ASET book club - Sept. 2010

September Book Club

The Big Short

DATE: Thursday, September 23th

TIME: 5:45 p.m. - 8:00 p.m.

LOCATION: ACEE office

Markets and Morality

The Wall Street Journal in the weekend edition ran an article on corporate social responsibility and on Monday, the letters "hit the fan." Although the following is quite long, it captures my attitude toward markets and morality. In essence, free market capitalism is the only moral system.

Business Ethics and Capitalism

Every time an economic crisis occurs, there is a thunderous call for teaching more "business ethics" at the university level. This is particularly the case when it is widely thought that a lapse of ethical behavior led to the crisis. What does it mean “to teach ethics”? Is ethics just a branch of philosophy so that spending time with Aristotle and Locke is satisfactory? A few courses are taught as a branch of philosophy. Or is ethics a branch of religion and spending time in the new or old testaments what is desired? Very few courses delve into the “book”. Or is ethics a list of what shouldn’t be done?
The latter seems to be the most common approach to teaching ethics. Isolated examples of unethical behavior in the business world are used to illustrate actions that should not be undertaken. Many of these illustrations demarcate legal and illegal behavior as if what is legal is moral and what is illegal is immoral. Some courses are based on some aspect of social justice. For instance, many devote considerable time arguing that companies need to take a stakeholder view rather than a shareholder view. The implicit assumption is that a moral company does more than simply earn profit for its shareholders. It takes care of all of its stakeholders – employees, suppliers, local community, larger community, the environment, shareholders, and anyone else affected by actions of the firm. A common statement from professors of business ethics is: We object to the all too common tendency for business managers to focus on very short-term profits for a very limited constituency (typically stockholders).
A Moral system defines right and wrong and ethic is based on the Moral system. Ethics seeks to address questions such as how a moral outcome can be achieved in a specific situation, how moral values should be determined and what morals people actually abide by. Morality is conduct that enables the human to flourish. Morality can only occur if people are free to reason and act on their reason without coercion.
Morality is consistent only with free market capitalism, what we will call capitalism. Morality requires that people can do what they want with what they own as long as it does not harm others. In other words, a moral system is a system of private property rights and non aggression. Yet, few are willing to say that capitalism is moral. With the fall of communism, many commentators and politicians grudgingly acknowledged the practical value of capitalism, that the free market is the best system for producing wealth and promoting prosperity. But this has not led to an acceptance that capitalism is moral. Quite the opposite: coercion and the state have only grown.
If capitalism is recognized as the only practical economic system--then why is it losing out to state control? The reason is that most people consider capitalism to be immoral. It leads to inequality, companies that exploit workers and consumers and despoil the environment. Consider George Soros’ Atlantic Monthly article.
The Capitalist Threat" by George Soros
Atlantic Monthly, Volume 279, No. 2, February 1997
Popper showed that fascism and communism had much in common, even though one constituted the extreme right and the other the extreme left, because both relied on the power of the state to repress the freedom of the individual. I want to extend his argument. I contend that an open society may also be threatened from the opposite direction -- from excessive individualism. Too much competition and too little cooperation can cause intolerable inequities and instability.
Insofar as there is a dominant belief in our society today, it is a belief in the magic of the marketplace. The doctrine of laissez-faire capitalism holds that the common good is best served by the uninhibited pursuit of self-interest. Unless it is tempered by the recognition of a common interest that ought to take precedence over particular interests, our present system -- which, however imperfect, qualifies as an open society -- is liable to break down.
Soros’ view is not a minority view. Many argue that capitalism has to be constrained if it is to be moral. The firm must be forced to take a stakeholder view of its business – the recognition of a common interest --rather than just a shareholder view. A corporate stakeholder is commonly defined as any identifiable group or individual who can affect or is affected by the firm. Since the stockholder approach assumes that the interactions between business organizations and those affected by their operations are most effectively structured as marketplace activities. So, if what is central to capitalism and the stockholder concept is that business relations should proceed along market lines, then the stakeholder view says the market has to be replaced with something else.
This view is wrong. It is coercive and counter to man’s reasoning. Human flourishing requires reasoned self interested action. Capitalism is based on this fact. It requires individual or private property rights and non-aggression. Each individual has a right to act on his own judgment for his own sake, so long as he does not violate the same rights of others. This is why Capitalism is moral. It enables human flourishing. Acting in one's rational self-interest while respecting the rights of others to do the same is the basic requirement of human life. The essence of capitalism is that it bans the use of physical force and fraud in men's economic relationships. All decisions are to be left to the "free market"--that is, to the un-coerced decisions of buyers and sellers, manufacturers and distributors, employers and employees. Capitalism also recognizes the necessity of responsibility. Thus, it seeks to match the liberty of making a decision with the responsibility for the consequences of making said decision. Hence, creators get to own whatever they create, whether it's good or bad. Destroyers are responsible for what they destroy, whether it's good or bad.
But we are told by Soros and many others that capitalism fails to promote social justice; instead it leads to inequality. Capitalism does not lead to egalitarianism but does require that everyone has equal rights to life, liberty, and the pursuit of happiness, and this is moral. It is social justice or egalitarianism that is immoral. By definition social justice does not treat everyone equally. It penalizes hard work and skills and rewards the opposite. Most importantly, it is coercive, taking from some to give to others.
We are also told that capitalism leads to bad dealing by businesses. The fact is that free markets lead to just the opposite. It is coercion and control that leads to bad dealing and corruption. Under free markets when a business does engage in bad dealing, the market penalizes it. Customers refuse to do business with the company and/or the company is sued, and the firm's stock price plummets. Capitalism does not guarantee ethical behavior, but it does reward it with profits. Under capitalism businesses can not gain unless they serve the public, not cheat it.
We are told that capitalism means exploitation of employees, not treating employees “fairly”. The result of the free market is just the opposite. Capitalism demands that workers be treated fairly in the sense that they are not exploited. A business that does not treat employees in what the employees deem to be fair, will lose those employees and have to work harder to attract new ones.
In a free-market economy, everyone is driven by his own ambitions for wealth and success. That's what free trade means: that no one may demand the work, effort, or money of another without offering to trade something of value in return. If both partners to the trade don't expect to gain, they are free to go elsewhere. All parties to a voluntary transaction must gain.
A system that sacrifices the self to society is a system of slavery--and a system that sacrifices thinking to coercion is a system of brutality. This is the essence of any anti-capitalist system, whether communist or fascist. And "mixed" systems, such as today's regulatory and welfare state, merely unleash the same evils on a smaller scale. Only capitalism renounces these evils entirely. Only capitalism is moral. Only capitalism protects the individual's freedom of thought and his right to his own life.
So much of what goes on in existing economies is immoral because behavior is coerced. Consider the 2008 financial crisis and aftermath. Under capitalism, if an individual or corporation chooses to create a bank, he or it is free to establish the policy that the bank will offer loans only to individuals and businesses the bank regards as creditworthy. The government may not force the bank to lend money to those it regards as unable to repay a loan or as too risky for business. Nor may the government dictate or limit the interest rates or other terms or conditions that the bank chooses to offer. The bank owner or owners are free to decide how they will run their business at every step and turn; free to open new branches, to purchase other banks, to purchase insurance companies, and to expand or diversify their bank in countless other ways. They are free to maximize their profits and to grow and thrive and prosper to the best of their ability. The only thing they are not free to do is to use physical force or fraud (indirect force) against people. If the bank’ policies lead to success, its success is good for the bank, good for its owners, and good for its customers. Remember, the bank can only succeed if it serves customers, that is, gives them what they want and value. If the bank’s policies lead the bank to failure, it may not seek a bailout from the government; nor may the government offer to bail out the bank. Under capitalism, bankers and banks, like all individuals and businesses, are responsible for the consequences of their decisions, whether good or bad, profitable or not. Consequently, under capitalism, if a bank fails, it files bankruptcy or offers itself for sale on the cheap or goes out of business; its owners suffer losses; and its customers find other means through which to save or borrow money.
But none of this occurred; government forced banks to behave as government demanded and government bailed out and took over banks.
Under capitalism, an automaker is free to manufacture and market cars and the company is free to succeed or to fail accordingly. The government may not force the company to sell a particular kind of car, nor force it to pay its employees a particular minimum or maximum wage, nor force it to contract with a particular vendor, nor a union, nor anyone else. The automaker is free to make all such decisions according to the judgment of its owners. If the automaker uses good judgment and succeeds, it is free to keep, use, and dispose of its profits. If it uses poor judgment and fails--or if its competitors outperform it such that it cannot remain profitable--the automaker may file for bankruptcy or offer itself for sale or close its doors. But it may not seek a bailout from the government. Under capitalism, individuals and corporations legally own not only their profits but also their problems, and the government is prohibited from intervening in the marketplace. But, the government has dictated what kinds of autos, their sizes and performances, and the wages that they had to pay employees.
In a system such as the mixed economy, when actions occur because of coercion from government, the system is immoral. Under capitalism, the initiation of physical force is barred from human relationships. Citizens may delegate the use of retaliatory force to their government, which may use force only in retaliation and only against those who initiate its use. Those who initiate force against others are met with force by the law. Government regulation, by contrast, coerces behavior. It subordinates the businessman's judgment to the decrees of government officials, who impose their will, not by reason, but by physical force.
So why teach business ethics as if morality was anything other than free market capitalism? Just teach what is required for free markets and capitalism to exist and endure and you have taught ethics.

Regime Uncertainty

Pratt and I have blogged about regime uncertainty before.

Robert Higgs writing on Mises.org stated
Between 1935 and 1940, this matter attained prime importance. So many businessmen and investors lost confidence in their ability to forecast the future property-rights regime that few were willing to venture their money in long-term investments. They constantly sought clarification of the government’s designs, but President Roosevelt merely continued to rage against “economic royalists” and to blame a “strike of capital” for the economy’s ongoing troubles, including the depression of 1937-38, which played havoc with the general public’s confidence in the New Deal. Treasury Secretary Henry Morgenthau tried repeatedly to persuade the president to make a public statement that would reassure investors, and as the president continued to reject his entreaty, Morgenthau became so frustrated that in a 1937 cabinet meeting, he blurted out to his boss: “What business wants to know is: are we headed toward Socialism or are we going to continue on a capitalist basis?” (qtd. in Higgs, Neither Liberty Nor Safety, p. 114). Astonishingly, Jim Farley and even Henry Wallace backed up Morgenthau’s insistence that the president spell out what sort of economic system the administration sought to foster.


I do not know that the regime uncertainty that an increasing number of commentators and others have perceived recently is comparable to that of the latter 1930s — by now there’s not much real capitalism left for the government to destroy, in any event. However, it is clear that the government’s frantic actions of the past several months have created a situation in which investors have little confidence about the character of future property rights in the United States. The takeovers of Fannie, Freddie, and AIG, the massive interventions into finanancial markets, the huge bailouts of banks and other financial institutions, mixed with letting Lehman Brothers go down and resisting a bailout for the Big Three auto manufacturers (so far, at least) — all these actions, and others, imply that a rational investor would do well to attach a huge risk premium to any money he puts into investments even for the intermediate term, not to mention the long term.

THE DIGITAL SURVEILLANCE STATE: VAST, SECRET, AND DANGEROUS

Over the summer I finished Stieg Larssons trilogy (I loved all three and he turned me on to the Scandanavian mystery writers - Mankell, Fossum, Larrsen, Indridason, Nesbo, etc) - the last book dealing with a mysterious, shadow, intelligence group in Sweden.

Fiction merges with the Digital Surveillance State:

Perhaps the most disturbing aspect of our mammoth Surveillance State is that the bulk of its actions are carried out not by shadowy government agencies, but by large private corporations which are beyond the reach of democratic accountability. At this point, perhaps it’s more accurate to view the U.S. Government and these huge industry interests as one gigantic, amalgamated, inseparable entity — with a public division and a private one. In every way that matters, the separation between government and corporations is nonexistent, especially (though not only) when it comes to the Surveillance State. Indeed, so extreme is this overlap that when Michael McConnell was nominated to be Bush’s Director of National Intelligence after serving for a decade as Vice President of Booz Allen (prior to which he was head of the NSA under Bush 41 and Clinton), he told The New York Times that his ten years of working “outside the government,” for Booz Allen, would not impede his ability to run the nation’s intelligence functions. That’s because his Booz Allen work was indistinguishable from working for the government, and therefore — as he put it — being at Booz Allen “has allowed me to stay focused on national security and intelligence communities as a strategist and as a consultant. Therefore, in many respects, I never left.”

As the NSA scandal revealed, private telecom giants and other corporations now occupy the central role in carrying out the government’s domestic surveillance and intelligence activities — almost always in the dark, beyond the reach of oversight or the law.

21st century draft horse?

Or we can rephrase the entire posting as “How comfortable would you feel working at your present job alongside someone whom you would rate as among the least competent 25 percent from your high school?”

BP and the Black Swan

THE BLACK SWAN
The Black Swan Theory was developed by Nassim Nicholas Taleb to explain 1) the disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology, 2) the non-computability of the probability of the consequential rare events using scientific methods (owing to their very nature of small probabilities) and 3) the psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.


Is the BP Macondo well in the Gulf of Mexico a black swan?
An email from a manager at BP said “WHO cares, it’s done, end of story, will probably be fine.” This was in regard to the decision to use only a few centralisers when cementing into place the pipe that ran from an oil reservoir 13,000 feet below the sea floor to Deepwater Horizon, the drilling rig floating 5,000 feet above it. The cement failed four days after the e-mail was sent, on April 20th. Oil and gas rushed up the well, dooming the rig and 11 of her crew.
Is the blowout due to corruption or bad management?
According to BP’s partner in the well, Anadarko Petroleum “The mounting evidence clearly demonstrates that this tragedy was preventable and the direct result of BP’s reckless decisions and actions. Some in the American oil industry think this reflects a poor corporate culture at BP, in which personal advancement has depended more on cutting costs than on technical proficiency. When Mr Hayward, with a background in exploration, replaced John Browne, much more associated with finance, in 2007, he emphasized a commitment to safety, with ambitious company-wide schemes meant to deliver these results. But chief executives cannot renew cultures without years of protracted and increasingly disseminated effort to that end.
Additional spending of $7 million to$12 million on a safer wellhead piping structure might have prevented natural gas from seeping to the surface and blowing up the rig. So, by saving several million, it has cost BP $20 billion and its shareholders initially $87 billion in stock market value.
In 2003, the Interior Department agreed with oil companies that installing a $500,000 acoustic shutoff switch on every offshore rig would be unreasonably expensive (even though such a switch would likely have prevented all that oil from spewing out). Of course, now that BP is staring at billions of dollars in clean-up costs and the prospect of bankruptcy, that $500,000 switch looks like a bargain. A single well out of the thousands drilled and developed by BP across the globe is responsible for wiping out $87 billion in shareholder wealth and causing a cash dividend that was providing a 6% yield to evaporate. Severe damage has been done to the shares of Anadarko and Mitsui, BP's partners and Trans-ocean the rig owner. By comparison, Exxon's market cap fell only less than 6% in 1989 after the spill in Alaskan waters from a single tanker, the Exxon Valdez.
How should black swans be dealt with?

Some argue that the Precautionary Principle should be followed for every decision. The precautionary principle says that if we are embarking on something new, we should not go ahead until we are convinced it is safe. But this means that many innovations will never see the light of day.

Taleb argues that there should be a redundancy to protect against the results of the event. He points out that Mother Nature has created redundancy – two eyes, two kidneys, and so on. This is what risk management should be about. He says that the financial crisis of 2008 was not a Black Swan, only the result of fragility in systems built upon ignorance—and denial—of the notion of Black Swan events. He provides an analogy, “You know with near certainty that a plane flown by an incompetent pilot will eventually crash.” Taleb’s approach takes no account of the costs of redundancy. His view is that when the event happens it will overwhelm any marginal cost of not having a redundant system.

Was this event a Black Swan?
Accidents of this type are unusual but not that rare. During the last decade, there were 72 offshore blowouts which caused significant spills, compared to 15 the previous decade. Naturally, the more wells that are drilled, and the farther underwater that equipment must operate, the more likely an accident is to happen. Despite these facts, BP was so confident that industry risks were overblown that they cancelled their accident insurance three years ago. BP clearly decided to save time and money at the expense of safety precautions.

Is a Black Swan event like any other – it involves tradeoffs and because it is a low probability event the costs of containing its results if it occurs are not worth it. If the odds of an event occurring are .00000000001 and the cost is $100 billion, the expected value is relatively small. In the BP case the odds of a blowout were considerably higher . So why did risk management not take a blowout into account?

Journal of Libertarian Studies

This journal, founded in 1977 by Murray Rothbard and housed by the Mises Institute is really a wonderful source of background in liberty and civil society.

The current issue has an accessible article by Tom Woods (the instructor for the online Mises Course in the New Deal which begins Sept. 6) on the Warfare State and the opportunity cost of the military. The entire article is worth a read, the excerpt below might tempt you to a full read:


Murray Weidenbaum made a similar point when he wrote that to convey the
true costs of the military establishment in a meaningful way it was necessary to
go beyond billions of dollars spent and consider also the


thousands of men and women pulled away (voluntarily or otherwise)
from civilian pursuits, millions of man-years of industrial effort, millions
of barrels of oil pumped from the earth, and thousands of square
yards of planet space filled with equipment and debris. In short, the
real cost of military activities should be measured in human and natural
resources and in the stocks of productive capital absorbed in producing,
transporting, and maintaining weapons and other military
equipment. It is in the sense of alternative opportunities lost that military
spending should be considered—the numbers of people
employed by the military, the goods and services it purchases from the
private sector, the real estate it ties up, and the technology devoted to
it. Not only do we lose the opportunity for civilian use of goods and
services, but we also lose the potential economic growth that these
resources might have brought about. (1974, pp. 28–29).

The scale of the resources siphoned off from the civilian sector
becomes more vivid in light of specific examples of military programs,
equipment, and personnel. To train a single combat pilot, for instance,
costs between $5 million and $7 million (Dunnigan 2003, p. 164). Over
a period of two years, the average U.S. motorist uses about as much fuel
as does a single F-16 training jet in less than an hour. The Abrams tank
uses up 3.8 gallons of fuel in order to travel a single mile. Between 2
and 11 percent of the world’s use of 14 important minerals, from copper
to aluminum to zinc, is consumed by the military, as is about 6 percent
of its consumption of petroleum (Biswas 2000, p. 306). The
Pentagon’s energy use in a single year could power all U.S. mass transit
systems for nearly 14 years (Sidel 2000, p. 441).
Still other statistics illuminate the scope of the resources consumed
by the military. “Since 1951,” Melman noted, “the budget of the
Department of Defense each year exceeds the net profits of all U.S. corporations.
So, in finance capital terms, that means that the management
of that budget controls the largest single block of finance capital
resources” (1989). According to the U.S. Department of Defense, during
the three decades from 1947 through 1987 it used (in 1982 dollars)
$7.62 trillion in capital resources. In 1985, the Department of
Commerce estimated the value of the nation’s plant and equipment,
and infrastructure, at just over $7.29 trillion. In other words, the
amount spent over that period could have doubled the American capital
stock or modernized and replaced its existing stock (1988, pp.
55–59).

Peter Gordon's Recommended reading list

How to Change the System

The Founders did not trust democracy. Many of them noted that no democracy in history has lasted. A democracy becomes mob rule sooner or later. So the Founders attempted to encase democracy in a Republic. It set up separation of powers ala Montesque, and it created a constitution that was supposed to ensure small government. But, a few of the Founders like Hamilton and Madison wanted strong federal government, as they stated in the Federalist Papers. Madison, while otensibly a small government person, argued for phrases in the Constitution such as the Welfare Clause and the Commerce clause, expectingg that these would provide the flexibility necessary for federal government to become more powerful.

We are now at the point the Federal Government is way too powerful; the Courts have allowed it to use the Commerce Clause to regulate anything and everything and used the Welfare Clause to mean anything deemed to be in the public interest can be done or provided by the federal government. The Congress is corrupt, the Executive Branch is corrupt,and the courts have no idea what the Constitution means. How can the original intention of the Constitution be captured again?

The Founders wanted a Congress composed of citizen-farmers, people who would leave their occupation temporarily to serve the country and then return quickly to their occupation. What we have now is a permanent class of politicians. Perhaps term limits would move in the right direction. What are the economics of term limits? Limits would stop the Charles Rangel, Maxine Walters type behavior based on the thought that the Congress people are privileged and can do what they want. But, would it create a moral hazard problem? What would it mean for the behavior of a Congressman in his last term? Since he would not need to appeal to voters, would his behavior change?

In business it has been found that the more a person's compensation can be linked to performance, the more productive is the person. Can we establish such a relationship with Congress? What would we want Congress to do -- what is its objective? It shouldn't be passing laws since that creates more problems. Perhaps we could require that a Congressman pays out of his own money, for any bill he introduces. This would incentivize them to not introduce bills. Perhaps we could offer Congressmen options that would be "in-the-money" only if the economy performed well over a period of time nd only if a panel of experts or a board of voters determined that nothing the Congressmen did reduced liberty. Perhaps they would learn that the economy works best when left alone.

We could probably figure out a way to incentivize Congress to do what we want -- the problem being what "we" want is often impossible becase some want the opposite of others. So, any suggestions on how the problem can be solved?

Mises Institute online

This online course taught by historian Thomas Woods runs from September 6 through October 22, 2010. It examines the critical period of American history from the stock market crash of 1929 to the end of World War II, focusing on domestic affairs. Topics include: the 1920s boom and bust, the Hoover record in light of recent scholarship, the New Deal programs and agencies, the evolution of the Supreme Court, international parallels, political and intellectual opposition to FDR, and the economic consequences of World War II. Readings include primary documents, works by contemporaries, and recent scholarship and commentary.

Problems, parties and possibilities

Boyes points out the role that the current administration continues to play in the fiscal irresponsibility that has seemed to accelerate over the past 5 administrations.

I wonder, is this irresponsibility party agnostic and a result of the expansion of the Welfare/Warfare state or can it be attributed to a particular party or ideology?

The deeply flawed and incestuous relationship between the executive and legislative branches of the state - at the local, state or federal level seems to me to be more of a culprit in the expanding corruption we see in the state - all parties or factions participate willingly in the charade that is governance and which, should more accurately be called reelection theater.

Boyes points out the relationship between public sector unions, the legislature and the Obama admininstration as an example of this theater and rent seeking. The message that "we have to save teachers" resonates with the masses. Simple economic reasoning (and intuition) would lead one to wonder, why any job would need to be "saved".

We have both previously blogged on the benefit of the market order - the voluntary exchange at the heart of this form of emergent social order leads to positive sum outcomes - wealth creation.

Boyes and I continue to point out that, setting aside the moral issue of statism, the Welfare/Warfare state leads to, at best, zero sum outcomes, and most often negative sum outcomes - that is wealth destruction.

Our continuing dialogue is an effort to underscore this essential distinction and to engage with concerned citizens to consider both this pragmatic reason for a change in thinking about the role of the state.

The Teacher Union Bailout

Pratt refers to the public pension problem faced by cities, states, and the federal government as being the Greek problem. He is correct that the greatest burden local and state governments have right now is the public employee pensions. And the problem is getting worse. But, the Obama Administration refuses to let states reduce that problem. The latest is a bailout sent to states in order to "protect teacher jobs."

The $26.1 billion legislation that the House approved on a largely party line vote is a payoff to political cronies. It is dangerous to the health of the states.
The President says that without this $10 billion, teachers will be fired this fall. But, it is not true. If teachers unions were really concerned about saving teachers’ jobs, they could easily agree to pay-freezes or to start paying for their own health care. The unions claim that the $10 billion public-education bailout will save 100,000 teaching jobs. Woops! Doesn’t that mean taxpayers are paying $100,000 per job? And, as noted by the Heritage Foundation, using a conservative estimate of $300 in annual dues paid by each job “saved”, the NEA and AFT have a minimum of $24 million in dues at stake.

President Obama originally just asked for this and other new bailouts to be tacked onto the deficit. But the Senate balked. So instead, Majority Leader Harry Reid (D-NV) identified $11.9 billion in unspent food stamp stimulus funds. And to make up the rest, Congress levied a $10 billion tax hike on American companies that compete overseas. Doesn’t this sound eerily like Smoot Hawley?

And what makes matters worse is that any state accepting the bailout will not be able to reduce its budgeted education budget in the next two years.So the states who accept the bailout are tying their own hands and feet in their attempts to reduce budget problems.

Greece: The Canary in the U.S. Coal Mine?

Steven Horowitz writes:

With everything that was going on in the U.S. economy this past winter, the beginnings of the crisis facing the Greek economy were certainly easy to miss. As that crisis has now come to full flower, American observers overlook it at their peril: Greece’s problems, and those of other European countries, might well represent a possible future for the U.S. economy if we cannot get our fiscal house in order.

Like a canary in a coal mine, the crisis in Greece should serve as a warning that polluting the fiscal air with large budget deficits, a growing public sector, and high debt-to-GDP ratios is a sure way to kill an economy. A serious examination of the situation in Greece should lead other Western countries to think carefully about the paths they are on. Continuing growth in government expenditures means continued deficits, which means growing debt—which means temptation to inflate and the possibility of default.

How public worker pensions are too rich for New York's - and America's - blood

The most obvious example of the clear and present danger of expanded state spending in the Welfare and Warfare state are the pension obligations found at the local level.

We have blogged on this topic before, the financial crisis will be on the order of the Greek catastrophe and, as public sector employees fight to maintain this largess we are destined for, to paraphrase Paul Seabright, turbulence of a magnitude not seen.

Click the link to read a recitation of the problem, below is a tidbit I have posted in our teachers' lounge (more accurately, a leisure area provided by taxpayers)

New York’s pension rules make it pay more to retire than to work. And the horrible habits here are a window on a national pension picture that’s looking more disastrous by the day.

Tacking on overtime is only one of a long list of union-won perks behind New York’s rising pension burden. To dodge a federal law capping public pensions to $195,000 a year, in 1997, Albany created a second fund for "excess benefits." Twenty-eight New York employees, nearly all teachers, exploited the loophole, leaving taxpayers with a $6 million check this year alone.

Read more:
http://www.nydailynews.com/opinions/2010/08/08/2010-08-08_how_public_worker_pensions_are.html#ixzz0w8tzkZe2

Adam Smith: An Enlightened Life

Nicholas Phillipson’s diligent biography is a quieter work of scholarship, ignoring Smith’s disciples and critics to reclaim him for the historians. Mr Phillipson is more interested in documenting Smith’s influences than in exploring his influence. He traces the ancestors of Smith’s ideas, but largely ignores their many offspring, legitimate and illegitimate.

http://www.economist.com/node/16740415?story_id=16740415&fsrc=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+economist%2Ffull_print_edition+%28The+Economist%3A+Full+print+edition%29

And we should subsidize education? . . .

And we should subsidize education? . . . I would be surprised if my students studied 14 hours a month.

Education
Leisure College, USA: The Decline in Student Study Timeby Philip Babcock, Mindy MarksAmerican Enterprise Institute
August 05, 2010

In 1961, the average full-time student at a four-year college in the United States studied about twenty-four hours per week, while his modern counterpart puts in only fourteen hours per week. Students now study less than half as much as universities claim to require. This dramatic decline in study time occurred for students from all demographic subgroups, for students who worked and those who did not, within every major, and at four-year colleges of every type, degree structure, and level of selectivity. Most of the decline predates the innovations in technology that are most relevant to education and thus was not driven by such changes. The most plausible explanation for these findings is that standards have fallen at postsecondary institutions in the United States.

URL: www.aei.org/docLib/07-EduO-Aug-2010g.pdf

Why Government Can’t Create Jobs

This Freeman article from 1993 is more relevant today than ever before.

Government spending, including spending designed to stimulate employment, may be derived from three sources. The first is taxes. If individual income taxes are raised by $3 billion to fund our highway project, disposable income is reduced by $3 billion. Consequently, individuals will demand less clothing, fewer appliances, and so on. Private sector employers will notice and respond by laying off workers. Since most of us will agree that we can spend our income more efficiently than can the government if only for the fact we do not have to pay a bureaucratic overhead charge—lay-offs in the affected companies will exceed the employment added by companies constructing the new highways.

Government - choosing winners . . . and losers

Of late I have found Richard Posner a bit curious - while consistency may be the hobgoblin of a small mind, Posner's lack of intellectual consistency reflects less evolution and growth than it does an odd ideological bent that is reminiscent of Brad deLong or Paul Krugman.

That said, his most recent post on the relationship between unions and governance is illustrative of the fear our founders had over the role that special interests might play in society. As we all know, government selection of winners necessarily generates losers and the process of centralized planning is at best a zero sum game and most often a negative sum game.

Posner writes:

Unions are weak in the private sector; only about 7 percent of private workers are unionized. But unions are powerful in the public sector—about 30 percent of public employees are unionized—and have contributed to the high wages of such employees. By swelling the labor costs of cities and states, these high wages have forced them to raise taxes and cut benefits in the midst of the most severe economic downturn since the Great Depression.

Even in the private sector, though unions are weak, employers are concerned that the pro-union policies of the Obama Administration will result in greater unionization and hence higher labor costs. This concern is a source of uncertainty, which slows economic activity. Under uncertainty consumers increase their savings (much of which may not get invested productively, at least without a considerable lag) and producers increase their cash balances.

Leaving aside the key issues of inflexibility in labor markets and increased uncertainty, another important component of the union of labor interests with the centralized state is the combination of expanding rents available to both sides of the relationship, the impact on the losers in society not a part of this mutually beneficial, wealth destroying combination and the implications to individual liberty.

While I have not read Jonas Goldberg's book, the potential for a Peronism or other forms of state domination are clear in the presence of large unionized public work forces. While the expansion of the state is generated by both the right and the left, the left's affirmation of public unions is a clear and present danger to liberty, just as the rights insistence on sacrificing rights in forms such as the Patriot Act.

Posner points out two of many examples of the wealth destruction inherent in the union between organized labor and the state. The first is opposition to the classical liberal stance on trade and the second is for all projects funded by the $787 (now $862) billion stimulus enacted in February 2009 comply with the Davis-Bacon Act, which requires payment of union wages.

These and other less overt examples of the union between organized labor and the state generate the uncertainty that amplifies the direct wealth destruction that is inherent in the joint actions of the state and unions.

Becker's reply points out the immediate, short term and long term potential harm of the axis of a union influenced state.

The real threat to a robust recovery on the labor side has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits. In this way the obvious pro-union-pro-worker bias of the present government has contributed to a slower recovery, especially in labor markets. This helps explain the depressingly slow decline in unemployment rates and in the number of workers who have given up looking for jobs.



Posner asserts that the current president has paraphrased Ronald Reagan

“labor is not part of the problem. Labor is part of the solution.”

If the chief executive is referring to unions then, of course, this paraphrase is political pandering on the order of a Peron.

A Different Look at Classical Liberalism

In an interesting coincidence a book review over on Mises expands on my post of Aug. 2 by referencing Tucker, deTocqueville and the process that may in fact lead to a sacrifice of liberty.

This is also interesting in light of a conversation I had last week with my brother who is an advocate of liberty and atheist. He tends to dismiss the institution of religion with a hostility that is intense and masks any effort to understand the role that religion plays in civil society.

Tucker writes:

It was during this period that Ralph Raico went to work on his dissertation. He hit the target with an extended discussion of three massively important figures in the history of liberalism for whom a religious orientation, and an overarching moral framework, was central for their thought: French Protestant Benjamin Constant (1767–1830), French Catholic Alexis de Tocqueville (1805–1859), and Lord Acton (1834–1902).

All three were distinguished for

consistent antistatism,

appreciation for modernity and commerce,

love of liberty and its identification with human rights,

a conviction in favor of social institutions such as churches and cultural norms, and

a belief that liberty is not a moral end in itself but rather a means toward a higher end.

Ours is a varied tradition of secularists, yes, but also of deeply pious thinkers. What drew them all together was a conviction that liberty is the mother and not the daughter of order.

What's more, these thinkers are people whom conservatives have tended to revere if only in passing, but have they really studied their thought to see their radicalism, their deep love of freedom, and their true attachment to the old-liberal cause?



Raico provides a detailed reading of their work in all these respects and shows that one need not embrace statism, and that one can be a consistent and full-blown liberal in the classical tradition, and not come anywhere near fulfilling the stereotype that conservatives were then creating of libertarians.

Individual rights and state privilege

Boyes refers to Tucker's collection of essays that outline the dichotomy between liberty, theindividual sphere of thought and action protected from coercion, and the state.

Tucker also recognizes the consequences of a free society supported by civil institutions - the creativity, innovation and exploration of a liberal society generates benefits that enhance opportunity and choice.

If market orders carry such powerful benefits, what leads then to an expansive state, one which effectively curtails then limits the market order and the benefits that are inherent to emergent, evolutionary orders?

As I near the end of deTocqueville, I think he identifies part of the process that leads to the false notion of state security. Hayek calls this a false individualism.

In the final book of volume 2 of Democracy in America (chapter 2) deTocqueville links egalitarianism with the democratic process. As the notion of egalitarianism becomes more and more entrenched in the minds of the masses there appears to be an inevitable evolution in public opinion toward statism.

As the condition of men becomes more equal among a people, individuals seem of less importance, and society of greater dimensions; or rather every citizen, being assimilated to all the rest, is lost in the crowd, nothing stands conspicuous but the great and imposing image of the people at large. This naturally gives the men of democratic periods a lofty opinion of the privileges of society, and a very humble notion of the rights of individuals; they are ready to admit that the interests of the former are everything and those of the latter nothing. (Book 4 chapter 2 - page 831 of the Bantam Classic edition)

Writing in 1835 of his 1830-1 visit to the United States, deTocqueville captures a process that we see writ large today. The misplaced confidence in egalitarianism as a virtue and goal for behavior leads to confidence in the state and a value on state (society or people at large - this mass is ultimately the state) knowledge, action and purpose. Further individual rights are willingly sacrificed to the privileges of society (the state).

deTocqueville goes on

They are willing to acknowledge that the power which represents the community has far more information and wisdom than any of the members of the community; and that it is the duty, as well as the right, of that power to guide as well as govern each private citizen. (p. 831)

This 1835 analysis informs the process that we see today. Tucker's Bourbon for Breakfast, Hayek's Use of Knowledge in Society and Economics and Knowledge and the classical liberal school of thought argue the opposite - individuals in society have far more information and wisdom that does society. But this egalitarianism has been internalized to such an extent that today any view that opposes the notion that assumes it is the duty and right of the state to guide and govern society is dismissed out of hand. This dismissal comes not only from public intellectuals such as a Paul Krugman or a Noam Chomsky but also though the intellegensia that dissiminates and reinforces statism - writers for the New York Times, Sean Penn, or Charlie Rangel suggest the breadth and depth of media and "intellectual" commitment to a notion of philosophy that de Tocqueville identified after his travel through early 19th century America.

Given the path dependence that results from emergent and evolutionary informal institutions - the beliefs, conventions and norms that shape society, it seems obvious that, to the extent that statism is rooted in egalitarianism and majority domination, future attempts to restore a civil society based upon classical liberal principles will face both short and long term challenges. These challenges make for an important and consequential discussion.

The Mises Institute set of online courses represent an important beginning to anticipate attempts to restore civil society. Tom Woods' Sept, online course in the New Deal (see blog posting last month) is an example of the efforts that can constructively lay the foundation for a return to civility. By understanding the process that deTocqueville articulates individuals can reflect on this tradeoff between individual rights and state privilege.

America’s Ruling Class – And the Perils of Revolution