Sunday, March 30, 2008

Senator Obama's Economy

Let's take a look at some of the text from SENATOR OBAMA'S SPEECH "Renewing the American Economy."
But the American experiment has worked in large part because we have guided the market's invisible hand with a higher principle. Our free market was never meant to be a free license to take whatever you can get, however you can get it. That is why we have put in place rules of the road to make competition fair, and open, and honest. We have done this not to stifle - but rather to advance prosperity and liberty. As I said at NASDAQ last September: the core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well being of American business, its capital markets, and the American people are aligned.

I think all of us here today would acknowledge that we've lost that sense of shared prosperity.
I'm not liking the sounds of this. America works because "we have guided" the invisible hand? Who is this "we?" Does he mean because government has guided the invisible hand? I suspect that is what he means, although he doesn't seem to me to specifically state what the higher principle is that has been used by government to guide the invisible hand.

I don't think we've lost the sense of prosperity. I'm not sure about the "sense of shared prosperity," maybe because I'm not sure what he means by this phrase. But "sense" seems to me a lot like "preference" or "utility." That is, "sense" is something we can't easily see or measure, which makes it a convenient choice for political rhetoric.

But, let's take a look at his explanation for why our "sense of shared prosperity" has been lost.
This loss has not happened by accident. It's because of decisions made in boardrooms, on trading floors and in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both.
I'm not sure what he means by a market that favors this street over that street. But, then, I like to think of markets as exchange, and I like to think of exchange as resulting from the voluntary choices of a buyer and a seller. Of course, an exchange cannot favor or disfavor anything, not even this street over that street.

Moving on:
Nor is this trend new. The concentrations of economic power - and the failures of our political system to protect the American economy from its worst excesses - have been a staple of our past, most famously in the 1920s, when with success we ended up plunging the country into the Great Depression. That is when government stepped in to create a series of regulatory structures - from the FDIC to the Glass-Steagall Act - to serve as a corrective to protect the American people and American business.
I'm not buying his history lesson in this speech either. Admittedly, I'm not an economic historian, and I didn't stay at a Holiday Inn Express last night either (I'll bet this is true for Senator Obama as well). But one of the things I learned about the economics of the Great Depression was that the research of Milton Friedman found that government's monetary policy was the explanation for why this recession turned into the Great Depression. Further, Amity Shlaes explains in THE FORGOTTEN MAN that when the "government stepped in to create a series of regulatory structures" those regulatory structures prolonged (not ended) the Great Depression. My students learn to suspect this as well when they study Supreme Court opinions from this period in my course Constitution and the Economy and discover numerous instances in which the policies of FDR reduced output at a time of "depression."

I also want to add that the "series of regulatory structures" referred to by Senator Obama were generally regarded by the Supreme Court at the time as unconstitutional, at least initially. I like to think our Constitution as it was written protected individual economic liberty and that these regulatory structures were seen as unconstitutional then because they infringed upon individual liberty. Unfortunately what emerged from politics at the time was FDR's scheme to pack the Supreme Court and the "switch in time that saved nine." Certainly from that time on, the Suprme Court's view of the Constitution became more and more a view that I think is fairly described as the lost constitution and which is discussed by Randy Barnett in RESTORING THE LOST CONSTITUTION.

Once again the Senator moves on to something that I'm not at all sure what he means by what he says:
Ironically, it was in reaction to the high taxes and some of the outmoded structures of the New Deal that both individuals and institutions began pushing for changes to this regulatory structure. But instead of sensible reform that rewarded success and freed the creative forces of the market, too often we've excused and even embraced an ethic of greed, corner cutting and inside dealing that has always threatened the long-term stability of our economic system. Too often, we've lost that common stake in each other's prosperity.
I don't think the Senator is clear here on who he is criticizing, and I don't think "that common stake in each other's prosperity" is something that can be lost because I think the "tendency to truck, barter and exchange" (to borrow from Adam Smith) is an inherent part of human nature. It seems to me that as long as government does not intervene with regulations that the "common stake in each other's prosperity" works out in exchange after exchange really rather well.

Now if Senator Obama means to say that the "we" who have lost a sense of understanding "that common stake" are our political leaders, then I might just be with him on this one. I do think much of Washington fails to understand (the basic economics) that exchange is voluntary and therefore beneficial for both buyer and seller (the common stake in prosperity), and that government's regulations bring force to bear upon the common stake in prosperity. When politicians overlook this stuff of basic economics, and when the Judicial branch of government fails to enforce the Constitutional constraints against government's infringements of economic liberty, then rent seeking prospers at the expense of "that common stake." But, my guess is that Senator Obama is not saying what I would say: "Government and rent seeking is the problem, not that answer."

I suspect Senator Obama means to say that the answer is to better use government's force in our lives and our individual daily economies. At least that is how I understand this:
Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform - to foster competition, lower prices, or replace outdated oversight structures. Old institutions cannot adequately oversee new practices. . . .
Or, consider this as well:
. . . . This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment. . . . .
In other words, it is the greedy corporate rent seekers (demanders), not the greedy Washington politicians (suppliers of rent seeking), who are to blame for our "failing" system of political economy.

What follows in his speech seems to be illustrations of his idea that "the rules that govern" the economy must be changed as the economy changes. I suspect this is an easy idea (or principle as I think he would say) to latch onto. In my view, this idea is of course quite the opposite of understanding that exchange, not force that is directed by government to intervene in exchange, is the foundation of "that common stake in each other's prosperity." When the Senator finishes with the list of illustrations he gets to the following:
Our history should give us confidence that we don't have to choose between an oppressive government-run economy and a chaotic and unforgiving capitalism. It tells us we can emerge from great economic upheavals stronger, not weaker. But we can do so only if we restore confidence in our markets. Only if we rebuild trust between investors and lenders. And only if we renew that common interest between Wall Street and Main Street that is the key to our success.
Of course this all sounds just fine on the surface, but I'm still nervous by his use of "we" in the context of restoring confidence and rebuilding trust. I already have great trust and confidence in "our markets," and I haven't lost that confidence because of any of the illustrations he draws upon. Instead, I see in his illustrations, and I see in our history, reason to conclude that "our markets" do just fine without government intervention. I'm nervous about his use of "we" because I'm pretty sure he means to say we have to involve government even more in our markets to restore trust and confidence, and I think it is largely because of government's intervention in the past that he can mistakenly assert today that we've lost trust and confidence in our markets. It seems he is saying that for all the ills he finds in our economy the answer is really more government policy so that "we" can try to fix the very problems "we" created with earlier government policy.

Well, the Senator's speech goes on for quite a bit longer, but, it seems to me that once I get to the end I've pretty much already covered with my comments above the Senator's view of our system of political economy. At the end of his speech he repeatedly refers again and again to "we" this and "we" that. While it sounds like by "we" he means all of us, it is pretty clear to me that he means "we" in the national government will fix all these ills for you. Or, perhaps I can say that Senator Obama's view of our economy is one in which he will try again and again (with his colleagues in Washington) to use government's force to intervene in our own individual economies to fix the problems that have now emerged from the earlier interventions of government policy. Of course, as you know by now, my view of government and prosperity is pretty much the opposite of the view I find in the Senator's speech.

Thursday, March 27, 2008

Obama's Tax Expectations

GREG MANKIW MAKES an interesting observation with respect to Senator Obama's choice not to make use of tax-deferred savings opportunities:
I was surprised to see that Senator Obama has, for some reason, decided not to use this opportunity. His recently released tax returns show significant Schedule C income from book royalties (about half a million dollars in the most recent year). I am not a tax accountant, but I believe he could have put a substantial part of these earnings ($44,000) into a SEP-IRA and deferred taxes on it until withdrawal. Line 28 on his tax return, however, is completely blank.

Why? I don't know. Maybe he is getting bad tax advice. Or maybe he is expecting vastly higher tax rates in the future when the accumulated savings will need to be withdrawn and taxed. As Obama economic adviser Austan Goolsbee has written, "Future increases in tax rates potentially threaten to significantly reduce the value of your retirement savings and may even mean that you should not save in 401(k) accounts at all."
Well, this is a very interesting possibility, especially since I don't think there is a clear reason to think Senator Obama would not want to hire sound tax advice. Maybe, the Senator is looking at the financial and political future of Social Security and Medicare, or maybe he is simply expecting the democrat party to be in control of the power to tax in the future.

Wednesday, March 26, 2008


The NY Times has an article that notes the positions of the presidential candidates with respect to MORTGAGE BAILOUTS:
Drawing a sharp distinction between himself and the two Democratic presidential candidates, Senator John McCain of Arizona warned Tuesday against vigorous government action to solve the deepening mortgage crisis and the market turmoil it has caused, saying that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”
Both democrat candidates have called for the federal government to create a fund to provide "relief" for those facing foreclosure.

I haven't watched this issue closely, but it seems to me taking the policy position that government should not save those who act irresponsibly is a good policy position to take.

Of course, since this is about mortgages, it would also seem relevant to point out the federal government is already in the business of subsidizing home mortgages because of government entitites that provide mortgages (e.g. FHA), and because of mortgage interest deductions from federal income tax liabilities. Perhaps we could guess that the federal government's subsidies had already caused an inefficiently large number of mortgages before the present crisis, and perhaps at least some of those facing foreclosure today are among those inefficient mortgages.

Tuesday, March 25, 2008

Hayek on the Benefits of Freedom

I often think about liberty from the point of view of what I can do with my freedom. In THE CONSTITUTION OF LIBERTY Hayek writes about the benefits of liberty by emphasizing what others do with their freedom:
The benefits I derive from freedom are thus largely the result of the uses of freedom by others, and mostly of those uses of freedom that I could never avail myself of. It is therefore not necessarily freedom that I can exercise myself that is most important to me. It is certainly more important that anything can be tried by somebody than that all can do the same things. It is not because we like to be able to do particular things, not because we regard any particular freedom as essential to our happiness, that we have a claim to freedom. . . .What is important is not what freedom I personally would like to exercise but what freedom some person may need in order to do things beneficial to society. This freedom we can assure to the unknown person only by giving it to all. (p. 32)
I think this is very important. It may be difficult to see why Hayek writes this about freedom. Perhaps one way to understand is to consider this question: How many of the things you use in your daily life would you have to make use of if you relied only upon your own freedom? Or consider this question: How many of the things you do in your daily life could you do if you relied only upon your own freedom?

If I relied only upon my own freedom, I would not have the personal computer I'm using right now, and I would not have the modem nor the internet connection I'm using to compose this blog post. I would not have the copy of THE CONSTITUTION OF LIBERTY that is sitting in front of me, and I would probably not have the eyeglasses I've been using to read this great book. Nor would I have the desk lamp I'm using to see the pages of this book. I would not have the desk my monitor and printer sit on, and for that matter I would not have the monitor and printer if I had to rely only upon my own freedom. I certainly would not have an automobile for transportation, nor would there be roads that I use every day if I relied only upon my own freedom. Of course I could go on and on and on with this. Take a look at your own daily life and consider what your life would be like if you relied only upon what you could do with your own freedom.

Perhaps some will read this and suggest that I am merely pointing out the fact that I rely on the production of others rather than the freedom of others, and that I would be able to benefit from the production of others even if those others were not allowed broad individual freedom and liberty. Such a suggestion would seem to miss the understanding of a fundamental aspect of the economic world:
It is through the mutually adjusted efforts of many people that more knowledge is utilized than any one individual possesses or that it is possible to synthesize intellectually; and it is through such utilization of dispersed knowledge that achievements are made possible greater than any single mind can foresee. It is because freedom means the renunciation of direct control of individual efforts that a free society can make use of so much more knowledge than the mind of the wisest ruler could comprehend.

. . .It is because we do not know how individuals will use their freedom that it is so important. If it were otherwise, the results of freedom could also be achieved by the majority's deciding what should be done by the individuals. (p. 30-31)
My standard of living is what it is not merely because I rely on the production of others.

I rely on the knowledge of others. I simply do not know how to make a car, a computer, a telephone, or the electricity that powers my computer and my desk lamp. Most importantly I rely on the use of knowledge in society which cannot possibly be known by any one individual. Even if I wanted to learn how to make a telephone or a modem or a personal computer, I would not be able to come to know for myself all of the knowledge that is required for such things to be part of my daily life. I cannot even come to know for myself all of the knowledge that is required to cause something as simple as a pencil to become part of my daily life. If you doubt this, then you must read I, PENCIL by Leonard E. Reed. Here is just a taste from I, Pencil:
My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. . . . .

The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines . . . .

My "lead" itself -- it contains no lead at all -- is complex. The graphite is mined in Ceylon . . .

The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow -- animal fats chemically reacted with sulfuric acid . . . .To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it?

. . . . .
And, of course, there is much, much more to knowing all that needs to be known in making a pencil part of my daily life.

While I certainly value my own individual freedom, I think Hayek's insights are correct. My life depends on the freedom of others. And, as Hayek writes:
Of course the benefits we derive from the freedom of others become greater as the number of those who can exercise freedom increase. (p. 32)


Monday, March 24, 2008

Paternal Government

A letter by DON BOUDREAUX:
I'm outraged that Hillary Clinton promises, if elected president, to help people (in her words) "quit smoking, to get more exercise, to eat right, to take their vitamins" ("The Iron Lady," March 17). Perhaps I'm overreacting because I buried my mother on Wednesday, but neither Uncle Sam nor Mrs. Clinton is my parent. That role was performed remarkably well and lovingly by the persons who had responsibility for it: my father and late mother. I, like any self-respecting adult, resent beyond words the impertinence of any stranger presuming to possess the moral authority to intrude into my affairs.

To my own dying day, I will live by the creed instilled in me by my parents: My life is my own, and just as I have no right (or wish) to meddle in the affairs of others, no one - regardless of how exalted her status or how large her electoral majority - has the right to meddle in mine.

Wednesday, March 19, 2008

Senate Corruption Continues

Citizens Against Government Waste (CAGW) named all 71 senators who voted against a one-year earmark moratorium March Porkers of the Month. The amendment to the fiscal year 2009 Budget Resolution was offered by Sen. Jim DeMint (R-S.C.) and had fourteen bipartisan co-sponsors including the support of all three presidential candidates.

“King of Pork” Sen. Robert Byrd (D-W. Va.) dismissed the earmark ban saying, “The idea that an all-knowing, all-powerful executive bureaucracy is more trustworthy than the elected representatives of the people when it comes to spending taxpayer dollars challenges the most basic tenet of our political system.”

In a similar vein, Senate Majority Leader Harry Reid (D-Nev.) opposed the ban as “unrealistic” and even went so far as to erroneously claim that earmarking “has been going in this country for 230-some-odd years,” and that “The Founding Fathers would be cringing to hear people talking about eliminating earmarks.”
I guess "pork" is one word for this, but I think a better word for it is corruption.

It strikes me as pure nonsense to suggest the "Founding Fathers would be cringing" at talk of ending the practice of earmarks. Let's take a look at the list CITIZENS AGAINST GOVERNMENT WASTE provides with respect to 2006. Here are just a few of the earmarks:
  • $5.7 million for a Wildlife Management Institute
  • $1.3 million for curriculum development at Mississippi State
  • $500,000 for the Artic Winter Games
  • $1 million for the Griffth Observatory Planetarium
  • $1 million for a competency based distance education initiative in the state of the Senator making the earmark
  • $1 million for the closed Philadelphia Navy Yard for what appears to be local urban redevelopment
  • $350,000 for the Chicago Greenstreets Program which included the design, installation, and maintenance of over 950 hanging baskets
  • $400,000 for the Kam Wah Chung & Company Museum
  • $250,000 for the Stanley Theater in Utica, New York
  • $100 million to create a family literacy course
  • $41 million for the Byrd Honors Scholarships
  • $21.7 million for a project to improve the writing skills of grade school teachers
  • $5 million for the Industrial Outreach Service at Mississippi State
  • $1 million for academic programs at the University of Redlands
  • $1.2 million for compact laser sensors at Montana State University
  • $2 million for the Virginia Community College System web portal
Of course the list could go on and on. I think our Founders knew what was in the Constitution, and I think they knew our Congress was supposed to be a Congress of enumerated powers. I find it very difficult to place any of the earmarks in the above list within the list of enumerated powers written as Article I, Section 8 of the Constitution. At least while James Madison was a member of Congress, I'm pretty sure that there would have been one of our Founders who would have been arguing strongly against Congress having the power to tax and spend for programs such as these. I mean, really, does Congress have the constitutional power to spend tax dollars on hanging baskets in Chicago?

Of course it is not just that such expenditures should be considered unconstitutional, it is also that for most (maybe all) of these earmarks a member of Congress is specifically designating that tax dollars be spent in his or her district or state for purposes of their choosing. There have even been earmarked projects that cause tax dollars to be spent on projects that directly involve a member of the earmarker's family.

The corruption continues.

In Colorado it appears that Senator Allard voted to stop the corruption for a year, while Senator Salazar voted in favor of the continued corruption.

At least all 3 Senators still competing to be our next President voted to stop the corruption for a year.

Tuesday, March 18, 2008


The latest great idea from 'digital-strategy consultant' Jim Griffin, who is advising the Recording Industry Association of America on new and innovative ways of rent seeking, is to propose a piracy surcharge on ISPs in the USA.

Of course the advantage of that is if all broadband users have to pay the music industry $5 per month, regardless of whether or not you actually download any music, legal or illegal, why bother promoting music at all? Who needs products when you can just force people to pay you regardless? Is it great that we have governments around the world who are in a position to actually try and do stuff like that?

Monday, March 17, 2008

Free Trade Parable


The challenge is to make an argument for free trade in terms that everyone can understand. Perhaps a parable is in order. Perhaps we could start with "Once upon a time," and describe an economy that works like ours today. But we decide that free trade has gone too far.

First, we enact national protectionism. Then, the "buy local" movement catches on and leads to effective elimination of the Constitutional provisions against trade barriers within the United States. Cities and states start enacting tariffs, quotas, and trade subsidies.

Finally, the movement moves toward its logical conclusion: only buy products made in your own household. People give up computers, cars, packaged food, electricity, and plumbing. We go back to subsistence farming and hunter-gathering.

Notice that the advantages of free trade are not described in this parable directly in terms of comparative advantage. The advantages of free trade in this parable seem to be due to the division of labor, even though this concept is not explicitly described. The advantages of free trade in this parable seem, perhaps, to rely more on what I've described in class as the broadening or deepening of the network on which we individually depend in our daily lives.

Saturday, March 15, 2008

Economic Advisors

Which economists are the presidential CANDIDATES LISTENING TO? Senator McCain's advisor is Douglas Holtz-Eakin:
"Nevertheless, Holtz-Eakin, a former director of the Congressional Budget Office and former chief economist on President Bush's Council of Economic Advisers, is well-respected among deficit hawks for his positions on less-than-hip issues like entitlement reform, for which he's advocated early and often.

In his view, the sooner the long-term shortfalls in Medicare and Social Security are addressed, the better for the economy. Shoring up both programs would involve tough choices when it comes to spending cuts, Holtz-Eakin has said, a route he believes would be more effective than tax increases. Both he and other economists estimate the economy is not likely to grow enough to offset the mandatory spending pressures that will build as Baby Boomers retire."
I agree that Medicare and Social Security are among the most important issues for Congress and the President to deal with.

Senator Obama's advisor is Austan Goolsbee:
But he is used to the politically fraught debate over how much to tax high-income Americans. In his estimate, the sky won't fall if the top tax rate returns to 39.6% from the current 35%.

In one of his New York Times columns, Goolsbee points to data showing income for the top 1% of earners rose disproportionately relative to everyone else both when tax rates fell and when they rose.

"Seeing the same pattern ... indicates that tax cuts weren't responsible. It suggests that cuts for high-income taxpayers likely gave windfalls to those whose incomes were already rising sharply because of broader market forces," he wrote.
I don't like an emphasis on taxing the rich, nor do I warm up to the idea that taking less money from anybody, rich or poor, should be called a "windfall."

Senator Clinton's advisor is Gene Sperling:
In his book "The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity," Sperling calls for balancing the advantages of a global economy with the goals of protecting workers.

"With hundreds of millions of new middle-class consumers coming into the world economy, we should be confident that in the long run America will win more than it loses from an open global economy," he writes. "What practical options do we have between simply assuming greater globalization will lift all boats, and resorting to self-defeating protectionism?"
I haven't read Sperling's book, and I'm not sure this quote tells me very much about his policy view. But I like his reference to protectionism as self-defeating, and I can also agree "America will win more that it loses from an open global economy." Winning more than losing is probably a view that is a bit too weak for me.

Tuesday, March 11, 2008

Free Trade Politicians

The Cato Institute provides information about how our politicians line up in Washington CONCERNING FREE TRADE issues. The 3 Senators still in the hunt to be our next President are clearly different on free trade issues based upon their voting records in the Senate. Senator McCain is characterized as a Free Trader, while the 2 Senators on the democrat side appear to be Interventionists.

I've looked at 21 Senators so far, and all the Free Traders are republicans: McCain, Allard, Lugar, Voinovich, and Kyl.

In Colorado, Senator Allard is a Free Trader, while Senator Salazar is between an Interventionist and an Internationalist. Since 1986 (when I moved to Colorado) I think it has been traditional for the voters to elect a Republican Senator and a Democrat Senator. You might expect when voters elect a Senator from each party that the senators would have similar voting records on important issues such as trade. But, Colorado seems not to have done that, and Indiana (another state with a Democrat and a Republican senator) also has a Free Trader (Lugar) and an Interventionist-Internationalist (Bayh). What do you suppose this means with respect to voter preferences? Could this be consistent with voter irrationality, which Bryan Caplan emphasizes in The Myth of the Rational Voter? Or, could this be consistent with the standard assumption of public choice that voters choose to be rationally ignorant?

Saturday, March 08, 2008

Olson's Logic In Neverland

for Econ 453 Power & Prosperity

Peter and Wendy is a children’s novel. However, the benefits of this delightful book extend far beyond merely entertaining young people. The inhabitants of Neverland take part in the most extraordinary adventures while behaving as rational human beings who are each a member of a group. For this reason, J.M. Barrie’s work is an excellent case study for students of Mancure Olson’s book The Logic of Collective Action. Neverland is home to two distinct groups. First I will discuss the classic small group represented by the Lost Boys. Then, I will analyze the large group behavior of the Pirates.

Peter and Wendy by J.M. Barrie is the story of a boy who never grows up. One night, Peter Pan flies in to the nursery in search of his shadow. There he meets Wendy, John, and Michael. Peter Pan teaches the children to fly and takes them to Neverland. Neverland is an island that the children have all imagined. They are shocked and delighted when they find the island is real. The island is inhabited by wild beasts, mermaids, redskins, pirates, and a band of motherless boys. Our hero, Peter Pan, is the leader of the orphans who call themselves the Lost Boys. In Pan’s absence, the people on the island have carried on in its usual routine. The Lost Boys go hunting for Peter Pan. The Pirates hunt the Lost Boys. The Redskins hunt the Pirates and the wild animals hunt the Redskins. When Peter Pan returns to Neverland, John and Michael fit right in with the Lost Boys and Wendy agrees to become their “mother.” Life in Neverland would continue without disturbance if it were not for the dreaded Captain James Hook. Captain Hook is the ruthless leader of the Pirates. Hook also has a deep seated hatred of Peter Pan and is determined to destroy the cocky boy. One night, Hook orders his band of swashbuckling pirates to capture the Lost Boys. Hook believes he has poisoned Peter Pan. However, Pan has a narrow escape and is able to rescue Wendy and the Lost Boys. Once they are free, the Lost Boys destroy the Pirates and Peter Pan himself drives Hook to his death. At the conclusion of the grand adventures, Pan returns Wendy, John, and Michael back their nursery.

The Lost Boys are a small group in which all its members share common goals. Each one of the seven boys shares a common need for food, shelter, and protection. In addition, each has a desire for care and attention. As is the nature of small groups, Peter Pan does not need to use force to keep his group together. The many collective and non-collective goods that the boys gain from group membership are more than enough to hold the group together. Their collective goods include the benefit of safety and the comfort of the underground home (Barrie 120). According to Olson, “social status and social acceptance are individual, noncollective goods (61).” Therefore, the affection each member receives in a noncollective good, along with the food he eats.

Social pressure is another factor that adds coherence to the group. According to Olson, “social pressure and social incentives operate only in groups of smaller size, in the groups so small that the members can have face-to-face contact with one another (62).” There are multiple instances where the Lost Boys use this kind of social pressure to influence group members. In one example, Tootles mistakes Wendy for a bird and shoots her out of the sky. Once he realizes what he has done, Tootles turns to leave the group. The other boys beg him not to go. When they ask him why he can’t stay he simple responds, “I can’t, I’m so afraid of Peter (124).” There is no evidence that leads us to believe that Peter would actually punish Tootles in any way for his mistake. Merely the thought of displeasing his hero and beloved leader was enough to drive Tootles to despair.

The Lost Boys are an effective, action-taking group. Olson presents the findings of his colleague that help us to better understand the logic behind the Lost Boys proficiency as a group. Olson explains, “Professor James found that in a variety of institutions, public and private, national and local, “action taking” groups and subgroups tended to be much smaller than “non-action taking” groups and subgroups. In one sample he studied, the average size of “action taking” subgroups was 6.5 members, whereas the average size of the “non-action taking subgroups was 14 members (54).” With a membership of seven boys, Peter Pan’s troop fits this description perfectly. Hunting wild beasts, playing make believe, or fighting off Pirates, the Lost Boys efficiently utilize their resources. For example, when Wendy first comes to the Neverland, Peter suggests they build her a house.

“’Quick,’ he ordered them, ‘bring me each of you the best of what you have. Gut our house. Be sharp.’ In an instant they were busy as tailors the night before a wedding. They scurried this way and that, down for bedding, up for firewood, and while they were at it who should appear but John and Michael….’Curly,’ said Peter in his most captiany voice, ‘see that these boys help in the building of the house.’…The astonished brothers were dragged away to hack and hew and carry (128).”

When this small group takes on a project, they are quick to act and maximize the utility of every available asset. Nothing stands between Peter and the boys when they are on a mission. This illustrates the point that Olson is making when he says that “small, centripetally organized groups usually call on and use all their energies, while in large groups, forces remain much oftener potential (54).”

Another example of the efficiency of our small group is when the Lost Boys embark on a lobbying campaign for a desired collective good. The boys want Wendy to become their mother. When they are finished building Wendy’s house they approach her with their request. Each boy contributes to the plea adding his own personal inputs. There is not a free-rider among them. Wendy is unsure at first until “all went on their knees, and holding out their arms cried, ‘O Wendy lady, be our mother.’ (131)” At this, the dear girl is won over. The lobby was a success. From that moment on, Wendy mothers the boys to the best of her abilities. She willingly cooks their meals, mends their clothes, nurses their wounds, tells them stories, and tucks them into bed at night. It may seem irrational for Wendy to work so hard. However, even though Wendy contributes to the group more than any of the boys, she is given selective incentives for her dedicated efforts. She lives in her own house, enjoys a pet wolf, and has a button that was given to her as a special gift from Peter. She also has the love and admiration of “her” boys.

On the other side of the island, there is another group that is altogether different from the jolly Lost Boys. The Pirates are the second group we will analyze. Captain Hook has seventeen men under his brutal command. Hook controls the size and actions of his large group by force and coersion. There are no apparent collective goods offered to followers of the infamous James Hook. Furthermore, the Captain would never consider offering selective incentives. In short, the Pirates are The Neverland edition of a union. Mancur Olson states that “by far the most important single factor enabling large, national unions to survive was that membership in those unions… was to a great degree compulsory (68).” Signing with Hook is compulsory for anyone in the Pirate profession who wishes to practice in Neverland. The very nature of the Pirate business is all about coercion. Hook has a monopoly on pirate ships and runs a strict union-ship policy among his crew. Moreover, the barriers of entry for piracy are insurmountable. If an individual wanted to be an independent pirate he would have to build a ship by himself from the limited resources of the island while warding off the Lost Boys, the Redskins, and the dreaded Hook. The Lost Boys discover for themselves what Hook will do to anyone who will not join his crew. One night, the Pirates raid the underground home of the Lost Boys and carry them off to their pirate ship. Hook addresses the boys as they are tied to the mast and informs them that he needs two cabin boys. All those who do not volunteer will be forced to walk the plank. When every boy refused to sign on “the infuriated pirates buffeted them in the mouth and Hook roared out, ‘That seals your doom. Bring up their mother. Get the plank ready’ (192).”

In response to Hook’s brutality, the Pirates waste no time in explicitly following his orders. Even though there is no perceived benefit for the individual members of the group, they still strive to carry out Hook’s ultimate goal. Early on, Hook shares his goal with his first mate Smee when he says, “’Most of all,…I want their captain Peter Pan. ‘Twas he cut off my arm.’ He brandishes his hook threateningly. ‘I’ve waited long to shake his hand with this. Oh, I’ll tear him’ (119).” Even though the crew labors to capture Peter Pan, none try harder than Captain Hook himself. Olson explains this behavior when he says:

“One point is immediately evident. If there is some quantity of a collective good that can be obtained at a cost sufficiently low in relation to its benefit that some one person in the relevant group would gain from providing that good all by himself, then there is some presumption that the collective good will be provided. The total gain would be so large in relation to the total cost that some one individual’s share would exceed the total cost (22).”

Hook believes that the personal benefit he would derive from Peter Pan’s death is so great, he is willing to carry the cost for the entire group of Pirates.

Neverland may not be the first place economic students would look for a case study. However, economists who go the Neverland will find two groups of people who behave rationally in group situations. The Lost Boys demonstrate the effective, action taking, small group while the Pirates exemplify a powerful and coercive union. Mancure Olson’s study of group theory is as true as the fact that Peter Pan will never grow up. The Logic of Collective Action is logical today and will be tomorrow. Olson’s theory is true in Professor Eubanks political economics class… and yes, even in Neverland.

Works Cited:
Peter and Wendy
The Logic of Collective Action

Tuesday, March 04, 2008

Something Higher? President Obama

The chief executive's power does not derive solely from the authority vested in him by the Constitution. To the contrary, it derives also - and in some ways, more so - from his ability to rally the people, to inspire them in some great challenge or crusade.

We do not live - yet - in a dictatorship. Americans do not move because they are told to move. They move because they are inspired to. It is no accident that history's most successful presidents are the ones who were able to frame, with concision and grace, America's challenges and hopes, the ones who had greatest command over what Theodore Roosevelt famously called "the bully pulpit."

Think Ronald Reagan saying government is not the solution to the problem, government is the problem. Think Franklin Roosevelt declaring that the only thing we had to fear was fear itself. Think Abraham Lincoln at Gettysburg vowing a new birth of freedom.

Now, try to remember anything Millard Fillmore ever uttered. A hundred years from now, will anyone still be saying, "I'm the decider?"

What some of us don't understand is that Mr. Obama is not running a campaign. He is rallying a movement. After seven years of what may go down as the worst presidency ever, after the grime of the Clinton-Lewinsky scandal, after dreary years of internecine sniping where ideological purity has routinely trumped national interest, Americans want something else. Something higher.
DON BOUDREAUX'S THOUGHTS on this idea of something higher:
If you, Dear Reader, want to be part of a collective movement, that's fine with me. Really, it is. I wish you luck and happiness. But please don't force me to join you in your crusade (whatever it might be). And please don't presume that if I choose not to join in any collective effort, or only in a collective effort involving fewer persons than the efforts you favor, that my life is somehow empty, my soul shriveled, my mind small, my heart uncaring, my habits contemptible. I myself might well wish to be part of a cause larger than myself -- I reserve that right -- but I promise never to force you to join with me; I promise never to presume that you are less of a person if you refuse to join my cause or even if you refuse to join any collectively pursued cause.
I tend more to Mr. Boudreaux's thoughts than to Mr. Pitts' thoughts on something higher. On the other hand if the something higher was a passion for individual liberty then I might well jump on board the train. But, the something higher in Senator Obama's campaign strikes me as more likely the opposite of a passion for liberty.

Monday, March 03, 2008

Hayek on Coercion

What does "coercion" mean? Let's look to Hayek in The Constitution of Liberty:
By ‘coercion’ we mean such control of the environment or circumstances of a person by another that, in order to avoid greater evil, he is forced to act not according to a coherent plan of his own but to serve the ends of another. . . . he is unable either to use his own intelligence or knowledge or to follow his own aims and beliefs. Coercion is evil precisely because it thus eliminates an individual as a thinking and valuing person and makes him a bare tool in the achievement of the ends of another. (20-21)
Certainly this idea of coercion can be related to what happens between people. Theft and assault clearly fit the idea of coercion. In addition, this meaning of coercion suggests to me, almost immediately, the relationships between government and the individual. It seems to me much public policy, and much of the efforts of individuals to influence government to choose this or that public policy, match this idea of coercion very well. Just consider policies like banning the incandescent light bulb, or policies that require automobiles to have passive restraint systems. Both sorts of policies seem to me to be very well described by the idea of being forced to act according to the plans and ends chosen by another, by being unable to use a person’s own knowledge and beliefs and intelligence to act in ways he chooses to in pursuit of his own aims and beliefs.

Hayek’s discussion of coercion and government suggests an interesting difference from my own discussions of government and coercion. I often emphasize that there is one word to characterize government’s inherent nature and it is “coercion.” I also suggest that I want government to be coercive because I want government to be the “protective state” which acts to protect me from harm to person and property caused by the deliberate actions of others. But, discussing things in this way may encourage us to miss something of importance that we can see from Hayek’s discussion of coercion and government.
Coercion, however, cannot be altogether avoided because the only way to prevent it is by the threat of coercion. Free society has met this problem by conferring the monopoly of coercion on the state and by attempting to limit this power of the state to instances where it is required to prevent coercion by private persons. This is possible only by the state’s protecting known private spheres of the individuals against interference by others and delimiting these private spheres, not by specific assignation, but by creating conditions under which the individual can determine his own sphere by relying on rules which tell him what the government will do in different types of situations.

The coercion which a government must still use for this end is reduced to a minimum and made as innocuous as possible by restraining it through known general rules, so that in most instances the individual need never be coerced unless he has placed himself in a position where he knows he will be coerced. . . .Being made impersonal and dependent upon general, abstract rules, whose effect on particular individuals cannot be foreseen at the time they are laid down, even the coercive acts of government become data on which the individual can base his own plans. Coercion according to known rules, which is generally the result of circumstances in which the person to be coerced has placed himself, then becomes an instrument assisting the individuals in the pursuit of their own ends and not a means to be used for the ends of others. (21)
For Hayek the idea of coercion is about being made to do certain things by others. By way of contrast, a person may be prevented from doing certain things. Hayek is discussing a government for freedom or liberty as a government that may make rules and use power and coercion to enforce those rules in order to protect individuals from harm to person or property by others. This seems to be my idea of the protective state, and my idea of wanting government to be coercive for these purposes. But, what my discussion probably misses, and Hayek’s emphasizes, is the idea of the rule of law. Hayek is really talking about what we would want “rule of law” to mean, i.e., known general rules that restrain rather than laws that force certain actions. The known rules will be supported by government’s use of coercion and force, but since they are known general rules about actions and conduct, Hayek sees the individual as being able to act to avoid the coercion or to place himself in position to have to suffer the coercion of government. Government is indeed coercive, even when it’s actions are structured within the rule of law, but as Hayek points out, the coercion is “minimized.” The rule of law is coercion, but it is coercion according to known rules, and as such Hayek suggests that the coercion embodied in following the rule of law becomes an instrument that assists individuals in pursuing their own ends. Coercion in general rules that do not pick out favored treatment for some means coercion that is not used for the ends of others.