Liberty

Why Rising Prices May Indicate Abundance

Vincent Geloso Economics, Liberty , , ,

I am currently writing a piece with Pierre Desrochers (University of Toronto at Mississauga) regarding environmental trends and economic theory for the conference of the Association for Private Economic Education (see here). In the process of writing up the first draft of the article, I had to revisit another article I wrote (with Desrochers) and I found a passage which now offers me a greater value than when I initially wrote it. In that piece, me and Desrochers basically argued that rising prices for certain environmental goods may not always indicate rising scarcity. In fact, we argued that prices could increase even if a resource grew in abundance.  Here is the passage from our article currently undergoing revise and resubmit:

Thirdly, technological innovations that increase productivity might drive up the price of a commodity without this truly reflecting the scarcity of the resource. Whale oil is a case in point. The decline of the whaling industry in the United States began around 1850 at which point real prices began to increase (Bardi 2007). However, economic historians agree that this was not because of resource depletion or overfishing (Davis, Gallman and Hutchins 1988). Brook Kaiser (2013) thus found that the increasing demand for illuminants created pressures on prices, which in turn motivated the development of substitutes like petroleum-derived kerosene. However, whale bone and oil prices did not fall as kerosene production expanded and, in spite of falling demand, prices stayed high and even increased. The answer to this conundrum is opportunity cost as the important surge in American labor productivity was greater than the observed increase in productivity in the whaling industry. This meant that the opportunity cost of using workers, capital and other resources in the whaling industry was great. These workers, capital goods and other resources were progressively reallocated to other industries. In the process, the whaling industry faced higher costs relative to productivity. While marginal players in the whaling industry exited, the supply of inputs to the whaling industry decreased and prices had to be increased [by the remaining firms in order for economy-wide equilibrium to be achieved]. Hence, prices in that situation are not reflective of depletion or expansion of resource stock.

 

The Dark Side of Polycentricity

Rick Weber Liberty, Politics , , , , , , ,

Who’da thunk?!

This raises the question: would anyone pay attention if the federal government wasn’t such a mess? I don’t think so. Oh well… can’t win ’em all.

On Scottish Free Banking (a Canadian Perspective)

Vincent Geloso Economics, Liberty , , , ,

Yesterday, George Selgin responded on Alt-M to a series of (relatively) recent paper that posit the impossibility of private money. While Selgin does criticize the theoretical reasoning of the papers, the majority of his case is based on the historical experience of private money – notably the Scottish experience with free banking.

I wanted to write something on this, but Selgin got there faster. Indeed, the historical evidence of free banking in Canada, Scotland, Sweden and the limited experiences observed in France and elsewhere provide a strong backing for soundness of private money. Selgin is right to emphasize this.

However, I can provide a small piece of evidence to support his case. It is not only scholars like Selgin who believe that the historical experience of Scotland was positive. As far back as 1835 and as far away as Canada, the robustness of the Scottish free banking experience was lauded. Consider the following quote from a report to the House of Assembly of Upper Canada (modern day Ontario):

“In Scotland, private banking has long existed and fewer failures have occurred there than in any other part of the world; their Joint Stock Banking Companies embrace some of the following principles by which the public are quite secured and the institutions useful as Banks of Deposit and circulation, while the stock is above par, and proved to be a good investment”

This report was actually presented in Canada arguing that Scottish free banking was a solution to a longstanding problem in the colony : dearth of small denominations. The “big problem of small change” was a real issue in the colony and created important frictions. The problem was most likely created by the fixing of exchange rates between the different currencies at levels dissonant with the actual value of different currencies so that “bad money drove out good money” (see Angela Redish’s work). The report recommended legislative actions to encourage the formation of banks that would issue private notes to solve this problem. Newspapers in the neighboring colony of Lower Canada also praised (in the early 1830s) the role that banks played in easing the problem of “poor money”.

I have made an initial foray on this with Mathieu Bédard of Aix-Marseille School of Economics (and we plan to make another few) and  showed that the role of free banking in improving economic growth was considerable exactly because of the issue of private money. While Canada is a small, it provides some additional support to the claim that private money can indeed exist, survive and be superior to state money.

Source:  House of Assembly of Upper Canada. 1835. Report of the Select Committee to which was referred the subject of The Currency. Toronto : M.Reynolds Printer.

P.S. Below there is a picture of a half-penny issued by the Quebec Bank in 1837 showing that there was even private coinage in Canada.

IMG_6955

A libertarian argument for an FDA

Rick Weber Economics, Liberty , , , , , ,

Whoa! Yeah, I’m going to do this, but let me start with some caveats. First, this is an argument, not the argument. Every silver lining has a storm cloud, and acknowledging the silver lining doesn’t mean you’re in favor of tornadoes. Second, I’m being sloppy with the term libertarian; classical liberal is closer to the truth, but doesn’t make for as good a title. Most importantly, I think my argument is swamped by the traditional libertarian arguments against the FDA. All that said, this argument has some interesting implications for how we think about intervention generally. Here goes…

The human body is a complex system that we do not fundamentally understand. Although every complex system is unique, they have similarities. In the case of both the human body and society/markets, interventions lead to unintended consequences which can offset the (ostensible) gains from the intervention. At the end of the day, although the FDA intervenes in the complex system of human society, it also prevents intervention in the complex system of human physiology.

The Hippocratic Oath instructs its speaker to not play God and to avoid over-treatment, and the justification for that is made clear in a recent Econ Talk. The guest was on to promote his book which discusses the problem of medical reversal–the phenomenon of medical practices that are adopted and subsequently abandoned after evidence shows the practice to be ineffective or worse. From this position he argues that the FDA’s mandate to ensure not just safety, but efficacy, is especially important. His argument is that because of the cost of type II error the FDA ought to go further.

Let’s look at two extreme cases. In the “anything-goes” world, we might have a lot of people trying good and bad interventions with a lot of harm being done to the unlucky ones. You and I know that the real problem is one of information and that in a perfect world we would have “anything-goes-that-consumers-with-access-to-good-information-from-Consumer-Reports-®-or-a-competitor” but this world still leaves us with the problem (which we face in today’s FDA-evaluated world) that consumer trial-and-error is a poor substitute for randomized control trials.

At the other extreme we have the “first-do-no-harm-second-do-real-good” world of an ideal FDA. This world has very steep type I errors but instead of two steps forward, one step back, we would have one step forward, then another, and never any steps back…. but of course each step forward would cost a few billion dollars.

Neither extreme is ideal, but the second world is one where standards of evidence are taken very seriously. In that world I’d be a third grade teacher instead of a college professor. The standards of evidence are at the core of the problem of medical reversal, but also the problem of economic intervention (which is far less likely to be reversed, even in the face of good evidence indicating that it should be).

As far as medical intervention is concerned, my position is bullish on better efficacy evaluation of medical procedures but still bearish on the FDA itself. But looking at the FDA from this angle opens up an interesting thought experiment: what might be the effects of an Economic Intervention Standards Authority? In practice it would probably be awful (my guess is a federal bureau that attempts to quash Tiebout competition), but in a libertarian utopia it would be the bureaucracy that libertarian kids with administrative bents would dream of heading.

Why Britain, in the Great Depression, is the best example in favor of NGDP targeting

Vincent Geloso Economics, Liberty , , , , ,

A few weeks ago, I finished reading Scott Sumner’s The Midas Paradox. As an economic historian, I must say that this is by far the best book on the Great Depression since the Monetary History of the United States. Moreover, it is the first book that I’ve read that argues simply that the Great Depression was the result of a sea of poor (and sometimes good) policy decisions. However, coming out of the book, there was one thing that came to mind: Sumner is underselling his (very strong) case.

In essence, the argument of Sumner looks considerably like that of Milton Friedman and Anna Schwartz: The Federal Reserve allowed the money supply to contract dramatically up to 1932, turning what would have been a mild recession into a depression.  However, Sumner adds a twist to this. He mentions that after the depth of the monetary contraction had been reached, there was a reflation allowing an important recovery during 1933. This is standard AS-AD macro of a (very late) expansionary policy to allow demand to return to equilibrium. Normally, that would have been sufficient to allow the rebound. Basically, this is the best case for NGDP targeting: never let nominal expenditures fall below a certain path because of a fall in demand.  The problem, according to Sumner, is that the recovery was thwarted by poor supply-side policies (like the National Industrial Recovery Act, the Agricultural Adjustment Act etc.). The positive effects of the policy were overshadowed by poor policy. And thus, the depression continued.

To be fair, Sumner is not the first to emphasize the “real” variables side of the Great Depression. I am especially fond of the work of Richard Vedder and Lowell Galloway, Out of Work, which is a very strong candidate for being the first econometric assessment of the effects of poor supply-side policies during the Great Depression. I was also disappointed (but not too much since Sumner did not need to make this case) to see that no mention was made of the Smoot-Hawley tariff as a channel for monetary transmission (as Allan Meltzer argued back in 1976) of the contraction. Nonetheless, Sumner is the first to bring this case so cogently as a story of the Great Depression. Thus, these small issues do not affect the overall potency of his argument.

The problem, as I mentioned earlier, is that Sumner is underselling his case! I base this belief on the experience of England at the same time. Unlike the United States, the British decided to apply their piss-poor supply-side policies during the 1920s – well before the depression.  The seminal paper (see this one too) on this is by Stephen Broadberry (note: I am very biased in favor of Broadberry given that he is my doctoral supervisor) who argued that the supply shocks of the 1920s caused substantial drops in hours worked and although the rise of unemployment benefits played a minor role, the vast majority of the causes were due to the legal encouragement of cartel formation. As a result, there were no supply-side shocks during the depression to create noise. However, England did have a demand-side expansionary policy in 1931. Even if it was by accident more than by design, England left the gold standard in September 1931. This led to the equivalent of an easy monetary policy and the British economy stopped digging and expanded afterwards. The Great Depression was not a pleasant experience for the British, but it was not even close to the dreadful situation in the United States. As a result, we can see whether or not it was possible to exit the Great Depression by virtue of a monetary policy. I’ve combined the FRED dataset on monthly industrial production and the monthly GDP estimates for inter-war Britain produced by Mitchell, Solomou and Weale (see here) to see what happened in England after it left the gold standard. As one can see, the economy of Britain rebounded much more magnificently than that of the United States in spite of supply-side constraints.

GBUSA

Sumner should expand on this point! To be fair, he does talk about it briefly. Not enough! A longer discussion of the British case provides him with the “extra mile” to cover the distance against competing theories. The absence of supply shocks in Britain during the Depression confirm his story that the woes of the United States during the 1930s are due to initially poor monetary policy and then poor supply-side policies. In my eyes, this is a strong confirmation of the importance of the NGDP level target argument!

With such a point made, it is easy to imagine a reasonable counterfactual scenario of what economic growth would have been after monetary easing in 1933 in the absence of supply-side shocks. Had the United States kept very unregulated labor and product markets, it is quite reasonable to believe (given the surge seen in 1933 in the Industrial Production data) that the United States would have returned to 1929 levels. In the absence of such a prolonged economic crisis, it is hard to imagine how different the 1930s and 1940s would have been but it is hard to argue that things would have been worse.

UPDATE: From the blog Historinhas, Marcus Nunes sent me the graph below confirming the importance of the NIRA shock on eliminating all the benefit from easy money after 1933.

J Goodman (1)

Prediction: Trump-Sanders 2016

Rick Weber Comments, Culture, Current Events, Liberty , ,

You heard it here first. At some point soon the two populist campaigns will join forces and take the White House with Donald Trump as the president. The odd-couple reality show residuals will foist Bernie to the top of Forbes’ “Lamest Billionaires” list before he’s even sworn in.

idiocracy3

By 2018 the supreme will be hearing disputed disputes over MLB umpires’ decisions. By 2024 they will be the official referees of Wrestlemania. Incidentally, Wrestlemania 42 is where Bernie Sanders will peacefully shuffle of this mortal coil. Conspiracy theorists will insist that he was killed before the event by a Russian assassin and that his aides carried his dead corpse in so that they could attend the event. After that it will only be another 5 years before the last Facebook (by then a branch of the Social Security Administration) comment using the phrase “Feel the Bern” which by then will understood to be a reference yeast infections.

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In fact, lots of good, funny, and interesting things will happen in the future! CSPAN will final get watchable. Even better news: selling the broadcast rights to the State of the Union Address will finally put a dent in the debt. And as budgets shift away from bureaucracies towards more explosive, entertaining, and big-data-y ventures, red tape will whither away. With a good dose of good luck, the world going to hell in a hand basket might be the best thing that’s ever happened to us.

Jews in the West and Jews in the Middle East

Brandon Christensen History, Liberty , , , , ,

Has there ever been a Holocaust in the Middle East?

Pogroms were an annual affair in Russia, and we all know how much Christian Spain loved its Jews. The Holocaust was horrific.

I also realize that anti-Semitism is rampant in the Middle East. Some of this is because of Israel, and some may be because some imams interpret the Koran to be anti-Semitic, but there’s never been any kind of mass murder committed by Muslims against Jews in the Middle East on the scale that has occurred in the West.

Is this because the West was industrialized and therefore had better access to technology with which to kill large amounts of people? Is it because the structure of states in the West made it easier to run roughshod over the liberties of minorities? These are the only two explanations that I can think of that make any sense. The second of the two possibilities seems like an especially weak option, given the amount of carnage post-colonial states have managed to produce (though, in a paradox, it is often minorities that do the killing and oppressing in these post-colonial states, rather than majorities; maybe this helps to explain why there has never been a Holocaust in the Middle East…).

The first possibility is reasonable enough, but since most of the states in the Middle East that are rich enough to “test” this hypothesis have expelled the Jews from their territories, it’s virtually impossible to know.

I am simplifying things here, I realize. I want to give this much more thought (and I have been), but I think that, given the toxic climate in the public sphere concerning Islam, it’s important to point out the obvious.

Myths about the “owners of capital”

Vincent Geloso Economics, Liberty

Yesterday, Steve Horwitz of Saint-Lawrence University made a small post on facebook. Basically, it was a complaint against enduring myths regarding capital owners. He pointed that “historically, the owners of capital have very often rejected free markets and asked for political privileges” and that free markets should be (solely) judged on their ability to increase the standard of living for consumers.

In essence, I share his complaint. History is a good guide on the issue. In both Canada and the United States (historically), protectionism was advanced by capital-owners who wanted to shield their capital from competition. Since both economies had abundant capital in the form of land relative to labor compared with European economies, European economies should have been the producers of labor-intensive goods such as manufactured goods. However, the “owners of capital” basically did lobby against free trade such as to protect their interests in the production of manufactured.  Indeed, these industries did expand in Canada and the US and it was good for profits (my co-author on a project regarding measuring Canadian GDP from 1870 to 1900, Michael Hinton, is coming out with a book showing Canadian productivity to be equal to American productivity in protected sectors like textiles). However, the American industries (at least in textiles) were much less productive than those found in England which had the competitive advantage in that area. Although it is a small example, it shows that the “owners” of capital are rarely about free markets and their benefits may not imply greater living standards.

However, I want to point out something important regarding capital that Horwitz fails to mention. In fact, it is the fact that his argument can be summarized in one simple sentence: the value of this capital is determined by the value of what it produces to consumers. Capital must be transformed into capital goods that are helpful in the production of consumer goods. If capital is not used to increase the production of the goods that consumers value the most, it is wasted. By definition, capital should serve consumers. If it does not, there is an incentive to reallocate capital to other areas of production to maximize profits by maximizing welfare for consumers. For example, capital-owners are very happy to lend money to individuals who invent new technologies to take more pie from an even larger pie. The main way through capital can be kept to uses that are not the most valued by consumers is through legislative coercion.

Take the case of Canada in the 19th century which we mentioned above. Capital-owners in Canada wanted to protect their investments in textiles. To do so, they had to prevent Canadian consumers from buying textiles from countries were capital was being used more efficiently to produce clothing.

Had there been free trade, Canadians would have bought more foreign cloth. Owners of capital in Canada would have had to compete with capital owners from abroad (since an increase in imports of goods means an increase in the exports of Canadian assets to foreigners which means more foreign investment in Canada) or would have had to reallocate their capital to other industries like shipping or agriculture. Canadians would have had more money in their pockets to save more money and thus increase the stock of capital to make everyone richer in the future.

I think that this was  the best way to illustrate the point made by Horwitz.

“On Working Shi**y Jobs”

Brandon Christensen Liberty, Links , ,

That’s the title of this short piece by yours truly. Please take a look and leave me some feedback. I am turning it into a longer essay that I hope to shop around once it’s complete.

Is there an Implied Consent to be Governed?

Fred Foldvary Liberty, Philosophy , , , , , ,

Implied consent means that what one may or may not do is understood without having to ask or say explicitly. In personal relationships, having established some interactions, it is implied that one may continue doing these. If a store is open for business, it is implied that customers may enter, and also that the customers will pay for what they take.

Implied consent has also been applied to the relationship between a resident and the government. The idea is that a person may not agree with some policies, but benefits from others, so it all evens out, and therefore there is an implied consent by all regarding government policies. Some say that if one does not move out, one implicitly agrees with the laws.

Being under the jurisdiction of a government is a major “state” of affairs. We might consider what Lysander Spooner, a 19th-century American philosopher, had to say in his book No Treason: The Constitution of No Authority.

“Neither law nor reason requires or expects a man to agree to an instrument, until it is written; for until it is written, he cannot know its precise legal meaning. And when it is written, and he has had the opportunity to satisfy himself of its precise legal meaning, he is then expected to decide, and not before, whether he will agree to it or not. And if he do not then sign it, his reason is supposed to be, that he does not choose to enter into such a contract.”

In the laws of the United States and many other countries, important relationships are required to be in writing and signed. When one buys real estate, the new buyer must sign a contract. When one gets married, there is a signed agreement. Being under the jurisdiction of a government is just as important.

When one buys a unit of a condominium or homeowners association, one is presented with the community documents, the master deed and bylaws, and the buyer signs an agreement. But this is not done when one moves into a governmental jurisdiction. Why not? Spooner says:

“The most they can say, in answer to this question, is, that some half, two-thirds, or three-fourths of the … adults of the country have a tacit understanding that they will maintain a government under the Constitution; that they will select, by ballot, the persons to administer it; and that those persons who may receive a majority, or a plurality, of their ballots, shall act as their representatives, and administer the Constitution in their name, and by their authority.”

But, says Spooner:

“No body of men can be said to authorize a man to act as their agent, to the injury of a third person, unless they do it in so open and authentic a manner as to make themselves personally responsible for his acts. None of the voters in this country appoint their political agents in any open, authentic manner, or in any manner to make themselves responsible for their acts. Therefore these pretended agents cannot legitimately claim to be really agents. Somebody must be responsible for the acts of these pretended agents; and if they cannot show any open and authentic credentials from their principals, they cannot, in law or reason, be said to have any principals. The maxim applies here, that what does not appear, does not exist. If they can show no principals, they have none.”

Although Spooner thought that his arguments against a governmental implied consent supported anarchism or voluntary governance under explicit contracts, there is another possibility. Coercion is the opposite of consent, and no consent is needed to defend against invasions. Therefore if there is a government whose sole function is to protect people from coercive harm, and that government does not itself commit coercive harm both in its laws and its public finances, then no consent is needed.

The function of natural moral law is the proper governance of humanity, to prohibit coercive harm. Therefore, as I wrote in Soul of Liberty, “There is no moral authority for government other than to enforce the Universal Ethic.” If government only enforces natural moral law, as expressed by the Universal Ethic, then no consent is needed, regardless of how the governors are selected, even if the governor is a dictator, as there is only protection from coercive harm.

However, in human reality, there is no perfect governance, and people disagree on the details of law, and so, as a practical matter, if we take human equality to its logical conclusion, no person should be above any other. That implies a voluntary governance among peaceful persons, enacted with the explicit consent of signed contracts. As to those who choose to not be peaceful, since they do not honor consent, they implicitly agree to be punished. That is the real implied consent in governance – those who coercively harm others imply that they may be resisted, put on trial, and punished.

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This article also appears in progress.org under “Implied Consent.”

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

Vincent Geloso Economics, Liberty , , , , , , ,

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

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

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

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

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

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

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

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

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

Free Trade and Labor Market Displacement

Vincent Geloso Current Events, Economics, Liberty , , , , , , ,

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

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

That’s all folks!

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

Rick Weber Current Events, Liberty, Politics , ,

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

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

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

Continue reading →

The High Wage Economy: the Stephenson critic

Vincent Geloso Economics, Liberty , , , , , ,

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

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

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

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

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

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

NOL Foreign Policy Quiz, Part One

Michelangelo Landgrave Liberty , , , , , , , , ,

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

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

nolanchart

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

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

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

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

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

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

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

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

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

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

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

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

Meeting these three conditions is difficult, but possible.

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

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

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

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

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

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

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

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

Foot Notes:

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

Further Reading:

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

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