

The whole idea was to reinforce the sense of belonging. This was critical in a system where the rules regarding what was legal and what was proscribed were full of vast areas of gray, and every time you wanted to accomplish anything you had to wade into the gray. In the West, laws are generally clear and courts are independent, so you know where the lines are. But in China, the rules were intentionally fuzzy, constantly changing, and always backdated. And the courts functioned as a tool of Party control. So that’s why building this sense of belonging was so crucial. To convince someone to venture into the gray zone with you, you first had to convince him or her to trust you. Only then could you take the leap together. To do that the two of you would research each other’s background, like Whitney had with Auntie Zhang. You’d talk to former colleagues and you’d spend hours cultivating each other so you could understand who each other really was. Auntie Zhang could vouch for Whitney and me on a macro level. But on the local level, it was up to me.

As early as July 1, 2001, the Party had officially changed its policy on capitalists when then Party boss Jiang Zemin made a speech that welcomed all leading Chinese, including entrepreneurs, into the Party’s ranks. Even though Jiang wrapped this announcement in Party-speak, calling it the “Three Represents,” that word salad couldn’t mask the momentous nature of this change. Communist China’s founder, Mao Zedong, had relegated capitalists like those in my father’s family to the bottom rung of society. Deng Xiaoping had given them a leg up by acknowledging that with economic reforms a small group would “get rich first.” Now, a generation later, Jiang Zemin was inviting entrepreneurs to join the Party and enter at least the margins of political power. It was enough to make you dizzy. Even high up in the Party, the elite seemed to be preparing mentally for a change. In 2004, Chen Shui-bian was reelected as the president of Taiwan, the island of 23 million people that the Communists have long claimed belongs to China. In 2000, Chen had become the first opposition candidate to be elected Taiwan’s president, ending five decades of one-party rule by the Nationalist Party. Taiwan’s democratization process shook Communist Party bigwigs because they saw in it a potential road map for mainland China and thus a threat to the Party’s monopoly on power. After his reelection, Chen announced that it was time to go after the riches of Taiwan’s Nationalist Party. When the Nationalists ran the island, they’d treated its economy as their party’s piggy bank.

At Aspen, I learned how people with money had always participated in the political process. China’s system was the outlier in that sense, denying its capitalist class a say in the direction of the country. But those of us who identified as capitalists wanted a voice. We wanted protection for our property, our investments, and other rights. We wanted, if not an independent judiciary, at least a fair one where judgments were made on the basis of law and not on the whims of the local Party boss. We craved predictability in government policies because only then could we invest with confidence. Whitney, who was a Christian, also wanted more religious freedom. At the very least, she wanted the Chinese government to acknowledge that a Chinese person could love God and love China at the same time.

Startled at the liberal tendencies of my fellow capitalists, the Chinese Communist Party, starting in the mid 2000s, moved to weaken the moneyed class, uproot the sprouts of civil society that we’d planted, and reassert the Party’s ideological and economic control of Chinese society. As part of this effort, the Party sought to bolster state-owned enterprises to the detriment of private firms.

This type of attitude wasn’t confined to our project; it infected the entire economy. “State-owned enterprises march forward, private firms retreat” became the new buzzwords, signaling a shift at the top of the Party. State-owned firms began to carry out forced mergers with successful private companies. Entrepreneurs had been the engines of China’s growth, but we were never trusted. Ever since it had seized power in 1949, the Chinese Communist Party had used elements of society when it needed them and discarded them when it was done.

As part of a campaign to centralize power, the Party began to parachute officials in from other regions. China’s state-run press agitated against what it called “dirt emperors,” local bigwigs who disregarded directives from Beijing. But the new brand of official created new problems because these characters arrived with the intention of staying for only a few years before moving out and up. They searched for quick wins to justify a promotion. For sure, the old system had its drawbacks. There was corruption, and dirt emperors often would run a locality like their private fiefdom. But the local officials also understood their communities and knew what was needed and what wasn’t. Many had feelings for the place because they didn’t want to be cursed when they left power and retired nearby. They worked for the benefit of family and lifelong friends in the locality. They were willing to focus on long-term, legacy projects. And because of their ties to the community, they could get things done.

I came to believe that in China a long-term business model wouldn’t work. I began to understand what some of my entrepreneur friends had been telling me all along: the smart way to do business in China was to build something, sell it, take money off the table, and go back in. If you invest $1 and you make $10, you take $7 out and reinvest $3. But if you keep $10 in, chances are you’ll lose it all. The Communist Party seemed increasingly threatened by entrepreneurs. A segment of society with means was getting more independent. Entrepreneurs like us were pushing for more freedom, more free speech, and in a direction that was less under the Party’s control. The Party was very uncomfortable with us wading into waters that it controlled.

In 2007, Xi Jinping got his big break in an affair that revealed much about China’s political system. A year earlier the Party secretary of Shanghai, Chen Liangyu, had been removed from his post as part of a corruption investigation involving the misuse of hundreds of millions of dollars from the city’s public pension fund. Chen’s downfall really wasn’t about corruption, however. It was a political hit job masquerading as a criminal case. It came because Chen refused to swear allegiance to China’s then Party chief, Hu Jintao. Chen had been a major player in what was known as the Shanghai Gang, led by Hu’s predecessor Jiang Zemin. When Hu had taken over from Jiang in 2002 as Party chief, Jiang had declined to relinquish all of his Party posts, staying on as the chairman of the Central Military Commission for an additional two years. Jiang had also packed the Standing Committee of the Politburo with his cronies; for several years, Jiang’s men held five of its nine seats, preventing Hu from doing anything without Jiang’s approval. So, in 2006, when Hu’s loyalists saw an opportunity to take down Chen Liangyu, a prominent Jiang loyalist, they struck. When Chen was forced from office in September 2006, he was replaced by Shanghai’s mayor, Han Zheng. Han had only been in office for several months, Auntie Zhang told us, before it was discovered that one of his family members had stashed more than $20 million in a bank account in Australia. The Party couldn’t purge Han, too, because it would’ve been bad for the stability of the leading financial center of China to have both its Party secretary and its mayor ousted in swift succession. Auntie Zhang told us that Han Zheng was allowed to return to his old post as mayor while Xi Jinping was appointed Shanghai’s Party chief. Han Zheng, too, would be forgiven his sins; he joined the Politburo’s Standing Committee in 2017 and was appointed a vice-premier, showing that in China political alignment and loyalty trump everything else.

In 2013, about a year after Xi Jinping had launched his anti-corruption campaign and a year after the Times story on the Wen family wealth, Auntie Zhang told us that she and her kids had “donated” all of their assets to the state in exchange for a guarantee that they wouldn’t be prosecuted. She said other red families had done the same. There was another reason behind this action. The Party wanted to rewrite history. In the future, if the Party faced allegations of tolerating systemic corruption, it could claim that these red families, in “donating” their wealth to China, had only been serving the state. All this seemed pretty surreal to Whitney and me. But then again, China’s Communists had a long record of stealing private property and distorting the truth.

In July 2012, as Xi prepared to take power, a document circulated from the Party’s General Office titled “Briefing on the Current Situation in the Ideological Realm.” The report, known as Document Number 9, warned that dangerous Western values, such as freedom of speech and judicial independence, were infecting China and needed to be rooted out. These ideas, the document said, were “extremely malicious” and would, henceforth, be banned from being taught at China’s schools and universities. The document also blasted the move to a more independent media, ordering Party organizations to redouble their efforts to rein in muckraking periodicals.

There’s a hill on the outskirts of Beijing called Xiang, or Fragrant, Mountain that’s dotted with pavilions first built in the twelfth century. Thousands of stone stairs lead to the top and I took a lesson from the mountain into my daily life. Instead of focusing on the peak, I fixed on the step in front of me, knowing that if I did that, I’d get where I needed to go. This lesson remains relevant to me today. Control what you can control. Don’t bother with the rest. You will always, I tell myself, get out of the pool. Still, it was a hard time. A friend of more than two decades was intent on screwing me. And the mother of my son was trying to turn me into a pauper.

That give-no-quarter feature is a function of the Communist system. From an early age, we Chinese are pitted against one another in a rat race and told that only the strong survive. We’re not taught to cooperate, or to be team players. Rather, we learn how to divide the world into enemies and allies—and that alliances are temporary and allies expendable. We’re prepared to inform on our parents, teachers, and friends if the Party tells us to. And we’re instructed that the only thing that matters is winning and that only suckers suffer moral qualms. This is the guiding philosophy that has kept the Party in power since 1949. Machiavelli would have been at home in China because from birth we learn that the end justifies the means. China under the Party is a coldhearted place.

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Key Points from Iran: A Modern History

By Abbas Amanat

Iran perhaps is one of the most invaded and most revolution-prone countries in world history, a debatable merit with lasting consequences. In between the Islamic conquest and the rise of the Safavid state, Iran survived more as a cultural than a unified political entity, in part because of geography and ecology, but also because of the prevalence of the Persian language and high culture.

The name Iran, as is often noted, is derived from the Iranian term Aryanum, the land of the Aryans, the branch of Indo-European pastoralists who settled in the Iranian plateau some four thousand years ago and gave their name to the land.

For many centuries Persia was the name of the country to the outside world, and Persian a reference to its people, language, and culture, while the term Iran was consistently used by Iranians in reference to their country. It was only in 1935 that the Iranian government adopted Iran instead of Persia as the official name of the country, a choice that made uniform the nomenclature but effectively obliterated beyond recovery the historical and cultural memory that the old name invoked.

Crystallized into a stern and exclusionist legal tradition, Islamic law emphatically prohibited playing or listening to music for leisure, and reproducing any images of humans and living things in any form; it denounced any preservation and celebration of “pagan” myths and festivals of the pre-Islamic past; and even more intrusively, it banned, at least in theory, social practices such as wine drinking, singing, mixing of the sexes, same-sex affection, recitation of lyrical poetry, and most, if not all, forms of social leisure. Despite political defeat and the relatively swift conversion to Islam, it can be argued that Iran never was fully won over by the predominant culture of normative Islam, perhaps less even than Egypt, the eastern Mediterranean, and Mesopotamia. It converted to Islam at its own pace and on its own terms, and with paradigms and practices it improvised along the way.

The persistence of messianism as a distinctive feature of Iranian religious culture is most evident in the long list of Persian prophetic and crypto-prophetic figures. The prophetic paradigm stood in contrast to the authority of the religious establishment, which spawned jurisprudence (fiqh) and regulated the life of the faithful. The ulama, the men of religious learning, held sway over interpretation of scripture. The jurists (foqaha; s. faqih) stood at the top of an informal hierarchy in Shi‘i Iran that also included the lower-rank teachers of the madrasa, preachers on the pulpit, reciters of Shi‘i elegies, and even lower, the seminarians, mosque custodians, and presumed descendants of the house of the Prophet. The jurists were distinct for their legal conservatism, scholastic outlook, and elitist demeanor. These jurists were also known by their judicial status as mojtaheds (often inadequately translated as “doctors of law”). They were qualified to issue legal opinions (fatwas) to be abided by their “followers” (moqalleds). In making their opinions, the mojtaheds exercised limited human reasoning (ejtehad; lit. “striving”) to utilize the sources of Islamic law. Since the end of the eighteenth century, the concept of following (taqlid; lit. “emulation”) gave the mojtaheds great legal, moral, and social latitude over the community of believers. What made the ulama especially conscious of themselves as a relatively coherent group was their self-assumed mission to preserve the “kernel of Islam” unmolested against the ever-present threat of heresy. Any sort of nonconformity or innovation contrary to mojtaheds’ understanding of the shari‘a was viewed as reprehensible. They were equipped with weapons of denunciation (takfir) and censure, which they freely used to mobilize the faithful and to call on the government to come to their aid.

The practice of “temporary marriage” (popularly known as siqeh), as sanctioned by Shi‘i law, gave women some agency through their choice of partner, as well as duration and terms of the marriage. Although open to many abuses, such as prostitution, temporary marriage essentially functioned as an accepted form of cohabitation, which offered some security to women and the right of inheritance to their children. For women of lower classes, such as daughters of peasants in the households of landowning families, temporary marriage with men of higher status served as a form of social mobility.

Isma‘il’s ferocity and the atrocities committed by his unruly Qezilbash hordes were followed soon after by a systematic and enduring program of Shi‘i indoctrination.

But no matter how eagerly the Qezilbash chiefs and the Arab ulama resisted the indigenous Persian element’s rise to prominence, they could not evade the dictates of a transforming state. The paradigm shift from a messianic crusade to a bureaucratic state appeared inevitable. The shift did not happen overnight, yet Isma‘il managed to strike a fragile equilibrium among the restive Qezilbash and their Persian rivals.

The Ottoman Sunni jurists considered the massacre legitimate, and even furnished the necessary license for an anti-Safavid campaign. The eternal reward for killing one Shi‘i, a fatwa by the mufti of Istanbul declared, was equal to killing seventy Christian infidels.

Mulla Sadra’s theory of movement of the substance (haraka jawhariyya, often translated as “transubstantiation”), arguably his most significant philosophical contribution, was a novel departure. His theory of substantial movement in part modified the influential Sufi monistic theory of the “unity of being” (wahdat-e wujod). The belief in the essential origin of all beings, celestial and terrestrial, and their ultimate union, had long been opposed by conservative jurists and theologians. Mulla Sadra further advanced the idea of “unity of being” by arguing that in the substance of all things created, of which humanity holds the highest rank, there is an innate cosmic dynamism without which all things cease to exist. This elemental movement transforms the quality of all things at all times from one state to another, without their substance ever changing. As the created being separates itself from its divine origin, in its downward journey toward matter it acquires material contingents, making the world as we see and experience it. The same intrinsic dynamism in an upward movement then transforms the substance of material things until ultimately they reach their original celestial state.

The greatest divergence from the Safavid concept of authority, however, was Nader’s extraordinary—and as it turned out, quite impolitic—call to relinquish Shi‘ism as the religious creed of Iran, at least in the way it was practiced under the Safavids. This was one of three conditions he set forth in Moghan for his acceptance of the crown of Iran. His declaration also called for total loyalty to himself and the abandoning of any sympathy for the house of the Safavids and hope for their future restoration. Instead of the Safavids’ Twelver Shi‘ism, which in his view had long been divisive internally and offensive to Iran’s Sunni neighbors, Nader proposed the relatively improvised Ja‘fari creed (after the Sixth Shi‘i Imam, Ja‘far Sadeq, who died in 765). Devoid of anti-Sunni exclusivity, messianic longing, and juristic tradition, Nader’s Ja‘fari brand seemed to be a diluted form of the Safavids’ state-dominated creed. More than two centuries of religious conflict, which had facilitated the Afghan invasion, must have persuaded Nader, whose own career, oddly enough, had been built on expelling Sunni invaders, to see the ills of an exclusionist form of Shi‘ism. He hoped that declaring the Ja‘fari creed would persuade the Ottomans to comply with the terms of his peace proposal, which called for the establishment in Mecca for the Shi‘i pilgrims of a fifth platform around the Ka’ba (lit. rokn, “pillar”), adjacent to that of the Hanafis, which was to be taken as recognition of Shi‘ism as a legitimate Islamic creed.

The growing volume of foreign imports from industrialized Europe and the export of cash crops, such as tobacco and opium, tilted the economic balance in favor of big merchants, large landowners, and European firms. Less privileged sectors of society, such as guilds, retailers, and peasants, bore the brunt of the changing economy. Chronic visitations of famine and pandemics worsened their lot.

By the middle of the eighteenth century, the Shi‘i ulama had to reinvent themselves to regain the ground they had lost since the fall of the Safavids. They were no longer functionaries of the state, nor were they bookish scholars in the secluded seminaries of Isfahan and Najaf endlessly debating the minute details of Shi‘i hadith and brandishing hefty glosses and commentaries on the works of earlier jurists. The Usuli Shi‘i mojtaheds’ answer to the crisis of the post-Safavid era was to come up with a new legal approach to shari‘a that stressed the methodology of jurisprudence (or roots of jurisprudence, usul al-fiqh) as the key to a broader legal application of the principle of ejtehad. The sole authority to exercise ejtehad, or legal judgment based on sources of Islamic law and through limited use of deductive analogy, distinguished the Shi‘i ulama, and more distinctly the Usuli mojtaheds, from their contemporary Sunni counterparts. For mojtaheds, the study of jurisprudence (fiqh) was the most authentic articulation of Islamic shari‘a, and they, as jurists, were the only experts qualified to interpret Islamic law. The Usuli jurisprudence in effect equipped the mojtaheds with claims for collective representation on behalf of the Hidden Imam. The Hidden Imam, or the Lord of the Age, was the Shi‘a reference to the Islamic Mahdi, whose advent from the world of the invisible according to the Shi‘is was expected to trigger the End of the Time. Such self-assumed authority offered doctrinal grounds for the mojtaheds to demand that their followers, or more specifically, their “emulators,” seek their legal and moral opinion and follow their expert advice in all matters of shari‘a. The doctrine of emulation (taqlid) obliged Shi‘i believers to follow an individual mojtahed of their choice in all issues of Islamic law. Any qualified Shi‘i mojtahed could issue independent legal opinions (fatwas). More important, given their social implications, these opinions were to exert, at least in theory, an unprecedented degree of control over the beliefs and practices of followers.

The Babi doctrine interpreted Resurrection not as an apocalyptic destruction of the material world but as the eclipse of one revelatory cycle and the dawn of the next. Relying on a long history of millennial speculations, the Bab utilized the familiar metaphor of seasonal changes to explain the nature of cyclical progression. The “tree of prophethood,” as he called it, blossoms in the spring, gains strength in the summer, bears fruit in the fall, and dies in winter, only to be reborn in the next seasonal cycle. It is the same tree and yet it is different every year as it grows with time. The sense of historical relativism embedded in this notion of prophetic renewal acknowledged historical change. It allowed for the potential for human innovation and promoted a forward-looking perspective, concepts that defied the essentially regressive worldview of the Shi‘i orthodoxy.

Like most non-Western reform-minded writers of the late nineteenth century, he laments the lack of modern education and Western-style schools and secular curricula, for which he blames the conservative clerical establishment. He held the Qajar elite, along with the ulama, responsible for Iran’s chronic weaknesses and its curse of being subordinate to superior powers. Domestic culprits aside, there was little blame on the Western powers’ territorial and economic exploits. Typically, he does not foresee a chance of the West respecting Iran’s sovereignty or caring for its well-being, so long as the state and the people are in their “deep slumber” and do not wake to care for themselves.

The incident marked the beginning of a popular movement that eventually came to be recognized as the Constitutional Revolution (Enqelab-e Mashruteh), a transformational experience with major consequences for twentieth-century Iran. The previously described episode highlights most, if not all, of the elements that would shape the revolution: merchants and artisans resentful of an inefficient and intrusive state; the lower- and middle-ranking mullahs of various shades calling on the mojtaheds to come out in support of the people; the Qajar state’s desperate reactions to demands for popular participation and eventually for a constitution; and finally, the large size of the urban population (fig. 6.1). To these groups were added in due course the Western-educated elite, who joined the indigenous radical elements and helped shape the parliament (Majles) and frame the modern constitution.

the Constitutional Revolution remained a turning point in the history of Iran above all because it marked a step forward on the path to sociopolitical modernity. Under the veneer of Western liberalism and constitutional order, the revolution tried to offer indigenous answers to a distinctly Perso-Shi‘i problem of social justice that had long been present in the milieu of Iranian dissent. In effect, the revolution sought to secularize Shi‘i millenarian aspirations by incorporating such modern concepts as nationalism, the rule of law, limits to state power, individual rights, and people’s representation. The revolution juxtaposed these principles with the ancient vestiges of kingship and the clerical establishment. The civil war of 1908–1909 between the constitutionalists and the royalists was the climax of a revolutionary struggle, for it weakened Qajar rule and relegated, at least temporarily, the conservative clergy to the political wilderness. The turmoil caused by the revolution, however, was compounded by the European threat of military occupation before and during World War I, which brought an abrupt end to the constitutional experiment and dampened revolutionary aspirations.

Reformist literature of the late Qajar era and the Constitutional Revolution lamented illiteracy and the absence of modern educational institutions and was critical of madrasa curriculum and its deficiencies. It also called for a change in Persian script, one instance of a broader preoccupation shared by reformers in many non-Western societies. The Persian highly stylized shekasteh handwriting common in the Qajar era, though undeniably an art form, was viewed as cumbersome for the demands of public education. The lack of modern sanitation and modern medicine, malnutrition, and the absence of an effective public health system to combat outbreaks such as cholera and to control diseases such as smallpox and trachoma were other sources of grievance. Glaring scientific and industrial shortcomings in comparison with “civilized” countries were the cause of profound concern. Images of decay and deprivation in Iran were contrasted not only with idealized notions of Western material advances but also with an idealized vision of Iran’s ancient past. Only on the model of Western powers, it was argued, and the modern rule of law and constitution could Iran overcome its rampant maladies. The reformist literature of the nineteenth century was generally oblivious to Europe’s colonial ambitions, and when it wasn’t, it often implied that falling under Western imperial might was an inevitable fate of the weaker nations.

A major theme in Akhundzadeh’s works, inspired by the simplicity of Molière’s plays, was the contrast between the hold of old beliefs and practices, the “superstitions,” in Muslim societies and the potency of modern civilizational forces, especially the modern sciences and medicine. More so in his unpublished polemics, Akhundzadeh internalized the positivist critique of Islam and its incompatibility with the demands of the modern world. In fictional correspondence dated 1863 between Kamal al-Dowleh, an Iranian skeptic writing from Tabriz, and his interlocutor, an Indian Shi‘i prince residing in the holy cities of southern Iraq, Akhundzadeh offered a daring criticism of Shi‘i beliefs and institutions. He held Islam, its scripture and doctrine, and more pointedly, the Shi‘i beliefs and teachings responsible for Iran’s current state of affairs and the root cause of the decline of the Persian civilization. In Voltairean fashion he ridiculed the idea of divine inspiration, the tales in the Qur’an, and the force of bigotry and unreason that the Islamic religion and the disastrous Arab conquest of Iran had unleashed on his countrymen. Like Kermani, he also lamented the loss of the great civilization of pre-Islamic Iran. Drawing historical and sociological comparisons with his own time, he chastised Islam for its antirational and unenlightened principles, including the ignorance, arrogance, and superstitions of the religious authorities and for their condoning of slavery, torture, and the mistreatment of women. With lesser intensity he also held the Qajar state responsible for corruption and mismanagement, and he attacked the undeserved privileges of the elite.

To appease detractors within the ulama camp, the constitution stipulated that all laws (qanun) legislated by the Majles were to remain within the bounds of political order, and thus outside the sphere of the shari‘a. In reality, however, it subverted the accepted universality of the shari‘a in some key provisions. In contrast to Islamic law that discriminated between Muslims and non-Muslims, the constitution recognized equal rights for all citizens. It further secured freedom of the press and publication, and freedom of association, so long as they were not against principles of Islam. Freedom of expression in particular was seen by the opposing ulama not only as a clear breach of restraints that Islam placed on individuals but also as sanctioning the spread of un-Islamic ideas and heresies. Article 1 of the 1907 Supplement to the Fundamental Law specifically declared Twelver Shi‘i Islam as the official religion of Iran, and article 2 specified: At no time must any legal enactment of the Sacred National Consultative Assembly [Majles Moqaddas Showra-ye Melli], established by the Imam of the Age and His Majesty the shahanshah of Islam and the whole people of the Iranian nation, be at variance with the sacred principles of Islam or the laws established by His Holiness the Best of Mankind [i.e., Prophet Mohammad].2 This, of course, was not merely lip service; it reflected the framers’ serious dilemma of how to reconcile the will of “the people of the Iranian nation” as a source of the constitution’s legitimacy with the ancient pillars of authority: Shi‘i Islam and Iranian kingship. After much bickering over the language, to appease Nuri and the mashru‘eh opposition who were battering the constitutionalists from their sanctuary near Tehran, the Majles approved, after several drafts, that a committee of five mojtaheds and experts of Islamic law would oversee the compatibility of legislation with preconditions laid out in the shari‘a. Though in reality the committee never convened and was forgotten after 1910, compatibility with the shari‘a remained an issue that would reemerge seven decades later during the Islamic Revolution of 1979.

The press and the telegraph, both modern means of communication in the public space, elevated the Majles in the eyes of the people to a sacred institution, as the epithet “sacred” (moqaddas), attached to the full name of the Consultative National Assembly, denoted. The Majles became the embodiment of lofty goals of the constitution, expected, quite unrealistically, to dispense social justice; to ensure peace, prosperity, and security; and to defend the country against foreign intrusions—all goals far beyond the frugal means of the Majles and the competence of most of its deputies. Yet despite inexperience and inefficiency, the Majles’ record was still impressive enough to alarm its opponents and ensure continued animosity.

In April 1909 a strongly worded Anglo-Russian memorandum warned the shah that unless he restored the constitution and removed its enemies from his court, he stood to lose the two powers’ already-sinking confidence in him—a warning that appeared to the shah’s opposition as a green light to capture Tehran. In reality, it was meant to encourage the shah to restore some semblance of a constitutional regime in order to stop the constitutionalists’ advances.

Despite months of repeated Russian and British warnings that jointly and individually demanded that the nationalists stay away from the capital, a force of nearly three thousand Bakhtiyari and Gilan fighters engaged for two days in a mopping-up operation inside the capital. Colonel Liakhov and his troops surrendered, only to be commissioned, ironically, back into service by the nationalists, even though they momentarily faded out of the revolutionary limelight. Mohammad ‘Ali Shah himself and an entourage of five hundred, including his hated army chief, Hosain Pasha Amir Bahador Jang, negotiated his way to the Russian legation, where he took refuge under the joint protection of the two powers. Conscious of European sensitivities, the nationalists quickly secured diplomatic missions and assured the safety of foreign residents, even before marching to the ruins of the Majles building, where on July 15 they officially announced the abdication of Mohammad ‘Ali Shah from the Qajar throne. With a discipline that impressed even the mostly hostile European press corps, the Bakhtiyari tribesmen and a contingent of the Armenian fighters from Gilan restored order in the capital, set up a rudimentary headquarters, and soon declared Mohammad ‘Ali Shah’s minor son, Sultan Ahmad (1898–1930), as the new shah. The elder of the Qajar tribe, ‘Ali Reza ‘Azod al-Molk (1847–1910), became his regent. By any account, the success of the nationalist forces was impressive. There was no looting, revenge killing, or retaliation. Even more remarkable was the level of cooperation between the heterogeneous rank and file of Gilani and Bakhtiyari fighters, who could barely communicate with one another in Persian.

More symbolic, and more daring, were the trials held shortly after the nationalists’ victory. To the Supreme Council’s credit, a national amnesty was declared, and there were hardly any vengeful killings. Only a handful of reactionaries were arrested and tried. Of the five who were executed by order of a special tribunal on specific charges of murdering constitutionalist protesters in the sanctuary of ‘Abd al-‘Azim during the final days of the old regime, the most prominent was Shaykh Fazlollah Nuri, the relentless opponent of the constitutionalists. The tribunal held as proof of its verdict Nuri’s fatwa to the effect that killing the protesters in the sanctuary was lawful. It hence underscored the new regime’s wishes not to punish anyone for ideological orientation. In the final months of the so-called Minor Tyranny, as the period of the civil war came to be known, Nuri had abandoned his earlier call for mashru‘eh in favor of the old absolutist order and avowed support for Mohammad ‘Ali Shah’s suppression of the constitutionalists. With peculiar zeal he orchestrated clerical petitions from the growing number of clergy in Tehran and elsewhere expressing loyalty to the Qajar regime and warning the shah of any compromise that might result in restoration of the constitution. Hanged by the gallows in Tupkhaneh Square in front of a dazed public witnessing the unprecedented execution of a mojtahed, one of the most prominent Shi‘i jurists of his time, the execution was emblematic of changing times. It seemed as though the kingship and the clergy, the two pillars of the ancient Iranian order, were cracked, if not shattered, by contingencies of a modern revolutionary movement. Another encouraging sign of change was the diversity of voices in the public sphere. The growth of the press and publications, the emergence of parliamentary factions and political parties, the first audible pleas of women protesting society’s misogynistic norms, and a greater sophistication in cultural and political discourse were evident and seemingly irreversible. By the end of 1909 there were half a dozen dailies and a growing number of book titles catering to a larger readership. In the following months and years, despite major upheavals, the number of newspapers multiplied, and although many of them were short-lived, they demonstrated not only a new relish in the freedom of expression—even freedom to slander—but also the potency of the press in fashioning the country’s nascent public opinion.

Fearful of dire consequences, the Iranian government succumbed to the threat of brute force. To appease St. Petersburg, the Iranian minister of foreign affairs arrived in person to the Russian legation and offered a formal apology on behalf of his government. Yet there was no end to the demands of the two powers or their shared desire to dismantle Iran’s young democracy. Almost immediately after the so-called satisfaction was given, on November 29 the Russian government served a second ultimatum to Iran, this time openly backed by Britain. In a rare expression of international bullying, the second ultimatum required Iran to immediately fulfill three conditions or else face Russian military occupation, and in effect an end to its national sovereignty. It demanded that Morgan Shuster be dismissed from his post of treasurer general together with his American colleagues. It also demanded that, in the future, the Iranian government not engage the service of foreign nationals without the consent of the two powers. Most outrageous of all, the ultimatum demanded that the Iranian government pay “indemnity” for the “expense of the present dispatch of troops” to Iran, the amount and manner of which was to be determined later. This demand was made at a time when Russia had landed more troops in Gilan and Azarbaijan provinces to reinforce its so-called zone of influence. The two powers in effect blatantly required that Iran reimburse the cost of the violation of its own sovereignty to an aggressor who, as it turned out, went on a rampage of massacres and maltreatment of defenseless Iranians. The second ultimatum, even more than the first, raised a storm inside and outside the Majles, leading to a nationwide movement of outrage, speeches in mosques and the Majles in support of Shuster, and telegraph messages of solidarity from the provinces. The Shi‘i clerical condemnations of the Europeans’ nefarious designs on the constitutional regime and the oppressed Iranian nation were headed by Mohammad Kazem Khorasani and his colleagues in Najaf . They called for the boycott of Russian and English goods in the bazaar, the revival of armed revolutionary anjomans, and the elimination of the royalists.

In his heart-wrenching account of the suspension of the mashruteh, Shuster himself called the destruction of the democratic experience in Iran “a sordid ending to a gallant struggle for liberty and enlightenment.” Reflecting on his short experience he further wrote: That the Persians were unskillful in the practical politics and in the technique of representative constitutional government no one could deny; but that they had the full right to develop along particular lines of their customs, character, temperament and tendencies is equally obvious. Five years is nothing in the life of a nation; it is not even long as a period for individual reform; yet after a bare five years of effort, during which the Persian people, with all their difficulties and harassed by the so-called friendly powers, succeeded in thwarting a despot’s well-planned effort to wrest from them their hard-earned liberties, the world is told by two European nations that these men were unfit, dangerous and incapable of producing a stable and orderly form of government.5 This was the judgment of an American in 1912, just before the disasters that befell Iran during World War I—before the British attempt to turn Iran into a semi-protectorate in 1919, and years before the Allied occupation of Iran during World War II, before the brazen Soviet attempt to snatch away Iran’s territory and subvert its government, and before Shuster’s own country conspired in 1953 with Britain to deprive Iran of economic sovereignty over its natural resources and its democratic aspirations.

Despite staging an earnest liberal movement with urban support, the Iranian constitutionalists never really succeeded in defining the relationship between the religious and the political spheres. Nor did the geopolitical contingencies of European powers allow for the natural growth and fruition of this experience. From the outset, the Constitutional Revolution faced not only opposition from the Qajar regime and the affiliated clerical conservatives but also the growing hostility of the great powers, which together eventually brought the movement to a standstill.

For some, the experience of the Constitutional Revolution proved that Western powers would not allow the establishment of a free and democratic regime and that domestic political players were incapable of maintaining it. For others, the mashruteh liberal democracy was an imported commodity, even an “ailment” devoid of imagined “authenticity.”

In the seven decades following the Constitutional Revolution, the Pahlavi era (1921–1979) transformed the politics, society, and economy of Iran. In the aftermath of World War I and the upheavals of the postwar period, Reza Shah’s authoritarian rule, boosted by oil revenue and a consolidated military, helped centralize the country, create modern administrative and educational institutions, co-opt the old elite, nurture a nationalist ideology, and conduct a relatively independent course of foreign policy. These were achieved at the expense of democratic aspirations and individual and political freedoms that were at the core of the constitutional experience. Westernization also deepened the rift between the Pahlavi state and the retreating clerical establishment.

The arrested growth of the private sector, the widening gap between living standards in the city versus the countryside, and the rise of the state’s reliance on independent income through monopolies on commodities and oil revenue were the most significant legacies of the first Pahlavi era. While the state became less dependent on its citizens and the meager revenue it could extract through taxation, it sped up military and police spending to safeguard the increasingly unpopular regime. To maintain its presence in nearly all economic sectors meant that the state should become the largest employer in the country by far. These patterns persisted through the whole of the Pahlavi era and beyond, with few exceptions—a curse on the modern Iranian political economy that continues to the present.

By 1928 the oil revenue reserve had reached six million tumans ($3,518,000), a hefty sum that was meant to be devoted to economic development but was instead appropriated by the state to consolidate the military and pay for the growing bureaucracy. The sugar monopoly was imposed in 1927 to pay for the construction of the railroad, followed in 1929 by a monopoly on the sale and export of opium, and thereafter on tobacco and other commodities. As a sign of the changing times, control of the commercial markets faced no resistance from the bazaar, in stark contrast to the Tobacco Protest of 1891–1892 or the protests against government price controls on the eve of the Constitutional Revolution. This was another cause of the bazaar’s reluctance to abandon the small-scale patterns of patronage and networking in favor of investment in modern financial and industrial sectors. A weakened bazaar and the relative worsening of the affairs of the bazaar merchants meant that the middle and lower ranks of traders and guilds suffered. The ensuing growth of conservatism in the bazaar surfaced in a firmer alliance with the conservative clergy, the other losing sector in Pahlavi society.

The schoolchildren who learned geography, history, and Persian literature as well as modern sciences internalized a different perspective of the world from that of their parents, one that gave prominence to secular knowledge and material progress. Yet the shift from instructing elites to a system of public education, part of a trend that revolutionized literacy worldwide, often reinforced uncritical learning. It rewarded uniformity and obedience and punished imagination and diversity. The prevailing pedagogical culture, to the extent perceived by its framers, militated against the body of knowledge in the sciences and humanities that was supposed to open intellectual horizons and change worldviews.

Despite restrictions on preaching in the mosques and donning clerical attire, the state never dismantled the clerical hierarchy or the institution of the madrasa, the waqf, and other means of revenue. Remarkably, in the early Pahlavi era, although the number of madrasas decreased, Qom acquired greater visibility as a clerical center. A majority of moderate ulama succumbed to the diminishing status of their class with a mix of resignation and remorse (the latter for not fighting hard enough for Qajar survival). They viewed Reza Shah and Pahlavi modernizing as an inevitable, even a necessary, evil, so long as the residue of their clerical power remained in place. Unlike the Sunni clerical institutions in other Muslim lands, which for centuries were under the aegis of the Ottoman state, the Shi‘i Iranian ulama had maintained their institutional independence even after the demise of the Qajars. Even if they lost Pahlavi patronage, and the unwritten contract with the state was about to be abrogated, their group solidarity was not entirely lost. As it turned out, the immediate hardships imposed on them added to overall clerical resilience and their rebound after Reza Shah.

The new Pahlavi legal reforms, primarily based on the Napoleonic Code, adopted the French system to reasonable dictates of the Shi‘i shari‘a, and did this perhaps more effectively than many other Muslim countries in the twentieth century. Under Davar’s supervision, a council of legal experts, consisting of middle-ranking mojtaheds and state administrators of madrasa background who were familiar with European law, reviewed the French codes in a relatively short period of time, refashioning them according to Islamic contingencies. The 1927 Penal Code and the subsequent 1931 Civil Code replaced, in stages, the mojtahed-run shari‘a courts. The new codes featured all the deficiencies of a state-dominated bureaucratic system, yet the Islamic provisions in the system proved vital for the state’s legitimacy.

The Allied occupation of Iran in September 1941 was a rude shock to most Iranians. Facing the soldiers of the Red Army, the British Indian army, and soon after American military personnel seemed almost a surreal reversal of two decades of Pahlavi assurances of Iran’s reclaimed sovereignty and the might of Iran’s Imperial Armed Forces. The shock was transient, but the consequences were not. The occupation triggered one of the most eventful episodes in Iran’s modern history and revealed persistent themes in the country’s recent past: the struggle for democracy, foreign intervention, and grave tensions within the polity and between the center and the periphery. Disruption of the economy, political instability, tribal rebellions, secessionist movements, frequent imposition of martial law, and growing hatred toward foreign powers were the darker outcomes. On the other hand, a national movement for nationalizing Iran’s oil industry, the opening up of the political space, greater freedom of the press, parliamentary politics, and a nascent labor movement were promising developments.

The AIOC—the forerunner of today’s British Petroleum (BP)—ran the Iranian oil industry not unlike a colonial plantation, exerting the hierarchy of class-conscious English society and preserving a culture of colonial privilege. Iran’s other major contribution to the workforce was cheap labor, mostly Bakhtiyari herdsmen and the Arabic-speaking population of Khuzestan working under harsh conditions and with exploitative wages and poor living standards.

Furthermore, the AIOC condescendingly viewed Iranian subordinates in its employment as incapable of holding managerial posts and unable to grasp the company’s bookkeeping—which the Iranians viewed as shady and full of dishonest accounting practices. It moreover brazenly defended its treatment of the Iranian workforce. Stubborn and shortsighted—almost cynical—it turned a deaf ear to Razmara’s repeated pleas and to the United States’ mediation efforts behind the scenes. The US interest in the negotiations was perceived by AIOC as likely to allow Americans an eventual foothold in the Iranian oil industry. American oil companies—themselves not models of fairness and integrity—had negotiated new contracts with the government of Venezuela on a fifty-fifty profit sharing basis, and in 1950 they were about to do the same with Saudi Arabia, where ARAMCO, a conglomerate of giant American oil companies, had been operating since 1933. ARAMCO had received, in exchange for the fifty-fifty deal with Saudi Arabia, a 50 percent tax break from US Congress (known as the “golden gimmick”). The AIOC refused to consider any of that and quietly urged the Americans to keep the Saudi deal a secret until the Iranians agreed to their far less favorable terms.

Outraged by the Iranian action, the British government also lodged complaints with the International Court of Justice at The Hague, demanding that Iranian oil nationalization be declared illegal and thus void under international law. In response, Iran lodged its own counterclaims and sent representatives to defend its case. The Iranian oil nationalization thus rapidly developed into an international crisis, with important security and strategic repercussions that soon invited US intervention. At the time, Iran supplied more than 20 percent of the world’s total oil production, and the imminent cutoff of such a vital source threatened to disrupt the Western economies that were coming out of the postwar recession.

Initial impact aside, the long-term effect of the embargo on the British market was minimal. Yet its effect on the Iranian economy was substantial throughout Mosaddeq’s premiership. Issuing national government bonds to compensate for the loss of income could barely avert a financial crisis. A later increase in the volume of currency issued by the Mosaddeq government only intensified the inflationary trend. It became apparent that nationalization, though a brave move expressive of national sentiments, was a formidable task, if not an untenable one. By early 1952, oil production had come to a complete standstill—for the first time since 1909—threatening with bankruptcy the government that aimed to liberate Iran from the yoke of economic hegemony.

The street slogan “We sacrificed our lives, we write with our blood: either death or Mosaddeq,” voiced by ordinary people, saw in Mosaddeq not merely a political leader but a savior of the Iranian nation. Mosaddeq’s victory was a serious blow to British and American hopes to see a compromising premier in his place. Both powers had actively sought out Qavam and backed him as an alternative to a coup or direct military action. Moreover, the July 21 uprising displayed the power of the urban lower and middle classes as a counterforce to the politics of the elite; this was a victory for Mosaddeq, who mustered such sentiments despite the Tudeh Party’s long-standing claims to be the party of the masses. Though Tudeh leadership still criticized Mosaddeq, during the uprising its rank and file embraced the National Movement en masse with Mosaddeq as their leader. If a further providential sign was needed, it came with news of Iran’s victory at The Hague on the same day: July 21, 1952. The ICJ agreed with Iran that the court lacked jurisdiction in the Iranian oil dispute since AIOC was a nonstate entity operating under an Iranian license; therefore, the court could not hear the case, as the British government had urged. This was the position initiated by Karim Sanjabi (1904–1995), a French-educated lawyer and a loyal member of Mosaddeq’s inner circle, who was a member of the delegation representing Iran in the court. The chief lawyer hired by Mosaddeq’s government, the Belgian Henri Rollin, skillfully argued Iran’s case. In June 1952 Mosaddeq himself attended the final court sessions to personally present Iran’s case and offer moral support to the defense team. The vote was perhaps the most constructive international victory for Mosaddeq and his allies, having reversed the International Court of Justice’s earlier injunction and vindicated the position Iran had taken all along.

Mosaddeq, sensing the changing international climate, offered a conciliatory counterproposal. In exchange for the British government complying, at least in public, with the principle of nationalization, he consented to arbitration by the International Court of Justice on the amount of compensation to be paid for the AIOC’s installations and other investments, but not for future losses of oil revenue. He further offered AIOC partnership with Iran—but not a monopoly—in the production and distribution of Iranian oil, at a percentage negotiable by the two sides. Under normal circumstances, this Iranian counterproposal would have provided viable grounds for an amicable agreement, but this was not to be the case, for the two Western powers obviously were not negotiating in good faith. By March 1953 the new Eisenhower administration was convinced that the only plausible course for the United States was to remove Mosaddeq by means of a military coup. John Foster Dulles and his brother, Allen Dulles (1893–1969), the director of the newly organized Central Intelligence Agency, were architects of a foreign policy that came to be known as the Eisenhower Doctrine. It was designed primarily to contain what seemed to Americans as the impending communist threat. Among countries neighboring the Soviet Union, Iran proved particularly crucial because of its long borders with its northern neighbor, its massive oil reserves, access to the oil-rich Persian Gulf, and its powerful Tudeh Party. The climate of communist phobia in the United States marked by the Red Scare and the hearings of the House Un-American Activities Committee further vindicated in the Americans’ eyes the undertaking of preemptive measures in a contentious case such as Iran.

The downfall of Mosaddeq brought to an end the eventful postwar era, a revolution of sorts that was aborted by familiar forces of conservative opposition and foreign intervention, but also by errors of judgment that proved destructive. In this and other respects, the Mosaddeq era resembled the Constitutional Revolution. In many respects, it was a follow-up to that unfinished revolution, resurfacing a generation later. Mosaddeq’s dilemma, and his tragedy, was that in the outset he tried to fulfill national aspirations while remaining committed to the principles of constitutionalism and democracy. Yet his disturbing display of autocratic conduct toward the end of his premiership may be seen as a conundrum, a vacillation between two modes of constitutional liberalism and radical populism. Mosaddeq and his colleagues also exhibited another dichotomy familiar to the constitutional period: they paid homage to Islam as a source of Iranian identity and courted religious authorities while also hoping to preserve the ideals of a secular society, freedom of the press, and equality before the law—notions that were in contrast to the conservative outlook of the Shi‘i establishment and its radical allies. Mosaddeq’s vision and frame of reference were in part the Shi‘i tradition of Iran. For the greater part, however, he was a man with a secular mind-set that he and his cohorts hailed as a necessary framework for individual rights, division of powers, and liberation from economic hegemony and foreign intrigue. This was a difficult balance to maintain.

In the following years as the CIA’s covert involvement became more apparent, the fall of Mosaddeq came to be seen by most Iranians as a flagrant intrusion by Western powers into Iran’s sovereignty and economic destiny. The shah’s authoritarian rule, evident shortly after the coup, further convinced his opponents of the United States’ malicious designs to impose on Iran a dictator subservient to its strategic interests. The fall of Mosaddeq turned into a traumatic memory that in the coming decades produced a narrative of victimization. It reinforced not only xenophobic suspicions but also pushed the Pahlavi opposition forces toward an anti-Western—more specifically, anti-American—discourse.

The second Pahlavi era was marked by royal politics of self-aggrandizement, especially in the 1970s, and this image was enhanced by the growth of oil revenue, the rise of a subservient technocrat class, and the unprecedented expansion of security forces and the secret police apparatus. Iran’s visibility as a regional power friendly to the United States and the Western world, and episodes of choreographed populism, also contributed. Mohammad Reza Shah’s White Revolution of the early 1960s in reality came to fruition in the mid-1970s with greater industrial growth, infrastructure development, institution building, implementation of a planned economy, greater professional expertise, and educational and legal advances for women. These crucial transformations also triggered contesting visions of modernity. The shah’s image of progress, patterned on a Westernizing model similar to his father’s, was questioned by a small but influential circle of secular dissidents and intellectuals—many with roots in the Tudeh and the National Movement of the postwar era. They began to question wholesale subservience to the West and the regime’s positivistic ideas of progress. With the uprising of June 1963, a turning point in Iran’s shift to Islamic activism, this laymen’s critique of repression, nepotism, and the perceived “moral decline” of society increasingly took on an Islamic veneer. Not only young radical clergy but also revolutionary Marxists and Islamist guerrilla organizations critical of the predominant Westernism began calling for resistance to the Pahlavi regime and eventually for its violent overthrow. Islamic militants, mostly under the aegis of Ayatollah Khomeini, were the ultimate beneficiaries of anti-Pahlavi discourse.

On paper Iran’s nationalization of its oil industry was recognized, and in 1954 the National Iranian Oil Company (NIOC), which had been formed under Mosaddeq, became the partner in a fifty-fifty profit-sharing agreement with a new holding company, Iranian Oil Participants Limited (IOP), which consisted of eight major American, British, and European oil companies. These partners replaced the Anglo-Iranian Oil Company’s monopoly. The pattern roughly resembled the ARAMCO consortium of Saudi Arabia, with a similar sharing arrangement. Although the new agreement was a far cry from the objectives of the National Movement, and was unpopular with the general public, it was a face-saving measure for the shah and for the United States. Known as the “seven sisters,” these oil companies held 60 percent of the newly formed consortium. They were Standard Oil of California (later Chevron), Standard Oil of New Jersey (later Exxon), Standard Oil of New York (later Mobil), Texaco (later Chevron), and Gulf Oil (later Chevron), each holding an 8 percent stake; Royal Dutch Shell, with 14 percent; and Compagnie Française des Pétroles (later Total), with 6 percent. Taking over from AIOC, the newly renamed British Petroleum (BP) held the remaining 40 percent of the consortium’s shares. The consortium was responsible for the exploration, production, and international distribution of Iranian oil and controlled production levels and the pricing structure. Admittedly operating within a smaller area under concession in Khuzestan than had the former AIOC monopoly, Iran nevertheless remained on the receiving end of the production process, with the National Iranian Oil Company in charge of domestic distribution and overall supervision of the operation, a position that proved mostly a formality, at least in the earlier years. IOP held full control over all operations, did not open its books to outsiders, did not allow any AIOC representation on its board, and kept a low political profile while maximizing profits. This was a victory for the big oil companies in tightening their monopoly not only over Iranian oil but also over more than 80 percent of world oil production.

Among the Shi‘i authorities, animosity toward the Baha’is was deep, in part because of doctrinal reasons but also, in the twentieth century, because of a paranoiac fear of Baha’i infiltration of government and society and of their presumed success in converting Muslims over to their “deviant path.” Through intermediaries Borujerdi demanded that because the clergy, with himself at the helm, supported Tudeh purges, in return the shah should repay them by eradicating the Baha’i menace.

Since as early as the Babi persecutions in the Qajar period, Baha’is had been routinely demonized as enemies of Islam. With the new campaign against them, however, the nature of the accusations shifted to a higher level: they were accused not only of doctrinal enmity to Islam but also of being politically disloyal to the country. These claims set the ground, starting in the 1960s, of accusing the Baha’is of being agents of British colonialism, and soon after of being agents of American imperialism and international Zionism, charges that after the 1979 Islamic Revolution had serious repercussions for the Baha’i community in Iran.

A crowd of supporters buoyed by Falsafi’s hate campaign organized a vigilante takeover of the Baha’i center in Tehran. In Shiraz the mob attacked the house of the Bab, the holiest site for the Baha’is and the Azalis in Iran, and all but destroyed it. As a sign of the government’s solidarity with the anti-Baha’i campaign, but in reality a weak attempt to control the situation, in May 1955 General Nader Batmanqlij, chief of staff of the Iranian armed forces, dispatched troops to occupy the Baha’i center in Tehran. The general personally climbed to the roof to strike the first symbolic blow, demolishing the center’s dome (fig. 10.2). Under pressure from Western governments and facing international criticism (and from Baha’i communities worldwide), the shah began to back off, having sensed the looming repercussions of the campaign getting out of hand. By the end of Ramadan, the most egregious persecutions had subsided. Yet the ban on Baha’i communal activities remained in force. They continued to be banned from government employment, at least officially, and the Baha’i center in Tehran was converted into the headquarters of the Tehran military command and army counterintelligence, the nucleus of what later became the Organization for Security and Intelligence, or the Savak.

By the early 1960s Savak, under the shah’s sponsorship, had begun to earn a reputation for efficiency and discipline, but also for fear mongering and ruthlessness, purposefully cultivating an image even darker than its reality. Among Savak’s new targets were independent political figures, the younger generation of intellectuals, members of the former National Front, leaders of student demonstrations, and outspoken clergy. When the shah ousted Teymur Bakhtiar in 1961, Savak was brought even more tightly under his direct control. Accused of conspiring against the Pahlavi regime in the outset of a new episode of anti-Pahlavi resistance, the general was forced into exile in Geneva, where he began organizing an anti-Pahlavi front together with an exiled Tudeh leader and Ayatollah Khomeini, the emerging de facto leader of the antiregime clergy in Qom. Bakhtiar consequently fled to Lebanon, and then to Iraq, where a Savak agent assassinated him in August 1970. The ouster of Bakhtiar was the last significant military hurdle in the shah’s path to absolute power. He was also the first of the top brass to fall victim to the shah.

An attempt against his life in 1949, from which he miraculously escaped, and soon afterward the arduous course that ended with the coup of 1953 transformed the young shah from a reactive maneuverer into a shrewd, even devious, manipulator. Especially after the tumultuous Mosaddeq years he learned to dominate the political stage at the expense of any independent voice within or outside his immediate reach. The bitter experience of the Mosaddeq years washed away whatever faith he might have had in the democratic process or in what his more liberal-minded advisers urged him to adopt. The experience made him suspicious of popular participation at any level and of genuine debate on any political issue. Although he offered his early support for the oil nationalization campaign, after July 1952 he found himself marginalized and unwanted. From his perspective, Mosaddeq’s course not only aimed to overthrow him and eliminate the monarchy but also would bring the country to the brink of chaos and eventually the throes of communism. His flight to Baghdad and then to Rome in August 1953 after the failure of the first coup to oust Mosaddeq, and his return under the shadow of a second coup staged with active help from American and British agents, was a tormenting memory, even though he presented it to his people as a patriotic victory over unspecified enemies.

With the American presidential election campaign under way, and viable prospects for a Democratic victory, there was growing concern in Tehran about what the implications of John F. Kennedy’s presidency would be for the Pahlavi regime. Kennedy was openly critical of the Republicans’ foreign policy in the developing world, and he questioned outright military aid to oppressive regimes that ignored economic development and democracy. He considered economic and political reforms as alternative means of saving non-Western societies from the lure of socialist-inspired revolutions. The collapse in Cuba of the US-backed dictator Fulgencio Batista in early 1959 and Fidel Castro’s rapid shift from a nationalist revolutionary to a committed Marxist made his points all the more glaring. At the time, perhaps no other country besides Iran fit Kennedy’s disapproval of the US granting of unconditional military largesse and moral support. It was therefore quite plausible that beyond Latin America Iran would become a priority for the new administration.

The Shi‘i upper ranks viewed the shah as an imperfect but viable partner, and in the course of the 1953 coup most of the upper and middle ranks, Khomeini included, had sided with Kashani and Borujerdi in their tacit support for the shah, being fearful of the Tudeh takeover. With the introduction of the shah’s reform program, however, that view began to change. The up-and-coming clerics with radical views and their students in Qom clearly were disgruntled with the Pahlavi state on ideological as well as material grounds.

The young Ruhollah (Ruh-Allah means “the Spirit of God,” a Qur’anic title for Jesus and a relatively rare first name for the children of Shi‘i clergy) was brought up by his mother, and after his mother’s premature death, by his paternal aunt, a woman of strong character who left her footprint on the young boy. He received a typical elementary maktab education in Khomein from female and male instructors, including his older brother, but not modern schooling. In the years following the Constitutional Revolution, Khomein, like most small towns, was untouched by modern education, even though the young Ruhollah may have learned rudiments of arithmetic, calligraphy, and some Persian poetry.

A blend of Shi‘i jurisprudence, speculative mysticism (as opposed to mysticism of the Sufis and the Sufi orders), and Islamic ethical and revivalist awareness thus characterized Khomeini’s training. Yet despite his interest in speculative mysticism, he remained loyal to the jurist tradition that carried a certain element of clerical entitlement, especially among high-ranking mojtaheds. He not only inherited this conservative, pedantic, text-oriented legacy but also shared a sense of communal loyalty to fellow jurists that was reinforced by isolation under Pahlavi rule.

In his judgment, attacks on Shi‘i beliefs and rituals were comparable to the attacks the Wahhabi “savages of Arabia” had long leveled against Shi‘ism. Holding nothing back, he was among the first to call upon believers to physically eliminate Kasravi for his blasphemy; it was not mere coincidence that members of Fada’iyan-e Islam assassinated Kasravi in March 1945 shortly after the publication of Khomeini’s book.

In the late 1950s and early 1960s Khomeini began to question a number of issues of domestic and foreign policy. Starting with marginal issues—such as the mingling of Boy Scouts and Girl Scouts and the performing of dances—he soon moved on to more substantive concerns, such as the passing of the first land reform legislation in 1959 and the opening of informal diplomatic relations with Israel and economic collaboration with the Jewish state. In 1962, when the government tried to introduce the elected provincial councils sanctioned by the 1906–1907 Constitution, mostly the shah’s window-dressing to compensate for closing other political channels, Khomeini was at the forefront of clerical opposition, objecting even to the hint of women’s right to vote. He argued that the voting regulations failed to specify the male gender—and hence exclude women—from the electorate. Along with other ayatollahs in Qom, he also objected to dropping the oath of allegiance to the Qur’an for the provincial councils’ delegates, an omission seen in Qom as a concession to the Baha’is and their election to the councils rather than as a symbolic delinking of religion and politics. In his telegram to the premier Asadollah ‘Alam in October 1962, Khomeini further threatened that on these and other issues contrary to shari‘a, he would not remain silent, and that, in response, the government would face severe clerical opposition.

He contrasted these excesses of the regime with the frugal and selfless clergy of Qom. He “advised” the shah, as he put it, in the strongest terms to abandon Israel, to listen to the marja‘s, and not to deviate from the path of Islam so as to avoid the sad fate of his father, whose abdication brought joy to Iranian hearts. Touching upon such sensitive themes in an emotionally charged environment, Khomeini’s speech was repeatedly interrupted by the loud weeping of the mournful audience. For the first time a copy of the recorded tape of his speech soon traveled across Iran and resonated with the people in the bazaars and streets of the poorer neighborhoods. The powerful call for defiance quickly bore results, leading to a bloody uprising in the capital and some provincial cities. In the early hours of June 5, two days after his Fayziyeh speech, Khomeini was arrested by security forces, brought to Tehran, and detained in the Officers’ Club, where Mosaddeq had been detained, before being sent off to jail. On the same day, June 5, as the news of Khomeini’s arrest reached the public, Iranian cities witnessed a violent uprising. As if the crowd had anticipated the arrest, tens of thousands of protesters holding makeshift placards of Khomeini’s portrait and shouting slogans against the shah poured into the streets near the bazaar and other neighborhoods of Tehran, smashing shop windows, burning down banks and cinemas, and attacking bus stations, police stations, and government buildings. Among other places, the Pepsi bottling facility, the Iran-US cultural center, and Iranian broadcasting services were attacked and burned down. The crowd, aroused by devout supporters of Khomeini from among the gang leaders (lutis) of Tehran’s wholesale vegetable market, armed with sticks and knives, began to move in the direction of the Marmar royal palace in central Tehran, where the shah’s office was located.

Khomeini was held in an army barracks in Tehran for nearly two months before being put under house arrest for another eight months. A handful of mojtaheds in major cities, many Khomeini’s supporters and students, were temporarily detained. The gang leaders responsible for the Tehran uprising were tried and hanged, and all physical signs of destruction in Tehran were quickly removed or restored. Yet the psychological wounds inflicted by the revolt remained unhealed. Khomeini, seemingly unrepentant and untarnished, returned to Qom in March 1964. He was spared the death sentence and released from detention after the other marja‘s in Qom, including Ayatollah Shari‘atmadari, pleaded with the shah, cautioning him of the dire consequences of executing a major figure like Khomeini. There was no love lost between Khomeini and the other ayatollahs in Qom. What was at stake, however, was clerical prestige and their glaring display of ineffectiveness before the state were one of their cohort to be detained or eliminated, an unprecedented event, save for the 1909 revolutionary trial and execution of Shaykh Fazlollah Nuri. In March 1964 the coming to office of a more appeasing government under Hasan-‘Ali Mansur (Mansour, 1923–1965) was instrumental in Khomeini’s release. His appointment generated further hope for reconciliation. Khomeini, relying on his growing popular support in and out of the bazaar, was determined to carry on his crusade even if, as he stated, it were to cost him his life. As if retreating from the Fada’iyan-e Islam agenda of the 1950s (whose supporters no doubt were crucial in the June uprising), Qom, under the spell of Khomeini, demanded implementation of Islamic laws and abolition of the White Revolution’s anti-Islamic decrees, which in reality meant reversing the land reform program, and especially returning waqf properties to their trustees. Honoring the demands of the Shi‘i clergy also meant annulling women’s right to vote, the possible enforcement of hijab, and allowance of ta‘ziyeh passion plays and other mourning ceremonies that the regime had deemed superstitious and barbaric. In a speech in Qom a few days after Khomeini’s arrival, Mansur also called for dissolution of the Majles and the Senate, accused the Pahlavi state of being in cahoots with Israel and “the agents of Zionism,” and called for an end to corruption. More vociferously than on earlier occasions, he also accused the Baha’is of perceived charges of occupying positions of power and collaborating with Israel. Most important, the declaration called for the implementation of article 2 of the 1907 Supplement to the Iranian Constitution, which stipulated the creation of a five-member mojtahed body to oversee the legislation of the Majles. The Pahlavi state and its projected reform program could not remotely honor any such demands.

He further condemned the mingling of boys and girls, especially in mixed schools; attacked as distorted the history textbooks portraying the clergy as detrimental to the prosperity of the country; and above all, called on the clergy, the armed forces, statesmen, and businessmen of Iran to beware of the impending decline and loss of Islam. Calling on the Najaf Shi‘i ayatollahs and heads of Islamic nations, including the shah, he warned: “Since we are a weak nation and don’t have dollars, does it mean that we should be pummeled under the American boots? America is worse than Britain and Britain is worse than America and the Soviet Union is worse than both of them; each is worse than the other and each more evil than the other. Yet today we are faced with America.” The focus of this vitriolic attack was the US president Lyndon B. Johnson, whom Khomeini believed to be “the most spiteful toward our nation than any human being because of the wrongs he inflicted on the Islamic nation. The Qur’an is his enemy; the people of Iran are his enemy. The government of the United States should know that in Iran he has been debased and scandalized.”5 This fuming rhetoric left little room for compromise. A week later, coinciding with the ratification in the Majles of the American loan, the Iranian special forces surrounded Khomeini’s house in Qom. He was whisked out of the city directly to Tehran airport and put on an airplane that took him to Turkey, where he spent a year in exile in the city of Bursa, known for its Islamic loyalties. Accompanied by his son, Mostafa, and clad in civilian clothing, he visited mosques and shrines in the ancient city (fig. 10.5). Later on, moving to Najaf, he kept a distance from the city’s clerical politics, although he was by no means isolated. He remained in exile for the following thirteen years, writing and teaching but also preserving his network of supporters and followers throughout Iran. Through his devout students and bazaar contacts he collected religious dues and redistributed funds among his former and current students and for other religious causes

By the mid-1970s Iran had developed a substantial domestic market for cars and related industries, household goods, clothing, food and drinks, furniture, and construction material, and the balance of the public and private sectors promised a viable mixed economy for a developing nation that still was heavily relying on oil revenue for its public investment. The critics on the intellectual left and later the extreme left, some still carrying the incurable Tudeh bug, belittled much of Iran’s industrialization as a mere “assembly” (montage) of useless products that had been imposed by Western consumer culture and were for the benefit of a “dependent bourgeoisie.” Often looking up to the smoke-belching, inefficient, labor-intensive, centralized Soviet and Eastern European industrialization model, such criticism later was picked up by the Islamic radicals and became part of the rhetoric of the 1979 revolution. Yet it is fair to say that in later years, the state industrialization program became overambitious and out of control, leading to waste, corruption, and nepotism—at times it was devoid of any meaningful relation to the state’s preconceived master plan.

The growth of the industrial sector barely satisfied the domestic markets’ growing demand for goods and services. Imports of all sorts from Europe, the United States, and Japan flooded Iran’s markets, mostly at the expense of the bazaar sector and associated small-scale manufactures and wholesalers. As the larger import-export and industrial businesses gradually moved out of the bazaar district into more fashionable areas, the bazaar’s demographics began to change, especially in Tehran but also in larger provincial centers. In due course the bazaar came to house mostly small merchants, distributors, wholesalers, and retailers of small industries catering to the poorer and more traditional sectors of the population. The change in its function was not necessarily detrimental to the bazaar, despite the government’s unfavorable attitude toward the bazaar merchants for harboring antiregime, and particularly pro-Khomeini, sentiments. Undeniably, demographic changes turned these old centers of commerce not merely into bastions of conservatism but also into important components, financially and otherwise, of the growing Islamic activism.

Between 1971 and 1977 Iran’s annual budget further grew sixfold from $8 billon to $48 billion, an upsurge substantially due to direct and indirect oil receipts. Shortly before the October 1973 war between Egypt and Israel that led to the Arab OPEC members’ oil embargo and triggered a rapid rise in oil prices, a barrel of Persian Gulf light crude traded at the exploitatively low price of $1.95, a price that was the outcome of many negotiations in previous years. Soon after the October war, however, the price jump stunned even the oil producers; by 1975 it had reached nearly $11 per barrel in the European spot market and even higher prices in the United States. By not taking part in the Arab embargo against the United States, Iran stood to benefit not only financially but also politically. In contrast to the unfavorable image of Arab oil producers in Western media, which stereotyped the Arab sheiks as greedy plunderers with undeserving riches, Iran was seen, at least by those who could differentiate Iran from its Arab neighbors, as something of a friend—still greedy and unfair, no doubt, but not hostile and uncompromising.

Despite voices of dissent—for instance, George Ball (1901–1994), US undersecretary of state in the Kennedy administration, who criticized the shah’s autocratic rule on a number of occasions—the US polity and public opinion overwhelmingly viewed Iran as America’s indispensable ally in the Middle East and the shah as a modernizing agent for his people. Friendly relations with Israel also contributed to Americans’ favorable attitude toward the shah, especially after 1973. The shah’s affinity with Israel was primarily grounded in common geopolitical and strategic concerns, but undeniably it helped ingratiate the shah to his American allies.

Despite growing publicity in the American press about violations of human rights, Iranian political prisoners, allegations of torture, military tribunals, and press censorship, American envoys to Iran and high-ranking politicians in Washington were, by and large, willing to turn a blind eye to such unpleasant realities. At most, they treated such issues as an unavoidable evil to be tolerated from a loyal and dependable friend. Even if objections were occasionally raised in private to trusted officials, such as the court minister Asadollah ‘Alam, or to the shah himself, they were often on specific issues that directly concerned the United States rather than any cautionary advice about the nature of the shah’s autocratic rule, the excesses of the secret police, the absence of credible elected bodies, press censorship, and the evident disarray in economic policies. These were seen by US administrations as issues related to the internal affairs of a sovereign nation, and hence outside the diplomatic mandate.

By the mid-1970s the shah had been able to carve out a strategic niche in the midst of a superpower divide on which the stability of the Persian Gulf and neighboring countries depended. Contrary to the conventional narrative articulated by his domestic and Western critics, and despite his many blind spots, the shah came to be seen by the two superpowers and by European powers as an experienced statesman and a crucial ally who built up a popular base at home, carried out domestic reforms, averted conservative opposition, thwarted his radical Arab neighbors, and worked toward stability and peace in the region. From the shah’s perspective, his compliance with US foreign policy objectives not only was inevitable, given his country’s perilous geopolitics, but also was beneficial to Iran’s stability and prosperity. Though always anxious to prove his loyalty to the West, he was skillful in appeasing his Soviet neighbor, too, often to his advantage. It could be argued that the shah’s latter years were the most stable in Iran’s foreign policy, considering Iran’s fateful geopolitics since the turn of the nineteenth century. In retrospect the shah’s stabilizing effect may be gauged by the aftershocks that the region witnessed after the collapse of the Pahlavi order and the revolution of 1979: the Soviet invasion of Afghanistan, destabilization of Pakistani politics, the rise of Saddam Hussein and the Ba‘athists as a regional menace, the emergence of Saudi Arabia as a petroleum empire, and subsequent Wahhabi-Salafi militancy.

By the mid-1970s repression at home and shortfalls in economic spheres cast a long shadow over the Pahlavi state, beyond even the reality—an image further blemished by perceptions of compliance with Western interests. The United States, in particular, came to be seen by the Iranian public—even beyond a cluster of liberal and leftist trends and clerical dissidents—as a selfish superpower that exploited Iran’s natural resources, kept the shah in power, and perpetuated repression. The burgeoning anti-Americanism of the 1940s and 1950s was later internalized by a wide spectrum of Iranian dissenters. The image of the United States as a hegemonic superpower was further blemished during the Vietnam War, which received extensive coverage in the Iranian press.

Yet aside from the favorable ambience created by the US cultural and educational commitments, the closer US association with the Iranian security and military exposed ordinary Iranians to another aspect of American presence. By the mid-1970s there were tens of thousands of Americans working in Iran, including a substantial number in the service of the government as military advisers, contractors, technicians, and skilled labor. Some were former military personnel of the post-Vietnam era who, in pursuit of handsomely paid jobs, moved to Iran. They were attracted to the country’s burgeoning military industry, such as the US-franchised Bell Helicopter plant in Isfahan operational by 1975. Others were employees of big corporations involved in large-scale construction, oil, communication, and technology projects. As far as the Pahlavi state was concerned, the American and European pool of expertise was a natural resource with which Iran could address shortages in homegrown skilled and technical labor force during the boom years of the Iranian economy. A majority of these military personnel and civilians serving in Iran were employed at far higher salaries than their Iranian counterparts who had mastered comparable skills and had similar experience. In turn, they enjoyed a standard of living higher than their Iranian counterparts. The economic disparity became a source of disgruntlement, soon to be compounded by notions of Americans’ cultural insensitivities. Instances of Americans’ condescending attitude toward Iranians in the workplace and in the street were amplified beyond proportion. Examples of rowdy, heavy-drinking, unrestrained young American men in particular publicized the imprudent Yankee stereotype in such traditional settings as in the city of Isfahan.

Complacency and a disconnection from the realities of Iranian society slowly eroded the foundations of the Pahlavi order. The shah’s all-embracing royal power began to be hollowed, first and foremost, because of his aversion to meaningful modes of pluralism and public participation. The memories of the pre-1953 years seem to have convinced him, as he declared even in public, that in Iran democracy could generate only discord and chaos. His resolve, his vision, and his people’s loyalty and compliance, he insisted, were viable assets for Iran’s progress toward “Great Civilization.” Such a vision, if it was to be believed, served as a potent excuse for applying all means of political control, without respect for contesting views that challenged his positivist vision and the arbitrary means of making it materialize.

Nearly two decades of state patronage had opened a wider and more exciting cultural space in Iran. Media, especially television, artistic venues, the press and book publication, and growing viewership and readership offered intellectuals and artists a broader market and greater recognition. These happened despite the shrinking political horizons and the state’s obsessive efforts to silence all forms of dissent or coopt willing partners. Voices of dissent survived, however veiled, in the state’s broadcasting network, cinema, and various cultural and public institutions. Insofar as giving Iranians a more articulate sense of themselves, the state was able to reap the fruits of a half century of Pahlavi nationalist policies. But as it remained closely identified with a vision of positivist progress and Westernizing modernity, it also set in motion a quest for “authenticity” and cultural sovereignty.

The state’s cultural policies were largely geared to absorb the intellectual left rather than the forces of religious dissent. The former could relay cryptic messages of dissent, as much as possible, and hope for better days. The latter enjoyed fewer forums and had to rely mostly on its own traditional venues. The closure of Hosainiyeh-e Ershad ironically diverted more energies and attention to mosques, Qur’an study classes, and inspirational preaching presided over by activist clergy who were not patronized by the state.

After fourteen years of exile in Najaf, Khomeini once more was about to reemerge as the most relentless critic of the Pahlavi state. He enjoyed support not only from among his clerical and lay followers but also within the general public, who hailed him as a champion of resistance. Yet by no means was he yet viewed as the sole leader of the protest movement, or even as the man at its forefront. Exiled but not forgotten, he patiently had waited out years in the social wilderness, perhaps with little hope of ever going back to Iran, let alone leading a revolution. For younger generations of Iranians, Ayatollah Khomeini was a figure of the opposition from the past who had returned to the political stage. An opportune moment seemed to have miraculously propelled him to the forefront of a powerful movement, and despite his best intentions, his image would soon be surrounded by an aura of sanctity.

Yet during his short stay in Tehran on New Year’s Eve of 1978, President Carter, at a banquet given in his honor, toasted the shah and declared Iran “an island of stability” in the troubled Middle East. A misstatement that was destined to gain some notoriety, it appeared in the official reports along with pictures of President Carter holding a glass of champagne and flanked by Princess Ashraf, who at the time was perhaps the most unpopular member of the Pahlavi family. Only two days prior to President Carter’s arrival (accompanied on the trip by Secretary of State Cyrus Vance and National Security Adviser Zbigniew Brzezinski), the American-Iranian Cultural Center building in Tehran, a hub of American-inspired cultural activities and English-language learning, was bombed by the Fada’iyan-e Khalq guerrillas. The opposition condemned the miscalculated American gesture as an affront to the Iranian people. But the apparent US insensitivity was topped only eight months later by a visit by the premier of the People’s Republic of China. Hua Guofeng’s state visit to Iran in September 1978 came at time when the revolutionary firestorm, of which Iranian Maoists were an integral part, was about to consume the Pahlavi regime. It was as if neither the United States nor the Chinese could yet grasp the force of the revolution in the offing.

That the 1979 revolution was destined to acquire an “Islamic” face is another debatable issue. Islamic, as it became blatantly clear, meant not merely respect for Islamic moral values in a secular constitutional framework. Nor did it mean merely honoring a national icon in the person of Ayatollah Khomeini. As the revolution unfolded and turned into an Islamic republic, it became painfully clear that Islamic meant something more: a radical state with theocratic underpinnings, or more accurately, a hierocracy headed by an authoritarian guardian jurist and buttressed by an oligarchy with militant clergy at its core. Utilizing modern means of ascendency and control, the republic’s clerical elite and subservient lay cohort quickly deployed weapons of intimidation and violence. They added to this concoction a generous dose of anti-Westernism and Islamist idealism,

Khomeini’s novel reading of the notion of guardianship of the jurist as the only legitimate alternative to “unjust” temporal rule was at odds with the traditional Shi‘i aversion toward political power, avoiding government offices, and, for the most part, engaging in state affairs (except the mostly hereditary post of serving as leaders of Friday congregational prayers in major cities). Shi‘i law generally held the position that in the absence of the Imam of the Age, any form of government, presumably even a government led by the jurists, is fundamentally “unjust” and therefore theoretically illegitimate. Only the savior Mahdi—in Twelver Shi‘ism, the Twelfth Imam who is considered to be in occultation—upon his return to the material world at the outset of a process that leads to the End of the Time will, with divine blessing, restore justice and equity to earth and establish the utopian society (or dystopian, if we consider its apocalyptic finale) that was lost with the death of the Prophet of Islam.

In Khomeini’s view the secular rulers are unlikely candidates to enforce Islamic law because: If the ruler is not knowledgeable about [Islamic] legal affairs, he is not fit to rule for if he would just follow ([taqlid] a jurist), his authority will be wrecked. And if he doesn’t follow [a jurist], he cannot enforce the Islamic law. It is an obvious fact [therefore] that “the jurists are rulers over the sultans” [al-fuqaha hukkam ala al-salatin]. If the sultans are obedient to Islam, they must abide by the jurists and ask them about laws and injunctions in order to enforce them. In that case the jurists are the true ruler, and therefore authority to rule [hakemiyat] must officially rest with them and not with those who because of their ignorance of the [Islamic] law must abide by the ruling of the jurists.

The men and women who were motivated through mosques and mourning associations were led to believe that Islam, and especially Shi‘i Islam, packaged as an ideological miracle pill for all of Iran’s ills, was not primarily a set of monotheistic beliefs, devotional acts, and moral principles, nor even loyalty to the House of the Prophet and belief in the coming of the Mahdi, but instead a religion of protest and political action against oppression and exploitation, monarchical power, and its global allies. It was among these awakened multitudes that Khomeini shrewdly managed to harness energies for his revolutionary cause. He repeatedly paid homage to what he called “our valiant Islamic nation” and invariably acted on a presumed mandate on behalf of the disinherited to further the “true” (rastin) objectives of his “dear Islam.”

A little over seven months after the founding of the Islamic Republic, Khomeini dismissed Mahdi Bazargan, the prime minister of the provisional government who had facilitated the birth of the new regime. Less than two years later, hard-line supporters of Khomeini not only forced out the relatively moderate first president of the Republic, Abol-Hasan Banisadr, and his allies but also wiped out nearly all the forces of the left. The republic, moreover, banned or marginalized all moderate clerical and secular voices and purged, jailed, or executed real or imagined supporters of the old regime. It forced hundreds of thousands of members of the middle classes into self-imposed exile. Conducting a “cultural revolution” of its own, the regime purged thousands from universities and research institutes and tried to redefine education and cultural discourse on its own terms. By all accounts, this was an impressive performance, irrespective of how oppressive and violent it turned out to be.

The symbiosis of the mullahs and Revolutionary Guards also worked well in the course of the war with Iraq, whereby the latter served as a parallel force to the regular army, however unprofessionally. In return, a vast treasure trove of “nationalized” industries and confiscated land and properties of the Pahlavi state and its elite soon came under the control of the Revolutionary Guards. The conglomerates of agricultural estates and other economic resources kept them content and in comportment with the wishes of the ruling mullahs. Even after the war, the Guards served as the single most effective guarantor of the regime’s survival. Parallel with the Revolutionary Guards and complementary to their mission of combatting so-called antirevolutionary forces, the Islamic Revolutionary Courts (dadgahha-ye enqelab-e Islami) were established immediately after the victory of February 1979. They were presided over by clerical judges appointed in most cases by Khomeini and functioned under the close supervision of his clerical allies. With singular ferocity the revolutionary courts exercised their version of Islamic justice. “God’s vengeance,” by which they often legitimized their verdicts, was clear and simple, irrespective of the complexity of the cases before them or a complete lack of viable evidence. Independent of Bazargan’s provisional government, the mission of the revolutionary courts was to eliminate the “enemy”: to imprison, confiscate, intimidate, and quash the “antirevolution,” which meant any voice or force deemed to be against the regime’s hegemony.

Article 14 made it a duty to display “noble conduct,” equanimity and justice toward all non-Muslims, and respect for “human rights” (hoquq-e ensani). Likewise, pledges for equal rights of all ethnicities, equal protection before the law, and protection of life and property of all citizens against illegal intrusions of all sorts (articles 19, 20, and 22) proved sheer rhetoric when thousands were illegally arrested and imprisoned on flimsy charges and their properties confiscated by order of the revolutionary courts. The ethnic Kurd, Turkmen, and Arab minorities were harassed, and many were persecuted and fell victim to the regime’s denial of their demands. Rights of women, which received some attention throughout the text, revealed familiar features of male superiority, as evident particularly among the clergy. The preamble to the constitution, which devoted a section to women, promised that “because in the idle-worshiping regime women sustained greater oppression, reclaiming their rights deserves a priority.” It is in the framework of the family, it further specifies, “that women will no longer be objects or tools disseminating consumerism and exploitation.” By “rediscovering their critical and precious duty of motherhood, women will be forebears in the active field of life [giving] so as to produce together with their male fellow warriors ideologically committed [maktabi] humans.” Discharging this duty “in Islamic perspective enjoys the highest value and blessing.” The trendy revolutionary language aside, the clerical framers of the constitution here defined women’s “function” as essentially the same as in traditional Shi‘i jurisprudence, where women primarily were recognized as reproductive units. Article 21 furthermore obliged the state to prepare suitable grounds for realizing all aspects of women’s rights “according to Islamic guidelines.” Among these rights, “qualified” women were granted custodianship of their children only when no other “legal guardian” could be appointed, so as to avoid women’s mental agony. In reality, this invariably meant giving priority to the divorced husband or male relatives of the deceased husband.

More detrimental to a manageable pattern of urban growth were the Islamic Republic’s promises to provide free housing for the poor, a remedy to the sprawling shantytowns that had grown around the capital and major provincial centers in the 1970s. Presided over in the early days of the revolution by two fiery mullahs, two self-styled housing organizations laid their hands on a vast number of privately owned houses, apartments, and plots of land in large cities. The seizure had no legal grounds, having occurred even before any ruling by the revolutionary courts. They invited the disinherited to apply for ownership and subsequently settled hundreds of thousands into confiscated properties. The prospect of free housing proved an incentive for the poor and lower-middle classes to migrate to larger cities. Far more than could have been realistically accommodated, there were so many applicants that the free housing scheme turned into a fiasco. Even the Revolutionary Guards were wary of how to maintain order and security. Multitudes of unlucky applicants had to settle for less in the poor neighborhoods that quickly swelled in the capital and provincial centers. In a short span, overenrolled schools, pressure on utilities, congested traffic, and air pollution became a fact of postrevolutionary urban life. Unregulated building permits granted to speculating building contractors aggravated the sprawl.

Beyond holding to the amenities and vital services, the new regime gradually adopted a haphazard privatization practice, whereby it parceled out some of its profitable assets to people with connections in very favorable terms as a reward for their loyalty—individuals and families the regime considered as its own, the insiders (khodi). The most obvious candidates were ayatollahs’ offspring and their cronies. The closer to the center of power, the better their chances were for building new business empires, ranging from manufactured goods, textiles, and food industries to banking, shipping, heavy industry, auto manufacturing, and import-export. Also favored as insiders were former members of the Revolutionary Guards, veterans of the Iraq-Iran War with notable loyalty to the regime, and families of the war martyrs who became clients of the powerful ayatollahs.

The ten-month-long coup de grace of 1981–1982 can thus justifiably be seen as the third stage of the revolution. While February 1979 brought down the Pahlavi ancien régime and the hostage crisis wiped out the “step-by-step” Bazargan model, the fall of Banisadr and the purging of the opposition—coinciding with mass mobilization for the war with Iraq—brought the greatest concentration of power into the hands of the hard-liner Khomeinists.

June 1981, Khomeini had denounced the National Front leadership as “apostates,” primarily for calling a rally to protest the passage by the Majles of the law of Islamic retribution (qesas). The law, which replaced the penal code of the Pahlavi era, instituted such ancient punishments as stoning married women for extramarital affairs, cutting off limbs for theft and other serious offenses, and determining life or death of murderers and other culprits by the mere consent of relatives of the victim, whom the new law defined as “custodians of the [victim’s] blood” (awliya-e damm). On a broader scheme, the National Front was being punished for holding Khomeini accountable for the climate of intimidation and terror. By the summer of 1982, most leaders of the National Front either had fled the country into permanent exile or had ended up in the prisons of the Islamic Republic. Not entirely devoid of potential middle-class support, the National Front nevertheless found itself in no position to withstand Khomeini’s rage or the terror of the club-wielding Hezbollah and their paymaster in the Islamic Republican Party. The Freedom Movement had been saved only barely by renouncing its old comrades in the National Front. This was a humiliating fate for a movement that had stood for national sovereignty and political freedom for three decades. Khomeini and his turbaned clique never really trusted or cared for the tie-wearing, liberal nationalists. Nor did Khomeini ever acknowledge Mosaddeq as a national leader or subscribe to his path. It was largely the misplaced hopes of the liberal nationalists in the early days of the revolution that made them believe Khomeini was their partner in democracy, an error they quickly began to regret. As Karim Sanjabi, the leader of the National Front, once said: “Now it is the mullahs’ slippers that replaced military boots.” Fearing for his life, in July 1981 Sanjabi went into hiding before leaving for Paris and soon after retiring in the United States.

By the end of 1983 an estimated 120,000 Iranians and 60,000 Iraqis had been killed in battle, stunning losses for both countries. This was also reflective of the Iranian resolve to push ahead at almost any cost. Iraq’s huge advantages included billions of dollars of financial support from conservative Arab states wary of the threat of the Islamic Revolution. Saudi Arabia contributed as much as US$30 billion to Saddam’s war chest, while Kuwait and the United Arab Emirates contributed in excess of $8 billion each. The Iraqi army, moreover, received massive military hardware from the United States, France, Britain, and West Germany. The Ba‘athist regime enjoyed the general blessing of countries of the Western Bloc throughout the war and in contrast to a spirit of belligerence aimed at Iran. A surfeit of financial and military and moral support nevertheless kept the Iraqi positions only barely defensible. By early 1984 Iran had managed to gain the upper hand not merely by fielding greater numbers of troops or superior strategy but also by high morale and sheer sacrifice. Deceived by its momentary successes, however, soon the Iranian leadership, and above all Khomeini, had to face the harsh reality as the Iraqis’ revived spirit of resistance countered Iran’s repeated offensives inside Iraq. Military and civilian casualties, too, were quickly rising. As Iran shifted from defense to the offensive, the war had turned bloodier and the carnage heavier. Early in 1984, for the first time Iraqis began deploying chemical weapons against Iranian troops and later against Kurdish Iraqi civilians in the north. The use of mustard gas and nerve gas were flagrant violations of the 1925 Geneva Protocol that prohibited the deployment of chemical and biological weapons. Yet the countries of the Western world did not condemn Saddam’s criminal act outright. In a ludicrous charade, the US administration and its European allies instead pointed their finger of blame toward Iran, if not as a chief culprit, at least as a co-offender of the chemical ban. Both the Reagan administration and Margaret Thatcher’s Conservative government surreptitiously facilitated, directly or through a third party, the sale to Iraq of material for production of chemical weapons, including a factory for manufacturing chlorine, the chief ingredient in producing chemical weapons. Thousands of Iranian soldiers died a painful death or were permanently injured after exposure to poisonous fumes. Though chemical weapons had limited logistical use, their effect on Iranian morale was lasting and helped slow down troop maneuvers. Gruesome scenes of victims of gas attacks with advanced skin burns, fatal respiratory problems, or total or partial blindness were eerily reminiscent of World War I chemical warfare. Use of deadly gases, however, did not substantially change the Iranians’ resolve to continue their offensive.

The downing of an Iran Air passenger Airbus on July 3, 1988, by the USS Vincennes, a guided missile cruiser, resulting in the loss of 290 civilian lives, was an ominous sign. The incident presumably was caused by the US cruiser mistaking the passenger airliner as an approaching Iranian fighter jet, a questionable judgment, perhaps, given Iran’s poor air force capabilities at the time and the USS Vincennes’s advanced radar and intelligence equipment. The incident, Iran’s first and only direct military engagement with the United States, reflected the growing tension that had built up between the two countries ever since the hostage crisis. The United States barely expressed regret for the incident, blaming it on the roguery of the Iran Air pilot. Eight years later, when the United States agreed to pay only minimal reparations to the victims’ relatives, this was interpreted as a further mark of the United States trying to humiliate Iran.

The humiliating end to the war, moreover, did not bring down the Iranian regime or even sap the revolutionary zeal of its leadership. In part, this can be explained by an effective purge of Iran’s political dissent throughout the war and after. Though never reaching the scale and ferocity of the police state in Saddam’s Iraq, silencing domestic opposition in Iran under the pretext of security and war priorities secured the regime enough synergy to last even after the demeaning final settlement. War, in effect, vastly helped the Islamic Republic consolidate its military, propaganda, and policing apparatuses; close constitutional loopholes; and increase ideological and economic control over society. In this respect, although the war was a net defeat with huge casualties, material ruination, and temporary territorial loss, it was a “blessing” in disguise, as was repeatedly acknowledged by the regime’s clerical leadership. Irrespective of what the regime claimed as its popular mandate, the experience of the war and memories of sacrifice, life in the trenches, bombing of the cities, rationing, and economic hardship were all ingredients for a trial by fire that contributed to shaping postrevolutionary Iran.

Revelations in November 1986 concerning an Iranian arms deal with the United States, using Israel as an intermediary, triggered a full-scale political scandal between August 1985 and March 1987 in Washington, known as the Iran-Contra Affair, with serious repercussions for the Reagan administration. The course of events that shaped the affair exhibited how the United States, despite a history of rancorous relations with Iran, was prepared to engage Iran by supplying it with arms and spare parts, albeit for its own covert operation. Even more troubling was the fact that despite the Islamic Republic’s public denouncement of Israel, it had no compunction in using Israel as an intermediary in the arms deal, all the while persecuting Baha’is in towns and villages of Iran on charges of espionage for the Great Satan and the Zionist entity. In the years leading to Iran-Contra, Iran was listed by the United States among the “rogue” states sponsoring terrorism and subject to an arms embargo and other sanctions. The secret arms deal thus promised to provide Iran with much-needed material in the war with the minor Satan, as Saddam ranked in the demonology of the Islamic Republic. Whatever the Reagan administration’s justifications for the arms deal with Iran, including raising funds needed for a covert operation against Nicaragua, facilitating the release of American hostages who were in the custody of the Hezbollah of Lebanon, and a goodwill gesture with the remote hope of rekindling relations with revolutionary Iran, the initiative eventually backfired. It blew up into a major embarrassment on several counts and received enormous publicity worldwide. In addition to breaching the arms sanctions against Iran, the White House security adviser stood accused of breaking a congressional ban on assistance to Contra forces fighting the Nicaraguan revolutionary regime.

At least three characteristics qualify the Islamic Revolution as a major revolutionary movement in modern times. First, it was based on mass mobilization and large-scale popular participation. It was unprecedented not only in Middle Eastern history but also in the sheer number of participants—perhaps one of the largest in modern history. The revolutionary movement was comprehensive and decisive in ousting the old political order and dismantling its associated political and economic elites. Second, in a remarkably short time, the Islamic Revolution managed to establish a new political order, nurture a new sociopolitical elite, and institutionalize its hierocracy despite serious domestic and external challenges. The incipient Islamic Republic violently surpassed all other real or potential contenders. In this respect it demonstrated a consistent drive toward greater monopoly of power. This was in common with most totalitarian regimes intolerant of dissent even within their own ranks. War in particular greatly contributed to the Islamic Republic’s grassroots support as much as to its ability to crush its opposition. Third, the Islamic Revolution offered a cultural program that included a curious mix of hard-line conservatism, anti-imperialist rhetoric, selective modernity, and conscious antisecularism. In practice, it showed no hesitation in employing modern means of repression, control, and propaganda. Nor did it show hesitation to adopt modern programs of economic development and social welfare, as long as they could be safely Islamicized. In this respect, too, despite many signs of anachronism, the Islamic Republic put into practice a program of social engineering with enduring results.

The steady growth of the Revolutionary Guard Corps in areas of defense, security, and economic activities exemplifies Khamenei’s purposeful patronage. In 1989, in the postwar construction era, a new economic arm of the Revolutionary Guard, known as Qarargah-e Sazandegi-e Khatam al-Anbiya (the Khatam al-Anbiya construction military base), gradually took over the most lucrative state development projects. In the following decades Qarargah, an expanding economic conglomerate with numerous subsidiaries, acquired a near monopoly over major engineering, energy transmission, oil and gas, hydrological, and telecommunications projects. Being an integral part of the Revolutionary Guards’ command structure and operating on a military model, the Qarargah may be compared to similar military-economic conglomerates elsewhere in Egypt, Thailand, and Myanmar. In the Islamic Republic the reciprocal arrangement between the clerical wing of the leadership, headed by the Supreme Leader, and the Revolutionary Guards, as the military guarantor of the regime, cannot be missed. In exchange for noninterference in the political sphere, the Revolutionary Guard is granted extensive economic monopolies to assure its institutional well-being and welfare of its personnel.

Drug addiction, in particular, became more widespread among the urban middle classes. While smoking opium was a declining recreational habit during the Pahlavi era, it gained a new lease on life under the Islamic Republic. More worrying, heroin addiction became dangerously rampant among youth. A ban on the cultivation of opium and the anti-addiction campaigns of the 1950s, one of the success stories of the Pahlavi era, had helped control opium addiction and drug abuse. With the rise of the Islamic Republic, however, it was as though the social stigma had been lifted and all moral barriers had crumbled. Even though the government of the Islamic Republic continued to enforce the ban on drugs and built up a substantial force to fight drug trafficking on its southeastern borders with Afghanistan and Pakistan, opium and purified heroin continued to be smuggled across the Baluchistan border in large quantities, despite the Revolutionary Guards’ routine clashes with armed drug traffickers. By the 1990s heroin, as a cheap and accessible drug, was available not only on the street but also in high schools and at universities. Young victims from both sexes and every social class multiplied in large numbers, turning addiction into a major cause for the growth of underaged prostitution, both male and female, juvenile delinquency, and petty and organized crime. Addiction in Iran had deep historical roots, though perhaps not any more prevalent than in other societies exposed to rapid urban change.

An even more pronounced feature of the silent rejection of the Islamic Republic’s dystopia was a contagious urge among many, and especially among the educated classes, to leave Iran and settle elsewhere. A sense of entrapment in their own country, coupled with an unrealistic, almost philistine, perception of the world beyond, was responsible for the departure from Iran of hundreds of thousands to uncertain futures. Iranian émigrés in increasing numbers were to be found wandering in low-income neighborhoods in Istanbul and Izmir awaiting entry visas to the United States and European countries; in the shopping malls in Dubai and other UAE countries; in Greek port cities near the harbor preparing for crossing to other European destinations; in detention centers as far east as in Malaysia, Indonesia, Australia, and New Guinea; and as undocumented émigrés everywhere and many in detention centers and refugee camps. At no time in Iran’s recent history has there been such a desperate movement of the population. The closest, the immigrant workers to the Baku oil fields in the early decades of the twentieth century or to Kuwait in the 1960s, were temporary guest workers in much smaller numbers and invariably limited to unskilled workers from the Iranian countryside. The Islamic Republic remained altogether indifferent to this massive brain drain. Propelled by the growth in the numbers of university graduates and professional classes who were unable to find gainful employment at home or unwilling to bow to unwelcome social pressures, the by-products of Iran’s demographic revolution were to the regime more of a potential liability than a precious workforce necessary to build Iran’s future. It was as if the boundary lines between the self and the other in the Islamic Republic were drawn in such a fashion as to protect an elite minority, loyal to the regime but inferior in education and skills, at the expense of repelling a far larger segment of the population who were educated and skilled but ideologically uncommitted to the emerging Islamic order. “Commitment [ta’ahhod] over expertise [takhassos]” was a favorite slogan that cost the Iranian economy dearly.

Obsession with the human body, especially the female body, had a deep history in the Shi‘i jurisprudence, for it served as the regulatory principle for enforcing hijab, gender segregation, and other controlling practices in the Islamic Republic and in its courts, schools, offices, and prisons. Shi‘i jurisprudence viewed the vagina (rahem) as the primal unit for kinship and family loyalties and legal rights, and henceforth demanded from the male members of the family and clan that they safeguard it. The ayatollahs’ detailed descriptions in their books of “explication of problems” (tawdih al-masa’il), a dissertation-like requirement for acquiring marja‘iyat in the twentieth century, in part spelled out intricate rules conducive to such a defense.

Beyond enforcing a shari‘a-prescribed bodily code, the essentially misogynistic clerical culture of Qom embarked on a systematic rewriting of women’s civil and legal rights in the Islamic Republic. It reversed many of the achievements of the late Pahlavi era. Marriage and family laws were drastically rewritten along old patriarchal lines. Uninhibited polygamy was reintroduced, the age of marriage for females was lowered according to the dictates of the shari‘a, under most circumstances divorce was redefined as the sole prerogative of the husband, and children’s custodianship was primarily granted to the husband and paternal relatives. Compliance (tamkin) with the husband’s sexual desires and abiding by his patriarchal superiority, rules that were endorsed by legislation and backed by the shari‘a, turned women, at least on the surface, into objects of control and instruments of pleasure.

In June 2009 the Green Movement (jonbesh-e sabz) brought to the surface among the urban middle classes these undercurrents of discontent with the Islamic Republic and its devious ways. Triggered by the presidential election campaigns of two opposition candidates, Mir Hosein Musavi (b. 1942) and Mahdi Karrubi (b. 1937), who were running against the incumbent President Ahmadinejad, the Green Movement brought millions to the streets of the capital and provincial centers. They were the largest demonstrations that Iran has seen since the early days of the revolution three decades earlier. Both challenging candidates were among the regime’s insiders—Musavi being the former prime minister between 1981 and 1989, and Karrubi a ranking cleric who served a number of times as speaker of the Majles—they were hailed by the public and welcomed as realistic alternatives to Ahmadinejad’s presidency. What motivated the campaign rallies to transform into a mass protest movement, more than the relative credibility of the opposition candidates, was Ahmadinejad’s disastrous presidency, Khamenei’s flawed judgment, and the Islamic Republic’s fearful elite. The vote rigging in favor of Ahmadinejad that reinstated him in office was followed in succeeding days by the Supreme Leader’s endorsement of the rigged election. His approval, coming after an equally flawed inquiry by the Guardian Council, confirmed the regime’s audacity to enforce a lie. The subsequent clampdown on the rallies, mass arrests of protesters, barbaric torture in detention centers, and secret murders of detainees further displayed a willingness to use whatever means were at the regime’s disposal to crush any voice of opposition. The mass trials in front of television cameras, when large numbers of “leaders of sedition” (saran-e fetneh) were tried and given heavy sentences, were reminiscent of the Soviet-style trials of the Stalin era. The Green Movement, named after the green color adopted by the protesters, above all demonstrated popular demand for liberalization, democracy, and accountability. It revealed to the Islamic regime, to the international community, and to the hundreds of thousands who gathered in Maydan Azadi in Tehran, in Maydan Naqsh-e Jahan in Isfahan, and elsewhere in Iran the existence of popular dissent among the predominantly young middle classes (pl. 17.2). After thirty years of the regime’s Islamification, failed economic policies, international isolation, and ethnic, religious, and cultural repression, people had not sunk into submission. Although the Green Movement was crushed, the hope for change is unabated: there is hope for a more open and more tolerant state that allows for its citizens to flourish, to emerge from deacades of isolation, and for the revolution to bear unspoiled fruits.

The Pahlavi ideology was also facilitated via the discovery of a new source of legitimacy that relied on Iran’s ancient past. Though Iran’s national awareness and its sense of mytho-historical continuity had never faded, the new nationalist narrative of the Pahlavi era was keen to contrast the glories of distant past with the perceived decadence of the Qajar era. These notions of glory and decadence laid the foundation for a national memory that has lasted up to the present. Reza Shah’s resolute personality also contributed to transforming Iran beyond anything it has experienced at least since the rise of the Qajars. The material success of Pahlavi modernity demonstrated the importance of oil revenue as a transformative commodity. But unlike coal in nineteenth-century European industrialization, oil revenue proved a blessing toward the creation of a stronger state with an extracting economy rather than a resource for growth of the national bourgeoisie. Since 1953, oil revenue, irrespective of Iran’s share of the proceeds and its legitimate claims for control of its natural resources, further strengthened the state at the expense of its citizens’ political and civil rights. Undermining old political checks and balances, the monopoly of the oil income, which had sharply increased over decades, gave the Iranian state a unique opportunity to implement top-down modernization projects. It also provided the state with more tools of repression and control.

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