Forget income, the greatest outcome of capitalism is healthier lives!

Yesterday, James Pethokoukis of the American Enterprise Institute posted, in response to Bernie Sanders’ skepticism towards free market, that capitalism has made human “fantastically better”.

I do not disagree – quite the contrary. However, Pethokoukis makes his case by citing the fact that material quality of life has increased for everyone on earth since the early 19th century. I believe that this is not the strongest case for capitalism.  The strongest case relies on health. This is because it addresses an element that skeptics are more concerned about.

Indeed, skeptics of capitalism tend to underline that “there is more to life than material consumption”. And they are right! They merely misunderstand that the “material standard of living” is strongly related to the “stuff of life”. For them, income is of little value as an indicator. Thus, we need to look at the “quality of human life”. And what could be better than our “health”?

The substantial improvement in the material living standard of mankind has been accompanied by substantial improvements in health-related outcomes! Life expectancy, infant mortality, pregnancy-related deaths, malnutrition, risks of dying from contagious diseases, occupational fatalities, heights, the types of diseases we die from, quality of life during old age, the physical requirements of work and the risks related to famines have all gone in directions indicating substantial improvements!

My favorite is the case of height. Human stature is strongly correlated with income and other health outcomes (net nutrition, risks of disease, life expectancy, pregnancy-related variables). Thus it is an incredible indicator of the improvement in the “stuff of life”. And throughout the globe since the industrial revolution, heights have increased (not equally though).  Over at OurWorldInData.org, Max Roser shows this increase since the 1800s (in centimeters)

height-development-by-world-regions-interpolation-baten-blum-2012-0-579x500

However, the true magnitude of the increase in human heights is best seen in the data from Gregory Clark who used skeletal remains found in archaeological sites for ancient societies. The magnitude of the improvement is even clearer through this graph.

male-heights-from-skeletons-in-europe-1-2000-clark-645x403.png

The ability of “capitalism” to generate improvement in material living standards did leak into broader measures of human well-being. By far, this is the greatest outcome from capitalism.

Free Trade and Labor Market Displacement

A few days ago, I saw Noah Smith’s piece on free trade and why opening up with China may have yielded some undesirable results. In essence, his argument is that labor market adjustments have been slow. It created a small storm in the economics blogosphere. I wanted to reply earlier. I did not and I regret that. However, better late than never. So here are my three key reactions to the piece written by Smith (see his blog here).

  1. Slow labor market adjustments are not a cause of free trade: If anything, they are the results of a series of government intervention. Countries like Denmark, which may have large governments combined with fewer regulations on businesses, are very well able to adapt to free trade. The ability to start businesses is basically the ability to properly channel inputs towards more valued output. If you prevent an entrepreneur from doing just that while you open your borders to more efficient producers, it is quite obvious that free trade could be “less” beneficial. This point can be well seen in the role of states with “right to work (RTW) laws”. Although there is a debate as to whether or not RTW laws increase wages (James Sherk at Heritage says yes, the good people at the Employment Policy Institute say no and I say that both don’t get it, we should care about regionally adjusted real wage growth), it does seem that it helps industrial activity while boosting employment levels (see here too).  Unions would hinder adjustments to changes in trade patterns. In fact, its worth pointing out that of the 11 states that had RTW laws before 1948 – in only three of those states did the income share of the top 10% exceed that on the whole United States (see the data here) in 2013. While the entire country has seen an increase in income inequality, the RTW states have seen the share of all income of the top 10% increase by only 26% (1947 to 2013) compared to 42% nationwide. This suggests that RTW laws are probably helping workers adjusts to changes caused by free trade (otherwise, there would be a state-level increase in inequality). This finding seems to conform to large section of the literature on the links between RTW and inequality (here and here).  I am sure that if the Autor, Dorn and Hanson study (on which Noah Smith relies) was to be redone with attempts to control for right to work laws, the effect would be concentrated in non-RTW states. Thus, if the problem is labor laws, don’t blame free trade for the poor adjustments!
  2. Nobody said that free trade was “costless” to adapt to. I do economic history. I see cases of industries being protected for decades. Protectionism not only raise prices, but it changes relative prices between different inputs. It incites the adoption of an artificially profitable production method. It is profitable to do so, but it is by no means the most efficient approach. It was made profitable only by the artifice of regulation and duties. Once you eliminate that artifice by removing the barriers, you still have “time to build” problem and a need to change production methods. That takes time. However, governments are very good at making sure this takes more time than needed (see point 1)
  3. Trade agreements with China are not free trade agreements: this is the point I keep repeating (and the point that actually make Paul Krugman interesting), free trade agreements should normally fit on a napkin. If it takes 10,000 pages, it is free trade with 10,000 exceptions. Noah Smith should realize that he may be looking at a case of such “managed trade”.

That’s all folks!

I wish I could just list every idea I’ve encountered then never cite anything…

Steve Horwitz has a great piece in the Freeman that I wish I’d written. The tl;dr: Voting isn’t all there is to political participation. This is an idea that’s been bouncing around in my head as I’m constantly remound that I’m now an American citizen (sorry everyone else in the world…) and that this November I’ll be eligible to vote for who I think should foster anti-American sentiments internationally (Republicans) or  domestically (Democrats).

The other day I said I’d consider voting but I couldn’t recall whose name I’d write in (turns out it’s Willie Nelson*). But my usual response to any question about whether I’ll vote is “No, it just encourages the bastards.” When that’s countered with “blah blah blah civic engagement blah blah” I retort with,essentially, Horwitz’s point: My vote is not going to change the outcome**, but I can contribute value by trying to convince my students that economics matters and that a vote for third party candidate (even a Green Party vote) does more good than a vote for the big two.

I don’t know where I picked up that idea, but if I’d remembered, I would have posted his piece here before he did. Even better would be if I could just list a repository of everything I’ve ever read (or heard) in some public place and just write and write without worrying about citing anything.

Continue reading

The High Wage Economy: the Stephenson critic

A recent trend has emerged in economics. The claim is that high wages can have a dynamic positive effect on market economies.  The intuition is that high wages increase productivity because they incite management to find new techniques of production. In essence, its an argument about efficiency wages: efficiency wages increase incentives to innovate on the part of managers, they can also incite workers to acquire more human capital and work harder and more diligently.

In economic history, this claim has been taken up by scholars like Robert Allen (see his work here for the general public) who argues that the Industrial Revolution took place in England because of high wages. The high-wages of England in the 17th and 18th centuries (relative to all other areas in Europe), together with cheap energy, created an incentive for capital-intensive methods of production (i.e. the industrial revolution). In fact, a great share of the literature on the desirability of high wages for economic development has emanated from the field of economic history.

I have always been skeptical of this argument for two reasons. The first is that efficiency wages is a strange theory that relies on debatable assumptions about labor (strangely, I have been convinced of this point by Austrian scholars like Don Bellante and Pavel Ryksa). The second is that numerous scholars have advanced large criticisms of the underlying data. Robert Allen – the figurehead proponent of the high wage argument – has been constantly criticized by historians like Jane Humphries (see here) for the quality of the data and assumptions used. Allen defends himself on numerous occasions and many of his replies (mainly those on the role of family size in living standards) show that his initial case might have been too conservative (i.e. he is more “correct” than he claims).

Until a year or two ago, I was agnostic on the issue even though I was skeptical. That was until I met Judy Stephenson – a colleague at the London School of Economics. Judy did what I really like to do – dig for data (yes, I am weird like that). She went to the original sources of data used by Allen and others and she looked at what any Law-and-Economics buffs like me like to look at – transaction costs and contracting models.

She recently published her work as a working paper at the LSE and what she found is crucial! Labor was not hired directly, it was hired through contractors who charged costs on the basis of days worked. But this did not translate into wages actually paid to workers. The costs included risks and overheads for contractors. Somewhere between 20% and 30% of the daily costs were not given to workers as wages. Thus, the wage series used to claim that England (Stephenson concentrates on London though) had high wages are actually 20% to 30% below the level often reported. They are also substantially close to those in western Europe.

Thus, the high wage story for England seems weaker. This little piece of historical evidence brought about by Judy is something to think about carefully when one makes the argument that high wages are conducive to growth. Since most of the argument brought to the public was informed largely by this argument in economic history, it makes sense to be cautious when thinking about it in the future.

NOL Foreign Policy Quiz, Part One

The goal of this post is to discuss the purpose of a NOL Foreign Policy Quiz. It is the first in a series of posts discussing the details of how to actually devise and distribute this quiz. Reader input is encouraged.


The Nolan Chart is a short political quiz developed by David Nolan, the Libertarian Party founder. The Nolan quiz plots individuals along two axes, asking them their preferences towards issues of personal and economic freedom (both Rick and Warren have blogged about the Nolan Chart here at NOL, too). Libertarians are those individuals who favor both personal and economic freedom.

nolanchart

The benefit of the Nolan Chart is that it moves us away from the left–right spectrum and towards a two-dimensional understanding of politics. The limitation of the Nolan Chart is that it only views politics through these two limitations. The Nolan Chart at best tells us what end policies we favor, but it fails to address how to achieve these goals.

This is problematic, as even political groups that agree on end goals differ substantially on how to best achieve them. Among libertarians, the largest debate is probably between those who believe a minimal state is needed (minarchists), and those who believe no state can be tolerated (market anarchists) to achieve maximum liberty. There is also, to a lesser extent, a debate on the form of government* and foreign policy.

It is possible to be a libertarian and believe that monarchy is superior to republicanism or democracy in upholding the law and maximizing liberty. Likewise, it is possible to be a libertarian and desire an active foreign policy beyond promoting free trade agreements. I know that I stir controversy with my latter comment, but give me a moment to defend it.

The standard libertarian foreign policy is one of non-intervention. It is a policy of wishing to sever military ties with foreign nations and instead promoting free trade with all. It is a policy consistent with the non-aggression principle.

However, this standard policy is not the only policy consistent with libertarianism. It is possible to believe that, although the loss of any human life is horrible and that the state is illegitimate, the best option to minimize human life and protect liberty is to attack, embargo, or annex another state.

I do believe that there are several tests that must be met before one adopts a foreign policy beyond the standard libertarian creed. Specifically:

  1. Loss of human life and liberty must be weighed for both sides.
    1. Discounting should not occur on national basis.
  2. All reasonable peaceful solutions must be acted on beforehand.
  3. The long-term consequences of the action must be considered and weighed for both sides.

Additionally, if actions are taken, then all precautions must be taken to minimize loss of human life and liberty on both sides.

Minarchist libertarians may see the state as a tool to maximize freedom, but I do not believe this grants them the authority to kill others. There may be a scenario where the murder of one man is outweighed by it leading to the protection of ten men, but the one man has still been murdered and his death must be felt as a regrettable action. The value of a man is not dependent on whether he was born in New York City or Tehran. A libertarian cannot be a jingoist.

At no point may a foreign policy action be taken if a reasonable peaceful action is still available. If a man enters your home with a gun and clearly intends to harm you, by all means it is justified to attack him, even if he has not yet shot or aimed at you.

And finally, the long-term consequence of a foreign policy action must be considered. Even if the first two rules are met, if there is not a long-term plan that is likely to succeed, no action should be taken.

For a long time, I wrestled with my stance on the Iraq war. I believed in the past that the first two requirements had been met and that the US invasion of Iraq was justified despite the loss of life and liberty on both sides. The Iraq war did not, however, meet the third hurdle. There was no viable long-term plan, and the latest consequence of this is the rise of ISIS and other militant groups in the MENA region.

Meeting these three conditions is difficult, but possible.

For example, I believe that expanding the US to include South Korea and Japan would be a proactive foreign policy stance consistent with my the rules I outlined above. Such an expansion would harm Okinawan residents, whose land is currently used for US bases. Such an expansion would also lead to retaliation from the PRC and North Korea. It would, however, lead to a net win for liberty. South Koreans and Japanese residents would have a stronger defense against a rising PRC seeking to dominate the region militarily. US residents would benefit from having defense costs, both in monetary and human life terms, more equitably shared. Although I am hopeful the PRC will liberalize in the future, its actions towards Hong Kong makes me doubtful that that will occur in the foreseeable future.

It is possible that I am wrong of course, and that adding South Korea and Japan would lead to a great loss of life and/or liberty. I am still a libertarian, however. I am not discounting the lives or liberty of non-US residents. I am not ignoring another peaceful solution – the current foreign policy scenario in East Asia is not sustainable for much longer, the PRC has clear intent to assert itself in the region, and it’s extremely doubtful that it will liberalize in the foreseeable future. I am considering the future: the PRC and North Korea are sure to retaliate, but I do not see either of them going to war over it. I do see the PRC being more likely to go to war over annexing Taiwan, even if not immediately, or otherwise I would promote Taiwanese annexation as well.

Hopefully I have successfully shown that it is possible to be a libertarian and favor a policy beyond the standard libertarian foreign policy. In which case, there is merit in discussing foreign policy beyond this standard.

There have been proposals to incorporate a foreign policy dimension to the extant Nolan Chart, but these proposals take it for granted that a non-interventionist policy is the only libertarian prescription. Over at FEE, Richard Fulmer proposes the following five questions:

  1. The United States should cease serving as the world’s policeman.
  2. The United States should not engage in nation building.
  3. The United States should not pledge to defend other countries.
  4. The United States should withdraw its troops currently stationed around the world.
  5. U.S. foreign policy should not be tied to that of the United Nations.

Unless one believes only a non-interventionist foreign policy is compatible with libertarianism, it is clear that these questions are insufficient. They also highlight that a NOL foreign policy quiz should seek to complement, but be independent of, the Nolan Chart. Otherwise, any attempt to add a foreign policy dimension will end with in fighting over who is a libertarian and who is a statist.

Again, the standard non-interventionist libertarian foreign policy view is a consistent and legitimate view point. It is however possible to favor foreign policy interventions under certain conditions and still be a consistent libertarian.

In the next post I will be proposing the foundation for a NOL foreign policy quiz.


Foot Notes:

*Even market anarchists who reject the need for a state debate on what type of organizations would exist and how the law would operate. For example, Murray Rothbard’s early vision for market anarchism presumed that a unitary law would exist, and that private defense associations (PDAs) would compete to best to carry out this unitary law. This unitary law would be based on ‘natural law.’ David Friedman’s vision for market anarchism does not presume a unitary law, and instead imagines competition for the law, as opposed to competition for the application of the law itself. My understanding is that there are also Rothbardians who have moved away from PDAs and towards dispute resolution organizations (DROs). It has been quite some time since I actively followed this debate among market anarchists, so I will defer to anyone who has more up-to-date information.

Further Reading:

Ian Bremmer’s American Foreign Policy Quiz [NOL Post] – The post that initiated the idea of a NOL Foreign Policy

A Three Dimensional Nolan Chart Extension Focusing on Form of Government (e.g. Anarchy v. Monarchy)

On the Canadian economy: the “real” problem

In Canada, the state of the economy has everyone worried. The fall in oil prices is causing the oil sector in the western provinces and in some of the Atlantic provinces to contract. As a result, everyone has the impression that Canada is sliding towards a recession and governments should act.

I disagree. My disagreement is fueled by two factors. The first is that we should never reason from a price change. The fall in the price of oil is mostly the result of increasing supply of oil. Such a price change is actually a good thing for the Canadian economy. The slowdown in economic activity is merely the result of frictions in the reallocation of resources. The second reason is that the slowdown is caused by “real factors” – policy decision affecting key regions of the Canadian economy. Any government action would worsen a situation caused by too much interference in the first place.

A fall in oil prices can indeed affect the Canadian economy. The oil produced in Canada is generally profitable when prices are relatively high (they require very capital-intensive methods of extraction and refining). An increase in the world oil supply (which is the case right now) would indeed affect the Canadian oil industry. However, Canadians win through lower oil prices – one important input has gotten cheaper. The problem is that once such a slowdown happens, resources are not reallocated without frictions. Business plans are positively affected by the lower oil prices and numerous firms are laying out new plans to expand production. Employment and output will fall in the oil industry before they will pick up in other industries. Eventually, there might even be greater output and employment because of the greater worldwide supply of oil. Right now, Canada is in-between those two situations.

My second reason for dissenting from the majority opinion is that certain regions of the Canadian economy are plagued by poor policy. To make my argument, consider a two-region (West and East) and two-industry economy (oil and manufacturing/services). In the West, the dominant industry is oil. In the East, the dominant industry is manufacturing/services.  The West economy has a more flexible market for inputs (limited regulation, freer labor market and low taxes on capital). The East economy suffers from greater rigidity in its market for inputs – high taxes, burdensome regulation and stringent labor laws.

In a way, this describes the Canadian economy. The provinces of Alberta, Saskatchewan, Manitoba and British-Columbia have been pulling the rest of the Canadian economy for the last twenty years. That’s the West. In the East, the historically poorer province of Quebec has been constantly pulling everyone behind, but less so in recent years as the province of Ontario (the most populous of Canadian provinces) began to slow down. Ontario dramatically expanded the size of its public sector, implemented important regulations and raised taxes – straight in the middle of the recession. In fact, if you exclude Ontario from the rest of Canada, you find (as Philip Cross did) that Canada’s performance is actually quite decent. So in the East, you have Quebec whose policies have not changed and you have Ontario who has adopted increasingly anti-growth policies. The East also has consistently higher taxes. The West has lower taxes. Etc.

Given the accuracy of this stylized description, imagine the effect of a shock on the western economy through a shock on its oil industry. Normally, firms in the East could adapt to lower oil prices by expanding their output in the manufacturing/services sector (thanks to cheaper inputs) while firms in the West contract their output and liberate inputs. However, in the presence of government-imposed frictions, this reallocation of resources is much harder and output has a harder time expanding in the East.

No demand-side policy can solve this problem! You could have easy money and a massive stimulus program, but if firms are discouraged from increasing output, little will happen. In Canada, the current slowdown is explained by “real factors”. Improving provincial policies would be the best channel for improving the state of the Canadian economy.

The Re-Privatization of Security (World Peace edition)

Sean McFate, a political scientist at National Defense University in Washington, DC, has a fascinating article in Aeon about the reemergence of mercenary and quasi-mercenary security firms throughout the world. The whole article is fulfilling throughout, especially if you’re a well-read anarchist or a history buff, but I wanted to highlight this tangent:

With the fall of the South African apartheid regime, unemployed soldiers from special forces units such as the 32nd Battalion and the Koevoet (‘crowbar’ in Afrikaans) special police formed the first modern private military company, appropriately named Executive Outcomes. Unlike WatchGuard, Executive Outcomes was not a military enterpriser but a true mercenary firm, waging war for the highest bidder. It operated in Angola, Mozambique, Uganda and Kenya. It offered to help stop the genocide in Rwanda in 1994, but Kofi Annan – then head of UN peacekeeping – refused, claiming ‘the world may not be ready to privatise peace’. Annan’s was an expensive ideology, given the fact that 800,000 people died. By 1998, the company closed its doors, but the mercenary market for force surged.

Two aspects are important here, one said and one unsaid. First, the unsaid. If this mercenary outfit was “waging war for the highest bidder,” why did it offer to go in to Rwanda to stop the bloodshed? I think scholars assume the worst when it comes to stateless actors and warfare. Why has Anheuser-Busch begun shipping free cans of water into Flint, MI? Why does Wal-Mart donate billions of dollars to charity? When it comes to reputation, costs may sometimes not make sense to outside observers who don’t have a sufficient understanding of benefits. Why on earth would a corporation built solely to wage war for the highest bidder be interested in offering its services to a country that would not be able to afford its services? To ask the question is to answer it, of course, but understanding incentives using a costs-benefits framework requires more effort than you might suspect.

There is simply no logical coherence to the idea that, in a world where stateless mercenary firms are the prominent form of security, violence and lawlessness will reign supreme; nor is there any evidence whatsoever to suggest that “[m]ore mercenaries means more war, as they are incentivised to start and expand wars for profit, and turn to criminality between contracts.” Indeed, as McFate notes in his excellent article, the market for security is already becoming freer and while he ends his piece on a depressing note, lamenting this indisputable fact of the present-day world, I couldn’t help but remember the now-famous graph on battle death trends produced by political scientist Jay Ulfelder (using data from the Uppsala Conflict Data Program [UCDP]), which illustrates nicely the overall decline in deaths due to warfare violence around the world:

blog battle deaths
Notice that the most deadly conflicts are the ones involving states with armies that had been nationalized?

The always excellent Max Roser and his Our World in Data project has another graph worth highlighting, with this one using data from Steven Pinker’s The Better Angels of Our Nature… and the UCDP:

blog battle deaths pinker data

Now, two graphs showing that deaths from warfare have been in decline for half a century does not necessarily mean that a freer market in security services has led directly to this overwhelmingly good news. I am confident in claiming, though, that the freeing up of security services markets, combined with the steady presence of a few, still-powerful nationalized armies has led to a reduction in war-related deaths (and violent conflict in general). Both graphs illustrate well what happens when there are too many nationalized armies vying for power and prestige. (It is worth noting here that the main goal of diplomats and policymakers everywhere, no matter their ideological orientation or citizenship status, is still to avoid another world war.)

Second, the said. Annan’s refusal to decriminalize mercenary activities led directly to the 800,000 Rwandan deaths. How is this moral failing any better than when a mercenary firm breaks its contract and ends up killing a few dozen more people than it was supposed to? Again, the graphs are useful here: When conflict is nationalized, everybody suffers; when it is privatized, atrocities happen but not on the same scale we have seen with nationalized conflicts. It’s not even close. Annan’s short-sightedness reminds me of economist Scott Sumner’s 2012 summary of Hillary Clinton’s view of the War on Drugs:

[…] in response to a final question on drugs (from a Latin American reporter), she said drug legalization would do no good because drug dealers are really bad people, and they would simply do other crimes. No discussion of how America’s murder rate fell in half after alcohol was legalized in 1933.

Like drug use, the privatization of security services causes many people, well-educated or otherwise, to bristle at the notion without quite thinking through its logical implications. While ugly, mercenary firms are far more efficient and effective at quelling “bush wars” than are nationalized armies and, in turn, mercenary outfits are far less capable of sowing the type of destruction that nationalized armies routinely carry out.

I don’t think that a world with a few nationalized armies and an abundance of mercenary firms is necessarily the best option going forward, though. It is, however, a better option than most scholars and analysts give it credit for. In fact, it’s the best option at the moment, and while the status quo may sometimes be ugly, remember the graphs. Privatization of security services has contributed, at least in part, to a more peaceful and less violent world.

In order to move forward from this status quo it is best not lament the way things are going, but to acknowledge that things are the way they are for a reason, and then look for avenues to alter the status quo without falling back on a blanket policy like nationalizing security services again. The horrors of the World Wars should still be fresh in our minds, and the horrors of those wars were enabled and encouraged by nationalized security forces.

The best way to move forward is by looking at where these “bush wars” are taking place and begin thinking about ways to incorporate these regions into the global order (such as it is). This policy represents a departure from traditional post-war thinking about international relations, but it doesn’t make it radical or unfeasible. Indeed, there is a long tradition of republican thinking in Western thought pertaining to international relations. The West needs to start recognizing the legitimacy of secessionist sentiments in the post-colonial world, even if it means friction with Russia and China.

Washington and Brussels will have to endure charges of hypocrisy when it comes to ignoring the lobbying efforts of places like Tibet and Dagestan, but Biafra should have become a member state of the United Nations long ago. Baluchistan should have access independent of Pakistan and Iran to the IMF and World Bank. Two or three soccer teams from the region known as Kurdistan could easily be present in all major FIFA tournaments. Examples abound throughout the world. The West should also be open to recognizing arguments made by Russia and China for the independence of regions. There is no good reason why Western diplomats should ignore Moscow’s recognition of places like South Ossetia and Donetsk; doing so only hardens Russia’s stance on recognizing secession in parts of the world where its influence is limited or non-existent and forces the West into bed with unsavory post-socialist regimes.

The West needs to start being more inclusive when it comes to its own federal and republican institutions, too. Morocco, for example, should have had its 1987 application to join the European Union taken seriously (same goes for Turkey). The US federation needs to be actively courting polities like Puerto Rico, Coahuila, Alberta, and Micronesia to join the union. Both the EU and US are contracts designed to dampen violent conflict by fostering diplomatic, economic, and cultural intercourse between provincial polities. The reasoning behind exclusionary policies simply doesn’t answer why these republican, supranational organizations should not be actively recruiting neighboring or geopolitically useful administrative units into their representative systems.

Without this change in mindset the status quo will continue, which again if we remember the graphs is not all that bad, but something worse may happen: There could be a reversion to the blanket nationalization of security services that we saw during World Wars I and II.