Econlib Archives - Page 338 of 418 - Liberty Fund (2024)

One of the greatest discoveries of the 18th century did not come from physics or astronomy but from the nascent science of economics. It is the theory that if individuals independently and freely pursue their ordinary self-interest, the resulting social order will be efficient, that is, will allow virtually all these individuals—or at least their vast majority, given their starting points in life—to better satisfy their own preferences.Adam Smith is, among the first modern economists, the one who, in his 1776 The Wealth of Nations, best formulated the idea:The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security.Most schools of economics, with notable exceptions (orthodox Marxian and Keynesian beliefs, for instance), have carried this idea to our days.The 18th-century idea of an autoregulating society was deeply revolutionary as it had been unknown all along the previous 500,000 years of mankind. It would make it possible to understand, during the following three centuries, the escape of ordinary people from hunger and poverty through the multiplication of real goods and services (GDP) in countries where political authorities stopped trying to control everything. Between 1775 and 2018, it is estimated that the British GDP per capita was multiplied by 13 (see the Maddison Project).Among many illustrations of the power of the idea of autoregulation, consider a story in yesterday’s Wall Street Journal: Leslie Scism, “Car Insurance Prices Fell in 2020 as Pandemic Reduced Driving.” Why did car insurance prices decrease by an average of 4% last year? Is it because the shareholders of property-casualty insurance companies started being altruistic? It would be a complex and unrealistic hypothesis to entertain. Nor would it be a credible hypothesis that altruistic governments across all American states forced the insurance companies to cut their prices. It is true that car insurance rates are monitored or controlled by many state governments (not everybody understands Adam Smith!) but only a minority of them require prior approval—which could probably not have worked so rapidly after Covid-19 hit in 2020. (See Marianne Bonner, “How Insurance Rates are Regulated,” December 14, 2028.)The explanation of the price reductions lies in the simple fact that that the several hundreds of car insurance companies in America are in competition and cannot avoid cutting their prices if only one of them does it to gain a competitive advantage. So if reduced driving pushes down automobile accidents and their cost during a pandemic, the price of insurance will automatically decrease.This is a general feature of free markets. Suppliers try to get the highest prices while buyers try to pay as little as possible. It would be vain to blame individuals in either group. On the contrary, it is because they act this way that prices are autoregulated towards the lowest possible prices for consumers consistent with suppliers’ costs.The drama is that many people still don’t understand the autoregulating character of free interindividual relations. A well-known story is that of the Russian official who, shortly after the collapse of the Soviet Union, asked British economist Paul Seabright, “Who is in charge of the supply of bread to the population of London?”There are many examples of the persistent ignorance of the autoregulating character of free interindividual relations, and one does not need to look at poor countries laboring under tyranny to find them.Consider the vice mayor of Long Beach in California who defended the imposition of a $15 per hour minimum wage for grocery workers. Two grocery stores just announced they were closing: see Havley Munguia, “Long Beach’s Grocery-Worker Wage Bump Spurs Closure of Ralphs, Food 4 Less Sites in City,” Press-Telegram, February 1, 2021 (H/T: Andrea Mays). “Our job is to keep providing for the residents,” he declared, not realizing that providing for the resident grocery workers means not providing for the residents who eat food, as food prices will rise if only through shopping travel. More fundamentally, the vice mayor does not understand that the most efficient way to determine wages is to let the market do it.Another exquisite example is the postal inspector who opined on the conduct of a convenience store owner who sold Covid-19 supplies at a price the politicians and bureaucrats considered too high (see the Department of Justice’s press release):Unfortunately, Mr. Singh allegedly chose to use this opportunity to make money by hoarding and price gouging PPE [personal protection equipment]. The conduct charged in the complaint is reprehensible and against our most fundamental American values.Singh later entered into a deferred prosecution agreement and agreed to “donate” $450,000 of PPE, to be distributed by politicians and bureaucrats instead of being sold on the market to ordinary individuals who needed it urgently. If he thought he was in the “country of free enterprise,” he was obviously mistaken.There are quite probably exceptions to, and within, the theory that individual liberty generates an autoregulating social order—a “spontaneous order” as contemporary economists like F.A. Hayek call it. Justifications exist for governments acting under a realistic presumption of unanimous consent—for example around the goal of not settling conflicts by open violence and organizing protection against that or, more controversially, around other preferences for public goods. But to be credible, these justifications must be built up from an understanding of the general efficiency of the spontaneous order, not handed down from the millennial ideal of a shepherd or some political authority protecting his flock to better exploit it.A good question is why the 18th-century monumental discovery is still ignored by so many people. Public choice theory suggests many answers, which revolve around the idea that it is in some individuals’ interests to make sure it is ignored. Think of shareholders and executives of steel companies and the bosses of their trade unions. But there are also purely intellectual reasons: after all, many people—despite, or because of, public schools—still believe that the earth is flat. (0 COMMENTS)

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The Power of Thinking on the MarginBecause I understand the power of one vote–it’s very close to zero–I always vote in Presidential elections for the candidate who’s closest to my views. The first time I was able to vote in a Presidential election was in 1988 and from then until now I have voted for the Libertarian Party candidate.That’s where thinking on the margin has led me.But Presidential candidates have a much thicker margin. They make hundreds of decisions–about where to speak, how to debate, and what to say. When they are incumbents, they have a large input on many policy issues that can affect the outcome of the election.Health economist (and friend) John C. Goodman sent me an email Monday with the provocative title “Why Trump lost the Election: Health Care.”In it, he writes:The editors of the Wall Street Journal, the editor of National Review (Rich Lowry) and John Goodman all agree: Trump didn’t endorse the plan outlined by Goodman and Heritage Foundation scholar, Marie Fishpaw.Oops.Trump actually did the things Goodman and Fishpaw recommended, including allowing people to talk to their doctors by phone, email, and Skype; allowing employees to have access to 24/7 primary care as an alternative to the emergency room; and allowing employer-provided health insurance to be personal and portable. But Trump never talked about any of this. So, he didn’t get credit for any of it.I think John is right. But one could also say that if he hadn’t been so incredibly rude and nasty in the first debate, he would have won also. (Although we now know in retrospect that Trump was probably awfully sick with COVID-19 during that first debate. When you’re sick, you tend to let out your inner self. And Trump’s inner self is nasty.)Consider the fact that if Trump had received just 43,000 more votes, properly distributed, in Arizona, Georgia, and Wisconsin, he would have won the electoral votes of those three states. That’s a total of 37 electoral votes. Had Trump won those, he would have had 269 to Biden’s, wait for it, 269.What would have happened then? It would have been thrown into the House of Representatives where each state delegation gets one vote. So California gets one vote and Rhode Island and Montana each get one vote. Etc. The vote is based on the November 2020 election results. Based on those results, Republicans had 26 votes. In that case, Trump would have won.Interestingly, though, he might have had Kamala Harris as his Veep because the vote for Veep would have been by U.S. Senators. This is unclear, though, because the Senate is tied 50-50. Does anyone who reads this know?Now back to the main point: Trump’s thick margin. As Holman Jenkins pointed out in an aptly titled Wall Street Journal opinion piece, “Trump Threw it Away,” January 6, 2020, Trump almost won. Jenkins wrote:Of course the microscopic margin rankles—he lost the pivotal electoral votes of Georgia, Arizona and Wisconsin by fewer than 43,000 votes. He has every reason to be beside himself since he absurdly oversupplied these voters with reasons to vote against him and he still almost won.Imagine a team so bad and good at the same time that it would have prevailed if it had fumbled the ball 1% fewer times in its own endzone.Imagine what would have happened if Trump had been neutral, not nice but simply neutral, to the memory of John McCain. He probably would have won Arizona. (Of course, that’s like asking what would have happened if Trump hadn’t been Trump.) What if he had pointed out the record growth in median incomes for various minority groups? He might have won Georgia. What if had actually run a campaign based on his accomplishments up to the end of 2019? He might have won Wisconsin. Etc.So although we voters can’t individually affect the outcome, candidates can influence the outcome with a few key decisions.Here’s the longer John C. Goodman piece. (0 COMMENTS)

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Reason magazine has a very good Nick Gillespie interview of former ACLU head Ira Glasser. (The bolded question is Gillespie, the rest is Glasser):It wasn’t until my 30s that I began to understand free speech, that the real antagonist of speech is power. The only important question about a speech restriction is not who is being restricted but who gets to decide who is being restricted—if it’s going to be decided by Joe McCarthy, Richard Nixon, Rudy Giuliani, [President Donald] Trump, or [Attorney General] William Barr, most social justice advocates are going to be on the short end of that decision. I used to say to black students in the ’90s who wanted to have speech codes on college campuses that if [such codes] had been in effect in the ’60s, Malcolm X or Eldridge Cleaver would have been their most frequent victim, not David Duke.Was that a convincing argument?It pulled people up short. They imagined themselves as controlling who the codes would be used against. I would tell them that speech restrictions are like poison gas. It seems like it’s a great weapon to have when you’ve got the poison gas in your hands and a target in sight, but the wind has a way of shifting—especially politically—and suddenly that poison gas is being blown back on you.Back when I was at the University of Chicago, there was a great deal of controversy about the ACLU’s decision to defend the right of Nazis to protest in Skokie, Illinois (which had a large Jewish population.) In 1977, there were many Holocaust survivors in Skokie, so the ACLU’s decision was understandably highly controversial. Thus I was interested to discover that the strategy seems to have paid off:How did Skokie turn out?We won the case at every level. It even went up to the Supreme Court. It was an easy case legally because these bonding statutes had been struck down a million times before.Meanwhile, some of the people who lived in Skokie—once we won the case and the Nazis said they were coming—did what the town should’ve advised them to do in the first place: They organized a massive counter-demonstration. About 60,000 people were ready to come. And then the irony of ironies is, when confronted with that, Collin and the neo-Nazis never came to Skokie. Once we won that case, it also allowed them to demonstrate in Marquette Park, which was what they had wanted to do all along. They also confronted a massive counter-demonstration there that never would have happened without the case. It completely overwhelmed them; they couldn’t be seen or heard. Right after that they fell apart.One thing I’ve discovered in life is that bullies tend to be cowards. (0 COMMENTS)

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You’ve got reactions to Orwell; I’ve got reactions to your reactions. Here goes:robc:How close are your 5 steps to what Pinochet did in Chile?I think he at least followed steps 1 and 2.I was offering for steps for reforming a socialist dictatorship from within. While Pinochet did step down and allow a return to democracy, the dictatorship he built was mild enough (and non-socialist enough) that he didn’t need a master plan to unravel it.Thomas DeMaio:I can’t help but to notice that the adherents of anti-racist ideology never seem to notice that structural racism, ongoing Jim Crow, etc. are taking place at the exact same time as an influx of immigrants who belong to the supposedly persecuted minority groups. Is this a matter of not spontaneously noticing the contradiction or an example of Crimestop? I’m thinking it’s the former.The obvious reply would be, “However bad things are in the U.S., they’re much worse at home,” or maybe, “There’s more racism in America than Mexico, but most Mexicans are happy to endure a little more racism if they can triple their material standard of living in the bargain.” Though I’d also point out that non-white immigration to the U.S. is much more Hispanic and Asian than African, and that latter-day anti-racists have relatively little to say about racism against the former two groups.Weir:The counterpoint to both Marx and Orwell is Aldous Huxley: “Within the next generation I believe that the world’s rulers will discover that infant conditioning and narco-hypnosis are more efficient, as instruments of government, than clubs and prisons, and that the lust for power can be just as completely satisfied by suggesting people into loving their servitude as by flogging and kicking them into obedience.”Brave New World was first published in 1932. So I’d say that Huxley was clearly wrong for the last four generations or so. And the only notable sign that he was on to anything is the psychiatric drugging of school children, which governments use to sedate difficult children – not instill support for themselves. I see no sign that governments are doing much to make people “love their servitude,” though there has been a notable increase in nagging alongside old-fashioned coercion. Even there, incarceration massively outweighs flogging and kicking.Max Avar:Contingency cuts both ways, though. Had Beria, who briefly took power after the death of Stalin, managed to stay in charge—and he was certainly ruthless and experienced enough that he might well have—the Cold War and/or Soviet Union might have ended within a few years of 1953.I’d say it was amazing that Khrushchev managed to liberalize as much as he did. I know Beria was allegedly open to a few compromises with the West, but I think he would have been much closer to Stalin than Khrushchev.John Alcorn:Re: Doublethink.Distinguish two scenarios:(a) Lucid insiders (The Party) deceive outsiders (the rest of society). I think Orwell underestimates this scenario.Orwell focusses on the psychology ofthe senderin propaganda. He narrowly — and, I think, mistakenly — asserts: “firmness of purpose […] goes with complete honesty.” Sometimes honesty and resoluteness are conjoined, but often not. Liars can be hellbent. Honest persons often keep their heads down.Plausible, but for your story to be right, the apparently self-righteously dogmatic ideologues I’ve encountered so many times would have to be Oscar-worthy actors. That just doesn’t add up. They’re notfeigning self-righteous dogmatism; they’re the real McCoy.We should consider also the psychology ofthe addresseein propaganda. If addressees lack competence in lie-detection, then The Party doesn’t need doublethink. If, instead, addressees ‘know a lie when they see it,’ then Party members first must deceive themselves. This brings us to the doublethink scenario.(b) Party members doublethink.Orwell defines doublethink as “the power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them.”Compare the standard psychological theory ofcognitive dissonance. When a belief (cognition) strongly conflicts with a desire (motivation), unconscious adaptation often occurs, like a person who turns in sleep and finds a comfortable position. This mechanism explains psychological adaptation to Party ‘rewrites’ more plausibly than doublethink does.The whole idea of cognitive dissonance is that people are strongly uncomfortable with holding contradictory beliefs. I’d say that for most political activists, the discomfort is mild at most.Orwell notwithstanding, it’s difficult consciously to believe X and not-X (contradictory cognitions) at the same time. It’s much easier for the unconscious to adapt a belief to a desire (or vice versa).Perhaps, but most politically active people have little trouble adapting incompatible beliefs with each other.Wishful thinking (to believeXbecause one hopesXis true), counter-wishful thinking (to believeYbecause one fearsYis true), and sour grapes (to believeZis bad becauseZis out of reach) are commonplace mechanisms in political psychology.You could classify doublethink as a species of wishful thinking – “I believe these seemingly contradictory beliefs are compatible because I hope they are compatible.” But I think this rushes over a rich mental process that Orwell patiently explores.KevinDC:The subsidiary reason is that the Party member, like the proletarian, tolerates present-day conditions partly because he has no standards of comparison. He must be cut off from the past, just as he must be cut off from foreign countries, because it is necessary for him to believe that he is better off than his ancestors and that the average level of material comfort is constantly rising.I think Orwell overstates the importance of this. People seem to put very little stock in how well off they are compared to the past, or to people of other nations. Libertarians love writing essays pointing out how even very low income people in America today have access to things far beyond the imagination of even the wealthiest from a few decades back, and have standards of living in many key areas which are significantly better than a much higher income person in Europe. Yet, nobody who is low income ever reads these essays and comes away feeling reassured. They care far more about how well off they are relative to their peers. It simply doesn’t matter to them that Rockefeller and J. P. Morgan would have envied their access to GPS devices and air conditioning and Novocain or that they have more living space than an upper income person in Belgium, when almost everyone around them has those things too.Brilliant words, Kevin. This is my favorite reaction in the entire Book Club.An alternate strategy of the Party would be to simply ensure that everyone is equally immiserated. Since people seem to care far more about their relative well being compared to their neighbors, rather than their absolute well being, or relative well being compared to the past or people in distant countries, the proles might have been kept relatively content in their condition. Since the whole society is kept poor, there would be none of the envy and resentment we are so often told is destabilizing for a society.Given the massive size of Oceania, I fully agree. If Luxembourg were vastly poorer than its neighbors, the stability of Luxembourg’s government would be endangered. But when your country is so large that you rarely remember the existence of other countries, your rulers can rest easy.Reminder: Next week, we start with “War Is Peace”! (0 COMMENTS)

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The recent story of Robinhood and the “short squeeze” on GameStop has raised the question whether Robinhood was doing some squeezing of its own, applied to the delicates of the small traders it serves. The comedian and renowned financial analyst John Stewart said it was all, somehow, “bullsh*t.” An article in New York magazine declared “Robinhood banning GameStop proves the free market is a lie” without, however, saying whether the “lie” is that “the free market” works in some sense or, instead, that we have “the free market” at all. Strange bedfellows Alexandria Ocasio-Cortez and Ted Cruz “fully agree” that the situation is “unacceptable.” The New York Times, however, has published an establishment-friendly piece explaining “Why Robinhood had to risk infuriating its customers.” Who are the good guys here and who are the bad guys? Elon Musk wants to know. He recently grilled Robinhood’s CEO, demanding, “Did you sell your clients down the river or did you have no choice?” Good question, that.Recall the elements of the story. GameStop looked like a business on the brink of collapse. It seemed like a good bet that its stock price would fall. Hedge funds put in bets that the price would indeed fall by “shorting” GameStop stock. That means they 1) borrowed the stock, promising to return it to the owner by a specified date and 2) sold the borrowed stock right away. You can see how this works. If the price goes down, you’re selling it now at the high price and buying it back later at the low price. Ka-ching! But if the price goes up, you’re selling it now at the low price and buying it back later at the high price. Ouch!In the GameStop episode, traders on the subreddit r/wallstreetbets started buying the stock. That drove the price up. That’s a “short squeeze,” in which short sellers must scrabble to buy potentially over-valued stocks. Okay, ouch for the hedge funds. Ho hum. But here’s the thing: “at the end of December more than 138% of its shares available for trading were sold short.” Yep. It’s possible to have more than 100% “short interest.” If you buy the stock from one short seller and then lend it to another short seller, that one stock is owed to two parties. If that sort of thing happens enough, you can have more than 100% of the stock sold short. A short squeeze plus 138% short interest caused the price of GameStop stocks to rise – a lot. On the first trading day in January, the price was $17.25. On the last trading day, it was $325. That’s an increase of 1,784%. Ouch! Ouch! Ouch!The “Redditors” squeezed the heck out of the hedge funds. A win for the little guy! But then suddenly you couldn’t buy GameStop on Robinhood, the broker so many of these “Redditors” used. Robinhood had restricted trading in GameStop stock and several other stocks experiencing similar gyrations.Does this episode prove that “the free market is a lie”? I suppose it depends on where you think the lie is. I think it is no “lie” that free markets generally “work,” although simple formulas can lead you astray. We should heed Hayek’s admonition to eschew the “wooden insistence” on “the principle of laissez faire.” The “lie,” which is no lie at all but just an unfortunate error, is that financial markets are free. Financial markets are heavily regulated and have little to do with “the free market.” Let’s look at Robinhood’s action in the context of all that regulation.Robinhood is a broker. It is a FINRA-regulated broker-dealer. It relies on a clearing house to clear its transactions. The clearing house it uses is the National Securities Clearing Corporation (NSCC), which is a subsidiary of the Depository Trust & Clearing Corporation (DTCC). Thus, Robinhood is a “member” of NSCC. The NSCC is a “designated financial market utility” as defined in the 2010 Dodd-Frank Act. Thus, it is “a financial market utility that the Council has designated as a systemically important.” (“The Council” is a regulatory body created by Dodd-Frank. Its ten voting members include the Treasury Secretary, the Fed chair, and the comptroller of the currency.) NSCC is a provider of “financial market infrastructure” (FMI). As such, it must publicly promulgate rules for the computation of the “Clearing Fund” every “member” must maintain with it. While the FMI is responsible for designing its own rules for determining the clearing fund, they are subject to approval or rejection by the regulatory authorities. In particular, the SEC may prohibit any changes NSCC wants to make in its formula for computing the clearing fund of each member. The Bank for International Settlements (BIS) has promulgated a set of “principles” that member states should adhere to in regulating payment and settlement systems. These include, “An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.”Thus, the regulatory authorities require clearing houses to require members to keep a risk-adjusted balance with them as a guard against credit risk. In the case of Robinhood, the short squeeze drove this formulaic value up sharply. Robinhood didn’t really have much of a choice about how to respond. It had to both pony up more money for the clearing fund and act to hold off (to the extent possible) further increases in it. Robinhood had to borrow a lot of money to maintain its clearing fund.We can now answer Elon Musk’s question. Given the institutional environment it occupies, Robinhood had no choice but to suspend purchases of GameStop. And, as far as I know, Robinhood did not shape that environment. As far as I know, Robinhood is an institution taker, not an institution maker. What about Robinhood’s clearing house, NSCC? It didn’t have a choice either. It had to demand increased contributions to Robinhood’s clearing fund. The algorithm for determining the clearing fund was locked in at that point. The much-discussed restrictions on trading GameStop were not ad hoc, discretionary, arbitrary, or avoidable. Not, at least, given the pre-existing and overarching regulatory environment. It’s just not true that “Wall Street” somehow “decided” to screw the Redditors. Nor is it true that “the government” somehow “decided” to screw the Redditors. Once the short squeeze was on, restrictions on trading GameStop were pretty much inevitable.No one specifically decided to give the Redditors a smackdown. So everything’s great, then? No! The regulatory environment is not meant to help the little guy. It rigs the system in favor of Big Players and incumbent interests. As I have explained elsewhere, “The Dodd–Frank Act creates a regime of discretionary regulation.” It is discretionary because “the regulatory requirements on a nominally private institution vary from firm to firm in ways that are difficult to rationalise or anticipate.” Thus, the regulators are discriminating among individual market participants and applying different rules to different parties even when they have the same legal charter. (That’s how NSCC got classified as “systemically important.”) Not all is for the best in the best of all possible regulatory worlds.I think we need reform in the regulation of financial markets. But we should reject the error that the problem is “free markets.” When Elizabeth Warren says “It’s a rigged game,” she’s not wrong! But her call for “the SEC to get off their duffs and do their jobs” is asking the fox to do a better job guarding the henhouse. We don’t need more regulation; we need better regulation. We need the rule of law not only in monetary institutions but in financial markets too. We need to replace the “regulatory leviathan” in financial markets with “a regulatory constitution.”Roger Koppl is Professor of Finance in the Whitman School of Management of Syracuse University and Associate Director of Whitman’s Institute for an Entrepreneurial Society (IES). (1 COMMENTS)

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A key insight of the Coase Theorem is that externalities are reciprocal. Yes, a polluter imposes a negative externality on his neighbor. But if the neighbor insists on clean air, he imposes a negative externality on the polluter. While common-sense morality may urge you to take the side of the neighbor, economic efficiency urges you to keep an open mind. If the polluter’s cost of reducing pollution greatly exceeds the neighbor’s cost of enduring pollution, the Coase Theorem tells you to tell the neighbor, “Tough luck. Suck it up.”This Coasean insight is deeply relevant to COVID policy. It’s also been almost entirely ignored. Yes, people who don’t wear masks impose negative externalities on others. But people who insist on masks impose negative externalities, too. Efficiency requires both sides to consider the burden they’re imposing on the other.Is the cost of wearing masks ever actually lower than the cost of enduring COVID exposure? Definitely. Suppose ten healthy young people all work in an office from 9-5 on weekdays. Once a week, an immuno-compromised senior citizen stops by for five minutes. The unmasked workers definitely impose a tiny negative externality one senior. But if you require everyone to wear masks all the time, you impose a large negative externality on all ten young workers. The efficient outcome would probably be to tell the senior to stay home if he’s nervous – not tell everyone else at the office to remain masked forty hours a week to accommodate him.You might reply, “Forcing everyone to wear masks is inefficient, but we should still follow common-sense morality.” I’m sympathetic, but is common-sense morality really on the senior’s side? Not really, for two reasons:1. Voluntary assumption of risk. Every job has problems, including a bundle of risks. The risks are unacceptable? Common-sense morality’s standard reply is: “If you don’t like your working conditions, quit.”2. De minimis. Even if you don’t voluntarily assume a risk, common-sense morality says that the expected severity of harm matters. If the expected harm is trivial, you’re free to inflict it. Example: I risk your life whenever I drive in your vicinity. You don’t consent, but common-sense says I’m still entitled to drive. Why? Because the expected severity is low. You could protest, “Only because you’re liable for any harm if it occurs.” But in the real-world, imposing such liability is easier said than done. After all, a lot of people are judgment-proof. While you could heavily restrict the freedom of everyone who fails to post a $1M bond, common-sense morality strongly condemns such measures as tyrannical.To state the obvious, I respect not only the individual right to wear a mask, but property-owners’ right to require a mask as a condition of entry. But not only do I have a strong presumption against any stronger legal support for mask-wearing. I also think that informal norms should take Coase’s notion of reciprocal externalities seriously. (0 COMMENTS)

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I have a new Econlib article, which will appear in two parts. It summarizes the results of my research on MMT.Note that this sentence in Part 1 has a typo:“In Singapore, both the interest rate and the exchange rate are endogenous.”It should have been interest rates and the money supply are endogenous. It might be corrected by the time you read the article.Thanks to commenter Garrett for pointing that out. (0 COMMENTS)

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A couple of weeks ago I published an article in the Neue Zürcher Zeitung, in which I have defended stakeholder value capitalism vis à vis the “great reset” envisioned by the World Economic Forum’s Klaus Schwab. The title of the piece is: “A better capitalism is a worse capitalism”.My main point is that the many narratives used to refashion capitalism according to some criteria of alleged “sustainability” are actually going in the direction of making businesses less accountable. My article is now available in English too thanks to the Austrian Institute, a remarkable think tank led by Martin Rhonheimer. A Professor of Ethics and Political Philosophy at the Pontifical University of the Holy Cross, Rome, Fr. Martin is a true scholar and a committed champion of economic freedom as a necessary component of human liberty and I am very glad he wanted to translate my piece and put it on the Austrian Institute’s website.In the piece, I was specifically referring to a Time magazine article by Schwab (I’ve linked it in the post) where he claimed that for “the past 30 to 50 years”—and it would be interesting to know whether it is actually thirty or fifty years—“the neoliberal ideology has increasingly prevailed in large parts of the world.”Klaus Schwab responded immediately with a counter-piece, which the NZZ published on line here. The title says that “CSR is in the best interest of businesses”. I was impressed that Schwab claims he battled for thirty years with Milton Friedman on corporate social responsibility, but acknowledges that Friedman won the debate. That is, in a sense, true: the jargon of CSR is all over the corporate world. But typically advocates of CSR and shareholder capitalism present it as a ought and not an is, a vision for the future. Schwab considers it pretty much a thing of the present. I consider this an admission potentially conducive to a healthier debate. In the real world of 2020, it is libertarians à la Friedman, who want a pristine separation between business and politics, that are in fact insisting on how the capitalist system *should* be and should fashion themselves as proponents of radical reform, not the other way around. (0 COMMENTS)

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Today, the Book Club finishes with Chapter 1, “Ignorance Is Strength.” Please leave your thoughts and questions in the comments and I’ll do an omnibus reply later this week.The alteration of the past is necessary for two reasons, one of which is subsidiary and, so to speak, precautionary. The subsidiary reason is that the Party member, like the proletarian, tolerates present-day conditions partly because he has no standards of comparison. He must be cut off from the past, just as he must be cut off from foreign countries, because it is necessary for him to believe that he is better off than his ancestors and that the average level of material comfort is constantly rising. But by far the more important reason for the readjustment of the past is the need to safeguard the infallibility of the Party.When you first read1984, the mutability of the past sounds like sci-fi. Real humans would never believe such nonsense, would they? If you pay a little attention to evolving political dogmas, however, you will soon notice that all of your political opponents keep rewriting the past. The final frontier is attaining sufficient detachment to see that all politically influential sides keep rewriting the past, too. As Tetlock documents, noted political experts are among the grossest offenders; when they make demonstrably false predictions, their first line of defense is to misremember their own predictions!It is not merely that speeches, statistics, and records of every kind must be constantly brought up to date in order to show that the predictions of the Party were in all cases right. It is also that no change in doctrine or in political alignment can ever be admitted. For to change one’s mind, or even one’s policy, is a confession of weakness.Another popular variant: Confess the “error” of overestimating your opponents’ intelligence, morality, etc. “My enemies are even worse than I imagined. I was so wrong” is no confession of weakness.Doublethinkmeans the power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them. The Party intellectual knows in which direction his memories must be altered; he therefore knows that he is playing tricks with reality; but by the exercise ofdoublethinkhe also satisfies himself that reality is not violated. The process has to be conscious, or it would not be carried out with sufficient precision, but it also has to be unconscious, or it would bring with it a feeling of falsity and hence of guilt.Doublethink lies at the very heart of Ingsoc, since the essential act of the Party is to use conscious deception while retaining the firmness of purpose that goes with complete honesty…Some philosophers will claim that Orwellian doublethink is somehow logically impossible. And many armchair psychologists will pronounce is psychologically impossible. But in all honesty, I see no other way to explain the social world. Most notably: Unless doublethink existed, why would so many people express absurd beliefs with so much sincerity – yet stubbornly refuse to bet on them? Yes, perhaps they’re Oscar-worthy actors. The better story, though, is doublethink. For rhetorical purposes, political activists confidently believe nonsense; for behavioral purposes, however, they modestly defer to common sense.All past oligarchies have fallen from power either because they ossified or because they grew soft. Either they became stupid and arrogant, failed to adjust themselves to changing circ*mstances, and were overthrown; or they became liberal and cowardly, made concessions when they should have used force, and once again were overthrown.When Orwell was writing, the “became liberal and cowardly” mechanism might have seemed overblown. The subsequent collapse of colonialism, the Soviet Empire, the Shah, and so on confirm the depth of his insight.It need hardly be said that the subtlest practitioners ofdoublethinkare those who inventeddoublethinkand know that it is a vast system of mental cheating. In our society, those who have the best knowledge of what is happening are also those who are furthest from seeing the world as it is. In general, the greater the understanding, the greater the delusion; the more intelligent, the less sane.At least in the real world, this is overstated. We can tone this down, however, to: “The most extreme political fanatics tend to be very well-informed according to objective tests of political knowledge.”The official ideology abounds with contradictions even when there is no practical reason for them. Thus, the Party rejects and vilifies every principle for which the Socialist movement originally stood, and it chooses to do this in the name of Socialism.Hyperbole. Most obviously: As Orwell elsewhere explains, Oceania really did expropriate the capitalist class and establish a state-run economy, fulfilling two great socialist dreams in the process.The Ministry of Peace concerns itself with war, the Ministry of Truth with lies, the Ministry of Love with torture and the Ministry of Plenty with starvation. These contradictions are not accidental, nor do they result from ordinary hypocrisy; they are deliberate exercises in doublethink.Amen.Here we reach the central secret. As we have seen. the mystique of the Party, and above all of the Inner Party, depends upondoublethink. But deeper than this lies the original motive, the never-questioned instinct that first led to the seizure of power and broughtdoublethink, the Thought Police, continuous warfare, and all the other necessary paraphernalia into existence afterwards. This motive really consists…Winston Smith gets arrested before we can read another word of Chapter 1. Toward the end of the book, however, O’Brien maniacally completes the ellipses:Now I will tell you the answer to my question. It is this. The Party seeks power entirely for its own sake. We are not interested in the good of others; we are interested solely in power. Not wealth or luxury or long life or happiness: only power, pure power… The German Nazis and the Russian Communists came very close to us in their methods, but they never had the courage to recognize their own motives. They pretended, perhaps they even believed, that they had seized power unwillingly and for a limited time, and that just round the corner there lay a paradise where human beings would be free and equal. We are not like that. We know that no one ever seizes power with the intention of relinquishing it. Power is not a means, it is an end. One does not establish a dictatorship in order to safeguard a revolution; one makes the revolution in order to establish the dictatorship. The object of persecution is persecution. The object of torture is torture. The object of power is power.I struggle to pick my favorite Orwell passage, but this is definitely a top contender. I understand why people rarelyadmit to power-hunger; all Social Desirability Bias goes against it. “The object of persecution is persecution. The object of torture is torture. The object of power is power,” is the kind of thing people only say off the record. Nevertheless, I have to wonder: How can anyone overlook the immense role that power-hunger plays in the social world? I see it. Orwell saw it. How can anyone deny it? (0 COMMENTS)

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Ludwig von Mises’s 1944 book Bureaucracy is an investigation into the dramatic expansion of bureaucratic management in the United States.1 Bureaucracy mushroomed in accordance with Woodrow Wilson’s advancement of public administration in the late 19th century as well as Franklin Roosevelt’s New Deal (1933-1939), which included a series of programs and projects in response to the Great Depression. For instance, Roosevelt established the Office of Price Administration as part of the office for Emergency Management in 1941 to control rents and prices for scarce supplies, including tires, gasoline, coffee, and meats.2 In 1944, the U.S. recorded a 50 percent increase in government employment over the previous 4-year span, with around 6,100,000 employees.Today, the number of government employees has risen to over 22 million, excluding military personnel.3 The second half of the 20th century saw the creation of the Occupational Safety and Health Administration (OSHA), the Consumer Product Safety Commission (CPSC), and the Environmental Protection Agency (EPA), among other agencies. The Department of Homeland Security (DHS) and Consumer Financial Protection Bureau (CFPB) were 21st century creations. The intention of these agencies is to protect citizens, regulate industries, and provide public goods. To engage in such activity requires new and expanding hierarchical organizations. Thus, the U.S. has undeniably gone from a small administrative state to a burgeoning bureaucracy.Mises identifies the growing scale and scope of the administrative state and issues a warning against the tendency to bureaucratize political, economic, and social life, arguing that such an expansion in the bureaucratization of human activity would infringe upon individual freedom to manage our own affairs.To see where Mises is coming from when he writes Bureaucracy, it is critical to understand his role in the socialist calculation debate in the 1920s and 30s. His writings during that time focused on the impossibility of rational economic calculation in a socialist system lacking private property, which is the cornerstone for the establishment of monetary prices and the profit and loss mechanism needed for economic exchange. Rational economic calculation is what enables myriad consumers and producers to figure out which goods, services, and production processes are economically viable amongst the innumerable technologically feasible options. It is through market exchange and the pursuit of profit and threat of loss that entrepreneurs figure out the appropriate materials and processes needed to manufacture goods and provide services that consumers find valuable.Throughout Bureaucracy, echoes and extensions of Mises’ arguments on economic calculation demonstrate why a comprehensive administrative state, a practical necessity for implementing socialism, is problematic for social coordination. However, Mises’ warning calls are not just applicable to socialist governments but to all modern administrative states. Given the challenges facing the world today, understanding the constraints and possibilities of bureaucratic management is as relevant today as it was in 1944.What is Bureaucratic Management?Mises explores bureaucratic management—an administrative method “bound to comply with detailed rules and regulations fixed by an authority of a superior body” (37). The term bureaucracy originates from “bureau” which stemmed from the old French word for dark brown, the color of a wooden chest of drawers. Bureau also came to signify a government office that might rely on such furniture for filing paperwork. Bureaucracy came to refer to the management structure used by such offices, and bureaucrats came to refer to employees tasked to “perform what the rules and regulations order [them] to do” (37). Police departments, military units, post offices, tax collectors, government agencies, and embassies all utilize bureaucratic management.Bureaucracy has a reputation as being inefficient and wasteful, even among those who favor an expanded role for government. However, it is the only method of management available to governments that operate largely in the absence of the profit and loss mechanism that regulates economic action.Over time, Congress and the executive branch have granted more and more discretion and legislative power to agencies—awarding them the ability to make, implement, and enforce rules and regulations. Mises argues that this discretion leads to administrative arbitrariness, as the actions of bureaucrats are not answerable directly to the citizenry. Instead, bureaucrats are appointed by political officials or hired by other bureaucrats and, thus, are further removed from democratic accountability mechanisms, such as voting, that add constraints to presidential and congressional power. To put it another way, bureaucracy can represent collections of despots within a democratic system designed to be constrained by checks and balances.The Bane of Bureaucracy“Mises contrasts two systems of economic organization—socialism and the market economy—to demonstrate the limitations and capabilities of bureaucratic management.”Mises’ Bureaucracy is a skilled example of comparative institutional analysis. He contrasts two systems of economic organization—socialism and the market economy—to demonstrate the limitations and capabilities of bureaucratic management. Whereas socialist countries must rely on bureaucratic management, market economies largely depend on profit management. The profit and loss mechanism ensures that those who stay in business are providing valuable services. Consumers “vote” with their wallets, indicating which goods and services are valuable to them and bypassing the rest. There is no parallel mechanism in a bureaucratic setting to evaluate the effectiveness of goods and services provided. Consumers are both the clientele and the bosses in the system of free enterprise; bureaucrats have no such regulator. Voters cannot be sovereign over an agency since they only choose political officials, not the bureaucrats those officials appoint, the allocation of tax dollars they disperse to agencies, nor the specific rules and regulations they create.It should be noted that non-profit organizations also lack the clear feedback of the profit and loss mechanism, and face difficulties in valuing their output. However, non-profits differ from governments in that donors can stop funding them while taxpayers cannot legally evade payment or choose to defund a specific agency. And while large for-profit organizations may implement bureaucratic management practices within the firm, they are ultimately regulated by the profitability (or lack thereof) of their products on the market. For that reason, Mises, like Gordon Tullock in his exploration on bureaucracy, focuses on the management structure as it applies to government action.4In short, bureaucratic activities are not governed by property rights, monetary prices, or profit and loss. There is little to no relationship between government revenue and expenditure. First, rarely does an administration have any stream of revenue by which to compare its expenditures and when it does, such revenues are dwarfed by the costs. Second, failure to achieve agency goals is often met with increasing, rather than decreasing, budgets, manpower, and authority. Third, bureaucrats spend taxpayer money in order to pursue their goals with little recourse if citizens do not approve of their practices and choices.This inability for bureaucracies to be checked by economic calculation, according to Mises, is the fundamental difference between government and free enterprise. As a result, one cannot apply the lessons of private entities to public entities. There is no such thing as bureaucratic Taylorism, where human ingenuity and data analysis lead to innovation and scientific progress.5 Further, Mises argues that while you can put an entrepreneur in a bureaucratic role, the incentives to serve constituents weakens as their objective moves from competition to compliance.Attempting to recreate prices within a bureaucracy requires using the market as a benchmark and valuing effectiveness relies on measuring outputs rather than trying to capture consumer satisfaction. This leads to bureaucracy’s characteristic inefficiency. Without a profit motive to incentivize investing in new ways of doing things, bureaucrats tend toward rigidity. By contrast, private entrepreneurs are governed by restless dynamism. In general, bureaucrats comply and entrepreneurs disrupt as a result of the institutional setting they operate within. This does not mean that there are not outliers—innovative and daring public entrepreneurs exist but are not the norm because their ability to use their own discretion is limited by the rules and regulations that bind them to their tasks.This is not to say that bureaucratic objectives should be measurable, priced, or subject to the profit and loss motive. As Mises points out, the task of arresting and sentencing a murderer is quite different from the growing of grains. Indeed, he argues that “A police department cannot sell its ‘products’: its achievements, however valuable, even indispensable as they may be, have no price on the market and therefore cannot be contrasted with the total expenditure made in the endeavors to bring them about” (page xv). As such, upholding the rule of law, providing protection to citizens, and defending the nation are all important activities that governments engage in and will operate outside of the price system.However, it is important to note that the lack of standards of determining bureaucratic success creates impassible problems for monitoring and managing the size of bureaucracy. For example, it is likely impossible to calculate whether an agency should have 500 employees or 50,000 and it is difficult to know whether agency services are too costly, and by how much. Because bureaucrats are not limited by considerations of financial success, superiors have to provide limitations in the form of rules and regulations. The mission of the bureaucrat is to serve the public, but the incentives point toward serving one’s supervisor and their preferences for implementing the agency’s goals.Delegation and monitoring are also easier in a market setting because losses warn managers of dysfunction. Whereas private employees are rewarded according to their productivity, bureaucrats are rewarded based on their obedience, loyalty, and seniority. Indeed, bureaucracies engage in guardianship—protecting citizens from perceived harms and risks. Jane Jacobs further addresses this tension in System of Survival in comparing two ethical systems—guardianship and commerce.6 The guardianship system is characterized by adherence to tradition, hierarchy, obedience, discipline, loyalty, and honor. By contrast, the commercial system requires honesty, collaboration, competition, initiative, creativity, industry, optimism, and thriftiness. Like Mises, Jacobs sees these systems as co-dependent and warns against the overreach of one or the other.Bureaucratization also transfers the power to pick winners and losers from consumers to bureaucrats. In a system governed by bureaucratic management, entrepreneurs must resort to diplomacy or rent seeking to stay competitive. And once economic competition is suppressed, political competition fills its place.7Bureaucratic management of private enterprises turns firms into agencies and employees into bureaucrats. Caps on firm profits, taxes, direct price manipulation, or confiscation of firm surplus cauterizes the profit motive and guts the signaling value of prices and profits and losses. Such firms and organizations can become extensions of the state, concerned with navigating rules and regulations and lobbying for payouts and competitive advantage. Think of inefficiencies and lack of consumer influence for local utilities and cable companies. In this setting, it is beneficial for businesses to hire former government employees or government relations specialists to interface with bureaucrats. Profit seeking is, in part, replaced by government-granted grift in the form of tariffs, government contracts, and other forms of rent seeking.8 This is known as the revolving door between government and private business and only comes into existence with the growth of the administrative state. Intervention in the private sector opens the door for further administrative acts to tweak prices and profits and losses when the bureaucrat’s intended outcomes are not forthcoming.9 Policymakers would do well to heed Mises’ warning: interventionism begets interventionism, expanding the role of bureaucracies into more and more aspects of our daily lives.Embracing other Avenues of Social ChangeThe real world is characterized by a state of permanent change, making it impossible for bureaucrats to effectively manage it. The federal government’s response to the current COVID-19 pandemic exemplifies this shortcoming. The Centers for Disease Control and Prevention (CDC) and the Federal Drug Administration (FDA) reacted slowly and rigidly. By contrast, it is the Misesian entrepreneur who drives progress and recovery: “Progress is precisely that which the rules and regulations did not foresee; it is necessarily outside the field of bureaucratic activities” (page 56). In the time of COVID-19, entrepreneurs developed procedures to deliver food to those in need, distilleries began making hand sanitizers, and clothing manufacturers shifted to making masks.10 The entrepreneur discovers new ways to provide value, adjusts production to the needs of consumers, and creates new opportunities to address pressing problems.Mises’ book, alongside Tullock’s own Bureaucracy, is critical for students interested in careers in policy or government because it sheds light on the behavior of bureaucrats and lobbyists.11 Mises reveals the underbelly of leviathan—the origins of bureaucratic inefficiency and waste, the expansion of the administrative state, the lack of proactive policymaking, the expansion of politically-infused hierarchies, and the emergence of rent seeking activities. These challenges persist in bureaucracy because of the knowledge and incentive problems of coordinating activity without the tools of rational economic calculation.According to Mises, the teachings of economics act as an antidote to bureaucratization. Ignorance of the function of property, prices, and profit and loss helps establish and reinforce regimentation. To him, bureaucracy represents the dangerous triumph of politics over economics. Those who do not like the competitive market want to substitute it for bureaucratic management. Mises views bureaucracy as a symptom of a destructive move toward more central planning. Even in 1944, he noted the danger of allowing full government control over education and healthcare—debates that dominate political dialogue today.For more on these topics, see “Inside Leviathan: Lessons from Gordon Tullock’s Bureaucracy“, by Stefanie Haeffele and Anne Hobson, Library of Economics and Liberty, November 4, 2019. See also the EconTalk podcast episodes Pete Boettke on Mises and Putting Entrepreneurship on the Menu, by Steven Horwitz, EconLog, December 26, 2020.In addition to his message, Mises’ method is worth emulating. Comparative institutional analysis applies economic theory to the workings of other real-world institutions—bureaucracies and the market. By examining the structure of incentives under which individuals operate, we can better understand their behavior and consequences. In fact, understanding the nature of bureaucracy allows those who enter it to work on the margins to mitigate these structural problems. For example, a government employee who understands the importance of hierarchy can use that knowledge to get to know and learn from change agents within government. Such a bureaucrat may be able to discourage favoritism, minimize new regulatory burdens, encourage reforms, and warn against regressive effects. In our experience with working in and studying policy and preparing students to enter the policy world, understanding the limitations and capabilities of the systems within which we interact better prepares students for their future careers and emphasizes where reforms and innovation can take place. While bureaucratic management will tend toward the status quo, there is a role for both those inside and outside of the system to analyze, critique, and strive for social change.12 As Mises states, “it is the most precious privilege of man to strive ceaselessly for improvement” (page 83).Mises’ warnings about bureaucracy may sound extreme. While the U.S. government and its administrative state have continued to grow and expand into more aspects of daily life, the United States still looks dramatically different than socialist countries. That said, the substance and implications of Mises’ argument are as relevant today as they were in 1944. Those interested in social change and progress would be well-served to look for innovative, bottom-up solutions proposed by our fellow citizens. This is certainly preferable to focusing within the bureaucratic management structure of government for solutions to our most pressing problems.Footnotes[1] Bureaucracy, by Ludwig von Mises, edited and with a foreword by Bettina Bien Greaves. Liberty Fund, Inc., 2007. Available through the Liberty Fund book catalog.[2] The Office of Price Administration. It was later dissolved in 1947.[3] U.S. Bureau of Labor Statistics, All Employees, Government [USGOVT], retrieved from FRED, Federal Reserve Bank of St. Louis, on May 30, 2020.[4] Bureaucracy, by Gordon Tullock, edited and with an introduction by Charles K. Rowley. Liberty Fund Inc., 2004. Available through the Liberty Fund book catalog.[5] “What Is the Difference Between Bureaucratic & Scientific Management?” by Zach Lazzari, Chron. August 27, 2018. .[6] Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics, by Jane Jacobs. Random House, 1992.[7] For more on this idea, see “The Minimal Politics of Market Order” by James M. Buchanan. Cato Journal (11, no. 2), 1991: 215-32.[8] The Pathology of Privilege: The Economic Consequences of Government Favoritism, by Matthew D. Mitchell. The Mercatus Center at George Mason University, 2014.[9] “The Dynamics of Interventionism,” by Sanford Ikeda. Advances in Austrian Economics (8), 2005: 21—57.[10] “Coming Back from COVID-19: Lessons in Entrepreneurship from Disaster Recovery Research,” by Stefanie Haeffele, Anne Hobson and Virgil Storr. The Mercatus Center at George Mason University, April 29, 2020..[11] “Inside Leviathan: Lessons from Gordon Tullock’s Bureaucracy,” by Stefanie Haeffele and Anne Hobson. The Library of Economics and Liberty: Liberty Classics, November 4, 2019..[12] See Public Governance and the Classical-Liberal Perspective, by Paul Dragos Aligica, Peter J. Boettke, and Vlad Tarko. Oxford University Press, 2019.*Stefanie Haeffele is Senior Research Fellow, Deputy Director of Academic and Student Programs and a senior fellow for the F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics at the Mercatus Center at George Mason University. Stefanie earned her Ph.D. in economics at George Mason University in 2016. After receiving an M.A. in economics at George Mason University in 2010, she completed a Presidential Management Fellowship where she worked in emergency and disaster management at both the Federal Emergency Management Agency and then the U.S. Forest Service.For more articles by Stefanie Haeffele, see the Archive.Anne Hobson is a Ph.D. student at George Mason University. She received her M.A. in economics from George Mason University in 2016. Previously, she was a program manager at the Mercatus Center at George Mason University, a technology policy fellow at the R Street Institute and a 2017-2019 Internet Law & Policy Foundry fellow.For more articles by Anne Hobson, see the Archive.As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

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