The Rules of the Game

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.

The Role of Troublemakers in Society

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.

What's the Plan?

Amid all the discussion of what must be done to get the economy moving again, it may be helpful to remember Hayek's words in "The Use of Knowledge in Society":

"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."

Michael Shermer, Bastiat, and the Economy

A Sustainable Development

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. 

Therein I read the barely month-old words of Jeffrey D. Sachs, director of the Earth Institute at Columbia University, BA summa cum laude from Harvard University, MA and PhD in economics also from Harvard. With a resume like that, only a fool would argue with Dr. Sachs. Lucky for me, my mother raised one.

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?

Extraordinary Events

"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."

From "A Random Walk Through Middle Land," by Michael Shermer, Scientific American, October 2008.

Another Urban Myth

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.

The New Deal Didn't Always Work

Professor Tyler Cowen of George Mason University discusses America's Great Depression and the New Deal. From the New York Times...

"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.

Debt Control

The Purpose of Business

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."

Putting politics aside, it appears self-evident that trading is inherent in human nature. Trading is an evolved survival strategy that appears in all times and in all places, from ice age settlements to POW camps. Trading is the logical consequence of a world that is too complex for one person to know it all. Life is better in societies where individuals specialize in useful knowledge and trade among themselves, what economists call the division of labor.

However, to say that trade is important is not to say that all trade is good. There are two basic trading strategies. One strategy is based on cooperation and mutual satisfaction. The other strategy is based on deception.

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. 

The social consequences of business are important, but they are derived from its primary purpose as a survival strategy. When individuals trade for mutual satisfaction, they spread the benefits of trading far beyond what they originally intended. This kind of trading  strengthens the network of trust in society, making it easier to trade again and again.

When individuals trade deceptively, the social consequences are exactly the opposite. Such individuals must be identified and punished quickly before they strip others of their property, destroy the network of trust, and begin dismantling the social order.

The purpose of business is an individual concern. The consequences of business are social concerns. 

No More Czars

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.

The Price of Everything

Order and abundance, with no one in charge...

Aristotle, Updated

In the 2002 hit movie, My Big Fat Greek Wedding, father of the bride Gus Portokalos says to his future non-Greek son-in-law, "When my people were writing philosophy, your people were still swinging in trees." 

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. 

Back to the 4th century. Aristotle also said that humans are social animals. We live in groups, and we use the behavior of our group as a guide for our behavior. We call such behavioral guides "culture," and to some degree, culture exists outside the realm of reason. Why do American's shake hands and the Japanese bow? Because they do. Social norms develop organically and over long periods of time. They do not always conform to rational expectations.

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. 

In one survey, over half the buyers of a Prius said the main reason they bought the car was that "it makes a statement about me." Maserati owners buy their cars for the same reason. 

The Math of Markets

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.

Lifeline or New Way of Life?

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."

Tyler Cowen on Markets

Do free markets corrode moral character? Here is part of the response to that question from Tyler Cowen, Holbert C. Harris Professor of Economics and Director of the Mercatus Center at George Mason University. His latest book is Discover Your Inner Economist, and he blogs at www.marginalrevolution.com.

"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.

Tacitus on Law and the State

Corruptissima in Republica Plurimae Leges

"The more corrupt the state, the more numerous the laws.""

Publius Gaius Cornelius Tacitus (ca. 56 – ca. 117) senator and historian of the Roman empire, Annales III, 27.

"We Blew It"

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.

Little Bits of Knowledge

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.

Social scientists would correct social mistakes as certainly as their physical science brethren calculated atomic weights or described the laws that arrange the stars. Like elements in a chemical equation, citizens would live productive and meaningful lives according to a scientifically designed social order.

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.

If we cannot foresee the outcome of a simple game, what on earth leads us to believe that we can foresee the outcome of a world where there are 6.5 billion people discovering and exchanging bits of knowledge, hundreds if not thousands of different, shifting, sometimes conflicting rules, and no consistent enforcement?

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.

That is the enduring appeal of socialism. Like religious faith, it gives some structure to a mysterious world. Like religious faith, it uses a set of metaphors. Metaphors are useful, even necessary for human existence. But metaphors are not the same as physical laws, and people are not as predictable as physical constants. Like religious faith, it is all too easy to mistake metaphors for immutable truth.

Most BAs are BS

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.

Dirigisme and Helotism

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.

There Must be A King Over Us

From over three thousand years ago, the voice of the prophet Samuel speaks, and reminds us of the danger of kings:

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

Marx, Unbound

The view from the Old Left...and I mean the Far Left...or is it the New Left? Via the BBC:

Is the intellectual opinion of capitalism changing? British Marxist historian Eric Hobsbawm, "arguably our greatest living historian" according to the New York Review, discusses the current economic crisis and the problems with a free market economy.

Listen to it here.

The Elections of Kings and Princes

The American republic was designed to accomplish a singular objective: protect American citizens from abuse at the hands of their own government.

Thus it was that we had a federal government divided into three competing powers. 

Thus it was that we had a legislative branch divided into two competing bodies, one based on population and the other based on an equal representation from each state, regardless of population.

Thus it was that we had a division between the powers of the federal government, and those of the individual states. 

Thus it was that the republic encouraged each state to experiment with its owns laws and its own regulations, thereby discovering what worked and what didn't.

And thus it was that we had a long list of explicitly enumerated rights of the citizen that no government could ever take away. 

Alas, the American republic was not built to defend its citizens from the greatest threat to their liberty: the citizens themselves. 

Democracy is steadily dismantling the old restraints of a divided government. Voters no longer want to hear what the government can't do. They want candidates who can "get things done" with economic policy, industrial policy, education policy, energy policy, environmental policy, foreign policy, health care policy, homeland security policy, national defense policy, social security policy, tax policy, veterans benefits, women's rights policy, abortion rights policy, civil rights policy, immigration policy, the distribution of wealth policy, rural policy, technology policy, faith policy, judicial policy, fiscal policy, equality policy, transportation policy, drug policy, trade policy, agriculture policy, housing policy, stem-cell research policy, urban policy, water policy, fishing policy, endangered species policy, historic preservation policy, carbon policy, humanities policy, telecommunications policy, fleet fuel economy policy, national parks policy, public health policy, broadcast spectrum policy, obesity policy and school lunch policy.

In the new American state, limited government means that we get to elect our king every four years, and our princes every two or six. 

Unstoppable Solar Cycles

Before we attempt to manage human impact on the Earth's climate, perhaps we should ask the question, do we really understand what is happening at all?

Voting Schmoting

Economist Gordon Tullock explains why it is perfectly rational NOT to vote...unless everyone else thinks the same way. 

From the WGBH Lab open call for election videos...

As Democracy is Perfected

"[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

From Cafe Hayek.

I Wanna Be Elected

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.

Free Markets and Moral Character

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."

Wealth, Work, Riches and Earnings

"Wealth is not so good as work, nor riches so good as earnings."

David Landes, The Wealth and Poverty of Nations.