In The Papers: Piracy

A short review of a short paper to end a short month.  Pete Leeson has a book out on piracy in the 18th century, and the social order which arose from it. Originally, though, it started out as a number of papers.  The calculus of piratical consent:  the myth of the myth of social contract is tied in with the book.

Abstract:

Is a genuine social contract mythical? I argue that pirates created genuine social contracts that established a system of constitutional democracy based on the same decision-making calculus and with the same effects that Buchanan and Tullock’s contractarian theory of government describes in The Calculus of Consent. Pirates’ constitutional democracy is the “holy grail” of social contract theory. It demonstrates that the contractarian basis of constitutional democracy is more than a mere analytic device or hypothetical explanation of how such a government could emerge. In pirates’ case, Buchanan and Tullock’s social contract theory describes how constitutional democracy actually did emerge.

Basically, when James Buchanan and Gordon Tullock wrote The Calculus of Consent, they believed that their form of contractarian activity was a useful fiction.  Imagine, they said, you lived in a society in which everybody got together and determined the rules under which they all would live.  They wrote this constitution, and everybody who lived in the society agreed to it.  Such a solution, “a written, unanimous agreement created by individuals in the state of nature with the express purpose of establishing political authority,” was considered nothing more than a myth (443).  Buchanan and Tullock used it simply as a mental tool, and nothing more.

Pete Leeson, however, argues that the authors were on to something they did not previously realize:  they were right about it!  It turns out that 18th-century pirate crews did, in fact, use a social contract upon which all parties agreed.  Leeson points out examples of fleshed-out constitutions, to which all parties on board the ship pledged their lives and livelihoods.  Although we are not talking about entire nations of millions (or billions) of individuals, lasting over a period of centuries, this is still an important find because it indicates that Tullock and Buchanan’s base solution, which they had built up simply for educational purposes and was very unlikely to be meaningful, really could work out in the real world.  Leeson also notes several other areas in which Tullock and Buchanan correctly anticipated the behaviors of individuals in that “state of nature,” including their selecting various types of election machinery to minimize the costs of decision-making (which rise as you get closer to requiring everybody to agree) and tyranny (which rise as you get closer to having one person in charge).

The paper, and Leeson’s book, are a great step toward getting to Tullock and Buchanan’s vision of a real social contract, a real constitution to which all parties are in agreement.  This kind of contract would make it so, in the words of a contemporary pirate, “we should not have known what was meant by arbitrary Power” (457).

In The Papers: Fool Me Once…

Just about a year ago, Bob Murphy put up a link to a paper he had written up on his blog.  His paper is an attempt to use information theory to dispute a mainstream critique of the Austrian Business Cycle Theory, namely that it is built on the premise that we just keep fooling entrepreneurs over and over.  Mainstream economists use a concept called “rational expectations” to describe how people think.  In it, they assume that all individuals have the same, correct model of how the world works (see back to a couple In The Papers posts the other day for an explanation of just how mistaken they are!).  More specifically, each individual has a working set of statistical probabilities which mirrors the probabilities of everything that will happen.  Murphy, in response, wrote The Rational Expectations Objection to Austrian Business Cycle Theory:  Prisoner’s Dilemma or Noisy Signal? I am working from the excerpt he posted on May 14, 2009.

Murphy points to two potential explanations for the Austrian Business Cycle Theory (ABCT) seemingly, but not actually, requiring entrepreneurs to have “invalid” expectations.  The first method, the Carilli-Dempster explanation, is that “the boom-bust occurs because the government’s intervention sets up incentives similar to those of a prisoner’s dilemma:  Even though actors maintain their individual rationality, they make decisions such that the collective outcome is far from optimal” (3, ital. in orig.).  Basically, it is in the interest of all entrepreneurs for government not to pump in money, or once it does, to avoid jumping into the boom in order to avoid the bust; unfortunately, when push comes to shove, it turns out (in the model) that this only makes sense if everybody else does the same.  And if everybody else is doing the same, one person can take advantage of all of this excess, pumped-in money to expand his base significantly during the entirety of the boom, so everybody holding out becomes unsustainable.

Murphy rejects this theory and instead substitutes his own.  He believes, as did Mises and Hayek, that “it is fundamentally an increase in entrepreneurial errors that lead to any given boom” (3).  The question, however, is how this occurs.  Murphy points out that Austrian responses generally require some sufficient level of ignorance of circumstances, a lack of complete awareness of what is truly in demand versus what is part of the government-fueled boom (3-4).  His theory:  “the government introduces an additional source of ‘noise’ in the signals being conveyed to actors in the economy” (5).

This is the same as what Mises and Hayek wrote, but Murphy’s idea is to switch the language a little bit.  As he writes, “no entrepreneur ever needs to worry about the ‘natural’ rate of interest; he must instead make his decisions on the basis of expected actual prices.”  Basically, Austrian economists may see one set of criteria as the true drivers of a market, and may think in those terms; that is, however, different from what the individual actors see and how they really act.  When an entrepreneur has to decide whether to produce a certain good and, if so, how much to produce, he doesn’t “speculate about a change in consumers’ ‘rate of time preference,’ or about the ‘supply of capital goods’” (6).  Instead, he is looking at just a small number of market prices.  Hayek is right about prices as a knowledge aggregation tool, and even if we need to understand the supply (and form!) of capital goods or consumers’ time preferences in order to understand how markets operate, this is emphatically not the story that entrepreneurs follow.

Finally, Murphy points out an important consideration:  Mises and Hayek started with a free and open set of markets, and then had the government inject funds for a certain amount of time, once.  They explained what would happen in this case:  an increase of credit over and above the “evenly rotating economy” (in mainstream parlance, equilibrium) level, a boom, inflation worries on the part of the government, a cutting off of the credit spigots, and a subsequent bust.  Think of it like a big game of musical chairs, where the chairs are funds to keep your project alive.  At the end, someone’s going to be left standing.  That’s all well and good, but, as Murphy points out, governments have “implemented a permanent intervention in the credit market by the creation of a central bank (or a centralized system of banks).  Actors in these economies have no idea what the free market rate of interest would be in the absence of such interference” (6).  This means that nobody really knows when interest rates are above or below their “natural” rates, because the government has been meddling with them for 80 years.  In our lifetimes, we have never seen a truly free-market determined interest rate in the United States, so there’s no way we could know what it would be.

Murphy’s model is that individuals have a sound idea of how their markets should operate, and receive a signal of profitability in an enterprise.  Unfortunately, government intervention causes that signal to become noisier.  People still need to act, but they are acting under an additional level of uncertainty, and as a result, they are more likely to make poor decisions.  This, for Murphy, is the crux of the matter.  You can still have rational individuals (even within a world of “rational expectations,” if I remember my grad school macro correctly), yet come up with an Austrian cycle.

Read the paper, and then hit the comments section for that post.  There are a couple very good comments by Silas Barta and Tom Woods, and Murphy’s response to each.

In The Papers: Open Source Economics

The economics of open source software is a topic of interest to me.  Without a sound understanding of economics, you might be tempted to believe that collaborative software in which you give away the end product for free simply cannot exist in a market-based society as such, and must instead be a proto-socialist endeavor.  Eric S. Raymond wrote a very powerful book, drawing on Hayekian themes, to counter this notion, and there is a basic explanation of how it can be in the self-interest of developers to contribute to open-source software (here’s the trick:  think about the services, not the software).

Michael Schwarz and Yuri Takhteyev take a slightly different tack in Half a Century of Public Software Institutions:  Open Source as a Solution to Hold-Up Problem.

Abstract:

We argue that the intrinsic inefficiency of proprietary software has historically created a space for alternative institutions that provide software as a public good. We discuss several sources of such inefficiency, focusing on one that has not been described in the literature: the underinvestment due to fear of holdup. An inefficient holdup occurs when a user of software must make complementary investments, when the return on such investments depends on future cooperation of the software vendor, and when contracting about a future relationship with the software vendor is not feasible. We also consider how the nature of the production function of software makes software cheaper to develop when the code is open to the end users. Our framework explains why open source dominates certain sectors of the software industry (e.g., the top ten programming languages all have an open source implementation), while being almost none existent in some other sectors (none of the top ten computer games are open source). We then use our discussion of efficiency to examine the history of institutions for provision of public software from the early collaborative projects of the 1950s to the modern “open source” software institutions. We look at how such institutions have created a sustainable coalition for provision of software as a public good by organizing diverse individual incentives, both altruistic and profit-seeking, providing open source products of tremendous commercial importance, which have come to dominate certain segments of the software industry.

One of the things that the authors point out is that “open source software” is a lot broader than we might imagine.  To the average person who has heard of the term, that person thinks Linux.  What they don’t usually think is Apache, the server of choice for more than half of the internet.  They don’t think BIND or one of the thousands of other vital tools for big corporations, even those big corporations which are not themselves open-source organizations (like Yahoo!, who support open source development, but don’t release many such tools).  Another point the authors bring up is that “employees of just five companies (Red Hat, IBM, Novell, Intel and Oracle) jointly contributed 32% of the changes for a recent release of the Linux kernel” (3).  The players have changed over the past five decades, and so have their motives, so a simple understanding of current motives (like I alluded to above) doesn’t do enough.  As they point out, even IBM has changed—they were a big open source company in the 1950s and 1960s, but for a different reason.

The authors’ theory is that “proprietary software causes underinvestment in complementary products and technologies due to the fear of hold up.”  They use this to explain “why open source software dominates some sectors of the industry, while playing [a] negligible role in others” (3).

What they mean by a “hold up” scenario is as follows:  when you purchase a piece of software from Company X, you may buy it for your own use, or for furthering your business.  In scenarios in which people buy business software, there is the fear that the company may be forced to lock in to Company X, and cannot go to a competitor.  At that point, Company X basically has a monopoly, in the sense that the cost of switching to Company Y’s software offerings is just too high.  Your company has, by that point, built a lot of processes and maybe some additional software around Company X’s offerings, and to switch it all over to what Company Y has would simply be too expensive to consider.  But the business needs of your company will likely change over time, and so you need Company X to remain responsive to you.  Unfortunately, “the exact nature and cost of such future modifications often cannot be foreseen ex ante.  Their price and quality must therefore be negotiated ex post” (5).  If you are concerned that Company X will screw you over later, once you need changes and are locked in, you either will not be as willing to pay as much for the product (or your own alterations), or you simply will forego the product.  In either event, there is a net loss, as the product and your modifications would allow you to provide services to your customers more easily, but it would not be worth the anticipated hold-up price.  Instead, you have in-house developers write software—vertical integration, as it’s called in economics.

There are a few other justifications for considering software purchases a potential hold-up problem, and the authors give some examples of these.  After that, they provide their explanation of how to get around this problem:  make the source code of software available to end users.  By doing that, you ensure that even if you change the way in which things work, your end users will still be able to make any modifications they require.  Maybe they want Module 49 to do something totally different—they could build their own custom version of the code and have that happen.  This also ensures that Company X will not exploit the company’s relationship with your firm later on.

So, given this, why is it that binary packages are the default for pretty much all software?  Because there are considerations that outweigh the problems listed above.  There is a free-rider problem here:  file sharing.  If I get the source code to a game, I can distribute it to others more easily and allow them to obtain the software without charging for it.  I can do the same with binary software, but there are some protections there which make it a bit harder—licensing provisions, etc.  When, then, should we see binary packages versus open source?  The authors “would especially expect this to be the case for software that does not require large complementary investments, is unlikely to need modifications, and is offered to users that have no capacity to modify software even when the source code is offered to them.  Computer games offer a quintessential example of such software:  they are typically used for a limited period of time, rarely require substantial game-specific complementary investments, offer limited opportunities for useful modifications, and are mostly offered to consumers with no programming skills” (9).  In contrast, web servers, database servers, and the like require significant complementary investments, and as a result, are more likely to see this solution to the hold-up problem.

The rest of the article is an interesting discussion of various solutions over the past 50 years, from IBM’s SHARE association (a number of IBM clients providing source code for various applications for each other) to ARPANET, and AT&T (and BSD) to Netscape and GNU.  It’s an entertaining history of some of the economic motives behind business and legal decisions, and worth a read.

In The Papers: From Mind to Society, Part II

In Part I, I went on and on about the first half of Steven Horwitz’s paper linking Hayek’s theory of the mind to his theory of social order, focusing mostly on how the mind operates.  Now, in part II, I would like to link his thoughts to his ideas on society, at least according to Horwitz.

So, we know that humans are limited in their ability to process knowledge.  We also see, from this, that central planning will not work.  Horwitz writes that “If indeed we were all the hyper-rational agents that general equilibrium theory assumes we are, then the very need for market institutions would disappear [...] the whole justification for competition is our ignorance as to its results” (34).  Competition is inefficient compared to perfect knowledge, but because perfect knowledge does not exist, competition is how we get as close to the truth as we can—multiple conjectures regarding the truth battle it out, and those closest to it will win out over time.

How we build up competition depends on a distinction between “law” and “legislation.”  Horwitz writes that “The law, in Hayek’s view, works best when it is the outcome of a further process of spontaneous evolution comprised of the case-by-case decisions of judges. [...] Legislation, by contrast, is a series of administrative commands designed to direct consciously the operation of a purposive organization with defined and mostly consistent ends” (34).  The law, as rightly understood, is a series of general principles we follow.  Legislation, in contrast, is what politicians come up with to supplement (or supplant!) these general rules.  In a free society, the purpose of the legislative branch—i.e., the branch that creates legislation and not law—is “to direct the resources of the government, not to attempt to direct resources in society at large” (34).  There is a need for a legislative branch in Hayek’s eyes—we have to have specific rules on what kinds of courts exist, with whom a country is at war, how much members of government receive as recompense, etc.  But these roles are entirely different.  The purpose of legislation is to carry on the day-to-day activities of the government; the purpose of law is to coordinate the efforts of individuals and provide people with a set of rules on which they may ground their theories of how the world operates.

Another important aspect about the law is that it cannot be fully articulated.  New laws come into existence as a spontaneous process.  “As parties in interactional relationships converge toward mutually acceptable rules of conduct,” Horwitz writes, “they will be unable to consciously consider and eliminate every feasible behavior the other might take” (35).  In addition, as new technologies emerge, laws relating to these technologies must also emerge, and sometimes even change.  The law “provides a framework for individuals to form expectations about the world around them” (35).  In contrast, for the neoclassical world (including individuals like Richard Posner), “the law [...] should strive to maximize net social benefits, defined as pecuniary and specific to the particular case.  The job of the judge is to make case law on the basis of cost-benefit analyses that assess the effects of alternative legal rules on the affected parties” (36).  The major problem with this, according to Hayekians, is twofold:  first, you can abuse any rule biased toward particular outcomes (by shifting the bias toward an outcome you prefer); and second, by making outcomes more arbitrary, you make it more difficult for individuals to create expectations and test their theories against the world.  Was the entrepreneur really wrong when a judge decreed that an activity he performed was “illegal,” or did the entrepreneur just need to find a more pliable judge?  By introducing that uncertainty, you make it more difficult for individuals to converge upon meaningful results.

Finally, Horwitz has a quick point regarding public choice economics.  Public choice theorists, like James Buchanan or Gordon Tullock, note that “the argument for constraints is that rationally maximizing politicians will pander to special interests, at the cost of general economic welfare, in the absence of constitutional limitations on their powers.”  Horwitz responds by writing, “The core issue for Hayek is not that we are insufficiently altruistic to live without constraints, but that we do not possess sufficient knowledge to do what is right even if we were sufficiently altruistic” (36, ital. in paper). Even though benevolent dictators are like unicorns—they’re pretty*, but don’t really exist—the problem is even bigger than them.  To be fair—and this is something that I know Horwitz would agree with—both reasons can be true simultaneously, and I personally believe they are.  I read Hayek’s critique as an “even if,” not as an “actually…”

All in all, I think that Horwitz has packed a huge amount into a small paper.  Even with this, I think there is still a lot of room to expand the ideas out further.  Hayek was unsatisfied with his own, incomplete account of how to link the two together, and although I’m with Horwitz in believing that it does flow together, I also respect that if the man who came up with both ideas could not himself do it, then it shouldn’t be quite as simple as Horwitz makes it.  Either that or Dr. Horwitz is the man—a thought I am also willing to consider…

* – I had a professor at Freiburg say something that stuck with me:  in Germany, talking about “benevolent” dictators just sounds weird, even in theory.  The economists who developed the theories never had to deal with a real dictatorship, so they got to use their imaginations.  For anybody who has ever lived under a real dictatorship at any time and in any place, however, it should quickly show how wrong that idea is.

Raise All Speed Limits

Ray LaHood, Transportation Secretary Extraordinaire, stated that driving 40 MPH is safer than driving 30 MPH. LaHood doesn’t understand the purpose of minimum speeds on highways, but I’d like to take this in another direction and raise all speed limits to be at least 40 MPH, and while we’re at it, the speed limit on freeways should probably be 70 or 75 MPH. I’m glad to hear that the Secretary of Transportation is on my side, and I look forward to his vigorous defense of the proposition. After all, it’s about safety.

In The Papers: From Mind To Society

I think that FA Hayek’s work on mental processes is both extremely interesting and hardly understood in the economics field, even among Austrian economists.  Among mainstream economists, good luck—they’re totally lost.  I have written a few times on this topic and linked to a couple of other works on the topic.  If you have not yet, read the first one.  It’s one of my favorite posts and does a decent job of explaining Hayek’s ideas in the context of a baseball manager.

Hayek tried to work his two key ideas—that the mind is a theory-based classification engine, and that the independent interactions of free individuals will constitute an order not of their design, but often beneficial to them—into one paper, but did not succeed at it.  He could not tie the two elements together in a manner satisfactory enough to publish.  A few decades later, Steven Horwitz tried, with From The Sensory Order to the Liberal Order:  Hayek’s Non-rationalist Liberalism.  One of the nice things about reading Horwitz is that he just makes it look so easy.  One of the less nice things is that whenever I think of a good paper topic, it seems that he beat me to the punch by a decade…

Horwitz sees links between the theory-based classification engine that people have and how we relate that to our larger society.  For example, Hayek would argue that “Human actors require constitutional constraints because we are epistemologically unable to generate social order in any other way” (23).  In other words, we need some kinds of general rules to follow, simply because are brains are hard-wired that way.  Horwitz states that the “mind is a cultural product that evolves from a particular physical structure” (24).  Our brains work in a certain way—we have theories and apply them to circumstances which arise or phenomena we experience (or don’t experience, occasionally).  From this experience, we create rules.  We also have a set of genetic rules built in (fight or flight, attraction to others, desire to be social, etc.).  But there is a third set of rules, as well:  cultural.  We pick up rules from our parents, friends, sources of entertainment, and so on.

With our particular physical brain, we absorb all kinds of theories and try to apply them to the world we see and experience.  Some of these rules may be incorrect.  Horwitz points out that “Sets of classifications that do not successfully guide action [...] will prevent the organism whose actions are being guided from thriving” (25).  In other words, failed mental classification structures endanger the evolutionary viability of an organism.  If you hear the sound of a lion and link it to a kitten, you as an organism just became a good bit less evolutionarily viable, given that you will soon become lion lunch.

What is important about our brains is that we can change our theories.  Think of the mind as a cartographer:  they fill in the details on a map, occasionally changing things when they’re wrong (i.e., when the model fails the test of reality).  Early maps of the Americas had some measure of truth, and some were actually quite close to reality, but as people explored and discovered more of the country, they updated these old maps and gave us new ones.  In mental terms, “the mind gives us a model of the present environment that serves as the backdrop for classifying incoming sensory information in the current context.  The model is also forward-looking in that it enables the actor to anticipate the likely consequences of both his own actions and external events” (25).  We don’t have “Kantian categories” but rather theories that reflect the perceived reality of the individual, the individuals forebearers, or the individual’s peers.

But the interesting thing here is that even though there are these other streams of experience, we cannot simply understand the categories in the minds of others and adapt our own minds to it, at least according to Hayek.  “We can never ‘step back’ and attempt to view the mind itself as a sensory input” (26).  You can’t see your own eyes with your own eyes; you can see with your eyes, but that’s as far back as you go.  Hayek notes that “any apparatus of classification must possess a structure of a higher degree of complexity than is possessed by the objects which it classifies” (26).  So the brain may be able to understand how the eyes operate or how neurons operate, but we will never understand precisely how the human brain operates, simply because we cannot categorize the thing which does the categorizing.  From this, Hayek derives that there is some knowledge which must, by necessity, always remain tacit—understood, but never really explained.  We cannot write it down, or even articulate it in a comprehensible and complete manner.  All we can do is get it; we can never explain it.

Horwitz argues that this is the link between Hayek’s theory of the mind and his theory of the liberal order.  Institutions develop out of human interaction as a means of communicating knowledge that we have difficulty articulating, due to mental limitations, an overwhelming amount of information available, or time constraints.  The amount of rain on every square inch of North America at every point in time over the past century is something that we could theoretically collect, but given that the price of foodstuffs already takes things like this into consideration, we don’t need to.  Furthermore, institutions help us correct these false theories and categories we develop—they assist us by providing knowledge that we otherwise could not have gleaned.

This differentiates Hayek from the equilibrium economists of his day (and ours, quite frankly).  As Horwitz notes, “Equilibrium requires that each actor has enough knowledge to have correct expectations of the future, including the actions of other choosers” (28).  And for a central planning board, these equilibrium economists believed that they simply needed to make a few assumptions regarding available data:  “1) treat the firm’s cost and revenue curves as given and known; 2) treat the consumer’s preferences as given and known; and 3) treat the quantity of available resources as given and known” (28).  After that point, you get a computer to do enough calculations and you have the best set of options for all individuals in an economy, so you can have the State tell people exactly how much of what to produce and you’ll be in Shangri-La.

But it isn’t that simple.  Hayek liked to point out that “data” is Latin for “given,” and that what we call “data” isn’t given.  It’s something we have to try to find, and much of the knowledge we would need is subjective and tacit.  Knowledge of individuals’ preferences is entirely subjective, depending upon that individual’s belief of what is available.  Furthermore, it is tacit—ask somebody to give a complete preference function and that person will be unable to.  This is true even for general equilibrium economists.  And to go to the next step—understanding preferences under all conceivable states of the world—is mind-boggling.  We simply do not have the mental capacity to do what general equilibrium economists take as “simple.”  Instead, “the ‘economic’ problem was how do firms and consumers most easily discover and disseminate knowledge about cheaper production methods and better consumption bundles?” (28)  Far from the world of taking all of the knowledge knowledge and applying it in the best way, we struggle to find ways to learn enough to get by.  We use knowledge aggregators and shortcuts like prices and general rules of behavior to get around the time-consuming and often-impossible knowledge problem.  This is what economists should study, Hayek argues, and not trying to scale up solutions to toy problems to a level that is infeasible.

Even with the above, there is yet another layer of difficulty.  Suppose that you could fully understand how the brain operates.  From there, it is still another step to getting all of the knowledge in a single brain, and from there, a much bigger step to processing and understanding all of the knowledge in a brain (much less billions of brains) and putting it together into a coherent whole.  Much of that knowledge is conjectural and a combination of loose facts and theories, so to attempt to aggregate this in some kind of mathematical fashion would be beyond even a being that could fully understand how the human brain operates.  Horwitz puts it a similar way, by writing that “[i]f the mind can never exhaustively describe and know itself, any one mind or group of minds can surely never direct economic processes that can only be understood in terms of the phenomenal pictures (i.e., expectations) held in the minds of all of the actors in an economy” (31).

So, instead of trying to seek out full information and solve mathematical maximization problems from there, we aggregate knowledge using tools such as relative prices.  “Where a final good has a number of technologically feasible methods of production involving inputs with multiple alternative uses, the producer needs some way of comparing the technologically feasible methods to determine which is the most economically rational” (31).  To do this, they use money prices, as Ludwig von Mises pointed out.  Entrepreneurs form conjectures and try to operate based on these conjectures, changing their patterns after they get proved wrong (or, as I would like to call it, Popperian entrepreneurship).  Horwitz spends more time combining the works of Mises and Hayek together to show that the Misesian entrepreneur had a Hayekian mind.  In this discussion on page 32, I scribbled a side note that I found it interesting that Mises and Karl Popper disagreed so strongly, considering how well, in this case at least, the ideas of Mises fit with Popper’s framework of conjecture and refutation.  My guess is that because Popper did not see praxeology as a legitimate scientific method, Mises probably took a strong enough dislike to make it difficult to fuse their ideas together in a meaningful way.  Now that they both have been dead for a little while, we may be able to combine them.  An interesting work might be to link Mises and Popper through Hayek—as he was the common bond between the two—and clear some of the tensions between all three.

Anyhow, back to the main topic.  Horwitz also points out that knowledge takes time.  “Today’s capital goods derive from yesterday’s plans, just as today’s ‘map’ reflects the result of the feedback to yesterday’s ‘model’” (33).  Knowledge comes as a result of the theories and efforts of the past, which means that there is the potential for sub-par paths as people start with bad theories and have trouble catching up.  If you hold the belief that import substitution or tariffs are great for development, that will keep a country poor, as it did to much of Latin America during the 1960s.  Ideas are important, as they help form the knowledge we have, and this knowledge forms plans of action for individuals.

I shall conclude this in part 2 (yeah, this is a cheap way of getting another day out of this paper…but I’m already over 1800 words and just about halfway through Horwitz’s work), which will go up tomorrow.

Odds and ends

– Finally bought a flatbed scanner, the impetus was a hard to find book in Russian. Knowing such things tend to be valuable, I scanned the book and returned it rather than lose it for six months, renewing it all the while, and then bringing it back as part of a huge pile at the end of the year.

– Still enjoying Dragon Age, but there just isn’t much time to play it. I need a long uninterrupted stretch of time, and between classes, prelims this fall, and spending time with the Lady Penguatroll, I just haven’t found it. EU 3 is much easier to pick up and put down. Currently, Russia is trying to be elected Holy Roman Emperor in order to counterbalance Austria.

– I was a bit hasty about Hearts of Iron III — the stability problems seem to be addressed now. However, it’s still harder to pick up and put down just because of the amount of stuff there is to do.

– Finished the second DLC for Assassin’s Creed II. Neither DLC was perfect, but they were so inexpensive that I couldn’t resist. It does fill in the gaps in the storyline. Eagerly awaiting the AC II expansion.

– Wrestlemania is already shaping up to be an excellent card. We have Batista (c) vs Cena, Edge vs Jericho (c) and Undertaker vs. Shawn Michaels (streak vs. career). I’ll have my usual predictions post once the card settles out.

That’s all for today! We’ll probably have a couple more forgotten classics in the next week, but no big posts until Wrestlemania (unless something catches my fancy!)

In The Papers: Nock, Part II

This concludes Cogitations from Albert Jay Nock.  I do recommend reading the thing.  Even though I do not agree entirely with him, he is an entertaining writer.  And for your entertainment, here are several more of my favorite snippets from the book, along with the occasional comment on my part.

“The State is no proper agency for social welfare, and never will be, for exactly the same reason that an ivory paperknife is nothing to shave with. The interests of society and of the State do not coincide; any pretense that they can be made to coincide is sheer nonsense. Society gets on best when people are most happy and contented, which they are when freest to do as they please and what they please; hence society’s interest is in having as little government as possible, and in keeping it decentralized as possible.  The State, on the other hand, is administered by jobholders; hence its interest is in having as much government as possible.  It is hard to imagine two sets of interests more directly opposed than these.” (40)

“The positive testimony of history is that the State invariably had its origin in conquest and confiscation.  No primitive State known to history originated in any other manner.  On the negative side, it has been proved beyond peradventure that no primitive State could possibly have had any other origin.  Moreover, the sole invariable characteristic of the State is the economic exploitation of one class by another.” (41) — This kind of sounds like a cynical version of Mancur Olson’s theory that the State arose as a stationary bandit—an individual who made his living by stealing from people, but realized that by not taking and destroying everything, he could guarantee a better and more prosperous living.

“Wherever economic exploitation has been for any reason either impracticable or unprofitable, the State has never come into existence; government has existed, but the State, never.” (42) — I thought thi was an important quotation because it differentiates the State as metaphysical idea versus government as its instrument.  It is possible to have a government which is not a State (a sufficiently small or limited government), but not the other way around.

“Based on the idea of natural rights, government secures those rights to the individual by strictly negative intervention, making justice costless and easy of access; and beyond that it does not go.  The State, on the other hand, both in its genesis and by its primary intention, is purely antisocial.  It is not based on the idea of natural rights, but on the idea that the individual has no rights except those that the State may provisionally grant him.  It has made justice costly and difficult of access, and has invariably held itself above justice and common morality whenever it could advantage itself by so doing.” (42)

“The sight of them set me once more to wondering why there is always most fuss made over an evil or injustice at the time when it is least prevalent.  We were well on our way to becoming a sober people when the great cry for prohibition arose.  The demand for “women’s rights” became urgent when women were treated better than they had ever been, and when they were worst treated there was no demand.  The same is true of the demand for justice to the proletariat.  I could never understand why this is so, but it seems to be a general rule.” (48)  — The answer, I believe, is that you need a majority of people to get a political solution to a problem.  So you won’t see issues pass until a majority of the populace already believes it, and at that point politicians will jump on the bandwagon.  Child labor didn’t end until after children were well on their way out of the workplace.  Civil rights laws (not including the ones which ended government segregation) were added after a large percentage of individuals supported them.  There are some people who are ahead of the curve on these things—they have to be, lest things never get started—but generally, the rest of the people don’t follow them and they fade into obscurity.

“Whenever I went in Europe I was [s]truck by the persistence of the old original idea that America, and especially the United States, has no reason for existence except as a milch cow for Europe.  People there were apparently born with this idea, as they might have been in the days of Columbus and Balboa.  I observed it not only in the higher walks of society, but also in the lower.  I observed also that Americans do not quite understand this persuasion, which is why I speak of it here.  As far as I could see, there was no meanness about it, no spirit of grafting or sponging, or of bilking a rich and easy-going neighbor.  It seemed rather to be the simple, natural expression of a sort of proprietary instinct.  The general harmony and fitness of things required that America’s resources should at all times be at the disposal of Europe for Europe’s benefit.  Especially it was imperative that when Europe got in any kind of scrape, America’s plain duty was to take the brunt of it, and to stand by when the scrape was settled, and clean up the debris at American expense.” (75)

In The Papers: Curmudgeonliness In The Morning

One of the (many) fine services the Foundation for Economic Education provides is hosting a PDF of Cogitations from Albert Jay Nock.  Even more than H.L. Mencken, Albert Jay Nock was a curmudgeon’s curmudgeon.  Without wading too deep into his philosophy, Nock was a man of fine writing and a bitter belief that the world was doomed, and that, like the Irish monks in 7th century Europe, a small remnant might be able to carry on the flame of western civilization after its imminent destruction.  In other words, just the kind of guy you want to read while eating your cereal…

The book is just a number of little paragraphs or statements from other works of his, so it’s fun to leaf through.  Here are a few of them.

“The egregious intellectual dishonesty of the English and Americans comes out strongly in their shirking of the names of things and actions.  We got used to “mandates” instead of the gross word “possessions,” and “reparations” instead of “indemnity” in the war.  Now we accept the dole by calling it “unemployment relief.”  Shortly we shall have to find some acceptable synonym for inflation, I dare say.” (26) —  Nock did not live long enough for “quantitative easing,” I should say…

“I have been thinking of how old some of our brand-new economic nostrums really are. Price-regulation by State authority (through State purchase, like our Farm Board) was tried in China about 350 B.C. It did not work. It was tried again, with State distribution, in the first century A.D., and did not work. Private trading was suppressed in the second century B.C., and regional planning was tried a little later. They did not work; the costs were too high. In the eleventh century A.D., a plan like the R.F.C. was tried, but again cost too much. State monopolies are very old; there were two in China in the seventh century B.C. I suppose there is not a single item on the modern politician’s agenda that was not tried and found wanting ages ago.” (28)

“A falling stock market seems to clarify and stimulate thought. When it is rising, nobody cares to know why or how, but when it falls, everyone is very eager to know all about it, and yards of explanation come out in the newspapers from pundits in our colleges and investment departments of our banks.”  (28)

“We all now know pretty well, probably, that the primary reason for a tariff is that it enables the exploitation of the domestic consumer by a process indistinguishable from sheer robbery.” (30)

“… The great truth which apparently must forever remain unlearned, that if a regime of complete economic freedom be established, social and political freedom will follow automatically; and until it is established neither social nor political freedom exist. Here one comes in sight of the reason why the State will never tolerate the establishment of economic freedom. In a spirit of sheer conscious fraud, the State will at any-time offer its people “four freedoms,” or six, or any number; but it will never let them have economic freedom. If it did, it would be signing its own death warrant, or as Lenin pointed out, “it is nonsense to make any pretense of reconciling the State and liberty.” Our economic system being what it is, and the State being what it is, all the mass of verbiage about “the free peoples” and “the free democracies” is merely So much obscene buffoonery.”(30-31)

“The simple truth is that our businessmen do not want a government that will let business alone. They want a government that they can use.” (33) — The irony here is that government wants businessmen that it can use.  They combine to form “public-private” initiatives and other nonsense as strategies for soaking as much from people as humanly possible.

In The Papers: An Ugly Moment In History

Barry Eichengreen and Douglas A. Irwin describe one of the uglier moments of the Great Depression in their recent paper, entitled The Slide to Protectionism in the Great Depression:  Who Succumbed and Why?

Abstract:

The Great Depression was marked by protectionist trade policies and the breakdown of the multilateral trading system. But contrary to the presumption that all countries scrambled to raise trade barriers, there was substantial cross-country variation in the movement to protectionism. Specifically, countries that remained on the gold standard resorted to tariffs, import quotas, and exchange controls to a greater extent than countries that went off gold. Just as the gold standard constraint on monetary policy is critical to understanding macroeconomic developments in this period, national policies toward the exchange rate help explain changes in trade policy. This suggests that trade protection in the 1930s was less an instance of special interest politics run amok than second-best macroeconomic policy management when monetary and fiscal policies were constrained.

Many Americans have heard of the Smoot-Hawley tariff, and some of them even know of the retaliatory tariffs brought about by other countries against the United States. However, there was a great deal more going on in the world of international trade at that time. The authors note that “governments used tariffs, import quotas, and exchange controls to restrict spending on foreign goods and established preferential trading blocs and bilateral clearing arrangements to channel trade toward favored partners” (1).

One of the interesting results of this paper is that countries on the gold standard were more likely to restrict foreign trade (1-2). Although I prefer a gold standard (and free banking, but that is beside the point), this is a sensible result. Countries wanted to protect their gold stocks and because they could not use monetary policy to reduce unemployment, they settled for a next best alternative—trade restrictions which would force people to purchase domestic goods in the hopes that this would reduce unemployment (2). Countries which were off the gold standard tended to reduce interest rates and it did not, as a rule, resort to protectionist policies.

Before the first world war, fixed exchange rates brought about by a worldwide gold standard had led to a major increase in worldwide productivity as well as an increase in world trade (4). After the war, though, the stability was gone. And with the Great Depression, governmental policy options were limited due to the gold standard. The authors point out that fiscal policy was, to a great extent, something which should be avoided because you do not want your government to run a deficit. The authors list of three options which were remaining: “enduring a grinding wage and price deflation to restore external and internal balance at the current gold parity; imposing trade and payments restrictions to limit spending on imports and reduce gold outflows; or abandoning the gold standard in allowing the change rate to depreciate” (6).

Another response would have been to lower gold reserve ratios worldwide, something which did happen by 1936 as a result of so many countries abandoning the gold standard (7). This was however too late.

The authors show four major groups of countries during the Depression: sterling Bloc countries like Australia, New Zealand, and Japan; Gold Bloc countries like Belgium and the Netherlands; exchange control countries like Austria, Czechoslovakia, and Italy; and countries which depreciated their currencies, such as Brazil, Greece, and the United States. Canada is a special case because by 1929, it had already moved to a floating exchange rate. The first group of countries left the gold standard by 1931. The second group remained on the gold standard until roughly 1936. The third group began putting exchange controls on by mid to late 1931. Finally, the fourth group depreciated against the gold standard throughout the 1929 through 1936 period (15-16, 42). She’s

Trying to defend or at least explain the actions of governments during this period, the authors argue that there were really only two options available to governments at this time: “maintaining fixed exchange rates or maintaining open trade” (28). The authors do find evidence that this is, at least, how public officials acted. Monetary economics has the impossible trinity: you may have a fixed exchange rate, free capital movement, or an independent monetary policy. Choose two. During the 1920s, countries generally selected the first two. During the Great Depression, we saw various ways of moving toward an independent monetary policy, either by eliminating the gold standard or putting some form of capital controls on. Both of these results have negative consequences, as we saw during the 1930s.