Book Recommendation: McCloskey & Carden, Leave Me Alone and I'll Make You Rich

McCloskey & Carden: "The alternative to respecting individual dignity is deciding economic matters collectively, through the government, a government seized by political 'competition.' After all, there are only two ways to get other people to do what you would like them to do, such as providing your dinner. You can coerce them, by private or public violence; get the government to do it. Or you can persuade them, by persuasion or offers of money."

Leave Me Alone and I'll Make You Rich

Coasian Quote of the Day

The quote of the day comes from an appeals court opinion of 1983: Carpenter v. Double R Cattle Co., 105 Idaho 320 (1983). The case is about smells coming from a cattle feedlot operation.

Although the problem of externalities affects both goals of efficiency and distributive justice, these objectives are conceptually different and may imply different solutions to a given problem. In theory, if there were no societal goal other than efficiency, and if there were no impediments to exchanges of property or property rights, individuals pursuing their economic self-interests might reach the most efficient allocation of costs and benefits by means of exchange without the direction by the courts. See Coase, The Problem of Social Cost. . . .However, the real world is not free from impediments to exchanges, and our economic system operates within the constraints of a society which is also concerned with distributive justice. Thus, the courts often are the battlegrounds upon which campaigns for efficiency and distributive justice are waged. (330-331)

And

Practically all human activities unless carried on in a wilderness interfere to some extent with others or involve some risk of interference, and these interferences range from mere trifling annoyances to serious harms. . . .Liability for damages is imposed in those cases in which the harm or risk to one is greater than he ought to be required to bear under the circumstances, at least without compensation. (333) 

Innovation

Great book!

The Fatal Conceit

 The quote for today comes from Hayek, The Fatal Conceit:

This book argues that our civilisation depends, not only for its origin but also for its preservation, on what can be precisely described only as the extended order of human cooperation, an order more commonly, if somewhat misleadingly, known as capitalism. To understand our civilisation, one must appreciate that the extend order resulted not from human design or intention but spontaneously: it arose from unintentionally conforming to certain traditional and largely moral practices, many of which men tend to dislike, whose significance they usually fail to understand, whose validity they cannot prove, and which have nonetheless fairly rapidly spread by means of an evolutionary selection - the comparative increase of population and wealth - of those groups that happened to follow them. The unwitting, reluctant, even painful adoption of these practices kept these groups together, increased their access to valuable information of all sorts, and enabled them to be 'fruitful, and multiply, and replenish the earth, and subdue it'. This process is perhaps the least appreciated facet of human evolution.

Socialists take a different view of these matters. they not only differ in their conclusions, they see the facts differently. That socialists are wrong about the facts is crucial to my argument, as it will unfold in the pages that follow. I am prepared to admit that if socialist analyses of the operation of the existing economic order, and of possible alternatives, were factually correct - we might be obliged to ensure that the distribution of incomes conform to certain moral principles, and that this distribution might be possible only by giving a central authority the power to direct the use of available resources, and might presuppose the abolition of individual ownership of means of production. If it were for instance true that central direction of the means of production could effect a collective product of at least the same magnitude as that which we now produce, it would indeed prove a grave moral problem how this could be done justly. This, however, is not the position in which we find ourselves. For there is no known way, other than by the distribution of products in a competitive market, to inform individuals in what direction their several efforts must aim so as to contribute as much as possible to the total product. (pp. 6-7)

The Constitution Drafting Project

    Jonathan Turley suggested in a recent commentary that "we are experiencing a crisis of faith in this country."

"All the images of protesters scaling the walls of the Capitol and briefly occupying Congress will remain seared in our collective memories for decades. Some called it a riot. Others called it an insurrection. Whatever you call it, it was a desecration. The rioters desecrated the most sacred moment of our constitutional system when the nation comes together to certify our next president. That is why it is too easy to treat this like an insurrection crisis. It is far more dangerous. It is a crisis of faith."

 Perhaps this is one important aspect of our politics these days.

     I'm wondering if a more central feature of our political divide is that people hold fundamentally different views about the role and purpose of government. Many differences in views can probably rest side-by-side in social interactions involving political issues, but perhaps some differing ideas about the role of government are not easily compatible. The National Constitution Center has sponsored The Constitution Drafting Project which brought three teams of constitutional scholars together to each draft an ideal constitution. This project has produced a Libertarian Constitution, a Progressive Constitution, and a Conservative Constitution. I think each group of scholars has done quite a good job, and I think there is much to learn from each of these efforts. 

    So, one idea I personally took away from reading each of these ideal constitutions is that I'm not sure a person who likes one of these ideals, but dislikes the other two, is likely to be happy with the politics and the government that emerges from the two disliked ideals. We have one constitution today, and I don't think the words in the constitution we have fit very well with either of these three ideal versions. But, in our body politic today I think there are significant numbers of people who will prefer one of these three versions, and at the same time pretty much dislike the other two. Actually, I suspect that much of today's angry politics is really about fighting over trying to make government fit one these three versions, even though none of these versions fits very well with the constitution we have. I suspect these three ideals aren't really compatible. Perhaps Turley's "crisis of faith" in this country is a consequence of the politics of trying to make one national government accommodate each of these three views.

I encourage you to take a look and see what you think. Which ideal do you prefer? Do you agree with me that these ideals aren't going to be compatible within the same constitutional approach to government? If our political differences are captured by the differences in these ideal constitutions do you think that a true federalist structure for government in this country might be a means of accommodating the differences while at the same time reducing the hatred and animosity that now seems a central feature of our politics?

 I found a really interesting story in Johan Norberg's Open: The Story of Human Progress.

. . .a friend sent me a message from his children's school about a problem with snack boxes. Apparently, the children had started trading food with one another. And rice cakes in the boxes created bigger problems than anything else because children at school had started using them to pay for other goods and even to buy help and services. The school wanted the parents' help to stop the kids from being free traders. The children had realized that by bartering they could get something to eat that they preferred to what they already had, so after an exchange both thought they had a better snack box than before. They even developed a medium of exchange -- rice cakes -- that they realized they could use to extend the market.

See, the market emerges. 

Introduction: The Constitution Line by Line

On Teaching Economics

Quote of the day from Paul Heyne's essay "Teaching Introductory Economics,"

It is certainly appropriate for economists to insist, in season and out, that government-funded projects also have opportunity costs and to call constant attention to the realities of what must be sacrificed to obtain desired goods. The question is how this can be done most effectively. It will not be by drawing production-possibility curves and extracting marginal rates of transformation, because that radically misstates the problem. Except in a dictatorship, no one economizes for society as a whole or for the government sector. In a democracy, public policies emerge from interactions--exchanges!--among optimizing parties: citizens, elected and appointed officials, and interest groups of many kinds. When the marginal benefits and the marginal costs accrue to different parties, an optimizing model just doesn't fit.

[from Chapter 17 in Paul Heyne, "Are Economists Basically Immoral?", Geoffrey Brennan & A.M.C. Waterman (eds.) Liberty Fund, Indianapolis (2008), p 308]

QOTD: Politics Is Process

I really like the opening paragraph to Buchanan's The Limits of Liberty :

Those who seek specific descriptions of the "good society" will not find them here. A listing of my own private preferences would be both unproductive and uninteresting. I claim no rights to impose these preferences on others, even within the limits of persuasion. In these introductory sentences, I have by implication expressed my disagreement with those who retain a Platonic faith that there is "truth" in politics, remaining only to be discovered and, once discovered, capable of being explained to reasonable men. We live together because social organization provides the efficient means of achieving our individual objectives and not because society offers us a means of arriving at some transcendental common bliss. Politics is a process of compromising our differences, and we differ as to the desired collective objectives just as we do over baskets of ordinary consumption goods. In a truth-judgment conception of politics, there might be some merit in an attempt to lay down precepts for a good society. Some professional search for quasi-objective standards might be legitimate. In sharp contrast, when we view politics as process, as means through which group differences are reconciled, any attempt to lay down standards becomes effort largely wasted at best and pernicious at worst, even for the man who qualifies himself as expert.

Certainly seeing politics as a process of reconciling group differences seems better than seeing politics as a search for truth. As a young economist I saw myself as an expert who could guide government and public policy toward the standard of an efficient allocation of resources by correcting the "market failures" I and my colleagues had discovered. Today these earlier efforts do seem to me largely wasted and pernicious, and as work in my classrooms that was best, not at correcting market failure, but at inculcating a spirit of controlling others through the force of government to a particular version of the "good society," i.e., the "efficient allocative society."

QOTD: The Missing Entrepreneur

There is no place for entrepreneurship in the market model of mainstream economics. Consider Kirzner in his How Markets Work:

The theory of entrepreneurial discovery sees the explanation of market phenomena in the way entrepreneurial decisions, taken under disequilibrium conditions, bring about changes in prices and quantities. The market process so initiated consists of continual entrepreneurial competition, made possible by an institutional framework which permits unimpeded entrepreneurial entry into both new and old markets. The success which capitalist market economies display is the result of a powerful tendency for less efficient, less imaginative courses of productive action to be replaced by newly discovered ways of serving consumers -- by producing better goods and/or by taking advantage of hitherto unknown but available, sources of resource supply. The theory focuses on the concept of discovery in contrast to the notion of the individual decision in mainstream theory. (p. 31)

 The mainstream economic view of the world relies on the idea of equilibrium. Every point in the diagram of the market model, including every point on the demand and supply curves, is an equilibrium point. So, the role of entrepreneurship is missing, and if you want to know more about the real economic world, this book by Kirzner is a good one to study.

Hayek Quote of the Day

From Hayek's "Individualism: True and False:"

The main merit of the individualism which [Adam Smith] and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. [Individualism and Economic Order, pp. 11-12]

The Radicalism of the American Revolution

Gordon Wood's The Radicalism of the American Revolution has been in my bookcase for some time now. Maybe too long, because I recently picked it up and found this in the preface:

Americans were not born free and democratic in any modern sense; they became so -- and largely as a consequence of the American Revolution. After eighteenth-century Americans threw off their monarchical allegiance in 1776, they struggled to find new attachments befitting a republican people. Living in a society that was already diverse and pluralistic, Americans realized that these attachments could not be the traditional ethnic, religious, and tribal loyalties of the Old World. Instead, they sought new enlightened connections to hold their new popular societies together. But when these proved too idealistic and visionary, they eventually found new democratic adhesives in the actual behavior of plain ordinary people -- in the everyday desire for the freedom to make money and pursue happiness in the here and now. To base a society on the commonplace behavior of ordinary people may be obvious and understandable to us today, but it was momentously radical in the long sweep of world history up to that time. 

Wow, this reminds me of Deirdre McCloskey's three volumes on the Bourgeois Era [Bourgeois Virtues, Bourgeois Dignity, and Bourgeois Equality] by which she explains that the modern world is the result of a change in ideas that gave liberty, dignity, and equality to ordinary people.

Here are a few more quotations from the introduction to Wood's book that fit with McCloskey's ideas:

By the time the Revolution had run its course in the early nineteenth century, American society had been radically and thoroughly transformed. One class did not overthrow another; the poor did not supplant the rich. But social relationships--the way people were connected one to another--were changed, and decisively so. By the early years of the nineteenth century the Revolution had created a society fundamentally different from the colonial society of the eighteenth century. It was in fact a new society unlike any that had ever existed anywhere in the world. (p. 6)

[The] revolution did more than legally create the United States; it transformed American society. Because the story of America has turned out the way it has, because the United States in the twentieth century has become the great power that it is, it is difficult, if not impossible, to appreciate and recover fully the insignificant and puny origins of the country. In 1760 America was only a collection of disparate colonies huddled along a narrow strip of the Atlantic coast--economically underdeveloped outposts existing on the very edges of the civilized world. The less than two million monarchical subjects who lived in these colonies still took for granted that society was and ought to be a hierarchy of ranks and degrees of dependency and that most people were bound together by personal ties of one sort or another. Yet scarcely fifty years later these insignificant borderland provinces had become a giant, almost continent-wide republic of nearly ten million egalitarian-minded bustling citizens who not only had thrust themselves into the vanguard of history but had fundamentally altered their society and their social relationship. Far from remaining monarchical, hierarchy-ridden subjects on the margin of civilization, Americans had become, almost overnight, the most liberal, the most democratic, the most commercially minded, and the most modern people in the world.

And this astonishing transformation took place without industrialization, without urbanization, without railroads, without the aid of any of the great forces we usually invoke to explain "modernization." It was the Revolution that was crucial to this transformation. It was the Revolution, more than any other single event, that made America into the most liberal, democratic, and modern nation in the world. (pp. 6-7) 

I think it is difficult for us to understand McCloskey's assertion that a change in ideas explains why we prosper basically because we can't really understand what social life as monarchical and hierarchy-ridden subjects would be like. The change in ideas essentially turned life upside down, and "almost overnight" Americans became liberal, democratic, egalitarian-minded and the most modern people in the world.

[The Revolution] destroyed aristocracy as it had been understood in the Western world for at least two millennia. The Revolution brought respectability and even dominance to ordinary people long held in contempt and gave dignity to their menial labor in a manner unprecedented in history and to a degree not equaled elsewhere in the world. The Revolution did not just eliminate monarchy and create republics; it actually reconstituted what Americans meant by public or state power and brought about an entirely new kind of popular politics and a new kind of democratic office holder. . . . Most important, it made the interests and prosperity of ordinary people--their pursuits of happiness--the goal of society and government. . . . it also released powerful popular entrepreneurial and commercial energies that few realized existed and transformed the economic landscape of the country. In short, the Revolution was the most radical and most far-reaching event in American history. (p. 8)

Yep. As McCloskey might put it, the Revolution gave liberty, dignity, and equality to ordinary people. And we prosper.

 

 

Not Capitalism

Let's consider the following from Jerry Mander's The Capitalism Papers: 

In the popular movie Avatar. . .a gigantic mining corporation travels
to a fictional distant planet where the valuable mineral “unobtanium” has been discovered in large supply. Alas, however, the mineral is located on the traditional lands of the Na’vi people, who live in a magnificent, wild, ancient forest. The corporate armada arrives in spaceships and includes immense military forces, fully equipped to invade and overpower these innocent and remarkable people if they don’t agree to move off their lands and yield control of these resources to the corporation. In the real world today, this scenario is entirely routine and has been played out literally thousands of times on every continent, without big Hollywood movies to illuminate the struggles. (43)

It seems Mander believes this fiction depicts important aspects of capitalism. But why is this capitalism? The story here involves the use of force because the corporate armada includes "immense military forces." This story seems to be a story that fits the history of imperialism by countries like Great Britain, Holland, Belgium, and Spain. It seems like the typical story told in textbooks of world history by which our kids learn about conquests and more conquests. Capitalism is the opposite of conquest. It is not predation. If this were capitalism, the corporate armada would not threaten force but offers deals for "their" lands instead. 

Of course, I know there are some who include imperialism in capitalism, but I say this is mistaken because doing so does not aid understanding. We cannot understand social interactions if we decide to say that taking and dealing characterize the same system of political economy. Predation and cooperation as fundamental aspects of the same system of political economy makes no sense to me. The human actions and interactions are different when predatory and when they are cooperative. Capitalism is cooperative. It involves voluntary exchange and making deals.

Professor Davies has a short video on this point that I think is worth watching.

Mises on Schools

Ludwig von Mises:

Education rears disciples, imitators, and routinists, not pioneers of new ideas and creative geniuses. The schools are not nurseries of progress and improvement but conservatories of tradition and unvarying modes of thought. The mark of the creative mind is that it defies a part of what it has learned or, at least, adds something new to it. One utterly misconstrues the feats of the pioneer in reducing them to the instruction he got from his teachers. No matter how efficient school training may be, it would only produce stagnation, orthodoxy, and rigid pedantry if there were no uncommon men pushing forward beyond the wisdom of their tutors. [Theory and History: An Interpretation of Social and Economic Evolution , p. 263]

Mises on Uber

Ludwig von Mises:

Every step on the road toward intensification of the division of labor hurts in the short run the personal interests of some people. The expansion of the more efficient plant hurts the interests of less efficient competitors whom it forces to go out of business. Technological innovation hurts the interests of workers who can no longer make a living by clinging to the discarded inferior methods. The vested short-run interests of small business and of inefficient workers are adversely affected by any improvement. This is not a new phenomenon. Neither is it a new phenomenon that those prejudiced by economic improvement ask for privileges that will protect them against the competition of the more efficient. The history of mankind is a long record of obstacles placed in the way of the more efficient for the benefit of the less efficient. [Theory and History: An Interpretation of Social and Economic Evolution, p. 236]

The other day my son asked: "Why would anyone not support Uber?" This observation by Mises seems like a very good answer.

Legislative Power or Executive Power

President Obama said recently that he would make an executive order regarding immigration.  I have not had an opportunity to actually read the executive order, and as of this moment no such executive order is listed and available through the White House webpage.  Even if the actual executive order has not yet been signed, there is much debate about whether the President has the constitutional power to do what he says he will do.

At least some of the debate concerns whether or not the President has the prosecutorial (or executive) discretion to do what he says he will do.  Josh Blackman argues no, while Ilya Somin argues yes (here and here).

After reading such analyses, I wonder if the fundamental constitutional issue can be simplified.  It seems to me that perhaps framing this issue in terms of discretion is off target, or at least discretion is only of indirect concern.  Looking at the Constitution I find that "all legislative powers herein granted shall be vested in a Congress," and also "the executive power shall be vested in a President."  I think that means there are two separate and distinct powers, and the idea is that Congress does not constitutionally have executive power while the President does not have legislative power.

Therefore, it seems to me the direct constitutional issue is whether or not the President's promised executive order will be exercising the legislative power or the executive power.  If it will exercise the legislative power, then the President does not have the constitutional power to take such action.

It seems to me the President has actually answered this question.

Had the House of Representatives allowed that kind of bill a simple yes or no vote, it would have passed with support from both parties.  And today it would be the law.

If Congress can constitutionally take the action the President says he wants to take, then I say that action falls within the legislative power.  The President seems to think this as well since he says if Congress had done what he wants to do, then "it would be the law."  It could not constitutionally be law if Congress was acting within the executive power.

Perhaps there is one other way to think about the relevant issue.  If Congress had acted to pass a statute that did what the President wants to do, would anyone, including the President, want to assert that the Congress was attempting to exercise the President's executive power.  According to the President's speech, he would not make such an assertion.

It seems to me we should conclude the President's promised executive order will be an unconstitutional presidential action because it will be a legislative action.

I want to add a couple of thoughts about the idea of discretion.  It seems to me the President must have some discretionary power, but that such discretionary power must be within his proper constitutionally granted executive power.  I do not think we want to say that proper discretionary power allows the President to act as though he also had legislative power.  Since I have just decided his proposed executive order would be an attempt to exercise a legislative power, I never have to take up the question of whether or not the action is within a proper discretionary exercise of the President's executive power.

Finally, I think more discretion means less rule of law, and vice versa.  More discretion means rule by authority, not rule by law.  More discretion, or more rule by authority, also seems to me to create greater incentives for corruption within government. Thus, I do not want to try too hard to justify an executive's discretion.

Laissez-Faire Capitalism

I've done quite a bit of reading lately concerning what different people have to say about capitalism. One thing to notice is that capitalism seems to have hundreds of different meanings. Long ago, I memorized the definition as "private property ownership of the means of production." This definition was also specifically contrasted with socialism, which was defined as "government ownership of the means of production." As you can guess, I tell the students in my courses this is how we should define capitalism and socialism.

I have also tended to see capitalism as Adam Smith's "simple system of liberty." With my recent readings I've encountered authors who call capitalism: Financial Capitalism, or Global Capitalism, or Corporate Capitalism, or Free-Market Corporate Capitalism, or Consumerist Capitalism, or Neoliberal Capitalism, or Disaster Capitalism. Not one of these capitalisms corresponds with my thinking of capitalism as Smith's simple system of liberty.  My concern is that when I use the word capitalism I am thinking about liberty while often my listener is thinking I mean one of these capitalisms.

To make these matters worse in my opinion, many people, perhaps most people, say that our system of political economy in the United States is capitalism. Certainly our system of political economy is characterized by private property ownership of the means of production, but our system of political economy is not Smith's simple system of liberty.  Confusion seems to characterize the analysis of capitalism.

What to do? I've recently read a number of people, who see capitalism much as I do, discussing whether or not to stop using capitalism as the word for "that simple system of liberty." Because capitalism has come to have so many different meanings, I am tempted to try to stop using the word. 

Or perhaps I can follow the lead of Deirdre McCloskey and say that I'm cool with just about any definition so long as the definition does not tautologically mean capitalism is bad:

I don't much care how "capitalism" is defined, so long as it is not defined a priori to mean vice incarnate.  The prejudging definition was favored by Rousseau -- though he did not literally use the word "capitalism," still to be coined -- and by Proudhon, Marx, Bakunin, Kropotkin, Luxemburg, Veblen, Goldman, and Sartre.  Less obviously, the same definition was used by their opponents Bentham, Ricardo, Rand, Friedman, and Becker.  All of them, left and right, have defined commercial society at the outset to be bad by any standard higher than successful greed.

Such a definition makes pointless an inquiry into the good and bad of modern commercial society.  If modern capitalism is defined to be the same thing as Greed -- "the restless never-ending process of profit-making alone. . . ., this boundless greed after riches," as Marx put it . . . -- then that settles it, before looking at the evidence. 

Still, since capitalism is a word that has been in use for so long by both proponents and opponents, I don't think it is going to work to try to stop using the word.  I suspect that the list of capitalisms above is not so much the consequence of prejudging capitalism as it is the consequence of mistakenly thinking each of these as invariably what becomes of capitalism over time.  Why mistakenly?  Because it seems the authors using each of these capitalisms has neglected to see that it is a system of political economy they are criticizing, and that means their concerns involve government as much as the private property ownership of the means of production.

As I think about each of the capitalisms I've read about lately, it seems to me there is nothing inherent in private property ownership of the means of production that requires capitalism to become Disaster Capitalism or Neoliberal Capitalism or any of these capitalisms.  Nor does it mean we cannot say any of these capitalisms is not truly capitalism when we define capitalism merely as the private property ownership of the means of production.  After all, there is private property ownership of the means of production in the US today, and each of the authors using these types of capitalism are criticizing aspects of the US system of political economy today.

In the past I have not wanted to give in to the idea that there could be different versions of capitalism.  I've wanted to say, "Now, look here, capitalism means Smith's simple system of liberty.  It cannot mean what people call Disaster Capitalism, or Consumerist Capitalism."  But, perhaps I've been wrong in this regard.  Perhaps I should accept the approach of saying there can be different versions of capitalism, and then make very clear the version of capitalism I'm writing and talking about.  I think it might be good to follow the lead of George Reisman and make clear that I'm writing and talking about Laissez-Faire Capitalism:

Laissez-Faire Capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual's rights against the initiation of physical force.  This protection applies to the initiation of physical force by other private individuals, by foreign governments, and, most importantly, by the individual's own government.

I might want to modify this definition just a bit, but it pretty much expresses what I mean by capitalism.  So, my intuition is that the best way to try to reduce confusion is to explicitly say that there are different versions of capitalism, and therefore the task is not to learn about capitalism but to learn about Laissez-Faire Capitalism, and perhaps the other versions as well.

PLUNDER

Frederic Bastiat:

It is absolutely necessary that this question of legal plunder should be determined, and there are only three solutions of it:

1. When the few plunder the many.

2. When everybody plunders everybody else.

3. When nobody plunders anybody.

Partial plunder, universal plunder, absence of plunder, amongst these we have to make our choice.  The law can only produce one of these results. [THE LAW, 61]

I believe this is correct.  Partial plunder seems to characterize most of history.  I say we should choose the third alternative, absence of plunder.  The United States Constitution was a good beginning for a system of political economy that might approximate the third alternative.  Alas, over time the Constitution has been lost [see Barnett, Restoring The Lost Constitution], and our system of political economy seems to have become an excellent illustration of universal plunder.  As you might guess, neither partial plunder nor universal plunder offer paths by which prosperity can be enjoyed by all.

Law, Liberty & This Odious Perversion

Frederic Bastiat:

In fact, if law were confined to causing all persons, all liberties, and all properties to be respected--if it were merely the organization of individual right and individual defense--if it were the obstacle, the check, the chastisement opposed to all oppression, to all plunder--is it likely that we should dispute much, as citizens, on the subject of the greater or less universality of suffrage?  Is it likely that it would compromises that greatest of advantages, the public peace?  Is it likely that the excluded classes would not quietly wait for their turn?  Is it likely that the enfranchised classes would be very jealous of their privilege?  And is it not clear, that the interest of all being one and the same, some would act without much inconvenience to the others?  But if the fatal principle should come to be introduced, that, under pretense of organization, regulation, protection, or encouragement, the law may take from one party in order to give to another, help itself to the wealth acquired by all the classes that it may increase that of one class, whether that of the agriculturists, the manufacturers, the ship owners, or artists and comedians; then certain, in this case, there is no class which may not try, and with reason, to place its hand upon the law, that would not demand with fury its rights of election and eligibility, and that would overturn society rather than not obtain it.  Even beggars and vagabonds will prove to you that they have an incontestable title to it. . . Yes, as long as it is admitted that the law may be diverted from its true mission, that it may violate property instead of securing it, everybody will be wanting to manufacture law, either to defend himself against plunder, or to organize it for his own profit. . . Is there any need to prove that this odious perversion of law is a perpetual source of hatred and discord, that it even tends to social disorganization. [The Law, 57-58]

Enemies Into Friends

SHELDON RICHMAN:

Mises, Hayek, and Buchanan were onto something important. In the popular mind, economics is a cold, detached study of the Economy, almost as though it were a machine that acts on society. In contrast, the catallaxy is where people who disagree about the value of things peacefully exchange goods and services in a never-ending cooperative effort to improve their lives. It is indeed a community where enemies may be changed into friends.

Capitalism

Deirdre McCloskey:

Capitalism has triumphed in our time, which I claim is a good thing, though boring.  The coming of bourgeois society to northwestern Europe was good.  So was the theorizing of bourgeois virtues in Holland and Scotland and France.  So were the early successes of bourgeois society in England and Belgium and the United States.  So was the enlargement of the clerisy.  So was the global triumph of capitalism from 1848 to 1914 and again from 1945 to the present in its spread to the second world and to more and more of the third.  It has allowed the escape from deadly poverty by hundreds of millions in the late twentieth century, the defeat of Fascism and then of Communism, the revolts against the tyrants from Marcos to the House of Saud, the liberal hegemony of the early twenty-first century.  All of these, I say, are good things.  One can think of the calamities of the twentieth century as caused by the sins of capitalism.  The left does.  Capital was born, wrote Marx, 'dripping from head to foot, from every pore, with blood and dirt.'  I think on the contrary that most of the calamities were a consequence of the attacks on capitalism." [Bourgeois Virtues]

Fiscal Responsibility

Given all the political talk in Washington these days of fiscal cliffs, deficits, and debt ceilings I wonder how many people, even how many of those doing all the talking, have much of an idea of what government's spending and taxing looks like of late?  I have to pay attention to some of this because of the courses I teach, and I have my course Economics of the Public Sector coming soon.  So, I thought I would spend some time, once again, with the numbers in the President's Budget Proposal for FY2013.  I don't like looking at numbers that are only estimates, so I'm only paying attention to actual numbers for outlays and revenues.

Here is what the total picture looked like with respect to spending, revenues, and borrowing for the US Government, and for the last two fiscal years for which there is actual information.  The numbers presented are in billions of dollars.  In FY 2010 the US Government had revenue of  $2,163 billions of dollars,  while it spent $3,456 billions of dollars.  In FY 2010 the US Government chose to borrow $1,293 billions of dollars.  This means that for FY 2010 Congress and the President chose to borrow 37 cents of every dollar they spent.

The story is pretty similar for FY 2011.  In that year the revenue was $2,303 billions of dollars while spending was $3,602 billions of dollars.  In FY 2011 the US Government chose to borrow $1,300 billions of dollars.   That means that for FY 2011 Congress and the President borrowed 36 cents of every dollar they spent.

The political talk these days often has one side of the political isle saying government has a spending problem and the other side counters by saying government has a revenue problem.  It seems to me better to say the US Government has a borrowing problem.  Can there be any justification, outside of events like WWI and WWII, for borrowing around 40 cents of every dollar spent?  I doubt it, but the question does suggest we might wonder what the government spends $3.5 trillion dollars on, and what aspects of this spending justify borrowing around a trillion dollars annually.

It seems a rather challenging task to get deeply into the budget numbers for the entire US Government.  So, I'm not going to get very detailed.  Still, I think we can probably draw some conclusions by looking at what sorts of things Congress and the President have been spending the most money on of late.  Consider the percentage of the entire budget spent by the largest four agencies of the US Government:

• Department of Health & Human Services . . . . . . . . . 24.7%
• Social Security Administration . . . . . . . . . . . . . . . . . 21.8%
• Department of Defense . . . . . . . . . . . . . . . . . . . . . . . 18.8%
• Department of the Treasury  . . . . . . . . . . . . . . . . . . . 14.9%

It is notable, I think, that these four agencies spent 80.2% of the entire amount of money spent by the US Government in FY 2011.  The next largest agency in terms of spending was the Department of Agriculture which spent 3.9% of the total spending for the US Government.  After taking the spending of these 4 agencies out of the budget, there are 24 remaining agencies which together spend the remaining 20% of total federal spending.

Take a look now at the amount spent by these 4 agencies in FY 2011:

• Department of Health & Human Services . . . . . . . . . $891,247 million
• Social Security Administration . . . . . . . . . . . . . . . . . $784,194 million
• Department of Defense . . . . . . . . . . . . . . . . . . . . . . . $678,074 million
• Department of the Treasury. . . . . . . . . . . . . . . . . . . . $536,740 million

Just the largest 3 agencies together spent $2,353,515 million, or $2,354 billion, in FY 2011.  In other words, the spending of just three agencies exceeded the government's revenue of $2,303 billion in FY 2011.  In a sense, then, in FY 2011 members of Congress and the President decided to borrow 40 cents of every dollar they spent in order to operate the rest of the 25 agencies of government.  Wow!

Take a look now at 3 of the programs the 2 largest agencies spent money on:

• Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $599,372 million
• Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $565,340 million
• Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $131,571 million  

Add these 3 programs together to get $1,296,282 million, or $1,296 billion, in FY 2011.  Members of Congress and the President borrowed $1,300 billion in FY 2011.  Thus, another way of trying to put the fiscal actions of the US Government into perspective is to say that in FY 2011 the money that was borrowed was borrowed in order to pay for just three programs: Social Security, Medicare, and Disability.

It seems to me we should conclude that something has gone seriously wrong with the recent fiscal actions of Congress and the President.  I don't think it is possible to justify borrowing the money necessary to operate 25 out of the 28 agencies of government.  Nor do I think it is possible to justify borrowing the money needed to fund Social Security, Medicare, and Disability.

Or think about this. Social Security and Medicare combined account for almost the amount borrowed, and these two programs are for only one group of people, those who have reached "retirement age."  I don't think it is possible to justify borrowing money to support programs for this group of people.

I'm sure some will complain that this way of thinking about government borrowing isn't sensible because Social Security isn't an entitlement program since people are just getting back their money from payments over the course of their working lives.  But, Social Security has never worked this way in fact.  It has always been a transfer program from those who are working to those who are retired.  In addition, the numbers I'm using here combine all sources of revenue and types of outlays into the total budget numbers.

In any case, I suggest it is important to think about all the budget talk by the President and members of Congress these days in some conceptual way that allows us to emphasize what our political representatives are choosing to do when they borrow money on our behalf.  It seems to me these two perspectives help in this regard.  Also, please don't forget that when our representatives decide to borrow money on our behalf that we adults won't be the only people paying the money back.  People who can't yet vote, our children, will also have to pay back money "we" borrowed for government today.

Perhaps there is another way to put the budget actions of Congress and the President into perspective.  Even if our representatives in Washington wanted to balance the government budget, it is possible to over estimate the revenue and thus to be required to borrow to cover the difference between predicted revenue and actual revenue.  But, if this reason explained the deficits then once in a while there would be a surplus, and the need to borrow would be just a few cents for every dollar spent annually, not almost 40 cents for every dollar spent.  Borrowing as much money as they have recently suggests it is unreasonable to assume the borrowing is needed because of inaccurate revenue estimates.  It seems better to assume other justifications are needed.  Thus, another way of putting the budget actions of Congress and the President into perspective is to see any new spending as requiring new borrowing.  As such, Congress and the President should be discussing why they want to borrow money for the new spending.  For example, just yesterday the House considered spending, or should we say borrowing, an additional $50 billion for hurricane Sandy "relief."  What reasons can justify borrowing money at this time for personal losses due to a hurricane?  Perhaps there are in fact good reasons.  But, if so, there is also the larger context that government has already found that it needs to borrow sufficient money to operate 90% of the government agencies.

It seems to me something has gone wrong with the US Government.  It also seems to me that what has gone wrong is related to the easy way by which members of Congress and the President have come to accept borrowing more and more money to fund government.  Perhaps the answer to what has gone wrong is to return to what Buchanan and Wagner (Democracy in Deficit) called the "Smithian principle of fiscal responsibility:"

Government should not spend without imposing taxes; and government should not place future generations in bondage by deficit financing of public outlays designed to provide temporary and short-lived benefits.

In other words, government should generally seek to operate without running a deficit.

Fiscal Cliff or Deficit Scissors?

All the political talk about a "fiscal cliff," and a post by Peter Boettke, has led me to begin reading Democracy in Deficit by Buchanan and Wagner.  I think the opening paragraph in the first chapter of Democracy in Deficit suggests a very simple way of thinking about the fiscal issues front and center in the news today:

In the year (1776) of the American Declaration of Independence, Adam Smith observed that "What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom."  Until the advent of the "Keynesian revolution" in the middle years of this century, the fiscal conduct of the American Republic was informed by this Smithian principle of fiscal responsibility: Government should not spend without imposing taxes; and government should not place future generations in bondage by deficit financing of public outlays designed to provide temporary and short-lived benefits.

In other words, government should generally operate without running a deficit.  Government should generally pay for its activities each year with annual tax revenues.

If you agree this is a reasonable idea, then perhaps you will wonder about the so-called fiscal cliff that the President and members of Congress are bickering over these days.  The idea of the fiscal cliff is that Congress and the President have "bound" themselves by past actions in ways that will, on January 1, result in (1) an increase in income tax rates (for every taxpayer), and in (2) automatic across the board cuts in government spending.  If you haven't been paying attention to politics lately you might wonder why the President and Congress would take action in the past that would bind them to (1) and (2) today.  The answer seems to have something to do with the fact that the President and Congress have been borrowing quite a lot of money to finance their activities of late.  I will show you how much borrowing in two charts below.  It seems that the President and members of Congress recognized in the past that they really aren't very good with budgets and fiscal responsibilities, and thus they concluded that if they wanted to start borrowing less money they would have to bind themselves to (1) and (2).  There must be some truth to the idea that they aren't very good with budgets because we are now less than a month away from (1) and (2) happening, and what are the President and members of Congress bickering about?  Yep, unbinding themselves from (1) and (2) so that they can borrow more money.

How is it that we are now facing a "fiscal cliff?"  Maybe our political leaders see this as a cliff because they can't face up to the idea that they should be more responsible than they are with the budget of the United States.  Or it may be that our political leaders and others see a cliff because they believe that more tax revenue and less spending will mean a new period of recession for the country.  Or, it may be that our fearless leaders are hoping to deflect our attention from the mountain of loans they have been taking out lately by telling us to pay attention instead to the cliff that is (1) and (2).

Given all the public bickering and finger pointing, I'm thinking the last alternative makes a lot of sense.  After all, if the President and Congress have been borrowing too much money in the past few years, then it seems that the quote from Democracy in Deficit would suggest they need to get out a pair of deficit scissors and cut the size of their borrowing.  What would deficit scissors be?  Well, pretty much something like (1) and (2).  One blade of the deficit scissors would be more tax revenue while the second blade would be cutting what they spend each year.

Should the President and Congress get the deficit scissors out?  You'll have to decide for yourself, of course.  But, after showing you some numbers that I found in the FY 2013 Budget Proposal of President Obama, I'll tell you my answer.  These numbers come only as close to the present fiscal year as FY 2011 because that is the last year for which actual information is available.  I do not present estimates.  The first chart shows the historical record of U.S. Government receipts and outlays as percentages of GDP.  Outlays are shown in red, and thus for any year that the red trend line is above the blue trend line the U.S. Government ran a deficit, i.e., Congress and the President borrowed money.  It looks like the President and Congress began to borrow more each year, compared to the past experience, from around 1970 on.  There is an exception which is shown by the

four years of surplus around the end of the Clinton presidency.  In most of the years after those four years of budget surplus the President and Congress borrowed pretty heavily.  The last three years in the chart show very heavy borrowing. 

I don't think it is really easy to understand the meaning of a government deficit when expressed as a  percentage of GDP.  The next chart shows the deficit in terms of the cents borrowed out of every dollar spent by government in each year.  For any year in which government's budget was in surplus 

the cents borrowed is shown as zero.  The information in this chart begins in 1900 and ends with the 2011 FY.  Notice that outside the years that involve either a world war or the Great Depression, the US Government seldom borrowed more than 20 cents of every dollar it spent.  It also appears that over the period of years since WWII the US Government's reliance on borrowing increased early in the decade of the 1970s.  The US Government's willingness to borrow seems also to have increased recently.  In the 2009 FY it borrowed 40 cents of every dollar it spent, in 2010 FY it borrowed 37 cents of every dollar spent, and in 2011 it borrowed 36 cents of every dollar spent.

I suggest that the President and Congress have borrowed far too much money in recent years.  Borrowing thirty to forty cents of every dollar spent is far too much.  I also suggest that if you look again at the first chart, it is reasonable to conclude that the last three years in the chart display a significant increase in the spending habits of the President and Congress.  Yes, there was also a decrease in tax revenues during the last three budget years, which is of course what happens with recession.  Given the proclivity of the red spending trend line to be above blue revenue line since around 1970, it seems to me the borrowing problem of the President and Congress results from their proclivity to spend too much.  

In any case, except for relatively unusual circumstances (e.g. a world war), it seems to me that the President and Congress should be budgeting for a surplus, or for a very small deficit (perhaps five or ten cents for every dollar spent).  The fiscal cliff looks to me like deficit scissors that are really needed at this point to begin to get the President and Congress to be fiscally responsible with our money and the money of future generations.  My preference is for the President and Congress to spend less rather than raise tax rates on any of us, but I suggest ending the unjustified borrowing is the greater priority at this time.

What do you think?  Should we fear the fiscal cliff, or should we get out the deficit scissors?

The Ethics of Voting

I just started Jason Brennan's The Ethics of Voting, and it looks very interesting.  Why?  Consider:

At base, democracy is just a decision-making method.  In politics, democracy is a method for deciding when and how to coerce people into doing things they do not wish to do.  Political democracy is a method for deciding (directly or indirectly) when, how, and in what ways a government will threaten people with violence.  The symbol of democracy is not just the ballot--it is the ballot connected to a gun.

Democracy is good because liberal, constitutional democratic governments perform well compared to the feasible alternatives.  People living under liberal, constitutional democratic governments tend to have higher standards of living, greater educational levels, longer life expectancy, higher exposure and access to culture and diversity, greater reported happiness and life satisfaction, more freedom of all kinds, and more wealth than people living under alternative regimes.  From a humanitarian point of view, liberal constitutional democracy is a clear winner, at least compared to the alternatives we have tried.

I like both these paragraphs, and I suspect students in just about any of my courses will find these views familiar.  I'm especially fond of the clarity about the nature of government expressed in the idea that "democracy is not just the ballot--it is the ballot connected to a gun."

I also think I like Brennan's ideas about what ethical voting means.  Here are the propositions he says he argues for in his book:

• Citizens have no civic or moral obligation to vote.
• Citizens can pay their debts to society and exercise civic virtue without being involved in politics.
• People who lack certain credentials (such as knowledge, rationality, and intellectual virtue) should abstain from voting.
• Voters should not vote for narrow self-interest.
• It can be permissible to buy and sell votes.  It is not inherently wrong to do so.

Perhaps by the end of his book I will decide against these views, but they seem right to me at this point.  I especially support the idea that a person does not have a moral obligation to vote, but if a person chooses to vote, then I think a person has a obligation to vote in support of an informed, justifiable view of  what is in the common interest.

I even like the last idea that it is not inherently wrong to buy and sell votes.  After all, it would be unusual for an economist not to support the idea that there was no better means of aggregating individual preference than voluntary exchange. 

Allocation, Distribution & Fairness

Peter Boettke:

The juxtaposition of the exchange approach to economics with the approach to economics that emphasizes optimal society allocation and just distribution as products of a benevolent social planner sets the stage for Buchanan's distinction between economics and politics, as well as the emphasis on rules and the institutional framework.  Questions of  "just distribution" are never about particular distributions of resources but instead always about the choices over the rules of the game which engender a pattern of exchange, production, and thus distribution.  Fairness is about rules, not outcomes; justice is about process, not end-states. [Living Economics, p. 50]

Congress shall make no law. . . .

You might be interested in an interview of Hayek done by James Buchanan. Hayek made the following suggestion about the Constitution:

Well, among the Founding Fathers, there were some who very clearly saw the very point I am making.  And I believe they did try, by the design of the American Constitution, to achieve a limit on their powers.  After all, the one phrase in the American Constitution, or rather in the First Amendment, which I think most highly of is the phrase, "Congress shall make no law. . . "  Now, that's unique, but unfortunately [it goes] only to a particular point.  I think the phrase ought to read, "Congress should make no law authorizing government to take any discriminatory measures of coercion."  I think this would make all the other rights unnecessary and create the sort of conditions which I want to see.

I like the idea.  If you are interested in Hayek's analysis that leads to this suggestion, then you will want to read Law, Legislation, and Liberty (all 3 volumes), and perhaps The Constitution of Liberty as well.