Saturday, April 30, 2011

Liquidate When Near Default

The federal government has a debt nearing $14.3 trillion. It is running a deficit of over $1.3 trillion per year. Its cash flow situation is terrible. It is only a few years given current projections when interest on the debt alone will consume most of current revenues. When a business faces an analogous situation, it will liquidate assets to pay the debt, cut spending so as to at least be break-even, and then perhaps will default if these moves don't stem the tide. The U.S. government should do the same. Would this solve the problem? You can see in the figure nearby that the U.S. government a great deal of land, 30 percent of the land in the United States. Even at very conservative estimates, a sale of land could pay the debt. Suppose the average price of the land is $1000 per acre; there are 650 million acres owned by the government. This means that selling all land at $1,000 an acre would bring in $650 billion. That is only 1/20 of the debt. How can the debt be paid without either defaulting or defaulting via inflation?

Friday, April 29, 2011

Free State Project

Are you familiar with the free state project? The idea is that libertarians would move to a state and become the dominant voting block. The project members voted on which state to begin with and selected New Hampshire.

"There's no better place for freedom-loving Americans than New Hampshire... In a vote that ended in September 2003, FSP participants chose New Hampshire because it has the lowest state and local tax burden in the continental U.S., the second-lowest level of dependence on federal spending in the U.S., a citizen legislature where state house representatives have not raised their $100 per year salary since 1889, the lowest crime levels in the U.S., a dynamic economy with plenty of jobs and investment, and a culture of individual responsibility indicated by, for example, an absence of seatbelt and helmet requirements for adults."

It is too bad Arizona was not selected. Weather is better and the golf is better. I would definitely choose to move to "free" Arizona. But, NH is too cold and snowy for me. Is it possible to begin the Az Free State Project? Could enough people join to place some pressure on the legislature and governor to move toward freedom?

Given the seeming inevitability of democracy to lead to more government and less freedom, is there any hope that liberty can be reached through democracy? If we look at the current crony capitalism of our democratic society and economy, is there an approach that can lead to more freedom rather than more government? We know that competition and free markets result in resources being allocated to their highest value and people purchasing at the lowest possible prices the goods and services they most desire. So, perhaps it is competition with the existing government that is necessary. Perhaps we might set up institutions that are substitutes for the statist institutions. Instead of using public schools, we organize private ones or some type of home schooling. Perhaps we use "bitcoins" or gold rather than Federal Reserve Notes. Are there other approaches?

Friday, April 22, 2011

Markets, morality and truth

In a recent post over at HHN Higgs writes

In economics, as in other areas of life, the pursuit and exploitation of truth depend on freedom. Every cognizant adult knows that virtually all politicians are habitual liars. Too few of us understand, however, that the free market itself is a grand generator of truth, and that, in general, government intrusion of any kind operates to substitute falsehood for this truth, with devastating consequences for the genuine flourishing of social and economic life.

This is, I think, a key component for a discussion about social interaction, individualism and collectivism.

Yesterday I attended the student Philosophy Club meeting at my institution. The topic was a debate - Is Capitalism Moral? I was intrigued to listen to students grapple with this important question.

What struck me was the absence of definitions of operative terms - capitalism, morality, criteria for evaluation . . . and

A remarkable misconception about self interest, organizations and interaction.

The students equated self interest with greed and used a false understanding of Adam Smith's invisible hand as the basis of their misunderstanding. Clearly non of the students had read The Wealth of Nations and, more striking, was the lack of awareness of his first book - The Theory of Moral Sentiments. This ignorance was remarkable in philosophy students, but that is another story.

The second misconception was the belief in corporations as evil malefactors that held monopoly power. Beyond a lack of understanding of monopoly, their comments showed a failure to understand Schumpeter and the power of competition in oligopolistc markets - think Coke and Pepsi and the result on price, quantity and product diversity in the soft drink market.

Finally, a strong confidence in the ability of collectivism was evident - the ability of central planners to improve what the students believed to be negative outcomes in our mixed economy.

While it is encouraging to hear young people interested in discussing this topic it is depressing to witness the result of interventionist ideology (that springs from media, education and government) on beliefs. This short meeting confirms the power that beliefs have in shaping what passes for analysis in young people (and old people) today.

Thursday, April 21, 2011

Thoughts on Westboro Church

There is a potential tension in society when ideas come into conflict. This Conflict of Visions (Thomas Sowell) lies at the heart of both civil and tolerant discourse or action as well as violent, ideological, intolerant discourse and action.

A free society protects the rights of all, particularly to articulate divergent points of view, in fact freedom of speech is only necessary when the speech is so extreme that most would find the content and form offensive.

That said, the delicate balance between liberty and responsibility constantly challenges the participants in a free society.

This blog posting could not take place in North Korea.

The political system that emerges to confront conflicts of vision will leave the majority in a state of discontent. Whether the issue is special interest influence in governance (labor unions, military industrial complex, envirornmental activists, large business, etc) or the reaction of elected officials to the conflict, we have a process that is far superior in composition and outcome to the vast majority of the planet - if our biggest problem is labor union unrest or religious expression I suspect an overwhelming number of residents of the People's Democratic Republic of the Congo, Parguary, the country formerly known as Somalia, or 170 other nations would willingly trade their problems/discontents with the fortunate residents of the US.

That said, I wonder what responsibility we have to our predecessors to extent the life of our mostly free and mostly civil society.

Wednesday, April 20, 2011

Incentives matter

Haitians need permanent solutions, including jobs and education; but many now have no incentive to move.Ask people in these tent cities if they have been receiving regular aid and they will tend to tell you they have not. But, says Mr Bellerive, people always say that. He asked a woman he had seen receiving food the day before, who lives in a camp in the gardens of his quake-wrecked office, why she had said on television afterwards that she had received nothing. “Because it is the only way to make sure people will continue to help,” she replied. Tent dwellers, used to journalists and do-gooding foreigners, are now well-aware that they can play to the media.

Better a tent than a slum

A large but unknown number of people in the camps are choosing to stay in them. Life is better there than in the sprawling, gang-infested slums. Camp-dwellers pay no rent. Nor do they have to pay for sanitation, because latrines are often provided by the aid agencies, or clean water, since that is often supplied by the agencies or by the government. Medical services are also easier to find and, again, probably free, courtesy of agencies like UNICEF or charities like Médecins Sans Frontières. A cholera epidemic makes that all the more vital.

Nigel Fisher, who oversees the UN’s aid operations in Haiti, worries about this. Haitians need permanent solutions, including jobs and education; but many now have no incentive to move. Aid is filling a gap that should be filled by the Haitian state. Unless the government can take charge again, properly providing for its people, Haiti will remain chronically and disastrously addicted to foreign aid.

Monday, April 18, 2011

Taming Leviathan...A special report on the future of the state

“We are in a transition from a big state to a small state, and from a small society to a big society.”

The speaker?

A Republican presidential candidate in America?

David Cameron rallying Britain’s Tories?


the speaker is supposedly China’s most highly regarded bureaucrat. Last year Ma Hong won the country’s national award for government innovation—a great coup for her department, which is trying to get more non-governmental organisations (NGOs) to take over parts of welfare, health and education services in the city of Shenzhen, just across the border from Hong Kong.

An excellent read . . .

Sunday, April 17, 2011

The Great Depression v the recent recession

I recently received the e mail below from an 8th grade student. The e mail and my response are provided and I wanted to both speculate on the assignment and provide a flushing out of my thoughts.

The assignment may have challenged the student to compare the causes of the 1929-1933depression to the 2007-2009 recession. This in and of itself would be an interesting exercise. The assignment may also push the student to compare the downturns and consequences and finally examine the responses to each downturn.

In addition to the similarities outlined below I would underscore two - the global nature of both contractions and the role that stress on the finanical system played in both cases.

Williamson and O Rourke compare world output then and now:

Vox - a Tale of 2 Recessions

CNN Comparison - Great Depression and Great Recession

Freeman comparison
Bruce Bartlett - Forbes

Pew Analysis

I am currently attending Rancho Solano Private Schools and I am in the 8th grade. The reason I am contacting you is because my humanities and U.S. History teachers have recently given me a documentary assignment. They gave me the decision to chose what my topic is to be about, and I chose to discuss the Great Depression and our current Recession by talking about how they are similar, different, and ultimately, if the recession is turning into another Great Depression.

I am in need of a professional viewpoint on this subject, which is why I have decided to contact you. I was wondering if I could sit down and have an interview with you for no longer than 15 minutes about my topic. It is very essential to my documentary project. If you are available, please contact me at ---- or email me at ------. I would like to interview you before 24th of April because on the week of the 25th I will be going on my 8th Grade trip to Catalina. Thank You for your time.

I would be pleased to talk with you - you may e mail me your questions or call me at 480 206-1139. Before calling I recommend you take a look at the following:

Economic growth over time

US Business Cycles over time

Economic Growth in the US

A simple comparison

Questions of interest about the 1929-1933 downturn (see link 2) and the 2007-2009 downturn (see link 2)

1. Causes - similarities and differences?

2. Downturn itself - see the last link.

3. Responses to the downturn - what "cured" the Great Depression - (hint: it was not WW2).

I do not hold a phd so you should not use the Dr. title -


Saturday, April 16, 2011

The Future and its Enemies

How we feel about the evolving future tells us who we are as individuals and as a civilization: Do we search for stasis—a regulated, engineered world? Or do we embrace dynamism—a world of constant creation, discovery, and competition? Do we value stability and control, or evolution and learning? Do we declare with Appelo that "we're scared of the future" and join Adams in decrying technology as "a killing thing"? Or do we see technology as an expression of human creativity and the future as inviting? Do we think that progress requires a central blueprint, or do we see it as a decentralized, evolutionary process? Do we consider mistakes permanent disasters, or the correctable by-products of experimentation? Do we crave predictability, or relish surprise? These two poles, stasis and dynamism, increasingly define our political, intellectual, and cultural landscape. The central question of our time is what to do about the future. And that question creates a deep divide.

"I think there's a personality that goes with this kind of thing," says economist Brian Arthur about the emerging science of complexity, which studies dynamic systems. "It's people who like process and pattern, as opposed to people who are comfortable with stasis....I know that every time in my life that I've run across simple rules giving rise to emergent, complex messiness, I've just said, 'Ah, isn't that lovely!' And I think that sometimes, when other people run across it, they recoil."

A fun read. While this is a polemic it channels Hayek, Sowell, Smith and when not baiting statists is a clear argument for liberty and freedom.

Capitalism's Failure?

One of my students sent me the following paper. I thought it portrayed some of the "failure" of economics/economists today.

Chrystia Freeland
Global capitalism leaving U.S. middle class behind
From Friday's Globe and Mail
Published Thursday, Apr. 14, 2011 7:02PM EDT
Last updated Friday, Apr. 15, 2011 8:28AM EDT

Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations.
Mr. Spence and his co-author, Sandile Hlatshwayo, examined the changes in the structure of the U.S. economy, particularly employment trends, over the past 20 years. They found that value added per U.S. worker increased sharply during that period – 21 per cent for the economy as a whole, and 44 per cent in the “tradable” sector, which is geek-speak for those businesses integrated into the global economy. But even as productivity soared, wages and job opportunities stagnated.
The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.
Here’s how Mr. Spence and Ms. Hlatshwayo put it: “The most educated, who work in the highly compensated jobs of the tradable and non-tradable sectors, have high and rising incomes and interesting and challenging employment opportunities, domestically and abroad. Many of the middle-income group, however, are seeing employment options narrow and incomes stagnate.”
Mr. Spence is neither a protectionist nor a Luddite. He prominently notes the benefit to consumers of globalization: “Many goods and services are less expensive than they would be if the economy were walled off from the global economy, and the benefits of lower prices are widespread.” He also points to the positive impact of globalization on much of what we used to call the Third World, particularly in China and India: “Poverty reduction has been tremendous, and more is yet to come.”
Mr. Spence’s paper should be read alongside the work that David Autor, an economist at the Massachusetts Institute of Technology, has been doing on the impact of the technology revolution on U.S. jobs. In an echo of Mr. Spence, Mr. Autor finds that technology has had a “polarizing” impact on the U.S. work force – it has made people at the top more productive and better paid and hasn’t had much effect on the “hands-on” jobs at the bottom of the labour force. But opportunities and salaries in the middle have been hollowed out.
Taken together, here’s the big story Mr. Spence and Mr. Autor tell about the U.S. and world economies: Globalization and the technology revolution are increasing productivity and prosperity. But those rewards are unevenly shared – they are going to the people at the top in the United States, and enriching emerging economies over all. But the American middle class is losing out.
To Americans in the middle, it may seem surprising that it takes a Nobel laureate and sheaves of economic data to reach this unremarkable conclusion. But the analysis and its impeccable provenance matter, because this basic truth about how the world economy is working today is being ignored by most of the politicians in the United States and denied by many of its leading business people.
Consider a recent breakfast at the Council on Foreign Relations that I moderated. The speaker was Randall Stephenson, chief executive officer of AT&T. Mr. Stephenson enthused that the technology revolution was the most transformative shift in the world economy since the invention of the combustion engine and electrification, leading to a huge increase in “the velocity of commerce” and therefore in productivity.
One of the Council of Foreign Relations members in the audience that morning was Farooq Kathwari, CEO of Ethan Allen, the furniture manufacturer and retailer. Mr. Kathwari is a storybook American entrepreneur. He arrived in New York from Kashmir with $37 in his pocket and got his start in the retail trade selling goods sent to him from home by his grandfather.
Here’s the question he asked Mr. Stephenson: “Over the last 10 years, with the help of technology and other things, we today are doing about the same business with 50 per cent less people. We’re talking of jobs. I would just like to get your perspectives on this great technology. How is it going to over all affect the job markets in the next five years?”
Mr. Stephenson said not to worry. “While technology allows companies like yours to do more with less, I don’t think that necessarily means that there is less employment opportunities available. It’s just a redeployment of those employment opportunities. And those employees you have, my expectation was, with your productivity, their standard of living has actually gotten better.”
Mr. Spence’s work tells us that simply isn’t happening. “One possible response to these trends would be to assert that market outcomes, especially efficient ones, always make everyone better off in the long run,” he wrote. “That seems clearly incorrect and is supported by neither theory nor experience.”
Mr. Spence says that as he was doing his research, he was often asked what “market failure” was responsible for these outcomes: Where were the skewed incentives, flawed regulations or missing information that led to this poor result? That question, Mr. Spence says, misses the point. “Multinational companies,” he said, “are doing exactly what one would expect them to do. The resulting efficiency of the global system is high and rising. So there is no market failure.”
This conclusion is a very big deal – Mr. Spence is telling us that global capitalism is working the way it should, but that the American middle class is losing out anyway. Since global capitalism is the best way we’ve come up with so far to run our economy, that creates quite a dilemma.
Mr. Spence is honest enough to admit that he has no easy answers. But he has posed the right question. American politicians in both parties are focused on a budget debate that is superficial, premature and ultimately about something pretty easy to figure out. Instead, we should all be working on the much bigger problem of how to make capitalism work for the American middle class.
© 2011 The Globe and Mail Inc. All Rights Reserved.

Has the middle class in the U.S. been left behind or even destroyed by globalism? Have the rich gotten richer while the middle class and poor got poorer? Depending on what numbers you want to focus on the answer could be yes, no or maybe. But what is it we should ask regarding the question of income inequality. Are people in any class worse off? Pre tax and pre government transfer income data show poor households becoming worse off over the past two decades. But these data show us nothing. The tax code is highly progressive and government transfers to individuals highly regressive. So once taxes and transfers are taken into account it is not so clear that the middle class have been hurt. Going further, it is really consumption that matters, not income. Are the lower income classes losing out on the basis of consumption? The answer is absolutely not. Not only have the prices of items the lower income classes spend money on declining while many items the rich spend money on rising, but total consumption between the two groups is not much different.

The real problem as I see it is that Michael Spence, nobel prize winner, is seeking to attack capitalism and its global aspects without having to resort to a so-called "market failure". Just think, if capitalism leads to disasters, inefficiencies, class warfare, etc., then it will take the learned elites to determine who gets what and how people behave. No longer will it be necessary to say the government needs to intervene when there are externalities or public goods but needs to intervene always.

Friday, April 15, 2011

Process analysis v statics

I was speaking with a colleague today whose son is in an introductory class in microeconomics at a state institution. The class is traditionally taught with a heavy emphasis upon outcome and not process, absent any real cohesive attempt to integrate the economic way of thinking with a strong dose of algebra, geometry and some calculus. And we wonder why . . .

In any event, the following post seems on point from The Coordination Problem

Austrian Final Exam Question
Steven Horwitz

I'm not giving a final exam in my Austrian course, but if I was....

Consider the following quote from Kirzner and explain what you think it means. Apply it to at least two standard models of market structure. “As soon as we draw the cost and revenue curves facing the firm, no matter what their shape, we have created a theoretical case in which all competitive behavior has by definition been ruled out.” (1973, p. 108).

Do you think Kirzner's argument is correct? Why or why not?

Thursday, April 14, 2011

Richard Epstein on “Free Market Reforms for Health Care”

New York University legal scholar Richard Epstein makes the case for “ridding the system of all the senseless restrictions on the provision of health care that should never had been put there in the first place.” As he writes:
Right now our statute books are littered with ill-thought out rules that restrain trade and raise the cost of doing business. There are state licensing laws that are intended to prevent the movement of physicians across state lines, to locations where they are needed most. There are all sorts of mandates to buy this and that kind of expensive protection—psychiatric and alcoholism benefits—that are worth to most people far less than they cost. There are restrictions on the new entry of health care insurers into any state. There are prohibitions against the corporate practice of medicine, which prevents the creation of cheap storefront operations to supply health care in competition with the world’s worst supplier of routine care—the Emergency Room. There are countless rules dealing with patient privacy that cost a fortune to enforce but which provide little or no benefit. The list goes on.

The obvious line of attack is first eliminate all these, which means taking on incumbents who have much to gain from these various forms of protectionism. Doing so has two benefits. First, it reduces both public and private costs, and it increases access through less regulation, not costly and divisive mandates. Second, once all this is done, then the question of health care support can be more sensibly attacked because it becomes a more limited problem.

Odds and Ends

Thanks Pratt for carrying the load here. I have been so busy I have been unable to take the time to post anything. I have seeral points to make here. First, I am retiring from ASU. The university offering me a deal I could not refuse even though I love teaching. The university said retire and we will give you a year's salary. Don't retire and we will require you carry a heavier load. Duh. Second, the nonsense from Washington continues. This administration and many in Congress have no understanding of what private property rights are. Obama decides to invade a country without any sense of national defense or private property rights. Lives are and will be lost -- don't those people own their own bodies? Not only do the constant unconstitutional wars violate private property rights, they cost enourmous amounts of money (estimates of Libya are $1b a day), and further encroach on the PPR and liberty of U.S. society. As Robert Higgs says, each crises (each war for instance) leads to larger government. Government in the U.S. today is about 40% of the economy. As Pratt notes below, a study shows that safety net spending in the U.S. is not much different from the socialist states of Scandinavia. In addition to the safety net spending, the U.S. has a huge military budget.

In the next few days Congress will be debating whether to lift the debt ceiling above the current $14.3 trillion to allow the government to borrow more and thus either print more money or raise taxes now or in the future. Obama's budget proposal under the most conservative estimates will increase the debt by $2 trillion a year for as long as can be seen. The argument against not raising the ceiling is that it will shut down the government, hurting the poor, the old, the infirm, and the military. That is just not true. The government will still be collecting $600 billion in revenues; it is spending that will have to be cut. Government will have to decide whether to cut across the board, eliminate departments, reduce the military spending, eliminated duplicative programs, and so on. It is merely a choice of whether to allow the government to grow further or to stop its growth at the current ridiculously high level. The ceiling should not be raised.

California just passed a law that requires one third of all energy to come from solar and air by 2020 (I think it is 2020, it could be 2015). What does this mean? It means a significant increase in electricity bills. Instead of allowing the market to determine how electricity is generated, government do-gooders decide to raise taxes on everyone. Who does this hurt the most -- the poor. The very people these do-gooders always claim they are trying to help.

While the screaming and ridiculous rhetoric that will be called upon by the democrat party and some republican party members as well to argue against revising Medicare, Medicaid and Social Security, if they are not revised people 45 and younger will be paying massive FICA taxes and not get anything in return. In fact, at some point the U.S. will have to default. But, revision need not mean harm to anyone. Allowing people 45 and younger to invest in mutual funds or other instruments of their own choice -- with some type of safety net restriciton -- will generate more funds for them. Raising the retirement age to 68 or 70 over the next 20 years will mean very little to those who retire in 20 or more years. Providing block grants to states will eliminate huge bureacracies in Washington and eliminate a great deal of waste, and will allow 50 different laboratories for experimenting with medical care provision and funding.

Well, enough for now.

Wednesday, April 13, 2011

Why I like David Warsh and Economic Principals

Dependable time and stable money are among government’s most fundamental responsibilities. Changing the calendar periodically to suit lobbying interests and bureaucratic enthusiasms is a bad idea.

Meanwhile, outrage at the government’s determination to favor the new fluorescent light bulbs by imposing efficiency standards on the old incandescent ones is one of the few concerns I share with the Tea Party. “It makes me want to explode,” says my friend, the critic Katherine A. Powers. Washington should repeal George W. Bush’s mandate and let the price system do its work.

But – and it is a big but – despite the fact that government occasionally steps on my toes, I am pretty certain that the mixed economy is here to stay, and that effective government is therefore as important to modern life as is a proper appreciation of the superiority of markets to other forms of organization for the provision of most goods and services.

A Big But

Tuesday, April 12, 2011

Does the free market corrode moral character?

Does the free market corrode moral character?

This is the fourth in a series of conversations among leading scientists, scholars, and public figures about the "Big Questions."

Monday, April 11, 2011

Sweden v US - from Price Fishbach

Social Welfare Expenditures in the United States and the Nordic Countries: 1900-2003

Price V. Fishback
University of Arizona; National Bureau of Economic Research (NBER)

May 2010

NBER Working Paper No. w15982

The extent of social expenditures in the U.S. and the Nordic Countries is compared in the early 1900s and again in the early 2000s. The common view that America spends much less on social welfare than the Nordic countries does not survive closer inspection when we consider the differences in the structures of social expenditures. The standard comparison examines gross social expenditures. After adjustments for direct and indirect taxes paid, the net social expenditures in the Nordic countries are much closer to American levels. Inclusion of mandatory and private social expenditures raises the American share of GDP devoted to social expenditures to rank among the middle of the Nordic countries. Per capita net public social expenditures in the U.S. rank behind only Sweden. Add in the private spending, and per capita spending in the U.S. is higher than in all of the Nordic countries. Finally, I document the enormous diversity across time and place in public social expenditures in the U.S. in the early 1900s and circa 1990.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at

Sunday, April 10, 2011

Cato Unbound

“Protection . . . against the tyranny of the magistrate is not enough,” wrote John Stuart Mill; “there needs protection also against the tyranny of the prevailing opinion and feeling.” Here at Cato Unbound, we aim to do our part.

The March topic

March 2011: The Rise and Fall of Neoconservatism
Neoconservatism is perhaps the slipperiest of current intellectual trends. Its adherents downplay the term itself, calling neoconservatism variously a “persuasion,” a “mode of thinking,” or even a “mood.” Our lead essayist this month begs to differ. Drawing on his recent book Neoconservatism: An Obituary for an Idea, C. Bradley Thompson claims that the thinking of two individuals illuminates nearly all of what we know today as neoconservatism. Those individuals are Irving Kristol and Leo Strauss, featured prominently on this month’s banner art.

Thompson argues that Kristol learned from Strauss a startling form of political pragmatism. The intellectual elite — represented, of course, by themselves — is privy to truths that would confuse, anger, or even corrupt the common man. What’s an intellectual giant to do?

Saturday, April 9, 2011

Top Ten Worst Disasters in the World

There is debate as to what the deadliest disasters of all time actually are, due to discrepancies in death tolls, especially with disasters that occurred outside of the last century. Following is a list of ten of the deadliest disasters in recorded history, from lowest to highest estimated death toll.

10. Aleppo Earthquake (Syria 1138) - 230,000 dead
9. Indian Ocean Earthquake/Tsunami (Indian Ocean 2004) - 230,000 dead
8. Haiyun Earthquake (China 1920) - 240,000 dead
7. Tangshan Earthquake (China 1976) - 242,000 dead
6. Antioch Earthquake (Syria and Turkey 526) - 250,000 dead
5. India Cyclone (India 1839) - 300,000 dead
4. Shaanxi Earthquake (China 1556) - 830,000 dead
3. Bhola Cyclone (Bangladesh 1970) - 500,000-1,000,000 dead
2. Yellow River Flood (China 1887) - 900,000-2,000,000 dead
1. Yellow River Flood (China 1931) - 1,000,000-4,000,000 dead

Friday, April 8, 2011

Public Sector Unions

Incentives matter and in this National Affairs analysis, Daniel Disalvo provides valuable historical context, insight and information to view the institutional setting that generates public sector unionization, the consequences of this institutional development and some basis for considering future consequences of this institutional development.

Much like the farm lobby, the public union presence in our political process may be a strong ongoing institution that will continue to evolve. Public choice theory suggests that this evolution will not lead to elimination, rather
In this important analysis, Disalvo provides background that may help observers contextualize the current debate over public employmment and the unionization of public employees. Well worth a read - in a key passage the author writes:

The Trouble with Public Sector Unions

When Chris Christie became New Jersey's governor in January, he wasted no time in identifying the chief perpetrators of his state's fiscal catastrophe. Facing a nearly $11 billion budget gap — as well as voters fed up with the sky-high taxes imposed on them to finance the state government's profligacy — Christie moved swiftly to take on the unions representing New Jersey's roughly 400,000 public employees.

On his first day in office, the governor signed an executive order preventing state-workers' unions from making political contributions — subjecting them to the same limits that had long applied to corporations. More recently, he has waged a protracted battle against state teachers' unions, which are seeking pay increases and free lifetime health care for their members. Recognizing the burden that such benefits would place on New Jersey's long-term finances, Christie has sought instead to impose a one-year wage freeze, to change pension rules to limit future benefits, and to require that teachers contribute a tiny fraction of their salaries to cover the costs of their health insurance — measures that, for private-sector workers, would be mostly uncontroversial.

The firestorm that these proposals have sparked demonstrates the political clout of state-workers' unions. Christie's executive order met with vicious condemnation from union leaders and the politicians aligned with them; his fight with the public-school teachers prompted the New Jersey Education Association to spend $6 million (drawn from members' dues) on anti-Christie attack ads over a two-month period. Clearly, the lesson for reform-minded politicians has been: Confront public-sector unions at your peril.

Yet confront them policymakers must. As Christie said about the duel with the NJEA, "If we don't win this fight, there's no other fight left." Melodramatic as this may sound, for many states, it is simply reality. The cost of public-sector pay and benefits (which in many cases far exceed what comparable workers earn in the private sector), combined with hundreds of billions of dollars in unfunded pension liabilities for retired government workers, are weighing down state and city budgets. And staggering as these burdens seem now, they are actually poised to grow exponentially in the years ahead. If policymakers fail to rein in this growth, a fiscal crack-up will be the inevitable result.

New Jersey has drawn national attention as a case study, but the same scenario is playing out in state capitals from coast to coast. New York, Michigan, California, Washington, and many other states also find themselves heavily indebted, with public-sector unions at the root of their problems. In exchange, taxpayers in these states are rewarded with larger and more expensive, yet less effective, government, and with elected officials who are afraid to cross the politically powerful unions. As the Wall Street Journal put it recently, public-sector unions "may be the single biggest problem...for the U.S. economy and small-d democratic governance." They may also be the biggest challenge facing state and local officials — a challenge that, unless economic conditions dramatically improve, will dominate the politics of the decade to come.


Since the middle of the 20th century, organized labor in America has undergone two transformations with major implications for the nation's politics. The first is the dramatic decline in overall union membership. In 1955, organized labor represented one-third of the non-agricultural work force; today, it represents just 12.3%. The second transformation, however, is even more significant: the change in the composition of the unionized work force.

As private-sector unions have withered, public-sector unions have grown dramatically. The Bureau of Labor Statistics reports that, in 2009, for the first time ever, more public-sector employees (7.9 million) than private-sector employees (7.4 million) belonged to unions. Today, unionized workers are more likely to be teachers, librarians, trash collectors, policemen, or firefighters than they are to be carpenters, electricians, plumbers, auto workers, or coal miners.

This shift has produced a noticeable change in the demographic profile of union members; gone is the image of a union man as a beefy laborer in a hard hat and steel-toed boots. According to data from the University of Michigan's American National Election Study, in 1952, about 80% of union members were blue-collar workers, while 20% were white-collar workers; by the mid-1990s, those classified as white-collar workers gained majority status. Nor do men dominate unions any longer: In the 1950s, more than 80% of union members were men, but today there is near gender parity. Union members also have much more schooling than they once did. In 1960, more than 35% of union members had not finished high school and barely 2% had college degrees. Today, almost every union member has completed high school, and more than 25% have college degrees. The typical union member no longer lives in a major city center close to the factory; by the 1990s, union members were more likely to live in suburban than urban areas. Unions have also become multi-racial: Nearly a quarter of union members are now non-white. Unions today represent a vastly different slice of America than they did at the height of the country's manufacturing prowess.

The rise of government-worker unionism has also combined with the broader transformation of the American economy to produce a sharp divergence between public- and private-sector employment. In today's public sector, good pay, generous benefits, and job security make possible a stable middle-class existence for nearly everyone from janitors to jailors. In the private economy, meanwhile, cutthroat competition, increased income inequality, and layoffs squeeze the middle class. This discrepancy indicates how poorly the middle class has fared in recent decades in the private economy, which is home to 80% of American jobs. But it also highlights the increased benefits of government work, and shines a spotlight on the gains public-sector unions have secured for their members. Perhaps this success helps explain why, on average, 39% of state- and local-government employees belong to unions. (Differences in state and local laws of course mean that the percentage varies from state to state; New York tops the chart with roughly 70% of state employees in unions, while many Southern right-to-work states hover in the single digits.)

The emergence of powerful public-sector unions was by no means inevitable. Prior to the 1950s, as labor lawyer Ida Klaus remarked in 1965, "the subject of labor relations in public employment could not have meant less to more people, both in and out of government." To the extent that people thought about it, most politicians, labor leaders, economists, and judges opposed collective bargaining in the public sector. Even President Franklin Roosevelt, a friend of private-sector unionism, drew a line when it came to government workers: "Meticulous attention," the president insisted in 1937, "should be paid to the special relations and obligations of public servants to the public itself and to the Government....The process of collective bargaining, as usually understood, cannot be transplanted into the public service." The reason? F.D.R. believed that "[a] strike of public employees manifests nothing less than an intent on their part to obstruct the operations of government until their demands are satisfied. Such action looking toward the paralysis of government by those who have sworn to support it is unthinkable and intolerable." Roosevelt was hardly alone in holding these views, even among the champions of organized labor. Indeed, the first president of the AFL-CIO, George Meany, believed it was "impossible to bargain collectively with the government."

Courts across the nation also generally held that collective bargaining by government workers should be forbidden on the legal grounds of sovereign immunity and unconstitutional delegation of government powers. In 1943, a New York Supreme Court judge held:

To tolerate or recognize any combination of civil service employees of the government as a labor organization or union is not only incompatible with the spirit of democracy, but inconsistent with every principle upon which our government is founded. Nothing is more dangerous to public welfare than to admit that hired servants of the State can dictate to the government the hours, the wages and conditions under which they will carry on essential services vital to the welfare, safety, and security of the citizen. To admit as true that government employees have power to halt or check the functions of government unless their demands are satisfied, is to transfer to them all legislative, executive and judicial power. Nothing would be more ridiculous.

The very nature of many public services — such as policing the streets and putting out fires — gives government a monopoly or near monopoly; striking public employees could therefore hold the public hostage. As long-time New York Times labor reporter A. H. Raskin wrote in 1968: "The community cannot tolerate the notion that it is defenseless at the hands of organized workers to whom it has entrusted responsibility for essential services."

Another common objection to collective bargaining with public-employee unions was that it would mean taking some of the decision-making authority over government functions away from the people's elected representatives and transferring it to union officials, with whom the public had vested no such authority. In this view, democracy would be compromised when elected officials began sharing with union leaders the power to determine government employees' wages, benefits, and working conditions. Furthermore, collectively bargained work rules could alter what public servants did day to day in ways not condoned by either elected officials or the voting public.

Given the forces and arguments aligned against public-sector unions, what led to their enormous growth? Three conditions prepared the ground for the legal reforms that facilitated collective bargaining in the public sector (and the subsequent swelling of the ranks of unionized government employees).

The first was the weakening of party machines at the state and (especially) local levels. In many of America's large cities, the responsibility for filling government jobs fell to the party machines; turnover in government employment was therefore high, connected as it was to election results. In New York during the 1930s and '40s, for instance, the average tenure of a cop or garbage collector was five years. Another effect of the machines' influence over government hiring was political: People in patronage jobs inevitably devoted a portion of their nominal working hours to party affairs. Because government employment under the machine system was both relatively brief and partisan in nature, a culture of professionalism was never really able to take hold.

Reformers' chief weapon in the war against the machines was the enactment of civil-service laws. Such laws sought to deprive ward bosses of control over patronage, which was their lifeblood. Civic groups, the press, and public-employees' associations believed that greater professionalization of the government work force would draw in talent, increase efficiency, and reduce corruption. In the 1950s, according to historian Leo Kramer, the leadership of the American Federation of State, County, and Municipal Employees (AFSCME) "saw itself as part of a great movement to reform government," one of whose principal aims was "the extension of the merit system to all nonpolicy determining positions in all government jurisdictions."

By the end of the 1950s, reformers had put the old machines on the defensive. And professionalization had had its intended effect: In their 1963 book City Politics, Edward Banfield and James Q. Wilson found that, by 1961, 52% of cities with populations over 500,000 had placed nearly all government employees under civil-service protections.

One important consequence of civil-service reform was that, with the end of election-based turnover — and with protections against undue political interference in hiring and firing — public employees gained nearly lifetime job security. This gave workers a long-term interest in their jobs and increased their capacity to express themselves collectively, thereby helping to make the unionization of public employees possible.

The second precondition for public-sector unionization was economic and demographic change. In the post-war period, the number of government jobs grew rapidly: Between 1950 and 1976, state- and local-government employment increased from 9.1% to 15.3% of the non-agricultural work force (an increase from roughly 4 million workers to about 12 million). A large part of this spike was the result of increased demand for government services caused by the Baby Boom. Huge numbers of young people meant a greater need for workers in schools in particular; the number of Americans working as teachers, principals, and administrators thus increased dramatically. It is hardly surprising, then, that some of the first public employees to unionize (and some of the most militant) were teachers. In the 1970s in New York state alone, there were, on average, 20 teacher strikes a year.

"The third precondition (for the rapid increase in public employee unions)was the solidification of the alliance between organized labor and the Democratic Party. Franklin Roosevelt's signing of the Wagner Act (which protected the rights of private-sector workers to organize and bargain collectively) in 1935 fully bonded labor to the Democrats; their partnership was reinforced during the fight over the Taft-Hartley Act of 1947, which was a Republican initiative to rein in union power. By mid-century, Democrats began to rely on labor unions for both funding and on-the-ground campaign organizing. In the 1950s and '60s, according to political scientist J. David Greenstone, "labor functioned as the most important nation-wide electoral organization for the Democratic Party." As a political tag team, both Democrats and labor had an incentive to broaden the base of the labor movement — and they came to see public-sector workers as the most promising new hunting ground, especially as private-sector union membership began to decline."

As private-sector unions have withered, public-sector unions have grown dramatically. The Bureau of Labor Statistics reports that, in 2009, for the first time ever, more public-sector employees (7.9 million) than private-sector employees (7.4 million) belonged to unions. Today, unionized workers are more likely to be teachers, librarians, trash collectors, policemen, or firefighters than they are to be carpenters, electricians, plumbers, auto workers, or coal miners.

The rise of government-worker unionism has also combined with the broader transformation of the American economy to produce a sharp divergence between public- and private-sector employment. In today's public sector, good pay, generous benefits, and job security make possible a stable middle-class existence for nearly everyone from janitors to jailors. In the private economy, meanwhile, cutthroat competition, increased income inequality, and layoffs squeeze the middle class. This discrepancy indicates how poorly the middle class has fared in recent decades in the private economy, which is home to 80% of American jobs. But it also highlights the increased benefits of government work, and shines a spotlight on the gains public-sector unions have secured for their members. Perhaps this success helps explain why, on average, 39% of state- and local-government employees belong to unions. (Differences in state and local laws of course mean that the percentage varies from state to state; New York tops the chart with roughly 70% of state employees in unions, while many Southern right-to-work states hover in the single digits.)

Thursday, April 7, 2011

Direction v spontaneous order

Paul Krugman writes:

So if we want a society of broadly shared prosperity, education isn’t the answer — we’ll have to go about building that society directly.

Boyes and I have discussed the work of Smith, Hayek, Sowell on this blog as they attempt to understand two key processes: the emergent, evolutionary spontaneous process that generates an unintended order and the point of view of planners, elites, intelligensia that oppose this process and argue instead for centralized planning.

In his March 6, 2011 NY Times editiorial Nobel winner Paul Krugman succinctly presents this latter point of view.

This confident assertion of the ability of "we" to direct the building of society is an accelerating perspective - it is articulated by the right and the left, republican and democrat and the increasing level of divisiveness in the public discourse centers not on this fundamental view about how society should develop, but rather on who should be in charge of the direction and which vision or blueprint should be imposed.

In language that captures Krugman's perspective, Higgs does two things in this review: first he captures the underlying hubris in a clear and incisive manner. This positive outcomes is offset by the unfortunate rhetoric - labelling planners as fools may be accurate but it cannot meaningfully advance the debate.

Bob Higgs reviews Derek Leebaert’s Magic and Mayhem: The Delusions of American Foreign Policy from Korea to Afghanistan.

Leebaert focuses on several dimensions of what he calls the foreign policy makers’ reliance on “magic” ― a collection of assumptions and convictions about what the United States government can and should do in its dealings with the rest of the world. He calls it magic, he explains .. because “shrewd, levelheaded people are so frequently bewitched into substituting passion, sloganeering, and haste for reflection, homework, and reasonable objectives.” As Leebaert illustrates with a great variety of cases, decision makers forgo careful study, detailed, factual evaluation, and judicious evaluation of alternatives (including the alternative of doing nothing) and instead opt for plunging almost blindly into efforts that almost any serious, informed thinker could have told them were doomed to fail.

They are supremely self-confident, notwithstanding their all-too-frequent lack of any real basis for such confidence.

This clear confidence by the intelligensia as they approach planning or directing in society in the face of complexity in human behavior is hubris. It is clear that attempts to shape and direct a complex phenomenon that is our social order will generate unintended consequences. In fact, all action generates unintended outcomes and the individual operating in a system of natural liberty can more quickly and responsibly react and respond to these consequences than can the central planner or director.

Higgs goes on in his review:

Such decision making almost always represents the work of what Leebaert calls “emergency men”―”the clever, energetic, self-assured, well-schooled people who take advantage of the opportunities intrinsic to the American political system to trifle with enormous risk” (p. 5) ….

The image of the emergency man evokes Smith's man of system - attempting to move men like pieces on a chess board. The use of emergence man includes in this metaphor Higg's well known analysis of the role that crisis plays in expanding government or state activity at the expense of private or individual space.

Emergency men tend to make a hash of matters for a variety of reasons, and Leebaert devotes the heart of his book to an elaboration of a half dozen chronic problems along these lines. He identifies these categories in the introduction:

1. A sensation of urgency and of “crisis” that accompanies the belief that most any resolute action is superior to restraint … joined by the emergency man’s eagerness to be his country’s revealer of dangers, real and imaginary.
2. The faith that American-style business management … can fix any global problem given enough time, resources, and appropriately “can-do,” businesslike zeal.
3. A distinctively American desire to fall in behind celebrities, stars, and peddlers of some newly distilled expertise who, in foreign affairs especially, seem to glow with wizardry.
4. An expectation of wondrous returns on investment, even when this is based on intellectual shortcuts.
5. Conjuring powerful, but simplified images from the depths of “history” to rationalize huge and amorphously expanding objectives.
6. The repeated belief that America can shape the destiny of other countries overnight and that the hearts and minds of distant people are throbbing to be transformed into something akin to the way we see ourselves. (pp. 7-8)

…. Leebaert’s approach to criticizing U.S. defense and foreign policies bears an interesting similarity to the criticisms Ludwig von Mises and F. A. Hayek leveled against socialism. These famous Austrian economists never criticized the socialists as bad people or as people who sought to act in a way that would harm the general public. They invariably gave their socialist ideological opponents the benefit of the doubt with regard to their good intentions. Although this approach has a certain theoretical justification in the development of economic theory, it flies in the face of historical reality. Many leading socialists, especially but by no means exclusively in the USSR, were little short of fiendish. It strains credulity to suppose that they were simply misguided men of good will.

Likewise, much of what seems merely foolish to Leebaert strikes me as the result, not of faulty thinking about policies and their likely consequences, but of the desire for political power and personal aggrandizement and of ideological and political motives that will not bear scrutiny. About such possibilities Leebaert has little .. to say. In his view, it appears that the emergency men have been good men who allowed themselves to be seduced by “magical” thinking, when they should have gone about their business in a more rational, deliberate, and evidence-based manner. He therefore thinks that a book such as his might well serve to educate policy makers, leading them to abandon magic and to adopt a sounder approach to making their decisions. In this regard, I believe he has slipped into wishful thinking as much as did many of the foreign policy makers he so aptly criticizes.

Whenever we try to understand why policy makers act as they do, we must answer the question: Are they fools or charlatans? Leebaert concludes, in effect, that in the defense and foreign policy realm, they are often fools. I am inclined to the conclusion that they are both.

Wednesday, April 6, 2011

6 killer apps

The Harvard historian Niall Ferguson, who has just written a book, Civilization: The West and the Rest, puts things in historical context: "For 500 years the West patented six killer applications that set it apart. The first to download them was Japan. Over the last century, one Asian country after another has downloaded these killer apps — competition, modern science, the rule of law and private property rights, modern medicine, the consumer society and the work ethic. Those six things are the secret sauce of Western civilization."

Read more:,8599,2056610,00.html

Tuesday, April 5, 2011

Economics of a Zombie Attack

My colleague Scott Gustafson's presentation.

Monday, April 4, 2011

Saturday, April 2, 2011

10th Annual ASET Conference

Celebrating Economics and Liberty

This year's conference is sponsored by the Arizona Council on Economic Education, Mesa Community College Economics Department, Liberty Fund, and the Council for Economic Education.

Click on the slideshow on your right to view the conference pictures in full screen.

This year's conference feature's John Morton of the Arizona Council on Economic Education and Keynote Speaker Dr. David M. Hart, Director or the Online Library of Liberty, Liberty Fund, Indianapolis, Indiana.

Dr. Hart's presentation on Bastiat can be viewed at his homepage or click here for the direct link -

Hart's presentation was a delight - his use of image to illustrate the humor in Bastiat's work was illustrated in a wonderful manner - this image is one of many David used:

Stephen Haessler of the Freedom and Prosperty Academy - lead a break out session on Economic Freedom:

Cate Johnson, director of the Office of Economic Education at the University of Arizona provided an overview of a web based double auction lesson -

Over 100 economic educators from around the state attended the 10th annual conference.

Man, Economy, State - book study 1.1

In the chapter 1 discussion of capital, Rothbard makes a powerful point that is unfortunately not well understood:

Capital is a way station along the road to the enjoyment of consumers’ goods. He who possesses capital is that much fur­ther advanced in time on the road to the desired consumers’ good. . . . Thus, the role of capital is to advance men in time toward their objective in producing consumers’ goods. This is true for both the case where new consumers’ goods are being produced and the case where more old goods are being produced.

I am now coming to an insight that I regret is a long time developing - in order to fully appreciate capitalism it is helpful to have a clear idea of the nature and source of capital and how time impacts this understanding. Rothbard goes on:

Thus, any actor, at any point in time, has the choice of: (a) adding to his capital structure, (b) maintaining his capital in­tact, or (c) consuming his capital. Choices (a) and (b) involve acts of saving. The course adopted will depend on the actor’s weighing his disutility of waiting, as determined by his time preference, against the utility to be provided in the future by the increase in his intake of consumers’ goods.
At this point in the discussion of the wearing out and replace­ment of capital goods we may observe that a capital good rarely retains its full “powers” to aid in production and then suddenly lose all its serviceability. In the words of Professor Benham, “capital goods do not usually remain in perfect technical con­dition and then suddenly collapse, like the wonderful ‘one-hoss shay.’

While I am tempted to think today of applications of the final statement - both at my place of employment and in a broader sense the infrastructure of our country, a more important rumination is the process by which the individual consumption, savings and investment decisions emerge and . . . I hate to use this term but struggle to find a substitute . . . aggregate in society. This process of intermediation and capital allocation is a vital one as societies evolve in complexity and character.

In our study guide Murphy offers a final study question for chapter 1:

Suppose that a farmer normally sets aside ten percent of his harvest as seed corn. His son says, “That’s silly! We should sell all of our harvest and make as much money as possible.” What would this policy lead to?

This is a great question for it implies a number of important issues that I read beneath the surface of chapter 1. The first is the Hayekian notion of competition as a discovery procedure - that is the discussion of factors of production and capital formation as well as the work v leisure tradeoff imply a process as work by the individual agents in society. So, the farmer has a rule of thumb that has evolved as he "normally" allocates 10 per cent of his crop to capital. This example illustrates a number of elements of capital - its perishability in particular. But more importantly this 10 per cent rule is one that has evolved over time. The development of the rule was based upon experience, trial and error and a reflective consciousness on the part of the producer.

Now the son presents an alternative to the evolved rule. A great opportunity to demonstrate the next issue that came to my mind in this reading - adaptive efficiency. As North uses this concept and the son illustrates, a flexibility and willingness to confront risk and uncertainty is evident in the son's proposal. The trial and error that was certainly at the basis of the 10 per cent rule is found in the son's proposal - he is a chip off the old block. The revenue from the additional 10 per cent of crop he proposes to sell is the opportunity cost of the father's investments. That income could be used for a number of purposes - purchasing insurance, expanding the family farm, diversification in capital investment, emergency savings, hedging. By confronting uncertainty and risk the son is allowing the 10 per cent rule to be tested and the application of freedom in action which is inherent in adaptive efficiency leads to a second test - the test of trial and error. This trial may or may not lead to a higher level outcome than the father's approach - but the family (and we as interested bystanders in society) will never know if the rule is not tested.

Rothbard's analysis in chapter 1 seems to support my reading. He writes:

Any actor will continue to save and invest his resources in various expected future consumers’ goods as long as the utility, considered in the present, of the marginal product of each unit saved and invested is greater than the utility of present con­sumers’ goods which he could obtain by not performing that saving. The latter utility—of present consumers’ goods forgone—is the “disutility of waiting.” Once the latter becomes greater than the utility of obtaining more goods in the future through saving, the actor will cease to save.

Allowing for the relative urgency of wants, man, as has been demonstrated above, tends to invest first in those consumers’ goods with the shortest processes of production.

Following in Rothbard's description - the father and son now have diverging views of the future and that divergence changes the calculus of present value of net marginal utilities between the two. So, this question is a great real world application - this type of divergence is ubiquitous, and doesn't even require multiple agents - how many times have I faced this type of dilemna in my everyday decision making?

So, all actions in the future are subject to both risk and uncertainty. To the extent that the costs and benefits of this risk and uncertainty are internalized the results of the decisions made by the farmer and his son will transmit information through society in a productive and positive way.

However, lurking within Bob's question is the spectre of moral hazard. I hope I am not being overly sensitive, but there is the possibility of social costs and benefits that are not in line with the private costs and benefits. Moreover, the market in which this farmer and his son operate may have been altered in a way that makes this question and speculation about outcomes more interesting and more significant.

I have to wonder if Bob selected this question with a further intent. In the US it is indeed hard to think of farming without immediately thinking of the state. The government is so deeply involved in US agriculture - and Bob did pick corn as the example - a crop profoundly influenced by government policy and action - that a reader is invited to wonder - why did the father set aside 10 per cent in the past, and what change (government or otherwise) has motivated the son to make a significant change in capitalization and investment.

To answer the question Bob asks - What would this policy lead to?

The wonderful answer that Hayek provides is . . . .

We don't know.

And isn't this wonderful. The ability of individuals to use information for their own ends in the absence of coercion is a indeed at the heart of a free and responsible society.

But Bob pushes the reader with the implications behind this question. I might ask, what motivated the son's proposal? Was it a government action - an increase for example in the subsidy that the government provides to corn farmers? A subsidy or credit to a consumer of corn (ethanol) that may have raised the demand for corn? Actions by another state (foreign government) that increased the demand for corn?

Price is a signifier of great information and the son's action is the result of that information.

Friday, April 1, 2011

Man, Economy, State - book study

As indicated at the end of this post, April will see a study of Rothbard's Man, Economy and State.

A sympathetic review of the book in 1962:

The publication of a standard book on economics raises again an important question, viz., for whom are essays of this consequence written: only for specialists, the students of economics, or for all of the people?

The main virtue of this book is that it is a comprehensive and methodical analysis of all activities commonly called economic. It looks upon these activities as human action, i.e., as conscious striving after chosen ends by resorting to appropriate means. This cognition exposes the fateful efforts of the mathematical treatment of economic problems.

Murray's Study Guide is a wonderful resource and supplement. Of the 10 chapter 1 questions that Murray offers I found two particularly helpful to thinking about my reading.

3. Suppose a man is strumming his guitar while sitting on the sidewalk in a large city, and that his only purpose is to listen to the enjoyable music.

How should the guitar be classified? What if passersby begin giving the man loose change, so that he now views the guitar as a means to earning money? (pp. 8–9)

4. Suppose that a boy, on June 4, is offered the choice of seeing a fireworks show that day, or in exactly one month.

If the boy chooses the show in the future, has he violated the law of time
preference? (pp. 15–16)

In preparing for this study (chapter 1 will be the source for the initial discussion}, I encountered a very useful observation by Rothbard on time preference which, I think anticipates the central role played by interest rates in the Austrian Perspective.

Rothbard's assertion that the present is preferred to the future by consumers of goods seems, in general reasonable. However, I wonder if this gives consumers too little credit for valuing savings. While Rothbard certainly will address this, it seems to me that, based upon my own experience there is a not insignificant set of goods that consumers may value in the future:

1. Leisure in the future. This is retirement and I wonder if a cultural stimuli to retirement has evolved in developed economies that is the inverse of Weber's work ethic. That is, retirement is to be delayed for middle age or later?

2. Learning in the future. This innovative book study exemplifies what I am trying to articulate here. That is, we value higher learning - in the future. I wonder what the average age is of the participants here. In a recent Mises University class (that actually required monetary payment and time as opposed to merely time) there were well over 100 participants and I sensed from the discussion, most were in my age bracket *(mid 50s). Now learning in this sense may merely be a subset of leisure, but is worth breaking out to my way of thinking.

3. Cultural activities such as bris, marriage, leadership in voluntary organizations. All of these would represent, for consumers, goods - yet they tend to be valued in the future.

A fundamental and constant truth about human action is that man prefers his end to be achieved in the shortest possible time. Given the specific satisfaction, the sooner it arrives, the better. This results from the fact that time is always scarce, and a means to be economized. The sooner any end is attained, the better. Thus, with any given end to be attained, the shorter the period of action, i.e., production, the more preferable for the actor. This is the universal fact of time preference. At any point of time, and for any action, the actor most prefers to have his end attained in the immediate present. Next best for him is the immediate future, and the further in the future the attainment of the end appears to be, the less preferable it is. The less waiting time, the more preferable it is for him
( )

Rothbard goes on to link develop the role of time and time preference in human action. Rothbard's analysis is one that places exchange at the center of human action. This exchange is, if I am readin correctly, both the cause and result of the inherent drive to improve ones' state of being. If I am on track with this reading it helps to clarify for me Adam Smith's assertion that the drive to truck, barter and exchange is also inherent in human nature. I wonder if this drive developed from evolutionary sources or is in fact genetic. Matt Ridley's work would suggest it is both - that the link between genetics and evolution makes both the source of "inherent" behaviors.

All action is an attempt to exchange a less satisfactory state of affairs for a more satisfactory one. The actor finds himself (or ex­pects to find himself) in a nonperfect state, and, by attempting to attain his most urgently desired ends, expects to be in a better state. He cannot measure the gain in satisfaction, but he does know which of his wants are more urgent than others, and he does know when his condition has improved. Therefore, all action in­volves exchange—an exchange of one state of affairs, X, for Y, which the actor anticipates will be a more satisfactory one (and therefore higher on his value scale). If his expectation turns out to be correct, the value of Y on his preference scale will be higher than the value of X, and he has made a net gain in his state of satisfaction or utility. If he has been in error, and the value of the state that he has given up—X—is higher than the value of Y, he has suffered a net loss. This psychic gain (or profit) and loss can­not be measured in terms of units, but the actor always knows whether he has experienced psychic profit or psychic loss as a result of an action-exchange.[18]

"Starting the first week of April, this group will read a few chapters weekly from Murray Rothbards "Man Economy and State with Power and Market" (MESwPM), then review and discuss them. The study guide by Robert Murphy contains clarifications and small quizzes which we will answer individually then select a "best answer".

I'm going to set up two or three sets of "office hours" throughout the week so we can meet in the "group chat" and help answer questions or clarify the weeks readings.

I'll be live blogging my thoughts on the book, and the study group process at I have done this before and it's a great way to increase your understanding of economics, liberty and the world around you.

Please invite or suggest any friends who are interested in Austrian or free market economics, libertarian political theory, or Murray Rothbard. Feel free to send me a private message or leave any questions, concerns, or comments on the group wall,\.

The book is available free here

The study guide here"

The 1962 review outlines the rationale and underlying purpose for Rothbard's book. In reflecting on the assertion below I wonder first how true this remains today. The reviewer is recalling Hayek's description of the role of intellectuals in society and anticipates Sowell's recent polemic on the topic. Clearly intellectuals represent an elite faction and, while the intelligensia is not homogeneous Klein and others have research that suggests the majority of elite are interventionists if not full on statists. The review -

It is quite different in the field of economics. The fact that the majority of our contemporaries, the masses of semi-barbarians led by self-styled intellectuals, entirely ignore everything that economics has brought forward, is the main political problem of our age. There is no use in deceiving ourselves. American public opinion rejects the market economy, the capitalistic free-enterprise system that provided the nation with the highest standard of living ever attained. Full government control of all activities of the individual is virtually the goal of both national parties. The individual is to be deprived of his moral, political, and economic responsibility and autonomy, and to be converted into a pawn in the schemes of a supreme authority aiming at a "national" purpose. His "affluence" is to be cut down for the benefit of what is called the "public sector," i.e., the machine operated by the party in power. Hosts of authors, writers, and professors are busy denouncing alleged shortcomings of capitalism and exalting the virtues of "planning." Full of a quasi-religious ardor, the immense majority is advocating measures that step by step lead to the methods of administration practiced in Moscow and in Peking.

My replies to the study guide questions

3. Guitar - first situation a first order capital good, the second situation a second order capital good.

4. Time preference - great question. I'd love to know how old the boy is. My 10 year old son would not wait, I would. In general this is marginal thinking coupled with a view of shared rather than individual utility. The shared benefit of a 4th of July fireworks for some (many?) would exceed the individual benefit of a 4th of June fireworks display. This question asks us to think about methological individualism and the subjective nature of utility. Moreover, this situation integrates individual planning and decision making within the context of society. I wonder how many of you also pondered the role of the state - in shaping the 4th of July as the preferred fireworks date through direct (national holiday) and indirect (education) means.

Finally, a major benefit of this first set of readings is a thoughtful foundation to distinguish free decision making from centralized:

. . . we must distinguish between "free-market capitalism" on the one hand, and "state capitalism" on the other. The two are as different as day and night in their nature and consequences. Free-market capitalism is a network of free and voluntary exchanges in which producers work, produce, and exchange their products for the products of others through prices voluntarily arrived at. State capitalism consists of one or more groups making use of the coercive apparatus of the government — the State — to accumulate capital for themselves by expropriating the production of others by force and violence.