Financial History to the Rescue: On Bitcoiners’ Many Troubles

It is unfair to expect technologically savvy bitcoiners to also be apt and well-read monetary economists. By no means do the skills and experiences of either have to overlap. Through the rise of Bitcoin with its explicit central banking challenge and attempt to become a worldwide currency, the subject matter of the two groups has unexpectedly clashed. All arguments that support or attack bitcoin is a head-first dive into monetary economics – sometimes exhuming centuries-long disputes among monetary economists and often blatantly distorts and overlooks money and banking arrangements of the past.

We can’t have that, can we.

One of the most delightful events in the libertarian world is the monthly Soho Forum debate run by Gene Epstein. Yesterday’s splendid showdown between Profs. George Selgin and Saifedean Ammous on the suitability of Bitcoin as a Medium of Exchange is bound to get some serious traction once the recording is on available only – look out for that!

A great debate for anyone interesting in monetary system and monetary economics more generally, this was probably the best and most entertaining of many Soho Forum debates I’ve watched. It’s a good format that forces speakers to engage and respond to one another’s arguments, which makes a two-hour conversation on something as technical and intricate as Bitcoin’s monetary role an absolute delight; even those of us deep into this nerdy rabbit hole can learn a lot and walk away with a trove of inspiration.

Channeling that inspiration into long-form, multi-part reviews of the relevant financial and monetary history is exactly what I’m going to do!

One question I often get regarding my research interests (banks, money and financial markets in the past) is the mildly offensive but absolutely correct question to ask: who the f— cares?! Bitcoin and the question of monetary regimes are perfect examples that make financial history relevant: the rise of crypto questions the fundamentals of monetary systems, systems that very rarely change. Naturally, the financial historian has an edge here, having a lot more nuanced knowledge about past monetary and financial arrangements and their operations. History becomes our (only) laboratory, to which the financial historian typically has a lot to contribute.

Moreso than other topics, fundamental questions of monetary regimes are explicitly pitted against other possible regimes – by their nature comparative and always informed by historical experience. It takes about two-and-a-half sentences before debates over money invoke some reference to financial and monetary history – as they should, since they illustrate how some (aspect of) a different monetary regime worked. Frustratingly enough, there’s a good chance that the speaker has mindboggingly little idea of what s/he’s talking about!

That’s where I like to come in. To a roomful of aspiring monetary economists at Cato’s Alternative Money University in July this year, Randall Wright‘s response to why he does monetary economics at all (“to debunk all this B-S!”) generalizes pretty well.

I’m gonna use this post to review some of the mistakes Saifedean made yesterday – and use it going forward as an updated collection of future posts on the topic, especially as I go through Saif’s promising book, The Bitcoin Standard: The Decentralized Alternative to Central Banking. The aim here is to respectfully clarify the parts of the Bitcoin arguments where I’d like to think that I have a comparative advantage – financial and monetary history – and to better develop my understanding of the monetary theory involved.

Here are some points that came up yesterday:

  • The Monetary Progression of ‘Harder Money’: the brilliance of the past is that almost any account, no matter how persuasive and compelling, is bound to run into inconvenient historical facts. The world is more nuanced than can be reasonably captured by pithy generalization (yes, I realize the irony here). In a piece attacking this bitcoiner’s creation myth earlier this year, I wrote:

This progressively upward story is pretty compelling: better money overtake worse money until one major player unfairly took over gold – the then-best money – replacing it with something inferior that the Davids of the crypto world now intents to reverse. […] Too bad that it’s not true. Virtually every step of this monetary account is mistaken.

  • The Lender-of-Last-Resort role privately provided: Many Austrians and opponents to fractional reserve banking routinely believe that banks holding less-than-100% reserve against their deposits must have a government backing them, providing emergency liquidity when such banks are inevitably run upon. This is completely false. I can point to many different historical instances that privately accounted for such risks, from private clearinghouses to insurance, to the option-clause debate in Scottish Free Banking and contingent/unlimited liability institutions.
  • …which leads us to Scottish Free Banking. There’s a famous quip by Rothbard (“Rothbard’s Law“) that describes the tendency for economists to specialize in the fields they’re worst at: Henry George specialized in land, where his writing is appalling; Milton Friedman on Money, where he’s awful etc. I usually say that the same thing applies for Rothbard whenever he writes on Financial History. Very bad. And yes, I will go through his article ‘Myth of Free Banking in Scotland’
  • Saif made a distinction yesterday between the “Medium of Exchange” and the “Payment Mechanism” involved that struck me as misleading, and I didn’t get a chance to finish my reasoning with him in person – so I’ll flush it out in a piece later on. Happily for all you Free Banking fans, it involves note-issuing Scottish banks and the bigger questions of redeemability and outside/inside money.

Some additional housekeeping from yesterday:

  • Saif: “There was no real estate bubble on the Gold Standard”.
    • Yes, Selgin said, the Florida 1920s housing bubble leading up to the Great Depression. No, Saif correctly objected, that wasn’t a real gold standard, but a central bank-planned Gold Exchange Standard.
      Ok, fine – I’d agree with Saif here. How about the 1893 Australian banking crisis? Classical Gold Standard, no central bank, but a property boom and bubble-like collapse nonetheless.
    • A response might be “but fractional reserve banking!” but a) that’s a topic I’ll delve into much more, and b) this is started to sound like a No True Scotsman fallacy…
  • Saif: “Central banks hold gold – they don’t trust each other enough to hold currency”
    • Saif probably misspoke here, since he couldn’t possibly believe this; looking at any central bank’s balance sheet would instantly dispell such beliefs. Central banks generally hold no more than 5-8% of their assets in gold, and often a lot more than that in foreign currency-denominated asset. The ECB holds about equal parts (7-8% of assets) in gold and foreign currency. I routinely follow the weekly changes in the Riksbank’s balance sheet and even after a more extreme QE programe than the Fed’s (as % of GDP), it holds more FX than it does SEK-denominated assets (and no more than 5% in gold). The Bank of England technically doesn’t actually have any gold at all on its balance sheet, but holds gold in storage at its vaults (on behalf of other countries and the UK Treasury).

Bear with me over the next few months, as I make my way through Saif’s book and engage with these thrilling debates. Feel free to interrupt/comment on Twitter at any point if you think I’ve made a factual/empirical error, error in reasoning or in relevance to Bitcoin.

And yes, keep in mind that this is a respectful inquiry into fascinating topics with people who agree on like 92% of everything. Feel free to call me out for unnecessarily snarky and offensive thing as we go along – and welcome to the party!

Is Dominic Cummings a hypocrite, or does the EU’s Common Agricultural Policy just suck?

Tedandralph

On Saturday, The Observer revealed that Prime Minister Boris Johnson’s recently appointed chief of staff received around £235,000 of EU farm subsidies over the course of two decades in relation that his family owns. Dominic Cummings is often portrayed as the mastermind behind the successful referendum campaign to Leave the European Union. So he is currently enemy no.1 among remain-supporters.

I am unconvinced this latest line of attack plays in Remainers’ favor (I was a marginal Remain voter in the referendum and still hold out some hope for an eventual EEA/EFTA arrangement). Instead, this story serves as a reminder of probably the worst feature of the current EU: the Common Agricultural Policy.

The CAP spends more than a third of the total EU budget (for a population of half a billion people) on agricultural policies that support around 22 million people, most of them neither poor nor disadvantaged as Cummings himself illustrates. Food is chiefly a private good and both the interests of consumers, producers and the environment (at least in the long-term, as suggested by the example of New Zealand) are best served through an unsubsidized market. But the CAP, developed on faulty dirigiste economic doctrines, has artificially raised food prices throughout the European Union, led to massive over-production of some food commodities, and denied farmers in the developing world access to European markets (the US, of course, has its equivalent system of agricultural protectionism).

These economic distortions make an appearance in my new paper with Charles Delmotte, ‘Cost and Choice in the Commons: Ostrom and the Case of British Flood Management’. In the final section, we discuss the role that farming subsidies have historically played in encouraging inappropriately aggressive floodplain drainage strategies and uneconomic use of marginal farming land that might well be better left to nature:

British farmers currently receive substantial subsidies through the European Union’s Common Agricultural Policy. This means that both land-use decisions and farm incomes are de-coupled from underlying farm productivity. Without the ordinarily presumed interest in maintaining intrinsic profitability, farmers may fail to contribute effectively to flood prevention or other environmental goals that impacts their output unless specifically incentivized by subsidy rules. If the farms were operating unsubsidized, the costs of flooding would figure more plainly in economic calculations when deciding where it is efficient to farm in a floodplain and what contributions to make to common flood defense. Indeed, European governments are currently in the perverse position of subsidizing relatively unproductive agriculture with one policy, while attempting to curb the resulting harm to the natural environment with another. These various schemes of regulation and subsidy plausibly combine to attenuate the capacity of the market process to furnish both private individuals and local communities with the appropriate knowledge and incentives to engage in common flood prevention without state support.

Our overall argument is that it is not just the direct costs of subsidies we should worry about, but the dynamics of intervention. In this case, they have led not only farmers but homeowners and entire towns to become reliant on public flood defenses with significant costs to the natural environment. There is limited scope for the government to withdraw provision (at least in a politically palatable way).

Turning back to The Observer’s gotcha story, it isn’t clear to me that Cummings is a hypocrite. I think the best theoretical work on hypocrisy in one’s personal politics comes from Adam Swift’s How Not To be Hypocrite: School Choice for the Morally Perplexed. In it Swift argues that the scope to complain about supposed hypocritical behavior, especially taking advantage of policies that you personally disagree with, can be narrower than intuitively imagined, mainly because of the nature of collective action problems. Swift’s conclusion is that, in some circumstances, leftwing critics of private schools are entitled to send their own children to private schools so long as others continue to do so and burden of doing otherwise is too strong. Presumably, this also means that strident libertarians are not hypocritical to use public roads so long as a reasonable private alternative is unavailable.

In an environment where every farmer receives an EU subsidy, it might be asking too much of EU-skeptic farmers to deny it to themselves. Instead, it seems legitimate and plausible to take the subsidy while campaigning sincerely to abolish it.

Do we want criminals to ‘feel terror at the thought of committing crimes’?

Last week, Priti Patel, the new British Home Secretary, provoked a media stir when she announced that she thought the criminal justice system should aim to strike fear into the heart of criminals. Critics combined her new interview with her previous support for the death penalty, banned in the mainline UK since 1965, to suggest that Patel represents a draconian and reactionary turn in British law enforcement.

Then a couple of days ago, a YouGov survey showed, that 72 per cent of the British public agreed with her. Media commentators can forget quite how high support is for law and order among ordinary citizens. Support for the death penalty itself still attracts almost half of the population.

Are the public right? The meat of the Government’s new policy is an increase in the number of police officers; this at a time of increasing violent crime and concerns about rising knife crime in London. On that front, the evidence points in Patel’s favour. More police often reduce crime and do so through a variety of mechanisms, including situational deterrence (for example, patrolling in high-crime areas) as well as increasing detection rates. There is general agreement that increasing the certainty of apprehension contributes to deterrence.

What about punishment severity? There the evidence is decidedly more mixed. There is remarkably little evidence, for example, that the death penalty deters crimes like murder more than an appropriate prison sentence.  Using a new data set of sentencing practice in all police force areas in England and Wales, myself and some great colleagues at the Centre for Crime, Justice and Policing at the University of Birmingham produced a study just printed last month: ‘Alternatives to Custody’. We compared the way a previous year’s sentencing influenced the subsequent year’s recorded crime.

What we found was that for property crime, our largest category, and robbery, community sentences generally reduced crime more than prison. In fact, one of our models suggested increased use of prison caused subsequent crime to go up. On the other hand, prison seemed to work (and was the only thing that worked) to reduce violent crime and sexual offences. (We summarised our results for the LSE British Politics and Policy blog.)

The lesson that we draw is that deterrence isn’t an overwhelming explanation of the impact of sentencing. Harsher sentencing probably works to deter some offenders. But at the same time carrying out punishments can have criminogenic effects. Experience of prison often makes convicts less employable and can effectively socialise them into having an enduring criminal identity. Of course, many offenders in the real-world are not particularly well informed about the criminal justice system. They may also have less self-control than a typical member of the public. So information about an increased penalty for a crime may never effectively filter into the deliberation and reflection of some offenders until they are sentenced, at which point you get the high financial and social costs of prison kicking in.

Getting caught by the police, perhaps on a few occasions,  is a more immediate sign to an offender that their behaviour is unlikely to pay off in the long-term. What does this mean for Patel? It suggests that fear of the consequences can play a role, but what we really need is graduated sanctions, avoiding prison when possible. This gives offenders plenty of options to exit a criminal career path. Relying on terror, by contrast, can lead to a large prison population producing a lot of stigmatized and harmed individuals who quite possibly will re-offend when they are released.

On Translating Earnings From The Past

A few days ago, John Avery Jones published a great piece on the Bank of England blog (“Bank Underground”), investigating how much Jane Austen earned from her novels in the early 1800s. By using the Bank’s own archives and tracking down Austen’s purchases of “Navy Fives” (Bank of England annuities, earning 5%), Avery Jones backed out that Austen’s lifetime earnings as a writer was probably something like £631 – assuming, of course, that the funds for this investment came straight from the profits of her novels.

Being a great fan of using literature to illustrate and investigate financial markets of the past, I obviously jumped on this. I also recently looked at the American novelist Edith Wharton’s financial affairs and got very frustrated with the way commentators, museums, and scholars try to express incomes of the past in “today’s terms”, ostensibly vivifying their meaning.

For the Austen case, both Avery Jones and the Financial Times article that followed it, felt the need to “translate” those earnings via a price index, describing them as “equivalent to just over £45,000 at today’s prices”.

Hang on a minute. Only “£45,000”? For the lifetime earnings of one of the most cherished writers in the English language? That sounds bizarrely small. That figure wouldn’t even pay for the bathroom in most London apartments – and barely get you a town-house in Newcastle. The FT specifically makes a comparison with contemporary fiction writers:

“[Austen’s] finances compare badly even with those of impoverished novelists today: research last year by the Authors’ Licensing and Collecting Society found that writers whose main earnings came from adult fiction earned around £37,000 a year on average”

Running £631 through MeasuringWorth’s calculator yields real-price estimates of £45,910 (using 1815 as a starting year) – pretty close. But what I think Avery Jones did was adjusting £631 with the Bank’s CPI index in Millenium of Macroeconomic Data dataset (A.47:D), which returns a modern-day price of £45,047 – but that series ends in 2016 and so should ideally be another 7% or so from 2016 until May 2019.

 “This may not be the best answer”

Where did Avery Jones go wrong in his translation? After all, updating prices through standard price indices (CPI/RPI/PCE etc) is standard practice in economics. Here’s where:

untitled-1

The third line on MeasuringWorth’s result page literally tells researchers that the pure price number may not reflect the question one is asking. The preface to the main site includes a nuanced discussion about prices in the past:

“There is no single ‘correct’ measure, and economic historians use one or more different indices depending on the context of the question.”

When I first estimated Mr. Darcy’s income, this was precisely the problem I grappled with; simply translating wealth or incomes from the past to the present using a price index severely understates the meaning we’re trying to convey – i.e., how unfathomably rich this guy was. There is no doubt that Mr. Darcy was among the richest people in England at the time (his annual income some 400 times a normal worker’s salary), a well-respected and wealthy man of elevated rank. However, translating his wealth using a price index doesn’t even put him on the Times’ Rich List over the thousand wealthiest Britons today. Clearly, that won’t do.

Because we are much richer today in real terms, price indices alone do not capture the meaning we’re trying to communicate here. Higher real income – by definition – is a growth in incomes above the rise in prices. We therefore ought to use a more tangible comparison, for instance with contemporary prices of food or mansions or trips abroad; or else, using real income adjustments, such as GDP/capita or average earnings.

MeasuringWorth provides us with three other metrics over and above the misleading price-index adjustment:

Labour Earnings = £487,000
using growth in wages for the average worker, it reports how large your wage would have to be today to afford what Austen could afford on £631 in 1815. Obviously, quality adjustments and technological improvements make these comparisons somewhat silly (how many smartphones, air fares and microwaves could Austen buy?), but the figure at least takes real earnings into account.

Relative Income = £591,300
Like ‘Labour Earnings’, this adjustment builds on the insight above, but uses growth in real GDP/capita rather than wages. It more closely captures the “relative ‘prestige value’” that we’re getting at.

Both these attempt are what I tried to do for Mr. Darcy (Attempt #2 and #3) a few years ago.

Relative Output = £2,767,000
This one is more exciting because it captures the relationship to the overall economy. If I understand MeasuringWorth’s explanation correctly, this is the number that equates the share of British GDP today with what Austen’s wealth – £631 – would have represented in 1815.

Another metric I have been experimenting with is reporting the wealth number that would put somebody in the same position in the wealth distribution of our time. For example, it takes about £2,5m to qualify for the top-1% of British wealth (~$10m in the United States) distribution today. What amount of wealth did somebody need to join the top 1% in, say, 1815? If we could find out where Austen’s wealth of £631 (provided her annuities were her only assets) rank in the distribution of 1815, we can back out a modern-day equivalent. This measure avoids many of the technical problems above for how to properly adjust for a growing economy, and how to capture inventions in a price index – and it gets to what we’re really trying to convey: how wealthy was Austen in her time?

Alas, we really don’t have those numbers. We have to dive deep into the wealth inequality rabbit hole to even get estimates (through imputed earnings, capital stocks or probate records) – and even then the assumptions we need to make are as tricky and inexact as the ones we employ for wage series or prices above.

The bottom line is pretty boring: we don’t have a panacea. There is no “single correct measure”, and the right figure depends on the question you’re asking. A reasonable approach is to provide ranges, such as MeasuringWorth does.

But it’s hard to imagine the Financial Times writing “equivalent of between £45,000 and £2,767,000 at today’s prices”…

One weird old tax could slash wealth inequality (NIMBYs, don’t click!)

yesnoimputedrent

What dominates the millennial economic experience? Impossibly high house prices in areas where jobs are available. I agree with the Yes In My Back Yard (YIMBY) movement that locally popular, long-term harmful restrictions on new buildings are the key cause of this crisis. So I enjoyed learning some nuances of the issue from a new Governance Podcast with Samuel DeCanio interviewing John Myers of London YIMBY and YIMBY Alliance.

Myers highlights the close link between housing shortages and income and wealth inequality. He describes the way that constraints on building in places like London and the South East of England have an immediate effect of driving rents and house prices up beyond what people relying on ordinary wages can afford. In addition, this has various knock-on effects in the labour market. Scarcity of housing in London drives up wages in areas of high worker demand in order to tempt people to travel in despite long commutes, while causing an excess of workers to bid wages down in deprived areas.

One of the aims of planning restrictions in the UK is to ‘rebalance’ the economy in favour of cities outside of London but the perverse result is to make the economic paths of different regions and generations diverge much more than they would do otherwise. Myers cites a compelling study by Matt Rognlie that argues that most increased wealth famously identified by Thomas Piketty is likely due to planning restrictions and not a more abstract law of capitalism.

Rognlie also inspires my friendly critique of Thomas Piketty and some philosophers agitating in his wake just published online in Critical Review of International Social and Political Philosophy: ‘The mirage of mark-to-market: distributive justice and alternatives to capital taxation’.

My co-author Charles Delmotte and I argue that for both practical and conceptual reasons, radical attempts to uproot capitalism by having governments take an annual bite out of everyone’s capital holdings are apt to fail because, among other reasons, the rich tend to be much better than everyone else at contesting tax assessments. Importantly, such an approach is not effectively targeting underlying causes of wealth inequality, as well as the lived inequalities of capability that housing restrictions generate. The more common metric of realized income is a fairer and more feasible measure of tax liabilities.

Instead, we propose that authorities should focus on taxing income based on generally applicable rules. Borrowing an idea from Philip Booth, we propose authorities start including imputed rent in their calculations of income tax liabilities. We explain as follows:

A better understanding of the realization approach can also facilitate the broadening of the tax base. One frequently overlooked form of realization is the imputed rent that homeowners derive from living in their own house. While no exchange takes place here, the homeowner realizes a stream of benefits that renters would have to pay for. Such rent differs from mark-to-market conceptions by conceptualizing only the service that a durable good yields to an individual who is both the owner of the asset and its consumer or user in a given year. It is backward-looking: it measures the value that someone derives from the choice to use a property for themselves rather than rent or lease it over a specific time-horizon. It applies only to the final consumer of the asset who happens also to be the owner.

Although calculating imputed rent is not without some difficulties, it has the advantage of not pretending to estimate the whole value of the asset indefinitely into the future. While not identical and fungible, as with bonds and shares, there are often enough real comparable contracts to rent or lease similar property in a given area so as to credibly estimate what the cost would have been to the homeowner if required to rent it on the open market. The key advantage of treating imputed rent as part of annual income is that, unlike other property taxes, it can be more easily included as income tax liabilities. This means that the usual progressivity of income taxes can be applied to the realized benefit that people generally draw from their single largest capital asset. For example, owners of a single-family home but on an otherwise low income will pay a small sum at a small marginal rate (or in some cases may be exempted entirely under ordinary tax allowances). By contrast, high earners, living in large or luxury properties that they also own, will pay a proportionately higher sum at a higher marginal rate on their imputed rent as it is added to their labor income. Compared to other taxes on real estate, imputed rent is more systematically progressive and has significant support among economists especially in the United Kingdom (where imputed rent used to be part of the income tax framework).

This approach to tax reform is particularly apt because a range of international evidence suggests that the majority of contemporary observed increases in wealth inequality in developed economies, at least between the upper middle class and the new precariat, can be explained by changes in real estate asset values. Under this proposal, homeowners will feel the cost of rent rises in a way that to some extent parallels actual renters.

For social democrats, what I hope will be immediately attractive about this proposal is that it directly takes aim at a major source of the new wealth inequality in a way that is more feasible than chasing mirages of capital around the world’s financial system. For me, however, the broader hope is the dynamic effects. It will align homeowners’ natural desire to reduce their tax liability with YIMBY policies that lower local rents (as that it is what part of their income tax will be assessed against). If a tax on imputed rent were combined with more effective fiscal federalism, then homeowners could become keener to bring newcomers into their communities because they will share in financing public services.

The long-run risks of Trump’s racism

hayekvstrump

This week, the United States and much of the world has been reeling from Trump’s xenophobic statements aimed at four of his Democratic opponents in Congress. But the U.S. economy continues to perform remarkably well for the time being and despite his protectionist spasms, Trump is widely considered a pro-growth, pro-business President.

This has led some classical liberals to consider Trump’s populist rhetoric and flirtations with the far right to be a price worth paying for what they see as the safest path to keeping the administrative state at bay. Many classical liberals believe the greater risk to liberty in the U.S. is inevitably on the left with its commitment to expanding welfare-state entitlements in ways that will shrink the economy and politicize commercial businesses.

In ‘Hayek vs Trump: The Radical Right’s Road to Serfdom’, Aris Trantidis and I dispute this complacency about authoritarianism on the right. In the article, now forthcoming in Polity, we re-interpret Hayek’s famous The Road to Serfdom in light of his later work on coercion in The Constitution of Liberty.

We find that only certain forms of state intervention, those that diminish the rule of law and allow for arbitrary and discriminatory administrative oversight and sanction, pose a credible risk of turning a democratic polity authoritarian. A bigger state, without more discretionary power, does not threaten political liberty. Although leftwing radicals have in the past shown disdain for the rule of law, today in the U.S. and Europe it is the ideology of economic nationalism (not socialism) that presently ignores democratic norms. While growth continues, this ideology may appear to be compatible with support for business. But whenever the music stops, the logic of the rhetoric will lead to a search for scapegoats with individual businesses in the firing line.

Several countries in Europe are much further down the 21st road to serfdom than the U.S., and America still has an expansive civil society and federal structures that we expect to resist the authoritarian trend. Nevertheless, as it stands, the greatest threat to the free society right now does not carry a red flag but wears a red cap.

Here is an extract from the penultimate section:

The economic agenda of the Radical Right is an extension of political nationalism in the sphere of economic policy. While most Radical Right parties rhetorically acknowledge what can be broadly described as a “neoliberal” ethos – supporting fiscal stability, currency stability, and a reduction of government regulation – they put forward a prominent agenda for economic protectionism. This is again justified as a question of serving the “national interest” which takes precedence over any other set of values and considerations that may equally drive economic policy in other political parties, such as individual freedom, social justice, gender equality, class solidarity, or environmental protection. Rather than a principled stance on government intervention along the traditional left-right spectrum, the Radical Right’s economic agenda can be described as mixing nativist, populist and authoritarian features. It seemingly respects property and professes a commitment to economic liberty, but it subordinates economic policy to the ideal of national sovereignty.

In the United States, President Trump has emerged to lead a radical faction from inside the traditional right-wing Republican Party on a strident platform opposing immigration, global institutions, and current international trade arrangements that he portrayed as antagonistic to American economic interests. Is economic nationalism likely to include the type of command-and-control economic policies that we fear as coercive? Economic nationalism can be applied through a series of policies such as tariffs and import quotas, as well as immigration quotas with an appeal to the “national interest.”

This approach to economic management allows authorities to treat property as an object of administration in a way similar to the directions of private activity which Hayek feared can take place in the pursuit of “social justice.” It can take the form of discriminatory decisions and commands with a coercive capacity even though their authorization may come from generally worded rules. Protectionism can be effectuated by expedient decisions and flexible discretion in the selection of beneficiaries and the exclusion of others (and thereby entails strong potential for discrimination). The government will enjoy wide discretion in identifying the sectors of the economy or even particular companies that enjoy such a protection, often national champions that need to be strengthened and weaker industries that need to be protected. The Radical Right can exploit protectionism’s highest capacity for partial discriminatory applications.

The Radical Right has employed tactics of attacking, scapegoating, and ostracizing opponents as unpatriotic. This attitude suggests that its policy preference for economic nationalism and protectionism can have a higher propensity to be arbitrary, ad hoc and applied to manipulate economic and political behavior. This is perhaps most tragically demonstrated in the case of immigration restrictions and deportation practices. These may appear to coerce exclusively foreign residents but ultimately harm citizens who are unable to prove their status, and citizens who choose to associate with foreign nationals.

Bourgeois IV: The Economics of difference

Economists Abhijit Banerjee and Esther Duflo studied the root causes of flawed decision making in their book Poor Economics. While much of the book is an applied economics redux of Ludwig von Mises’ more cerebral Human Action: A Treatise on Economics, there were several points that are particularly applicable in an examination on the difference between the bourgeois and the middle-class as defined only by income. The most important point is Banerjee and Duflo’s concept of the S-curve. According to this model, social mobility is not a sequence of steps or a diagonal line; it is shaped like the letter S, and each of the curves represents a significant hurdle on the path from the bottom left edge to the right top one. The first curve (obstacle) is a love of pointless material display, and the second is a desire for security and stability.

In Poor Economics, a crucial part is understanding the extent to which family plays in the equation. Banerjee and Duflo discovered that on the S-curve only the very top and the very bottom had more children than was the national average. The parents on both ends were more solicitous of their children’s educations and futures than those in the middle. In fact, having fewer children in the case of the middle which was recently elevated from the lower portion had an adverse effect on parental spending on education and opportunity, with the result that the middle became a place of stagnation. The economists explained that to some extent in cultures where having children is the retirement plan, middle parents felt as though they had less to spend because they had fewer children. But this did not explain similar gaps in cultures where reliance on grown children was not normative. 

Across the board, though, the top and bottom segments expressed the sentiment that they couldn’t afford to not invest in the very best for their children. For the top, the feeling was related to understanding that maintaining their position was contingent upon vast investment in the next generation; for the bottom, the only way having an above average number of children was worth the time and effort was for all of them to become highly successful. In other words, on both ends, the prevailing attitude was “can’t afford to fail.” Conversely, those in the middle of the S-curve aspired to security, rather than success, and the parents were only willing to spend as much as necessary to obtain that – it varied among the different countries studied, but no more than high school and a local college were quite common – even if the parents could afford much more and the children were capable of pursuing more. The correlation between more children and advanced, better quality education regardless of official social class was a shock to the researchers because it defied popular wisdom, which mandates that fewer children equals more opportunity and better education for them. Based on Banerjee and Duflo’s findings, parental indifference is more or less the root cause of modern “stagnation” and “inequality.”   

Given that today there is quite a bit of complaining in the developed world, particularly the US, about the “shrinking middle-class” and the ills, mostly portrayed as economic, associated with it. It is worth considering based on the data from Poor Economics that the middle-class is shrinking in a literal demographic sense, as well as a social one. The researchers found that it is common for families on the bottom half of the S to have, on average, four to five children (with as many as nine or twelve being usual in cultures with strong intergenerational dependency dynamics) and those at the top to have between three and four; middle families never had more than two. The image is that of an hourglass, with the “middle-class” being perceived as squeezed by virtue of the larger groups on the top and bottom. 

In July 2018, Brookings published a study on the subject of the “decline in social mobility,” with the surprise twist being that it was a downward drop from the American professional classes, rather than from an income-based general category:

As Aparna Mathur and Cody Kallen of AEI wrote in “Poor rich kids?”; “[P]erhaps the most puzzling – and least commented upon – finding is the large positive correlation between the parent’s income and the decline in absolute mobility over the years. Put more simply, the richer the parents, the larger has been the decline in mobility for their kids.”

While the “poor rich kids” phenomenon might be upsetting from the American mythos perspective, from the data collected by Banerjee and Duflo, it is completely to be expected. The researchers established that middle-S families experience diminishing returns over the course of multiple generations as a direct result of their priorities. For example, in India, one of the main countries studied, government bureaucratic jobs have been the favored, hereditary domain of middle-S families because of their security but over the course of the last-third of the 20thcentury and into the 21st these jobs have experienced wage stagnation, saturated markets, and, with the first two, declining social capital; in other words, they lose social mobility. However, middle-S families continue to persist in their established behavioral routines. Hence, Banerjee and Duflo diagnosed love of security as the second ill, the (almost) insurmountable “hump” in the quest for social mobility. 

According to the Brookings study, the fallen American middle-class has experienced all of these symptoms as well, and certainly the demagogues have happily adopted rhetoric relating to claiming a disappearance of the “middle-class.” Although, as the AEI study cited by Brookings cautioned, income is not a particularly good indicator of mobility, there is no doubt that there is a sharp decrease in perceived well-being among the children of the American “middle-class:”

The reason this is interesting is that it matches Banjeree and Duflo’s findings regarding the middle-S groups of all the countries they studied, which indicates that their research is applicable to developed and underdeveloped countries alike. 

But the loss of manufacturing jobs cannot explain what happened to the near-rich and the top 1%. Naturally, it may be difficult to surpass highly successful parents, but that does not explain why mobility rates have declined so sharply at the top income levels, especially if wealth and incomes are becoming more concentrated. Moreover, average incomes for the top 1% have remained at about 4 times the median income over these years. Yet, for the 95th percentile, absolute mobility fell from 84 percent for those born in 1940 to 20 percent for those born in 1984. And for those born in 1984, coming from a top 1% family essentially guarantees earning less than one’s parents, with a mobility rate of 1.2 percent.  

While there are some cultural differences that serve to obscure similarities, if one looks at American educational expenditure, for example, one sees that the average middle-American family spends more on semi-educational activities than other families in comparable situations in other cultures. However, viewed critically, very little of that expenditure is on efforts that advance career prospects, or even on pursuits that hold genuine cultural and intellectual value. This was the issue with the Abigail Fisher vs. University of Texas case. For those who might not be aware of the case, Fisher sued UT-Austin, claiming that the institution had racially discriminated against her using affirmative action; UT-Austin said that race hadn’t factored into its decision in regard to her because she simply wasn’t candidate material. After two hearings by the Supreme Court, the judges ruled in favor of the university. Ultimately, though, the case had little to do with affirmative action and everything to do with that all the extracurricular activities she cited as proof of extenuating circumstances for mediocre academic performance, e.g. involvement with Habitat for Humanity, were ultimately worthless. Cutting through the legalese, the lawyers for UT-Austin essentially explained that her “achievements” were not remarkable literally because every applicant put down something similar on his/her CV. It was a simple case of supply and demand.

From a Poor Economics perspective, the case fell within the bounds of middle-S behavior, the pursuit of security represented by conforming to “everyone else;” from a historical bourgeois view, it is proof that activities, or busyness, are not a replacement for true achievement and accomplishment. It is a classic example of value not always equaling cost with the twist that the cost of the cited extracurricular activities was not equal to their value. To map this firmly to the S-curve and the “squeezing” of the middle-class, it doesn’t matter if the refusal to invest is direct, as in middle-S parents interviewed by Banerjee and Duflo in developing countries, or insistence that average activities are equivalent to achievement, as in the Fisher case, the effect is the same: the ersatz middle-class with its aspirations to and mimicry of the bourgeois is revealed as simply inadequate, and it is so as a result of its choices.   

If there is one thing economist Tyler Cowen has been warning the country of for the last two decades, it is that many of the declines and discontents we face today stem squarely from a mania for stability that afflicted American post-War society. In the same vein, there was Kevin D. Williamson’s infamous, although completely justified, U-Haul article from right before the 2016 presidential election, which elicited anger because his prescription supposedly required people to “abandon their roots,” to reject something integral to themselves. 

One of the greatest pieces of wisdom from classical antiquity is that mimesis will ultimately fail; conversely, metamorphoses will ultimately succeed. Rising along the S-curve requires rejection, demolition of perceptions and of, possibly, mental values. It demands metamorphoses, not merely imitation. In The Anti-capitalistic Mentality, von Mises remarked that the resentment directed at multi-generational, hereditary prosperity and privilege overlooked that everyone involved went out and recaptured “every day” the ingredients for their own success. Their nice cars, big houses, fine clothes, etc. were simply the reward for their constant, invisible toil, one which Mises pointed out very specifically embraced the concept of sic transit gloria mundi. It is not an accident that the two hurdles of the S-curve are points of mimesis: the material and the perceived, which does not even exist. The question that people must ask is: Are we content to pretend, to wrap ourselves in the apparel of success and achievement, or do we wish to become?