Cracks in the Ivory Tower, by Jason Brennan and Phillip Magness, brings a much needed discussion of the pathologies of US higher education to the table. Brennan and Magness are two well-known classical liberals with a strong record of thoughtful interaction with Public Choice political economy.
Public Choice is an application of mainstream economic concepts to political situations. One of the key points of Public Choice is that people are self-interested and rational. This drives the choices they make. But people also act within formal and informal institutional environments. This constrains and enables some of their choices to a large degree. In other words, people react to incentives.
The Public Choice approach is not so much a normative handbook, but rather an attempt to explain how politics operate. The application of this theory to understand higher education in the US is a welcome addition to a growing literature on the economics of higher education.
It is perhaps surprising how the subtitle of the book stresses an aspect that tends to be extraneous to Public Choice scholarship: “The Moral Mess of Higher Education”. Of course we all draw on moral reasoning and assumptions in order to pass judgment on economic and political phenomena, but normally the descriptive side is kept separate – at least by economists – from explicit value judgment.
John Staddon, from Duke University, has reviewed Brennan’s and Magness’ book. In his review, he focuses on three main key issues. First, colleges and universities act on distorted incentives created, for example, by college rankings, to recruit students in ways that are not necessarily related to maintaining or expanding the academic prestige of the institution.
Second, teaching in higher education, at least in the US, is poorly evaluated. Historically, it has shifted from student evaluation to administrative assessment.
So why the shift from student-run to administration-enforced? And why did faculty agree to give these mandated evaluations to their students? Faculty acquiescence — naiveté — is relatively easy to understand. Who can object to more information? Who can object to a new, formal system that is bound to be more accurate than any informal student-run one? And besides, for most faculty at elite schools, research, not teaching, is the driver. Faculty often just care less about teaching; some may even regard it as a chore.
The incentives for college administrations are much clearer. Informal, student-run evaluations are assumed to be unreliable, hence cannot be used to evaluate faculty for tenure and promotion. But once the process is formalized, mandatory, and supposedly valid, it becomes a useful disciplinary tool, a way for administrators to control faculty, especially junior and untenured faculty.
This is not necessarily conducive to improvement in the quality of teaching. Perhaps colleges fare better than universities here, given that their faculty is not expected to allocate a large amount of hours per week to research and writing.
Third, Brennan and Magness offer a critique of what is known in the US system as “general education” courses. In their view, it is clear that those courses are unhelpful in a world where academic disciplines are increasingly more specialized. However, offering those courses is a good excuse for universities to grab more money from the students.
This is where Staddon begs to differ:
Cracks in the Ivory Tower usefully emphasizes the economic costs and benefits of university practices. But absent from the book is any consideration of the intrinsic value of the academic endeavor. Remaining is a vacuum that is filled by two things: the university as a business; and the university as a social activist. Both are destructive of the proper purpose of a university.
I tend to agree with this point, and I do not think it is a minor point. We can do colleges and universities without football, without gigantic administrative bureaucracies, and without the gimmicks to game the college ranking system. I could even go further and argue that we should do colleges and universities without dorms and an artificial second and worse version of teenage years right when students are supposed and expected to behave like adults. Getting rid of those tangential features of US higher education should help refocus on knowledge and reduce the cost.
Colleges and universities in the US are also expensive and unnecessarily inflated because of the structure of the student loans system, which also generates perverse incentives. But this point has been explained and described to exhaustion in the economic literature. This also has to change.
However, I am not convinced that making universities focus on professionalizing their students would be the best way to go. Brennan and Magness raise some important issues and concerns, some of which also apply outside the US, but the Staddon highlights in his review an important counterpoint: higher education, at least on the undergraduate level, shouldn’t be seen 100% as an investment good, but also as a consumer good:
Higher education does not exist for economic reasons. It exists (in the famous words of Matthew Arnold) to transmit “the best that has been thought and said,” in other words the ‘high culture’ of our civilization. Job-related, practical training is not unimportant. Universities, and much else of society, could not exist without a functioning economy. But — and this point is increasingly ignored on the modern campus and by the authors of CIT — these things are not the purpose, the telos if you like, of a university.
Undergraduate education is there to hand over knowledge to the next generation. It can be small and cheap. You need an adequate building, a small library with the best classic books, electronic access to journals, and faculty that excels at teaching. Courses would be general, comprehensive, and interdisciplinary by definition. The program could last only three years. An optional additional year could be offered to those with an academic profile, where they could pursue more specialization as a bridge to graduate education.
This is more or less the mediaeval model. I am not sure we need to reinvent the wheel in order to deal with the crisis of higher education. What we need is to get back on track – back to the bread and butter of college education. This is a reflection that both sides of the story – those who demand education and those that offer it – need to make.
In a recent contribution to Notes on Liberty, Mary Lucia Darst has recently commented on the status of higher education during the 2020 pandemic and prospects for the future.
I also wrote about the college trap in the US a few years ago.
- The Old Normal Andrew Bacevich, Harper’s
- “Iran Doesn’t Want War but has a big appetite for risk” War on the Rocks
- Nice try, economists Arnold Kling, askblog
- Against “aggregate demand” Chris Dillow, Stumbling and Mumbling
Be Our Guest is an open invitation to NOL‘s readers to participate with us. Pretty much anything is on the table. The latest article comes from the Freeconomist, who is following up on his earlier piece about making Brexit worthwhile via information asymmetries. His new piece is on financial regulation through the prism of Brexit. Check out this excerpt:
I do not want to write a lengthy discussion on the question of which alternative is the least costly in dealing with the incentive problems arising from the implicit subsidy by the taxpayer. There are good reasons to believe an incremental, decentralized and evolutionary system of market-based regulation to be superior to centrally designed government regulation. (4)
But even if this is the case, private regulation arising as a response to the incentive problems resulting from explicit and/or implicit government guarantees is still costly. Indeed, the evolved system of private regulation in the UK banking industry was giving the appearance of a restrictive cartel. If my analysis is correct, this “cartel” served a useful social function, namely to deal with the incentive problems created by the implicit government guarantee. Nevertheless, it also involved costs.
At the root of the problem are the taxpayer guarantees.
Please, read the rest. It’s another excellent piece of work.
And don’t be afraid to submit your thoughts to us.
In my first post, I would like to share with you part of my work as a scholar of politics.
I study clientelism, which is, in my view, a fundamental but understudied and highly underrated phenomenon in politics. In my book, Clientelism and Economic Policy: Greece and the Crisis (2016), I define clientelism as ‘the distribution of resources by political power through an agreement in which politicians – the patrons – make this allocation dependent on the political support of the beneficiaries – their clients’ (page 12). Clientelism emerges at the intersection of political power with social and economic activity.
Why is this phenomenon important? As Harold Laswell put it, politics is the art and science of ‘who gets what’ in society (1936). This famous phrase epitomizes the nature of politics as a competitive process for power and resources. Because these resources are often excludable and rivalrous, multiple social actors and groups are expected to compete with one another for access to political power and the resources it distributes. In addition, as political power decides how scarce resources are to be allocated, there is competition among political actors who wish to gain power and take control of the distribution mechanism. Either way, participation in political competition is costly and occurs in anticipation of higher benefits for each of the participants. Clientelist exchange occurs when political actors competing to gain political power interact with socioeconomic actors striving to persuade political power to meet their demands and claims.
A ‘political market’ for the allocation of economic resources emerges and has distinct characteristics. On the one hand, it generates informal ‘prices’, for the goods and services provided by the government: there is demand by economic actors for preferential treatment and there is supply by political agents of resources, opportunities and benefits. On the other hand, the terms under which clientelist exchange takes place differ substantially from ordinary market transactions, primarily in terms of bargaining power, the enforcement mechanism, externalities, and selection process.
Power asymmetry characterizes the relations between patrons and clients. Clientelism works as an oligopoly. Few patrons occupy the supply side while myriads of candidate clients inhabit the demand side. Depending on what resources each side trades or possesses for future trade, as well as how long one has been – or expects to be – in a position to trade, power asymmetry can tilt in favor of the patron or the client, as in the case of big donors.
Another distinctive element of clientelism is the fact that, while clientelist exchanges is not legally binding or enforceable before courts, honoring the agreement depends on expectations of reciprocation from each party and, quite often, on fears and threats of retaliation in case one party fails to meet the terms of the agreement. On the part of the political agents involved in clientelist exchange, it is a matter of building trust and reputation over time, which, in the absence of formal sanctions, reduces the perceived risk of breaking the terms of the agreement.
In economic theory, clientelism is linked to the concept of rent seeking. Clientelist exchange is actually a subset of rent seeking. It involves explicit agreements according to which the beneficiary must reciprocate by supporting the agent in the political and administrative authority who has offered them the opportunity to extract a rent.
The conventional approach in economics is to view rent seeking as a distortion of market competition for the externalities it imposes on all other non-participating actors. In the real political economy approach, almost all political decisions distribute benefits and costs. My work focuses on the political implications of clientelism.
The process by which the government distributes clientelist benefits inevitably requires some sort of selection of who would be the beneficiary among a pool of prospective clients. Politicians whose political survival and success depend on getting elected to office have a strong incentive to distribute resources to those who would offer them the most valuable form of political support; not just a single vote, but campaign funding, loyal party membership, activist support or favorable media coverage (Trantidis 2016, 18)
The concept of clientelism is mistakenly reduced to a form of vote-buying. This is a narrow view of a much broader phenomenon. Indeed, clientelism serves politicians as a way to strengthen their chances to win elections but resources for clientelist distribution are scarce and the best way to use these resources is to attract those who could made a campaign contribution. It is difficult to monitor voters’ behavior and it is definitely not economical to use resources indiscriminately to buy individual votes, particularly in advanced economies where voters may be too costly to buy and many may simply refuse to be bought off.
Instead, clientelism works as an indirect way of gaining votes (Trantidis 2016, 19). By allocating benefits strategically to attract the biggest possible campaign contributors, politicians can gain an advantage in campaign resources that would allow them to make a stronger appeal to general voters. In short, clientelism is a strategy for political organization and campaign recruitment that has an indirect effect on voters’ behavior. Resource endowments define the capacity of each party to perform a number of tasks necessary for political survival and growth.
As I explain in the introduction of my 2016 book, the first and typical ‘image’ of clientelism is that of an individual agreement. The second ‘image’ of clientelism is that of a strategy for collective mobilization. Politicians create networks of clients that help them organize a campaign infrastructure with a strong support network.
The second image of clientelism refers to the formation of groups of loyal supporters on a more permanent basis. Clientelism is a way by which politicians and political organizations overcome the famous problem of collective action (Olson, 1965). Collective action does not occur automatically from groups having common concerns or a perception of shared interest. This holds especially if the perceived collective benefit is to be indiscriminately shared by multiple actors in large groups. In that case, there are weak incentives for someone to actively contribute to the collective effort. This logic of collective action applies to political organization too. Political parties need active supporters and campaign resources to be able to compete for votes and, for that purpose, they have to find a way to overcome a free-riding problem. For party leaders, the organization of a coherent and active party basis can be achieved through the distribution of targeted benefits to party members and supporters entering a clientelist network. While it is costly to mobilize political support, available state resources allow political actors to pass this cost on society. In forthcoming posts, I will discuss how this phenomenon could affect the design of public policies.
For the time being, let’s summarize the three key characteristics of clientelism:
- Clientelism is a common form of distribution of resources by political power. It stems from the intersection of two competitive processes: a ‘market’ for political support and a ‘market’ for rents and other government granted privileges.
- Clientelism is more than vote buying. The practice gives preference to those who can make the highest valued contribution to a politicians’ campaign infrastructure and support network: donors, activists, prominent figures, journalists.
- Clientelism generates support networks. It is a way for political agents and organizations to overcome a collective action problem regarding how to mobilize, control and discipline active groups of supporters. This is a valued strategy for political organization that can hardly be eradicated from the political process.
Clientelism is a common, expected and inevitable practice in politics. In the next blogs, I will talk about how this practice should make us reconsider the notions of political participation and representation, rethink how public policies are formulated and reconceptualize democracy as a competitive arena in which authoritarian and democratic governments work to become dominant political forces. Thank you for your attention.
Laswell, Harold. 1936. Politics: Who Gets What, When, How. New York: Whittlesey House.
Olson, Mancur. 1965. The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge MA: Harvard University Press.
Trantidis, Aris. 2016. Clientelism and Economic Policy: Greece and the Crisis: London and New York: Routledge.
The advocates of the sunk cost fallacy state that, since an agent ponders in his decisions marginal costs against marginal incomes, any consideration upon sunk costs would be irrational. Notwithstanding, as soon as we accept the arguments of the said sunk cost fallacy and try to put its recommendations into practice, we discover that we have just become an easy prey of a more severe kind of irrationality: the one that concerns with intransitive preferences.
Jon Elster exemplifies the sunk cost fallacy with the case of a huge snowfall that pours onto the city the very same day we were planning to attend a theatre play whose tickets we had bought the previous days and are not refundable. Elster points out that, since our attendance to the play will not bring the money we had paid for the tickets back, there is no reason to make the decision on whether or not to attend the play on the basis of the sunk costs of the tickets. The correct reasoning should take into account only the cost of enduring the heavy snowfall in order to reach to the theatre where the play would be performed. Nevertheless, the same Jon Elster makes the disclaimer that a zealous observance of avoiding the sunk cost fallacy could lead to make choices following non transitive preferences.
If we change our mind every day, discarding previous decisions and assuming a new direction just because a new opportunity has arisen, we risk to end up in the ruin. Transitive preferences tend to assure the agent of a certain profit and non transitive ones exposes him to losses. In evolutionary games simulations, agents who act according to transitive preferences outshine agents who do not. It seems, then, that the rational agents walks on the edge of the razor, between sunk cost fallacies and non transitive preferences.
That is why there is not such a thing as a sunk cost fallacy. The rational agent, to be such, must ponder a whole plan against an alternative plan in a whole as well, which in some cases, both of them last several periods of time. It is true that in the “very short term” all past costs are sunk and that it only matters the opportunity costs, but most decisions are made in the short term, which lasts more than just a moment. Otherwise, the very concept of transitive preferences would lack any meaning.
Of course certain costs are sunk: if the flux of earnings that a good of capital produces just covers the variable costs of putting it to work (for example, a truck whose earnings just pay for the gas and the salary of the driver), the more rational choice is to use it until it becomes full obsolete and do not replace it with a brand new unit.
But the sunk cost fallacy does not provide a criterion to distinguish sunk costs from just mere costs of a single plan. What a rational agent with transitive preferences discards in his considerations will be named sunk costs, and what he does not, will not. A pure tautology.
Even the snowfall case does not explain satisfactorily the said fallacy: when the agent bought the tickets, their cost were inferior to the income of watching the play, but a heavy snowfall adds not a marginal cost but increases the marginal cost of the plan composed by the cost of the tickets plus the cost of enduring the snowfall.
Notwithstanding, the sunk cost fallacy derives into a philosophical puzzle: what is the subject? How are relations between time and being and between being and becoming. It seems that our permanence as rational agents depends mostly upon not to put into practice the opportunistic approach of the sunk cost fallacy ad libidum.
Moreover, the matter has a political strand: constitutional constraints demand from the authorities to take into account the weight of certain principles in their decisions and those principles could be disregarded if the decisions are purely made on the basis of expediency. If it is the same authority the one who decides whether certain constitutional principle should be followed or not, then all the citizens would be left exposed to arbitrariness.
The considerations about the length of the period a plan should last, the responsibility upon the consequences of our past choices, and the weight of the constitutional principles on the legitimacy of political decisions, become rational if they are not pondered by an isolated agent but in the framework of the interplay among several agents.
This framework of human interaction upon which the agent’s choices take place had been characterised by Friedrich A.Hayek as a spontaneous, or abstract or extended order. He proposed to leave the term “economics” to the explanation of the choices made by an isolated agent and to establish the science of “catallaxy” as the study of the complex phenomena involved in the said structure of interactions. In the same line, James M.Buchanan labelled the interplay of individual agents as “symbiosis” and proposed to redefine the task of the political economy to its study. More recently, in 2009, Douglass C. North, John Joseph Wallis and Barry R. Weingast, in Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, coined the term “open access orders” to analyse the same set of events. To this stream of thought, it also belongs Vernon L. Smith’s own account of the concept of ecological rationality.
Catallaxy, Symbiosis, Complex Phenomena, and Open Access Order or Ecological Rationality are some of the aspects of what Karl Popper once called “critical rationalism” and supersedes old problems such as those of the instrumental or subjective reason. An authentic “toolbox,” ready to be used.
There is a thin line between the abstract model of “natural selection of institutions,” its instantiation in an imaginary example that interprets it and the application of that theory to interpret historical experience. The latter does not test the model, but is the result of the organization of the record of events around this interpretive model. The instantiation in an imaginary example is a visualization that allows us to identify the inconsistencies in the model -if there are any- and to test general predictions about the behaviour of the variables. Such interpretations of the model assume that the rest of the variables remain unchanged, that is, the ceteris paribus condition.
If the abstract model does not have inconsistencies, i.e.: if in its imaginary interpretation, contradictory events do not arise, and, nevertheless, its explanatory or predictive power is contradicted with the experience, this does not imply a refutation. On the contrary, it is an indicator that another set of events are acting that neutralize the effects of the process described by the theory. In this case, although the theory does not achieve results in terms of explanations and predictions, it does fulfil a heuristic function: that is, it inspires new lines of research and discovery.
One such line of such lines is, for example, how politics plays out in the process of natural selection of social habits and practices. As indicated by the School of Public Choice, the regulations on economic activity that affect the distribution of corporate profits, assign monopolies, restrict imports, intervene in the market of credits and capital to favour certain activities over others, among others many cases of economic dirigisme encourage the development of practices known as “lobbying.” Investing in human capital and new technologies means an opportunity cost that will never be assumed if higher yields are obtained as a result of influencing government decisions that protect the producer from competition, or allowing the State to sell at a price higher than the market price. Therefore, if experience is indicating a low capacity for innovation, lack of initiative and stagnation, it is most appropriate to focus the observation on which incentives are acting effectively in that country.
The counterpart of the logical models is the empirical models, the latter consist of abstractions of elements that occur in reality, highlighting their common notes to obtain various classifications of such elements, and they are a simplified scheme of perceived reality. However, any system of abstraction of the common notes of a set of objects requires a prior conceptualization of such notes as defining a set or class. In order to classify diverse populations in countries, it is previously necessary to be in possession of the notion of population, for example.
On the other hand, abstract notions are not necessarily conformed by a deliberate operation of consciousness, but by the perception of series of events that are repeated and differentiated from one another, generating in the cognitive apparatus an association of diverse stimuli. Out of habit arises the expectation that from the appearance of a particular event or series of events a range of determined events will follow and not follow another range of events of various kinds. On these spontaneous classifications, articulated around the repetition of events, their differential in the system of stimuli of the nervous apparatus, and the predisposition generated by the habit of waiting and ruling out the consequent appearance of other events and stimuli is that consciousness is conformed and the cognitive apparatus of the knowledge subject.
But, likewise, those “spontaneous classifications” allow the appearance of an abstract set of functionally related notions whose ordering does not depend on a deliberate decision. These are the cases of norms with empirical observation and of what Douglass North called “informal institutions.” The value of the contribution of Friedrich Hayek in Law, legislation and Liberty consists in both the positive legal norms (deliberately created by the legislator) and the informal institutions that condition our conduct also depend for their enunciation of that abstract order of notions that it arises from pure experience.
These logical models -as they are abstract- that make up the consciousness and the cognitive apparatus of the subjects, are in permanent trial and error testing and, therefore, in continuous reformulation. It is a kind of negative feedback process in which the frustration of an expectation is corrected in the interpretative scheme of reality that the individual has, in a process of continuous readjustment. From the invariant reiteration of a certain series of events, a structure is formed that serves as a parameter to order other events of less frequency or more erratic behaviour.
To the extent that the subject continues its experimentation, the spontaneous classification system that makes up its consciousness becomes more complex, incorporating new ranges of events, adjusting its frequency and incorporating new structures. These are the relative limits of knowledge. They depend on the experimentation and the readjustment of the abstract patterns that allowed the subject to classify the events of reality.
However, knowledge can also grow in another direction: consciousness can focus not on the events that come from its perceptions but in the analysis of the classifications themselves. In this activity, the abstract classification schemes that had been shaped by habit do not apply to reality, but reflect on these classifications and extend and reformulate them, not in terms of their experience, but in virtue of their abstract speculation. This is the task of deliberately shaping the logical models to be applied to the interpretation of reality.
The elaboration of a legal theory -for example, about representation-, the description of a market structure -for example, monopolistic competition-, the outline of a sociological explanation -through the ideal types statement, to cite a case- , are situations in which the subject of knowledge does not experiment on events, but reformulates the classificatory systems that until then had arrived spontaneously. Knowledge in this case does not grow in specificity, but increases in levels of abstraction.
These are the cases in which the historian questions not only the interpretative frameworks he uses, but also the conditions that underlie these interpretative frameworks. The philosophy of science dabbled in the scientific paradigms (Thomas Kuhn), or in the research programs (Imre Lakatos), or in the great stories (Jean Francois Lyotard). The common denominator of these three concepts can be found in that they lack an “author,” they are inferences, true conjectures that we make about the framework in which a given scientific community develops tacitly.
Many interpret these currents of philosophy of science, although diverse, as relativistic, since they lend themselves to postulate that the statements of science are conditioned by the historical circumstances that serve as the frame of legitimation. There would not be a truth in itself, but a truth enunciated in a frame of reference. Another way to see it is to interpret these scientific communities structured around a set of practices, procedures, and validation rules whose origin is mainly spontaneous in a sort of “abstract discovery machines.”
In general, a series of physical devices conformed in a process of transforming inputs into exits is called a machine. But such physical devices are organized according to an abstract plane that assigns them functions for a certain process. This plane can be interpreted through mental operations without resorting to the construction of the physical machine, throwing said mental operations verifiable results; we are faced with an abstract machine. In recent times, the term “algorithm” has also been used to compare an information process that does not depend on the free will of the researchers, but consists in the follow-up of an automatic process.
In this line, Friedrich Hayek characterized competition as a process of discovery, that is, as an abstract machine that processes data and yields results that describe reality. In fact, the discovery would be the only function of a system of free competition that gives a differential over the rest of the systems. A monopoly, whose margins of profitability were controlled either by a maximum price or by a tax on profits, would be more efficient in terms of the production of a given good, than a set of small producers without market power and without scale. The scale of the monopolistic producer allows greater efficiency at a technological level than small producers competing with each other, being able to resolve economic inefficiency through regulatory or tax tools. However, in what a system of free competition is incomparably superior is in terms of the discovery process that drives its own dynamics. These are the benefits that innovation brings, as a consequence of an unanticipated system of free competition or competition, which far exceed all the supposed advantages of a regulated system.
It is this innovation that produces, most of the time involuntarily, an institutional system of free competition, called by Acemoglu & Robinson “inclusive economic institutions” – the one that allowed Hayek to characterize it as a process of discovery, in other words, as an abstract innovation machine.
This characterization of innovation processes through institutions that function as algorithms that produce new knowledge can also be extended to scientific communities and to the evolutionary process of legal norms.
Following my Mr. Darcy piece that outlined the use and convenience of British government debt instruments in the eighteenth (and predominantly the nineteenth) century, I thought to extend the discussion to two particular financial instruments. In addition to the Consols (homogenous, tradeable perpetual government debt) that formed the center of public finance – and whose active secondary market that made them so popular as savings devices – the Bill of Exchange was the prime instrument used by merchants for financing trade and settling debts.
The complementarity of the Consol and the Bill in international finance, roughly from the South Sea Bubble (1720) to the end of Napoleon (1815), was the “secret of success for international finance” (Neal 2015: 101) and arose without an overarching plan, i.e. rather spontaneously. As the Consol is more easily understood for a modern reader, and the Bill is both more ancient and less well understood, I’ll focus the bulk of my attention on the latter.
According to Anderson (1970: 90), the Bill constituted “a decisive turning-point in the development of the English credit system,” but is much older than that. In practice, it was a paper indicating debt and a time for repayment, allowing financing of current trade. Cameron (1967:19) writes that the Bill
was far more ancient than either the banknote or the demand deposit; it had been developed in the Middle Ages. At first the bill was used as a device for avoiding the cost and risks of shipping coin or bullion over great distances, then as a credit instrument which circumvented the Church’s prohibition of usury. When it first came to be used as a means of current payment is a moot question that may never be answered, but that it was so used in eighteenth-century England is beyond doubt.
The Bill was predominantly used in coastal cities in the Mediterranean and around the North-Sea, becoming frequent perhaps in the 1700s. One observer even dates an early instance of its use to 1161, and it was of standard use among traveling traders, merchants and brokers throughout the Middle Ages (Cassis & Cottrell 2015: 12). Occasionally – warranting a discussion of its own – Bills in England became “so widespread that they drove out even banknotes” (Cameron 1967: 19).
There is an unfitting competition among financial historians as to who can produce the most persuasive, informative or complicated schedule for how Bills worked (I know of at least four similar, yet uncredited, renditions). Here’s Anthony Hotson’s (2017: 92) attempt from last year:
- We start, counter-intuitively, in the top-right corner. Andrew, an English exporter of Apples, draws up a Bill on Bas, a Amsterdam maker of Bankets – a Dutch pastry. Bas, having no coin/gold available to pay Andrew – either because he won’t have the funds until after he has sold his apple-flavored(!) Bankets, or because the risk of loss or cost of transportation is too great – accepts the Bill and returns it to Andrew.
- Having returned it to Andrew, we now have a debt and a financial instrument; Bas has promised to pay Andrew £x for the apples in 90 days, a common duration for a Bill of exchange.
- But like most merchants, Andrew cannot wait 90 days for payment; he has sold and shipped his Apples, but needs funds for himself (feeding his family, or investing in new Apple-harvesting equipment etc). In the heyday of British financial markets, Andrew could simply visit a bank, Bill-broker or the London financial markets himself, and offer to sell the Bill there. Of course, Andrew won’t be able to sell the Bill for £x, since his buyer is effectively providing him with a loan for 90 days. The bank, bill-broker or financial market trader will discount the Bill with the going interest rate (say 6%, for one-quarter of a year, so ~1.5%), paying at most £0.985x for the Bill. Besides, there is a risk-of-default element involved, so the buyer applies a risk premium as well, perhaps buying the Bill at £0.95x.
- In the schedule above Hotson uses the Bill trade to show how merchants trading Bills could net out their respective debts and minimize the need to send payment across the British channel. For (3) and (4), then, we replace the banker with an English importer – Dave – of Dutch goods (perhaps tin-glazed pottery) looking for a way to pay his Amsterdam pottery supplier, Cremer. Instead of shipping gold to Amsterdam, Dave may purchase Andrew’s Bill, and settle his account with Cremer by sending along the Bill drawn on Bas. Once the 90 days are up, Cremer can simply wander over to Bas’ pastry shop and present him with the Bill to receive payment for the goods Cremer already shipped to England.
This venture can – and usually was – made infinitely more complicated; we can add brokers and discounting banks in every transaction between Andrew, Bas, Dave and Cremer, as well as a number of endorsers and re-discounters. In his popular book Exorbitant Privilege, Barry Eichengreen recounts a 12-step, several-pages long account for how a U.S. importer of coffee and his Brazilian supplier both get credit and signed papers from their local (New York + Brazil) banks, how both banks send their endorsed bills to their London correspondent banks, and some investor in the London money markets purchase (and perhaps re-sell) the Bill that eventually settles the transaction between the American coffee importer and the Brazilian farmer.
Although it might sound excessive, complicated and impossible to overlook, the entire process simplified business for everyone involved – and allowed business that otherwise couldn’t have been done. In econo-speak, the Bill of Exchange set within a globalizing financial system, extended the market for merchants and farmers and customers alike, lowered transaction costs and solved information asymmetries so that trade could take place.
Turning to the opposite end of the maturity spectrum, the Consol as a perpetual debt by the government was never intended to be repaid. Having a large secondary market of identical instruments, allowed investors or financial traders everywhere to pass Gorton’s No-Questions-Asked criteria for trade. A larger market for government debt, such as after Britain’s wars in the late-1700s and early 1800s, allowed dealers in financial markets to a) be reasonably certain that they could instantly re-sell the instrument when in need of cash, and b) quickly and effortlessly identify it. These aspects contributed to traders applying a smaller risk premium to the instrument and to be much more willing to hold it.
While the Bills were the opposite of Consols in terms of homogeniety (they all consisted of different originators, traders, and commodities), there developed specialized dealers known as Discount Houses whose task it was to assess, buy, and sell Bills available (Battilosso 2016: 223). Essentially, they became the credit rating institutions of the early modern age.
Together these two instruments, the Bills of Exchange and the Consols, laid the foundations for the modern financial capitalism that develops out of the Amsterdam-London nexus of international finance.
And how ‘bout them Dodgers, hunh? Actually, how about each division’s top team? That’s a lot of winning!
— A partial response to Marx’ claim that managers are expropriating the value produced by the workers while providing nothing themselves: “The study showed that managers didn’t just influence the results their teams achieved, they explained a full 70% of the variance. In other words, if it’s a superior team you’re after, hiring the right manager is nearly three-fourths of the battle.”
— Boudreaux wonders what supposedly-enormous transaction cost prevents firms from offering workers a choice of pay packages – buying more parental time for a lower wage, for instance. One commenter notes their firm does just that, letting workers buy back vacation time. This is also, of course, standard practice in much of academia, where faculty are allowed to reduce their teaching load in exchange for a salary cut – usually funded by a research grant.
— Sumner on how labor market reforms (including cutting unemployment benefits) helped Germany and Israel to lower average unemployment rates and increase economic growth.
— But there appears to be a great deal that only deregulation will not be able to change. A new paper by Berger and Engzell finds correlation between the European-country-of-origin of people in modern US and the level of inequality and intergenerational mobility. Institutions persist for a very, very long time … again. (Homework: How does this apply to the reparations debate?)
— Another new paper by Fone, Sabia, and Cesur finds that higher minimum wages increase property crime arrests – contra expectations – so that “a $15 Federal minimum wage could generate criminal externality costs of nearly $2.4 billion.”
— A history of civil asset forfeiture tells how the British Crown’s attempt to encourage the Royal Navy to enforce trade restrictions and tariffs became so widely used in modern America.
— Summers and Sarin show that wealth taxes will take in much less than their proponents hope.
With the ongoing troubles in Venezuela some commentators ask for a humanitarian intervention, by the US. Intervention by other countries, for example Brasil, seem to be out of the question. And of course the US has long regarded Central and South America their backyard, going back to the Monroe doctrine. What would be a liberal perspective on this? Basically, there are three answers.
Most people who call themselves liberal in the US have a favourable attitude towards humanitarian intervention. Or used to have this over the past decades (until it went wrong -at least in their view- in Iraq and Afghanistan). Their motives differ, but they would probably argue that there is a moral duty to intervene on behalf of the suffering majority. This moral duty, however defined in detail, is seen to exist when grave abuse of human rights take place in failed state situations, people’s lives are under threat, when a danger of genocide exists. The intervention may take place unauthorized (without United Nations Security Council mandate), or authorized. Dangers of intervention are recognized by liberals, as for example the potential for abuse by the intervening state is ever present. Liberals are less concerned about the duty of the governments of intervening countries towards their own citizens.
Classical liberals start by pointing out there is never a moral duty to intervene, because, as Adam Smith wrote, for humans there is only the duty to mind the happiness of their relatives, friends, country. This is not to say there is never a right to intervention in the classical liberal view. For sure, this right should be exercised in very rare circumstances, as international relations is more about preserving order than about achieving justice for all, and more about the importance of sovereignty for individual liberty than about obligations or rights following from a shared humanity. Yet prudent leaders do have some room for manoeuvre in international politics, according to classical liberals. However, intervention can only take place if they are able to explain to their voters and countrymen how the intervention would promote natural liberty. Foreign intervention is often counterproductive, and only an option when international disorder is seriously under threat. However, most often, the benefits of nonintervention outweigh the costs of attempting a universal protection of even a limited set of rights. Interventions start with the best intentions, but will often have unforeseen, negative consequences, which only in rare cases will be justified.
Libertarians normally have the most straightforward position: the anarcho-capitalists will not allow their private armies to conduct foreign adventures, while most minarchists (Rand excepted) are of the same opinion in case of (partly) publicly funded armies. So for them it is easy, no troops to Caracas.
How about the classical liberal and social liberal (as I continue to call them) position towards Venezuela? First of all: there is no question the situation is bad for large groups of Venezuelans. Maduro is a rotten and corrupt leader, standing on the shoulders of his socialist fairy tale teller predecessor – who was by the way democratically elected by those same Venezuelans, in very large numbers. Closing borders is the common instrument of autocratic leaders without any societal support. Inflation is high, the oil sector is in peril, basic medical services are beyond the reach of millions. There is a contending president, Guaidó, yet he appears to lack the support of the army and other crucial actors. The Catholic church refuses to take a position, for example.
Yet the costs of an intervention are high and the outcome uncertain. The military part might not be so easy, and will cost lives and lead to tremendous economic damage, both in Venezuela and the US. Guaidó, who now seems the reasonable alternative, is basically a young and unproven guy, without any track record. No certainty exists that he will lead the country in the good direction, even if he wants too. To reconstruct the country will almost certainly demand billions of dollars, which will not be easily recouped once the oil sector is on its feet again (remember that argument from the start of the intervention in Iraq?). It will take years before US troops on the ground can return home.
Needless to say this analysis is incomplete and lacks sufficient detail for any policy decision. Still, all in all, I would advise against intervention. Despite the bad situation, the proposed cure seems worse, not least from the perspective of the intervening country.
We must recognize than any orderly system used to select and admit immigrants involves a degree of bureaucratic slowness. Hence, the existing family preference-based program would have to be extended for several years, maybe as long as ten, while accepting no more new applications. It’s likely that the compromise solution would even have to be some sort of measure that guarantees that the last direct descendants and direct ascendants of existing immigrants have been accommodated.
To remedy the labor rigidity consequent on the abolition of family preference as the primary source of admission, the US might re-instate a new version of the 1942-1964 bracero program. I refer to a system of admission of temporary contractual workers guaranteed a minimum wage and decent living conditions by employers for a stated period. Temporary immigrants admitted in this manner would have no expectation of permanent admission to the US. The problem of “stay-overs” could be solved through a conventional bonding system. (I am puzzled about why bonding has not yet been tried in connection to immigration.) The work sojourns would have to be made renewable in law so that the US might preserve the option of keeping temp. workers who had acquired valuable and rare skills during, or even before their first, or following stay in-country. In exceptional cases, temp. workers in such a program could be channeled to the new F-1B program, perhaps with credit given for experiences working in the US and for cultural adjustment.
In summary: I deplore two features of current public discussions of legal immigration: They are ill-informed to an astonishing degree; and, they are often crude, lacking in both subtlety and imagination, like an argument between two people who keep cutting each other off. Unless one formulates a systematic alternative to the current system, one squarely separating immigration based on altruism from merit-based immigration, immigration based on the expected immigrants contributions to American society, the helter-skelter liberal project will continue to prevail. It is now prevailing by default in the minds of most Americans. Those who have the energy to resist it too often limit their response to a blind “No!”In the end, if no countervailing project emerges forcefully, we will witness the establishment of a statist one-party system in the US. Libertarians, among others, should hurry to confront their close friends and relatives who toy with the dangerous delusion of open borders.
Now, here is what I, personally, a US citizen and an appreciative immigrant, as well as a small government conservative, would like to see happen: As I pointed out before, most liberals and quite a few conservatives perceive allowing all immigration as a sort of altruistic gesture. That includes those who do not overtly call for open borders but whose concrete proposals (“Abolish ICE.”) would result in a soft state that would provide the equivalent of open borders. As far as I can tell – with the major exception of Tabarrok, discussed above – many pure libertarians whisper that they are all for open borders, but they only whisper it. I speculate that they are forced to take this principled but unreasonable position to avoid having to defend the nation-state as a necessary institutional arrangement to control immigration. Frankly, I wish they would come out of the closet and I hope this essay will shame some into doing so.
The most urgent thing to my mind is to separate conceptually and bureaucratically with the utmost vigor, immigration intended to benefit us, American citizens and lawfully admitted immigrants, and beyond us, to promote a version of the American polity close to the Founders’ vision, on the one hand, from immigration intended to help someone else, or something else, on the other. The US can afford both but the amalgam of the two leads to bad policies. (See, for example the story “The Refugee Detectives: Inside Germany’s High-Stake Operation to Sort People Fleeing Death…” by Graeme Wood in The Atlantic, April 2018.)
Next, I think conservatives should favor, for now, an upper numerical limit to immigration, one pegged perhaps to the growth of our domestic population. Though my heart is not in it, it seems to me that this is a prudent recommendation in view of the threatening prospect of a Democratic one-party governance.
The first category of immigrants would be admitted on some sort of merit basis, as I said, perhaps a version of the system I discuss above. The second category would include all refugees and asylum seekers, and, to a limited extent, their relatives. Given a strictly altruistic intent in accepting such people, Congress and the President jointly would be in a better position than they are today to apply any strictures at all, including philosophical and even religious tests of compatibility with central features of American legal and philosophical tradition – if any. (Of course, in spite of the courts’ interventions in the matter, I have not found the part of the Constitution that forbids the Federal Government from barring anyone it wants, including on religious grounds. Rational arguments can be made against such decisions but they are not anchored in the Constitution, I believe. (See constitutional lawyers David B. Rivkin and Lee A. Casey’s analysis: “The Judicial ‘Resistance’ is Futile” in the Wall Street Journal of 2/7/18.)
I think thus both that we could admit many more people seeking shelter from war and other catastrophes than we do, and that we should vet them extensively and deeply. We could also rehabilitate the notion of provisional admission. Many of the large number of current Syrian refugees would not doubt like to go home if it were possible. Such refugees could be given, say, a five-year renewable visa. As I pointed out above, some beliefs system are but little compatible with peaceful assimilation into American society. This can be said aloud without proffering superfluous insults toward any group. National hypocrisy does not make sense because it rarely fools anyone. In general, I think all American society has been too shy in this connection, too submissive to political correctness. So, think of this example: French constitutions, most of the fifteen of them anyway, proclaim the primacy of something called “the general interest,” a wide open door to authoritarian collectivism if there ever was one. There is no reason to not query French would-be immigrants on this account. I would gladly take points off for answers expressing a submissiveness to this viewpoint. (Yes, I am one of those who suspect that the French Revolution is one of the mothers of democracy but also, of Communism and of Fascism.)
Similarly Muslim religious authorities as well as would-be Muslim immigrants could be challenged like this: Just tell us publicly if Islamic dogma welcomes separation of religion and government. State, also in public, loudly and clearly that apostasy does not deserve death, that it deserves no punishment at all. Admission decisions would be a function of the answers given. Sure, people would be coached and many would cheat but, they would be on record. The most sincere would not accept going on record against their doctrine. Sorry to be so cynical but I don’t fear the least sincere!
The underlying reasoning for such policies of exclusion is this: First, I repeat that there is no ethical system that obligates American society to commit suicide, fast or slowly; second, probabilistic calculations of danger and of usefulness both are the only practicable ones in the matter of admitting different groups and categories. (I don’t avoid jumping from planes with a parachute because those who do die every time they try but because they die more often than those who don’t.) Based on recent experience (twenty years+), Muslims are more likely to commit terrorist acts than Lutherans. (It’s also true that there is a very low probability for both groups.) Based on common sense and the news, most Mexicans must have acquired a high tolerance for political corruption. Based on longer experience, many Western Europeans have extensive and expensive expectations regarding the availability of tax supported welfare benefits. Based – perhaps- on one thousand years of observation, the Chinese tend to favor collective discipline over individual rights more than Americans do. (See my: “Muslim Refugees in perspective.”)
Pronouncing aloud these probabilistic statements does not shut off the possibility of ignoring them because immigrants from the same groups bring with them many improvements to American society, of course. I could easily allow a handful of well chosen French chefs to come in despite of their deep belief in the existence of a common public interest. I even have a list ready. Admitting facts is not the same as making decisions. I can also imagine a permanent invitation to anyone to challenge publicly such generalizations. It would have at least the merit of clearing the air.
Last and very importantly: Invalidating the generalizations I make above, to an unknown extent, is the likelihood that immigrants are not a true sample of their population of origin: Chinese immigrants may tend to have an anarchist streak; that may be the very reason they want to live in the US. Mexicans may seek to move to the US precisely to flee corruption for which they have a low tolerance, etc. The French individuals wishing to come to the US may be trying to escape the shadow of authoritarianism they perceive in French political thought, etc.
[Editor’s note: in case you missed it, here is Part 17]
The long-established numerical prominence of immigration into the US via family relations makes it difficult to distinguish conceptually between legal immigration responding to matters of the heart and immigration that corresponds to hard economic, and possibly, demographic facts. The one motive has tainted the other and vice-versa. The current public discussions (2016-2018) suggest that many native-born Americans think of immigration as a matter of charity, or of solidarity with the poor of this world, as in the inscription at the foot of the Statue of Liberty: “Give me your tired, your poor, your huddled masses yearning to breathe free,….” Many Americans accordingly perceive as hard-hearted those who wish to limit or reduce immigration. Inevitably, as whenever the subject of hard-heartedness emerges as a topic in politics, a Right/Left divide appears, always to the detriment of the former.
It seems to me that conservatives are not speaking clearly from the side of the divide where they are stuck. They have tacitly agreed to appear as a less generous version of liberals instead of carriers of an altogether different social project. Whatever the case may be, the politically most urgent thing to do from a rational standpoint is to try and divide for good in public opinion, immigration for the heart and immigration for the head, immigration for the sake of generosity and immigration for the benefit of American society. Incidentally, and for the record, here is a digression: I repeat that I believe that American society has a big capacity to admit immigrants under the first guise without endangering itself. That can only happen once the vagueness about controlling our national boundaries has dissipated. Such a strategy requires that the Federal Government have the unambiguous power to select and vet refugees and to pace their admission to the country.
In reaction to the reality and also, of to abuses associated with the current policy, a deliberate, and more realistic doctrine of immigration has emerged on the right of the political spectrum. It asks for admission based on merit, partly in imitation of Australia’s and Canada’s. Canada’s so-called “Express Entry System” is set to admit more than 300,000 immigrants on the basis of formally scored merit in 2118. That’s for a population of only about 37 million. The central idea is to replace the current de facto policy favoring family relations as a ground for admission, resulting in seemingly endless “chain migration,” with something like a point system. The system would attempt scoring an immigrant’s potential usefulness to American society. In its simplest form, it would look something like this: high school graduate, 1 point; able to speak English, 1 point; literate in English, 1 more point; college graduate, 2 points (not cumulative with the single point for being a high school graduate); STEM major, 2 points; certified welder, 2 points; balalaika instructor, 2 points. Rocket scientist with positive record, 5 points. Certified welder, 10 points.
The sum of points would determine the order of admission of candidates to immigration into the US for a set period, preferable a short period because America’s needs may change fast. With the instances I give, this would be a fair but harsh system: Most current immigrants would probably obtain a score near zero, relegating them to eternal wait for admission.
There are two major problems with this kind of policy. First, it would place the Federal Government perilously close to articulating a national industrial policy. Deciding to give several point to software designers and none to those with experience running neighborhood grocery stores, for example, is to make predictions about the American economy of tomorrow. From a conservative standpoint, it’s a slippery slope, from a libertarian standpoint, it’s a free fall. Of course, we know how well national industrial policies work in other countries, France for example. (For 25 years, as a French-speaking professor on the spot, visiting French delegations to my business school would take me aside; they would buy me an expensive lunch and demand that I give away the secret of Silicon Valley. First, create a first rate university, I would answer meanly…)
Second, the conceit that a merit-based system of admission, any merit-based system, is an automatic substitute for the family reunion-dominated current policy is on a loose footing. Suppose, a Chinese woman receives top points in the new system as a world-class nuclear scientist whose poetry was nominated for a Nobel in literature. She walks right to the head of the line, of course. But she is married and she and her husband have three children. Can we really expect her to move to the US and leave her family behind? Do we even want her to, if we expect her to remain? Does anyone? Then, the woman and her husband both turn out to be busy as bees and hard workers, major contributors to the US economy, and to American society in general. (They are both also engaged in lively volunteering.) So, they need help with child care. The husband’s old but still healthy mother is eager and willing to come to live with the couple. She is the best possible baby-sitter for the family. The problem is that the old lady will not leave her even older husband behind. (And, again, would we want her here if she were the kind to leave him?)
Here you go, making ordinary, humane, rational decisions, the merit-based admission of one turns into admission of seven! And, I forgot to tell you: Two of the kids become little hoodlums, as happens in the best families in the second generation. They require multiple interventions from social services. They will both cost society a great deal in the end. In this moderate scenario, the attempt to rationalize immigration into a more selfish policy benefiting Americans has resulted in a (limited) reconstitution of the despised chain immigration, with some of the usual pitfalls.
The arguments can nevertheless be made that in the scenario above, the new merit-based policy has resulted in the admission of upper-middle class individuals rather than in that of the rural, poorly educated immigrants that the old policy tended to select for. This can easily be counted as a benefit but the whole story is probably more complicated. In the exact case described above, the US did replace lower-class individuals with upper-middle class people but also with people possibly of more alien political culture, with consequences for their eventual assimilation. I mean that all Mexicans tend to be experts in Americana and that our political institutions are familiar to them because theirs are copy-cat copies of ours. I surmise further that Mexicans are unlikely from their experience to expect the government to be mostly benevolent. Moreover, it seems to me the children of semi-literate Mexicans whose native language is fairly well related to English and uses the same alphabet, are more likely to master English well than even accomplished Chinese. This is a guess but a well-educated teacher’s guess. (I don’t think this holds true for the grand-children, incidentally.) Of course, if my argument is persuasive, there would be a temptation to down-score candidates just for being Chinese, pretty much the stuff for which Harvard University is on trial as I write (October 2018).
I described elsewhere how the fact of having relatives established in the country facilitates installation and economic integration, even as it may retard assimilation. Note that a point system does not have to forego the advantages associated with family relationships. Such a system can easily accommodate family and other relationships, like this: adult, self-sufficient offspring legally in the US: 3 points; any other relation in the US: 1 point; married to a US resident with a welder certification: 15 points, etc.
[Editor’s note: in case you missed it, here is Part 16]