Nightcap

  1. The battle for truth in Soviet science Michael Gordin, Aeon
  2. Governing least: a New England libertarianism Dan Moller, Bleeding Heart Libertarians
  3. A tale of two paths Michael Koplow, Ottomans and Zionists
  4. 10 walls that have actually been built – My latest at RealClearHistory

From the Comments: Why did Cambodians trade foreign terror for domestic horror?

John Cyberome pitches the question to Chhay Lin on his post about the terrorist attacks in Paris. Chhay Lin’s response (which I have broken up into smaller paragraphs) deserves a closer look:

I don’t understand why Cambodians traded foreign terror for native horror. It’s something I’ve always wanted to understand. I don’t remember a time when I did not have such questions as: how can people be so cruel to each other or would they (the friends I had) be able to commit such horrendous acts to me if they would live during the Khmer Rouge period? It seems like there is a terrible part of human nature that is called upon in certain circumstances. I think the Milgram Experiment and the Stanford Prison Experiment have been examples of how peaceful people can move to extremely horrifying acts. I also think that the Khmer Rouge had good intentions. In their eyes, they were saving the nation from corruption, from immorality, from foreign invaders and from domestic traitors.

Cambodia by the way, is a country that is quite paranoid. Until this day, they still fear that the Thai or the Vietnamese will one day take over the country. Some already believe that the country only exists by name, but that it’s actually under Vietnamese rule. According to them, after the Vietnamese occupation from 1979-1989, they have installed a pro-Vietnamese ‘puppet’. This paranoia feeds nationalism – a sentiment, I believe, that can be easily manipulated into hatred towards foreign Khmer like Sino-khmer or Vietnamese-khmer.

Besides that, I also think that the poorer people were envious of the wealthy class. When the Khmer Rouge came into power and turned the social hierarchy upside down by installing the poor people into higher social positions, they may have been especially cruel to those fellow Cambodians who they believed were better off.

I also think that we can partly blame it on the Cambodian culture. The culture is very hierarchical. People of status look down on poorer people and treat them like crap. The poor don’t even dare to look the better-off in their eyes. It’s a culture that breeds envy and discontents between classes. I think these are a few reasons why the Cambodians had traded foreign terror for native horror. In all honesty, I find the culture quite backward 😛.

This is a whole lotta insight packed into one short ‘comment’.

For starters, I would be comfortable in suggesting that land is the crucial factor of production in Cambodia, rather than capital. (I am not as confident as Rick in arguing that land, labor, and capital are basically obsolete tools, in large part because there are big swathes of the world that don’t share the institutions that have created the West.) Land-based societies that I have read about all share the same general cultural characteristics as those mentioned by Chhay Lin (though none would dare call these characteristics ‘backward’!).

Trade has, in my reading of history, been the traditional arbiter of destruction for land-based interests. Does anybody have any good information on international trade and Cambodia? I’ve looked in to a few sources (World Bank, OECD, Heritage) and it looks like the volume of trade has been increasing since at least 2010, but that there are institutional problems which have yet to be addressed.

‘Creative destruction’ is such a strange concept, especially to a libertarian like me.

The Dangerous Inequality Meme

The inequality of wealth and income has become a meme loaded with danger. A “meme” is an idea that gets propagated like genes in biology. Economic inequality has long been a topic of interest, but during the past few years, and especially during the 2015-2016 American elections, the inequality meme has erupted into a major political issue among those who identify as progressive, liberal, and socialist.

The facts about inequality in the USA are clear. Since 1970, income inequality has increased. As national income has grown, most of the gains have gone to the rich. Average incomes have even dropped since the recession of 2007-2009.

During the 1800s, the first economist to analyze equality and inequality was Henry George. Karl Marx had touched on economic inequality by saying that the surplus from production was due to labor but was captured by the capitalist, the owner of the firm and its tools. Thus, the proletariat, the workers, stay poor and the capitalists get rich, creating inequality. But Marx and his followers focused on the conflict between labor and capital rather than the inequality.

Henry George pointed out that the surplus from production is not in wages, nor in business profits, but in land rent, which is a pure surplus, since land has no cost of production. George showed how land rent captures the gains from economic progress, creating the inequality in wealth and income between workers and the landowners. Competitive firms make normal profits, which has no surplus. Of course monopolies can capture surplus also, but the profits from entrepreneurship are a bonus to society, rather than a social problem, as entrepreneurs drive innovation and economic progress.

Unfortunately, when the classical economics of the 1800s turned into the neoclassical doctrines of the 1900s, both by design (in opposition to the Georgist remedy of taxing land value) and for mathematical convenience, land was dropped as an input factor, and mainstream economics became the two-factor production function Q=f(K,L). It is illogical that land rent gets included in the distribution of income in the return on K, but excluded on the production side, as the models are based only on the two inputs, labor L and capital goods K. This contradiction is not questioned by graduate students in economics, who are too busy learning the calculus of “math econ” to bother asking if the whole system makes sense.

Therefore the inequality meme is now blended with the labor-capital meme, ignoring the real source of economic inequality, unequal land tenure. Politicians exploit the all-too-real economic inequality with a superficial, simplistic, and dangerous remedy: tax the rich and transfer the funds to the poor. Of course governments are doing that already, and that has not reduced inequality, but the welfare-statists insist that government should do more of it.

Conservative opponents of greater redistribution point out, correctly, that higher taxes and takings from the rich will stifle entrepreneurship and savings, reducing the economic growth. But other than eliminating some of the tax deductions and generating more growth by reducing the top tax rates, the conservatives have no effective remedy. Their call to flatten the tax rates play into the political agenda of the redistributionists who call for higher, not lower, tax rates on the rich.

The danger in the inequality meme is the confiscation of the wealth not just of the rich but also of the middle class. A family that spent all its income and now has no wealth would be given welfare aid, while the family with the same income but frugally saved its income for retirement or to provide for their children would have their wealth taken away, not just by ordinary and predictable taxation, but by a sudden taking, as happened in Cyprus in 2013. Government chiefs facing a debt crisis can kill two birds with one stone: confiscate savings and use some of it to pay off debt and the rest to transfer to the poor. Such confiscation has been suggested by the International Monetary Fund, which lends funds to countries bogged down in debt. In its publication Fiscal Monitor Report, the IMF stated (pdf):

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).” There we have the proposition that such confiscation of wealth can be “fair” (49).

This IMF capital-levy proposition was presented in Forbes with the title, “The International Monetary Fund Lays The Groundwork For Global Wealth Confiscation.” The Wikipedia article on “capital levy” shows that this meme is getting some traction, such as by Germany’s Bundesbank. The concept of a capital levy, confiscation of savings and investment, comes from the meme of economic inequality that looks only at the superficial existence of unequal wealth and not to the source.

It has been well pointed out by British journalist and economist Fred Harrison in his Youtube video “Ricardo’s Law: the Great Tax Clawback Scam” that while the rich pay much in taxes, many of them get the tax back, as a clawback, from government’s public goods, which generate higher rent and land value.

The effective and equitable remedy for economic inequality is not redistribution but the proper initial distribution of income. Wages and capital yields should be kept by the workers and investors, while land rent should be equally distributed either as cash or in public services. Public revenue from land rent would equalize income while promoting growth and raising wages. We need to bring land back into economic discourse, but that requires penetrating the appeal of superficial thinking. That’s what Henry George tried to do, and the Georgist meme had reached up to the heads of state in China, Great Britain, and Russia (after the first revolution with Kerensky), but World War I blasted the impending tax reforms to bits.

The candidates who now rant against inequality, the corporations, and the billionaires, even if they don’t win the election, will influence policy and generate calls for more redistribution and, perhaps in the next financial crisis, a capital levy. While alarmists often exploit impending doom for their own gains, sometimes they are right.

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This article is also in progress.org under the title “Tyrants Exploit Income Inequality”

[Ed. note: I added tags, categories, and links, and patched up some grammar – BC]

Information doesn’t matter

The classical economists gave us three basic factors of production: Land (i.e. nature-given resources), Labor (i.e. human effort), and Capital (i.e. tools). Naturally this involves lumping together a lot of heterogeneous things. Capital includes a rock you might use to smash an assailant over the head as well as a particle accelerator. But prices do a brilliant thing: they provide information about the relative scarcity of goods and compress that information into a single dimension

This allows us to aggregate! It means that we can talk about how much capital per capita is available in a region (or better yet, provide a distribution of workers’ access to capital… a project I’m not sure if anyone’s done) and the like.

This whole intellectual project is necessary if we want to talk about the nature and causes of a particular economy’s well being. But the original factors have become less useful as the nature of economic activity has changed over time.

It gradually became clear that the concept of labor was too fuzzy: how do we compare the labor of a doctor with that of a stevedore with that of a professional wrestler? We could try to use prices, but for a variety of reasons that just won’t work very well. Household production and leisure don’t have market prices, market frictions are particularly pronounced, information asymmetries abound and are entangled with principal-agent problems (you don’t have to watch a wrench to ensure that it doesn’t slack off, but your administrator may very well cease to administrate while browsing Facebook).

Economists have dealt with the issue with the idea of human capital. In addition to physical tools, people also have mental tools (skills). This idea leads into the notion of social capital (people invest in relationships), and can be extended in any number of directions. It’s a wonderful lens through which to view the world because it lets us see the nature of what we do.

But it’s not the right way to think about the factors of production. Not because it’s difficult to measure human capital (I’m not convinced it’s really possible to measure much of anything of importance in economics… even though I keep trying to). The problem is that it doesn’t get us down to the core, atomic thing that we’re really interested in.

Boulding tells us [emphasis mine]:

It is much more accurate to identify the factors of production as know-how (that is genetic information structure), energy, and materials, for, as we have seen, all processes of production involve the direction of energy by some know-how structure toward the selection, transportation, and transformation of materials into the product.

And I think he’s on to something here. The basic stuff of our economy is information applied to objects (even information has to be physically embodied in writing, magnetic manipulation of hard drives, or the shape of our neural connections), which requires energy.

But we’ve got the information necessary to do far more than we actually do. What is it that stands between the vast amounts of knowledge at our command being applied to our enormous stocks of physical resources using our still plentiful and cheap energy? Why is there so much slack in our economic systems?

It could simply be transaction costs, but I think we can go deeper. Boulding’s factors give a more refined view of both labor and capital, but he’s still missing the fundamental kernel of labor. It’s not our know-how that matters–we all know we’re supposed to save for retirement and yet we don’t. It’s not that we don’t have enough energy. What’s missing is an appreciation of attention.

Attention is at the root of alertness which Kirzner tells us is the prime mover that sets in motion economizing behavior. Attention is what is necessary to learn. Most importantly, it is what is necessary to remember and apply what we learn. And it’s universal. Laborers have it and so will our future robot overlords. It’s easily as basic as energy and materials. The question then is how to tie it into the notion of know-how (the psychology of learning) and social sciences more generally.

The burden of imperialism, the virtues of immigration, and the importance of data

One thing I have noticed about the terrorist attacks in Paris is the relatively little that imperialism is brought up. The Muslims of France hail from parts of the world that were once a part of the official French empire. This empire is still a force in much of its old official boundaries. The British and the Dutch also have problems with Muslims that were once a part of an official empire. The Germans and the Turks are a different case, as the Ottoman and German empires had more of a deal between themselves in regards to cheap labor than the cases of Western Europe, but the relationship is still not one of immigration – not in the sense that is perceived by Americans, Canadians, and Australians.

I wonder how much of the tension between natives and immigrants is due to the imperial relationship of the sides involved. I would wager quite a bit. I also have to wonder about the role of land in all of this. Land, of course, is the ugly cousin of labor and capital, two of the three factors of production utilized by economics (there is a fourth sometimes cited, entrepreneurship, but I am not yet convinced that this belongs and neither are many economists).

Immigration is different than what the former imperial states of Western Europe are dealing with. I know the similarities are seemingly the same, but they are not. I would be happy to flesh this out more in the ‘comments’ threads if anyone takes issue with it.

Here is the abstract from an excellent article in Social Forces on the futility of deriving any conclusions about a society based on simple perceptions:

We investigate the thesis widely credited to Max Weber that Protestantism contributed to the rise of industrial capitalism by estimating the associations between the percentage of Protestants and the development of industrial capitalism in European countries in the mid- to late nineteenth century. Development is measured using five sets of variables, including measures of wealth and savings, the founding date of the principal stock exchange, extension of the railroads network, distribution of the male labor force in agriculture and in industry, and infant mortality. On the basis of this evidence, there is little empirical support for what we call the “Common Interpretation” of Weber’s The Protestant Ethic, namely the idea that the strength of Protestantism in a country was associated with the early development of industrial capitalism. The origin of the Common Interpretation and its popular success are probably derived largely from selected anecdotal evidence fortified, through retrospective imputation, by the perceived well-being of contemporary Protestant countries.

The article is titled “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe” and it can be read here (pdf). As you read through analyses of the terrorist attacks in Paris, be sure to keep this in the back of your mind.

By the way, the piece is co-authored by Jacques, who has failed to adhere to his own standards when it comes to discussing Islam.