Wednesday, December 29, 2010

Regulation, common goods and institutions

Boyes raises the question about the public choice implications of state regulation. Regulation or coordination, can take place in a number of settings. The state can generate top down regulation and, as Eleanor and Vincent Ostrom observe, regulation can be bottoms up - that is individuals can develop modes of coordination or regulation that deal with issues arising from commons, expernalities and public goods.

I recall a comment made years ago at a Liberty Fund conference in which a participant observed that the world is characterized by ubiquitous externalities. As I reflect on this and the important considerations raised by Seabright in The Company of Strangers I can see how institutions have emerged and evolved to address issues of the commons. Seabright uses the metaphor of the stranger to illustrate this issue and I think his analysis provides food for thought. How does coordination emerge and persist in social settings? Vernon Smith argues that successful societies have emergent ideologies of honesty. This trust is an important lubricant for the functioning of a society.

So the question becomes, are there any tops down regulations that in fact foster rather than inhibit emergence and persistence of honesty and trust?

For some reason this question lead me back to Adam Smith's view in The Theory of Moral Sentiments that humans all have a moral sense composed of justice, beneficience, prudence and self command.

Regulation or coordination that is both wealth creating and supportive of liberalism must support and encourage self command and not replace it. One of the costs that state mandated regulation is at risk of creating is weakening individual self command.

Complex modern societies confront the challenge of coordination or regulation daily. Successful societies tend to evolve a mix of coordination systems to foster honesty and trust. Failed states or societies devolve and the coordination and regulatory schemes become predatory.

Douglass North's last book - Violence and the Social Orders argued that successful, modern societies evolve a mix of coordination and regulatory matrices that include public and private schemes. The public organizations (the North definition of organizations) are dense and diffuse and operate at local, state and national levels in a mosaic of interconnections with each other and the private sector.

This argument is intriguing and one that libertarians confront - the empirical evidence, at least in North's work, suggests that the open access orders (developed, successful societies) manifest honesty and trust in an environment of significant state presence. Natural orders (developing societies) range from failed states to mature natural orders and tend to have markedly less public sector presence in the form of public organizations.

So, coordination is the challenge of societies. What is the mix and source of regulation that emerges to support honesty and trust?

Is Regulation for Sale

Pratt asks "Is Regulation for Sale?" The question should be is there any regulation that does not provide benefits to special groups. As long as democracy enables diffused costs and concentrated benefits to guide legislation, regulation is nothing but a saleable service; that is why it is referred to as rent seeking and rent providing. Moreover, the larger the size of government, the greater the returns to rent seeking. Allocating resources to non-productive activities -- rent seeking -- becomes increasingly a better policy for firms than allocating resources to productive activities.

A case in point is the Dodd-Frank financial regulation bill just enacted. It is a full package of benefits to special interests. We should have a look at the bill. In a future post we will.

Economic Optimism? Yes, I’ll Take That Bet

Interesting NY Times article by John Tierney - I just finished Paul Seabright's book - The Company of Strangers and Tieney's replication of the Julian Simon "experiement" is a wonderful illustration of the emergence of problem solving among strangers.

Seabright's book is a wonderfully accessible and informed integration of the work of Hayek, Simon, Mancur and Vernon Smith - although he does not cite the first or last.

The chapter dealing with the economics of water is a masterful application of the economic way of thinking and, I would argue, must reading along with Capitalism and Freedom.

Sunday, December 26, 2010

EconTalk Podcast Listening Guides | Library of Economics and Liberty

Russ Roberts has a series of outstanding podcasts that illustrate the economic way of thinking. For a number of these he has developed listening guides for use in guiding student discussion and debrief.

EconTalk Podcast Listening Guides | Library of Economics and Liberty

Saturday, December 25, 2010

Friday, December 24, 2010

Is regulation really for sale?

The answer is obvious and implies a change in both the attitude toward government regulation and adtion to effect that changed attitude. Unfortunately, as Hayek and later Sowell point out, the intelligensia either ignore the answer to this question (difficult to do, but still within their considerable hubris) or respond that the answer is more regulation.

One can hope that continued evidence of the unintended and perverse consequences of state action - regulation or otherwise - will lead to constructive steps toward reduced government action.

Freedom Watch hosted 3 Reason thinkers and Nick Gillspie argued that looking forward there was little propect of reducing existing state presence. His advice, work to maintain and strength liberty and freedom in the spheres in which it continues to exist.

Sound advice in my view.

Thursday, December 23, 2010

Creation, Consent, and Government Power over Property Rights

Great conversation this month over on CATO regarding the role of the state and the locus of rights.

A sample . . .

I. Government did not “Create” Property Rights

Scholars such as Robert Ellickson, Harold Demsetz, Elinor Ostrom, and Hernando de Soto have documented how private property rights often emerge even in the absence of government enforcement.[1] The claim that such rights are necessarily “created” by the state is simply empirically false. The institution of private property long predates the existence of the modern state, or indeed states of any kind.[2]

Obviously, states do often enforce property rights, and that state enforcement is sometimes more efficient than private sector alternatives would be. But the mere fact that government enforces property rights does not give it the right to redistribute them in any way it sees fit.

The circumstance that the state enforces a right does not prove either that the right could not exist at all without the state or that its moral legitimacy flows solely from the state’s recognition.

Wednesday, December 22, 2010

Unintended consequences

As Boyes points out, the involvement by the state in college athletics leads to any number of perverse outcomes. The government regulations interacting with a government sanctioned cartel - the NCAA - leads to inefficiency and barriers to entry that perpetuate rent seeking.

Most of the institutions that are affected by Title 9 and other government regulations are state institutions or quasi government institutions. Other than Hillsdale College one would be hard pressed to find a college or university that is not a state enterprise or state controlled enterprise.

The specific example of the UConn woman's basketball team, while interesting, is not really on point. UConn woman's teams actually benefit from the barriers to entry erected by the complex scaffolding of state university and government regulation. This complex witch's brew guarantees that the powerful institutions, UConn woman's basketball may well be the most powerful institution on that campus, will perpetuate in rent seeking. This is not to denigrate the amazing achievement of UConn woman - that team has historically operated at the highest level against all ranked opposition. But the success is, in large part, a result of the government - directly and indirectly through the government sanctioned cartel - NCAA.

The real lesson of Title 9 is the discrimination that is at the heart of all government action. In the name of egalitarian equal outcome, state action leads to discrimination. And in athletics . . . title 9 leads to the elimination of men's sports (think UCal Berkeley men's rugby - defending national champion) and introduction of "innovative" women's sports like rowing that would never be present in the absence of state action. This results in both mis and mal allocation of resources . . . which tends to be typical of state action.

The US government and NCAA "partnership" is reminiscent of the state "support" of athletics in the old Soviet period - in both the old USSR and the Warsaw pact countries.

What we can learn from the UConn woman's record breaking performance is to recognize and oppose the perverse outcomes that always spring from the seedy underbelly of the state intervention that is the basis for the road to serfdom.

Title IX and UConn

Pratt is so far ahead of me that I had forgotten he had already blogged on the Ridley book. In his post, he notes that we should read McClusky and Ridley on Cato. So I went to look at McClusky's discussion on values on Cato and found instead the following comments on Title IX given the women's basketball team at UConn setting a winning streak record:

All of that, however, flies in the face of the implicit rationale of Title IX, the federal statute requiring colleges to offer equal athletic opportunities to men and women. The law assumes that colleges that fail to offer proportionate roster spots are discriminating against girls, but the reality is that women might just not want to play sports as fervently as men.

UConn’s dominance might be just one more bit of evidence that it is time to stop assuming that there is rampant, sexist ill will when it comes to college sports, and for government to let people freely choose what interests they pursue. At the very least, it would probably make a lot of people happier than they’d be getting destroyed by the UConn women’s basketball team.

When will government stop attempting to control every aspect ofour lives? Never. That is just the nature of progressism and most forms of government. Just look at what occurred yesterday. The FCC, on a party line 3-2 vote decided to regulate the internet. Did it need regulating? Absolutely not. It is the freest form of communication in the world today. The dissenters in the totalitarian countries of Iran, China, and others get their information from the internet. This move by the FCC, without Congressional approval, is unconstitutional. But that does not seem to matter to the Administraton. As some congressman recently said, "Not much that we do is constitutional."

Matt Ridley

My Oct. 17 blog post on Matt Ridley's The Rational Optimist, echoes Boyes positive view.

I find intriguing his contention and that of Adam Smith, that voluntary exchange is inherent to humanity.

Ridley does a nice job of outlining the benefits to growth and the role that decentralized exchange plays.

He also posted a reaction over on CATO to the current discussion of McCluskey's view of the central role played by values and informal norms.

His full essay is well worth a read - he writes (as he always does so well)

“A true liberalism, what Adam Smith called ‘the obvious and simple system of natural liberty,’ contrary to both the socialist and conservative ideologues, has the historical evidence on its side.” Yes!

So let’s agree that absolutely key to the economic success of the last 200 years is that people are free to innovate in an undirected way. What I cannot bring myself to agree with is that this was an idea that had to be invented. I cannot agree that “what changed around 1700 was the valuation of economic and intellectual novelties within a system of all the virtues.”

Tuesday, December 21, 2010

The Rational Optimist

Matt Ridley's The Rational Optimist is a fun and interesting read. His thesis is that development and growth, from millions of years ago continuing through today, is due to voluntary trade based on specialization according to comparative advantage. He also bases his arguments on a bottom up development rather than a top down one. He plays tribute to, but does not put in the premiere position I do, the role of private property rights. Trade will not occur without a form of private property rights.

This morning's Wall Street Journal has an opinion piece by Bret Stephens that makes a point I have been trying to make for some time. China's development is currently a top down procedure. It will not be successful in the end. Much like Japan's 1970s industrial policy, which people like Lestor Thurow and Paul Krugman were supporting as the way to go, ledto the lost two decades Japan is currently experiencing. Top down development can not be successful; to think so is to ignore Hayek's Fatal Conceipt.

Another good read, but not easy going, is Capitalism with Chinese Characteristics. It ties in with the Ridley book.

Dan Klein on Coordination and Cooperation | EconTalk | Library of Economics and Liberty

Dan Klein on Coordination and Cooperation | EconTalk | Library of Economics and Liberty

Monday, December 20, 2010

Dwight R. Lee, The Political Economy of Morality: Political Pretense vs. Market Performance | Library of Economics and Liberty

At a time when the power of emotion seems to color discussion and debate, contemplation of the moral or ethic dimensions to freedom and responsibility may be worthwhile. Dwight Lee models such a reflection in this Liberty Fund column.

Dwight R. Lee, The Political Economy of Morality: Political Pretense vs. Market Performance | Library of Economics and Liberty

Sunday, December 19, 2010

Regime uncertainty

This is perhaps the clearest illustration of what Bob Higgs refers to as regime uncertainty. The unintended and perverse consequences of this uncertainty has been analyzed in Higgs' work. To the extent that this type of government action continues, our society will be plagued by bubbles and booms and, more importantly, increased rent seeking by actors attempting to mitigate this regime uncertainty.

The WSJ reports on the current tax code discussions:

This means that if the compromise passes largely intact, the U.S. will have no permanent regime governing levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top of dozens of corporate-tax provisions that already were subject to annual renewal.

The level of uncertainty, unusual for developed nations, complicates planning and discourages hiring and investment, many economists and corporate executives say.

"I haven't seen anything like it, and it's hard historically to find anything like" the current and pending negotiations, says Mortimer Caplin, an Internal Revenue Service commissioner in the Kennedy administration who at 94 is just three years younger than the income tax itself. "This Congress has left an awful lot up in the air."


Pratt notes the Warsh lament that economics is not empirical enough. I think the Austrians would disagree. Empiricism can measure what has occurred; it can differentiate among hypotheses. However, to do that requires assumptions usually resting on static equilibria. If an economy is never in a static equilibrium, how valid are the empirics based on it. In addition, there are the errors that begin with the assumption of a normal distribution -- how often does that apply to economic data? Having said this, I think that looking at data is necessary and important. But, there is a difference between empiricism and examining data.

Saturday, December 18, 2010

Economic Turbulence: Is a Volatile Economy Good for America?

I have tremedous respect for the work of David Warsh. So, his conclusion - is the basis for a thoughtful and civil discussion/disagreement.

Indeed, more attention to measurement in economics in general wouldn’t hurt. It has been more than 25 years since the last Nobel prize went to a measurement economist – to Richard Stone, of Cambridge University, in 1984 (and just two others before that, to Simon Kuznets and Wassily Leontief, both of Harvard, in 1971 and 1973, in the early days of the prize). Economics needs to become much more empirical.

The eventual payoff was 2006 book by Clair Brown, John Haltiwanger and Lane: Economic Turbulence: Is a Volatile Economy Good for America?, that offered a clear definition right from the start. Economic turbulence was as the entire process of economic change; workers changing jobs, firms expanding and starting up, contracting and shutting down. The sheer amount was staggering, they wrote: in any given quarter, one jon in four begins or ends, one in thirteen jobs is created or destroyed, and one in twenty establishments opens up or closes down.

A Few Words about the Vladimir Chavrid Ward

Friday, December 17, 2010

Economic Education

Two announcements that show the options for economics instrutors who want to impact economic education.

The National Science Foundation (NSF) recently funded an initiative to promote the use of innovative economic education at community colleges (see

The project is co-led by Mark Maier, Glendale Community College (CA), and Cathryn Manduca, Science Education Resource Center, Carleton College (MN).

The first phase of this project will bring together 20 economic educators for a workshop to plan regionally-based outreach programs and workshops for community college economics instructors. The economic educators will be joined by 8 experts from other disciplines that have already developed national outreach programs targeting community college instructors. The entire group will meet in Palo Alto, CA, May 31-June 1, 2011. Working in a collaborative manner, building on material prepared in advance of the meeting, the group will develop plans for four regionally-based training programs to take place during 2011-2012. Participants in the June workshop will be encouraged to apply to take part in these efforts.

The NSF grant will pay the following expenses for the economic educators selected to participate in this workshop:

* two nights, hotel and meals for representatives from four-year colleges and universities;
* two nights, hotel, meals and travel for representatives from two-year institutions.

This meeting was intentionally scheduled just prior to the inaugural National Conference on Teaching Economics and Research in Economic Education (June 1-3, 2011, Palo Alto, CA) <> with the hope that workshop participants would also be able to participate in the conference. Note, however, that the grant will not pay for the conference registration or for accommodation after June 1.

National Conference on Teaching Economics and Research in Economic Education
June 1-3, 2011 Palo Alto, CA

The AEA Committee on Economic Education, in cooperation with the Journal of Economic Education, will host a national conference on Teaching Economics (at the undergraduate and graduate levels) and Research in Economic Education (all levels, including precollege) from June 1-3, 2011.

The venue for the conference will be the Stanford Institute for Economic Policy Research, with a dinner on June 1 at the San Francisco Federal Reserve Bank. Due to space constraints, registrations will be limited to 150.

Plenary sessions at the conference will include:

■Vernon Smith, "Bringing Experiments and the Scottish Enlightenment into the Classroom"

■B. Douglas Bernheim, "What Have We Learned About the Effects of Economic and Financial Education on Household Financial Decisions?"

■John Taylor, “Lessons from the Financial Crisis for Teaching Economics”

Tuesday, December 14, 2010

Columbia Eminent Domain Case Will Not Be Heard - Megan McArdle - National - The Atlantic

Boyes illustrates the growth of the state in the recent Washington "compromise" over tax policy. The Washington decision illustrates the public choice observation that concentrated perceived benefits will be "maximized" in the short run if costs can be differed into the future. This short term/long term element of public policy offers continuing opportunities for rent seeking as well as stimulus for expansion of the state.

Another example of the expansion of the state takes place in New York City.

Megan McArdle ends her post on the expansion of the state:

I don't understand why this is an issue that only fires up libertarians. Can't we all agree that it would be better to live in a world where Columbia cannot do this sort of thing? I guess not, though.

I think part of the answer to McArdle's bafflement is twofold - first an evolution in the belief system that underlies our ethical concern with freedom and second the shaping of this belief system by the intelligensia.

First, as the debate over at CATO illustrates, there is a real debate today over the source of rights. The majority in our society seem to agree that that state is the source of rights. This would reflect the change in culture that has become both collectivist and focused on security rather than liberty. McArdle's outrage is understandable in this case, but the state will consistently respond to rent seekers and the concentration of benefit to a large university will predicably override the diffused costs to the inhabitants of the surrounding area. This case also illustrates the power of the intelligensia - university concerns are, in their view, much more important than the concerns of the "common" folk surrounding Columbia.

McArdle seems to miss the point as she writes below. The benefit, from the perspective of the elite intelligensia is a larger capacity to create more elite intelligensia. The consequence - NYC becomes more elite and able to shape society - this is the perceived benefit to the rent seekers at Columbia and the threat that Leviathan poses to us all. While it is not surprising that elite rent seekers would strive to expand their sphere of control, nor that the elite intelligensia (would members of the courts in this area have attended elite schools?) would support this expansion, it is of concern (although not surprise) that the "common" inhabitants of New York City and our country so willingly acquiese to this sacrifice of the source of liberty - our property rights.

In the case of Columbia, there's a tangible public loss--they're going to tear down one of the few gas stations in Manhattan in order to give Columbia's privileged students more space. And what public benefit does the city get? We're talking about taking taxpaying private properties and transferring them to a non-profit which will not pay taxes, and will turn a large swathe of Manhattan into a quasi-compound for some of the wealthiest and most privileged people in the city.

One's gut and one's social conscience positively riot at the thought of taking this seized land and handing it over to wealthy private institution that almost exclusively serves the affluent class.

Columbia Eminent Domain Case Will Not Be Heard - Megan McArdle - National - The Atlantic

The Tax Compromise

The so-called tax compromise looks sure to pass. It keeps tax rates where they have been for eight years for another two years, increases the death tax from its current zero percent to 35%, increases unemployment compensation by allowing those long term unemployed to receive benefits another thirteen months, and reduces the employee payroll tax by two percentage points. And this is all paid for by ......borrowing, printing money running higher deficits and increasing debt. And this is good? It seems to me that a better solution would have been for Republicans to demand spending cuts along with a permanent extension of income taxes. If businesses have been unwilling to invest because of uncertainty about taxes, how will this help. Invest now so tyhat in two years you might have significantly higher taxes? Doesn't make sense.

In the WSJ today, Jeremy Siegel says the Fed policy is working. The QEII is to print $600 billion (Bernanke says not print money but digitize it??) and focus on bringing long term rates down. But, the fact that long term rates have risen suggests the Fed policy is working -- quite convoluted, but Siegel says that the rates are rising due to expectations of an improving economy and future inflation. I am a little confused over this, although the expectations of future inflation surely have to be there. However, with that debt ratio (debt to GDP) getting higher, I don't see how expectations of strong economic growth can exist.

I just finished a fascinating book titled "Capitalism with Chinese Characteristics". Not easy going but explains how the state continues to control things in China, how the entrepreneurial spirit that developed in the 1990s in the rural areas has been taken over by state spending in urban areas. I mention this because so many people are arguing that the US should follow the Chinese example of state capitalism. With the tax compromise and Fed policy, the US is doing just that -- the state continues to grow.

Monday, December 13, 2010

Coordination v cooperation

Dan Klein of George Mason University talks with EconTalk host Russ Roberts about the marvel of economic coordination that takes place without a coordinator--the sequence of complex tasks done by individuals often separated by immense distances who unknowingly contribute to everyday products and services we enjoy. Klein also discusses what he calls "the people's romance"--the idea that the highest form of human cooperation is through government action.

This podcast is an accessible and thoughtful introduction to the work of Adam Smith and FA Hayek and provides a set of resources that might be of interest to those interested in comparative institutional arrangements.

The Liberty Fund has an annual conference on each of these thinkers.

Saturday, December 11, 2010

Robert Nozick -- Why Do Intellectuals Oppose Capitalism?

Boyes and I have blogged on more than one occasion on the notion of spontaneous orders (emergent and evolutionary in nature) and command systems. The former arise from the actions of individuals, what Austrians characterize of human action and not of human design. That is, liberal societies that are civil allow for a diversity that leads to outcomes far different than anything a single human could envision.

The latter suggests that the chaos of humanity is best tamed and controlled in order to achieve some aim.

Hayek and Sowell have invested time in exploring this difference in cosmology. Nozick's article is an accessible and provocative examination of the underlying rational for the command perspective. I found his focus on intellectuals and public education thoughtful and worth considering:

Central Planning in the Classroom

There is a further point to be added. The (future) wordsmith intellectuals are successful within the formal, official social system of the schools, wherein the relevant rewards are distributed by the central authority of the teacher. The schools contain another informal social system within classrooms, hallways, and schoolyards, wherein rewards are distributed not by central direction but spontaneously at the pleasure and whim of schoolmates. Here the intellectuals do less well.

It is not surprising, therefore, that distribution of goods and rewards via a centrally organized distributional mechanism later strikes intellectuals as more appropriate than the "anarchy and chaos" of the marketplace. For distribution in a centrally planned socialist society stands to distribution in a capitalist society as distribution by the teacher stands to distribution by the schoolyard and hallway.

Robert Nozick -- Why Do Intellectuals Oppose Capitalism?

The analysis of the alternative perspectives - individual v command, is the topic of the Econ Talk episode with Dan Klein.

Dan Klein of George Mason University talks with EconTalk host Russ Roberts about the marvel of economic coordination that takes place without a coordinator--the sequence of complex tasks done by individuals often separated by immense distances who unknowingly contribute to everyday products and services we enjoy. Klein also discusses what he calls "the people's romance"--the idea that the highest form of human cooperation is through government action.

Thursday, December 9, 2010

The Grinch Who Stole Christmas

The following story was posted by Art Carden on the website.
How Economics Saved Christmas
Dec. 9 2010 - 9:11 am

Every Who down in Whoville liked Christmas a lot.

But the Grinch, who lived just north of Whoville, DID NOT.

He stood and he hated the Whos and their noise

He hated the shrieks of the Who girls and boys

For fifty-three years he’d put up with it now—

He had to stop Christmas from coming, somehow.

He asked and he questioned the whole thing’s legality

Then his eyes brightened: he screamed “externality!”

He reached for his textbooks; he knew what to do

He’d fight them with ideas from A.C. Pigou

This idea has merit, he thought in the frost

A tax that was equal to external cost

At the margin, would give all the Who girls and boys

An incentive to stop all their screaming and noise

Failing that, an injunction to make them all cease

And they’d have to pay him to have their Roast Beast.

Low costs of transacting meant that if the Whos

Were the high-value users and wanted to use

All the rights to have feasts and the rights to sing songs

Then they’d have to buy them, to right their Who wrongs

They’d buy a noise easement, if they wished to sing

Until then, the Grinch could stop the whole thing.

On Christmas Eve Night, the Grinch went to town

He stole all the presents, he took their wreaths down

He stole their Who Hash, everything for their feast!

He swiped their Who Pudding! He swiped their Roast Beast!

He looked at his sled loaded up with Who snacks

‘Twas quite an efficient Pigovian tax!

Then late in the night, when he got to Mount Crumpit

For he’d taken the load, and he threatened to dump it

The Whos, with one voice crying out in the night

Screamed “bring back our stuff! You haven’t the right!

“We know that we’re noisy all through Christmas Day,

But if you don’t like it, it’s you who should pay!

“For we were here first, and homesteaded the rights

To sing, to make noise, and to hang Christmas lights

“The costs of our Christmas joy helped you to save!

They were fully reflected in the price of your cave!”

“We’ll all be good neighbors, and we’ll be polite

“But you’ve done us wrong on this Christmas Eve Night!”

The Grinch was crestfallen, he knew he had lost

For he was the source of the “external” cost

He’d come to the nuisance, and yes, he was wrong

He’d now have to live with their noise and their songs

He realized that day, though, that they could be friends

His heart grew three sizes (you know how this ends)

The Whos asked the Grinch to join them in their feast

And he—he, the Grinch—carved the Roast Beast.

The holiday season brings specials galore

They teach us that Christmas can’t come from a store

Reflect, as you watch them, as day turns to night

On good economics, and property rights.

Monday, December 6, 2010

Civil society and voluntary self help

Boyes raises what is a significant illustration of the difference in outcomes from voluntary exchange v. centralized planning. That there will be those less fortunate and in the extreme those unable to maintain themselves is a regretable yet universal in society.

The alternatives for providing assistance to those in need range along the same continue of all exchange - on one hand voluntary self help groups to centralized programs.

Boyes and I both work for the state, but the holiday efforts to coerce "giving" can lead to unfortunate outcomes. Like Boyes I prefer to provide assistance voluntarily to those groups that I view as achieving ends that I support - for example The Foundation for the Teaching of Economics, the Arizona Council for Economic Education, the congregation that my family attends.

This individual, voluntary support had a long history in American culture - deTocqville was struck by the magnitude and generosity of 19th century Americans. Our society inculcates through secular and religious institutions this self help, which continues at a reduced level due to the expansion of the Welfare and Warfare state.

Boyes points out an interesting empirical issue - statists tend to provide less private support to charity than do those who value liberty and freedom. In order to support a civil society the strength of private support for values such as self help and mutual support seems essential. With a commitment to liberty comes a commitment to responsibility and it appears that responsibility is defined and viewed very differently depending upon the perception of the role and significance of the state in charity.

That said, the 20th and 21st century emergence of a welfare state seems to have "crowded out" some private support at the margin.

Russ Roberts elaborates on this point:

Perhaps Americans are less generous than they appear to be. But economics suggests a different explanation. Charitable giving by Americans one hundred years ago was a very different picture. Back then, numerous private charities helped the destitute, the insane, the single mother, and the elderly. Some catered to the poor of specific nationalities or religions. Some provided coal in the winter or work or food or clothes. What has changed?

The simple answer is the role of the federal government in the welfare system. It is commonly believed that before the great depression, the poor, the elderly, and the vagrant had to rely on private alms. That turns out not to be true. The government has been involved in helping the poor in America since colonial times.

But the Great Depression is a key watershed. Before the Great Depression, public aid to the poor typically took place in almshouses or poorhouses, facilities run by the city or county where destitute people could get work and receive food and shelter in return. By all accounts, these were distinctly unpleasant places, perhaps deliberately so, as stigma was believed to be an important deterrent to dependency.

Free markets tend to allow for the emergence of systems of survival. Part of this emergence are private systems of assessment, the one Boyes references is very useful Chairty Navigator - which has a mission to:

Charity Navigator, America's premier independent charity evaluator, works to advance a more efficient and responsive philanthropic marketplace by evaluating the financial health of over 5,500 of America's largest charities.

Click over to determine the efficacy of the charity you are voluntarily considering for support v the charity that your employer is attempting to promote.

For fun, I compared the ratings of the Goldwater Institution -

and, while I was unsuccessfully in a review of Greenpeace, I did look at United Way of Mesa -

Saturday, December 4, 2010

The Christmas Season, Charities and Government

It is the Christmas season and with the economy experiencing high unemployment, many people are donating to charities. Arthur Brooks, Who Really Cares, notes that conservatives are more generous than liberals and religious people are more generous than secular people. I read today that Cuomo, the ne governor of New York, gave approximately $2,000 when his income exceeded 1.5 million dollars and gave nothing when his income was near $300,000. Liberals believe that charity is carried out through the coercion of taxes. I am being charitable if I support raising your taxes and transferring that money to others. One problem is that the liberals never point out the relative inefficiency of public income redistribution programs. Public income redistribution agencies are estimated to absorb about two-thirds of each dollar budgeted to them in overhead costs, and in some cases as much as three-quarters of each dollar. Robert L. Woodson (1989, p. 63) calculated that, on average, 70 cents of each dollar budgeted for government assistance goes not to the poor, but to the members of the welfare bureaucracy and others serving the poor. Michael Tanner (1996, p. 136 n. 18) cites regional studies supporting this 70/30 split.
In contrast, administrative and other operating costs in private charities absorb, on average, only one-third or less of each dollar donated, leaving the other two-thirds (or more) to be delivered to recipients. Charity Navigator (, one of several private sector organizations that rate charities by various criteria and supply that information to the public on their web sites, found that, as of 2004, 70 percent of charities they rated
spent at least 75 percent of their budgets on the programs and services they exist to provide, and 90 percent spent at least 65 percent. The median administrative expense among all charities in their sample was only 10.3 percent. (See )

Each year my employer pushes hard on each employee to contribute to the United Way. I received approximately ten emails from officials at the University asking me to donate. I refuse to donate to United Way because of some of the groups United Way associates with. Moreover, United Way pays executives $300,000 salaries and flies them first class. But, most importantly, United Way keeps around 17% of revenues raised to cover overhead. Then when United Way distributes money to its associated charities they hold on to approximately thirty percent of the funds they receive. This would appear to make United Way a very inefficient charity – of each dollar raised only a little more than fifty cents goes to the people in need.

Cause for wonder

Friday, December 3, 2010

Hi, I'm from the government

NY Times hosted blog, so you can feel free to read on if you are pre disposed to trust that "media" site and distrust the WSJ or AEA. The summary of economic research is both provocative and might inform the calculation of costs and benefits in the short and long term of government interventions.

I fear, as I have blogged previously, that belief will trump any reasoned review of either the incentives or consequences of extensions of unemployment benefits. Odd to consider providing a benefit to unemployment.

Claims that extensions of unemployment are critical for the recovery of the economy smack of the triumph of faith and hope over reason and history. Moreover, the empirical confusion over the impact of 1 dollar spent on benefitting umemployment (this could be tax money or borrowing coerced from those who are working) on future economic performance - creates 1.60 dollars, creates 2.25 dollars, creates .55 dollars, destroys .45 . . . well this confusion or lack of consensus is no reason to not act.

Yet, belief trumps analysis.

As the elected representatives negotiate in Washington - extensions of unemployment in return for temporary extension of the tax cuts, I can't help but think of Bob Higgs and Kurt Vonnegut. Higgs convincingly presents the case for the negative consequences of regime uncertaintly - and the US has plenty of this right now. Vonnegut excelled at demonstrating the absurdity of central planning and that black comedy anticipates what we will be reading about over the next 5 weeks. In fact, the 2012 campaign season seems to have exploded in earnest - and actions to deal with debt and deficit are swept aside, as the media demands that we direct our attention to the unemployed. And any attention toward tax policy is filtered through a lense of rent seeking rather than legitimacy - with my apologies to Simpson and Bowles.

Thursday, December 2, 2010

Great overview of the state of economics

Earlier this fall Washington University in St. Louis hosted a wonderful conference honoring Douglass North and his work. John Nye, a longtime close colleague with North, spoke on the continuing crisis of economics and the dilemma with respect to the acceptance of New Institutionalism. It is a brilliantly delivered talk that is full of important insights.

Wednesday, December 1, 2010

Austrian School of Economics: The Concise Encyclopedia of Economics | Library of Economics and Liberty

Austrian School of Economics: The Concise Encyclopedia of Economics | Library of Economics and Liberty

Well worth a read - 3, 7 and 10 are sadly absent in much of our economic discourse and instruction.

1. Only individuals choose.

2. The study of the market order is fundamentally about exchange behavior and the institutions within which exchanges take place.

3. The “facts” of the social sciences are what people believe and think.

4. Utility and costs are subjective.

5. The price system economizes on the information that people need to process in making their decisions.

6. Private property in the means of production is a necessary condition for rational economic calculation.

7. The competitive market is a process of entrepreneurial discovery.

8. Money is nonneutral.

9. The capital structure consists of heterogeneous goods that have multispecific uses that must be aligned.

10. Social institutions often are the result of human action, but not of human design.

Tuesday, November 30, 2010

Postrel on Shiny Futures

A must read - this informs the discussion on our blog over the past month on the knowledge problem and the distinct differences in values that lead to individual v collective approaches to knowledge.

Postrel on Shiny Futures

Monday, November 29, 2010

Complex regulation - is there simple?

A very interesting application of the economic way of thinking to regulation. I suggest a reading of this article after listening to the Robert Frank podcast over on EconTalk.

Bad Complex Regulation

Sunday, November 28, 2010

Barry Eichengreen

This list of books dealing with the EURO include 2 that should be on our reading lists. The question is which 2?

Barry Eichengreen

Friday, November 26, 2010

Robert Frank on Inequality | EconTalk | Library of Economics and Liberty

This podcast is well worth a lesson for any and all of the following reasons:

1. A civil and critical discourse modeled by two social scientists.

2. A timely application of the economic way of thinking to important issues.

3. An examination of the role of ethics, values and morality in social science.

4. A discussion about the use and limitation of empiricism.

5. The types of knowledge - tacit v scientific

In a previous post I referenced Frank's book - The Economic Naturalist - esssentially a collection of student assignments from his introductory classes over the past 15+ years. For those of us who teach economics this is, to my way of thinking, an amazing activity to allow students to see the power of economic thinking.

Robert Frank on Inequality | EconTalk | Library of Economics and Liberty

Wednesday, November 24, 2010

Stimulus Waste Panel Cancels Ritz-Carlton Meeting.

Boyes warns of confidence in central planning. It is indeed a paradox that as individuals we engage in planning throughout our lives. This planning is constantly evaluated and adjusted, at least to the extent that individuals experience the consequences of these plans. Thus, planning at the individual level can reflect liberty and responsibility.

Contrast this individual planning with the central planning in China that Boyes uses to illustrate his analysis of potential consequences of central planning. This central planning generates alternative incentives for participants in a centrally planned society. These incentives often lead away from feedback loops and often obfuscate the consequences of central planning. And, as students of Tullock and Buchanann might anticipate, the process of central planning can lead to concentrated benefits or costs and diffused costs or benefits. This clearly can led to actions by the planner and a centrally planned economy that are short and long term negative sum.

In discussing factor mobility in my class yesterday the students seemed to arrive at an a ha moment on this topic. The concentration of perceived benefits from limiting factor mobility in the short run might well lead to significant costs in terms of foregone opportunities for future generations. Thus, what might seem to be a zero or positive sum game might well be negative sum game. This type of discussion/analysis is exemplified in the current debate over proposed central plans to address climate change.

This was an amusing local story - a cautionary tale that seems to evoke for me the work of Harold Jacobson:

A panel advising the independent agency charged with rooting out waste, fraud and abuse in the stimulus plan announced Friday night that it had pulled the plug on a public meeting which was to have taken place at the Ritz-Carlton in Phoenix, Arizona.

This example does not illustrate stupidity or vice or criminal behavior - rather this is the inevitable outcome of an institutional arrangement that incentivizes top down action. Reading the story also evokes Hayek's Road to Serfdom.

Tuesday, November 23, 2010

China: Should we Copy It?

So many commentators these days are comparing our "capitalism" to China's "state capitalism" or "capitalism with Chinese characteristics and saying we should emulate theirs or that theirs is the model of the future. In the 1970s the same comments were being made about Japan's system. Japan has now been in a no growth period for two decades. China has grown significantly, doubling its GDP every decade for three decades or so. This while the U.S. has slugged along at 2.5% or thereabouts.

What people seem to ignore is that the central planner can not better the invisible hand. In turn, China's malinvestments will come home to roost. The government controls where resources are allocated and thus misallocates and is inefficient. An example is the stark ghost city, Kangbashi, in Inner Mongolia. The government built Kangbashi in just five years. It was designed to be the showcase urban center of Ordos City, a relatively wealthy coal-mining hub that's home to 1.5 million people. A public-works project worthy of Kubla Khan, Kangbashi is filled with office towers, administrative centers, government buildings, museums, theaters and sports fields and acre on acre of subdivisions overflowing with middle-class duplexes and bungalows. The only problem is that no one lives there. The district was originally designed to house, support and entertain 1 million people. Now, only a handful of cars drive down Kangbashi's multilane highways, a few government offices are open during the day and an occasional pedestrian can be seen trudging down a sidewalk. It looks like a Will Smith movie lot.

Government inefficiency is sure to come home to roost in China.

Why Did 17 Million Students Go to College?

Excellent article by Richard Vedder

I think the American people understand, albeit dimly, the logic outlined by the author in this piece.. Increasingly, state governments are cutting back higher-education funding, thinking it is an activity that largely confers private benefits. The pleas of university leaders and governmental officials for more and more college attendance appear to be increasingly costly and unproductive forms of special pleading by a sector that abhors transparency and performance measures.

Higher education is on the brink of big change, like it or not.

Monday, November 22, 2010

Naked Classism

Hubris - the confidence of an elite that assumes knowledge and wishes to impose that assumed superiority on society. This may be a greater threat to liberty than the overt actions of Leviathan.Naked Classism

Sunday, November 21, 2010

The Theory of Moral Sentiments - Part 6

Douglas Irwin - Against the Tide: An Intellectual History of Free Trade, Free Trade Under Fire

Both books are excellent, the first provides an historical overview of the pre and post Adam Smith debate about the foundations for mercantilism (protectionism) and free trade. Irwin traces much of the thought back to classical works of philosophy.

David Landes The The Unbound Prometheus: Technical Change and Industrial Development in Western Europe from 1750 to Present

Wealth and the Poverty of Nations was an outstanding read (must for economic historians). This book is tougher going but worth it as Landes goes into significant detail. If time is an issue, I would recommend Mokyr.

Joel Mokyr The Levers of Riches

I loved reading this book - Mokyr does a wonderful job, well let me quote from this Amazon review:

"Mokyr has demonstrated, yet again, that he is one the best economic historians around. His book is a treasure trove of facts and insights about technological progress often overlooked in other accounts. Further, his argument that economics might do well to adopt the methodology of evolutionary biology instead of the standard application of Newtonian physics is cogent and convincing."--Howard Bodenhorn, St. Lawrence Univ.

"Joel Mokyr is a first-rate scholar who has read a wide body of literature. The book is very well written, lively and engaging. It is closely reasoned and well executed"--Nathan Rosenberg, Stanford University

"Joel Mokyr likes telling his story and he tells it well; his book makes for good reading and rereading, and this in itself sets him apart from many of his fellow economic historians."--The New York Times Book Review

According to Joel Mokyr, economic growth is the result of four distinct processes: Investment (increases in the capital stock), Commercial Expansion, Scale or Size Effects, and Increase in the Stock of Human Knowledge (which includes technological progress proper as well as changes in institutions). Throughout his brilliant book, he correlates technological creativity with economic progress throughout classical antiquity, the Middle Ages, the Renaissance, the Industrial Revolution, and then into the later 19th century.

Eric Rauchway Blessed Among Nations

Thomas Sowell A Conflict of Visions

Sowell at his best. This analysis of the constrained and unconstrained visions is clear and direct. He relies heavily on Adam Smith and William Godwin for illustration.

Adam Smith: Theory of Moral Sentiments, Lectures on Rhetoric and Belles Lettres, Lectures on Jurisprudence, Wealth of Nations, Essays on Philosophical Subjects

This reading is a delight. I was invited to a Liberty Fund colloquia on Smith in July, 2009.

Laird Bergad - The Comparative Histories of Slavery in Brazil, Cuba, and the United States

Michael Gruber Tropic of Night

Gruber's first novel. I really enjoyed The Book of Air and Shadows, this one not so much. I will try his newest book The Forgery of Venus.

David Liss A Conspiracy of Paper

I am pleasantly surprised - I could not finish The Coffee Trader and his latest The Whiskey Rebel received negative reviews, but this is wonderful. I have the sequel - A Spectacle of Corruption on order.

John Sanford - Rules of Prey

Sanford's first Lucas Davenport and I am so glad I got to read the beginning.

Daniel Simmons Drood

Wow, talk about an unreliable narrator. A very intense exploration of . . . addiction, obsession, jealousy and . . . Charles Dickens. Excellent historical fiction - made me realize how little I know about this period, Dickens and Dicken's fiction. Very long, but worth it. I have - The Terror, on my reading list.

Saturday, November 20, 2010

California's Budget Blues Get Deeper

California faces a $25.4-billion deficit -- far larger than state officials were projecting only days ago -- the state's chief budget analyst said...[because of] billions of dollars in phantom savings approved by Gov. Arnold Schwarzenegger and legislators last month, more budget restrictions passed by voters last week and predictions of a "painfully slow economic recovery," ...

In addition, more than $8 billion in temporary sales, car and income taxes are set to expire in the coming year, and the federal stimulus program that has helped prop up schools, healthcare for the poor and other state programs also will soon disappear.....

The predicted $25.4-billion deficit is the equivalent of about 29% of this year's general fund budget....

And guess what? Republicans respond by promising no taxes, and Dems ferociously defend spending.
California's Budget Blues Get Deeper

Thursday, November 18, 2010

Responsibility, liberty and how big to think

Boyes reflections on the pace and scope of change is provocative and challenges the institutional school of North. This work argues that the process of change is evolutionary and emergent. As I think of this view I wonder to what extent change is path dependent, marginal and slow.

I suspect that Smith, Hayek and classical liberals would describe the emergent or spontaneous order as one that is of human action and not design. To the extent that spontaneous order thinking is useful it seems to me that human design, whether micro in design - tax systems, regulatory regimes, or other legislative regimes, or macro economic - pacing, scale and scope - run contrary to a liberal society based upon notions of justice. That is, justice as Smith and Hayek outline in emergent rules as opposed to the potential tyranny embedded in the legislative process.

Boyes has a well grounded concern that seems both valid and perplexing - the expanding scale and scope of the state in the form of government regulation (one small example, the California prohibition of toys in fast food meals) that results in a nanny state, the evolution of the welfare state in our country (from military pensions after the Civil War to the wide "safety net" of today, and the emergence and growth of the warfare state.

That said, these developments have been beyond the control of humans, that is they seem to be the result of human action not human design. Had FDR not been elected, would Herbert Hoover have governed a New Deal? Had the momentum established by Wilson set in motion a path dependence that, at the margin, could be shaped but not significantly redirected?

These are important questions that lead me back to Dan Klein's question - what is the responsibility of the economist who believes in liberty? Klein argues we should try to educate the everyman.

Interesting, and as a long time educator, the barriers to open minded, civil consideration of the free exchange of ideas seems to be at the heart of a teaching and learning process that might allow for a meaningful consideration of the costs and benefits of alternative decision making regimes.

Can these barriers be altered, reduced, or eliminated in a sweeping action? Or will change be Northian?

Government and Markets Toward A New Theory of Regulation

Government and Markets Toward A New Theory of Regulation

The blurbs and table of contents for this book suggests it might be appropriate for a reading list or discussion

"The heritage of James Tobin is well represented by this outstanding volume. The authors analyze the relations of government and the market from many different angles, showing the fallacies of simple critiques on the basis of deep scholarship." - Kenneth J. Arrow, Stanford University

Table of Contents
Part I. Beyond Market Failure:

1. Government failure vs. market failure: principles of regulation Joseph E. Stiglitz

2. Effective regulation through credible cost-benefit analysis: the opportunity costs of superfund Michael Greenstone

3. From 'state interference' to the 'return to the market': the rhetoric of economic regulation from the old Gilded Age to the new Mary O. Furner

4. Lessons from Europe: some reflections on the European Union and the regulation of business Neil Fligstein

5. Confidence games: how does regulation constitute markets? Daniel Carpenter

Part II. Beyond the Economic Theory of Politics:

6. The end of special interests theory and the beginning of a more positive view of democratic politics Donald Wittman

7. Public choice: a critical reassessment Jessica Leight

8. The paranoid style in the study of American politics David A. Moss and Mary Oey

9. Law, policy, and cooperation Yochai Benkler

Part III. Beyond Command and Control:

10. What opportunity is knocking? Regulating corporate governance in the United States Mary A. O'Sullivan

11. Taxation as a regulatory tool: lessons from environmental taxes in Europe Monica Prasad

12. Redesigning regulation: a case study from the consumer credit market Elizabeth Warren

13. Origins and regulatory consequences of the subprime crisis Barry Eichengreen

14. Prospects for economic 'self-regulation' in the United States: an historian's view from the early twenty-first century Edward J. Balleisen

15. Deregulation theories in a litigious society: American antitrust and tort Tony Freyer

16. Markets in the shadow of the state: an appraisal of deregulation and implications for future research Marc Allen Eisner

After two generations of emphasis on governmental inefficiency and the need for deregulation, we now see growing interest in the possibility of constructive governance, alongside public calls for new, smarter regulation. Yet there is a real danger that regulatory reforms will be rooted in outdated ideas. As the financial crisis has shown, neither traditional market failure models nor public choice theory, by themselves, sufficiently inform or explain our current regulatory challenges. Regulatory studies, long neglected in an atmosphere focused on deregulatory work, is in critical need of new models and theories that can guide effective policy-making. This interdisciplinary volume points the way toward the modernization of regulatory theory. Its essays by leading scholars move past predominant approaches, integrating the latest research about the interplay between human behavior, societal needs, and regulatory institutions. The book concludes by setting out a potential research agenda for the social sciences.

Marginal -- How big is it?

Pratt makes the important point about the "ratchet effect" and the importance of marginal versus large scale changes in response to my comment that marginal reductions in government size will do nothing but lead to increasing size in the future. Histor of government and liberty as presented in two brief books, The Road to Tyranny, by Michael E. Newton, and The Future of Freedom, by Fareed Zakaria, suggest that there is no stopping of government growth and the erosion of liberty. While Zakaria makes this point throughout he ends with some gobbly gook about the road to increased liberty.

Simply look at the policy proposals suggested so far by the debt commission and others. Look at the suggestions by a commissoin of CEOs, leaders, and the Economic Development leaders for the State of Arizona. They are so limited, so marginal, that they will at best slow, temporarily, the growth of the state. Machiavelli said in making policy give the bad news all at once and spread the good news out. We must seriously reduce the role of government, not marginally change it. In Arizona, the corporate tax should be eliminated, the personal tax reduced to a small flat consumption tax, and no tax imposed on income. There should be NO special incentives for businesses to locate in Arizona. If policies are correct, all businesses will have an incentive to locate in Arizona. It is not the government's role to pick and choose which businesses to recruit and bring to the state. Similarly at the Federal level, taxes on corporations should be cut to the lowest level of all OECD nations, the personal income tax eliminated and a flat consumption tax be imposed. Government spending should be reduced by privatizing as much as possible. At the Federal level this means that Social Security and Medicare must begin transitioning to private pension and health programs and away from government programs. At the State level public pensions have to be converted to defined contribution programs and state employees, and departments cut.

Big Ideas, Big Policies, not Marginal changes are necessary to retard the reduction in liberty.

Wednesday, November 17, 2010

The Theory of Moral Sentiments - Part 5

Podcast 5

Two great articles on the invisible hand.
"In Adam Smith's Invisible Hands: Comment on Gavin Kennedy", by Daniel B. Klein. Econ Journal Watch, vol. 6, no. 2, pp 264-279. May 2009.

"Adam Smith and the Invisible Hand: From Metaphor to Myth"
, by Gavin Kennedy. Econ Journal Watch, vol. 6, no. 2, pp 239-263. May 2009.

Tuesday, November 16, 2010

Democracy, Liberty and Freedom

Boyes makes an interesting and significant point when he writes:

"Unless very bold steps are considered, marginal steps will not be undertaken. We have to recognize that history is not favorable toward reducing size of government and the welfare state."

This is an assertion worth examining - first are bold steps a condition for marginal action. Stated differently, are stimuli for major action - crisis for example - a necessary condition for marginal steps or actions. This idea would seem to be supported by the work of Robert Higgs - I am thinking here of the ratchett effect he uses to describe the growth of the state. On the other hand, this assertion seems opposed to the emergent and evolutionary development of spontaneous orders. Smith, Hayek and North seem to argue that it is the force of culture and belief that evolve over long periods of time that shape the institutions reflect our beliefs and values. That is, the informal norms that are more important than the formal ones are in fact a result of subjective marginalism and not of large sweeping change.

This is an intriquing question - if a Liberty Fund representative is reading this blog I would think that this would make a great conference topic.

This question was raised at a conference honoring Douglass North at Washington University and treated thoughtfully in a number of papers presented by students of North.

The Moykr paper, in particular, argues for a marginal rather than sweeping process in shaping culture, beliefs and values. All of these papers are accessible and well worth a read.

Click here to access all the papers
The Rules of the Game: What Rules? Which Game?
Kenneth Shepsle, Harvard University

Culture, Institutions, and Modern Growth

Joel Mokyr, Northwestern University

The New Institutionalism

Robert Bates, Harvard University

Endogenous Institutions: Law as a Coordinating Device

Gillian K. Hadfield, University of Southern California Law and Economics Department and

Barry R. Weingast, Hoover Institution and Departmetn of Political Science, Stanford University

Persistence and Change in Institutions: the Evolution of Douglass C. North

John Joseph Wallis, University of Maryland

Monday, November 15, 2010

Democracy, Liberty and Big Government

The Republicans won a big victory on November 2nd. Will they be able to do anything constructive in reducing the growth (or more particularly the size) of government? I don't think so. Already, the establishment is reluctant to cut out earmarks. Sen Inhof from Oklahoma has some distorted argument about Congress doing the spending rather than the President, but it is more likely that Inhof is a big earmark spender. Although total earmarks are not large relative to government spending, they are extremely important on the margin -- their symbolic role is large.

The debt commission came out with some good proposals -- moving in the direction of privatiing social security and medicare (although they suggested moving far too slowly), reducing corporate taxes (although the decrease from 35% to 26%, the middle of industrial nations is too high still), reducing home mortgage deductions (for mortgages greater than $500,000 (too high, all such deductions need to be eliminated), reducing subsidies particuarly agricultural subsidies(this is absolutely necessary but will be very difficult to implement). What they should also have proposed was to eliminate several departments and return the U.S. to pre-Great Depression structures. Wliminate departments of education, energy, etc.

Unless very bold steps are considered, marginal steps will not be undertaken. We have to recognize that history is not favorable toward reducing size of government and the welfare state. In "The Future of Freedom" Fareed Zakaria points out that lobbies have existed for most of American history. Their explosion since the early 1960s is a result of the government becoming much bigger. "For conservatives it [more lobbyists] means that the goal of reducing federal spending has become a hopeless case." p. 175. In eight years Reagan was able to close only four government programs of any note. In 1994 Newt Gringrich and his freshman horde came to power on a contract with America to changing the way Washington worked and reducing subsidies. Four years later, the Republican revolution was in shambles, Gingrich had resigned, and Washington was not changed.

As Zakaria notes, the Republicans began in 1995 with a budget proposal that would have eliminated about 300 programs, mostly corporate welfare, saving more than $15 billion. Then the lobbying began...." p. 176 The budget that was finally passed had total reductions of $1.5 billion. Thus, start huge and end with significant marginal cuts.

Task of economics

Several comments in the blogsphere recently reflect an ongoing dialogue (which is always below the surface) centering on Hayek's assertion of the goal of economics:

Russ Roberts

So let’s have a contest for the best poster design that uses the Hayek quote with an illustration that you create or use with permission.

Robert Schiller

He writes of current financial law making. This process and Schiller's view evokes the dichotomy Hayek encourages us to consider between law (the process/result of human action) and legislation (the process of human design)

CATO Unbound - Nov. discussion

Regulations on how, when, and by whom money can be spent are perennially popular, but just as often they encounter legal obstacles stemming from the First Amendment’s protections on speech and the right of petition. Money also shows a frustrating tendency to flow around regulations, frustrating their enactors’ intent.

A key problem is how to balance several conflicting goals: holding a clean, and clean appearing election; allowing all citizens to participate in campaigns as they think best; allowing citizens to know who supports or opposes various candidates and proposals; and guaranteeing the personal safety of those who choose to participate in the process.

This month, lead essayist Bruce Cain makes the case for semi-disclosure of campaign-related spending. Under semi-disclosure, the public would have access to aggregate spending data for groups, as well as data about individual donors, albeit stripped of personal identification data. Semi-disclosure might work a lot like the census, in which data is made available, but privacy is still protected.

Will Cain’s proposed compromise work? Will it satisfy all sides in the debate?

Sunday, November 14, 2010

Victory of Reason

Tyler Cowen is the reader who never sleeps.

That said, Boyes' recommendation of Rodney Stark's book reminds me to move this title up on my reading list.

In previous conversations and postings, Boyes has recommended this book, so I ordered it this afternoon which should force me to begin reading.

From Amazon:

"The Victory of Reason" is the third in a series of books studying the influence of Christianity on Western Civilization, the first two being "For the Glory of God" and "One True God." Each of these books looks at different aspects of Western Civilization to determine how they were influenced by Christian theology. How were they influenced? Profoundly!

"The Victory of Reason" looks at the concepts of freedom and capitalism, and how they were natural outgrowths of both Christian theology and favorable economic conditions. Along they way, Stark makes some iconoclastic statements and backs them up with sound argument. e.g. The fall of the Roman Empire was a good thing. The Dark Ages were more progressive and enlightened than the Classical World.

Taken together, "The Victory of Reason," "For the Glory of God," and "One True God" make a very strong case for the proposition that were it not for Christianity (particularly the Catholic Church), we'd probably still be living in a pre-industrial, pre-scientific world dependent in large measure on slave labor.

Odds and Ends

On Friday a headline in the Arizona Republic said "Stimulus Saves 50 SRP Jobs" and goes on to tell us how the money was used to employ 50 people that would have been laid off otherwise. I don't know the amount of money spent per job saved, but that actually misses the point. Bastiat's broken window fallacy applies here: how many jobs that would have occurred in other sectors of the economy were destroyed due to the government taxes needed to send stimulus money to SRP? And, these jobs would have been preferred to the SRP jobs. How do I know that -- because if people had been allowed to keep their tax money, they would not have spent it on the SRP jobs, most likely.

As I stated earlier, this is a great time for Arizona to create policies that will attract businesses from California. Already, multi-billion dollar facilities that would have been built in California by a private firm are being constructed in Oregon and North Carolina. I sent an open letter to Jan Brewer via the Arizona Republic on this issue but the Republic disagreedd with what I was saying and did not run it. I will send a direct letter to both Governor Brewer and Russ Pearce. According to today's Republic, the state faces more than 1.5 billion dollars in unfunded liabilities. Not only must the defined benefit programs be turned into defined contribution programs, but all prograqms must be decreased. But, most importantly, Arizona must create an environment in which people want to invest and do business here.

No, Really – Nobody Cares About the Deficit

Interesting - I wonder if the apathy about the federal deficit is in any way related to the current state of economic education in the US? Or, on the positive side, perhaps the populace has internalized a Hayekian view that the emergence through human action and not design will result in an unintended order?

Thursday, November 11, 2010

Immigration and liberty

One of the areas of legitimate discussion amoung libertarians (and all groups, I suppose) is the attitude toward immigration. There are any number of formal an informal institutions that develop that shape immigration - Benjamin Friedman in The Moral Consequences of Growth presents an interesting thesis that the short term attitude toward immigration and immigrants is shaped by both the level and health of economic activity and the perception of agents within the society regarding their relative position in the economy.

Voluntary exchange and processes are generally positive sum while contraints on the ability to use ones' own knowledge for ones' own aims in the absence of coercion generate perverse are negative sum and lead to unintended consequences and, due to the path dependent nature of change, long term threats to liberty and freedom, expansion of the state (the enforcement mechanism for limits on freedom) and reinforce the intolerance that undermines a civil society.

Tyler Cowen writes persuasively about this issue (Oct. 31 NY Times):

How Immigrants Create More JobsBy TYLER COWEN
Published: October 30, 2010

The campaign season now drawing to a close, immigration and globalization have often been described as economic threats. The truth, however, is more complex.

Over all, it turns out that the continuing arrival of immigrants to American shores is encouraging business activity here, thereby producing more jobs, according to a new study. Its authors argue that the easier it is to find cheap immigrant labor at home, the less likely that production will relocate offshore.

The study, “Immigration, Offshoring and American Jobs,” was written by two economics professors — Gianmarco I. P. Ottaviano of Bocconi University in Italy and Giovanni Peri of the University of California, Davis — along with Greg C. Wright, a Ph.D. candidate at Davis.

The study notes that when companies move production offshore, they pull away not only low-wage jobs but also many related jobs, which can include high-skilled managers, tech repairmen and others. But hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the United States, the authors say. In fact, when immigration is rising as a share of employment in an economic sector, offshoring tends to be falling, and vice versa, the study found.

In other words, immigrants may be competing more with offshored workers than with other laborers in America.

The study referred to above:

Immigration, Offshoring and American Jobs
Gianmarco I.P. Ottaviano, Giovanni Peri, Greg C. Wright
NBER Working Paper No. 16439
Issued in October 2010
NBER Program(s): ITI LS

How many "American jobs" have U.S.-born workers lost due to immigration and offshoring? Or, alternatively, is it possible that immigration and offshoring, by promoting cost-savings and enhanced efficiency in firms, have spurred the creation of jobs for U.S. natives? We consider a multi-sector version of the Grossman and Rossi-Hansberg (2008) model with a continuum of tasks in each sector and we augment it to include immigrants with heterogeneous productivity in tasks. We use this model to jointly analyze the impact of a reduction in the costs of offshoring and of the costs of immigrating to the U.S. The model predicts that while cheaper offshoring reduces the share of natives among less skilled workers, cheaper immigration does not, but rather reduces the share of offshored jobs instead. Moreover, since both phenomena have a positive "cost-savings" effect they may leave unaffected, or even increase, total native employment of less skilled workers. Our model also predicts that offshoring will push natives toward jobs that are more intensive in communication-interactive skills and away from those that are manual and routine intensive. We test the predictions of the model on data for 58 U.S. manufacturing industries over the period 2000-2007 and find evidence in favor of a positive productivity effect such that immigration has a positive net effect on native employment while offshoring has no effect on it. We also find some evidence that offshoring has pushed natives toward more communication-intensive tasks while it has pushed immigrants away from them.

Survey of knowledge

Like Boyes I begin my classes with a simple survey - I ask the following:

1. Who is the "father" of communisim?

2. Who is considered the "father" of capitalism?

In the 15+ years of surveying introductory students of economics (freshmen or sophomores) well over 50 per cent can answer Marx to the first question. Under 5 per cent answer Smith to the second and over two thirds cannot even venture a guess.

This tends to support Boyes, very, very few of our students have exposure or retention to the big ideas that shape the discourse of freedom, liberty and responsibility.

Wednesday, November 10, 2010


Watching the Obama Press Conference following the election a reporter asks "What can the government do to create jobs?"

If you have not done so go to youtube and find Linda McMahon asking Richard Blumenthal how you create a job. Amazing and to think Blumenthal won.

At the beginning of every MBA course (and often other courses) I teach, I have them fill out a survey. The survey is noted below:
Part 1
The following asks for your opinion. A scenario describing a problem is presented and four possible ways to solve the problem are provided. For each of the possible solutions to the problem listed under each scenario, choose which of the following five options best represents your attitude.
a. Completely agree
b. Agree with slight reservations
c. Neither agree nor disagree
d. Disagree with slight reservations
e. Completely disagree

At a sight-seeing point, reachable only on foot, a stand selling bottled water has been established. The bottled water is sold to thirsty hikers. The price is one dollar per bottle. Early each morning 100 bottles are carried up the hill. On a particularly hot day 200 hikers want a bottle of water. How do you evaluate the following means to distribute the water among the hikers.
Raising the price on the water until the number of hikers willing and able to purchase the water equals the water available.
Allocating the water on a first come first serve basis at $1 per bottle.
The government decides who gets the water.
Having the hikers enter a lottery to see who gets the water.

The normal number of consumers purchasing gas at the Mobil station is 1000 per day. The station could handle no more than 1200 per day. The day following a news report of possible gas shortages, 3000 cars show up to purchase gas. Using one of the five listed choices above, please indicate how you feel about the following ways to allocate the gas.
.An increase in the price until the number of people willing and able to purchase the gas equals the amount offered for sale.
Selling the gas at the same price on a first-come-first-served basis.
The government buys the gas and distributes ration coupons according to its own judgment.
Selling the gas following a random procedure such as a lottery to determine who receives the opportunity to purchase the gas.

Hot dog vendors at the local baseball stadium have limited ability to cook hot dogs and they keep running out of hot dogs before the 7th inning. Using one of the five listed choices above, please indicate how you feel about the following means to solve the hot dog shortage at ballgames.

Increase the selling price of hot dogs until sales drop enough so that the vendors stop running out of hot dogs before the end of the game.
Pass out just the same number of coupons as there are hot dogs to fans when they enter the stadium and require a coupon to purchase a hot dog.
Have the vendors start selling later in the game, that is, prohibit the vendors from selling hot dogs until the 5th inning.
Limit the number of vendors who are walking through the stands selling hot dogs.

A huge snowstorm in upstate New York causes the demand for snow blowers to increase dramatically. So many people want snow blowers that stores begin to run out and many people who say they really need this equipment are having trouble obtaining it. This problem should be solved by:
Allowing the price to rise so those who are willing and able to pay the highest prices get the limited number of snow blowers.
Require that snow blowers be sold only to those people who have snow blower coupons issued by the local government.
Require that stores selling snow blowers not raise prices and use a lotter to decide who gets to buy one.
Require that stores not raise prices and use a first come first serve rule until sold out of snow blowers.

A doctor is able to handle 30 patients per day on a normal day. One day the flu has sent more than 60 patients to the doctor. Evaluate the following ways to decide who gets to see the doctor.
the doctor raises the price until the number the doctor can see equals the number willing and able to pay the price.
the first patients to show up at the office get to see the doctor – later arrivals don’t get to see the doctor
the government decides who is to see the doctor.
a lottery takes place and the winners get to see the doctor.

There are many more kidney patients needing new kidneys than there are kidney donors. Using one of the listed five choices above, please indicate how you feel about the following means to distribute the kidneys among the patients.
Allow the patients to pay donors a price sufficient to equalize the number of kidneys needed or demanded and the number provided.
Allocate the organs on a first-come-first-served basis.
The government pays for the operations and provides the organs according to its own allocation system.
Provide the organs according to a random procedure such as a lottery to see who receives the organs.

The internet is becoming so popular worldwide that access is congested; many people are unable to sign on when they want. How would you evaluate each of the following solutions to the congestion problem?
Allow internet users to pay a fee to obtain access to the internet. The fee would rise or fall as the number of users rose or declined.
The government decides who gets access to the internet.
Each person simply attempts to get access – those attempting to obtain access first would get access while those attempting later might be denied.
A lottery is held and the winners receive access for a given period of time.

Part 2
Who is John Locke?

Who is Adam Smith?

Who is John Keynes?

Who is Milton Friedman?

What are natural rights?

What are rights? List as many as you can.

Try it and see what your outcome is. Out of 85 students none chose the market in every scenario and only 6 chose it when dealing with health care. Only 3 students got the second part correct.

No wonder a reporter asks "How does the government create jobs?"

The Theory of Moral Sentiments - Part 4

Podcast 4

This is a fascinating portion of the book and Klein's discussion is illuminating as he uses the twin concepts of: spectatorial and organon to understand Smith's cosmology. I really can't do justice to Klein's analysis - I recommend a listen of this podcast.

Tuesday, November 9, 2010

The Quiet Coup - Magazine - The Atlantic

This interesting article is referenced a an excellent blog post.

I follow this Russian blog and recommend it, like the Economist or the Financial Times, an outside persepective of the US is often insightful. This blog - Sublime Oblivion writes:

Introducing the Karlin Corruption Index (KCI)the scale is 10 (least corrupt) to 1 (Most Corrupt - interestingly North Korea is a 2 with 4 areas in the 1 spot.) and the blogger describes the US as an 8 trending to a 7

You might also click over to his Democracy ratings to see if you agree that on his 6 level scale the US is slipping rapidly toward illiberal democracy. (he says about the US - ■USA – highest prison population; corporatist surveillance state; runs transnational Gulag; increasingly arbitrary power structures, institutional groundwork being laid for Caesarism? (1, 2); but strong freedom of speech traditions relatively unmarred by PC & libel laws; strongly trending to Illiberal Democracy. ↓↓)

Writing about corruption:

These are countries where corruption begins to acquire big dimensions amongst the elites, but remains small at the lower rungs. The United States (↓) is here because privileged corporations enjoy extensive government largess, often at the expense of ordinary citizens (especially in the defense, oil, and financial services sectors). For the skeptics, The Quiet Coup by Simon Johnson is required reading.

The trends are negative. Corporate influence (disguised under Tea Party populism) is growing under the “socialist” (LOL) Obama administration: the overturning of corporate funding limits on political campaigns, BP’s requisitioning of Louisiana police to suppress freedom of speech, and the uncontrolled growth of the privatized anti-terrorism sector are just three examples that come to mind. Though these might not make it into the considerations of the experts and businesspeople gauging US “transparency”, I don’t think that makes it any less corrupt for all that.

Though the elites feed off the public trough, corruption is much less prevalent at lower levels. In countries like Russia or Mexico, corruption in institutions like the traffic police is the rule; in the US it isn’t even an exception – it’s practically unheard of. That’s because in rich, socially cohesive nations, corruption is simply too expensive for simple people. For this reason, I think the US is still above a 6 at the very least, and probably above a 7. But as the popular saying goes, the fish rots from the head. If the economy stagnates and corrupt elites continue misleading the public with “spontaneous” Astroturf organizations, then who knows, by 2020 you could be driving down Route 101 when a policeman pulls you ever and asks if you want to “reach an understanding”.

Other countries in this category include the UK (↓), France (↓), Japan and Israel (↓), where things are ostensibly all prim and proper but the elites live by different rules from the rest in the darker corners. US states like Texas, New York, California and Ohio are probably in this category.

Simon writes in the Atlantic:

The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on.
The Quiet Coup - Magazine - The Atlantic

Monday, November 8, 2010

The Newfoundland lesson: during the 1930s, long before the IMF, the British Empire coped with a debt crisis in a small country. -

As the frequency of developing country debt crises will testify, there is often a contradiction in the modern era between democracy and debt. Voters elect governments that pursue populist policies which lead to debt crises. The countries then turn to the International Monetary for help. The IMF attempts to impose conditions that set the stage for economic slumps. The governments became highly unpopular and sometimes suffer counterrevolutions. The recent histories of Indonesia and Argentina are case studies in such a process. But there are other less dramatic examples in Latin America, Africa, and Asia of tension between democracy and IMF-driven austerity.

The Newfoundland lesson: during the 1930s, long before the IMF, the British Empire coped with a debt crisis in a small country. -

Sunday, November 7, 2010

Acne Cream? Tax-Sheltered. Breast Pump? No.

No surprises here . . . after one stops laughing one might reflect on the unintended consequences of an expanding state sector coupled with an amazingly complex tax code.

From Oct. 26 NY Times

Denture wearers will get a tax break on the cost of adhesives to keep their false teeth in place. So will acne sufferers who buy pimple creams.

People whose children have severe allergies might even be allowed the break for replacing grass with artificial turf since it could be considered a medical expense.

But nursing mothers will not be allowed to use their tax-sheltered health care accounts to pay for breast pumps and other supplies.

That is because the Internal Revenue Service has ruled that breast-feeding does not have enough health benefits to qualify as a form of medical care.

Saturday, November 6, 2010

The Theory of Moral Sentiments - Part 3

This is another in a series of posts anticipating the July 2009 Liberty Fund colloquia dealing with Adam Smith

Part 3 - Duty

Chapter 1 - Self examination

What is required of the individual - that is our own duty. How do we judge ourselves? This section is the most intense application of the impartial spectator.

"The principle by which we naturally either approve or disapprove of our own conduct, seems to be altogether the same with that by which we exercise the like judgments concerning the conduct of other people. We either approve or disapprove of the conduct of another man according as we feel that, when we bring his case home to ourselves, we either can or cannot entirely sympathize with the sentiments and motives which directed it. And, in the same manner, we either approve or disapprove of our own conduct, according as we feel that, when we place ourselves in the situation of another man, and view it, as it were, with his eyes and from his station, we either can or cannot entirely enter into and sympathize with the sentiments and motives which influenced it."

1. View our conduct as we image the impartial spectator would. (This is the only looking glass by which we can, in some measure . . . scrutinize the propriety of our won conduct." III.1.5

2. Praise virtue and condemn (punish) vice.

Chapter 2 - Praise v blame

1. Must deserve the praise or blame by motive and action.

2. Behavior should conform to measure of conduct we know to exist (these are the emergent and evolutionary informal norms and conventions as well as formal institutions)

3. Smith argues we are endowed with a desire to please others and a desire to be pleasing in character.

4. Golden median or place between pleasure and pain. And pain a greater motivator than pleasure.

5. Poets v mathematicians

6. Judgments from society (external) and conscience (internal) - how are these a part of the impartial spectator?

Chapter 3 - Conscience

1. Natural eye of the mind (eye of the impartial spectator)

2. Impartial spectator

3. China example hundred million dead v my pinky - self love countered by reason, principle, conscience

4. Famous perspective (Stoic) act and regard ourselves "as a citizen of the world, a member of the vast commonwealth of nature" III.3.10

5. How to get self command? - page 145 "sentiments of the real or supposed spectator of our conduct."

6. 2 philosophies - whining and melancholy v Stoics

7. Back to a pinky (147) fortitude in the face of scratched finger not the same as lost leg

8. Happiness = tranquillity and enjoyment

9. Misery = discord

10. Man of perfect virtue - page 152

Chapter 4 - Self deceit and general rules

Challenge to self judgment - self deceit

Response - general rules from experience

1. Rules emergent and evolutionary

2. Come from moral faculties, natural sense of merit and propriety

3. Also called general rules of conduct - Hayek

Chapter 5 - Influence and authority of the rules of morality

1. Key point - page 102-3 - course clay can reach a minimum standard, not perfection

2. Is God the ultimate enforcer of these rules of conduct/morality - 165?

3. Basis for moral faculties - reason and/or moral sense

4. WN anticipated on pages 166 - incentive of "success in every sort of business" and 168

Chapter 6 - role of Duty

1. Self interest in "common, little and ordinary cases" - follow the general rules

2. Self interest in extraordinary and important objects"(173) - subject to passion called ambition - this can be very positive.

3. Rules of conduct - grammar v aesthetics that is p175 precise, accurate and indispensable (commutative justice) v loose, vague and indeterminant (distributive justice).

Podcast 4

"Thinking of yourself as being observed, not comfortable place to be. Thinking about it unconsciously all the time. Allows for independence, but founded on dependence of internal spectator which itself is derived from society."

Podcast 1 - Introduction

Dan Klein anticipates the discussion of justice and the famous differences between commutative and distributive justice and the rules that govern each:


Smith is explicit about that remaining "loose, vague, and indeterminate." Rules like grammar, that are precise and accurate, versus the rules of aesthetics, what critics lay down for what is sublime and elegant in writing.

Everything in TMS except for Smith's demand for commutative justice which he says is precise and accurate and indispensable like grammar--the punishment fitting the crime and that you shouldn't commit crimes that violate property or contract, which are black and white; also adds reputation, shouldn't do something to injure someone's reputation (p. 84 doesn't mention reputation but other times does). Apart from that justice--reserves that justice as justice, means this commutative justice--everything else for Smith is in the category of "vague, loose and indeterminate."