Author: Fred Foldvary

California Times Six

Fred Foldvary Current Events, Politics , , , , , , , , , ,

I live in California. It’s a great state. Too great.

A proposition to split California into six states may be on the ballot in 2016. “Six Californias” has announced that it has collected sufficient signatures. Why six? California’s population of over 38 million is six times lager than the US state average. The ruling powers may find a way to block the proposal, as some opponents claim that the signature gathering was unlawful. If “Six Californias” does get on the 2016 ballot, in my judgment, this will be a rare chance for fundamental reforms.

Many Californians have said that the state is too big to govern effectively. But the governance problem is not size, but structure. After the property-tax limiting Proposition 13 was adopted in 1978, taxes and political power shifted from the counties and cities to the state government. California could be governed well if decentralized, but the concentration of fiscal power to the state has made the state among the highest taxed and worst regulated in the USA.

There have been many attempts to reform the lengthy California constitution, but they have all failed. Attempts to replace the Proposition 13 have gone nowhere. The best option is to start over. Creating new states would provide six fresh starts.

Critics of the six-state plan say that the wealth of the new Californias would be unequal. The Silicon Valley state would include the high-tech wealthy counties of San Francisco, San Mateo, and Santa Clara, among others. The promoter of this initiative, Timothy Drapers, happens to be a Silicon Valley entrepreneur.

But the current 50 US states are also unequal in wealth. The income inequality problem is a national and global problem. Income can become more equal without hurting production by collecting the land rent and distributing it equally among the population. Since the critics of Six Californias are not proposing or even discussing this most effective way to equalize income, their complaints should be dismissed as irrelevant, immaterial, and incompetent.

US states have been split in the past. Maine was split off from Massachusetts in 1820, and West Virginia was carved out of Virginia in 1863.

If the initiative passes, a board of commissioners would draw up a plan to divide the state’s assets and liabilities among the six new states. A good way to do this would be to divide the value of the assets by population, but to divide the liabilities (including both the official debt and the unfunded liabilities such as promised pensions) by the wealth of each state. That would go a ways to deal with the inequality problem.

California’s complex water rights could be simplified by eliminating subsidies, instead charging all users the market price of water. There could continue to be a unified water system with a water commission with representatives from the six state.

If this measure is approved by the voters and by Congress, each state will design a constitution. The new constitutions should be brief, like the US Constitution, in contrast to the lengthy current California constitution that contains many provisions best left to statute law.

The new constitutions should retain the declaration of rights in the current state constitution, including Article I, Section 24: “This declaration of rights may not be construed to impair or deny others retained by the people.” This wording, similar to the US 9th Amendment, recognizes the existence of natural and common-law rights. This text should be strengthened with something like this: “These rights of the people include the natural right to do anything which does not coercively invade the properties and bodies of others, notwithstanding any state interest or police power.”

These new constitutions will be an opportunity to replace California’s market-hampering tax system with economy-enhancing levies on pollution and land value. There should be a parallel initiative stating that if Six Californias passes, the states will collect all the land rent within their jurisdictions and distribute the rent to all six states based on their populations. A tax on land value is by itself market enhancing, better than neutral, because it promotes an efficient use of land, it reduces housing costs for lower-income folks, and eliminates real-estate bubbles. Combined with the elimination of taxes on wages, business profits, and goods, the prosperity tax shift would raise wages and make California the best place in the world for labor and business.

This is all a dream, but the past dreams of abolishing slavery, having equal rights for women, and eliminating forced segregation all came true. This proposition will at least provide a platform for discussing such fundamental reforms.
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This article was first published at http://www.progress.org/views/editorials/california-times-six/

How the Rentenbank Stopped Inflation

Fred Foldvary Economics, History , , , , , , , , , ,

After World War I, Germany had to pay reparations to the United Kingdom and France. Having sold off its gold, the German government had no specie with which to back its currency, the mark. Therefore Germany issued fiat money, not backed by anything. It was called the Papiermark, the paper mark.

With its economy in ruins, the German government printed more and more currency with which to pay its bills, and the German expansion of money became the world’s most famous example of hyperinflation.

The inflation induced alternative currencies in Germany. In 1922, the Roggenrentebank was established, issuing notes backed by rye grain. In 1923 several local governments issued small-denomination loan notes denominated in commodities such as rye, coal, and gold. The commodity front served as a price index relative to marks for the notes.

The inflation came to a halt with the replacement of the Papiermark with a new currency, the Rentenmark on October 15, 1923*. One Rentenmark could be exchanged for a trillion Papiermarks.

The Rentenmark was fronted by bonds indexed to amounts of gold. Since the US dollar was backed by gold then, the Rentenmark was thus also pegged to the US dollar at 4.2 RM to $1. To “back” a currency means to exchange it for a commodity at a fixed rate. It was not enough to merely index the units of the Rentenmark to gold. To become stabilized, the new currency needed to be fronted by a commodity that was actually used. That commodity was real estate.

The Deutschen Rentenbank, the central bank of Germany, established reserves that included industrial bonds as well as mortagages on Germany’s real estate. A currency is fronted when the issuer has collateral that it can deliver in exchange for indexed units of the money. Real estate rentals payable in Rentenmarks were fronts for the new German currency. “Rente,” derived from French, means income in German, such as a pension.

After having stabilized the money, the Rentenmark was replaced by the legal-tender Reichsmark in 1924 one-to-one, although Rentenmark notes continued to serve as money until 1948.

Previous attempts to front a currency with land value failed, because such frontage is insufficient. In France during the early 1700s, John Law’s bank issued money on the collateral of land in Louisiana, but that hypothetical land value did not constrain the over issue of the banks’ notes. Then during the French Revolution, the government issued “assignats” on the collateral of confiscated church land, but that too did not prevent the inflation of the money.

Land rent cannot “back” a currency, since there are no uniform units of land that can be exchanged for units of money. But land rent can be a “front” for money when taxes are payable in that currency, which helps give that money its value. But that alone does not prevent an excessive expansion of the money. To stabilize the currency, it also needs to be backed by or indexed to some commodity. And gold has been a common and suitable backing for paper and bank-account currency.

The German experience also shows that the gold backing does not require large amounts of gold. It is sufficient for stabilization that there is some credible limit to the expansion of the money. The Germans were lucky in 1923 in having monetary chiefs such as Hans Luther of the Finance Ministry, and Hjalmar Schacht, Commissioner for National Currency, who maintained the gold index by limiting the expansion of the new currency.

But as the experience of France, shows, it is risky to depend on the integrity of monetary chiefs. Permanent monetary stability requires a structure of money and banking that is self-correcting. That structure is best provided by free-market banking, in which the real money (outside money) is some commodity beyond the control of the banks, and the banks issue “inside money” or money substitutes backed by the real money. Competition and convertibility prevent inflation.

Any kind of tax can serve to help endow money with value, but a land-value tax offers the greatest frontage for currency, because in effect, LVT acts as a mortgage on land value, and the government can take over land when the tax is not paid. Unlike with taxes on income, nobody goes to prison for not paying a real estate tax, because the rent serves as a reliable collateral. Land rent can serve as collateral not just for real estate loans, but also for taxation, and for currencies. All countries can have “renten money” when they covert from market-hampering taxes on production to market-enhancing taxes on the economic surplus that is land rent.

* This was corrected from an earlier typo listing the year as 2013 instead of 1923.

How to Achieve Peace in Gaza

Fred Foldvary Current Events , , , , , , , , , , ,

Israel’s bombing of Gaza has not stopped its rocket attacks, so it is counterproductive. Instead, Israel should help the people of Gaza establish a communitarian democracy.

The government of Israel would announce on radio, television, web sites, and leaflets, that it will be sending in troops, not to fight against the people of Gaza, but to empower their communities.

The Israeli government would also apologize for its misguided policies of the past, and for the suffering and humiliation it caused for the Gaza Palestinians. Of course the Israelis have suffered also, but if one demands a counter apology, one is not really repenting and regretting.

The Israeli administration would designate neighborhood boundaries for communities of about 1000 residents and also enterprise owners. Residents would volunteer to serve on the community council. The Israeli troops would defend the community from any extremist opponents of the new democracy. The communities would set up their own protective elements, and the Israeli troops would withdraw.

Israel should have democratized Gaza in 1967 rather then let the area fester. Then in 2005, Israel removed its settlements without negotiating with the Palestinian rulers. Now Israel should do what occupiers world-wide have failed to do, lay down an infrastructure of democracy.

The community councils of Gaza would elect representatives to regional associations, and the regions would elect representatives to a Gaza parliament. The Palestinians of the West Bank should also elect their own parliament. Then the two parliaments would elect a Palestinian federation of two provinces, Gaza and the West Bank (perhaps renamed East Palestine). It would be best to leave local matters to the two provinces.

Israel should then stop imposing tax policy on the Palestinians and let them set up their own public finances. But advisers should encourage the Palestinian councils to collect the land rent and use that for public revenue rather than tax their wages and goods.

Unfortunately the Palestinian governors have focused their resources on fighting Israel rather than economic development. But after the communities in Gaza have become empowered, Gaza will no longer be occupied territory. Israel would remove the barriers around Gaza gradually, since there will still be extremists who seek destruction. But Israel should facilitate the greatest possible mobility for the Palestinians under the constraint of protection, rather than treat the Palestinians with the arrogance that has been practiced in the past. “No more humiliation” should be the stated slogan.

A similar policy should be pursued in the West Bank. The Palestinian authority chiefs will resist transferring power to the people and their local councils, but a democratic Gaza (or West Palestine) will cause the East Palestinians to demand genuine democracy. A bottom-up governance in the West Bank would then result in a federation of West and East Palestine that would then negotiate a lasting peace with Israel.

There have been some peace gatherings among Israelis and Palestinians to humanize their relations and to see that individuals are people much like themselves. But such personal interactions are no substitute for confronting the essential issue of who shall own the land.

The solution that is both just and politically feasible is to recognize the pre-1967 boundaries and then convert the Israeli settlements as leaseholds that pay rent to the Palestinian government.

Ideally all landowners in Israel and Palestine should pay the market rent of their land possessions. Land rent would serve as the best public revenue for a Confederation of Israel and Palestine. Palestine would be a state within the Confederation and would itself also be a federation of West and East Palestine.

The other contentious issue has been the return of displaced Palestinians to their pre-1948 lands. A peace treaty should allow a limited return of Palestinians to Israel, with some compensation for lands that have become homes for others. So long as justice is sought, the maximalists will usually be in the minority.

If justice is not established, time will be an enemy of both the Israelis and the Palestinians, as extremists and nuclear perils are on the rise. The choice is either justice now or destruction later.
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Note: this article is also at http://www.progress.org/views/editorials/democracy-and-justice-for-gaza/

Immigrant Children Victims of Drug War

Fred Foldvary Current Events , , ,

Thousands of children are entering the US to escape threats by drug gangs and drug lords. The US has for many years exported its war on drug users to Mexico. The increasing force applied in Mexico has driven the drug dealers to Central America, and now the governments of those countries are being increasingly corrupted and destabilized.

Anti-immigrant voices in the USA are obsessed with the effects of their policies, the child migrants, and seek to strengthen immigration barriers rather than confront the causes. The children are not coming to the USA to take advantage of welfare aid. They are fleeing from physical danger.

The drug gangs in Central America are forcing teenagers to join them, or else get killed. That is how they recruit new members. That is why children are fleeing.

US immigration policy contributes to the problem. With legal immigration restricted, and paths to legal residency blocked, immigrants are forced to work in the underground economy, where they are vulnerable to being arrested by the immigration authorities. The undocumented persons then become victims of extortion rackets. Traffickers tell parents that their children left behind in the home country are in danger, and demand money to bring them into the USA. But often the children are abandoned in the desert or used to carry drugs.

The US government is telling the Mexican government to do more to stop children from entering Mexico. But when a child’s parents have been killed in the drug war, and the children are threatened with death, they will swim across rivers, trek through jungles, and cross deserts to save their lives. The US government is committing policy child abuse by refusing to remedy the causes.

Now US government officials are offering the Central American governments aid to programs to keep children in their home country. But until the violence stops, children will not stay in a school where the drug gangs will kill them or make them miserable.

The only way to stop this tragedy is to end the war on drug users and to legalize immigration. Children are not being victimized in the production and sale of alcohol, because it is legal. When a substance is legal, there is a competitive market, and profits are competed down to normal. There is advertizing, and goods can be transported and traded at normal costs.

When a substance is illegal, we get turf wars and coerced children. The criminal systems treat minors with special care, especially when they have been forced to help criminals. Therefore, the drug lords use helpless children, who are also more dependent on adults.

Besides decriminalizing drugs, as Portugal has done successfully, the US should legalize the immigration of all persons who are not threats. US policy has created violence in Latin America, and then the US refuses entry to the victims of that violence.

Critics of immigration claim that the new residents take jobs from American citizens. This claim has been disproved by economic studies. But immigrants would be even less dependent on governmental welfare if labor were fully legalized. It is illegal even for American citizens to freely engage in labor in the USA; the penalty for labor is a levy on the wages earned. When labor is fully legal, it is free of any tax or minimum wage law. A tax on wages has an excess burden or deadweight loss, making it a penalty for working.

In this way, three deeply unjust policies have created the crisis of immigrant children. First, the prohibition of drugs drives the industry towards drug lords and gangs that enslave children, who seek escape by emigrating. Secondly, anti-immigration policies make children have to suffer long and dangerous trips without protection, to evade immigration controls, and risk getting deported. Third, the children are not allowed to work, work opportunities for undocumented adults are limited, and legal labor is suppressed with heavy taxes.

One hundred years ago, prior to World War I, the US did not suffer this inflow of children. The causes were absent. There was no war on drugs, there were no immigration barriers, and there was no tax on wages. Millions of immigrants entered legally, became employed, and contributed to American prosperity. Now we have a declining labor participation rate, drug violence, and a big immigration problem. Our technology is better, but smarter phones will not save us from fundamentally bad government policy.

Central Banks’ Stock Socialism

Fred Foldvary Liberty , ,

Central banks have until recently obtained their income from interest on the bonds they hold. But with interest rates now so low, central banks, like other bond holders, are receiving little revenue. So now, central banks are buying shares of stock to get higher income from dividends and capital gains.

Since central banks are agents of governments, their stock ownership amounts to back-door socialism.

The reason interest is so low now is because central banks around the world have been pushing rates down. The low income from savings accounts and bonds has hurt retired folks and have distorted stock markets. The U.S. stock market averages have been making new highs to a great extent because bonds yields are so low, and also because US companies are borrowing funds at low rates to buy back their stocks.

Governments already tax and regulate economies, and they own industries such as education and much of medical care.  Now they want to own more of the whole economy. Even if a central bank buys shares in an index fund, they artificially raise share prices, and they do it with money they create. Moreover, what happens when the price of stocks has a large drop? Will the central banks contribute to the selling, or buy more?

According to a report by the a report to be published this week by the Official Monetary and Financial Institutions Forum, governments and their agencies have already made twenty-nine trillion dollars of market investments. The largest governmental investor is China. The Swiss and Danish central banks have also been buying substantial equities. Central banks have also been buying real estate. Ever more financial and real assets are being acquired by central banks, and thus also by the governments that own and control them.

The ownership of the economy is not what the founders of central banks had in mind. When the Federal Reserve was established in 1913 in response to the banking panic of 1907, its role was to stabilize the banking system as a lender of last resort. For a long time, the Fed purchased US treasury bonds to expand the money supply, as it created the funds it used to buy bonds. But after the recession of 2008, the Fed also bought mortgage-backed securities as well as shares in companies it wanted to bail out.

But now central banks are not buying shares to bail out failing companies, but to increase their income. Ultimately this buying is self-defeating for central banks and all investors, because such massive purchases raise the ratio of share prices to yields, reducing the rates of return.

The pension funds of government employees have, of course, been investing in the stock markets, as well as in bonds and real estate, but these funds can be regarded as belonging to the employees rather than to governments. Governments with surpluses such as from trade or oil sales have set up “sovereign wealth funds” that invest in financial markets, with the potential to manipulate and distort markets. There should be a global treaty to confine sovereign funds to government bonds and global index funds.

It is even worse for central banks to invest in private financial markets because they are creating the money they use for these purchases. This inflation of the money supply is not for stabilizing the currency or helping the banking system, but just to get stock market yield. That monetary inflation will eventually cause price inflation and fuel an even bigger real estate bubble than that which ended in the Crash of 2008.

The ultimate remedy for such asset distortion is the elimination of all central banks. Since that will not happen, we will have to witness a coming financial tragic horror. Just as in the years prior to 2008, we are sitting in boats on a river whose current will take us ever faster the financial waterfall. The most likely year of the next crash will be in 2026, as the 18-year real estate cycle has been the leading cause of the business or interventionist cycle for the past two centuries.

Last time around, government-sponsored enterprises such as Fannie Mae helped stoke the boom by packaging and selling real estate mortgages. The financial reforms after 2007 did nothing to stop the basic causes of the real estate cycle. Now, the massive purchases of stocks, in addition to bonds and real-estate related assets, will help make the Crash of 2026 the biggest ever.

U.S. Should Follow Nonintervention in Iraq

Fred Foldvary Current Events , , , , , , ,

Now that the Islamic State of Iraq and Syria (ISIS) has conquered territory in both states, the US policy response is up for debate. We should, first of all, heed one of the major axioms of economics: in making a decision, ignore sunk costs, and consider only the future costs and benefits. The USA has spent huge amounts of treasure and sacrificed many lives, and also cost the lives and health of its allies and the people of Iraq. That is all in the past, and the US and other players should not make the mistake of being slaves to history.

One of the problems of US foreign policy has been that there is no unifying vision. The US seeks to defend itself from enemies, but it also claims to promote human rights and democracy, and it seeks to protect the status quo, current boundaries and governments. The US is also pursuing an aggressive foreign war on drug makers and users. Another policy goal is greater trade and economic development.

Another economic principle is that it is often less costly to prevent problems than to have to remedy them. The best foreign policy for the US is to, first, prevent the generation of enemies, and secondly, to defend against them when the enemies insist on that status. That proposition implies that US policy should avoid automatically protecting the status quo, and deal with the reality that exists.

The US has been fighting al-Qaeda because that organization has declared war against the US along with other countries, but we should not assume that all self-proclaimed Islamic regimes are necessarily at war with the USA. The problem in Iraq is that there are two clashing Islamic sects, Shiite and Sunni, and the US occupation set up a veneer of mass democracy that established a Shiite domination over the Sunni. That domination fuels an insurgency which now has been captured by ISIS.

It is probably now too late to restructure the governance of Iraq. Exhortations for greater inclusiveness are useless. Aiding the current government of Iraq would amount to taking sides in a civil war. The US should instead seek contact with the chiefs of ISIS and find out what they ultimately want. If they seek the destruction of the USA, then the US should defend itself now, before the ISIS becomes more powerful. But if they only seek to govern territory and re-establish a caliphate, and do not threaten other countries such as Jordan, then the US should monitor their activities but not become an ally of the Iraqi and Iranian Shiite governments in a religious war against ISIS. The US and its allies would then accept the fact that Iraq is no longer a unified country, but has split into three governments, the Kurdish region, the Sunni region, and the remaining Shiite-dominated land governed from Baghdad with the help of Iran.

The human-rights angle should still remain, as when the rulers become vicious, committing mass murder, then if that can be stopped, action would be warranted. But many regimes around the world are repressive and corrupt, and the US can do little about it other than to stop aiding them. The USA has its own violations of natural rights, and reform should start at home.

Hayekian Environmental Policy

Fred Foldvary Economics, Liberty , , , , , ,

Just as decentralized knowledge implies economic non-intervention, so too it implies environmental non-intervention.

One of the contributions to economics made by the Austrian-school economist Friedrich Hayek is the theory of scattered knowledge. In his famous article, “The use of knowledge in society,” Hayek analyzed how the knowledge needed for economic activity by consumers, producers, legislators, and bureaucrats is dispersed, tacit, and ever-changing. Sellers of goods can conduct surveys to find out what people want, but such data collection reveals only a small fraction of the subjective desires of buyers. The knowledge of how to produce goods is decentralized among the firms, each of which has its own local knowledge of the costs and the demand for its goods.

Much of the knowledge about goods is tacit, not written down. A label can list the ingredients, but it will not tell the buyer about how good it will taste, and does not reveal the full story about the nutritional benefits and harmful effects. A government bureaucrat cannot know all the details about the way a company handles its goods. The biggest and fastest computers cannot be programmed to know everything the economy is doing. The supplies and demands for goods are dynamic, always changing, like the weather, so that even when knowledge is gathered and analyzed, it soon becomes obsolete.

The Hayekian knowledge problem is one reason the Austrian school of economic thought concludes that only a truly free market can effectively apply the relevant knowledge. Government officials who try industrial policy, the promotion of some goods at the expense of others, often fail. For examples, subsidies to energy from the wind end up wasting resources, as a uniform policy cannot be applied to suit local conditions, and the full effects (such as windmills killing birds) are not known in advance, resulting in bad unintended consequences.

The natural environment, everything apart from human action, is too complex for human beings to fully understand it. As with economic knowledge, the data needed to understand human effects on the environment is both global and local. The knowledge of environmental conditions is tacit, and changing. The ecologies of the earth, like the economies, have interconnected elements with feedback loops. Kill the mountain lions, and the deer multiply, eat up the vegetation, and then the rains wash away the soils.

The Hayekian perspective on global climate change as well as local impacts is to admit that we don’t know the full effects of human activity, but we do know that interference with long-established interconnections can be deadly. The policy implication is that we should minimize unnecessary human interference with the natural environment. Any human presence displaces the natural presence, as a farm replaces meadows and forests. But it is excessive to burn down large areas of rain forests in order to have a few years of crops until the soil nutrients are depleted.

The optimal application of the knowledge issue is to understand that we can apply some general knowledge but not specific knowledge. For example, we know that emissions from power plants, factories, and vehicles have bad effects. Costs are ultimately subjective, but some costs, such as lost income and resources, can be quantified. We cannot precisely measure the social cost of pollution, but by comparing places with various amounts of pollution, and the various rates of diseases in those places, we can obtain some estimates of the ill effects. Policy can therefore require a payment for emissions that invade others’ property. To do nothing is to declare a price of zero, which is less accurate than the positive price obtained by statistical means.

The Hayekian policy for emissions is therefore a payment for the estimated damage. A pollution charge requires less knowledge than detailed regulations such as engine requirements, gasoline additives, and smog tests. The emissions charge would not be based on uncertain climate changes, but on the proposition that human interventions into the atmosphere and oceans could be catastrophic. The probabilities are uncertain, but what we do know is that a small probability times a huge cost equals a substantial present value. Because the earth’s environment is a balance of water and air temperatures, cycles of carbon emissions and absorptions, feedback loops, and substances such as the ozone layer, the probability that human interventions are harmful is much greater than the chance that they are beneficial. The mutual relationship of wolves, deer, and vegetation imply that killing off either the wolves or the deer will have bad effects.

The knowledge problem implies that policy has to confront the environmental issue rather than ignore it, because human activity is inherently environmentally interventionist. In some cases, intervention can help the environment, such as with artificial coral reefs. But large interventions such as deliberately dumping iron compounds into the ocean should be avoided.

The Austrian school of economic thought is critical of central planning due to its absence of economic calculation via market prices, and due to the knowledge problem. But the absence of pollution charges itself implies mispricing and the presumption that we know nothing about the effects of emissions. Given today’s highly regulated economy, the implication of Hayek’s thought on knowledge is to replace regulations and emissions trading schemes with the requirement to pay the estimated social costs. Firms (and their customers) can then either pay that cost or else avoid that cost by polluting less. To be most effective, pollution charges would need to be applied globally.

Some free-market economists respond to the pollution issue by stating that property rights are sufficient to solve the problem. But any negotiation or lawsuit to compensate others for negative external effects necessarily requires an objective estimate of the damages. A complete prohibition of an external effect, whether of emissions or noise or visual effects, imposes a cost on the emitter. Tort law, with transferable lawsuits, as well as arbitration and mediation, could replace governmentally enacted pollution levies when the victims can be identified, but there is no avoiding some objective estimate of costs. And where torts are not effective, an international agreement on pollution charges would be warranted.

The Discovery Doctrine of Land Ownership

Fred Foldvary Economics, History, Religion , , , , , ,

The legal basis for land ownership in the Americas is “Christian Discovery.” This land doctrine derives from the 15th century theology of the Catholic Church. The moral origin of the Vatican’s land doctrine is its old claim of the supremacy of Christianity over all other religions. The “Christian discovery” doctrine is not in the US Constitution, yet it has been adopted by the US government and upheld by the courts.

“Bully’s Justice” by George Zebrowsky, an eye-opening article on Christian Discovery, was published in the June/July 2014 issues of Free Inquiry. Under Christian Discovery, the first Christians to “discover” land previously unknown to the Christian chiefs of state, and held by non-Christians, have a legally legitimate claim to that land. The indigenous and current dwellers have no legal property rights.

A court case in 2005 showed that the Christian Discovery doctrine is still in force. The Onondaga Indian (native American) nation in the State of New York sought federal-court recognition to title of ancestral lands. Also in 2005 the Oneida and Cayuga Indian nations had their land claims dismissed by the US Supreme Court. The Onondaga claim was dismissed in 2010 based on the 2005 Supreme Court decision.

The Supreme Court stated that “Under the doctrine of discovery,” the ownership of “lands occupied by Indians when the colonists arrived became vested in the sovereign, first the discovering European nation and later the original states and the United States.”

There are three moral justifications of land ownership. First is natural moral law, the universal ethic that is inherent in human nature and is a moral imperative for humanity. Second is tradition. Third is force. Natural moral law invalidates both tradition and force as moral rationales.

The laws of the United States derive from English common law, the US Constitution, natural moral law, and the Vatican’s doctrine of land discovery. The US Constitution recognizes the supremacy of natural moral law in its Ninth Amendment, and it also recognizes common law. The US Constitution does not recognize the legality of tradition, force, or the Christian Discovery doctrine, yet the US Supreme Court continues to adhere to Christian Discovery.

As stated in “Bully’s Justice” (p. 28), this Doctrine of Discovery is “one of the rare principles of American law that came not from English common law or from the pen of some Enlightenment philosopher but rather from the Vatican.” The US Supreme Court recognized the doctrine in Johnson v. M’Intosh in 1823 under Chief Justice John Marshall.

The doctrine of Christian Discovery originated in 1455 when Pope Nicholas V issued the papal bull Romanus Pontifex. Without any Biblical justification, this declaration justified the conquest of African lands by the king of Portugal. Pope Alexander VI extended the doctrine to the Spanish conquests in the Americas. The doctrine of Christian Discovery authorized European Christian explorers and their monarchs the rationale to claim lands not occupied by Christians. The doctrine deprived the indigenous inhabitants of any legal land rights.

As ultimate legal owner of the land, the state can then lease land to private tenants, and it can sell or transfer land titles to private persons, but such titles are always secondary to the state as senior and supreme owner, as the state can tax land, control its use, and forcibly buy back title with eminent domain.

The current Pope has expressed concern with global inequalities, but he has not gone to the core cause of inequality and poverty: privileged land tenure and the denial of labor’s self-ownership rights. The Catholic Church would have to confront its old doctrine on the conquest of land, and this is cannot do, and therefore popes must confine their concern about poverty and inequality to laments and exhortations. Now come economists such as Thomas Piketty calling for massive redistribution to treat the effects of income inequality, but refusing to acknowledge the origins and remedies in land and labor.

The Christian Discovery doctrine is based on supremacism, the belief that one’s religion, culture, and traditions are superior to those of others, justifying the use of force to maintain this supremacy. Such supremacy has been adopted by several religions, but this violates the human equality that is the basis of natural moral law and that has been recognized in declarations of human rights. Such constitutional cognitive dissonance does not seem to bother legal authorities.

If we seriously apply natural moral law to the question of land ownership, we need to confront both the false justifications of Christian Doctrine of Discovery and also the aboriginal land claims. As stated by John Locke in his Second Treatise of Government, human moral equality implies that one may fully own land only so long as there is free land of that quality available to others. When such land is scarce and has a price, the analysis of Henry George kicks in, that one may have possession conditional on paying the land rent to the members of the relevant community in equal shares.

Therefore the native American Indians may not take full ownership of their former lands. The land rent belongs not to them but to all humanity, or at least to all Americans. Also, the rental value of land due to civic improvements is a return on the capital goods, not the natural spacial resource.

Justice requires the abolition of the supremacist Doctrine of Discovery and its replacement with natural moral law. Some compensation and restoration of rights of possession are due to the aboriginal inhabitants, but history cannot be erased, and the current residents, users, and title holders, having followed the current rules, also deserve some consideration.

The Problem with Modern Monetary Theory

Fred Foldvary Economics, History, Liberty , , , , ,

“Modern Monetary Theory,” a doctrine about fiat money, has captured the attention of some reformers and progressives. This doctrine – a set of propositions contrary to logic and evidence – purports to explain why the US and other economies are ailing, but is beset by contradictions with the historic facts and within the doctrine.

For example, The New Inquiry on 11 April 2014 featured an article by Rebecca Rojer on “The World According to Modern Monetary Theory.” The author regards it as a revelation of MMT that the “rules of money are not immutable laws of nature.” Since the science of economics explains the effects of incentives and decisions, evidently these money “rules” are the outcomes of private and governmental decisions, and since the effects are not immutable laws, people can arbitrarily create whatever outcomes they wish. That would indeed be wonderful, to just print money are thereby eliminate unemployment, depressions, and poverty, all without creating price inflation, because the rules of money creation are not immutable, so we can have whatever outcome we wish!

Science is based on logic and evidence rather than “revelations.” It is possible that there have been revelations, but these create religion rather than science, since if an experience or experiment cannot be duplicated, the revelations are not sufficient for scientific warrants. Various religions have had different revelations, and the members do not believe the revelations of the others.

The author provides an example of the MMT doctrine. Suppose there is an island that has minerals. The owner of the mines hires workers and pays them with fiat money, like the paper and bank-account money we have today, i.e. money created out of nothing. But the owner also imposes a tax on the wages of the miners. So evidently this mine owner is a government, and we are not dealing with private enterprise, but a coercive socialist state. The miners work enough to both pay the wage tax and be able to survive.

But a premise of this MMT island example is that prior to the mining, the people were able to hunt and farm without working too hard. So why would anyone work in the mines? The historical explanation is the “enclosures” movement, in which land that was held by small-scale farmers or by villages was forcibly taken by the aristocracy or by the state or by foreign invaders. This is not a money story, but a land-grab story. Another way to get forced labor, other than chattel slavery, is to require the payment of taxes in money, which forces subsistence farmers to work on plantations at least long enough to pay the taxes. That is more a tax story than a money story, since if the government insists on being paid in coconuts, and a farmer does not grow coconuts, he must work on the coconut plantation, get paid in coconuts, and then pay the tax. Therefore the forced labor is based on the government’s restrictions on alternative employment opportunities.

MMT is correct in stating that one way that the government gets people to accept its fiat money is what economists call the “fiscal theory of money,” that the government reinforces its money as a medium of exchange by requiring the use of that money for paying taxes. However, if the government currency is being hyper-inflated, taxpayers would keep their savings in, say, gold, or a stable foreign currency, and then convert it to the fiat money only when a tax payment is due. The fiscal effect only works if the government is not creating too much inflation.

Therefore MMT is incorrect as stating, as a “core building block,” that forcing people to pay taxes with fiat money “gives it its value.” That was not the case, for example, in Zimbabwe, which suffered hyperinflation. One “immutable” economic law of money is that the creation of money, beyond what is needed for transactions, results in price inflation, and the payment of taxes becomes tied to that inflation, via the nominal rise of prices and wages, rather than preventing inflation.

A related fallacy of MMT is that “sovereigns” in general create money by “spending it into existence.” That can indeed happen, as for example in the Zimbabwe hyperinflation, but in the US and most countries today, government spending comes from taxes and borrowing, not money creation. The central bank, such as the Federal Reserve, does not create money by spending it for goods, but rather by buying bonds and then increasing the banks’ reserves or funds to pay for the bonds.

Since the “core” proposition of MMT, that price inflation can be controlled by government’s taxing and spending, is incorrect, the whole superstructure of the MMT doctrine built on it collapses. Actually, MMT does accept the proposition that monetary inflation creates price inflation, but that true proposition contradicts the core MMT premise that tax-paying gives money its value.

A worse MMT fallacy is that the taxes paid to the government destroys money. MMT tells us that governments create money when they spend, and then the money disappears when taxes are paid. But a tax no more destroys money than the dollars used to buy bread. The seller of bread now has the money, and the government now has the dollars paid in taxes, and they then spend that money.

There have been various theories and doctrines on money and banking in the history of economic thought, and in my judgment, the explanations that best fit the facts are a combination of the monetarist and the Austrian schools of thought. The monetarist core is the equation MV=PT, which explains that the quantity of money (M) multiplied by its annual velocity or turnover (V) equals the price level (P) multiplied by the amount of transactions (T) measured in money. Thus high price inflation, a rise in P, is usually caused by monetary inflation, an on-going increase in M.

The Austrian school explains how excessive monetary inflation not only cause price inflation, but distorts relative prices, such as when house purchase prices rise faster than rentals. Austrian theory shows how governmental central planning fails because the knowledge to do so well is always lacking, and that applies to money as well. Hence the Austrians propose free-market money and banking, so that the market sets interest rates and the money supply.

Indeed the Fed failed to prevent the Great Depression of the 1930s and the Great Recession of 2008, and its policies generated high inflation during the 1970s and the cheap credit that has fueled land-value bubbles. MMT cannot do any better, because, as the Austrian theory explains, the optimal money supply is not only not known, but not knowable. The pure free market provides the optimal money supply just as it provides the optimal amount of bread and the optimal amount of shoes.

Eurocraine and Russocraine

Fred Foldvary Current Events , , , , , , ,

Elections are supposed to achieve social peace by providing a government that represents the people. But voting has not brought peace to Ukraine. Many people distrust the honesty of the elections, and many in Ukraine have disagreed with the policies of the government, both when policy favored association with Europe and when it favored association with Russia. The fact that many voters in the Crimea and eastern Ukraine favor union with Russia, or else independence, shows that many there do not feel well represented.

The election in Ukraine will not solve the governance problem, because it is just a continuation of the same system that some are rebelling against. Ukraine needs a new structure of government and democracy. The solution is to shift political power from the central government to the people as individuals. When a citizen of Ukraine holds power equal to that of all others, he will have nothing to rebel against.

Individual sovereignty can best be represented by a neighborhood council. The neighborhood should have a small population, such as a thousand residents. That is small enough for the people to personally know the candidates and for someone to be elected with little cost. The government of Ukraine can begin the decentralization by establishing neighborhood or village election districts. If the neighborhood population is a mixture of ethnic Ukrainians and Russians, and the people wish to have a council that is aligned with one of these groups, or other interests, then the residents may regroup their districts and have councils that best represent their individual interests. This is the level-one level of governance.

In the Russian language, “Soviet” means “council”. The Soviet Union was supposed to be a union of elected councils, and there was indeed a structure of bottom-up multi-level soviets, but in practice, the Communist Party ruled top-down. Ukraine should resurrect the old Soviet system, which actually derives from the 19th-century anarchist concept of associations of voluntary communities. The Bolshevik slogan was, “All power to the soviets!”, but instead they perpetuated the dictatorship of the proletariat, usurped by the party oligarchs.

The power of the neighborhoods has to be constrained by a constitution that recognizes and enforces natural rights. In most countries, constitutions that proclaimed liberty have failed to be implemented, mainly because the structure of mass voting facilitates plutocracy, with policies that transfer wealth from workers to the moneyed and landed interests, resulting in poverty that gets remedied by trickle-down government welfare.

But with the bottom-up system of genuine soviets, the government would much better represent the people, and constitutional rights would be more strongly protected. As the level-one councils elect level-two regional councils, and these elect the supreme soviet or national parliament, the structure would prevent the usurpation of power from the top. The president would be elected by the parliament and easily dismissed if the people are dissatisfied. Any council member could be recalled by the council that elected him.

Decentralized government gets hampered by centralized tax collection, such as an income tax or value-added tax imposed from the central government. Decentralized governance is suitable to decentralized public finance, and the source of public revenue best suited to local power is the tapping of the area’s land rent or land value. Taxing wealth and investment invites capital to flee, hide, or else it shrinks from the burden. But land cannot hide, and it does not run away, nor does land shrink when taxed. Revenue from land-value taxation can be applied by the level-two councils, with revenues sent to both the level-one and level-three governments.

Ukraine needs two things: better governance and strong economic growth. The replacement of the current complex of market-hampering taxes by taxes on land value and pollution would give the economy such a comparative advantage that investment would pour in, wages would rise, the government would be able to pay off its debts, and the economic misery that fuels much of the unrest would be replaced by an economic joy that would eliminate the economic motivation to join Russia.

With small-group voting, the residents of eastern Ukraine would have their own local Russian-speaking councils, and probably ethnic Russian level-two councils representing some 25 thousand persons. The constitution of Ukraine should devolve most government services to the level-two councils, including local security, education, and public works. The ethnic Russians would no longer feel alienated from the government, and the government of Russia would find it difficult to control the local governments, because the council members would come from the people.

As to the situation of takeovers of government buildings in eastern Ukraine, the national government should surround them with walls of troops while establishing new centers of administration in other guarded buildings. But a lasting solution needs to replace the current government with councils that people feel represents them. The one good thing about the old Soviet Union, the bottom-up multi-level system of soviets, was the element that was most discarded without any debate. Ukraine: bring back the soviets, only this time, make it “all power to the people” as individuals and their chosen councils.

Physics in Human Action

Fred Foldvary Liberty , ,

Some Austrian-school economists dislike analogies from physics in economics, because they don’t regard economics as mechanical. But since human action is physical, we can understand economics better if we understand the basics of physics.

We begin with space. For human action, space encompasses distance in three dimensions. For economics, space constitutes the sites in which activity takes place. The economics of space includes three-dimensional volume as well as a location. For human purposes, spacial land is fixed relative to the earth. Space is not altered by use, but it is consumed by using its value, as reflected by its rent, over time. There is also another type of economic space in the electromagnetic spectrum, made up of frequencies that travel through three-dimensional space.

The second rudiment of the universe is time, which has two meanings, a moment and a duration. Time is not an input into production, but a dimension of all activity. An analysis that examines a phenomenon over a duration is called “dynamic,” in contrast to the static analysis of a moment.

The third universal rudiment is mass, or its synonym, matter. Mass is what takes up space and has inertia. Economics categorizes mass as land (natural resources), human beings, capital goods, and trash.

A fundamental law of physics is that of conservation, that matter (and its sibling energy) cannot be created or destroyed, but only changed in form. But there is no conservation of value. In economics, production is the creation of economic value, processing inputs to make them more desirable. Consumption is the using up of economic value. Capital goods are items that have been produced but not yet consumed.

Linear velocity is the rate of the motion of a mass object in some direction. In economics, activity has a velocity as a mass of inputs gets processed into outputs, or objects get transported. There is also angular velocity in the speed of rotation, including the velocity of money as its turnover as measured during a year. Momentum equals mass times velocity, including a velocity of zero. Human action has momentum when activity proceeds at a constant speed and direction.

However, economic dynamics involves changes in speed or direction, which is acceleration (including negative acceleration or deceleration). A fundamental equation in physics is F=MA, force equals mass times its acceleration, Newton’s second law of motion. Newton’s first law of motion is that of inertia, that a body will retain its momentum unless an external force is applied. Force makes mass objects accelerate. On earth, mass has a weight due to the force applied by gravity

In human action, force can mean either a physical action, as inputs are moved and combined, or else a coercive action by either criminals or governments. The initiation of coercive force alters what people would otherwise voluntarily do. Such forceful intervention imposes a net loss of value on society by accelerating the mass of human action into directions or speeds that reduce its net utility. The economy and society maximize well being with rules that prevent coercive force.

Newton’s third law of motion is that for every action there is an equal and opposite reaction. When one body exerts force on another body, the other body exerts an opposite force on the first body. This law is what propels a rocket, as the force of the ejected fuel makes the rocket go in the opposite direction. Economic action encounters resistance to motion, or friction, which is good if we want to walk (as without friction we would slide around), but is bad if the friction consists of obstacles imposed by coercive force.

In economics, energy is the generation of heat, light, and movement. There are many forms of energy. In physics, potential energy is mass that can be accelerated into motion, such as an object that can fall down, or molecules that can be combined to create heat and light. There is kinetic energy of motion, with the equation: e = ½ mv2. Einstein’s equation reflecting the convertibility of mass and energy is e = mc2, but that has no relevance in the human scale of action.

In physics, work is force times displacement. Applied to human action, work is done when a person applies force (human exertion and tools) to a mass to change its location or composition, even if the change is only of bits in a computer memory. Work can also be a change in the kinetic energy of a system.

Another physics concept that has been applied to economics is equilibrium, a state of constant momentum, including zero velocity, where there is no incentive or force for acceleration. In economics, equilibrium is the exhaustion of gains from trade. At the moment you pay for goods at a store, you are in equilibrium, as you do not wish to trade any more money for goods. But a moment later, you are in disequilibrium, as some goods now have more value than the money you exchange for them. Market prices and quantities move towards equilibrium to remove a shortage or surplus or to gain from extra production, consumption, and trade.

We can see that the application of physics to human action is not mechanistic, as people act on their subjective values and beliefs and psychological inclinations, but their physical action is necessarily subject to the laws and concepts of physics. F=MA applies to human action as it does to physical particles.

Courting Campaign Money

Fred Foldvary Liberty , ,

The Supreme Court has overruled 5 to 4 the previous limit on total campaign contributions in the US. In the McCutcheon v. Federal Election Commission case, The Court eliminated the limits on the total campaign contributions an individual could make to candidates and committees per election. Previously, in the Citizens United case, the Court struck down the limits on campaign funding and electioneering by corporations, labor unions, and nonprofit organizations.

Critics of these rulings say that they transform our democracy into a plutocracy, the rule by the rich, but the United States has always been a plutocracy, and the voters have used democracy to keep the system plutocratic. Wealthy donors could already finance Super PACs – political action committees. The amount of money spent in US elections had been escalating each election for decades.

American political culture has had a mixture of two ideals. The first is democracy, the rule by the people as equals rather than by a king or an aristocracy. The second ideal is liberty, especially freedom of speech. When the rich can influence candidates and elections by spending huge amounts of money, the ideal of liberty clashes with the egalitarian ideal of democracy.

Political speech is the most important of all, and the speech that most needs to be free of restrictions. Just as the government should not limit how many times one may give a speech, or how many editorials one may write on a topic, the government should not limit how much one spends to propagate speech.

Proposals to have the government finance campaigns also clash with free speech, if private financing is again limited. Governmental funding entrenches the established parties, and it forces the taxpayers to finance political ads which they may well detest.

Unfortunately, along with democracy and liberty there has been a third political idea in the USA. Economists call it “rent seeking.” In classical political economy, “rent” meant the yield of land. The classical economists knew that landowners receive rent in exchange for nothing, since the title holders did not create the land. They broadened the term to “economic rent,” which means any gains beyond what is needed to put resources to their most productive use.

Then economists in the branch called “public choice,,” which applies economics to voting and politics, recognized that the subsidies and privileges that special interests receive from government are economic rent, since it is loot taken from the public in exchange for less than nothing. Hence, when special interests seek favors from government, they are rent seekers.

The modern use of “rent” has become so far removed from its landed origin, and the land factor so much subsumed under capital, that economists no longer appreciate that the biggest rent seekers are the landed interests who obtain the implicit subsidy as the land rent generated by public goods paid for by taxes on labor.

Because superficial appearances trump the understanding of implicit reality, the reflexive reaction to the corruption of rent seeking is to limit campaign money. That then clashes with free speech. But the reason there is a clash between free speech and democracy is that we have inherited an antiquated 19th-century model of voting that is no longer appropriate to the 21st century world of mass democracy combined with great state power.

Public-choice economists such as Mancur Olson have recognized that the way to limit the rent seeking disease of democracy is to vote in small groups rather than in large groups. In a large country, the small groups should federate rather than become a large single group.

The demand for campaign money dissolves when people vote in tiny local districts. The district councils send representatives to a higher-level (or broader-level) council. With such a bottom-up small-group voting system, we would have much fewer political ads in the mass media.

The mass-democracy model has been grafted world-wide, and it has not brought social peace, as we have witnessed in place such as Egypt and Ukraine. But one day, mass democracy will be regarded as a relic like we today regard the former power of monarchs and aristocrats.

(Note: this article is also at http://www.progress.org)

School Choice for Lunch

Fred Foldvary Liberty ,

School is not just for learning any more. Schools now provide breakfast and lunch for students. In the past, students and their parents had the option to either eat lunch at the school cafeteria or else bring their home-made lunch to school. But now, some schools are banning home-made meals. For example, Chicago’s Little Village Academy ruled that children had to eat only a school-provided lunch.

As reported by AOL News on 11 April 2011, Susan Rubin, a nutritionist and founder of the Better School Food program, stated that the lunches offered by the schools’ food providers are not necessarily more nutritious than those made at home.

“It’s rare that I see a school, especially a public school, that actually serves food that’s good,” she told AOL News. “It makes me sick that kids are eating this processed crap.”

A Chicago Tribune newspaper reporter spoke to students and parents who opposed the ban. They told the reporter that some children don’t like the cafeteria food, and much of it gets thrown away.

According to Medical Daily (16 Nov. 2013), a preschool in Richmond, Virginia also banned homemade lunches. The school blamed the Federal Programs Preschool rules on lunches from home, which state that students may bring lunches from home only if there is a medical condition requiring a specific diet, along with a note from a physician.

Such bans have been reported at other schools. The “Healthy Home Economist” reported that a preschooler at the West Hoke Elementary School in North Carolina had to eat a cafeteria lunch containing pink slime chicken nuggets when the school decided that the turkey and cheese sandwich, banana, potato chips, and apple juice her mother packed was not nutritious enough.

About 32 million American children eat breakfast and lunch at school under the National School Lunch Program. Of these, 21 million students participate in free or reduced-price meals. Children in poor families that cannot afford to feed their children adequately may well need to be helped, but that does not provide any reason to ban nutritious homemade meals.

Food tyranny is not confined to the USA. Canada has a national Food Guide, and if a student’s homemade lunch does not follow it, the parent is fined. For example, the Manitoba Government’s Early Learning and Child Care lunch regulations require a child’s lunch to be “balanced.” A mother who packed a lunch was slapped with a $10 fine. Her meal was unbalanced because she did not include crackers.

Nutrition is a controversial subject. Some people think cow milk is healthy, while others disagree. Some think that moderate amounts of sugar do not harm, while others think that any artificial sugar is bad. Some believe that meat provides good nutrition, while others believe it is healthier to be vegetarians or vegans. The experts disagree among themselves. Also, of course, children have individual tastes and dietary needs. Government policy forces most of the children to consume the same meal or a narrow range of choices. Much of the food then gets thrown out.

Any decision about school lunches in government-run schools is inevitably political. The federal government is now in charge of what children eat, and policy is influenced by the special interests which finance political campaigns and lobby for legislation.

Thus, the U.S. Department of Agriculture subsidizes poultry production, and then provides schools with free chicken. Many schools do not cook the chicken themselves; they send the chicken to food processors that turn the meat into chicken nuggets and sell them back to the schools. Rather than cook pizza themselves, many schools buy pizzas from food sellers. Schools get potatoes from the government and send them to food makers that sell them back to the school as French Fries.

The cafeteria management companies save money by not having to hire cooks, and they often receive rebates from the food processors. The schools pay the full price for the processed food, which includes rebates that are not disclosed. Since homemade food competes with cafeteria food, it is in the financial interest of the big food producers and cafeteria management firms to stop competition from home production.

The Center for Science in the Public Interest has declared that such sending of food out to be processed results in food high in saturated fat and salt. A 2008 study, “Impact of Federal Commodity Programs on School Meal Nutrition,” by the Robert Wood Johnson Foundation, concluded that what starts as healthy food gets processed into products whose nutritional value is the same as junk food. The study found that California school districts used more than 82 percent of their food commodity funds to buy meat and cheese, spending only 13 percent on fruits and vegetables.

One problem with homemade lunches is that some parents give their children junk food. In that case, the school lunch would be better. But some parents provide a superior lunch, so a ban prevents both better and worse lunches. A sensible approach is to hire a nutritionist who would inform and council parents about better food choices. Few parents seek to deliberately harm their child with unhealthy food. For better nutrition, persuasion is a better policy than force.

Towards a Free-Market Global Climate Treaty

Fred Foldvary Current Events, Economics, Liberty ,

An article in the 19 March 2014 “NewScientist” featured Catherine Brahic’s interview of Christiana Figueres, executive secretary of the U.N. Framework Convention on Climate Change. She is leading a project to create a Global Climate Treaty in December 2015. A draft agreement is scheduled to be delivered to all country governments in May 2015.

A previous U.N. climate change conference in Copenhagen in 2009 failed to achieve an agreement. Christiana Figueres points out that while in 2009 there was doubt that countries would adopt policies to curb emissions, more than 60 countries now have climate legislation that apply to 90 percent of global emissions. There has been more investment in renewable energy. But this progress is much less than what is needed to reduce air pollution to a sustainable optimal level.

A major technological obstacle to the use of renewable energy is the expense of storing electricity in batteries in order to have a steady supply of power on grids. Another technology that is needed for emission reduction is carbon capture and storage.

Unfortunately this interview did not delve into the economics of climate policy. Economists are in wide agreement that the most effective policy to reduce widespread pollution is full-cost pricing, to make the polluters pay the social cost of the damage. The charge is passed on to the buyers of the products, who buy less. The firm either installs methods of reducing the emissions or else pays the fee and reduces pollution by producing less of the product.

A pollution charge or tax is more efficient than command-and-control restrictions, because the tax lets the polluter respond according to its particular costs. In contrast, when government dictates particular methods such as gasoline additives and engine technologies, these may not be the most effective means, and the mandates and restrictions may not encourage innovations.

There is much talk about carbon taxes, but carbon exists in both the inputs and outputs. A tax on the gasoline input does not create an incentive to capture the carbon and other emission outputs, and the tax imposes an excess burden on cars that have already reduced their pollution. A tax on the emission output does induce technology to capture the carbon, and avoids the excess burden.

The executive secretary talked about carbon neutrality, such that each factory, building, city, and vehicle has very low or zero carbon outputs. But the most effective policy is not to regulate and micro-manage, but to set an overall goal and an emission charge per ton of pollutant, and then let each person, enterprise, and facility adjust according to its own costs and benefits. If the cost of carbon neutrality is greater than the social benefit, then such neutrality is bad for the environment, because it wastes resources.

Unfortunately, governments are moving towards regulations rather than pollution taxes. The government of Australia is seeking to replace the carbon tax, enacted by a coalition of the Green and Labor parties in 2012, with a subsidy to industry and an emission permit trading scheme. On 20 March 2014 the Australian Senate voted against repealing the carbon tax, but the prime minister continues to seek repeal on July 1.

While emission permit exchanges are more efficient than regulations, the increase in the price of permits is a gain only to the permit holders, and the price of the permits may be different from the social cost of the pollution. A pollution fine, charge, or tax, however it’s called, enables the government to enact a “green tax shift” to replace market-hampering taxes on income, sales, and value added, with payment for emissions that not only reduce pollution, but also prevent what would otherwise be a subsidy to polluters by not having them pay the full social costs.

Economists and their journalist followers should be in the forefront of promoting a green tax shift as the best policy both for the environment and the economy. Even the skeptics of global warming should embrace the green tax shift, as pollution is harmful trespass regardless of climate change, and the shift promotes greater economic freedom along with productivity.

If the 2015 Global Climate Treaty is based on pollution levies, it will succeed. If instead the Treaty calls for “command and control,” it will doom the planet to yet another failure of central planning, and the result will be both a worsening global economy and a backlash against the tyranny of regulation strangulation.

Natural Law and Economics

Fred Foldvary Liberty ,

The field of “law and economics” applies economic theory to the consequences of law. This branch of economic theory examines the laws that would maximize efficiency and equity. The theory compares, for example, the incentives created by criminal versus tort law to determine the mix of laws that minimize the social cost of wrong-doing. Law and economics studies contract law to determine when a contract is proper, what is the most effective way to enforce contracts, and how best to deal with breach of contract.

The pure market has voluntary exchanges that involve contracts, and so the structure of contract law becomes important. Deficient law and enforcement breeds uncertainty, corruption, and less prosperity. Since contracts are part of the market, contract law is also within the market, and the enforcement and governance that forms the legal infrastructure is part of the market.

Law and economics also deals with external effects, acts that affect others without compensation. The theory examines taxes, regulations, bargaining, and lawsuits as ways to deal with bad effects such as pollution. Another contrast is between property rights and liability rules. A liability rule does not prohibit a trespass, but requires compensation when it happens. And so law and economics contrasts prohibiting an action in advance, versus dealing with the consequences after the act is done.

People think of the market economy as having buying and selling, supply and demand, production and consumption. But there is much more to the market than a customer buying a product. The product may be defective, or the seller might not get paid. There are many legal doctrines that deal with such problems. These are part of the market and part of economics.

A pure free market economy would include the body of law that has evolved over hundreds of years. There are several origins of law: constitutional law, legislated statute law, the common law from decisions by judges, the law merchant of commerce, and natural moral law.

An anarchist society would need much of the law that now applies to marriages and families, lawsuits, crimes, contracts, and uncompensated effects on others. The difference would be that the anarchist society would have voluntary governance, by individual consent, rather than an imposed government. But a network or federation of voluntary communities would need much of the same law that we have today.

One controversial area of law and economics is whether there should be legal monopolies on “intellectual property,” i.e. copyrights on expressions and patents on inventions. Today’s law is mostly utilitarian, providing protection from copying for a limited time in order to provide incentives to creations, although political influence has extended copyright protection for long durations.

The difference between a libertarian society and today’s world is that there would be no laws prohibiting peaceful and honest acts, even if they are offensive. Drugs, prostitution, and gambling would be legal. There would be no restrictions on trade such as with Cuba or on the production, importation, and use of hemp.

Whether in today’s world or a libertarian world, there should be a basic “law of the market” which prescribes that products are presumed to be safe and effective unless stated otherwise. But a pure free market would avoid laws that restrict one’s own use, or consensual use, of property. Lawsuits would mostly adhere to the British system in which the loser of a case would have to pay the legal costs of the winner, which would greatly reduce frivolous law suits, thereby reducing overall litigation costs.

Today’s complex tax laws would be abolished in free-market law and economics, because honest and peaceful transactions would not be hampered by imposed costs. The public finance consistent with a free market would include voluntary user fees, penalties for damage such as pollution, and the land rent that comes from nature or is generated by population and government’s public works. The full employment of a pure free market would provide the job security that comes from employers needing to fill positions, with few idle workers from which to choose.

The complexity of today’s division of labor makes the law that governs relationships necessarily complex, but the clout of lawyers, special interests, and bureaucrats make the law excessively restrictive and needful of attorneys. A truly free society would make the law the servant of the economy and not its master.

What economic theory needs to take into account is that the field of law and economics is not just one of many applications of economics but rather an inherent part of the market economy, and so law has to become more integrated into economic theory. Also, equity is a goal of law and economics, along with efficiency, and an objective application of equity cannot exist without its foundation, natural moral law. “Natural law and economics” needs to become a prominent part of law and economics.