Tag: economics

But Who Would Bilk the Roads?

But who would create the long lines in which to wait to be told you have the wrong documents?  Who would build the bridges to nowhere?  Who would pay $300 for a toilet seat?  Who would lose your important items in the mail?  Who would force you to turn off your cell phone while taxiing on the runway?  Who would pay a horseshoer to not shoe horses?  Who would pay a farmer to not grow crops?

Who would encourage the poor to buy education and housing they can’t afford?  Who would encourage workers not to work?  Who would encourage the generous not to give?  Who would encourage the productive to stop producing?

Who would punish the innocent for doing what makes them happy?  Who would subsidize some chemicals and plants and ban others?  Who would perpetuate gang wars across the globe?  Who would encourage and prop up organized crime?  Who would jail sickly grandmothers for seeking natural pain-relief remedies?

Who would incentivise healers not to heal?  Who would force entrepreneurs to become legal experts rather than creators?  Who would create laws sufficient to make everyone a criminal?  Who would artificially raise the price of health care?  Who would artificially lower the price of waste?

Who would prevent people from seeking damages when another pollutes the water?  Who would fail to maintain the forests?  Who would squander the resources?

Who would help well-heeled businesses crush their competition with laws and regulations?  Who would steal half of the production and spend it on stifling the other half?  Who would pay thousands of agents to create thousand of rules to penalize millions of people for making a living and not properly filling out paperwork to classify and justify it all?

Who would force the children into factory schools?  Who would cram bad ideas into their heads?  Who would drive them to near madness with tedium and tyranny controlling their every waking minute?  Who would call it bullying or a disorder when they reacted?  Who would cram pills down their throats when they thought divergently?  Who would lie to them about the value of schooling?  Who would teach them to obey arbitrary authority instead of their own consciences?

Who would force the peaceful to pay for war?  Who would encourage the violent to aggress and call it honorable?  Who would give sanction to racist, hateful tendencies and call it security?  Who would attack the innocent?  Who would build the drones?  Who would man the concentration camps?

Indeed, who would carry out the genocide?  Who would massacre the millions?  Who would force famines?  Who would torture?

Want a Better World? Make a Profit

A few days ago, I noticed a post on Fast Company’s Co.Exist titled, “Is Working on Wall Street Actually the Most Ethical Career Choice?”  The post is about a project called 80,000 hours that is trying to get people to think about how best to spend the average 80,000 hours they will be in a career.

Somewhat refreshingly, the project encourages people to consider going into high-income careers rather than the non-profit world.  It describes the outsized impact you can have by funding several causes vs. working in one.  But the premise remains: to do good, it’s nonprofits that provide the boots on the ground.  You might have to bite the bullet and take a high-paying job so that you can support such efforts, but it’s very clear that aid and charitable organizations are what make the world a better place.

What’s so odd about this perspective is that all the evidence in world history reveals just the opposite.  There has not been a single, massively transformative development driven by charity work.  But millions upon millions have seen the end of poverty, disease and plague; we’ve seen lifespans extended, air and water cleaned, culture, art and beauty preserved and enhanced, and lives saved by profit-seeking enterprises.

Working for profit is, in a free-market, always a win for others.  Profit is a signal.  It reveals when value has been added to society, as measured by the subjective values of those in society.  Resources are purchased for a price.  That price is what the resources are valued at for their next best use.  Profit-seekers then do something to the resources.  They apply ideas, time, other resources and labor.  What comes out the other end is sold.  If consumers willingly pay a price high enough to cover the cost of inputs plus some, profit is made.  What does that profit signify?  It signifies value created.  It shows how much more valuable the resources are after the transformation than before.  It shows, in dollars, how much better off people are because of the enterprise.

Of course dollars are not a perfect measurement of value.  And of course economic value is subjective and changing.  But there is no perfect measurement, and there is none clearer, cleaner, or fairer.  You can ask people what they value, but when they willingly trade their dollars for it, it speaks volumes.  Any uncoerced exchange that generates profit should be hailed as a wonderful benefit to the world.

Sure, you can make a bunch of money so you can give lots away to causes you believe in.  That’s a wonderful thing.  It feels good.  It can help some people in tangible ways that are fulfilling to be a part of.  The truth is, whether you like it or not, you’re doing more good for the world by the activity that makes you the money (so long as it’s not subsidy, tax, or regulation supported) than by the activities you support in giving it away.

I highly recommend this excellent article by F.A. Harper on “The Greatest Economic Charity“.

Review: Madmen, Intellectuals, and Academic Scribblers

Any book that uses an Oxford comma in the title is immediately in my good graces. Add the nicely designed cover, the slim size, and the intriguing topic, and Edward Lopez and Wayne Leighton would have had to commit heinous rhetorical or logical crimes to turn me off of their new book, Madmen, Intellectuals, and Academic Scribblers. Fortunately, they commit no such crimes but present a sweeping and readable examination of the forces that generate social change.

I have long been obsessed with the question of how to change the world. In my personal life, this question took me from humanitarian mission trips, to politics, to policy advocacy, to education, to developing educators, to raising support to develop educators. To borrow the old adage, I found I could do more in teaching a man to fish than giving a man a fish…then I took it further: Now I raise the capital to build the factories to make the rope to produce the nets to give the teachers to teach people to catch millions of fish.

This doesn’t mean I’ve discovered once for all the secret of changing the world; far from it. Every day my approach changes as I gain experience and learn new ideas. Madmen is, in many ways, a clear articulation of many of the ideas I’ve come to hold about social change. It details how Public Choice Theory reveals that governments have all the wrong incentives for positive change. It discusses the role of ideas, and how they are able to overcome the vested interests that Public Choice makes seem so insurmountable. It lays out Hayek’s description of social change coming from intellectuals, and spreading through the general public. But Madmen adds a new dimension, one I have not been able to integrate into my worldview until recently: the bottom-up role of culture, and the circumstance of time and place.

It is not only coherent, conscious ideology that determines what institutions will be tolerated, and therefore what incentives exist and what outcomes result. The conscious beliefs of individuals in society do play a major role, and are something we focus on perhaps because we feel capable of altering them through education and persuasion. But there is also a role for bottom-up, experiential, subconscious or tacit knowledge. The kind of knowledge that culture carries from generation to generation, passing on when it produces better outcomes.

Often no one is aware the valuable function of such cultural trends or norms. Economist Peter Leeson has done research on a variety of bizarre superstitions and practices embedded in various cultures; memes that seem to have no value. If you asked the members of that culture what the purpose was, they would likely provide an answer steeped in their religion or mythology. Yet time and again, the practices have proven efficient means of achieving desirable ends, at least compared with the known alternatives. Such cultural norms needn’t be recognized for what they are even by the people that benefit from them in order to have influence over institutions, incentives, and outcomes – good or bad.

I’ve come to believe that, when it comes to bringing about a better world, valuing freedom because we’ve experienced it and consider it normal is just as important as valuing freedom because it makes sense in the moral or utilitarian abstract. A generation that believes in the power of voluntary cooperation because they take part in it every day is no less valuable than one that reads libertarian theory.

Madmen integrates the top-down flow of ideas from intellectuals to the general public with the bottom up influence of learned cultural memes, and uses the combined forces to explain where the ideas come from that shape the institutions in which (as Public Choice reveals) incentives will lead to predictable outcomes. To create this integrated view of social change, Leighton and Lopez ask and answer three questions:

1. Why do democracies generate policies that are wasteful and unjust?

2. Why do failed policies persist over long periods, even when they are known to be socially wasteful and even when better alternatives exist?

3. Why do some wasteful policies get repealed (airline and telephone regulations) while others endure (sugar subsidies, tariffs)?

They offer answers in less than 200 pages, yet somehow manage to work in an expansive history of economic and political thought, beginning with the earliest philosophers and ending with the most current economists. This is an excellent tour of political economy as a discipline: what questions it asks, what personalities populate the field, and what competing and complimentary theories they present. There is enough detail to satisfy the wannabe economist in me, and enough colorful storytelling to sate my inner layman.

The book opens with a story of the shot-clock that saved basketball, and closes with a story of hybrid wheat that saved millions of lives. It is full of examples of social change, both good and bad, and the authors’ thoughts on why it happened when and how it did. If you are interested in how the world works from a ten thousand foot vantage point, I cannot recommend Madmen, Intellectuals, and Academic Scribblers enough.

How the World Will Change

(Originally posted here.)

When the world becomes free it will not be by the creation of new laws, or the removal of old, or new political leaders or any election result. It will not be because of a change in government, but because of a change in attitude toward government. It will not be because of legislation, but because of disregard for legislation.

Genuine change will come when the state is ignored, not reformed. It will come not when politicians are better, but when they are irrelevant.

When state-made law is no longer deemed necessary or important it will not be respected. When it is not respected it will not be enforced because it will not be enforceable.

This is how the world will change.

Evidence in the Face of Disbelief

The world can become free of the barbarous relic called the state. The state is a dangerous fiction whose power rests entirely on people’s belief in its necessity, or inevitability. Belief in the state is not insurmountable. It is not hard-wired into the human mind. It is not a given that a state must or will always exist. The state, like so many other superstitions now thought to be outrageous, inhumane and inefficient, can be left in the ash heap of history.

Many once laughed at the notion that an institution as old as humanity itself, the institution of slavery, would or could ever be removed. The prevailing wisdom for centuries, even among those who had discovered the moral repugnance of slavery, was that it was just a part of human nature. Reformers argued the best thing was to work for a more humane version of slavery.

Slavery was an institution that, however evil it may sometimes be and however utopians might imagine a more perfect world without it, was here to stay. Some embarked on efforts to improve the institution, to teach masters to be “good” to their slaves. Some setup rules and mores designed to limit the nastiest outcomes of the institution. But the institution itself was as unavoidable as scarcity and death.

The fatal flaw in this thinking is that slavery and government, unlike scarcity and death, are human institutions. They are, above all, mental constructs. Their physical manifestations are not physical realities humans simply encounter in nature, but realities we create, and humans only create by first imagining. An idea does not become an action unless the individual actor believes that the idea is worth acting on. To subjugate another human being, or to condone or allow the subjugation of one by another, one must first have the idea of subjugation and must believe that acting on it is preferable to ignoring or condemning it. Scarcity and natural death need no such human consent. The old saying about death and taxes turns out to be only half true.

If the state, like slavery, is the result of the ideas held by people it is not inevitable. Some day humanity could look back on the institution called the state with the same sense of shame and wonder that we now have about slavery. How could so many people – many of them good people – live their lives day in and day out surrounded by an institution so inhumane, so nakedly violent and demeaning? Did they really think it was necessary? Did they not understand how degrading it was? It will be hard to understand how so many humans thought the state was inevitable, tolerable and even good. As sure as slavery became a hated relic, so can the state.

How It Happens

When slavery ended it was not by changes in rules or laws or political leaders. Such changes often quickly follow changes in belief and mistakenly receive the credit, but they are never the cause. Slavery ended as people’s ideas about it changed. People began to believe it was not only an evil, but an unnecessary one. People began to believe it so evil that they were willing to tolerate the short-term sacrifices of ending it in order to reap the long-term improvement in the human condition.

The calculation of cost and benefit changed as people’s sense of morality trumped their sense of conservative institutional stability. The unknown outcome of ending slavery became an acceptable risk when considered against the known evil of the institution, which became an unacceptable reality.

Political Reform

Political reform can never bring about liberty. It can on rare occasion expand a bit of liberty for a few, but as long as that expansion occurs via political methods, it means bargaining that often takes away freedom in some other arena, or the long-term furtherance of trust in the state. The political game is about reshuffling and re-enforcing the necessity of the state.

The political game attracts great attention, and as such many suggest using it as a means of educating people about the power of liberty. Politics as education is only valuable in the long term to the extent that it educates people that politics is at bottom bad and government cannot ever be good. If it merely inspires people to advocate that the state do to things better, it is not, in the end, going to make society more free. It is disbelief in politics and in the state that leads to freedom.

The Chinese army fired on their fellow citizens in Tiananmen Square. This massacre was not caused by political leaders and generals saying, “Shoot”; but by men in the Chinese army deciding to shoot. It was not caused ultimately by bad leadership, but by a belief in the necessity of obeying orders. There will always be people with a will to power; a desire to control. Only when the rest don’t believe that power to be necessary and therefore do not obey does freedom reign.

Shift Focus

Humans want to solve problems in the most immediate and direct way possible. We want to know where the problem of restricted liberty begins. We discover the source in a gradual progression. First the focus is on people – the wrong political leaders. This quickly generalizes to political parties or groups, then to policies or laws, then to agencies and institutions, and finally to the state itself.

Here it seems we’re at the core of the problem: the state itself. Not any of the personalities or parties or bureaus or laws under its aegis. But a further shift in focus is required. The state is not the root of the problem. The real problem is not an institution, but an idea. It is the idea that government is necessary. That’s the culprit and final basis for every bad thing the state has ever done.

To a small degree, a shift in focus is happening now. A great many people don’t believe that a particular politician will solve the problems created by the state. An increasing number don’t believe one party is more likely than another to do so. It is more common to hear institutions or the incentives built into the system of government blamed. This is progress. It is, however, still rare to hear the existence of the state itself blamed, and rarer still to hear blame placed on the idea that a state is necessary.

The belief in its necessity gives rise to the state, which by definition is full of bad incentives that attract and nurture bad people in bad parties. To say the people, parties, or policies are the problem would be like blaming the sidewalk for breaking your leg after you walked off a tall building because you were ignorant of the staircase and elevator. Frustration with the sidewalk is useless and ignorant. The proper response would be to question the necessity of walking off the building; perhaps in so doing you would discover other less painful methods of achieving your goal and reaching the ground floor.

There is no form or arrangement of a state that can guarantee liberty. The answer is always peace, markets, and voluntarism. The ring of power cannot be wielded for good, but must be thrown into the fire before it uses good for evil.

Changing Lives and Changing Life

I do not wish to downplay the possible outcomes of attempts to reform the state. By such efforts lives can be changed. A court decision can save an individual or a whole neighborhood from being bulldozed by the state. The removal of a regulation can change the life of an entrepreneur and allow her to pursue her dream. These activities are analogous to disaster relief or soup kitchens; they can genuinely change lives and offer welcome relief. They can change lives, but they cannot change life.

Disasters will still come and go. The conditions that brought about hunger are not ameliorated with the appetite of the person receiving soup. The liberty-crushing actions of the state do not cease when it ceases to crush one neighborhood or regulate one industry for some period of time. The state will – must – continue to seek its own expansion, and it will push at every weak point it finds to do so, ensuring that an endless stream of lives will remain to be helped, but that the conditions of life itself will not be fundamentally altered. Treating disease is noble, but it is different than eradicating disease.

Changing lives is good and fulfilling work. But for those courageous enough to dream, changing life itself is bliss, and can only be done by undermining, not improving the state.

What to Do?

The only tactic worth pursuing is enlightenment. Enlightenment of self and of others, and both continuously. This does not mean telling people what to believe or what to do. It is more akin to discovery than education. A teacher may help you discover truth by providing information, but the discoverer has to have curiosity and openness. It is the discoverer himself who chooses to discover.

Become a free person, and your freedom will be a beacon to others who are searching. Create liberty in your own life, exchange ideas, be open to the power of human creativity. Free your own mind and you will begin to help others to free theirs not by telling them what to believe, but by demonstration and discussion.

The market does not produce new innovations and technologies because smart people tell others what to design; instead it is a constant dynamic give and take, show and tell, creation and imitation, trial and error, the greatest ongoing play of economic exchange.

The building of a free-society needn’t wait until the state is limited or absent; indeed the state will not wither until the free society is first built to replace it. The explosive power of ideas will destroy the foundations of the state as free people continue to live and breath those ideas and demonstrate the life, energy, fun, progress and fulfillment in freedom.

This does not mean everyone who wants liberty must do the same thing. Demonstrating and discussion the ideas of a free society is such a broad and evolutionary task that it opens endless doors. The differences we have in ability and interest lead to numerous efforts, and enlightenment leaves ample room for differentiation.

Our differences will manifest in which “others” we exchange with, and what methods and mediums we use. But it must be an exchange of ideas and the building of a free society. It cannot mean deceiving, cajoling, “nudging”, forcing, bribing, or dictating. These, in the end, will only lead to less freedom.

Liberty not inevitable, but it is possible. A state that does not trample liberty is not possible. So long as the state is deemed necessary it will exist, and the state will always grow beyond its originally desired limits. The state will prey upon society until it destroys it, and then destroys itself. But if the belief in the necessity of the state remains, the deposed state will soon be replaced by a new one and the process will begin again.

The only foundation that society can be built on without collapse is a belief in statelessness.

It must be belief. Consequential (practical) and deontological (moral) arguments against the state miss the point. People will accept an inefficient and immoral system if they believe it necessary. Once they find it unnecessary, they will abandon it and give moral or practical reasons for doing so, but the belief in the necessity of the state must go first.

Imagine Liberty

Ludwig von Mises described three preconditions to human action. An individual must have dissatisfaction with his current condition, a vision of something better, and a belief in the ability to achieve that vision.

Everyone has dissatisfaction with government. Almost no one has a vision of something better. People have visions of a differently structured “necessary evil”, but their lack of imagination makes them keep the modifier, “necessary”. The Proverb says that for lack of vision people perish.

If we open up our imagination there is abundant evidence of order without the state. Non-state norms and institutions produce the majority of the world we see around us. Historically, society precedes the state, and there is ample evidence of stateless solutions to problems we are taught to believe only the state can solve.

Beyond past or present evidence, an application of our knowledge of human potential can also help us envision what could be. Science fiction writers imagine unheard of technologies by looking at technological advances in the here and now. They extrapolate and predict where human ingenuity, if it continues on its present course, may go. The best social thinkers do the same with society.

Some advocates for liberty do have a vision of something better. They can imagine multifarious social arrangements without the state. But most still lack the third condition of human action; a belief in the ability to get there. After so many vein attempts at revolution and political activism it seems there is no answer. But in some ways, the second condition of action is the answer to the third. If enough people can imagine a better solution, they will cease to support an inferior one (even in the face of the unknown, if they believe it to hold promise) and cease to prohibit new experiments. People with imagination too small to envision an automobile may very well accept restrictions on road building. But people who can’t envision the specific manifestation of the automobile, but can imagine human progress and invention capable of surprising them will be reticent to restrict the construction of something with unknown promise.

This is why we needn’t all share the same, or even a very specific, vision of a stateless world. We must, however, be brave and broad-minded enough to see in human relations the potential of order without the state.

For those who can imagine such a world, the task is to open others up to the same possibility. Show them, intrigue them, inspire them. Where imagination is wanting, so is liberty.

When It Happens

Perhaps the beginning of the end of the state will be gradual. Maybe state efforts to restrict minor activities will be increasingly ignored. Bans on food and drink may be laughed at and become unenforceable. Perhaps it will slowly extend to ignoring bigger and bigger restrictions.
Perhaps it will start with a bang. The prohibition of drugs may simply come to an abrupt end, and sooner than anyone expects. Public schooling may suddenly become so little used and so uncompetitive in the face of educational innovation that it disappears.

It may happen without a big production. The visage of the state may not even die with its function. The royalty of England still exist, but they are longer relevant in regulating daily life. They exist as reflection or memory of what was once believed. Some Native American tribes perform rain dances not because they believe, as they once did, that they will bring rain, but as an homage to their past. The state may transform similarly. It may never “go away”, but it may cease to have meaning except as a tradition. Parades and pomp may remain while power over our lives withers.

Fast or slow, big or small, conscious or unconscious as it may be, the world will change. The state can be a relic of the past, harder to understand as time moves on, like slavery in America today. In so many ways the trend is well underway and we are already in a mostly stateless world, though it is little appreciated or understood. It may be a matter of merely realizing what is already true: the state is not, and never has been necessary.

Realistic and Radical

The dissolution of the state doesn’t rely on people to become better or morality to change, or for the next step in evolution. It is a fallacy that government is inevitable and necessary. It could wither away in no time. It is only a matter of us changing our beliefs, paradigms, and theories of world. It only requires that we realize that it is not necessary. I say only, but the power of imagination necessary to see that the state is not is no small thing. Opening our minds to this possibility is the greatest and most promising intellectual and practical adventure.

Old, New, Borrowed, Blue

Old

An imaginative and captivating read, Screwtape Proposes a Toast was C.S. Lewis’s follow-up published in the Saturday Evening Post to his popular book, the Screwtape Letters.  Screwtape is a fictitious correspondence between a senior and junior devil about how to damn men’s souls.  In the follow-up, Lewis has poignant insights into the nature of modern society, and in particular the way in which equality and democracy can corrode all that is good and sturdy in humans.

The text is posted here.  You can also read a PDF version of the original magazine publication here.

“Now, this useful phenomenon is in itself by no means new. Under the name of Envy it has been known to humans for thousands of years. But hitherto they always regarded it as the most odious, and also the most comical, of vices. Those who were aware of feeling it felt it with shame; those who were not gave it no quarter in others. The delightful novelty of the present situation is that you can sanction it — make it respectable and even laudable — by the incantatory use of the word democratic.”

New

Jeffrey Tucker absolutely nails it in this piece for The Freeman.  Jeff is one of those guys that gets freedom on a real gut, rubber-meets-the-road level.  He also gets it on an intellectual level.  He can pull from a treasure trove of work done by great thinkers on why liberty trumps central control, and he can also pull from keen insights on every day life and apply it all to present ideas for living free, here and now, and fighting to free the future.  Tucker talks first of the intellectual journey to anarchism, then the practical journey; the part that really transforms your outlook on life.

“[L]et me admit that my anarchism is probably more practical than ideological—which is the reverse of what it is for the most well-known anarchist thinkers in history. I see the orderliness of human volition and action all around me. I find it inspiring. It frees my mind to understand what is truly important in life. I can see reality for what it is. It is not some far-flung ideology that makes me long for a world without the State but rather the practical realities of the human struggle to make something of this world though our own efforts. Only human beings can overcome the great curse of scarcity the world has imposed on us. So far as I can tell, the State is, at best, the great annoyance that slows down the mighty project of building civilization.”

Borrowed

I borrowed this story from a friend’s Facebook feed.   She rightly pointed out that this research has pretty significant implications for the social sciences and might alter the current direction of sociology, psychology, and behavioral economics.  What I find interesting is how common-sensical the findings are.  The fact that this work will shake up these disciplines reveals just how silly and prone to trendiness academia can be.  I’m also willing to wager that, should this and similar work start a new trend in the social sciences towards more context-dependent theories, the pendulum will swing absurdly far and another counter-revolution will happen a few decades later reminding us that, yes, some elements of the human mind are universal.  The paper posits, in short, that institutions matter, a lot.  They shape our worldview and affect everything from how our brain processes spacial relations, to our sense of fairness.

“The potential implications of the unexpected results were quickly apparent to Henrich. He knew that a vast amount of scholarly literature in the social sciences—particularly in economics and psychology—relied on the ultimatum game and similar experiments. At the heart of most of that research was the implicit assumption that the results revealed evolved psychological traits common to all humans, never mind that the test subjects were nearly always from the industrialized West. Henrich realized that if the Machiguenga results stood up, and if similar differences could be measured across other populations, this assumption of universality would have to be challenged.”

Blue

This excellent book review by Anthony Gregory is depressing, or “blue”, upon first reading, especially if you’re new to revisionism.  The patriotic myths of war heroes and cunning statesmen are shattered, and with them a sense of American identity.  It takes some time.  You have to stand back and look at the facts and alternative narratives free from nationalistic impulse.  Then you grasp that most history books are little more than propaganda favoring the powerful status quo.  It hurts at first. With time, it is liberating.  This book review is an excellent appetizer for this way of examining the past.  Open your mind and give the revisionist view a try.  Let it sink in before you reject it.  See what happens.  I’m willing to bet you’ll develop lingering suspicions about mainstream histories.  That’s a good thing.

“The Founding Fathers are the first official heroes targeted, appropriate in both chronological terms and in considering the civic mythology of the United States. And so who were the true heroes? According to Russell, it was the rabble. John Adams, Alexander Hamilton, Sam Adams, John Jay and the rest of them looked upon the common American people, populating Philadelphia where they were holding their conspiratorial meetings, as “vicious,” “vile” and otherwise unsavory folk. “But what the Founding Fathers called corruption, depravity, viciousness, and vice, many of us would call freedom”

Why Corporations Don’t Support Freedom

There is a common assumption that advocacy of free-market ideas is funded in large part by big corporations.  As much as I wish the many great organizations and projects that are educating in liberty received financial support from large corporations, almost none of them do, and when they do it is in very small amounts when compared to the other things such firms support.

But why?  Businesses are constantly hampered and harassed by government regulation, taxation, and the uncertainty of the legal landscape one day to the next.  Don’t they stand to gain from laissez faire?  Well, yes, businesses stand to gain tremendously from market freedom.  Entrepreneurs, owners, employees, consumers, and every other market participant stands to gain.  Businesses of all sizes stand to gain, provided they can produce what consumers demand.

Aye, there’s the rub.

You see, while business stands to gain from free exchange, nobody knows which specific businesses will be most successful in a competitive environment.  Consumers are a tough bunch to please.  It takes a lot of work, and there’s a lot of uncertainty.  The creative destruction of the market is a little daunting to a businessperson who dwells on it for long.  It’s easier, for those who can afford it, to cozy up to the state and ensure that it’s restrictions and interventions hurt you a little less than they harm your competitors.  If you have resources enough and play your cards right, you might even be able to get policies that make you more profitable or put your competitors out of business entirely.

The result?  Bigger businesses tend to support state intervention, because they have the lawyers and money and can hire the guns of government.  It is entirely possible that some of these very businesses would fare better under economic freedom, but they don’t know for sure, so they go the somewhat safer route of state cronyism.  Smaller businesses typically aren’t organized enough and lack the resources to manipulate policy in their favor.  Worse still, the unimaginable number of new ventures that would have been created were it not for government impediments have no voice at all; we don’t even know who would have created them.

In short, freedom is good for business, but scary to businesses.

Democracy is Not Our Savior

(Originally posted here, but I remain bewildered by the religious devotion to democracy, so I’m reposting.)

Imagine if your local grocer used mass voting to determine what to stock on the shelves. Everyone in a 30-mile radius of the store would get a ballot every few years, and you could vote on what items they should sell. Think long and hard about what people would vote for. Do you think this would result in better selection and quality than the current system of letting markets decide?

Voting is an incredibly inefficient mode of social organization. It rewards irrationality, selfishness, ignorance and greed. It makes peaceful coordination and cooperation incredibly difficult. It is divisive and hopelessly, systemically flawed. All the incentives are wrong. We should not see voting or democracy as a solution to social or political problems, but one of the primary causes.

Perhaps my example of voting on groceries is unfair. In most political systems we don’t vote on each and every issue. Instead, imagine that residents within 30 miles of the grocer don’t vote on the store’s stock and policies, but rather vote on who should manage the store. Let’s go a little further and say they vote on the manager, CFO, board members and a handful of other middle-management roles. What would be the result?

For starters, those seeking to hold management positions at the grocery store should forget about any skills except the skill of convincing all the voters to vote for them. Marketing themselves as better than the other would-be managers would be the only thing that would get them the job; not their expertise at running a store or their knowledge of stocking procedures, management or the industry. Would people’s votes provide better and clearer information about who should manage the store than the profits, losses, operations and happiness of employees? Of course not.

At first glance, voting may seem similar to a market. After all, when people buy or don’t buy from the grocer, it sends price signals telling management what shoppers value. It’s like a vote, with a crucial difference: It costs the buyer. Market exchanges reveal what people want when they face trade-offs. Voting reveals what people want when it’s “free.” Lots of people might vote for the store manager who promises not to import anything from other countries because it makes them feel good to support local farmers. These same people, when faced with higher priced and lower quality local food in the open market might very well choose to purchase imported produce. Voters support candidates who promise to restrict cheap imported goods, then on the way home from the polls they stop and buy cheap, imported goods. Voting irrationally is costless, while shopping that way hurts your pocketbook.

Voting also turns friends into enemies. I have neighbors that support different products and services and businesses than I do, but this doesn’t cause any tension in our relationships. But if we were forced to vote on which products, services and businesses were available to us, how much they should cost and who would pay for it, in a zero-sum election, you’d better believe tension would arise.

The fact that no grocery stores select products or managers by popular vote should clue us in to something: Democracy is a far worse way of coordinating and managing complex processes than markets.

It’s easy to see how disastrously inferior democracy is to the market in providing groceries. The provision of food is the most fundamental and important service to any society; if the market can handle food provision so much better than democratic processes, why not the provision of less fundamental services like health care, education, protection and all kinds of lesser services? In truth, the incentives built in to the democratic process create massive inefficiencies in all these government services, as well as allow for corruption and all manner of moral transgression.Government failure is an inescapable part of government.

In civil society, voting is a rarely used mechanism. We vote on inconsequential things like where to eat or what movie to see with a small group of indecisive friends. Voting is used in religious or civic organizations to select board members or decide on some major issues. Not only are these relatively small, homogenous groups, but they are groups of people who have voluntarily come together around a shared vision. They can also freely enter and exit; shopping for a church or denomination may sound off-putting, but the freedom to do so is crucial to the health of individuals and churches.

Even in these smaller, voluntary institutions, voting has important incentive and information problems that most organizations try to curb in some way. The more populous the group, the more complex the decision—and the more costly or important the outcome, the worse voting is as a coordinating mechanism. When you’re dealing with hundreds of millions of people and a cross-section of highly complex policies with life-and-death consequences and millions in potential gains or losses, voting becomes an absurd mechanism of coordination. Governments may try to supplement voting with all kinds of irritating and invasive data collection like censuses, but these do not solve the problem in any way—and can make it worse. Does your grocery store need to conduct a census to supplement the anonymous information you provide them with your purchasing behavior?

Most advocates of limited government understand why tyranny and central planning are dangerous. But too often they assume more or better democracy will improve things. We hear about turning backward countries around by making them more democratic. We hear about turning our own country around by convincing people to vote for better candidates or policies. None of these will ultimately address the problem. The grocery store that is managed by vote would not be much better off if the residents selected a “better” manager; the manager would face the same lack of vital information, and the voters and manager would face the same bad incentives.

The way to make the world a freer, better and more prosperous place is not to enhance and expand democracy or to elect better people through the democratic process. It is instead to reduce to a minimum the number of things decided through the democratic process, and to allow more peaceful and emergent institutions for social and economic coordination to take its place. This can only happen when enough people understand and believe in the power of peaceful, voluntary interactions over the power of coercive political methods.

Smith, Smith Everywhere

Everywhere I turn I see a theme: decentralized, unplanned order is superior to rigid top-down plans.

Popular economist Nassim Talib’s new book, Antifragile is about, “Things that gain from disorder”.  Historian James C. Scott’s latest book is called, Two Cheers for Anarchism.  A few years back I read a pop-business book called, The Starfish and the Spider, about the “Unstoppable power of leaderless organizations.”   Then there’s this discussion of the 2004 book, Sync, on, “The emerging science of spontaneous order.”

What do these have in common?  None of the authors describe themselves as libertarians, and only some of them reference F.A. Hayek or other libertarian thinkers who are known for the idea of spontaneous order.  This is exciting.

At first I noticed this trend and thought it was interesting how Hayek’s ideas are so fundamental that they are being explored in all disciplines by all kinds of thinkers.  But really, it goes back to Adam Smith (who doubtless drew on ideas from many others before him).  One of Smith’s core insights was that individuals pursuing their own interests unwittingly produce a broader order that benefits all.  It seems simple.  Yet this observation is so deep and rich with explanatory power that we might easily overlook it’s staggering implications.  Hayek’s work, among others, extended this insight and asked more questions about why and how unplanned order is superior to top-down dictates.

Today we see not only an extension of this idea in theory, but widespread application. Websites like Wikipedia were founded on this insight.  User-generated content and the network based framework of the web are live experiments in decentralized order.  The self-policing of blogs and forums and the customers reviews on Amazon and Yelp put the idea to test for all to see.  It’s increasingly difficult to be unaware of the “invisible hand”; it’s becoming more visible every day.

Many who are tapping the power of this insight don’t necessarily extend it to society at large.  As I said, most of the works referenced above are not full-fledged calls for libertarianism.  Still, the power of decentralization, the clunkiness of monopolistic bureaucracy, and the beauty of the unknown and emergent are more understood than ever.  Understanding breeds acceptance.

Seeing is believing.  So is doing.  A generation that believes in the power of voluntary cooperation because they take part in it every day is no less valuable than one that reads libertarian theory.  The future is open, unknown, and bright.

Why Government Fails – Public Choice for Everyone

There are innumerable arguments about the legitimacy and morality of government and its proper scope, all of which are worth exploring.  Public Choice Theory examines an entirely different question than what government ought to do.  It asks what government actually does.

Public Choice is the study of the operations of government using the analytical tools of economics.  In short, the same assumptions about human interests and actions are applied to the political market as the market for economic goods.

The real power in this theory is its ability to reveal how poorly government works in practice.  It does not address lofty notions of the ideal state, or the right and wrong of state action, but rather examines the actual operations of states to see if they are effective at achieving their stated goals.

Public Choice theory by that name is relatively new among schools of economic thought, but the application of economic insights to political institutions is not new.

This is a basic overview of the core insights of Public Choice Theory.

Why government?

The need for government is typically justified by the claim that there are certain “public goods” which cannot be supplied by the voluntary forces of the market, but are nonetheless beneficial to all members of society.

The standard analysis describes goods like roads, for example, and spends a great deal of time analyzing the incentives in the market to explain why roads will not be sufficiently provided.  It is supposed that everyone would benefit from a road and it would be “non-excludable”.  That is, once constructed, it would be too costly to prevent members of society from using the road whether they paid for it or not.  Because of this non-excludability, rationally self-interested individuals would be unwilling to contribute to a voluntary fund for the maintenance of the road.  Each individual knows that their contribution is small relative to the entire road fund, and furthermore that without their contribution, they will still enjoy use of the road.  With these incentives facing everyone, no one will contribute and the road will decay.  It is in no one’s individual interest to pay for road maintenance, but everyone would be better off if each person contributed.

You may substitute any number of “public goods” for roads, but the standard analysis is the same.  It looks closely at the incentives in the market, deems them unfit to provide the good in question, and concludes that the good must be provided by the state.

Let’s grant, for the sake of argument, that the analysis of the market is correct.  (There is ample evidence to the contrary of course: Nearly any “public good” you can imagine has at some point been, or is even today, provided by the private sector, even though theorists sometimes fail to imagine how.)  If we accept the inability of the market to sufficiently provide the good, there’s still something missing in the standard story.

All the time is spent analyzing what would happen in a market of rationally self-interested individuals and what the incentive structure would produce.  When deemed insufficient, no time is spent analyzing what happens when government attempts to provide the good.  (This is what Art Carden has colorfully dubbed the political economy of the Underpants Gnomes.) What happens if we use the same assumptions and analytical rigor when examining government provision of public goods as we do for the market?

Political self-interest

In order for government to solve public goods problems it would require selfless politicians.  The political actors who use tax dollars to maintain the road would have to be counted on to discharge this duty rather than, say, spend the money on something else or give it to a subpar contractor who happens to be their friend.  But if we are consistent in our analysis, we must treat politicians as rationally self-interested people too.  They have every incentive to act to their own benefit at the expense of the taxpayer.

How can the self-interest of the political class be kept in check?  The textbook answer is democracy.

Democracy as a restraint

Does democracy ensure that the political class will pursue the interest of the public, rather than their own?  The answer is a resounding ‘no’.  The reason is because voters are also self-interested.

It is well known that, statistically, an individual vote in a state or national election is meaningless.  The odds of one vote changing the outcome of a national election are worse than the odds of winning the lottery.  The odds of getting in a car accident on the way to the polls are greater than the odds of an individual vote making a difference.  In other words, the possibility of an individual vote resulting in measurable benefits to that individual is almost nonexistent.

In order for democracy to keep the self-interest of politicians in check, voters need to have an understanding of what they’re voting on and what policies are good for the whole of society.  This would take a tremendous amount of time and effort.  A single bill may be several hundred pages of technical legalese, and most elected officials vote on hundreds of bills in each term.  For a citizen to be informed enough to know what policies are good for society vs. good only for the politicians is incredibly costly.  Yet the individual vote of a citizen has almost no chance of changing the outcome or conferring any benefit.  The rational response is to be ignorant of policies, because the cost of being informed is so much greater than the chance of benefiting from being informed.  A dedicated, informed voter has one vote that is cancelled out by just one ignorant voter.

The result is what economists call “rational ignorance”.  Voters are ignorant of policies and positions because to be otherwise is a burden with no reward.  But there are some people for whom knowledge of policies is beneficial; namely, the small groups that are directly affected by those policies.

A bill to give a $100 million subsidy to Acme co. is worth a great deal to that company.  They would not be foolish to spend $99 million lobbying for its passage, as they would still come out $1 million ahead.  Voters, on the other hand, have no incentive to lobby against the bill because spread out across taxpayers it might cost each just a few dollars, while active opposition – even just a letter to a Congressperson – might take hours of time that could be spent doing something worth more than a few dollars.  This is why democracy results in concentrated benefits and dispersed or diffused costs.  The rationale of politics is to provide benefits to concentrated interests and spread the costs as far and wide as possible – including into the future by way of borrowing or inflating to pay for it.

The obvious result is a myriad of special interests seeking benefits at the expense of the broader public.  In the end, everyone is worse off, but every group has the incentive to continue to seek privileges, if for no other reason than to offset the costs they are bearing for the privileges lavished on every other group.  This is why Frederic Bastiat described the state as, “That great fiction by which everyone tries to live at the expense of everyone else.”  It has been described elsewhere as a game where people stand in a circle and the state takes a penny from each person, then awards five pennies to one of them at the end of the round (the other five being kept by the state).  The game is repeated until each person has been the “winner” of five pennies at least once.  They all begrudge the loss of a single penny each round, but all eagerly expect to be the winner in another round, not realizing that at the end of the game every single person in the circle has less than they started with.

The incentives in a democratic system lead to special interests lobbying for and receiving privileges at the expense of society.  Far from keeping the self-interest of politicians in check, instead democracy promotes and rewards it, so long as those politicians also provide benefits to every imaginable minority and hand the majority the bill.

But let’s ignore all that…

Let’s assume away rational ignorance on the part of voters.  Let’s pretend that voters will expend every effort to become knowledgeable and constrain the self-interest of politicians.  Let’s say the “will of the voters” can keep officials in check.

But what is “the will of the voters”?  It is not an easy question to answer.  Let’s walk through the selection of a preferred policy through the democratic process.  The policy in question is what to do with troops in Iraq.

Option A: Keep troop levels the same

Option B: Increase troop levels

Option C: Remove all troops

Now let’s look at the preferences of three different voters.

Voter 1: A>B>C – Prefer to keep the same level of troops, but if any change is going to occur would rather increase troops and “get the job done” than to pull out.

Voter 2: B>C>A – Prefer to increase troops to “get the job done”, but if that’s not going to happen better to pull out entirely than keep the same level of troops.

Voter 3: C>A>B – Prefer to remove all troops, but short of that, better to leave the same number of troops there than to add more.

Whether or not you agree with the preferences of these voters, it is clear that each of them has a rational sequence of preferences among the given policy options.  You probably have met people who hold each of these views.  To determine the “will of the voters”, let’s put these options to a vote and see what policy the elected officials should follow…

In a vote between policy A and B, policy A would win.  Two of the voters prefer A to B.  If we put policy B and C to a vote, policy B would win.  Finally, if we put policy A and C to a vote, policy C would win.

So what is the will of the voters?  According to the votes, they prefer A>B, B>C, and C>A.  In practical terms, it means the “will of the voters” is to have the same level of troops instead of more, more troops instead of none, and no troops instead of the same number.  That would be like a person saying that, between Snickers, Baby Ruth and Heath bars, they prefer Snickers above all, followed by Baby Ruth, followed by Heath, which they prefer to Snickers.  This is a non-transitive set of preferences, and is one of the definitions of a mentally impaired person.  The will of the voters is a logical impossibility. This is called vote cycling, or Arrow’s Impossibility Theorem.

You can see how, based on the structure of the voting process, entirely different preferences can emerge.  This means that even if the voters were well informed, democracy would fail to provide a clear “will of the voters” for politicians to be accountable to.  Take this simple example of three clear policies and substitute a number of politicians each with positions on dozens of different policies and it is utterly impossible to know what the “will of the voters” is based on the results of elections.

Okay, let’s also ignore all that…

Let’s go a step further.  Let’s pretend that voters are not only informed, but that by some magic the “will of the voters” is clear as day and easily ascertainable through the democratic process.  If we grant these two monumental assumptions surely democracy will serve to protect the interest of the public at large from those of politicians and special interests…right?  Unfortunately for democracy, its problems are even greater than rational ignorance and the impossibility of a clear “will of the voters.”  The “will of the voters” may actually be for policies that are harmful to those voters themselves and the public at large.  This is what Brian Caplan has called “Rational irrationality”.

Voting is not the same as purchasing something in the market.  To vote is to express a preference, while to purchase something is to demonstrate a preference.  Voting, like filling out an anonymous survey, is “free”.  You can voice whatever preference you like without being held accountable for the result.  Imagine if a grocery store sent a survey to nearby residents and asked them to vote for what items they would like on the shelves.  It’s not hard to see what a disaster this would be for patrons of the store.  People may vote for bizarre items just to be funny.  People may vote for items they think they ought to buy, rather than items they actually do buy; or items they think their neighbors should like, rather than what they do like.

When people are asked whether they like it when companies outsource production to countries where labor is cheaper, most will say no.  Yet many of these same people purchase lower priced items produced overseas instead of more expensive domestically produced alternatives.  Their stated preference is for American made goods, but they demonstrate by their actions that they see foreign goods as more beneficial to their own well-being.  It is “free” to say you want to protect American manufacturing jobs, and it may feel better to voice that opinion, but if faced with the costs that result from the outcome of a protective tariff, people may choose otherwise.

Voting is a free way to indulge irrational biases.  Voters do not vote for policies that they themselves favor, but for policies that make them feel good to vote for.  They vote for the candidate who promises to stop immigration because it feels right on an emotional level, yet they hire the migrant worker to landscape their business because it benefits them more than the alternative.

Voting separates the voter from the results of his vote, and creates an incentive to use votes carelessly and in ways contrary to his actual interest.  Even if we grant the most generous assumptions imaginable – voters who are fully informed no matter the cost to them and the fact that they have no chance of benefiting from being informed, and a democratic process that can clearly express a single “will of the voters” across a complex range of issues – democracy still provides incentives for policies that harm the public by their own definition.

Public goods revisited

We began the exploration of how government works by assuming it was the solution to public goods problems.  Government was supposed to the solve those instances where it is in no individual’s interest to bear the cost of overcoming a problem, but where everyone would be better off if all would share the cost.  What Public Choice reveals is that, rather than solving public goods problems, democracy is the greatest public good of all.  It is in no individual’s interest to bear the cost of being informed and voting their true preferences, but in order for the system to work everyone would have to sacrifice their self-interest to the greater good.

Regardless of the moral standing of the state, the practical outcomes of government activity are inferior to what the market produces.  Even in cases of so-called “market failure”, it may be better for the government to take no action than to intervene and make things worse with the even greater “government failure” embedded in the incentives of the state.  In other words, whether or not government is an evil, it may be an unnecessary one.

Hope?

To reduce the harmful effects of the perverse incentives in government, it must be reduced to its smallest possible form.  The scope of activities taken on by the state must be narrowed as far as can be accomplished.  Many practitioners of Public Choice theory advocate constitutional checks, supermajorities and other adjustments to government procedures in the hope that these will change the incentives and create a more accountable government.  The flaw in this approach is that the parties responsible for making such changes are themselves part of the government apparatus and face all the same incentives they are hoping to overcome.

If followed to its logical conclusion, pure Public Choice theory would lead us to believe that the state would be all-encompassing even now.  The incentives are aligned, for example, so that there should be mandates on every facet of our lives in every industry and the sphere of freedom should be nonexistent.  Yet this is not the state of affairs in which we find ourselves.  Why, given the incentives in the system, has the state been restrained at all, little though the restraint may seem to us?

In the final analysis, it is the beliefs of the public that create the ultimate check on the state.  If the public has a firm belief that alcohol should be legal, the interests of bootleggers and Baptists will not be sufficient to bring prohibition back.  We cannot reasonably expect incentives to be overcome or people to act against their self-interest, but we can and do see incentives change as people’s view of what is in their self-interest changes.  Most people would not find it worth their while to attempt to stop the passage of a subsidy to Midwestern beet farmers; but a great number of people consider it worth their while to attempt to stop the passage of a new prohibition bill.

Only when it is widely believed that farm subsidies are as absurd as alcohol prohibition will the incentives change enough to produce a more restrained state.

Further reading

Public Choice, A Primer – Eamonn Butler

Beyond Politics – Randy T. Simmons

Government Failure – Gordon Tullock, Arthur Seldon, and Gordon L. Brady

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*I am indebted to Professor Benjamin Powell for the basic structure of the arguments in this article, which he presents in a lecture for the Foundation for Economic Education.

*I am indebted to Matthew Mitchell for the example of vote cycling.

*This was originally posted at LibertarianChristians.com.  I thought it prudent to repost here because there are so few basic intros to Public Choice and because many would-be readers who are not interested in Christianity or Libertarianism may overlook it at the original site.

Rational Choice Robots Are Real (and they are us)

One of my pet peeves is when characters in movies don’t behave like real people.  I don’t mean when people teleport, or fly, or grab onto the landing gear of a moving plane – I love sci-fi, action and fantasy.  These things don’t make sense in our world, but can be perfectly consistent with the rules of the world in the film.  What gets me is when the storytellers try to convince us that the characters are normal humans, just like you an me, regardless of whether gravity is the same, yet they behave completely irrationally.

I don’t mean irrationally as in crazy, or emotional, or too short-sighted; real people do that.  I mean in ways that do not benefit them in any way, even according to what we are supposed to believe is their own subjective valuation.  Movie villains are notorious for this.  How often are they portrayed as hell-bent on a particular goal, only to stall just before realizing the goal to deliver some one-liner.  If the character is supposed to crave attention and the recognition of being witty above all else, this might make sense, but that’s not often what we’re supposed to believe about them.  How many movies portray business tycoons as so greedy for more money that they do things that will guarantee them less money?

I have a hunch that this unrealistic portrayal of humans in extraordinary circumstances stems from an unrealistic understanding of humans in ordinary circumstances.  There seems to be a failure among writers and the general public to appreciate the power of rational choice theory in explaining human behavior.  Too many people do not see everyday actions as the result of rational self-interest.  If you don’t think people pick a brand of black beans based on rational choice, then why would they pick a method of murdering their nemesis any more rationally?

Critics of rational choice theory correctly point out that real people are not robots that calculate their projected “utility” with every decision.  This critique is correct insofar is the calculation is not often conscious nor does it involve anything called a “util”.  But calculations of self-interest do occur all the time, and in dizzying complexity.  To take a well-documented example, when seat-belt laws are enacted, injury from accidents tends to increase slightly.

Economist use a rational choice model to explain that humans comfortable with a certain level of risk will maintain that level and if you make them wear seat-belts  they may compensate by driving more dangerously.  I doubt anyone consciously gets into their car after a seat-belt law is passed and says, “I’m comfortable with a 0.7% chance of death every time I drive, and this damn seat-belt lowered it to 0.5%.  I’m going to speed up!”  Still, we make subtle, marginal calculations like this all the time without realizing it.  If you crave a candy bar you may be willing to get in your car and drive at night through the rain to get one – an act that dramatically increases your risk of injury.  But if it’s snow mixed with rain, you may deem it not worth the risk.  A very minor change in risk alters your decision.

It is impossible for an economist to get inside anyone else’s head and understand their subjective preferences or what creates them.  It’s hard enough to understand what generates our own.  Absent some telepathic ability, we are left with few tools to analyze the decisions people make and the norms and institutions that result.  We could assume that people behave in completely irrational, unpredictable ways and have no expectation of generating a desired result when they take any action.  But then, why would someone act if they did not believe, whether rightly or wrongly, that acting would yield some benefit (as defined by them, not some objective standard)?  An assumption of rationally self-interested individuals is the only tool available to us, and it turns out it’s amazingly powerful.

Since value (in the economic sense anyway) is subjective, calling someone a rational chooser does not mean they have no emotions or impulses.  These things are part of what form their judgements of what is valuable.  Neither does it mean people will always choose the most effective means of getting what they desire.  No one is perfectly informed and we often have false ideas about cause and effect.  What we value also changes over time and with circumstance.  All it means is that, given the knowledge and preferences we have we will choose the actions that we perceive as yielding the greatest benefit (subjectively defined) at the time of choosing.  So simple it’s often dismissed as an unhelpful truism.  But how many times do we forget this and assume all kinds of far-fetched things about people’s choices instead?

When we apply this model, even some of the most bizarre behaviors can start to make at least some sense, given the constraints (real or perceived) and context.  (Check out some of the work of Peter Leeson).  This can help us see the root causes of behaviors and social phenomena and, if we so choose, attempt to change the cost/benefit equation and alter the situation.  Without this model we are left making wild and arbitrary guesses and claims about what motivates actions and we pursue remedies that do nothing to change the underlying incentives.  “They hate us because we’re free”, for example, might make one feel better, but it doesn’t offer any valuable insight into why someone rational enough to plan for months would conduct a seemingly irrational act like a suicide bombing.

I love a tall tale at the movies, but it would be a lot better if writers kept their characters actions consistent with the motives and values they are supposed to have.  Understanding real human behavior is the first step in creating pretend worlds that really capture the imagination of real world viewers.

Fantasy Football and Economics

An article from last month’s edition of The Freeman in which I discuss some economic lessons from fantasy football and at the same time grind an ax with a former fantasy football commissioner. Maybe it’s wrong to use economic principles and a great outlet like The Freeman as a way to vent frustration, but it worked and I am now over it…mostly.

The article is here.

America’s Great Depression

Murray Rothbard’s seminal but often overlooked work, America’s Great Depression, is especially enlightening since the 2007 financial crisis.  If you want to read the entire 400 page book (which I highly recommend), here it is.  If you’re short on time, here’s a 12 page summary of the main arguments in the book with some additional context.  Enjoy.

Was Adam Smith Wrong?

Here’s an article I originally wrote for the Prometheus Institute.

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Disagreeing with a man whose face appears on the necktie of many a freedom-lover is perhaps dangerous, but sound reason can’t be sacrificed on the altar of great men – and Smith was a great man.

Indeed, Adam Smith, in his depiction of the division of labor in a pin factory and his timeless prose on the invisible hand and the self-interest of the butcher, offers some of the greatest explanations and defenses of capitalism ever written, even some 230 years later. I consider Smith a great thinker, and a hero of liberty. That doesn’t mean he was never wrong; particularly when it comes to the question of value.

Smith’s thoughts on the derivation of value in his Wealth of Nations laid the groundwork in this area for later thinkers like David Ricardo (another brilliant mind who was right about many other things) and eventually Karl Marx. In the case of the latter we have clearly seen how bad ideas can have horrific real-world consequences. As John Maynard Keynes famously remarked,

“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

I might add too the bad ideas of otherwise good economists.

Smith essentially, though somewhat confusedly, argued that the value of any good was ultimately derived from the amount of labor it took to produce. Money or commodity prices reflected only the nominal but never the real value of a good. In this way he described the different prices of different goods as a simple formula:

“If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.” (The Wealth of Nations, Book I, Chapter VI)

Smith elaborated further by describing other costs of producing a good, including the role of the entrepreneur and capitalist and the profits they require. Unlike Marx, Smith never denigrated the role of the capitalist or the profits they earned, but his conception of value resulting from the cost of production (ultimately labor) opened the door for the idea that anything charged or earned above the cost of real inputs is unnecessary; excellent fodder for anyone anxious to obtain power by appealing to an envious middle class.

The problem with Smith’s analysis is not that the cost of production has no link to the value or money price of a good – indeed, the two are closely connected. He merely had the relationship backwards.

In reality, prices reflect the money equivalent of the value a buyer places on a good. That is to say, an individual who wishes to have a good places an entirely subjective value upon that good as compared to other goods, and the difference is typically expressed in terms of money. If in Smith’s example no one cared for beavers, the cost of killing a beaver wouldn’t matter; the beaver would sell for little or nothing. There is no one value of a good, but each individual values each good differently, as compared to other goods. It is the same for Smith’s supposedly changeless measure of value, labor. An hour of the same kind of labor may be valued (or disdained) to different degrees by different people.

It is for this reason that price is merely the reflection of the amount of money an individual was willing to give up to obtain a given good in the most recent exchange.

However, Smith was correct in seeing a relationship between the cost of production and price: Once a producer or entrepreneur has an indicator of what someone was willing to pay for a good, he can speculate how much others will be willing to pay in the future. He may be incorrect, but he will start with an estimate based on past experience and hope to get an equal or higher price. It is the estimated price (which reflects the value others place on the good) that will dictate how much he can spend on production. If a producer expects a good to sell for $1, he will be willing to spend up to $0.99 to produce it. (This is obviously a simplification, as he may be willing to take short term loss if he expects long term gains, he may want more than a $0.01 profit, etc.) In other words, the amount of labor and other costs of production flow from the expected sale price of the good, not the other way around. No one will spend more to produce an item than they believe others will be willing to pay to buy it.

Smith correctly saw that the various costs which go into production must be paid by the sale price of the final good. What he failed to see is that the costs of production do not create the price of the final good or imbue it with some objective value, but that the subjective value that each consumer places on the good sends signals backwards to producers and tells them how much they can expend on production without suffering a loss.

That Smith saw the factors which go into the production of a good as the cause of the price, rather than the effect, may seem like a small error. But economics, like all attempts to study the behavior of human beings, is a subtle science which requires great attention to the correct logical progression of actions. A misunderstanding between cause and effect can be fatal.

A slight adjustment to the angle of a satellite signal can, when extrapolated over thousands of miles, result in a beam nowhere near its target location. Likewise, looking at an economic phenomenon, such as the price of a good, from an even slightly incorrect angle can result in consequences far greater than imagined when spread over time and by different minds in different cultures. I would never single-handedly blame Adam Smith for the horrors of socialism. But his backwards theory of value contributed, over time and space, to a set of ideas which laid the theoretical groundwork for socialism – a philosophy completely contrary to the views of Smith.

I still admire and respect Adam Smith as one of the world’s great minds and a positive force in the battle for liberty. His conclusions and prescriptions were correct, even though his methodology was sometimes flawed. However, the lessons to be gleaned are to never let admiration for a great mind blind you to areas in which they are in error; and that even correct conclusions, if based on incorrect reasoning, can be dangerous.

The Problem of Paradigms

Here’s an old and dusty blog post on paradigms.  Recent events brought it to memory so I’m posting it here.  Also see this post on worldviews.

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Johan Norberg wrote a brilliant and devastating critique for the Cato Institute on Noami Klein’s recent book, The Shock Doctrine.

Norberg’s article is well worth a read.  It reminded me of the immense importance of the long-term battle of ideas.  The practice of teaching political ideas on a simple continuum of left to right, with fascism on one end and communism on the other, has resulted in all manner of untruthful re-interpretations of history, philosophy and economics.   This book is probably the strongest example of the major problems this simplistic and inaccurate paradigm creates.

Klein is unable to see the world through any lens besides the left/right paradigm.  Because of this, she is forced to make everything fit into this vision.  She crams big government Republicans, fascists, despots, corporate welfare leeches, bureaucrats, militarists, and libertarians all into one bizarre category.  No matter how strongly reality disagrees with this view, and no matter how impossible it is to fit these different shapes together, she still tries and apparently believes she’s succeeded.

The paradigms we form early in our intellectual endeavors can prove incredibly hard to shake.  Seeing the world as merely a left/right world is the root cause of almost all of Klein’s inaccurate, and frankly stupid, conclusions.  It seems glaringly apparent that libertarians and neoconservatives are not even close to the same thing – scads of books, websites, essays and debates are widely available which make this overtly clear to even a casual observer.  Yet Klein holds so firmly to her left/right paradigm that she fails to see these distinctions, and sometimes even offers critiques of government and calls them critiques of free-markets.

If we are to analyze policies and philosophies on their moral and practical merits, it is imperative that we learn to break out of overly-simplistic paradigms, and allow each argument to stand on its own rather than be mashed together in unnatural associations that are easier to label and fit on our continuum.  (Though also simplistic, here’s another at least somewhat better way to view political ideas – one that allows for more deviations and does a better job of explaining the world that we actually see.)

Paradigms are important and necessary mental tools that help us understand abstractions and put them into a broader and more meaningful context.  However, they are only mental tools – the paradigm should never be confused with the truth itself.  When reality does not fit into our paradigms, we need to explore new ones rather than bend and twist reality and deceive ourselves into believing it fits.  Paradigms should be checked against logic; a sometimes difficult task that would’ve saved Ms. Klein from a great deal of error.

Klein’s book should serve as a reminder that the current left/right political spectrum is one of the least useful or explanatory paradigms around, and adherence to it in the face of divergent realities can be dangerous – to freedom and to truth.

Aristotle on Mixed Economies

This is an article I wrote some time ago for the Ludwig von Mises Institute.

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A friend recently commented that he has found wisdom in moderation. He said it seems that truth and goodness are found not at the extremes, but at the place of balance between extremes. This can be very true.

As Aristotle wrote in his Nicomachean Ethics, “Virtue must have the quality of aiming at the intermediate.” In Aristotle’s examples, it is cowardice and recklessness that are the extremes, courage the middle ground. It is drunkenness and uptightness that are extremes, and moderate drinking the mean.

My friend went on from this concept to state that he believed in neither socialism nor capitalism, but in a mixed economy — or what he called a “messy middle ground.” There are two main problems with this conclusion.

The first is that statements like this in the abstract are meaningless. To construct a pretend spectrum, and place various actions and beliefs on it and then to choose the “middle” between them does not give meaning to that middle in and of itself. That is, without actual arguments and definitions regarding what that middle choice or belief is, it is simply a made up point on an imaginary spectrum on which other ideas are arbitrarily placed. Using this logic, I could claim that, since the mean is always good, green beans and omelets are both extremes and I prefer the middle ground.

Most often, those advocating an idea simply because it is in the “middle” of their mentally constructed spectrum do so because they lack any real arguments about the idea itself. For the idea of a middle ground or moderation to have any meaning, the extremes must first be defined and understood as opposite responses to a common problem, and must be placed on an ordinal value spectrum, such as a standard of basic morality that always holds falsehood as bad and truth as good.

The second problem with the conclusion that, since even Aristotle recognized moderation as the source of virtue, a mixed economy is better than capitalism or socialism is that it departs from the logic used in the earlier examples of courage and moderate drinking.

Courage and moderate drinking were the mean because either an excess or a deficiency was problematic. However, both courage and moderate drinking are extremes in another sense. Courage is a word that describes the good state of mind in the face of danger. There is no case in which courage itself is bad or not to be desired, since it is by definition the proper balance between cowardice and recklessness — you cannot have too much courage, nor too little, only too much fear or too little. There is either courage or noncourage (cowardice, recklessness), just as there is either truth or falsehood. In this sense it is an extreme.

Perhaps this sounds like a simple matter of definitional difference. There is, however, a fundamental difference here, meant to show that moderation is only good if it is moderating between two bad extremes and to a good mean, and not if it is moderating between a good and a bad. As Aristotle put it:

But not every action nor every passion admits of a mean; for some have names that already imply badness, e.g., spite, shamelessness, envy, and in the case of actions adultery, theft, murder; for all of these and suchlike things imply by their names that they are themselves bad, and not the excess or deficiencies of them. It is not possible, then, ever to be right with regard to them; one must always be wrong.

The midpoint between murder and nonmurder is not the good choice — nonmurder is. However, the moderation between not caring a lick about the actions of another and caring so much you would use violence to control them is a good middle ground — but this middle ground is not to be confused with socialism.

Socialism is a system where government uses force to tell people what decisions they can and cannot make. There may be degrees of freedom within different socialist systems, just as a prisoner may be treated better or worse by different wardens, but if you are not free, you are not free.

Capitalism is an economic system that allows people to make choices free from government intervention. All government intervention is backed by the threat of violence — if it were not, it would not be a government policy, but rather a voluntary recommendation, or a rule of a voluntary association. The fact that one cannot avoid taxation and obedience to a government without physical consequences proves that it is not a voluntary institution, but rather one backed by force.

Advocating a “mixed economy” or a middle ground between socialism and capitalism is nothing more than advocating a middle ground between threatening your neighbor with violence if he doesn’t do your will and not threatening him with violence. If he resists, it becomes the same as the “middle ground” between murdering and not murdering. In that sense, capitalism is an extreme, just as courage is an extreme against noncourage.

In another sense, there is a middle ground economically. The middle ground is between caring so much about the economic decisions people make that you would threaten them with murder to control them, and caring so little that you would allow them to harm themselves or others. By definition, you cannot escape the second extreme by application of the first. You cannot care about individuals by threatening them with violence. Such care must come peacefully and voluntarily: by persuasion, not force.

The middle ground in this case is not socialism — or control by threat of violence — but a capitalist system in which individuals voluntarily look out for one another, and peacefully persuade others to look out for themselves and others. Capitalism is not a virtue in the way that courage is a virtue; it is rather a framework that avoids the extreme of violent coercion. Avoiding the one extreme, as a capitalist system does, does not guarantee avoidance of the other extreme, just as not being reckless does not guarantee you will be courageous. But again, avoiding the extreme of neglecting others cannot be achieved by embracing the extreme of coercing them.

The true middle ground is to accept a capitalist system — i.e., avoid the extreme of coercion — and choose personally to care for and about others, and persuade them to do the same — i.e., avoid the extreme of neglect. Since caring for others is a highly subjective, individual concept, no form of coercive economic arrangement can bring it about; one can only allow it to occur.

In one sense capitalism is an extreme in that it is the opposite of coercion. In another sense, capitalism is simply a system that allows individuals to choose the middle ground between coercion and neglect. Socialism, on the other hand, is an extreme in both cases; it is the opposite of freedom and it is not a middle ground between coercion and neglect; it is itself coercion.

Attempting to find a middle ground between coercion and freedom is a bad idea.

Finding a middle ground between coercion and neglect is a good one.

Capitalism is the only system that allows for both of these. We should not stop advocating capitalism, nor should we stop caring about ourselves and others in peaceful, voluntary ways.

I find it no less disturbing when someone says both capitalism and socialism are extreme and they seek a middle ground than if someone were to say both love and cruelty were extreme, and they therefore seek a middle ground. Some vices or virtues are found in moderation; some are found in absoluteness. As Barry Goldwater famously said,

Extremism in the defense of liberty is no vice! — Moderation in the pursuit of justice is no virtue.

Capitalism is just. Socialism is unjust. There is no “messy middle.”