In 1776, Adam Smith famously noted the human "propensity to truck, barter, and exchange one thing for another."
But why do humans trade at all?
Another way to ask the question is, what is the survival value of trade?
To put the answer in its simplest terms, trade must deliver what humans want, and deliver it more reliably and with less effort than violence, fraud, or self-sufficiency.
Ah, you may ask, but what do humans want? For most of the history of our species, the answer was simple: food and sex. Today, in a world that offers most people food and sex in abundance, surely human desires have grown more sophisticated.
Or have they?
The Washington Post reports that the CIA is trading Viagra for information about the movement of the Taliban in Afghanistan. Traditional inducements for information like weapons and cash aren't working as well as they used to.
One 60-year-old Afghan chieftain had extensive knowledge of the region but would not cooperate with the Americans. He changed his mind after a CIA operative gave him some Viagra. The next time the operative visited, the chieftain "came up to us beaming. He said, 'You are a great man.' And after that we could do whatever we wanted in his area."
The more things change...
Wednesday, December 31, 2008
In 1776, Adam Smith famously noted the human "propensity to truck, barter, and exchange one thing for another."
Tuesday, December 30, 2008
Barron's Economics Editor Gene Epstein recommends seven economics-related books for the New Year, including the two volume edition of The Bastiat Collection.
Here's what Epstein says about Bastiat:
"Over the years, I have seen many references to the work of Frédéric Bastiat, a French economist who lived and wrote during the first half of the 19th century. (Caplan describes him in The Myth of the Rational Voter as "the original one-handed economist" -- a reference to the type of economic seer that Harry Truman vainly sought.)Here is Gene Epstein discussing his selections:
This year, I finally read the two volumes of The Bastiat Collection (2007). The only depressing part about these funny and satirical essays that assault economic myths is that they all seem so current.
Nothing much seems to have changed in the more than century-and-a-half since they were published. Just read Bastiat's "Petition of the Manufacturers of Candles...and...Everything Connected with Lighting," (volume 1, pages 227-232), in which the French parliament is exhorted to protect the lighting industry from "the intolerable competition of a foreign rival" -- the sun."
Monday, December 29, 2008
Saturday, December 27, 2008
It is a sad truth that most academic writing about business is indecipherable, pointless, or openly hostile towards its subject. Business people wisely ignore it. Their time is better spent making money by serving the lives of their customers.
But there are exceptions. For that rare treasure, really useful academic musings about business and economics, I highly recommend spending some time at the blog Organizations and Markets. It's creators describe the blog as follows:
Organizations and Markets was created in April 2006 by Nicolai J. Foss and Peter G. Klein, professors with research interests spanning organizational economics, strategic management, entrepreneurship, innovation, the economics of institutions, and the history, philosophy, and sociology of science. Foss teaches management at the Copenhagen Business School and Klein teaches economics at the University of Missouri, giving the blog an international and interdisciplinary orientation.
Consider Peter Klein's comments on the popularity of business guru books like Jim Collins' Good to Great. I read Collins' book, and went away with a nagging doubt. Klein not only puts that doubt into words, he backs it up with research:
I’m not a fan of “guru” books like "In Search of Excellence," "Built to Last," and "Good to Great," for reasons well documented by Phil Rosenzweig in his excellent "Halo Effect." These books suffer from ad hoc generalization, sampling on the dependent variable, and a host of related methodological and expository flaws. If Rosenszweig’s critique is startling, then two articles from the November 2008 Academy of Management Perspectives on Jim Collins’s" Good to Great" — perhaps the leading guru book of our time — are devastating.
Organizations and Markets is a valuable stop for the time-starved but intellectually curious business person who would like to spend a little time in the company of important and perhaps even profitable ideas.
All those in search of excellence should start there.
Friday, December 26, 2008
Every business is the expression of the human will to survive.
Where there are no legal businesses, illegal ones will have to do. Consider the success of Somali pirates.
"While their countrymen face the threat of famine, pirates in northern Somalia are building houses, buying cell phones and SUVs, giving relatives hundreds of dollars and winning the attention of beautiful women, who seem to be flocking to the area from miles around."
Healthy societies make it possible for men to support themselves and their families without violating the rights of others. The best way to reduce crime is to make behaving well more rewarding than behaving badly. That happy state of affairs begins with legally enforceable property rights. Where there are no property rights, only the most violent will dare own property. Violence offers the only reward.
When behaving well equals starvation, it comes as no surprise that desperate humans are drawn to violence, especially when it pays so well. As one Somali taxi driver said, "The pirates are the hottest men in town," he said. "Girls from all over Somalia moved here to marry pirates. But if the girl isn't cute, she's out of luck, because the pirates only go with beautiful girls."
Thursday, December 25, 2008
Back in the USSR, General Secretary Brezhnev stood on a crowded reviewing stand in Red Square as the mighty Red Army paraded by.
"You see those men?" Brezhnev asked the official standing next to him, "those men are snipers. They can light a match at two hundred yards."
Next came the tanks. "You see those tanks? They can go 50 miles per hour and fire a shell two miles."
Next came the missiles. "You see those missiles? They can reach a target anywhere on the globe in fifteen minutes."
Finally came three men absent-mindedly walking, wearing thick glasses and bad suits. "Who are they?" the official asked.
"Oh, they are our finest economists. You have no idea how much damage they can do."
Adapted from The Age of Turbulence by Alan Greenspan
Wednesday, December 24, 2008
In the January 2009 special issue of Scientific American, Steve Mirsky makes fun of Republican politicians who dared to criticized some taxpayer-supported scientific research:
"On October 24 vice presidential candidate Governor Sarah Palin took on what looked through her designer eyeglasses like silly pork-barrel spending by the U.S.: “Some of these pet projects, they really don’t make a whole lot of sense, and sometimes, these dollars, they go to projects having little or nothing to do with the public good. Things like fruit-fly research in Paris, France. I kid you not.” Never mind that fruit-fly research has brought us modern genetics and molecular biology. The particular earmark in question was some $211,000 to a laboratory in Montpelier, France, with long experience studying ways to protect olive trees from fruit flies. And the little pests are threatening California’s olive crop—with a retail value estimated in 2005 at $85 million. So this money might be looked at by anybody with business savvy as an investment."The question Mr. Mirsky fails to answer is why an industry with a retail value of $85 million deserves a $211,000 transfer payment from taxpayers. The beneficiaries of such money often dress it up as an "investment." Anyone with business savy knows that such "investments" are, in reality, examples of the truth of Bastiat's observation: "The state is that great fiction through which everyone tries to live at the expense of everyone else."
Tuesday, December 23, 2008
“We’re seeing a more statist world economy,” says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. “That’s not good for growth in the longer run.”
It’s not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University’s Kellogg School of Management. Slower economic growth means lower profits. Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector.
“If the rules of the game are changing, people are reluctant to invest in the stock market,” Sapienza says.
From Bloomberg, "Saving Capitalism No Sure Thing as Statism Undermines Economy"
Monday, December 22, 2008
"The whole country is with him, just so he does something. If he burned down the Capitol, we would all cheer and say, well, we at least got a fire started anyhow."
Humorist Will Rogers, referring to President Roosevelt in 1933; quoted in "Great Myths of the Great Depression" by Lawrence W. Reed
Saturday, December 20, 2008
The fiduciary responsibilities inherent in the profession of management are essentially those of an agent. An agent is empowered to act in behalf of a principal but not against the principal's interests. The doctrine that managers are agents of shareholders does not diminish managers' fiduciary responsibilities, and the law certainly allows different degrees of risk-taking within the bounds of fiduciary responsibility, depending on the goals or needs of the person on whose behalf the fiduciary acts. A trustee has a fiduciary responsibility to the trust's beneficiaries, for example, and not to society at large. Depending on the terms of the trust, he or she may manage its assets aggressively or conservatively, and may take single or multiple objectives into consideration. To society the trustee owes compliance with the law but not the subordination of the trust's interests to the claimed interests of society.
Friday, December 19, 2008
Henry Hazlitt described Keynesian economics as “one of the great intellectual scandals of our age."
Thursday, December 18, 2008
In Forbes, Professors Fisman and Khurana criticize the view that managers are agents for shareholders. They say that managers are agents for society.
In other words, mangers don’t work for the owners, they work for society.
This is a startling metaphysical leap, little different from the claim that an individual’s will to live is secondary to the will of society. The purpose of any business is an individual concern. The consequences of business are a social concern. Society does have a role to play in dealing with some of those consequences; preventing violence, theft and fraud, for example.
But it is a mistake to use businesses as a means to dreamy social ends. So long as a business is peaceful, does not commit fraud, or violate the property rights of others, society has no right to insist on different social ends.
We all agree that a manager who enriches himself at the expense of the owner is guilty of an injustice. Such a thing is not "free market capitalism." It is more correctly described as theft. Calling it free market capitalism is a symptom of confused morality. Capitalism does not equal looting the shareholders. That is hardly the way to maximize shareholder value.
Why should a social program that enriches itself at the expense of the owners be viewed any differently? Such a program is not "stewardship." It is another form of theft. Social justice does not equal looting the shareholders, either.
In his great novel Crime and Punishment, Dostoevsky made a point the professors miss: a crime committed in the name of society is morally indistinguishable from a crime committed for individual gain.
Wednesday, December 17, 2008
The difference between just and unjust government intervention is simple.
If your house catches fire and the fire department comes when called, puts out the fire, and then leaves, that's justice. If your house catches fire and the fire department comes when called, puts out the fire, and then claims ownership of your house, that's injustice.
There are times when even the most ardent believer in markets relies on government intervention; even times when it is his right to expect it.
Sunday, December 14, 2008
Saturday, December 13, 2008
We often hear about businesses with flat organizational charts, by which is meant the business has comparatively few layers of decision-making between its top management and its front line.
Flatter is better, according to most people. But why?
There are at least two reasons. First, flat organizations are less likely to distort or destroy vital information as it moves up, down, and throughout the organization. Better information means better decision making.
Second, individuals in flat organizations don't have as much incentive or opportunity to behave bureaucratically by seeking more power and pay at the expense of organizational goals. Reduced bureaucratic behavior increases the chances that individual and organizational goals will overlap to a useful degree.
Considering the advantages of flat organizations, it's remarkable that we ever tried anything else. Yet, the unsettling and unavoidable truth is that for most of human history, flat organizations were simply unthinkable, as unthinkable as a man without a king or king without a church.
In a sense, you could say that all of human history is the messy and sometimes bloody process of flattening out our social organizational chart. Flatter is better in business because flatter is better in society. Societies with stronger horizontal social bonds -- i.e. more individual autonomy -- have proven better at interpreting dispersed information and at adapting to new situations than societies held together by predominantly vertical bonds.
The unpleasant truth of business is also the unpleasant truth of history: power destroys more creativity than it rewards.
Friday, December 12, 2008
Thursday, December 11, 2008
Wednesday, December 10, 2008
A September article in the New York Sun describes the mission of the Clemson Institute for the Study of Capitalism, and also illustrates the primary problem: most of the intellectual elite in America are deeply opposed to capitalism.
"Capitalism is thoroughly immoral and has no moral foundation," said Kirkpatrick Sale, the director of the Middlebury Institute, a think tank that studies separatism and self-determination. "In fact, it celebrates all of what we know of as the seven deadly sins except for sloth."
"All fundamental human rights have material and institutional conditions," a professor of law and ethics at the University of Chicago, Martha Nussbaum, said. "There would be no such thing as private property, for example, without government protection of property from trespass and other damages. There would be no freedom of travel if government did not maintain the highways in a safe condition, enforce traffic regulations, and so forth."
She added, "Early capitalists thought parents should be free to use their children for labor; we now think that government must require all children to go to school, no matter what the parents want. The story of the 20th century has been the story of the gradual rejection of the idea of minimal government in favor of a capitalism that protects 'human capabilities,' meaning the ability of people to live a decent life and enjoy their rights on a basis of equality with others."
Tuesday, December 9, 2008
All eyes are focused on Washington these days. That is just the way the folks in Washington like it. Washington is The Greatest Show on Earth, the World's Largest, Grandest, Best Amusement Institution. Barnum & Bailey has finally met its match.
But there is a far more important and impressive show happening somewhere else. You can find it wherever individuals labor to discover new and useful knowledge: in garages and office cubicles; in buses, trains and commuting cars; in living rooms and across kitchen tables; in easy chairs and taxi cabs. Here, in places like these, wealth is truly created, not just moved around. Here, in places like these, the economic life of the nation rises and falls. Here, millions of individuals satisfy their basic need for security and status through a process of mutually beneficial trading, independent of what happens in the circus tents of Congress
Our economic salvation does not lie in the glitter and pomp of Washington; it lies with the dreams of unknown men.
Friday, December 5, 2008
Thursday, December 4, 2008
This is Part Two of the Center for Freedom and Prosperity's series on tax havens.
Wednesday, December 3, 2008
I've added a new link to the Center for Freedom and Prosperity. Based in Alexandria, VA, the Center is a non-profit created to lobby lawmakers in favor of market liberalization. The top project at the Center is the Coalition for Tax Competition, which fights to preserve jurisdictional competition and taxpayer privacy.
Tuesday, December 2, 2008
Monday, December 1, 2008
"I believe that not only should government not increase its spending on higher education, but also that the case for subsidizing it at all is very weak."
George Leef, in the featured article at the Library of Economics and Liberty
Sunday, November 30, 2008
Writing in the Washington Post, columnist George Will quotes Russell Roberts of George Mason University on the danger of New Deal-like attempts to straighten out a misbehaving economy:
"By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s."
Read the rest of "Same Old New Deal" by George Will here.
Here you can read more from Russell Roberts on why the rules of the game are important.
Saturday, November 29, 2008
We praise entrepreneurship at least as much as it used to be despised, and for the same reason.
The entrepreneur is an innovator, the discoverer of new and useful knowledge. Radical innovations destabilize groups, organizations, industries, and even whole societies. Innovation is the act of a rebel.
The difference between an entrepreneur and an enemy of the state can be a fine one. The great success of capitalism is that it institutionalizes innovation, which is another way of saying it decriminalizes entrepreneurship. Capitalism makes troublemakers legit.
When the social order outlaws innovation, the innovators become outlaws. Consider pirates, for example.
Friday, November 28, 2008
"This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly."
Thursday, November 27, 2008
Wednesday, November 26, 2008
On my way to a doctor's appointment, I searched inside my briefcase for something to read while I waited. I found an issue of one of my favorite magazines, Scientific American, dated October, 2008.
Actually, my mother -- God rest her soul -- raised a polite skeptic who tolerates the pretensions of other people, especially when they are well-intentioned and harmless, but is ready to rise up in indignation at the kind of arrogance that presumes to speak ex cathedra . Here is what Dr. Sachs wrote in a column entitled "Coping With a Persistent Oil Crisis":
"...the fundamental factors of supply and demand will keep oil costly for years to come."
"The current energy crisis will most likely worsen before it gets better."
Here is what actually happened to energy prices almost immediately after Dr. Sachs' confident declarations, according to the Energy Information Administration, Harvard summa cum laude notwithstanding:
At Harvard, do they still teach that humility is a virtue, or is pretension a sustainable development?
Tuesday, November 25, 2008
"Extraordinary events do not always require extraordinary causes. Given enough time, they can happen by chance. Knowing this, [Leonard] Mlodinow says, “we can improve our skill at decision making and tame some of the biases that lead us to make poor judgments and poor choices ... and we can learn to judge decisions by the spectrum of potential outcomes they might have produced rather than by the particular result that actually occurred.” Embrace the random. Find the pattern. Know the difference."
Monday, November 24, 2008
Did deregulation cause the financial mess? "Yes," if you ask most people. "No," if you ask a small group of thoughtful commentators who are willing to look beyond the self-serving political spin of the angry legion that wants to crush the spirit of deregulation, once and for all.
Consider Jeff Jacoby in the Boston Globe...
"Like the alligators lurking in New York City sewers, Bush's massive regulatory rollback is mostly urban legend. Far from throwing out the rulebook, the administration has expanded it: Since Bush became president, the Federal Register - the government's annual compendium of proposed and finalized regulations - has run to more than 74,000 pages every year but one. During the Clinton years, by contrast, the Federal Register reached that length just once."
Read the rest here.
By the way, 74,000 pages is equivalent to 74 novels the length of Tolstoy's Anna Karenina. If you read ten pages every night, it would take you twenty years to read all 74,000 pages -- if nothing changes.
Sunday, November 23, 2008
"In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression. Our current downturn will end as well someday, and, as in the ’30s, the recovery will probably come for reasons that have little to do with most policy initiatives."
Read the rest here.
Friday, November 21, 2008
What is the purpose of business?
That is a question with many answers. The answer often reveals more about an individual's political point of view than the truth behind the human "propensity to truck, barter and trade."
In repeated trades over time, the strategy of deception produces lower and lower yields. Try it yourself, and you'll quickly discover the truth in the old adage, "Fool me once, shame on you. Fool me twice, shame on me." Deception eventually destroys trust.
Over time, the most successful trading strategy is to cooperate with those who cooperate with you, and to punish or avoid those who deceive you, a strategy that is known as "tit for tat." This type of trading is a non-zero sum, that is a two-person game with two winners. It also has the advantage of a built in mechanism for dealing with cheaters.
Thursday, November 20, 2008
Commentary from Will Wilkinson on the unfortunate habit of naming "czars."
"Remember America's can-do, point man in the war on drugs, the so-called "Drug Czar?" Well, if you like czars, you'll love President-elect Barack Obama. He's proposing a new "technology czar," he's considering a "climate czar," and he's even floated the idea of a "car czar."
In tough times like these, America does not need a dose of tragic Russian authoritarianism. America does not need more czars."
Listen to the rest here.
Wednesday, November 19, 2008
Monday, November 17, 2008
Aristotle is one of the people Gus was bragging about. In the 4th century BC, Aristotle said that man is a rational animal. Reason is man's most reliable guide, and an essential tool for investigating the natural world. No wonder Aristotle has been called the father of modern science.
But modern economic science teaches us that human reason has its limits. The human mind is not a computer sorting through complex alternatives at the rate of billions per second. It simply does not have the time or the resources to analyze decisions in that kind of exhaustive detail. Somewhere along the way, the mind must decide that enough is enough. It must make a decision on the basis of a reasonable expectation, not an optimal solution. To quote a popular saying, "better a good plan than a perfect one." The human mind is not an optimizer.
In both of Aristotle's 4th century statements, he implies a third point: humans are animals. Modern science has validated Aristotle's conclusion in ways that would have startled but no doubt delighted him. We are more closely related to the animals than he ever could have imagined. We share many of the same organs, physiology, and we have the same genetic material, just arranged differently.
One of the primary goals of animal social behavior is social status. This is visibly true in the world of primates and human teenagers. Status is no less important in the world of adult humans, where it is earnestly but more subtly pursued. Everyone is sensitive to the charge of naked ambition.
In Aristotle's age, status came from an individual's high birth, education, and being Greek (some things never change, Gus). Wealth did not necessarily equal status. In fact, Aristotle's view of the money making business was that it was an unpleasant necessity best left to men of lower rank.
Aristotle's view was not unique. For most of history, making money was viewed as a low-status occupation, less worthy than politics, the military, and religious orders. Napoleon I would famously disparage the English nation by dismissing it as "a nation of shopkeepers."
Napoleon not withstanding, by the late 19th and early 20th centuries, especially in the United States, business fortunes finally brought a social status rivaling that of aristocrats, generals, and religious potentates.
Today, creating wealth through business activity is the most widely accepted means of achieving higher social status. But it is not, by any means, the only one. A degree from an Ivy League school is really more about status than it is about getting a superior education. Driving a Prius is more about status than it is about environmental concerns. In fact, driving a Prius and driving a Maserati serve exactly the same social purpose. Both cars elevate the status of the driver within their chosen circles.
Sunday, November 16, 2008
Markets are epiphenomena derived from individual acts of discovery and exchange. In the modern world, markets are described by quantitative expressions. We call these expressions prices.
Prices are also themselves drivers of human behavior. They play the roles of both cause and effect. This duality makes the math of markets very different from the math of the physical world.
In the physical world, math conveys predictability. In markets, math conveys no such thing. In fact, it creates the illusion of a certainty that we do not possess. The probabilities are different. Rocks don't decide where they will go or how fast they will get there. People do.
People often ask, when will prices stop going down? The answer is, when the underlying phenomenon, i.e. human behavior, makes that happen. Predicting the behavior of falling stones is easy. Predicting the behavior of falling markets is as difficult as predicting the next thought that will flicker across your mind.
Saturday, November 15, 2008
When business spends more time lobbying in Washington for government money instead of trying to make its own money, it's hard to continue calling it business. Is the bailout a lifeline or a new way of life?
Businesses as diverse as plumbers and boat manufacturers are crowding the halls of Washington. The New York Time reports, "The biggest surprise was how quickly it went from ‘I don’t need this,’ to ‘How do I get in?’ ” said Michele A. Davis, the head of public affairs at the Treasury."
Friday, November 14, 2008
"Markets allow productive people to provide extraordinary service to generations of their fellow human beings: by inventing new drugs,developing labor-saving devices, or finding cheaper, more efficient ways to supply the world with food. !e chance to become wealthy is often an incentive for such creative types, and ego and ambition are also prime factors. But we should not confuse these motivations with bad character. Markets make it possible to harness our desire for wealth and personal distinction to our more altruistic impulses. They spark us to do good by doing well. And, of course, they create the means for people to donate their wealth and labor to a range of philanthropic causes."
Read the rest here.
Professor Cowen will be the Bastiat Society's December speaker on Wednesday, December 3, 2008.
Thursday, November 13, 2008
Wednesday, November 12, 2008
P. J. O'Rourke offers some post-election advice to his fellow conservatives:
"Let us bend over and kiss our ass goodbye. Our 28-year conservative opportunity to fix the moral and practical boundaries of government is gone--gone with the bear market and the Bear Stearns and the bear that's headed off to do you-know-what in the woods on our philosophy.
An entire generation has been born, grown up, and had families of its own since Ronald Reagan was elected. And where is the world we promised these children of the Conservative Age? Where is this land of freedom and responsibility, knowledge, opportunity, accomplishment, honor, truth, trust, and one boring hour each week spent in itchy clothes at church, synagogue, or mosque? It lies in ruins at our feet, as well it might, since we ourselves kicked the shining city upon a hill into dust and rubble. The progeny of the Reagan Revolution will live instead in the universe that revolves around Hyde Park."
Read the rest here.
Tuesday, November 11, 2008
In the late 19th and early 20th centuries, progressive intellectuals (a.k.a. socialists) looked on with envy as scientists enjoyed one stunning success after another in their attempts to explain the physical world. By borrowing the methods of the natural sciences, these intellectuals reasoned, they could invent a new kind of man, one liberated from the dead weight of tradition. They believed all of mankind's problems, from war to public health, could be solved by the intervention of modern science, recast as public policy.
It did not work. Not only did it not work, but it lead to some of the most horrible crimes in history. Totalitarianism, eugenics, racism, nationalism, genocide, concentration camps, and gulags are all direct consequences of the attempt by progressives to substitute social calculations for traditions and individual choices.
Perhaps this is mankind's fate, to forever misapply the insights of one field of knowledge to another. Enthusiasm cannot overcome the limitations of infallibility. At best, we can hope to limit the size and scope of our mistakes, but we can never get rid of them altogether. They are our most reliable companions. They are part of our very nature.
But what is human nature? Human nature is tool for survival. It was built by a process of incremental discovery in a world of complex phenomena. Human nature is well-adapted to deal with small groups of individuals and little bits of information, but it is supremely confounded at trying to comprehend the sum and effect of all the knowledge in the system. Human nature struggles to conceive of the infinitely large and the very small. It is most comfortable in the middle-sized world of its own making: a world of predictable patterns, family, a few close friends, a couple hundred acquaintances, and a world where bits of knowledge are shared like food.
When people exchange knowledge because they are required to, we have an economy based on servitude. When that exchange occurs voluntarily, we have an economy based on cooperation. Either way, the exchange of little bits of knowledge is precisely what makes an economy. The more opportunity individuals have to specialize in a particular field of knowledge, the faster they can discover and exchange new knowledge with one another, and the faster the economy grows. Economic growth depends first on discovery, and discovery is an individual, not a collective act. It cannot be scripted, forced, or deliberately planned. It can, however, be encouraged.
The discovery and exchange of little bits of information results in yet another system far larger and more complex than any one person can comprehend, because that would mean that he already possessed all the little bits of knowledge owned by every actor in the system. Further, it would mean that he already knew how every other actor planned to use his little bit of knowledge, and how that use would affect every other exchange in the network, forever and ever. Humans do not possess such God-like knowledge. The 17th century French liberals had it right, "the world moves by itself."
Yet, our human nature still longs for a middle-sized world of understandable patterns. Consider something as simple as a football game. In the fall of every year, hundreds of thousands of football fans offer their predictions for "the game." Most of them are wrong. A few are right some of the time. None are right all the time.
The self-evident truth of football season this: we cannot consistently predict the outcome of even a simple game, a microcosm of human action where there are only twenty-two players on the field, and we have a wealth of information about each of them, and everyone knows the rules, and we have officials who enforce the rules. The outcome depends on events unseen, unanticipated, and unknowable.
Scientific socialism failed to deliver what it promised because it did not recognize the importance of individual knowledge in producing a larger social order far beyond anything one person intended. Socialism continues to succeed as a political faith because it appeals to that part of human nature that is awed and frightened by the vast phenomenon of human exchange that we call the economy. Socialism promises to reduce boundless life to a set of variables in a social equation, something one man can manage.
Monday, November 10, 2008
Scholar Charles Murray of the American Enterprise Institute argues that the most popular college degree, the BA, is overpriced and largely a waste of time. First, the BA is cast in an inflexible term of four years, regardless of how long it takes to acquire marketable proficiency in whatever is being taught. Second, the rewards of having a BA often have nothing to do with what was learned. Third, encouraging students to pursue a BA means large numbers of young people will spend valuable time and money trying to complete course work they may not have the ability to do. Finally, the BA system makes everyone who does not have that degree a second-class citizen, even though non-BA holders may make more money and accumulate more wealth over their lifetimes.
In short, Murray examines the question, "Is college worth it?" and answers "For most people, no." His alternative is a set of professional competency tests, like the CPA exam.
Read more here.
On a personal note, I tell my children there are only three skills you should possess as the result of an education, whether or not you possess a degree: the ability to think logically, the ability to express yourself clearly in writing and in speech, and the ability to perform math at a high level. All the rest you can learn as you need it.
Sunday, November 9, 2008
Here are two bona fide but arcane English words that soon should be making a popular comeback, considering the political tilt of the times:
Dirigisme: (noun) economic planning and control by the state; also, state control of social matters.
Helotism: (noun) a system under which a nominally free social class or a religious, national, or racial minority is permanently oppressed and degraded.
Saturday, November 8, 2008
Samuel delivered the message of the LORD in full to those who were asking him for a king.
He told them: "The rights of the king who will rule you will be as follows: He will take your sons and assign them to his chariots and horses, and they will run before his chariot.
He will also appoint from among them his commanders of groups of a thousand and of a hundred soldiers. He will set them to do his plowing and his harvesting, and to make his implements of war and the equipment of his chariots.
He will use your daughters as ointment-makers, as cooks, and as bakers.
He will take the best of your fields, vineyards, and olive groves, and give them to his officials.
He will tithe your crops and your vineyards, and give the revenue to his eunuchs and his slaves.
He will take your male and female servants, as well as your best oxen and your asses, and use them to do his work.
He will tithe your flocks and you yourselves will become his slaves.
When this takes place, you will complain against the king whom you have chosen, but on that day the LORD will not answer you."
The people, however, refused to listen to Samuel's warning and said, "Not so! There must be a king over us.
We too must be like other nations, with a king to rule us and to lead us in warfare and fight our battles."
1 Samuel, Chapter 8, verses 10-20
Friday, November 7, 2008
Thursday, November 6, 2008
Wednesday, November 5, 2008
Tuesday, November 4, 2008
"[W]hen a candidate for public office faces the voters he does not face men of sense; he faces a mob of men whose chief distinguishing mark is the fact that they are quite incapable of weighing ideas, or even of comprehending any save the most elemental—men whose whole thinking is done in terms of emotion, and whose dominant emotion is dread of what they cannot understand. So confronted, the candidate must either bark with the pack or be lost… [A]ll the odds are on the man who is, intrinsically, the most devious and mediocre—the man who can most adeptly disperse the notion that his mind is a virtual vacuum. The Presidency tends, year by year, to go to such men. As democracy is perfected, the office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their heart’s desire at last, and the White House will be adorned by a downright moron."
H. L. Mencken, The Baltimore Sun, July 16, 1920
Monday, November 3, 2008
On the eve of the US elections, I offer what is perhaps the most complete expression of political ambition yet attempted in popular music: Alice Cooper's 1972 hit, "Elected."
The lyrics quickly capture the heady mixture of raw ambition, exclusive privilege, religious frenzy, and the desire to control the lives of others that has come to identify most political movements:
I'm your top prime cut of meat, I'm your choice,
I wanna be elected,
I'm your yankee doodle dandy in a gold Rolls Royce,
I wanna be elected,
Kids want a saviour, don't need a fake,
I wanna be elected,
We're all gonna rock to the rules that I make,
I wanna be elected, elected, elected.
By the way, Alice Cooper was NOT elected in 1972. That was the year Republican Richard Nixon crushed Democrat George McGovern. Two years later, amid the Watergate scandal, Nixon resigned in disgrace.
Sunday, November 2, 2008
Over at the John Templeton Foundation, they have a deep conversation going on over the Big Question, "Does the free market corrode moral character?"
You can read the essays of famous intellectuals, politicians and celebrities, as well as leave comments of your own.
I didn't make the cut for the starting lineup, so here's what I said in the comments section:
"Perhaps the best way to answer this question is to ask another: does an un-free market improve moral character? Or, to phrase it differently, can coercion improve moral character? I think the answer is found in history. Rare is the man who can exercise such power over others without eventually being corrupted by it. As C.S. Lewis said: Aristotle was right; some men are fit to be only slaves; but I oppose slavery because I do not believe any man is fit to be a master."
Saturday, November 1, 2008
Friday, October 31, 2008
Thursday, October 30, 2008
Sometimes we hear the claim that capitalism turns people into "wage slaves." An odd kind of slavery it must be that allows people the freedom to walk away from the wage anytime they want to.
Consider the contrast with chattel slavery. Born into slavery and sold for the equivalent of $400 when she was just 12, she was raped for the first time by her master when she was 13. She eventually bore him three children. Two survived. Both were taken from her. For almost nine years, she had to work long hours in the fields and in his home without pay. If she did anything wrong or tried to escape, she was beaten. But after she fled and married a man of her own choice, she was charged with bigamy and sentenced to six months in jail. “No woman”, she says, “should suffer the way I did.”
Are we talking about a slave on a cotton plantation in the American deep South of the early 19th century? No, Hadijatou Mani lives in the 21st century. She also has the great misfortune of living in Niger, an African country where the government turns a blind eye towards slavery. According to The Economist, there are an estimated 43,000 slaves in Niger, and tens of thousands more in other countries in Western Africa.
If capitalism did nothing more than turn chattel slaves into wage slaves, it would still be a wonderful thing. Just ask a real slave like Haijatou.
And if you ever need confirmation of the questionable value of government paper, remember that the the 1962 UN Slavery Convention condemns chattel slavery, the curiously named 1981 African Charter on Human and People's Rights condemns it, and so does the Niger constitution and criminal law.
"Aristotle said that some people were only fit to be slaves. I do not contradict him. But I reject slavery because I see no men fit to be masters." - C.S. Lewis
Tuesday, October 28, 2008
Over at The Austrian Economists, Richard Ebeling comments on "the pretense of knowledge" and the "hubris of the intellectuals." He writes:
"What these debates about whether we are in a credit crunch or not; whether we are faced with a coming serious inflation or instead deflation; whether this will be a "normal" recession or a coming real depression, etc., etc., -- what this should remind all of us of is Hayek's points about the pretense of knowledge, or what Wilhelm Roepke called the hubris of the intellectuals.
In fact, neither Austrian Economists nor our Neoclassical and Chicago and Rational Expectations "colleagues" know what is happening in the economy -- nor exactly how and why it hit right now or where the present "crisis" is taking us.
The "deadly sin" of hubris clearly has been greater with our economist colleagues. So using all available information (i.e., statistical patterns of past events) and inserting it in the "correct" model of how the macroeconomic "really" works . . .
Did Robert Lucus or Thomas Sargent know this was going to happen, when and why? Hmmmm. Or did I miss that op-ed piece of theirs in the WSJ? (Oh, they kept it as private, secret information so they could make a "killing" in the market -- now I know who the evil "short-sellers" have been.)
But more seriously Austrians have long insisted that the laws of economics are essentially logical relationships, not empirical ones; that economics can "predict" but only in qualitative terms, not quantitative ones; that economics can only make "pattern" predictions.
This economic crisis may I suggest, again reinforces the reality of the Austrian approach to social phenomena.
Austrians (true to their theory of the logic of the interconnections between credit expansion, market rates of interest, the term structure of investment, and relative price and allocation effects caused by the non-neutrality of money) have often warned of the inflationary and destabilizing consequences from Fed policy over the last decade.
But no Austrian could (or did) claim to know when the cycle would turn, or what would set it off, and how the downturn would or could play itself out, i.e., in what in historical retrospect we will see from the vantage point of some future moment as the actual patterns and also unique time-sequence of the "micro" steps by which this will play out.
We could not and cannot know these things. As Karl Popper pointed out in "The Poverty of Historicism," knowledge of the future is logically impossible. If we live in a world in which knowledge changes, he said, then it is impossible to know tomorrow's knowledge today. Otherwise, it would be today's knowledge and not a knowledge of the future, the details of which can only be known when the future comes.
We know how the Great Depression of the 1930s played out because it is now history. We know, for example, that FDR ran on a "conservative" platform of balancing the budget, cutting taxes, maintaining the gold standard, limiting Federal intrusiveness in state-level affairs, etc.
And we know that he did the exact opposite of these things when actually in office.
But instead of reading histories of the Great Depression, suppose we went into the archives of the newspapers of the time -- the "Wall Street Journal," the "New York Times" -- and, say, from 1929 to 1935 read the stories, day-by-day, the analysis and the commentaries and interpretations of what was happening and where it was leading.
I would suggest that virtually no one knew where the process was leading. Because it depended upon the "complex phenomena" of individual decisions, political policy choices, ideological influences, and everyday actions based on the expectations held at each moment in time. And these intersecting actions and events generated the unique path-dependent process that we call the history of that time.
All of our analysis, expectations and predictions should be implicitly framed with the inescapable humility of what our limited minds can know about the workings of our world.
Indeed, this is the reason we Austrians are always suspicious of political solutions to our social and economic problems. The working through the problem -- including an economy-wide economic crisis -- requires more knowledge about the present and the future than any one mind or group of minds can master or ever possess.
So, are we suffering from "tight" or "easy" credit conditions? Has the stock market and housing market "bottomed out"? Will globalization be part of the solution to the problem, or will governments impose forms of trade restrictions to shore up domestic output and employment levels against foreign competition? Will the next president actually be more concerned with "spreading the wealth" or letting the market adjust so the "pie" can keep growing (or growing faster than wrong-headed policy would allow)?
We will know all the answers -- when some future economic historian (maybe even an "Austrian") writes the history of our times, and tries to tell those future readers how it all happened and why."
Monday, October 27, 2008
In this clip from Cato Weekly Video, Gene Healy, author of The Cult of the Presidency, discusses changing American attitudes towards executive authority. The film discussed, Gabriel Over the White House, was released in 1933 just after the election of Franklin Delano Roosevelt.
Sunday, October 26, 2008
With this little story from Cafe Hayek, Professor Walter Williams of George Mason University takes the lead in the ongoing reality-show, Who Will Be the Next Bastiat?
"Today on my way to lunch I passed a homeless guy with a sign that read 'Vote Obama, I need the money.' I laughed. Once in the restaurant my server had on a 'Obama 08' tie, again I laughed as he had given away his political preference -- just imagine the coincidence. When the bill came I decided not to tip the server and explained to him that I was exploring the Obama redistribution of wealth concept. He stood there in disbelief while I told him that I was going to redistribute his tip to someone who I deemed more in need -- the homeless guy outside. The server angrily stormed from my sight. I went outside, gave the homeless guy $10 and told him to thank the server inside as I've decided he could use the money more. The homeless guy was grateful. At the end of my rather unscientific redistribution experiment I realized the homeless guy was grateful for the money he did not earn, but the waiter was pretty angry that I gave away the money he did earn even though the actual recipient needed money more. I guess redistribution of wealth is an easier thing to swallow in concept than in practical application."
Saturday, October 25, 2008
The Initiative for Public Choice & Market Process at the College of Charleston has launched a new web site at www.cofc.edu/ipcmp.
The Initiative for Public Choice & Market Process advances the understanding of the economic, political and moral foundations of a free market economy. The Initiative supports the growth and development of teaching and research at the College of Charleston School of Business and Economics while engaging students and the greater Charleston business community.
Friday, October 24, 2008
Thursday, October 23, 2008
Suddenly, socialism is cool, at least in places that never had to deal with a Great Leap Forward or a Great Proletarian Cultural Revolution.
For the rapidly shrinking population of native English-speaking capitalists, I offer distressing evidence of the current state of affairs from the best English-language magazine in the world, The Economist:
If capitalism is dead, what will take its place?
There is undeniably something deep and ineradicable in human nature that longs for the kind of relationships found in healthy families and in close friendships. "If only the rest of the world was like this" we say to ourselves, "it would be a better place." This explains, at least in part, the persistent appeal of political philosophies like socialism, communism, and communitarianism, and the draw of religious fundamentalism. They all promise a world that offers the reassurance of familiar small-scale human relationships.
Unfortunately, it is also a world that does not work very well. The problem is one of scale. Intense relationships don't scale up. Eventually, we run out of something I call emotional capital.
Like every other form of capital, the emotional capital of human nature is a limited resource. We must use it carefully and with discrimination. No one can honestly claim to treat everyone the same way. Such a thing would be an abomination to universally recognized primary relationships like those between husband and wife, parent and child, brother and sister, or the special relationship between close friends. In different times and in different places, these relationships have varied in relative importance and in form, but they are everywhere the most important forces of small-scale, long-term social cohesion.
Things quickly get more complicated when we try to build a larger social order the same way we build smaller ones. It's like trying to be everybody's best friend. Beyond a small number of relationships, human nature simply cannot monitor things well enough to avoid neglecting the people who really matter; or avoid being exploited; or avoid being made a slave to someone else's desires.
What, then, prompts otherwise cautious humans to rush towards social theories that raise the awful specters of neglect, exploitation and slavery? I can think of three reasons this might happen. Or, more appropriately, we could say that there are three kinds of people who are drawn to the idea of a social order where everyone is family and everyone is a friend. I call them the Faithful, the Prince, and the Frightened.
The Faithful are those people who genuinely believe small-scale, primary relationships are the right model for large scale social order. The Faithful are a combination of well-educated intellectuals and secular mystics who genuinely believe the power of the state can bring to every human relationship the kind of empathy we experience in our closest ones. These people are not evil. They are often likeable, even lovable, and can usually defend their beliefs well. They cannot or do not want to believe that emotional capital is a limited resource. Beyond their vision lies mostly disappointment.
On the other hand, the Prince is cynical, calculating, and solely self-serving. He does not invoke primary relationships to improve the social order. He wears them like a garment of public virtue, even while he sins in private. He uses them to acquire, keep, and gain power over others. Once powerful, he lays claim to all emotional capital. He demands more than respect. He demands to be loved, even worshiped. Beyond love and worship lie fear and cruelty.
Finally, the Frightened are driven to this kind of thinking by a crisis. When a distinct population, identified by geography, race, political boundaries, or some other marker, is attacked or otherwise threatened, either from the outside or inside, the members of that population will draw together around what they have in common. If the threat is large enough, what they have in common will actually become their primary relationship, supplanting all others.
From the Frightened comes the brave, and dulce et decorum est pro patria mori. Moments of crisis drive humans to make sacrifices they would not normally make, break human bonds they would not normally break, and submit to depredations they would normally resist.
But such a moment cannot last, not without a new crisis to sustain it, for human nature inevitably reverts back to the primary relationships that form the backbone of the social order. Humans can make stunning sacrifices, if they believe the sacrifices are necessary, and therein lies many noble acts and heroic moments worthy of our highest praise. But it is madness to expect endless years of such behavior. Beyond the vision of the Frightened lies the return to normal. Home. Hearth. Plow.
Capitalism is not dead so much as it has been abandoned. For their own reasons, the Faithful, the Prince, and the Frightened are driving us away from it. Before we go much further, we should ask, whose vision is likely to dominate? What lies beyond?
Wednesday, October 22, 2008
Tuesday, October 21, 2008
How to save capitalism? Try it first.
Monday, October 20, 2008
The Fed speaks in Charleston Thursday night!
The Initiative for Public Choice & Market Process is pleased to announce the first BB&T Free Market Process Speaker Series.
Dr. Gerald Dwyer, Vice President, the Federal Reserve Bank of Atlanta, will present a current analysis of financial markets. This event is open to all faculty and members of the business community.
If you would like more information about this event please contact Peter Calcagno, Department of Economics and Finance, 843-953-4279, or email firstname.lastname@example.org.
Date: Thursday, 23 October 2008
Time: 7 pm
Venue: College of Charleston Beatty Center, Wachovia Auditorium
Location: 5 Liberty Street, Charleston, SC
Saturday, October 18, 2008
Massive government intervention in the banking system is driving the political left into delirious pronouncements that the free market is finally dead.
It is also driving conservatives and libertarians into apoplexy for the same reason.
Neither side has it right. Since the creation of the Federal Reserve in 1913, the banking system has been a government construction, from its foundation to the top floor. Within this imposing structure, most bankers have tried to operate according to the laws of the market, but government has repeatedly destabilized those laws by arbitrarily ignoring or rewriting them.
Consumers and bankers are both the victims of a massive government failure, not a market failure. It was not greed that led consumers to borrow too much money, and it was not greed that led bankers to lend it. It was not greed that led investment banks to turn those loans into securities, and it was not greed that led investors to buy them. All along the way, through this chain of economic decision making, one thing remains constant: government encouraged consumers to borrow, encouraged bankers to lend, encouraged investment banks to securitize loans, and encouraged investors to invest. More than any other agent, government is to blame.
Blaming the market for the collapse of the entire structure is like blaming the occupants of a building for its shoddy construction, not the architects.