Both books are excellent, the first provides an historical overview of the pre and post Adam Smith debate about the foundations for mercantilism (protectionism) and free trade. Irwin traces much of the thought back to classical works of philosophy.
Wealth and the Poverty of Nations was an outstanding read (must for economic historians). This book is tougher going but worth it as Landes goes into significant detail. If time is an issue, I would recommend Mokyr.
I loved reading this book - Mokyr does a wonderful job, well let me quote from this Amazon review:
"Mokyr has demonstrated, yet again, that he is one the best economic historians around. His book is a treasure trove of facts and insights about technological progress often overlooked in other accounts. Further, his argument that economics might do well to adopt the methodology of evolutionary biology instead of the standard application of Newtonian physics is cogent and convincing."--Howard Bodenhorn, St. Lawrence Univ.
"Joel Mokyr is a first-rate scholar who has read a wide body of literature. The book is very well written, lively and engaging. It is closely reasoned and well executed"--Nathan Rosenberg, Stanford University
"Joel Mokyr likes telling his story and he tells it well; his book makes for good reading and rereading, and this in itself sets him apart from many of his fellow economic historians."--The New York Times Book Review
According to Joel Mokyr, economic growth is the result of four distinct processes: Investment (increases in the capital stock), Commercial Expansion, Scale or Size Effects, and Increase in the Stock of Human Knowledge (which includes technological progress proper as well as changes in institutions). Throughout his brilliant book, he correlates technological creativity with economic progress throughout classical antiquity, the Middle Ages, the Renaissance, the Industrial Revolution, and then into the later 19th century.
I am pleasantly surprised - I could not finish The Coffee Trader and his latest The Whiskey Rebel received negative reviews, but this is wonderful. I have the sequel - A Spectacle of Corruption on order.
Wow, talk about an unreliable narrator. A very intense exploration of . . . addiction, obsession, jealousy and . . . Charles Dickens. Excellent historical fiction - made me realize how little I know about this period, Dickens and Dicken's fiction. Very long, but worth it. I have - The Terror, on my reading list.
As we continue to reflect on Gordon Woods massive view of the nascent American republic - 1789-1815 I continue to consider the CATO Unbound discussion from last month, its relevance to our analysis of the historical conflict of visions in our society and the apparent triumph today of the unconstrained view of life.
The entire Sept. discussion is well worth a read if you have not yet been over there, but the commentary - The Best of the Blogs is particularly relevant.
A bit of heads up - Amy Willis tells me that the APEE conference in April will feature a session on blogs, she writes:
As you may know, the annual conference of the Association of Private Enterprise (APEE) is coming up, April 10-12, 2011 in Nassau, Bahamas. The theme of this year's conference is "Institutional Evolution Toward Freedom and Prosperity". (Please see below for some elaboration on this theme.) As part of this program, I am organizing a panel presentation, "The Institutional Evolution of the Blogosphere", made up of of active bloggers. My hope is that each blogger can comment on their objectives, the success with which they feel they've met, and especially the evolution of this particular form of communication. That is, how has the blogosphere changed since each began? How effective is the blogosphere in terms of questions of political economy? How does this venue differ from other forms of (mass) communication? How has the blogosphere influenced ongoing conversations about political economy? What are we missing thus far and/or what do we have to look forward to from the blogosphere? And, of course, any other questions you feel pertinent.
Feinsten has an interesting response to McCluskey over on CATO Unbound.
As I mull over this process I can identify in Feinsten the elite and perhaps unconstrained vision of the planner. He writes that "we" can . . . and then goes on to describe a process he deems appropriate.
Creativity, an essential ingredient of adaptively efficient societies, entrepreneurship, and Schumpterian destruction seems to me to be an emergent and evolutionary outcome of natural liberty. For Feinstein to assert that "we" can go further implies a plan, set of goals and overarching policy.
Perhaps I am misreading this Yale scholar and his extension is not an intellectual justification for centralized action - centralization that can stifle rather than encourage emergent solutions to as yet unanticipated challenges.
The valuation of creativity and innovation is an ongoing historical process that we believe can go a good deal further. This belief perhaps helps sharpen the difference between us and McCloskey. . . . Now, in the twenty-first century, our views on human creative potential need to be developed even further
We seem the hubris of the elite here in a demand that a problem or opportunity exists and something needs to be done. What is that, you ask?
Feinstein answers: We envision a scenario in which individuals are taught the process of creative development and are encouraged to embark on their own paths of discovery and development. This can happen in the classroom, the workplace, or the open spaces of personal time.
We know that "the classroom" at least administered by the state is not a successful institution for fostering much of anything. The workplace, as Milton Friedman pointed out has an important social responsibility and it most certainly does not include a Feinstein (or Pratt agenda) and the last comment is ambiguous and a little terrifying.
Is Feinstein suggesting that the state invade by personal space to determine what is open (the state's space) and closed (my space). This last phrase cries out for elaboration and explanation.
The Nov. 2009 discussion - How the World got Modern is an interesting read to this topic.
Boyes directs our attention to a key element in Wood's analysis of the federalist and Jeffersonian period and a central process that shapes emergent and evolutionary orders.
He writes: p. 471 "Americans knew that the mode of government in any nation will alwyas be moulded by the state of education."...."If Americans were to sustain their republican experiment and remain a free and independent people, they must be taught not just their rights but also their duties as citizens. They must be educated in their moral obligations to the community." This seems to be Wood's view; I do not see it justified by stateements of founders. What is the moral obligation to the community -- isn't it the non-aggression principle?
Adam Smith spent some time *(as did Hayek) on the institution of education and the process of learning. This process of learning and the impact that it has on change in society is of interest - not only to the teachers who make up the ASET book club but to any citizen. I know I sound like a broken record, but the FEE podcasts have been useful to me in better understanding both this process, the responsibility that I personally have as an advocate for liberty and the role that teaching and learning plays in my individual responsibility. Geoffrey Lea of FEE paraphrased Leonard Reed who recommended that lovers of liberty act on their liberty - that is consistently exercise that liberty.
He also made a key point for me in terms of civil discourse and persuasion. Lea is an Aristotlean and he asserts that there are 2 ways to argue or persuade - the first is to inform (logos) that is present the facts or information and the audience will use that information to make an informed decision. An example might be that if you live in New Orleans and the weatherman indicates that there is a Grade 5 Hurricane offshore and it is headed for your city - you might take action. Lea said that in terms of advocating liberty and responsibility this type of persuasion will not be very effective.
The second is to advocate a change in values. The example he presents is that of egalitarianism v liberty. For one who values equal outcomes there is very little that "fact" or "information" will accomplish in terms of change. Values are deeply held and only marginally formed by these types of external stimuli. So, what arethe options? Douglass North and others argue that these values, he calls them informal institutions and includes norms, conventions and morals, emerge and evolve incrementally and very slowly over time.
So, our interactions our efforts to teach and/or persuade must take a very long term perspective and perhaps our responsibility as lovers of liberty and responsibility is to follow Leonard Reed's injunction to act on our liberty.
Herbert Simon has stated the issues succinctly:
If… we accept the proposition that both the knowledge and the computational power of the decisionmaker are severely limited, then we must distinguish between the real world and the actor's perception of it and reasoning about it. . . . Our theory must include not only the reasoning processes but also the processes that generated the actor's subjective representation of the decision problem, his or her frame. (Simon, 1986, pp. S210-11)
North's reference to Simon is instructive - reality appears to be what we believe it to be, not what is empirical. Thus the creationist belief trumps Darwin and civil interactions with believers must recognize the role of perception and belief and the disconnect between these informal norms and empirical measurements. So, a belief in equal outcomes is a perception and civil efforts to argue that this will reduce current and future growth, standards of living, opportunities and wealth are likely to have no positive impact.
North goes on:
The analytical framework we must build, must originate in an understanding of how human learning takes place. We have a way to go before we can construct such a theory but cognitive science has made immense strides in recent years - enough strides to suggest a tentative approach that can help us understand decision making under uncertainty.
Learning entails developing a structure by which to interpret the varied signals received by the senses.
I like the fact that North articulates our human limitations. We do not understand how learning takes place and I think that this lack of understanding is on point in understanding Boyes and my concern about a state monopoly on education. Adam Smith argues, like Wood, that there are strong public good reasons to have the government provide schooling. Our experience with choice here in Arizona, the work of Milton Friedman and an application of the non aggression principle provide the grounds for a reasonable and civil debate on this topic.
North points out the complexity of learning.
The initial architecture of the structure is genetic but the subsequent scaffolding is a result of the experiences of the individual. The experiences can be classified into two kinds - those from the physical environment and those from the socio-cultural linguistic environment.
We just don't know if these are the only two factors but it is clear that measures of intelligence suggest biological differences - Vernon Smith, Douglass North, Eleanor Ostrom all have higher genetically based intelligence than . . . Glenn Beck, Rachel Maddow, Juan Williams or Rush Limbaugh.
But, the cultural and social environment also plays a key role and while I would not want to make this argument, one might argue that those endowed with less genetic intelligence might well have more overall intelligence due to these cultural factors.
The point is, learning is so complex that it seems to be the textbook example of a process to be addressed by the spontaneous order.
Boyes goes on to offer a warning (the unintended consequence) of state mandated schooling.
p. 473 "Most of the educational reformers in these years were less interested in releasing the talents of individuals than, as Benjamin Rush put it, in rendering 'the mass of the people more homogeneous' in order 'fit them more easily for uniform and peaceable government.'" Sounds like brainwashing to me. Sounds like socialism as well as Mao, Stalin, and Hitler youth training organizations.
More than brainwashing I fear a loss of individuality and the evolution of generations lacking the ability to critically consider important questions such as power v liberty and secuity v freedom. These big questions demand a reasoned, civil and thoughtful debate that actively considers the alternative perspectives that are inherent in big issues.
Russ Roberts offers a model of this type of civil discourse in his podcast with Alan Wolfe. They have alternative perspectives on the role of the state and yet their exchange is critical, thoughtful, deep and always civil. Roberts inspires by modeling the civil discourse that is necessary, to my view, for a long term impact through the informal institutional framework that North asserts trumps formal institutions.
Pratt remarks on the self interestedness of the founders, especially the interplay between Hamilton and Jefferson. It is interesting because it shows the internal contradictions we each experience at times. The debate between Federalists and Jeffersonian Republicans was very vitriolic during the late 18th Century. But, it is a debate that has continued until today when we have the tea party versus the progressives. I suspect there will always be those who believe they are especially enlightened and should dictate how others behave. Will there always be those who believe in individual liberty?
Pratt mentions that he did not realize the importance of the non-aggression provision; it is along with private property rights the basis of morality. It is crucial. Both Jewish and Christian faiths are based on the non aggression principal -- consider the Golden Rule and the comparable statement in the Torah.
Chapters 11-13 are crucial reads. They lay out the idea of judicial review and how it came about. Perhaps the worst Supreme Court Chief Justice was Marshall -- he established and created the idea of judicial review. As Pratt noted, neither Jefferson nor Hamilton thought much of an independent judiciary; they surely had not idea of what judicial review would mean.
p. 467 "...many Americans retained a republican faith in the power of government to promote the public good." "Individuals may have had rights but the public had rights as well -- rights that grew out of the sovereignty of the state and its legitimate power to police the society." This is Wood's interpretation of the results of the expansion of corporate charters and local government. I do not see where he obtains the view that many americans had this faith in government and I definitely do not see how this is a republican view.
p. 471 "Americans knew that the mode of government in any nation will alwyas be moulded by the state of education."...."If Americans were to sustain their republican experiment and remain a free and independent people, tey must be taught not just their rights but also their duties as citizens. They must be educated in their moral obligations to the community." This seems to be Wood's view; I do not see it justified by stateements of founders. What is the moral obligation to the community -- isn't it the non-aggression principle?
p. 473 "Most of the educational reformers in these years were less interested in releasing the talents of individuals than, as Benjamin Rush put it, in rendering 'the mass of the people more homogeneous' in order 'fit them more easily for uniform and peaceable government.'" Sounds like brainwashing to me. Sounds like socialsim as well as Mao, Stalin, and Hitler youth training organizations.
The pp 485-end of chapter are very interesting. They detail the private nature of roads and canals and the rent seeking that went on to gain corporate charters. They also detail how the private voluntary charitable societies emerged. In The Voluntary City, there is a great chapter on the friendly societies and how government took them over. The history of penitentiaries is also interesting.
Equality Destroyed in the Name of Equality October 19, 2010 by Chidem Kurdas
Law and government should treat people equally. This old principle may seem obvious and firmly in place, but in fact it’s much violated. Instead, the focus is on income distribution. Thus Robert H Frank in the NYT points to the bad effects of income inequality – like people spending too much money to emulate the rich – and suggests we “try to do something about it.”
His column about the costs of income differences shows no awareness of the costs of equity-promoting policies.
In thinking about the conversation with Boyes over the past 3 weeks dealing with the first half of Wood's view of the federalist period in our history I am struck by the timeless nature of the issues raised, particularly the debate represented by Hamilton and Jefferson. Informing my thinking of this debate is the impact of centralization v decentralization from the libertarian perspective. Over the past weekend I listened to an FEE podcast by Gene Callahan that was provocative and helpful in crystalizing the importance of this discussion.
1. Civil discourse 2. The usefulness of the work of Oakeshott and Hayek in understanding libertarian first principles. 3. How Aristotle, Machievilli, Hobbs, and Oakshott can be used to better round out an understanding of libertarian first principles. 4. Non aggression as an organizing assumption to apply libertarian ideas to important debates.
So, I found Callahan's podcast (a tad over an hour) useful - I learned
1. To remind myself that civil discourse above all is a pre condition for change. 2. Hayek admired Oakeshott and I need to read Rationalism and Politics 3. Oh, so much here - what comes to mind is Aristotle's view of "the one", "the few" and "the many" and the role that the synthesis of these 3 groups had on liberty and freedom. 4. I had never consider the impact of placing non aggression at the lead of the libertarian assumption hit parade.
On to the three chapters that end the first half of Wood.
Boyes does a nice job of outlining the key issued dealing with land. In many ways the relationship between the relative scarcity of the factors of production (land, labor and capital) shaped the evolution of formal and informal institutions in the United States. The abundance of land played a role in the emergence of the United States that has lead to a number of important beliefs about mobility, responsibility and change. Boyes and I have touched on this and page 398 captures the Whitmanesque contradictions of this "capacity of people to reinvent themselves".
This contradiction is most evident in the Burr/Wilkerson episode and reflects the tension that some find in Adam Smith - TMS v WN. The question is what shapes human behavior - justice, benevolence, prudence and self command as Smith argued in TMS. Or is it exclusively prudence, as the Wealth of Nations seems to argue. Or, as Vernon Smith argues are these two facets of the complexity of human behavior which may find different emergent rules in personal spheres as opposed to public ones. Does this relate to the abundance of land, the schemes for allocating this land and the attempts to shape rules to govern land?
The list of famous historical figures - Daniel Boone, Lewis and Clarke, William Henry Harrison seem to me to reflect both private and public motivations and invite an application of Smith's two works to the immediate issue of land and land ownership and the longer term issue of institutional change. Callahan invites libertarians to resist a doctrinaire approach to thinking about historical and political issues and instead concentrate on the various perspectives and messages embedded in these issues. Clearly as complex and self motivated personalities Burr, Madison, Wilkerson and Jefferson shared any number of motivating rules and differing on how there resolved the contradictions that inevitably arose from their underlying efforts to apply a moral code that included various doses of justice, benevolence, prudence and self command. Washington may well have epitomized the last, Hamilton the third, Marshall the first and, well perhaps they all had attributes of benevolence. How they applied their moral outlook, particularly in the sphere was shaped by prudence, self interest and public interest.
The force of unplanned and the resulting unintended orders are illustrated well here in the westward migration's overwhelming of planning (358) and the results of what Wood calls the demographic imperalism of the time. I heard this described by Louis Tambs (he was referring to the westward expansion of Brazil) as conquest by copulation.
Chapters 11 and 12 deal with the judiciary and Wood writes:
"strong indepedent judiciary and a flexible common law were crucial" (431). This is interesting and, as I previously posted, I learned that the judiciary was an afterthought to both Hamilton and Jefferson and was considered unimportant to the checks and balances and federalism that lay at the heart of the success of the emergent set of formal and informal rules. Again, Callahan has a fresh perspective regarding this institutional evolution during this period.
These two chapters resonate through the decades from decisions such as Dred Scott and Plessey to larger than life personalities and efforts to impose an ideology that may well be, in the long run, futile. The importance of the common law and the fundamental of natural law (448) argue for the importance of an independent judiciary and the Marshall impact on the evolution of the court and the role that the courts play in supporting common law was, for me, a second take away of these two chapters. Finally, it is clear that legal, political and judicial evolution is so interrelated and interconnected that efforts to understand these connections seem as important as ideologically based arguments to change this relationshiop.
Matt Welsh's report reveals that the Audacity of Hope may well be another example of the politics as usual and politics as usual tends to be a . . . rough and tumble game.
So, to the extent that this is an accurate representation of what transpired in the murky world of the beltway and this murk is not restricted to the incumbent party if we recall the days of Gordon Libby and Nixon or perhaps the master - FDR.
That said, it is a tad disappointing, if not surprising.
Should we be surprised that Austan Goolsbee has joined in the White House's campaign against the Kochs? Not at all. Outraged or disappointed, if you wanna be. But save some of that disappointment, if it applies, to yourself, for ever believing that smarts, elbow-rubbing, and surface integrity were enough for a single person to avoid or even overcome the awful, awful business of both politics and governance. This is as true in 2010 as it will be in 2012 and every thereafter.
Literally from his first day in office, Obama has been rejecting the "false choice" between "whether our government is too big or too small, but whether it works." The results of such hollow post-ideological pragmatism have been as predictable as the president's political need, two years later, to identify as political enemy No. 1 the family that has donated the most money over the years to the limited-government cause. Left-libertarianism, it would appear, did not survive the collision with governing reality.
Reason's Radley Balko illuminates the response of the elite, the intelligensia (in this case on the left, the response is identical in on the right) in this review of the NPR firing of Juan Williams.
I agree with the assessment that Williams is mediocre at best and reflects the NPR level of journalism - his firing however is instructive about the attitude toward diversity and difference in opinion by the elite.
Chapter 10 is an odd one, sandwiched between the discussion of rapid political and economic change and the evolution of the judiciary.
In his chapter 10 comment, Boyes makes the case that the Native American question and the eventual reservation system may have been the result of the lack of property rights that characterized the native American society.
Terry Anderson, PERC and a generation of natural resource economists might take issue with this view. Instead they might argue that property rights regimes did in fact exist in native American society. Moreover, the Ostrom perspective of informal resolutions to conflicts over what may be called the commons may have been common to native American societies of this time.
But beyond this, the Jefferson/Jackson flexible attitude toward treaties with Native Americans might lay the foundation for an argument that the hegemonic white elites of the nascent republic used the rule of law in a selective manner.
That said, the land rush clearly was one that was accelerated by Jefferson's presidential "purchases" and overwhelmed his efforts in the late 18th century Land Ordnances to give a rational and ordered shape to settlement.
This, to me, is a Hayekian story, in which cabin rights, tomahawk rights, and corn rights reflected a set of informal institutional norms that were recognized by the formal institutions including the courts. deSoto actually references this era in American economic history in the Mystery of Capital as an adaptively efficient process that lead to a firm foundation for economic growth and development.
The theme of these chapters is the "democracy" that took over the country after John Adams' administration. The Federalists wanted the elite to run and control government. Jefferson and the Republicans did not want the central government and pushed more power to the states -- except if Jefferson wanted something such as the purchase of Louisiana Territory or the Lewis and Clark expedition. Then going it without democratic control was OK.
p. 292: "The Republicans were determined to destroy the Federalist dream of creating a modern army and navy." Jefrferson read Napoleon's overthrow of the Bourbon monarchy as "..a lesson against standing armies." As mentioned previously, the Constitution does not allow standing armies -- at least my reading of Article I Section 8 indicates that. Were the Republicans merely following the Constitution? Jefferson wanted a navy to consist of small gunboats that would provide defense of canals and rivers but not go rampaging across the globe.
p. 296: "The Massachusetts legislature had required the second state bank it created to lend at least 20 percent of its funds to citizens living outside of the city of Boston...." Wow, the Barney Franks and Chris Dodds were functioning clear back then.
Chapter 9 Population growth, expansion of territory and the rush to land ownership captured the first decade of 1800.
Rioting occurred as the War of 1812 broke out -- the Federalists liked the Brits, the Republicans did not. It is simply amazing and basically inconceivable to me that Wood's hypothesis as to the source of the rioting is accurate -- that people were drinking more hard liquor.
Chapter 10 The expansion West decimated the Native Americans. This chapter is devoted to the arguments in favor and opposed to the integration of the Indians. Woods gives us his personal lament that neither Jefferson nor Washington before him gave any thought to the cost of destroying a way of life. This makes no sense. The general lack of private property rights to land is what destroyed the Indians. Had they had private property rights it is at least arguable that the property would have remained in the owners' hands.
These two chapters explicate and analyze the republican agenda that lead to one party rule in the US during the first 2 decades of the 19th century.
The centrality of adaptive efficiency and the role that Douglass North's conception plays in economic change is evident - "It was all part of the process of learning . . ." (314).
Wood has outlined the pace and scope of transformation - economic, political and social during this period and the positive result - economic growth and increasing standards of living argue for emergent adaptive efficiency in the new republic.
Chapter 8 - The Jeffersonian Revolution of1800
I must start with a startling assertion by the author in his evaluation that Thomas Jefferson is/was the
. . . supreme spokesman for this nation's noblest ideals and highest aspriations. (277)
The next paragraph provides an attempt to contextualize or limit this incredible assertion. I am eagerly awaiting the book club discussion on this statement.
Another topic, reoccurring then and now, is this idea of American exceptionalism. Jefferson's first inaugural address: American was the world's best hope. (286)
The recent PBS series God in America touches on the seeming consensus and traces the religious foundations of what Jefferson articulated - the United States is the best hope for the entire world, and that implies a responsibility that the United States ignored at home throughout the 19th end 20th century (Native Americas and African Americans - two issues that Jefferson was a clear spokesman).
On a lighter note, I visualize Jefferson as the Dude in the Big Lebowski, doing business in a bath robe.
Chapter 9 - Republican Society
Woods points out the speed of change as he opens this chapter with a description of ". . . the same dynamic forces that had been at work . . ."(315)
The next paragraph points out the futility and hubris of human efforts at design and prediction and underscores the insight articulated by Hayek of the essential nature of understanding institutions as a result of human action and not human design and the task of economics is to underscore what we do not understand.
The transformation of society resonates through this chapter and I wonder about the tension between Jefferson's efforts at control (think his work in the 18th century Land Ordinances, the surveying attempt to construct new states out of the new territories in geometric design and the Louisiana Purchase. A history radio podcast indicates this last issue is illustrative of the essential non heroic nature of Jefferson. I might observe that the slavery question is a much better example.)
"Many others, however, were frightened and confused by what seemed to be a whole society being taken over by money-making and the pursuit of 'soul-destroying dollars"(356)
This section of Wood's work is must reading and I hope we explore the legacy that this accelerating belief had on development and growth in the US. Our reading of Sowell - Intellectuals and Society, Hayek and modern confidence in the commerical society (see the current CATO discussion for animated discourse on this topic.
The take away here is that the elites (Jeffersonian republicans would be part of this elite as well as the Federalists) deeply believed that individual freedom had gone too far and opposed the emergent and spontaneous order that encourages adaptive efficiency that North would argue laid the foundation for economic growth in the US rather than economic stagnation or disintegration.
I would like to explore the contention presented by Woods early in chapter 9:
"If the United States were eventually to become a fiscal military state capable of . . . " (318)
Now this would appear to be the intent of Federalists and much of Jefferson's administration was an effort to prevent this evolution - while he may have succeeded in delaying the evolution I wonder is this an inevitable consequence of growth? North et al seem to argue that it is in their recent work - Violence and the Social Orders.
In the key paragraph in this work (323) I think that Wood overstates and misses the case when he writes: "Only when the market system became separated from the political, social and cultural systems constraining it and became its itself an agent of change . . . ."
By definition the market system is an agent of change and may well have caused the political, social and cultural changes that Wood is describing. More importantly, society and culture are institutions that are deeply interconnected with the systems of economic decision making whether mercantile or market and the evolution of change during this period was reflected in all institutions and the causation is not as clear as Wood would have us believe.
Boyes makes a key point in his analysis of chapters 4, 5 and 6 of Empire of Liberty when he observes that the public choice issues of 1789 are with us today.
These issues revolve around:
1. The role of the state. 2. The locus of power within the state. 3. Federalism. 4. The size of the state.
As I reflect on the Federalist/Republican debate as described by Wood I think that Madison (see Boyes previous post on the book) is a reflective personality in illuminating the similarity in views of the two camps. Both Hamilton and Jefferson were familiar with Adam Smith's work in The Wealth of Nations and considered what a system of natural liberty implied, the role of the state within that system and how they anticipated that the state would emerge.
Both, I think, supported a state that would defend the nascent republic, a state that would defend individual liberty and rights and would provide security from the threats that confronted the new nation.
Jefferson appears to see the state as supporting the agricultural and rural life of society - so he would be pleased with the subsidies that currently characterize the Dept. of Agriculture and American farming. Moreover, given his interest in science and nature and state sponsored exploration (Lewis and Clark) he would have supported state sponsored RandD and the government grants to universities that we see today. Finally, I guess he would have loved in his enthusiastic manner, NASA and our convoluted efforts to explore and perhaps add Antartica to the Empire of Liberty.
Hamilton's view of the role of the state, what would be called the American System, emphasizes other public policy projects. That said, I wonder what these two founding fathers would say about the Bush/Obama stimulus, the Bush/Obama Farm Bills, the Bush/Obama policy on tariffs and on subsidy, the Bush/Obama war on drugs, poverty, immigration.
2. The locus of power within the state.
Well clearly Jefferson advocated at this stage, in theory, states over the national government. It is interesting that his thinking on this key issue "evolved" over time - think the Embargo Act, Louisiana Purchase, Land Ordinance Acts . . . and any number of policy activities that seem in alignment with Hamilton.
I see both agreeing on this fundamental element that is embedded within the constitution, although they might well disagree over the relative important of the legislature and executive branch. What is intriguing is that both agreed that the judiciary was of little importance. Clearly this changed over time and, as we will see when we read about Marshall (cousin and adversary to Jefferson) their notion of federalism evolved.
4. The size of the state.
This really seems to be a prime issue for discussion. The Coordination Problem posted a really key analysis on this issue referencing, what is apparently a well known James Buchanan teaching question -
If a fly was 9 times bigger that its current size, could it fly?
The associated question is then posed about the size of the government.
Apparently left-liberal pundits are convinced that people oppose government expansion either out of stupidity or cupidity—not, say, out of a sincere belief in freedom. The oft-repeated story is that ignorant and misguided masses are being led by greedy business interests. Paul Krugman’s recent column is one of many examples in the genre where billionaires intent on ravaging the country provide the bucks while clueless Tea Partiers provide grass roots brawn.
The best insight regarding this type of criticism comes from Thomas Sowell, whose analysis of two distinct visions of human nature puts current attacks into long-term perspective. Jerry O’Driscoll referred to this work in his comment on anti-intellectualism, a charge often levied by the same left-liberal critics.
Again, since Pratt beats me to it, I will simply try to add a few points to what he has posted. An overall thought from these three chapters is that the struggle over a larger government with more power in the executive has been evident from the beginning. According to Article I Section 8, the Congress shall have the power "To raise and support Armies, but no Appropriaton of Money to that Use shall be for a longer Term than two Years; To provide and maintain a Navy; To make Rules for the Government and Regulation of the land and naval Forces; To provide for calling forth the Militia to execute the laws of the Union, suppress Insurrections and repel Invasions."
In my reading of Article I Section 8, the founders did not want a standing army. The militia could exist and was expected to exist at the state levels. But, a standing army was to exist for only two years at a maximum. There was to be no federal standing army. Hamilton's attempt to create such an army and use George Washington to do so should have been deemed unconstitutional. However, it appears that the Navy is a different matter.
P. 263: "At last, many Federalists believed they would have the standing army that they had long yearned for. Without an army, they believed, tyhe United States could scarcely qualify as a modern nation.....it could not wage war."
On a different matter, p. 271: "...Madison on January 7, 1800, issued a notable committee to the Virginia assembly in which he defended the earlier resoltuions and warned that the Federalist plans for a consolidation would "transform the republican system of the United States into a monarchy." If the federal government extended its "power to every subject falling wityhin the idea of the 'general welfare'." This makes it clear that Madison and Hamilton knew, when writing the Federalist papers, that Article I Section 8 would enable the central government to grow without limit. The General Welfare clause coupled with the Commerce clause have corrupted the meaning of limited government.
Finally, it shouldn't be a surprise that all he public choice issues existing today existed in 1798.
Very, very said as we approach the day of reckoning with a tsunami of foreclosed homes.
I suspect that, as large investors work to arbitrage and clear the incredible surplus of homes (how this surplus developed is an important insight into the our future as a society based upon our decisions as individuals about the role of the state) I would anticipate (as would Kling) that the gap between old fashioned and modern lending will resolve itself - I hope that courts are allowed to referee the disputes and our legislative and executive branches do not.
I just finished Ridley's new book - The Rational Optimist. I recommend it and will suggest that this be a future ASET book club selection. It is a more nuanced and centered version of Capitalism Democracy and Ralph's Pretty Good Grocer and Ridley makes effective use of anthropology to buttress his thesis. Ridley does a nice job of outlining the benefits to growth and the role that decentralized exchange plays.
He also posted a reaction over on CATO to the current discussion of McCluskey's view of the central role played by values and informal norms.
His full essay is well worth a read - he writes (as he always does so well)
“A true liberalism, what Adam Smith called ‘the obvious and simple system of natural liberty,’ contrary to both the socialist and conservative ideologues, has the historical evidence on its side.” Yes!
So let’s agree that absolutely key to the economic success of the last 200 years is that people are free to innovate in an undirected way. What I cannot bring myself to agree with is that this was an idea that had to be invented. I cannot agree that “what changed around 1700 was the valuation of economic and intellectual novelties within a system of all the virtues.”
I had to delay my reading of The Empire of Liberty in order to do a little research on the decisions surrounding catastrophes such as the BP well blowout to prepare for a panel I am on in a couple of weeks. The title of the Panel is “The Drama that Drives Decisions” and is sponsored by the Executive MBA Program at ASU. I first looked at the top ten industrial disasters. These included Bhopal, Three Mile Island, Love Canal, Ecuador, Papua New Guinea, Exxon Valdez, Niger, and BP. Notice how all of these occurred to companies headquartered in non-dictatorial countries or on these non-dictatorial nations. Does this mean that no such disasters occur in the dictatorial nations? Moreover, notice that no one was killed in the Valdez, Three Mile Island, and Love Canal cases. (Three Mile Island was a nuclear meltdown where no radiation leaked. But it led to “No more nukes! No more nukes! Love Canal was a municipal dumping site and the city gave Hooker permission to dump wastes there. The canal was covered up and houses built on it. It appears no one was injured by it. ) But the publicity surrounding the Valdez, the Love Canal, Three Mile Island, and BP was far more extensive than the others noted. Also note that in these cases, either there was no government (a war such as in Niger was going on), no or very weak private property rights existed such as in Ecuador, Guinea, and Bhopal, or an accident occurred due to a drunken pilot – the Valdez – or some other cause --BP.
It seems that to understand how decisions are made we need to understand the environment that leads to and arises around disasters such as the oil spill . There are at least two factors that create the environment of drama or hysteria. The first is government intervention in market transactions. The second is media coverage of the stories. If we look at oil spills and other industrial environmental disasters over the past fifty years, there is a very consistent pattern. Disasters occur primarily in areas where the government is broken down, the government controls everything, and/or the companies causing the problems are government entities. Major oil spills occur in Niger, Sudan, China, Saudi Arabia, Russia, Ecuador, and Mexico regularly. But the most well known disasters occur in the Gulf of Mexico or on the U.S. or Canadian property, or much less so in Finland and the North Sea. Why are these well known and the disasters in the dictatorial countries not publicized? If you consider that people want news on disasters and Armageddon like events, and that the cost of obtaining information about such disasters and events is so much easier in free nations than in the dictatorial ones, it is obvious why the media and environmental groups tend to focus on the events occurring in free nations. (For a great read on this idea using the Canadian oil sands and comparing it to oil collected from dictatorial regimes, see Ethical Oil by Ezra Levant. ) When governments seek oil sales to acquire weapons to use against others, such as in Sudan, clearly there is no concern over environmental disasters. The genocide in Darfur is far more important to the Sudanese than oil spills. When dictators control oil there is little concern with environmental issues. Saudi Arabia does not care about oil spills – in fact they have become experts in clean ups. Venezuela, Russia, China , Kuwait, Iran, and Burma don’t report spills or accidents.
So now turn to BP. Why would BP decide to drill in waters five miles deep fifty miles off shore, drilling that is path breaking? Because that is the only place the U.S. would allow companies to drill. In the figure, notice that the “no” areas for drilling include the U.S. interior and the U.S. coastline except in a narrow region of the gulf.
In addition to forcing drilling outside the U.S., the government placed a cap on liability of $75 million for companies if they experience a spill in the deep waters. As it did in banking, the government’s liability limits created moral hazard problems. Finally, as in all cases where an industry or business is regulated, we find regulatory capture – where the regulators are responding to the desires of the industry. The regulatory body of deep water drilling, the Minerals Management Service, raked in $13 million a year from oil companies; MMS employees accepted gifts, had sex with oil personnel, and did drugs while inspecting oil rigs. It should not have been a surprise that the MMS waived requirements for environmental impact studies and allowed oil companies to write their own inspection reports.
Doug Irwin does a great job of contextualizing the benefits of trade, the cost of protectionism and the political reward (all presidents and Congresses earn this reward at the expense of American consumers and voters) for advancing protectionism.
Our current president is going down the road the both Bushes, FDR, and all those forgettable Republican presidents of the last quarter of the 19th century followed.
Fiscal Crises and Imperial Collapses: Historical Perspective on Current Predicaments
Niall Ferguson, Harvard University, delivered the Peterson Institute's ninth annual Niarchos Lecture on May 13, 2010, on the topic "Fiscal Crises and Imperial Collapses: Historical Perspectives on Current Predicaments."
Niall Ferguson is one of the world's leading thinkers and writers on geoeconomic, global systemic, and other key international strategic issues. Time has named him one of the world's 100 most influential people, and two of his books, Empire: The Rise and Demise of the British World Order and the Lessons for Global Power (2003) and The War of the World: Twentieth Century Conflict and the Descent of the West (2008) have been converted into television series. His most recent book is the best-selling Ascent of Money: A Financial History of the World (2008), from which he has drawn numerous lessons for analyzing and responding to the current global crisis. His earlier The World's Banker: The History of the House of Rothschild won the Wadsworth Prize for Business History.
Boyes identifies an important, perhaps the most important issue in chapters 3 and 4 in his discussion of the mediating role of Madison.
Madison seems to to have evolved in his thinking and moved from the Hamilton camp in his work on the Federalist Papers and the Constitutional Convention to his close ties to Jefferson and the republican perspective as the last decade of the 18th century died. I say seems, because a scholar of the era, constitution and Madison argues for a consistency in Madison - I referenced this scholar in a previous post and strongly recommend a listen to his views:
What was James Madison's background? How did he feel about the idea of democracy? What ideas did he contribute to the drafting of the Constitution? Larry Kramer, Dean at Stanford Law School, discusses Madison's legacy.
Pratt captures about everything of import in Chapters 2, 3 and 4. Thus I will just mention a few matters that are of minor importance but of interest. In Chapter 2 it is noted how Madison attempted to explain to Jefferson how attempting to write out the people's reights might actually have the effect of limiting them. But, the way these rights were specified, essentially negative rights for government, do the opposite. They should have expanded indivdual's rights not limited them. Woods seems to give Madison the appearance of being slightly confused over the issues. First he was a Federalist but then became a Jeffersonian Republican. I wonder if the confusion was there or if all the major founders feared the "lower classes" and that democracy would become mobocracy.
Both Chapters 3 and 4 emphasize how much of a leaning there was to form a strong central government. Page 107 it is noted how the Federalists attempted to create crony capitalism. "Hamilton's financial program was designed not to make money for any particular group but to use patronage like all the great European staet builders before him, to create a powerful nation state." Yet, doesn't the central bank harm the Southern agricultural interests relative to the commercial and industrial Northern interests?
The Federalists believed a strong military, a standing army, was necessary for a nation state. p. 111: "When Elbridge Gerry proposed that no standing army exceed 3,000, Washington resonded that no foreign enemy should invade the U.S. with more than 3,000 men. Having survived and won the Revultionary War without a standing army, I find it disingenuous for the founders to support a standing army.
p. 116: Desiring that the Western settlers be properly educated Congress mandated setting aside land for public schools. What is "properly educated"? Is it controlled -- thinking like the elitists or founders? Why public education? These settlers were very independent people. And, like all people, if trouble comes, they call on the government for aid. p. 129: "As hostilities with native peoples became increasingly fierce, the settlers called on the federal government for protection."
And, can't waste a crisis -- like Robert Higgs says, a crisis leads to expanded government which never declines but merely ratches up. p. 130: The St Clair's defeat led to the doubling of the military budget, a standing army of 5,000, "something the Federalists had always wanted."
p. 148: Madison had ecome fearful, by 1792, of the very government he had done so much to create. Why?
p. 149: Woods makes fun of Jefferson's "outlandish" ideas. Jefferson calculated that a generation lasted about 19 years. This is why he stated that everything should start over every 19 years. Is this the same as a revolution is needed every 19 years?
p.157: We see the debate between Jeffersonian Republicans and Hamiltonian Federalists widen -- and Jefferson thought that Congress was merely enriching itself not leading liberty.
Woods directly asks us to consider American exceptionalism and the inchoate ideal of
. . . the American's enlightened dream of a new world order based upon commerce . . .(192)
This is a driving tendency in American history and the behavior of both the vernacular and genteel seem to be guided by this idealized new world order and consciously or unconsciously striving for this dream informs so much activity. Perhaps Sowell would argue that the conflict of visions is best understood by examining actions either emergent or directed toward this vision of the world, a vision made in the image of a nascent America at the time and a "mature" America today.
The chapters that review the French Revolution and Adam's administration are particularly significant in their relevance to issues today of the role of the state, assumptions of human behavior and the intersection of institutional evolution and change. I was constantly reminded of the work of North and Hayek as Woods illustrated the pace of institutional change in the face of rapid changes in society - this lag between the change in institutions, particularly formal ones, and the emergence of alternative norms and conventions, motivated Washington in his Farewell address to stress:
. . .the importance of religion, morality, a general diffusion of knowledge, and public credit, . . .(208)
This list begins and ends with two formal institutions sandwiched between a process and, what Adam Smith and other enlightenment thinkers viewed as a or perhaps the central informal institution. In The Theory of Moral Sentiments Smith used the metaphor of an impartial spectator to explore the role and important of sympathy to the well being of the individual and society. It is this relationship between the well being of the individual and society that I see as organizing the themes of these three chapters if not the entire book.
. . . many members of the elite had become increasingly anxious about the growth of popular power in America . . . (176)
Woods captures an important point here - the distinction between power and liberty. The elite were concerned (perhaps rightly) that the masses would have no system of cosmology for dealing with liberty. That they would, instead, turn to power - the power of the mob, the tyranny of the majority, the demogagory of the press . . .
To me, this seems not only a reasonable anxiety, but a concern that our history confirms as having very nasty consequences - as we know examples ranging from the Know Nothing Party to the Comstock Laws represent points on the continuum of this history - the first the "power" of the commoners to engage in their own fears and intolerance, the second, a response by those in power (by this time would they be elites or merely a faction of the common?) to activity perceived as wrong.
So the question becomes - what is power? Where is the locus of power?
Clearly this is important, in fact perhaps critical as North et al argue in Violence and the Social Orders as without a mechanism to maintain the equilibrium between power and liberty both will be threatened.
Chapter 5 - The French Revolution in America
Hamilton articulates the organizing theme in a political context: "The United Sates are a young nation"
Woods makes this very important paranthetical comment following the above comment: (Note the use of the plural verb, which remained common usage until after the Civil War) (184).
Woods directs us to think of the evolution in attitude of federalism and the impact that this changing conception had on the locus of power and decision making and the impact of this change on liberty and freedom.
Woods writes of the Federalists struggle to govern in the face of "accelerated powerful underlying demographic and economic forces . . .(178) Well ok, but isn't this true of today and actually, as I think about it over all time? This period is significant for the revolutionary nature of the reaction as leadership reacted to these forces - the republican response and eventual success was a break from the traditon of the past on par with the Glorious Revolution.
A key issue that is relevant today was the free trade, free sea, free ship stance adopted by the nascent republic in a time of global conflict, and the reaction of the hegemonic powers of the day. The "stenuous promotion of liberal principles concerning commerce on the high seas in wartime (and at all times) namely that free ships made free goods . . (189) was an exemplary example of the mixture of pragmatism and principle. Today the US reflects an ambivalence to this ideal - we defend this ideal off the coast of Somalia and oppose this ideal off the coast of Cuba.
The ancillary idea from this free trade philosophy is the role of conflict and the relationship between free trade and peace . . . or war. (190).
Woods does a nice job of capturing the opposing perspectives on page 195 and in thinking of Boyes' preliminary evalution of Hamilton, it seems that the Jeffersonians are the fools (or just real naive) and Hamilton is the realist - "The seeds of war are sown thickly in the human breast."(195).
Chapter 6 - John Adams and the Few and the Many
The title and contents of chapter 6 consciously echo the classical notion of "the good" and the "few". (214).
In previous posts we have examined the notion of public v private character, Woods does a nice job of reminding us in the previous chapter: The Federalists assumed in traditional eightenth-century fashion-and it was an assumption that they never lost-that no free government could long exist without the people's confidence in the private character and respectability of the governing officials; indeed, they believed that without their personal creditility the weak national government might not be able to sustain itself.(203)
Woods ends this chapter (first full paragraph on page 238) be indicating the change in a this 18th century view of leadership and the election of 1800 illustrates this change and tension with Burr as the symbol of the "new" self interested man scurrying between Hamilton and Jefferson. Woods as an outstanding podcast on Burr over on Gilder Lehrman that amplifies this key point in American history. While Burr was truly a traitor to his class - he was a member of the elite by birthright, Woods is exploring the emergent vernacular in society and the demand of these middling sorts for participation and ultimately control of the political process. Telling, Franklin labels these "Molatto Gentlemen" (226) and we are asked to reflect in this intensifying Hamiltonian/Jeffersonian debate - what are the consequences of a participatory, yeoman democracy. Is it possible that the Hamiltonians had a basis to fear the mob?
This powerful notion from the enlightenment is so alien today - due to the immense scope and breadth of the government we have come to accept and tolerate leadership that at best reflects the moral condition of everyman and most often reflects the worst in terms of the awful virtues that Adam Smith argues come from self command.
Two take aways from this chapter - the first is the conception of checks and balances held by the founders. This was previously mentioned but a close reading of 215 shows that these checks and balances between the three loci of power in the national govenrment did not include the courts. The President was to mediate between the House and the Senate. In an earlier post I referenced a podcast by Larry Kramer over on Gilder Lehrman that made this very point, which was new information to me.
Finally, given the misconception today that our political process is violently and perhaps irrationally partisan - the story of republican Matt Lyons spitting into the face of Federalist Griswold on the floor of Congress and Griswold's predicatable reaction reminded me that anti-intellectualism and anti-authoritarian behavior have commonly manifest themselves in our public life in a vernacular rather than genteel manner.
This has been the most important chapter in thinking about the historical roots of contemporary debate over the role of the state, private v public sphere and liberty v freedom.
I view this chapter as a clear and present warning to concerned citizens about the real cost of war - loss, perhaps permanently, of liberty. This period exemplifies the process that Bob Higgs writes about and fears - the ratchett effect and the result of "crisis" in the evolution of the state and, more importantly, the shaping of norms, conventions, opinions and morality to accept and support the welfare and warfare state.
Higgs shares Monroe's concern that:
. . . military measures were designed to create a military establishment that . . . [was] a far greater danger to public liberty than [fill in the blank - really anything else - war with Britain at the time - terrorism today].(196)
All contemporary attacks on liberty and freedom by the government are seen in the Alien and Sedition Acts. The Quasi War allowed aqnd juistified efforts to limit and regulate immigration, deport critics of the government, and shackle a free press.
On the issue of immigration - "these masses of new immigrants with their disorderly and Jacobinical ideas were the grand cause of our present difficulties"(249) could easily be the words of Russell Pierce, Patrick Buchanan, Lou Dobbs, democratic union bosses and hacks, or any of a number of current representatives of special interest who have refined the blame game to nuanced use of racism, victimization, zenophobia and religious intolerance.
We do not expect this Father Coglin demogagory from Abigal Adams
"in times like the present, a more careful and attentive watch ought to be kept on foreigners"(249). The second first lady sounds like a lackey for Wilson's secret policy, or Bush's internal security agency.
The efforts to muzzle the press anticipate the actions of all administrations of all ilk in the days of the republic.
The rational was
. . . the press itself was changing. it began shedding its traditional neutral role . . . instead they became political advocates and party activists. (251)
Woods argues the actions fo the Federalists to muzzle opposition press through oppression and suppression of the 1st amendment was the prime force destroying the party.
The common law view of the state relationship to the press was no prior restraint or censorship. (258). The effort of Adam's Sedition Act, like that of future war presidents was to stifle dissent.
To date, this chapter would be the one I would recommend as required reading - if indeed contemporary society is to reexamine the underlying set of norms and conventions that seem to support an intrusive state and favor security over liberty, this material may well provide the basis to reconsider that tacit support for totalitarianism and a culture of oppression.
The survey referenced by the articles below can be viewed here
Poll: Despite anti-government sentiment, people still want what government offers If there is an overarching theme of election 2010, it is the question of how big the government should be and how far it should reach into people's lives
By Jon Cohen and Dan Balz
The Washington Post
WASHINGTON — If there is an overarching theme of election 2010, it is the question of how big the government should be and how far it should reach into people's lives.
Americans have a more negative view of government today than they did a decade ago, or even a few years ago. Most say it focuses on the wrong things and lack confidence it can solve big domestic problems; this general anti-Washington sentiment is helping to fuel a potential Republican takeover of Congress next month.
But ask people what they expect the government to do for them, and a more complicated picture emerges.
A new study by The Washington Post, the Henry J. Kaiser Family Foundation and Harvard University shows most Americans who say they want more limited government also call Social Security and Medicare "very important." They want Washington to be involved in schools and help reduce poverty. Nearly half want the government to maintain a role in regulating health care.
By Susan Page, USA TODAY WASHINGTON — Americans are having a crisis of confidence in their government. A majority in a new USA TODAY/Gallup Poll disapprove of the jobs President Obama and Congress are doing and have unfavorable views of both major political parties. Only half express even a fair amount of trust and confidence in the people who hold or are running for public office. Just one in four are satisfied with the way the nation is being governed.
Meanwhile, six in 10 Americans say the government has too much power, and nearly half agree with this alarming statement: "The federal government poses an immediate threat to the rights and freedom of ordinary citizens."
So what size and scope of government do Americans want?
That issue has fueled the Tea Party movement and defined this year's elections. Anti-government feeling — ignited by angst over the cost of government bailouts and the reach of the sweeping health care law — is the biggest force behind projected Democratic losses on Nov. 2 that are expected to reshape the capital's politics and could deliver control of Congress to the Republicans.
Three weeks before Election Day, USA TODAY and Gallup are trying to understand the underlying attitudes driving this debate with a national survey and an analysis that charts five distinct groups of public opinion. They range from the 22% of Americans at one end who want government out of their lives — among them many Tea Party supporters — to the 20% at the other end who endorse an expansive government that protects its citizens from life's travails.
No political issue is more fundamental, and no other question divides the electorate more sharply along partisan lines.
Clark's response to McCluskey over on CATO is in the mainstream and really illuminates the North thesis of the centrality of informal institutions in the process of economic change.
I believe modern growth is associated with a deeper, more basic shift in values and capacities than McCloskey identifies for a number of reasons. First, the behavioral shifts that took place in societies like England before the Industrial Revolution were much longer in development than some brief intellectual fashion of the seventeenth and eighteenth centuries. England already in 1300 was a fundamentally different type of society than that of our hunter-gatherer forbears. We are talking in some cases about at least 3,000 years of change.
Second, behaviors changed that people were not even aware of, or subjecting to public discussion. These fundamental changes include changes in how impatient people were, changes in how hard they liked to work, and changes in how much interpersonal violence they displayed. 
Third, the drive toward innovation, improvement, and consumption that moves capitalism ever forward is remarkably resistant to attempts at reformation. Mao could re-educate a whole generation of Chinese on the virtues of communism, yet they have turned en masse to a fervent pursuit of material goods and personal interest within two decades of his death.
Reasonable people can disagree about whether and how much the government should redistribute income. And, to be sure, the looming budget deficits require hard choices about spending and taxes. But don’t let anyone fool you into thinking that when the government taxes the rich, only the rich bear the burden.
The second two chapters in Empire of Liberty (hereafter EL)outline the foundations of the debate between Federalists and Republicans. There are a number of provocative issues raised by Woods in these chapters including:
1. Role played by the state in the emergence of political and economic institutions
2. The pace and scope of the transformation over the last 20 years of the 18th century
3. Role of Madison in the widening debate between Hamilton and Jefferson
4. The role of the state in the emergence and evolution of financial institutions
Chapter 3 - The Federalist Program
Woods writes: "Hamilton expected that these interest payments would make the United States the best credit risk in the world, as well as create an attactive system of investment . . . "(97).
The fundamental element of the Hamiltonian program - assumption and full repayment of the debt by the national government to create a national debt which he called a blessing (see Hamilton's Blessing by John Steele Gordon) and was opposed by those who would agree with Thomas DiLorenzo that this would be Hamilton's Curse has shaped political economy in the US. In reading Reihart and Rogoff's This Time is Different (see oage 70 the North discussion of the Glorious Revolution and the impact on financing by the state)it is clear that Hamilton's goal was achieved - at least from his time to today and the authors of this excellent analysis suggest those days may well be numbered. But the significance of the debt, as Woods points out, goes beyond the structure of capital markets as it would profoundly impact the money supply in ways that could not be anticipated. (97). This debate over the role of the government in money and banking was eventually won by Hamiltonians, although Selgin and White outline the minority opposition that continues today. Charles Kindleberger's classic Manias, panics, and Crashes identifies the challenge faced by the government (and the private sector) to the "continuous' expansion/evolution of the money "and existing money has been used ever more efficiently in periods of boom to finance expansion, including speculation."(59 in 1977 edition). Paul David argues that this type of evolution will outpace the ability of institutional structures to cope with destabilization, in the absence of a strong control presence, if my reading of David is correct. Kindleberger seems pessimistic about the efficacy of a central control: "The process [of control] is Sisyphean akin to efforts at tax reform in which lawyers seek out tax loopholes, Congress and the IRS block them up, and the tax lawyers carve out new ones." (60)
Adam Smith anticipated and articulated the concern about the nationalization or federalization of debt (96) and Woods argues that Hamilton had intents for the debt that were policy based and would shape government intervention in the future: " . . . he [Hamilton]had no intention of paying off the outstanding principal of the debt. Retiring the debt would only destroy its usefulness as money and as a means of attaching investors to the federal government."(96). I would argue that this last clause could be seen over time as attaching investors to US debt - think the British during the canal and railroad booms and busts to the Chinese today to fund the consumer boom and . . .
This issue of the role of the government was addressed over on EconTalk in two outstanding and accessible podcasts - George Selgin and Larry White. This latter podcast is a must listen as White overviews a bit of history, the Austrian perspective and free banking.
Chapter 4 - The Emergence of the Jeffersonian Republican Party
This chapter raises a series of issues centered around institutional emergence and evolution, the pace of this change and the role of the state. This chapter strongly evokes the work of Douglass North and the school of thought that argues for and understanding of the role of institutions in economic change.
Woods makes an interesting contention on page 160 - "Because the United States was still without firmly established institutions and structures of political behavior . . . ". Really, after almost 180 years there were no firmly established institutions? This area is not one of expertise for me, so I am anticipating comment and discussion on this topic at book club.
But the rate of transformation echoes a posting byDavid Warsh regarding a Paul David article that seems to be on point, if the point is that individual and organizational behavior evolves in advance of institutional structures and that this emergence can potential destabilize the system or "network" in David's words. This is a provocative article, one that is worth a review as David uses the May 6, 2010 stock market drop as a powerful example of this black swan.
Warsh writes of David's article:
David takes his parable in a different direction. There is a parallel, he says, between what happens when human beings are deprived of feedback from their own communications what happens in the communication of diseases. Pathogens transmitted person-to-person – tuberculosis, say — have evolved in the direction of diminished virulence, as opposed to those borne by insects that have had no previous contact with a human host. “Communities of dependence” between carrier and host tend to diminish the bad results. In each case, feedback – what traders call liquidity – is your friend.
An implication is that Hamilton may well have been correct, that the pace of change and the incentives of entreprenuears to arbitrage this change may lead to destabilizing or destructive systemic plagues that threaten the system itself - that this activity will outpace institutional change - in both formal and informal forms.
I learned from this reading the evolutionary role that Madison played as he initially mediated the Hamilton/Jefferson debate. I strongly recommend the Kramer podcasts over at Gilder/Lehrman.
George Selgin of West Virginia University talks with EconTalk host Russ Roberts about free banking, where government treats banks as no different from other firms in the economy. Rather than rely on government guarantees to protect depositors (coupled with regulation), banks would compete with each other in offering security and return on deposits. Selgin draws on historical episodes of free banking, particularly in Scotland, to show that such a world need not be unduly hazardous or filled with bank runs. He also talks about Gresham's Law and an episode in British history when banks successfully issued their own currency.
Larry White of George Mason University talks with EconTalk host Russ Roberts about Hayek's ideas on the business cycle and money. White lays out Hayek's view of business cycles and the role of monetary policy in creating a boom and bust cycle. The conversation also explores the historical context of Hayek's work on business cycle theory--the onset of the Great Depression and the intellectual battle with Keynes and his work. In the second half of the podcast, White turns to alternative ways to provide money, in particular, the possibility of private currency and free banking explored by Hayek late in his career. White then describes his own research on free banking and in particular, the more than a century-long experience Scotland had with free banking. The podcast concludes with the economics rap "Fear the Boom and Bust," recently created by John Papola and Russ Roberts. The song itself can be downloaded at EconStories.tv where viewers can also watch the video, read the lyrics, and find related resources on the web for Keynes and Hayek.
What was James Madison's background? How did he feel about the idea of democracy? What ideas did he contribute to the drafting of the Constitution? Larry Kramer, Dean at Stanford Law School, discusses Madison's legacy.
Kramer has 6 excellent podcasts - this is a must listen
Throughout American history the Supreme Court has played a role in striking a balance between the power of federal vs. state governments. Larry Kramer, Dean at Stanford Law School, traces the rise and fall of federal power during the first 150 years of the nation's existence.
May 6th – Signals from a Very Brief but Emblematic Catastrophe on Wall Street
Paul A. David Stanford University - Department of Economics; University of Oxford - All Souls College; UNU-MERIT (Maastricht); Ecole Polytechnique & Telecom ParisTech
June 27, 2010
Abstract: This essay begins by looking closely at the underlying structural causes of the discontinuity that appeared in the behavior of the U.S. stock market at 2:40pm in the afternoon of 6th May 2010, because the emblematic “catastrophic” aspect of the collapse of equity prices, and their subsequent equally abrupt rebound, renders these events potentially informative about things that can happen in a wider array of dynamical systems or processes – including those with consequences about which there is cause for serious concern. What transpired in those 7 minutes is viewed as being best understood as a hitherto unrecognized “emergent property” of structural conditions in the U.S. national stock market that all the actors in the story collectively had allowed to come into existence largely unremarked upon, through an historical process that was viewed generally as benign and therefore left to follow its own course of evolution unimpeded. The deeper significance of the events of May 6th lies in the attention it directs to the difference between a society being able to create and deploy technical “codes” enabling greatly enhanced connectivity for “exchange networks” – the condition of “hyper-connectivity” among an increasing number of its decentralized sub-systems, and a society that also provides timely mutually compatible institutional regulations and administrative rules for the coherent governance of computer-mediated transactions among “community-like” organizations of human agents. Regulating mechanisms operating to damp volatility and stabilize systems in which there is beneficial positive feedback are considered, as are a variety of circumstances in which their absence results in dysfunctional dynamic behavior. It is suggested that in view of the growing dependence of contemporary society upon on-line human-machine organizations for the performance of vital social and economic functions, continuing to focus resources and creative imagination upon accomplishing the former, while neglecting the latter form of “progress” is a recipe for embarking upon dangerous trajectories that will be characterized by rising systemic hazards of catastrophic events of the non-transient
Boyes writes: I have never been an admirer of Hamilton, but this quotation makes him seem foolish. Why would this "natural aristocracy" not be self interested? Why would they not want power or more power?
Implicit in Boyes' speculation is an inquiry into the tension between the Hamiltonian and Jeffersonian perspectives and this inquiry is, in my view, essential to a more rounded understanding of the emergent civil society that evolved during the period that Wood describes. It is this commercial society that McCluskey argues over on CATO that actually stimulated the catallaxy which we rely upon today. And we know that Jefferson was intensely distrustful of this commercial society while Hamilton wished to stimulate it.
In thinking back to the period prior to the Enlightenment the issue of power and governance was one that evolved to my reading as one based in Western Europe on classical origins. That is, in thinking back to Aristotle, "the good" was to be achieved by "the few". As this evolved over time, there was a sense that the vast majority, the mob in the view of the elites, were incapable of self rule - these masses could not know "the good" and therefore "the few" were responsible for the interests of all. Woods points to the French Revolution as compelling evidence for this belief system. It might be argued that the Glorious Revolution was also, for all the benefits to later generations, evidence for a bit of concern over the masses as a governing group.
An odd philosophy that seems so alien to a Revolutionary movement, but this philosophy was widely shared - Washington, Madison, Wilson, even Jefferson held to varying degrees this attitude.
I found the following useful to think of the contradictions that Hamilton represents. David Hackett Fischer writes in Liberty and Freedom: This [Hamiltonian] vision of liberty and freedom cannot be understood in the categories of the twentiy-first century. It accepted inequalities of wealth . . . supported the rights of free labor and was deeply hostile to slavery. It fiercely defended private property, commerce and industry but favored active public regulation of the economy in a syustem of mixed enterprise public and private together. Here was a vision of a republic as a commonweath of free men who combined individual rights with a strong sense of community. (200)
It should be remembered that Hamilton was an outspoken opponent of slavery, a stalwart defender of property rights and as we know an advocate of the commercial society. Jefferson on the other hand, in spite of reservations, supported slavery in his shameful capitulation in the writing of the declaration of independence and his deafening public silence on the issue. His support of private property is thus undermined as the most fundamental property right is to ones' own life. Jefferson also privileged a Rousseurian view that advantaged argiculture over industry (so in his own way he wanted the government to pick winners) and his disasterous welding of power as president (the Embargo Act of 1807 comes immediately to mind) along with the purchase of Louisiana (an action that is at odds with his previous stated philosophy) reflects a character that seems in the tradition of a pragmatist.
That said, anticipating the end of the Woods story and book and the legacy today, I can report that I agree with Matt Ridley's concluding comments in The Rational Optimist.
I forecast that the twenty-first centruy will show a continuing expansion of catallaxy-Hayek's word for spontaneous order created by exchange and specialization. Intelligence will become more and more collective; innovation and order will become more and more bottom-up; . . . The bottom-up world is to be the great theme of this century. (355)
I am drawn to this optimism and the argument that Ridley presents is persuasive. Echoing the work of Baumol it suggests that institutions will evolve in a manner to incentivize wealth creating entrepreneaurship (wikipedia, google, facebook) at the expense of unproductive (state rent seeking) entrepreneaurship.
This optimism challenges the contemporary reader to reflect on the question raised by Boyes which is inherent in our study of Woods and the late 18th century debate that was shaped by these two founding fathers.
This inquiry into the causes and conditions of Jeffersonian and Hamiltonian philosophy and action is important for no other reason than it illustrates the synthesis of ideas that informed the adaptation and emergence of the United States and it anticipates Walt Whitman . . .
Do I contradict myself? Very well then, I contradict myself, I am large, I contain multatudes.
Clearly our evolved national character, to the extent that such a culture exists contains strains of both of these opposing perspectives.
Our author in this podcast on Aaron Burr, the quintessential, self interested politician and in Woods' must listen podcast, talks about the 1800 election. Burr and Hamilton were fellow New Yorkers and had a very amiable personal relationship. By this time, Hamilton had a strong animosity toward Jefferson and detested his political ideology (as well as his very sophisticated political practice). Nonetheless, in the time after the 1800 electorial college tie vote, Hamilton worked tirelessly, Woods says almost hysterically for Jefferson and against Burr. Burr, for Hamilton, epitomized self interested behavior writ large, at the expense of "the good" and while Jefferson had an ideology that was at total odds with the Hamiltonian program, Jefferson was a gentleman, fellow member of the aristocracy and, while mistaken in Hamilton's view, was working from an ideology that was directed toward society and was not self interest, particularly in comparison to Burr, who anticipates most presidents and certainly our 20th and 21st century chief executives a la FDR, Clinton, Bush Jr. In fact, in the podcast, Wood says that Burr was a traitor to his class.
The University Club, New York, February 4, 1998 Running Time: 46:23
In 1807, Aaron Burr was tried and acquitted on charges of treason for his "adventures" in the American West, but he had fallen out of favor in American life long before, after he had run for president against Thomas Jefferson, served a single term as vice president, and shot and killed Alexander Hamilton in an 1804 duel. A free spender, a womanizer, and the only Founding Father who was actually descended from the English aristocracy, Burr was famously secretive and conspiratorial. In this lecture, historian Gordon Wood argues that Burr's true treason was not his actions in the West but his naked ambition, his lack of principles and character that made him a threat to the young republic.
Pratt is correct -- this book is massive. I can hardly lift it. I have read the Introduction and Chapter 1. The point of the move from the Articles of Confederation to the Constitution, according to my reading of Woods, is that the founding fathers wanted to ensure that the "natural aristocracy" of enlightened men would rule. On page 17 Woods quotes Robert Livingston that state legislatures had become full of men unimproved by education and unreformed by honor. On page 21 Woods says, "When the Revolutionary leaders had asserted that all men were created equal, most had not imagined that ordinary people, farmers, artisans, and other workers would actually come to hold high governmental office." Then on page 27 hew quotes Hamilton in Federalist No. 35, that "the learned professions" by which he meant lawyers, "will feel a neutrality to the rivalsips between the different branches of industry" and will most likely to be "an impartial arbiter" between the diverse interests of the society.
I have never been an admirer of Hamilton, but this quotation makes him seem foolish. Why would this "natural aristocracy" not be self interested? Why would they not want power or more power?
I find it fascinating that by 1787 the special interests or factions had already begun dominating democracy. This is always the demise of democracy and has been historically in Rome, in Athens, and in the United States. And, the founders knew this. I suspect we will see this viewpoint later in the book.
This month's CATO - Bourgeois Dignity: A Revolution in Rhetoric - dicussion looks to be intriguing.
Deirdre McCloskey kicked it off on Oct. 4 - A big change in the common opinion about markets and innovation, I claim, caused the Industrial Revolution, and then the modern world. The change occurred during the seventeenth and eighteenth centuries in northwestern Europe. More or less suddenly the Dutch and British and then the Americans and the French began talking about the middle class, high or low — the “bourgeoisie” — as though it were dignified and free. The result was modern economic growth.
Replies are scheduled by Greg Clark, Matt Ridley and Jonathan Feinstein so this should be outstanding.
Nathaniel Ropes Professor of Political Economics, Department of Economics, Harvard University, Cambridge, MA USA Why: for theoretical and empirical studies on the relationship between politics and macroeconomics, and specifically for research on politico-economic cycle
Nobuhiro Kiyotaki Professor of Economics, Department of Economics, Princeton University, Princeton NJ USA Why: for formulation of the Kiyotaki-Moore model, which describes how small shocks to an economy may lead to a cycle of lower output resulting from a decline in collateral values that creates a restrictive credit environment
John H. Moore George Watson’s and Daniel Stewart’s Professor of Political Economics, University of Edinburgh, Edinburgh, Scotland, and Professor of Economics, Department of Economics, London School of Economics, London, England Why: for formulation of the Kiyotaki-Moore model, which describes how small shocks to an economy may lead to a cycle of lower output resulting from a decline in collateral values that creates a restrictive credit environment
Kevin M. Murphy George J. Stigler Distinguished Service Professor of Economics, University of Chicago Booth School of Business, Chicago, IL USA, and Senior Fellow, Hoover Institution, Stanford CA USA Why: for pioneering empirical research in social economics, including wage inequality and labor demand, unemployment, addiction, and the economic return of investment in medical research, among other topics