Saturday, February 27, 2010

Many Pieces, Many Hands

Many Pieces, Many Hands
David Warsh does a very nice job of overviewing current writing on the financial crisis.

Friday, February 26, 2010

ASET book club - March 2010

At the ASET conference on Sunday I learned that the ASET book for our March, 2010 will be Intellectuals and Society. I was delighted as I had mistakenly "heard" that the book would be Knowledge and Decisions. Like all Sowell's work, this latter book is excellent and I will finish it, but I have eagerly been looking forward to the latest book by Thomas Sowell.

This blog has explored the related concerns of civil discourse, the responsibility of educators and the instrumental and ultimate value of liberty and freedom in our society. Sowell's latest book provides an outstanding foundation for furthering that discussion and, as I reflect upon it, Knowledge and Decisions is a prerequisite for understanding the landscape that shapes institutional and individual responses to these three concerns.

Interestingly, the topic of civil discourse came to my attention this week (see this blog post) as deLong again exemplifies that antithesis of civil discourse as well as the arrogance of the elite, while Russ Roberts models responsibility in, what I hope is not a futile effort to engage in constructive education. While this approach may be wasted on elites of deLong's ilk, it may find some ground with colleagues in the profession.

During the Q and A at our ASET conference on Feb. 20, 2010, one of the participants prefaced a question to John Morton's presentation of Keynes revisited with a comment obviously endorsing intervention in the markets. While I did not have the opportunity to speak with this teacher later in the day, it is my hope that an open minded, reasonable individual might find much to consider from the conference activities to reconsider a position that uncritically supports government intervention.

A critical review of the Intellectuals and Society published in The Chronicle of Higher Education, before attacking the author and his thesis in a manner that seems to me to confirm Sowell's inditement of elites, contextualizes the book as one of a trilogy. Sowell makes this point in the preface to the book by saying that his work follows Paul Johnson in Intellectuals (1988) and Richard Posner in Public Intellectuals (2003).

While the criticism Jacoby directs to Professor Posner is richly deserved, I do think a review of those two works, as well as the reviewer's book might also provide a firmer foundation for consideration of this key topic. Jacoby, an interventionist of the Marxist stripe laments the passing of far left public intellectuals. I would agree that the public proponents of today's totalitarianism, while as misguided and intellectually dishonest as those of previous generations, are intellectual midgets (here I channel Brad deLong and Paul Krugman) by comparison. However, a comment in a review of the reviewer's book may guide our book discussion:

Jacoby's thesis is that nonacademic intellectuals capable of a dialogue with a general, educated audience are an endangered species, nearly extinct.

I would concur with this observation, as well as:

. . . today's intellectuals cluster in universities, producing monographs and articles read by a select few. . . .where they have produced a body of . . . work "largely technical, unreadable, and unread."

I am thinking of Paul Krugman as I shake my head in affirmation of the above comment. Unfortuately only the first two of these consequences are true of Krugman as his work is read, if not widely, then intently by the elite, the uninformed and the arrogant.

Thursday, February 25, 2010

Financial innovation and growth debate topic - financial innovation boosts economic growth.

Sadly I am not surprised by the current voting. Click above, review the debate and vote.

The attention getter in the current Economist online debate is-

Paul Volcker put the matter clearly when he said, "I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy."

This is actually sad, reflecting a basic misunderstanding of the emergent and evolutionary nature of innovation and the impact of innovation on economic change. A view of economic history confirms this evolution and, like other innovations, the impact of financial innovation may take decades to emerge. Volcker is impatient and distrustful of systemic processes beyond the control of the state.

Ross Levine takes the longer view

Even the most conventional components of modern finance, such as debt contracts and liquid securities markets, were themselves once financial innovations that circumvented former barriers to investment and growth. Consider an oceanic expedition or trading voyage in the 17th or 18th century. Such an endeavour required a large injection of capital and did not produce profits for a long time. Investors were reluctant to commit savings to such a long-term, albeit profitable, project because they valued having ready access to their wealth to cushion bad times or switch into other investments. Liquid securities markets eased this problem, allowing investors to sell their financial securities, which are claims on the future profitability of the project, if they wanted access to their wealth. With liquid markets, investors fund the oceanic voyage, but without those markets, economic progress slows.

Financial innovation, like all innovation, has risks, which have been unmistakably demonstrated by the current crisis.

My reading of this interesting debate - Ross Levine of Brown argues pro and our friend Joseph Stiglitz argues con - is informed by my reading of Thomas Sowell's Intellectuals and Society. In that book, Sowell contrasts the tragic or constrained vision with the anointed or unconstrained vision.

As one of the anointed, Stiglitz exemplifies the characteristics enumerated by Sowell - the identification of a big solution for a big problem, elite decision making and an emotional argument for centralization, in this case and increase in regulation.

Wednesday, February 24, 2010

Civil engagement?

While I have never responded to a student in this manner, I can certainly appreciate the frustration.

Sunday, February 21, 2010

Random Thoughts

I see journalists offering their random thoughts in columns, so here goes some of mine. The Arizona State Budget is in shambles. Like virtually every government at every level that runs into budget problems, the answer is to increase taxes. Arizona is considering a 2 % sales tax increase, a sales tax base broadening to food for home consumption and a tax on services, as well as increases in state property taxes. Tax increases is not the correct policy. Although the State has sold some property and shut some facilities, it could privatize most of these facilities and properties. It could collect either a rent as it enables private companies to run the parks or highway rest stops or it could sell them to a private company. In addition, the state needs to simply eliminate some departments. There is no need for many of the state government departments that currently exist. Simply go to

and look a the the number of state agencies and departments. Perhaps a better source is Dean Martin's new website, Inside that website is the diagram of the allocation of state spending by agency, bet few of us cold even suggest what these agencies do.

The book by Stephen Greenhut, Plunder, describes how public employee unions are destroying America. You can see the poster childs of plunder in California, New York, and New Jersey specifically. The unions fight privatization of any form; fight merit based pay; fight any termination of teachers even incompetent or dangerous ones. The pay of a government worker is now on average significantly higher than that of the average worker in the private sector. Federal workers average more than $60,000, state workers $41,000, local government workers $42,000 and private sector workers less than $40,000. But the real difference is the value of pensions. Most state employees are under a defined benefit pension fund whereas most private sector employees are under a defined contribution penson plan. For instance in California, a state employee can retire after 30 years (3% per year) at 90% of the highest year's salary. With a defined contribution plan, the employee's contributions plus the employer's contributions are invested and its size depends on the performance of the investments.

Unfunded liabilities will drive states into bankruptcy and perhaps the US as well. The likely proposed solution to this issue will be tax increases. I fully expect Obama's "bipartisan" budget commission to propose a VAT tax. If adopted, the United States will not ever be the country its founders intended. The VAT is a destroyer of jobs and new businesses.

While most economists noted in the media and most media commentators are claiming the economy has recovered or is recovering and that the future is only up, I am far more pessimistic. I see the huge debts, the huge amount of potential money supply that has been created, and the upcoming increases in taxes, I can only see at best a sluggish economy.

Civil discourse

I rarely comment on our fellow bloggers, but the recent "exchange" between deLong and Russ Roberts exemplifies a concern often expressed on this blog - the vanishing commitment to civil discourse.

I follow both the deLong and Cafe Hayek blogs and have followed this "exchange" with mixed emotions. I see one of the challenges in spirited discussion and debate exemplified here - one that Samuel Gregg outlined in his book The Commercial Society.

Civil discourse is, clearly, a vanishing form of public discourse. All deLong readers know what they get when they come to the blog - spirited discussion that is rarely delivered in a civil manner. Those of us who read and follow Russ Roberts are accustomed to a spirited discussion that is consistently delivered in a civil manner.

As I listened to the silver and gold medalists in the men's figure skating I could not help but think of deLong's rhetorical approach (the Russian) v Robert's civil and thoughtful response (the gold metal).

If one considers the end of rhetoric it is clear which approach will successful engage and stimulate.

ASET conference

The 9th annual ASET conference, held for the first time off the MCC campus at the SRP Pera Club was a success. Teachers from across the state gathered for a day of conversation, discussion and the opportunity to hear views on the economy.

Dr. Gerald Swanson delivered the keynote address and, following in the line of analysis of our 2009 speaker, Dr. William Boyes, presented a series of observations about the causes and consequences of the 2007 - present Great Recession.

I made use of Bankruptcy 1995 in my macro classes in the late 1990s and, based upon this presentation, I am considering making using of America the Broke in future classes.

Prominent points in his address (click back next week to see slides of this presentation) echo two important books by Swanson:

Saturday, February 20, 2010

Buying Local

Pratt's post on buying local reminds me of the statement made by Abraham Lincoln about purchasing steel rails from Britain. He said if we buy the rails from Britain we have the rails but they have our money. If we make the rails here in the US, we have both the rails and the money. Buying local is simply another attempt to ignore the fact that specialization according to comparative advantage followed by trade leads to gains. Restricting trade is perhaps beneficial to a special interest, but leads to losses overall.

Friday, February 19, 2010

Buying local

As I indicated in yesterday's blog post, the student newspaper at my institution ran a front page story touting the benefits of buying local. In the spirit of my colleague Don Boudreaux, see below my response to the newspaper - which clearly lacks Don's pithy conciseness.

Amy Shaw, in a 2007 view, displayed an very different perspective to exploring the issue of buying local to that of Jacqueline Bernatt, the author of the Feb. 9, 2010 Mesa Legend editorial - "Helping Arizona's Economy". Had Shaw written a news story rather than editorial for the Mesa Legend, she might have titled the report Does Buying Local Influence the Arizona Economy". In fact, Shaw in "Is Buying Local Really Good" reflects the essence of solid news reporting and scholarship which is exemplified in her conclusion:

At the end of all this questioning (and this is just the beginning), I’m left with only more questions. Of course there are myriad arguments for why buying local is better than the corporate alternative . . . But I also see that what’s important is that we not take ideas like “buy local" for granted.

But I will question received truths, for we must be ever mindful . . .

Shaw reflects a critical perspective absent in the Mesa Legend editorial. Had Bernatt's editorial properly been placed on the editorial page I would not have responded. While I disagree with the illusion, myth and falsehood of this point of view, Bernatt in a free and open society is entitled to both hold and express this opinion and the editorial page is the place for this opinion. I do wonder about the training of young journalists who are allowed to use the front page of a news magazine for opinion that is appropriately located on the editorial page. There were numerous misstatements in the Legend editorial, an absence of citation or effort to seek a full view of this important question and no effort to explore other points of view. Shaw, on the other hand, clearly has reviewed the work of economists, biologists and ecologists in her thoughtful piece that concludes with more questions than assertions.

I suppose I am concerned most with the clear advocacy in a front page story in a news publication, a spot that traditionally has been reserved for news coverage the encompasses the ethical standards and best practices of journalism. The media is an essential institution in a free and open society. To the extent that participants in that institution weaken and damage that institution they pose a clear and present danger to a free and open society.

On to a more nuanced view of "buying local". Social scientists have been intrigued by the operation of human agents in society. The operation of those agents (consumers and producers) can take place under any number of systems, ranging from the natural liberty of Adam Smith to the totalitarianism of Stalin.

Regardless of the system that informs human behavior we each individually act in ways to achieve our own goals based upon the knowledge we have available. In Knowledge and Decisions Thomas Sowell outlines the process of decision making and the types of knowledge that can be used for decisions. He sees knowledge as falling into theory, vision, illusion, myth, fact or falsehood.(4-5) Bernatt's article includes all categories with the exception of fact, but the predominant form of knowledge or information used by this editorial writer is illusion, followed closely by falsehood.

The illusion presented that buying local is stimulative to an economy is false. Empirical evidence clearly indicates that voluntary trade is positive sum in its result - agents (consumers and producers) that freely and without coercion create opportunities that expand the economy of a country. The reverse is also true - policies that limit or reduce trade eliminate opportunities and contract the economy. Examples are numerous, compare the economy of the US (free trade - buying internationally) with North Korea (no free trade - buy local). So the underlying assumption of the MCC Legend editorial is false - it can be empirically disproved. See the 100 mile suit by Paul Adams for a humorous illustration.

Illusions in the MCC Legend editorial include the notion that locally produced foods are lower priced, of higher quality and are in demand. As the food shopper in my family I would challenge the editorial writer to explore the illusion that farmers market products are cheaper than similar products found in grocery stores. I have shopped both and consistently found lower prices in grocery stores. This illusion could be converted to a theory and then to either fact or falsehood. It merely takes reporting - select a product, say tomatoes, then compare prices at Frys, Safeway, WalMart and the local farmers market. I wonder if any other reader laughed out loud at the quote regarding tomatoes: "You can get them at Fry's, but (produce) is not pulled fresh off the vine there,"-I wonder what is fresh - the farmer pulled a tomato off the vine early on a Sat morning to sell that afternoon, I have purchased tomatoes at Fry's still on the vine.

This all said, a free and open society maximizes opportunities for participants. Some (actually very, very few) "locally produced" products are available in a developed and free society like Arizona consumers are free to purchase these items. While Arizona does produce excellent lettuce, tomatoes and oranges, our state does not produce bananas, kiwi or coffee. As an aside, I wonder if the editorial writer attempted a price comparison on similar drinks at Starbucks and Gold Bar - she would be surprised to learn the locus of the lower price. That said, the existence of Gold Bar, farmers markets, online business that tout local crafts attests to the fact that some consumers are willing to pay a higher price for a local product. The existence of WalMart, Nordstroms, Safeway and Starbucks attests to the fact that the vast majority of consumers freely act on their own knowledge to increase their own standard of living and that of their community act to purchase goods from around the world. In fact, most consumers use criteria other than location of production in their calculus prior to purchase. And in a free and open society this diversity is to be applauded and encouraged.

Student journalists have the opportunity to get it right while in an academic setting - I applaud the editorial writer of the Legend for expressing views protected under our long standing tradition of free speech. Free speech is designed to protect illusion, myth and falsehood and clearly most of our population is experienced at voicing opinion. It is my hope that this journalist will explore the role of news reporting - which is central to the development of all types of knowledge and a key institution supporting free exchange.

Adams, Paul "The 100 mile suit wears its origins on its sleeve"

Australian Government "The role of growth, trade and aid"

Center for Economic Policy Research "Economic Growth: Free Trade Effects"

EconTalk "Boudreaux on the Economics of Buying Local"

Science News "Buying Local is Not Always Better for the Environment"

Selick, Karen "The Buying Local Fallacy"

Shaw, Amy "Is Buying Local Really Good?"

Smith, Adam The Theory of Moral Sentiments

Smith, Adam The Wealth of Nations

Sowell, Thomas Knowledge and Decisons

Thursday, February 18, 2010

. . . distributed intelligence

Steve Horowitz channels Hayek and Sowell in his posting over on the NPR blog. The ASET book club is reading Knowledge and Decisions and I see echoes of Sowell's thesis throughout Horowitz.

Sowell compares and contrasts informal decision making processes (marriage) with formal decision making process (the draft). His point, I believe is not to judge the desired ends or even the process, but to evaluate the process in terms of costs and benefits. And, he takes the Hayekian stance that individual agents, voluntarily and independently acting will typically select the process that aligns both with value in society and with wealth creation, while a centralized, hierarchial, tops down selection will typically result in decisions with perverse and unintended consequences that are the predictable result of a lack of information and knowledge by the man or woman at the top making the decision.

Sowell also distinguishes between a different types of knowledge - a distinction that I see in Horowitz's observation about government action and, in the words and deeds of many individuals I come in contact with. Sowell describes knowledge as theory, vision, illusion, myth, fact or falsehood and his analysis of the underlying dynamics of how society views/uses these different knowledge types is informative. To the extent that elites in or out of the government are self conscious and rational it seems clear that illusion, myth or falsehood are routinely a part of the discourse and rhetoric urging tops down calls for action - in the social interest.

An excellent example of this is from an aspiring elite, progressive, a reporter for the college newspaper at my institution. She writes glowingly about the benefits of buying local.

I am excited to be reading Sowell's book and looking forward to our discussion. While I had looked forward to a book club discussion of Intellectuals and Society I anticipate a fruitful discussion of this classic.


Wednesday, February 17, 2010

Tuesday, February 16, 2010

No Morality, No Markets - The Acton Institute

Earlier this week Boyes blogged on morality and markets. Clearly the relationship between the two is essential, that is markets in the absence of morality will drift toward the "crony capitalism" that is the antithesis of freedom and morality. Samuel Gregg develops this point over at Action.

No Morality, No Markets - The Acton Institute

Monday, February 15, 2010

Saturday, February 13, 2010

Markets and Morality

Many people believe that capitalism and especially free markets necessarily leads to a debasement in morality. They point to the corrupt business leader or the tendency of people to cheat when confronting a competitive situation. Barney Frank tells us that the free market got us into the fiscal crisis and the government will have to get us out. Do free markets destroy morality?
I was recently asked to speak to or carry on a discussion with a group of high income citizens about markets and morality, especially the recent financial crisis. (How did I know they were high income? They told me so and also informed me that they had a guilt as a result and wanted to help the downtrodden and redistribute wealth. It would be more moral than this current situation of huge inequality, they said.) In preparing for the talk, it was necessary to define morality. I consulted a number of sources and found many different definitions – most could be couched as normative or simply one’s opinion. I think it is moral to follow the golden rule; I think it is moral to treat others well; and so on. As a conceptual experiment I said, if I took all definitions and created a Venn diagram with them, the mutually inclusive definition would be the non-aggression principle:
People own their own bodies and minds. They also own the land they have mixed with their labor to create output. Anything people own can not be taken, attacked, or damaged by anyone else.
It does not matter whether this principle comes from religion or is accepted as natural law. It does not matter where it comes from, only that it is the mutually inclusive definition. So are markets moral when morality is defined in this manner? A market is the voluntary exchange of a good or service. A market can only exist if people have private property rights. If people don’t own something they can not trade it or exchange it. If people do have PPR and voluntarily exchange something, then both parties to the exchange are made better off. How do we know that? Because if not, then the exchange would not take place. So markets are founded on morality. Without this morality there would be no markets.
Consider some immoral actions. A taking is an aggression against property rights. It is immoral. What are takings? They are the use of coercion to acquire another person’s property. Theft, bodily harm, but also taxes, eminent domain, involuntary conscription, etc. are takings. Whenever the govt takes from one and redistributes to others, it is acting immorally.
Creating money out of thin air is counterfeiting and theft, no matter who does it. Thus, the fiat money system is immoral. Bonds that can never be paid are promises that cannot be kept, and are dishonest or immoral. Government debt is, in most instances, immoral.
Adam Smith said that if everyone acts in their own self interest, their actions will as a whole benefit society. I was told during my talk that this was all crap. What about the greedy business man? He will throw contamination into the rivers and destroy the earth. I responded – really? What is greed? It is self interest ; I care more about myself and my family than I do strangers. But, to get what I want, I will SERVE strangers. Bill Gates is greedy but he has to SERVE you to get you to purchase his products. And if Bill Gates contaminates the landscape and you care about that landscape, he is not serving you; he will not be able to stay in business.
The government has to step in a protect us from the greedy businessmen said the participant. I asked, What about government officials – are they greedy? Of course they are. The difference between them and the business person is that the government official does not have to SERVE you. The govt can “command” you and “aggress” against you.
Now with these points in mind, let us see what immoral acts led to the recent financial crisis. A very brief history of the problem in housing markets begins with FDR but really got going in 1967 with the Community Reinvestment Act (CRA). This act instituted the idea that “affordable” or subprime loans had to be made. Everyone has a right to the American Dream of owning a house don’t they. (In fact, one of the participants in my discussion said exactly that.) So as government continued expanding the pressure on providing high risk loans for housing, Fannie and Freddie fell in line. These government sponsored enterprises (GSEs) began accumulating more and more subprime mortgages. This distorted the market very significantly since there is an implicit government guarantee on any purchases or loans made by the government enterprises. The government guarantee means if the loan goes bad, the holder of the mortgage will not lose. As a result, large profit opportunities existed with little risk, to purchase, trade, and sell mortgage backed securities. Of course, the “greedy” business person made loans. We shouldn’t expect anything different. The incentives were there to loan more and more with fewer and fewer restrictions. Incentives were created for everyone to leverage as much as possible by obtaining the adjustable rate loans and subprime loans. Investors began purchasing houses and “flipping” them using no money of their own.
The loans were bundled and sold as mortgage backed securities (MBS). Each MSB would contain different risk tranches – some high risk mortgages, some low risk, etc. It was up to the rating agencies to evaluate the securities and provide ratings. The problem is that the government allowed only Moody’s, S&P’s, and Fitch’s to do the ratings. Moreover, the rating agencies were paid by those holding the mortgages – a conflict of interest that would not have occurred had competition in rating agencies existed.
In short, the crisis was created by government intervention, not by free markets and a lack of government regulation. A great deal of corruption on the part of various Senators and House members took place. There was some dishonesty and corruption in the private sector – again incentivized by the government guarantee. But, the private sector has to SERVE you and would not have been able to act immorally had the government not been involved.
One of the issues of concern for those who oppose capitalism and free markets is that some people get left out – specifically the poor. What these critics fail to recognize is that necessarily, some people get left out no matter the allocation mechanism. That is what scarcity means – not enough for everyone to have everything they want. The important question in economics is how do we decide who gets the stuff and who doesn’t? Consider the following scenario: At a sightseeing point, reachable only after a strenuous hike, a firm has established a stand where bottled water is sold. The water, carried in by the employees of the firm, is sold to thirsty hikers in six-ounce bottles. The price is $1 per bottle. Typically only 100 bottles of the water are sold each day. On a particularly hot day, 200 hikers want to buy at least one bottle of water. How is this scarcity situation resolved? On method would be for the firm to increase the price until the quantity of bottles hikers are willing and able to purchase exactly equals the number of bottles available for sale. Another could be for the local authority (government) to buy the water for $1 per bottle and distribute it according to its own judgment. Most people would agree that the best solution is for the firm to raise price although some argue that the government should give everyone a half bottle. What is the difference? It is in the incentives created. Suppose 200 people (or perhaps 300 or more) keep showing up at the water stand wanting a bottle of water. The firm would experience a rising profit and hence bring additional supplies of water while at the same time competitors would arise. The result is that more bottles of water would be available. The business man has to SERVE you. If government allocates water, then it might give one half of the bottle to each hiker when there are 200 hikers, one-third when 300 show up, one-fourth when 400 show up, etc. But, the supply of water bottles does not increase; there is no profit incentive for the firm to increase supplies. In fact, seeing the profit confiscated by the government, the firm might decide to leave the business.
Now consider another scenario that is a similar situation but involves a different product. A physician has been providing medical services at a fee of $100 per patient and is unable to see more than 30 patients per day. One day the flu bug has been so vicious that the number of patients attempting to visit the physician exceeds 60. Indicate what you think of each of the following means of distributing the physician’s services to the sick patients by responding with one of the five answers shown above. Again, if the physician can raise price and increase profits, a larger supply of physician services will arise. If the government allocates the services, either the quality will decline (if more people have to be tended to) or some people will be left out. No additional services will be provided.
Finally, the following describes an all too familiar situation of shortage. The number of people needing new kidneys far exceeds the number of kidneys being donated for transplant. Now if a market for kidneys can be created (especially a futures market) the supply of kidneys will increase. But, if the government decides who gets the transplants, the supply will not rise and someone will be left on dialysis and perhaps left to die. Only the free market creates the inc3entives that will increase supplies and improve standards of living.
If the free market is so wonderful, why do we hear about so many businesses getting special favors from government. Isn’t this immoral? In one of the most famous passages in The Wealth of Nations, Adam Smith cautions, People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. . . .
Adam Smith rightly warned us of the dangers of business conspiracies. But in the same famous passage, he went on to warn of the even greater danger of relying on government institutions to combat such conspiracies:
It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
Transparency and free markets is the best protection against crony capitalism. Markets are not simply based on morality but they protect and defend morality.

Friday, February 12, 2010

My friend Sarah

This government doesn’t merely breed corruption. It is corruption.

Sheldon Richman describes the ultimate end of the state/government in today's Freeman. As I read this analysis I couldn't help but think of the Schlesinger article on Heroic Leadership - labeled a doctrine that was despicable by a fellow blogger. The expansion of the state and metastasizing government that follows inevitably lead to corruption.

I spend my summers in Bisbee, a small community along the Arizona/Mexico border. Near Bisbee is the town of Douglas, Arizona which was named one of the 10 most corrupt communities some years ago. I was told by a year round resident that 90 per cent of the income earned in Douglas was from the underground economy. The reasons for this are clear - Douglas is an international port of entry from the US to Mexico and back, there are two major Border Patrol facilities along the border near Douglas from which some 1000 agents do their work to fight the war on immmigration, there are a number of major government facilities in the area to fight the war on drugs, eastern Cochise County is low income so the layers of government in and around Douglas are fighting the war on poverty, the level of educational attainment in the area is low so other layers of government are fighting the war on illiteracy, . . .

With all these wars going on there is amble opportunity for collateral damage - the subject of another post. What is apparent is that with such a dominant state presence in Cochise Co. - in addition to the government units engaged in the wars above - Bisbee is the county seat, the State is manifest in office of postal delivery, primary, secondary and post secondary education, incarceration, etc . . . - there is clearly opportunity for entrepreneurial activity. I am thinking of the distinction that William Baumol and Ben Powell(Chapters 3 by Holcombe and 4 by Baumol) make in terms of wealth creating entrepreneurial activity that responds to incentives from the market (positive sum exchange is the inevitable outcome of the voluntary exchange) and wealth destroying entrepreneurial activity that responds to the incentives of the state (negative sum inevitably results from involuntary exchange).

Richman's humorous reference to Captain Renault in Casablanca captures the sad absurdity - I am shocked, shocked that there is corruption in a state dominated, welfare society.

Wednesday, February 10, 2010

Blog focus - entrepreneurship

An interesting forward looking forecast based upon a survey of economists who blog - well worth a read - click here.

Tuesday, February 9, 2010

Heroic Leadership: A destestable doctrine

In a coincidence, my reading of the third book in Richard Slotkin's trilogy examining the Myth of the Frontier in American History (I recommend this one) lead me to search for a Schlesinger 1960s essay “On Heroic Leadership and the Dilemma of Strong Men and Weak People.” I could not locate it, but an interesting reference can be found at (

This essay does a nice job of contextualizing our current president in the tradition of the imperial presidency.

The image of the Latin American caudillo or jefe is a familiar one, and perhaps we are seeing an extension of that creature (that began with Lincoln) in our current president.

The author of the first article makes a point that clarifies the dark side of the utopian longing that is the foundation for the acceptance of a caudillo (or a ward style politician skilled at logrolling and rent seeking).

Finally, I wish to comment on Mr. Schlesinger's leading essay which carries the pretentious title “On Heroic Leadership and the Dilemma of Strong Men and Weak People.” This is an important essay, not because it says anything important, but because it seems to express the ideology which is now dominant among the President's intellectuals in Washington. Here Mr. Schlesinger calls for a reconstitution of democratic theory, since “maintained in rigid purity, it has been an abundant source of trouble.” The citizen in a democracy, he says, simply cannot play the role in which classical democratic theory has cast him. This has led to political estrangement and frustration. Hence, Mr. Schlesinger argues, we need to rely on heroic leadership, we need to divest ourselves of our instinctive distrust of such leadership if the democratic polity is not to flounder in a sea of mass emotions. This, I submit, is a detestable doctrine.

Monday, February 8, 2010

The Power of Incentives

Talk about the power of incentives check this out.

Bastiat - a conservative?

A bit of background for this post. I work at a community college in a department (Social Sciences) that includes the disciplines of economics, political science, history, sociology, anthropology and geography.

The work of Klein and Stern (click here) describes the interventionist views of almost all of my colleagues, including my fellow economists. That is, on the scale used by Klein and Stern 1 to 5 with 1 a strong agreement with decentralized individual based decision making to 5 a strong agreement with government intervention I suspect if my colleagues completed the Klein survey they would range from 4.5 to 5.0. I believe Klein and Stern found in their sample that there was little diversity in higher education in these disciplines, with average overall ratings of 4.0 and above.

Klein is referenced in an Steve Horowitz article in the current Freeman - if you missed this it is work a click - a very disturbing, but not unexpected survey showing the attitude of professional economists to government and freedom.

That said, I was discussing Bastiat with a colleague yesterday in our work room and a junior faculty in political science remarked, "Oh, that conservative."

This comment speaks volumes - beginning with the danger of labels. I was not quick enough on the uptake to ask my colleague if his evaluation was based upon actual reading of Bastiat or impressions he had formed over time.

This junior faculty member teaches 6 sections of 30 students so the scope of his influence over time is not insignificant. What is equally troubling is the scale of his influence - to the extent that he misrepresents liberty and freedom and the the thinkers that advocate for individualism and liberty, he broadens the ongoing support by the masses for Leviathan.

So, to build upon the previous post dealing with mainstream v mainline thinking - it seems apparent that many (most?) in our profession have a tendency toward the mainstream and may well lack familiarity with mainline. To the extent that the next wave of faculty are more interventionist in their outlook than the current generation I suspect that the expanding scale and scope of government in our lives will expand.

Two sociologists attempt to explain the source of strong interventionism in higher education faculty in this paper which does reference the work of Klein and Stern.

An added variable that may well contribute to accelerating acceptance of the state in our society is the changing preparation of the students who are subjected to these interventionist faculty in college.

George Leaf describes the current college student as:

Ill-prepared and unmotivated as many applicants are, colleges are eager to have them. Otherwise, they wouldn’t be able to stay afloat financially. Admitting throngs of weak students, however, leads to an array of problems for non-selective schools.

One of those problems is the need for remedial courses. Speaking from recent teaching experience, Toby observes that many students, even at a “flagship” state university like Rutgers, are terrible writers. They make mistakes on points that should have been learned in about third grade (such as the difference between the words “to,” “too,” and “two”) and cannot read college-level material because they have such limited vocabularies. That observation was also made by Professor Mark Bauerlein in his book The Dumbest Generation, reviewed here.

His analysis is well worth a read as it describes the above deterioration of college student preparation and motivation as a predictable outcome of incentives generated by state dominance of higher education.

Leaf aptly describes the situation at my institution:

Another unfortunate result of admitting a large cadre of weak students is that it means classrooms filled with an oil-and-water mixture: some eager and capable students and some lazy and incapable ones. How does a professor deal with that? Concentrate on the good students and let the weak ones fail if they can’t or won’t keep up? Or dumb down the course and inject plenty of entertainment so the poor students can keep up and get the “decent” grades they’re accustomed to? Since most colleges are frantic about student retention, they often pressure the faculty to adopt the latter course. Academic rigor thus erodes.

The final sentence is, I would argue, universal across the board, at least at community colleges. While I encounter more water and less oil in my classrooms, the "data driven" administration looks closely at metrics such as classroom capacity, completion rate, retention rate and withdrawal rate.

Sunday, February 7, 2010

Education in Arizona

The education establishment is pushing very hard for voters to provide overrides -- property tax increases - and to support the 2% sales tax increase the legislature is putting on the ballot. Rather than follow this failed approach of continuing to increase finances for an education system that is failing, it is time to privatize the system. Arizona should be the first state to eliminate public education, creating vouchers and private schools. Property taxes could be reduced. Schools would compete for students and teh best teachers. The best teachers would command higher salaries while lower quality teachers would command lower salaries. The improvement in test scores and other measures of quality would be substantial.

Tuesday, February 2, 2010

Mainstream v mainline economics

Like many of you I look forward to the conversation over on The Coordination Problem - formerly The Austrian Economists.

Recently a blog post took me to a summary of the work of Peter Boettke and I found two of his shorter papers to be clear and thoughtful, as well as relevant to our conversation.

The first - Liberty v Power in Economic Policy in the 20th and 21st Century (scroll down the link to item 7 to download the paper) touches on the question of our dual responsibility as educators and as economists.

Boeetke makes a distinction between mainline economics and mainstream economics. The latter comprise the fundamentals of economics analysis set forth by Smith, Hume and Say and elaborated by Menger, Mises and Hayek.

Boettke reviews the evolution of the Smithian natural liberty - peace, easy taxes, and Hume's property, contract and consent. This evolution forms the foundation of the economic way of thinking and, Boettke anticipates the second paper in suggesting a timelessness to mainline economics.

Mainstream economics is the model de juer - adherents to the popular, consensus view of economics is characterizes as:

" . . . sources unenlightened by the economic way of thinking, but not always as some of the more vociferous criticisms and calls for government solutions come from the likes of Joseph Stigliz, Jeffrey Sachs and Paul Krugman"

I'll leave to you his rebuttals to the first two, but his reaction to the 2008 nobel winner is worth repeating:

Krugman as decided that since he is so very smart, it is perfectly reasonable to use the op-ed page of the New York Times to discredit himself and his profession by becoming a political hack, instead of practicing the sober analysis of the dismal science.

The meat of this first paper argues that the 20th and 21st century can be viewed as three historical movements which he labels The End of Laissez Faire (1900-1930), The End of Socialism (1980-1995) and the Rise of Leviathan (emerged since 9/11/2001). Your time will be richly rewarded from a read of this paper.

The second paper is The Ordinary Economics of an Extraordinary Crisis.

While this paper would most profitably be read by those who view the economic/financial crisis of 2008/9 as a market failure (clearly this is a failure of both government and understanding) there is a great deal here for reflection for those who are looking for constructive avenues with which to engage statists.

Boeetke makes the following point before beginning his analysis:

While there may be macroeconomic problems, there are only microeconomic solutions. We do not need more of the same old bad economic ideas that have persisted for much of the last century. What we need, instead, is a return to ordinary economics.

The rest of the paper uses the recent crisis to illustrate this point.