A common theme in the push for financial reform has been an attack on financial practices where people “make money without actually producing anything.” Obama has made this remark any number of times, and Christopher Dodd just made the remark on Meet the Press.
Reminds me of Aristotle and the widespread medieval view that usury (interest) is immoral. (I posted this years ago, but it seemed worth repeating as we consider financial reform). Aristotle writes,
“There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural.” Politics X
Here is Aquinas’ argument:
“I answer that, To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice. Onorder to make this evident, we must observe that there are certain things the use of which consists in their consumption: thus we consume wine when we use it for drink and we consume wheat when we use it for food. Wherefore in such like things the use of the thing must not be reckoned apart from the thing itself, and whoever is granted the use of the thing, is granted the thing itself and for this reason, to lend things of this kin is to transfer the ownership. Accordingly if a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice. On like manner he commits an injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury.
On the other hand, there are things the use of which does not consist in their consumption: thus to use a house is to dwell in it, not to destroy it. Wherefore in such things both may be granted: for instance, one man may hand over to another the ownership of his house while reserving to himself the use of it for a time, or vice versa, he may grant the use of the house, while retaining the ownership. For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate the house from the person to whom he has granted its use, as happens in renting and letting a house.
Now money, according to the Philosopher [Aristotle] (Ethic. v, 5; Polit. i, 3) was invented chiefly for the purpose of exchange: and consequently the proper and principal use of money is its consumption or alienation whereby it is sunk in exchange. Hence it is by its very nature unlawful to take payment for the use of money lent, which payment is known as usury: and just as a man is bound to restore other ill-gotten goods, so is he bound to restore the money which he has taken in usury.” (Summa, II-II, 78.1)
My summary:
What Aristotle and Aquinas after him are doing is distinguishing between what is natural and what is unnatural (good and bad), and here they make a distinction between natural and unnatural commerce. Here is the basic argument:
A distinction is drawn between two types of goods, fungible and non-fungible (those are actually Aquinas’ terms for them). Fungible goods are goods that are destroyed (consumed) when they are used. Food (wine) is the best example here. Food is destroyed when it is used, it cannot be returned and does not naturally make more of itself when used (from bread one does not get more bread, in fact, when you ‘use’ bread you have less and less of it).
Fields and flocks are examples of non-fungible goods (in the passage above Aquinas mentions houses). They are not destroyed when they are used. Quite to the contrary, they are naturally reproductive (they naturally produce surplus value in their use, as in the case of a flock producing wool or more sheep, a field yeilding a crop year in and year out). For this reason they can be rented.
Aristotle thinks that money is a fungible good because it does not naturally create more value. It is unnatural (immoral) to expect money to create surplus value out of itself. For that reason, money is good solely as a means of exchange. With money (as with wine and wheat), there is no distinction between the thing itself and its use, and so one ought not add an additional usury fee. In other words, lending money at interest is wrong.
Of course at issue in the current debate is not interest per se, but wild speculative financial practices that make money by not doing anything but playing casino games with Wall Street money (shorting and derivatives come to mind). The Democrats’ focus on “making money by actually producing things” is not only good populist rhetoric, it is good Aristotelian social philosophy.
USUPhilosophy 
Excellent perspective into the current debate; thank you.
Perhaps you could help me understand the concept just a bit more. When money is lent and interest is charged it seems to me that value is being created in two ways 1) the money lent becomes the same as normal money in that it can be considered synonymous with what ever it purchases (field, house, car, etc) and 2) the interest then paid on that loan also becomes normal money as soon as it is spent, in this case perhaps on the salary of the bank worker who then in turn spends it on say, his daughters college education.
It seems that even money paid as usury does not simply remain in a coffer. In fact, as you are aware, without the usury the original loan doesn’t go out and so any value creation resulting thereafter (the construction of a house, the maintenance of an office)is forfeited.
Perhaps what I am most trying to understand is money as a fungible good. A dollar spent is not a dollar gone, it is simply a dollar transfered, instantly ready to again be used in the process of value creation.
It seems to me that the refrain of “making money by actually producing things” is intuitively appealing, but all that it can actually argue against is letting money sit in a bank. A dollar lent is used productively, as is the 15 cents interest paid on it both as the means by which the original dollar may be lent and in itself as a further vehicle of exchange.
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Great point, Andrew. Yes, the “making money by actually producing things” does have intuitive appeal, but it is not particularly applicable to a modern capitalist system. Without usury (or some kind of making money from lending money), we’d have no venture capital and economic growth would be seriously hindered. So your point is well-taken, without usury you have less lending and so less overall value creation.
While I am not an expert on the history of capitalism, this has to be one reason why usury practices eventually came to be accepted despite the philosophical and religious arguments against them. Most, I would think, see this development from feudal land-based economies to modern capital based economies as a good. Setting aside the Marxist critique, I think most would agree that the development lead to considerably more opportunity and welfare across society. Your point, then, is that it seems like money can sometimes function as a non-fungible good.
I rather doubt that any of the Dems making this populist appeal have Aristotle in mind. But it is interesting to see this old natural law view’s populist appeal. Despite our acceptance of usury and all sorts of other devices for making money from money, there remains a deep-seated distrust of money-lenders. Perhaps a moderated argument could be made – we might say that usury is only permissible when it is tied to actual value creation. This weaker argument would allow for venture capital and the real value creation allowed by the kind of money lending you describe. But you would, on that argument, be permitted to restrict many of the financial instruments that led to the recent economic meltdown. If you allow usury only in cases where it is tied to actual value creation, you would basically outlaw short selling practices, wouldn’t you? Would you also have to outlaw derivatives? Even the packaging of mortgages in giant mortgage securities that were then traded added degrees of distance between the actual money lending and the value creation.
Here we have basically concluded that the “fungibility” of money depends on its use. That is, money can be both a fungible and a non-fungible good, depending on whether it is being used to create value or not. Though Aristotle and Aquinas would not have agreed, we might say that they just didn’t know how modern capitalist states can use money as a non-fungible good (as a way of creating value).
Is anybody around here an economist?
What was so offensive about the money lenders in this particular case is that there well-being seemed disconnected from the well-being of the economy at large and from real value creation. I am thinking in particular of the now infamous Goldman Sachs memo. They made heaps of money as the housing market rose, and then they made heaps of money as the housing market crashed by shorting. There does seem to be something wrong with this kind of wealth-creation that operates in complete independence from actual value creation. Aristotle’s argument is probably too strong, but it is in the neighborhood.
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Up until somewhere mid-20th century “usury” still had relevance in finance and I believe it was capped at something like 10% Below that it was called interest and above that, usury. To me this was a rational compromise. Things like credit card debt that have 20 or 30% interest are simply predatory lending; they are rates specifically designed to financially enslave lenders. The same can be said of the sub-prime mortgage debacle, though lenders probably never conceived the disastrously harsh consequences. (I say this only because I know they never suspected it might affect them personally, not that I think they have any public conscience whatsoever.)
In my opinion reasonable interest (usury) is not immoral, and neither are financial instruments like derivatives, which were first developed in farming industry and served to secure and stabilize the market. It is only when these things are misapplied and exploited that they become destabilizing and dangerous. Not every financial operation that anyone can think of should be sanctioned by law, even when they are specifically defined by contract. This is a hard pill for “free marketeers” to swallow.
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“enslave borrowers,” rather
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Here is something though that both these great thinkers failed to mention in their arguments. Interest is payment for risk. As a lender you assume that the borrower might not pay you back. In exchange, they pay you a little (little being subjective in this case) extra. This might not be “fair” however, unless the borrower is forced to borrow from that lender, the lender may charge whatever interest he wishes and the borrower is free to accept the lender’s terms. That is why, when you default on your loan payments your interest rate goes up.
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I think both philosophers understand why people charge interest (produce wealth from wealth by assuming risk). The issue here is not the economical mechanics of interest, the issue is a moral question – not why is it done but ought it be done?
Arielle’s view, basically representative of the modern liberal view, is that if both sides consent, then almost any economic interaction is permissible. Aristotle and Aquinas would disagree. I think they are right – mere consent is a pretty low bar for moral permissibility.
Just in terms of economic welfare, it seems pretty clear in the wake of this recent financial meltdown that mere consent is not sufficient for guaranteeing the smooth operation of an economy for the sake of the common good. (Though one might argue that if consumers had truly informed consent they would not have used some of the dangerous lending practices).
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I disagree. I feel that the liberal view would be your view (that the government should have control over what people spend their money on, how they spend it etc. for example the takeover of student loans by the federal government.) I see my view as a free-market view, perhaps it is liberal, but most of those who hold liberal views would probably disagree with my opinion on the matter.
In regards to what “ought” to be done I will say this: Simply because people choose to spend their money unwisely, borrow money against their means and otherwise act in a foolish manner does not mean the government “ought” to mediate every financial transaction. It is sad that our economy is in the rundown state it is in but that does not make it the government’s responsibility to fix it. In fact, I would argue that much of the problem comes from our government itself.
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Kleiner means “liberalism” as in “classical liberalism,” Lockean liberalism or the economics of Adam Smith and free market capitalism. In other words, more or less the reverse of many American “liberal” policies of regulation. In classical terms an American liberal would probably be closer to a classic republican. Confused yet? In common American parlance “liberal” should be phased out; “progressive” is much better.
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Though now I see that he wrote “modern liberal,” so I dunno. I’ll leave it for him to explain.
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Yes, I mean Lockean liberalism.
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Ok. :) I don’t mind being termed a liberal, I just thought it was ironic.
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In the modern age of inflation, interest is _required_. Because of government borrowing your dollar is worth less when you get it back after some period of time. You need to at least charge some usury fee in order to break even at the time of repayment.
Also while that money is out being used by a neighbor I have given it to, I have lost opportunities to put my money to my own uses. Perhaps Macey’s had a sale on bread and I could have saved a dollar buying it during the sale. But my money was in use by my neighbor. When the money is repayed and I can finally buy that bread, it is no longer on sale. It now costs me a dollar more than it _would have_ and is a measurable/quantifiable lost opportunity. Am I not entitled to ask for some compensation for that lost opportunity? Call it usury, interest, whatever you like, the fact is my bread just cost me a dollar more than it would have.
I also appreciate your reference to Rand. Objectivism is my personal philosophy and this is a great reference. I think Fancisco’s speech, which is being quoted in that link, is often taken at face value, when it’s said that money is a medium of exchange. I’ve read enough Rand to know that she is speaking of the fundamental of trade. Trade only happens if a value is traded for a value, and “production” means trading something of productive value. We call it “Value Add” these days, but that is what she is always driving at. So a service, not just a widget, can have productive value. Money only represents the value of the trade.
Francisco’s speech also gets at the heart of Arielle’s comment. Evading the knowledge of the contract you’ve entered into with your loan, does not make you innocent. If your are a volitional being, and not some particle of a super-organism or a sheep in a managed herd, then YOU are ultimately responsible for the contracts you enter into. You are not the money’s equal and it will not serve you, but are now instead a servant to it, if you chose to ignore the terms of the exchange. You wanted something bad enough, you ignored your obligation of judging the terms of the value or the trade. The other party in the trade offered you a loan they believed had some value, and you took their offer. Only in hindsight, do you judge it as a bad trade. But nobody should be made to answer for it, but you. You have abdicated your volitional faculties, to your desires of the moment. You surrendered your long-term rational needs and goals, to your short-term wants. Part of being a volitional being, is living with your own bad choices. In fact, it’s requisite to solving the issue of omission of knowledge.
I’m rambling on about it to the wrong group… It’s just how excited I get over the mention of Rand. ;-) Thanks for the indulgence. The only real point to be made are my first few paragraphs of some of the things interest can represent, that both Aristotle and Aquinas may not have considered in their judgments of it.
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Hey thanks! :) I love Rand. I get excited about her too!
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But nobody should be made to answer for it, but you. You have abdicated your volitional faculties, to your desires of the moment. You surrendered your long-term rational needs and goals, to your short-term wants.
The problem is that others are made to answer for bad decisions like sub-prime mortgages. When a borrower defaults by bankruptcy it doesn’t really matter how responsible they are or feel. The damage, in effect, has already been done. For starters, the lenders and borrowers have acted irresponsibly. The borrowers are now homeless, the lenders have a repossession to deal with, but that’s only for starters. When these mortgages are packaged into securities and traded — and then collapse, the damage extends elsewhere (internationally!) with great repercussion. What Randians and Libertarians should realize is that regulation to prohibit these things is acting responsibly, analogous to establishing and enforcing traffic laws.
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That’s opposite of how the dominos fall. A sub-prime loan is a loan that carries more risk. The loans have to start going bad, people defaulting or not meeting their payment obligations, before we have a sub-prime collapse. The borrowers first become homeless, then sub-prime markets collapse.
My father is a real estate appraiser for the last couple of decades, and a bank loan officer for the two decades before that. I paid my way through college as an apprentice appraiser, under him. It was a well established saying in the business, long before there were sub-prime markets, that as goes Fannie, so goes the mortgage business. Fannie, Freddie, and HUD ,all new deal government programs bent on getting all citizens into a home, _ARE_ the sub-prime market. When I was an appraiser, I remember the Janet Reno Dept of Justice and the Federal Reserve, bullying banks into making even riskier loans, waving a debunked study that claimed discrimination. The idea was to get banks that were on the fence or saying it was a bad allocation of resources, into going along with Fannie’s new policies, being pushed by a new administration. (Dodd played no small part in it from the legislative side) They doubled down on it in ’97 again, and the Bush administration stayed the course, crooning about home ownership at all time highs. Never questioning whether some of them COULD afford homes, without creative investment vehicles. Had there been no tampering with the
Go ahead and check my facts:
– 1994 NY Times (pages 2 and 3 are most eye popping as they talk about we will only know if this is a proper allocation of financial resources, in hindsight.) http://query.nytimes.com/gst/fullpage.html?res=9400E3D91F39F933A0575BC0A962958260&sec=&spon=&&scp=5&sq=federal%20reserve%20mortgage%20descrimination&st=cse
-1998 NY Times (The Clinton cabinet doubling down on their housing policy) http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&&scp=2&sq=holmes%20fannie%20mae&st=cse
If you were paying attention, or cared to at the time, you could see the building blocks for the bubble were laid then. Many of the banks were drug kicking and screaming into it, then started riding the waves when it became good times, throwing their previous caution to the wind. But to begin with, they were stuck between risk and government bullying. SO government meddling creates a problem, then dodges their own responsibility in the game. Or rather, they fessed up to it in a round about way, by bailing out those they pushed into it to begin with. Notice that CITI was one of those that the DoJ filed suit against, then dropped later, when CITI decided to go along with the scheme. Perhaps it’s just coincidence they were one of the largest receivers of aid…
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Thank you Anonymous, you said that better than I ever could have. Unfortunately, I’m not a bank of information when it comes to real-life examples. I’m more interested in the philosophy of economics. But, like you, my father is a loan officer, has been for twenty some years so I have some idea of what lending and borrowing money involves.
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I believe you, and I’m certainly not trying to make this a partisan issue. Clinton had as much to do with it (or more) as Bush. I’m not sure I’d say the cause was government meddling as much as greedy interests ignoring sound practice. If the gov was pushing home loans unwisely, then yes that’s stupid. The fact that Fannie and Freddie also bought mortgage securities was always a potential source of moral hazard. In keeping with free market ideals, once you have assumed risk, it seems you should not be able to escape the consequence by gaming the system. This, by definition, goes against a rational free market and should always raise red flags. The market is now so complex that nobody can accurately or even vaguely predict certain investment risks. That, I think, is the biggest problem.
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To the extent that Smith was a “good Aristotelian” he updated the debate. Sure we all know that some amount of interest is needed for risk taking. However, the interest paid seems to be above that mark.
B = R + E
Where B is the observed rate, R is the rate of return that covers risk, and E is some excess return.
Smith lived through one of “The” bubbles, the south sea bubble. He was convinced that Aristotle was not simply outdated.
For my own understanding, Smith worries too little about the public choice arguments. If excess return is a function of access to capital, then it is any cartel condition that makes return excessive. Regulation, to the extent that it limits access to markets, maximizes rather than minimizes E.
If B decreases while E increases, R must be going down right? These are the things that make me take Aristotle in spirit, but want to push back a little in application.
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Vince,
You are right, Goldman did not function in a desirable way.
However, your rather detailed post seems to bite a major fallacy. You compare Goldman to a snake-oil sales man, but this isn’t true. The reason snake-oil salesmen were able to continue to make sales is they travelled around the country siphoning off wealth and leaving before people could protest the false claims. To the extent that they had a placebo effect, this is a bad analogy. To the extent that they did actual harm, all the better to move on down the road (some snake oil had turpentine in it, not good for health).
Goldman should have gone out of business, why didn’t it? Well, it was argued that there was a systemic risk. Now what has happened, the horrible practices that aided by a faulty regulatory regime have continued, why – because of a regulatory regime that said they were too big to fail.
This seems to be the equivalent of your snake oil salesman working for the mafia, asking people “you got a problem?”
The mafia in your story is the regulator that kept Goldman open. If it weren’t for the restrictions on the free market represented by failed regulation here, Goldman would have had to “move on” to some other venue (presumably something other than wall street if anything at all).
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I followed you until the last two paragraphs — where exactly are you getting your information on the “wild west.”
If something has to be broken in order to qualify as evidence of a free market, you aren’t really being fair to a free market.
There is no reason that firms will not invest in lead-free toys in order to build a reputation, but a reputation has to be worth something for someone to invest in it. A dentist has to be certified, but do you really know that he is doing the best job for the money? No. How do you decide from all the dentists available which one to go to? Are you aware at least of the possiblity that there are dentists that will do better and worse jobs — sounds pretty wild west to me.
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“Wild-west” typically means the actual wild west, right? Why use the term otherwise. So was the west wild? Sources? What does it mean in context? Using colorful metaphors and then backing away from them as irrelevant leaves a bad taste in my mouth.
You solved the wild west problem and saved your kids from a horrible cycle of victimization and re-victimization. Isn’t it unfair to assume that other people are not capable of this? Do we assume other people simply don’t care? Do we assume that only a few people are smart enough to do this? The type of regulation that you used is a non-government type of regulation.
You assume that measures have to be regulated by a government — this is a big assumption. There is no reason that regulation has to be done by a political body, I don’t follow you. If you wanted to compare regulation between one body and another, body — one being a government regulatory agency, you could make these comparisons. Be careful not to assume that the seal of the US makes it the best regulatory agency regardless of what the actual structure is. It seems normative and a great leap of the imagination. Actually, I think this may be the problem with the current banking situation — it must be the best solution, the GOVERNMENT is fixing it. We don’t care about outcomes, just that Uncle Sam is on the case.
You have somehow made your argument against Ayn Rand. I have no particular love for objectivists, Marx or Rand. They are interesting, but they miss a great deal about the world. Seems like a staw man to me. However, Ayn’s point is that doing something AGAINST your own interest and calling that altruism is wrong. She simply states that anything good is self-interested. It is a definitional trick that makes everything objective. I have no reason to bite her methodology here, but you are not being fair to her argument either.
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Also, while clarifying: I have no problem with an amoral Goldman — I think the problem comes when we are dealing with an immoral Goldman. We bite the normative when we make this distiction, but I see no positive argument against amoralism.
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I have a hard time imagining how regulation would not come through government. What would be the alternative? There are of course private agencies that establish regulatory laws, or the bases for them. I’m thinking of things like the National Fire Protection Association that writes the National Electrical Code. The Fed is a quasi-private institution. But how would private regulation be applied and enforced? Would they only be information services and everything would be determined in the market? How would they fund themselves? How would we be sure they didn’t collude with other private agencies. How would their findings be made public? Many questions. Free Marketers don’t seem to have many answers.
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Because you are unaware of answers you infer there are not any. I don’t follow that claim, but it isn’t very inviting to answer a question that is not really a question as much as a dismissal of contrary evidence.
Let us try however to give you one very good example, and then make the claim that it is easy to generalize.
Suffolk Bank, Boston (Mid-19th Century). The problem is that all banks in Mass (and the surrounding area) offer currencies. When people from country banks come to Boston, they can’t spend their money and if they want to get local currency they have to convince a local bank to give them their currency – same problem, the local banks have some real expectation that the currency this stranger is giving is fraudulent. Enter Suffolk bank — they collect information, charge member banks to be part of the Suffolk system and the banks gladly join to advertise to their currency holders that they can freely go to Boston and employ the correspondent relationship with the Suffolk bank. Suffolk bank clarified this process and became the first major clearinghouse in the US, without any feel good political rhetoric.
Now, given this case and many more like it, you might say — “If all your evidence is old, then I assume we are smarter, faster, brighter, and smell better than our ancestors, so we need a government solution that smells better too.”
To that I would say, look at international law. Who is the enforcer? Merchant law is still arbitrated by relationship. I know, you are thinking — we need a one world government to be a regulator — but why? Why think that? What specifically is broken about the reputation mechanism and coordination that is resolved sans government? And can we please not just assume the answer here.
When you allow government to monopolize an industry or to create draconian regulation of that industry, the benefit goes to people that have not earned that benefit (typically the incumbents). This is the thrust of my first post on this thread. There is no free lunch. I want to smash the ideological notion that government stepping in makes people better off — It does not. It creates privilege and makes only plutocrats and lobbyists better off. I have no stomach for laws that create cartels and enshrine privilege in the name of “protecting the market.” Protecting the market from what? From entry — from innovation — from efficiency — from internalizing incentives that will correct mistakes going forward — but certainly not making the outsiders better off.
We agree, people that abuse the system should be punished. We don’t agree about the mechanism to get there. I state that your chosen mechanism exacerbates the problem we both detest.
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I bowed out of this discussion when it became so Randian. Ayn Rand is wrong in so many ways I don’t know where to start. That she is wrong is not that disturbing, she is a third rate thinker who is not really worthy of much attention. What is disturbing is that she is so popular because it shows just how hard of heart men can be and shows just how much some moderns can struggle to deal with organized society.
Michael – is all regulation “draconian”? Your argument seems to be against excessive regulation, not regulation as such. But you quickly generalize your conclusion, and I don’t see why. As such, you argue against a straw man – I’ve not seen Vince or Hunt propose a “one world government.”
Corporations do not have a right to exist. As a society we agree to this system of corporate capitalism only insofar as it is in the interest of the common good. When financial practices, marketing practices, or safety practices are no longer in the interest of the common good, regulation can be justified. This regulation need not be “draconian”. And I don’t think you’ll get much argument that some regulations and some govt involvement (aspects of fannie and freddie, for instance) have been ill conceived or poorly executed or both. But let’s not throw out the baby with the bathwater. Demonstrating that some regulations are bad is not to show that all regulations are bad. While I subscribe to Consumer Reports, I am also glad that there are federal regulations mandating the basic safety of consumer products.
I also think your dated examples are dated not because we are smarter now, but because the reality of global capitalism is different. And it is not true that there is no binding international agreements governing trade – see the IMF, WTO, etc.
In short – there isn’t enough prudence or moderation in Michael’s position. Tea partiers identify some bad governance and conclude that all governance is bad. Sometimes government stepping in does make people better off. Even socialization is a good with respect to certain basic life goods. Water comes to mind. I am glad that water is “socialized” (municipal) rather than being a commodity in an entirely free market. Since capitalism always has winners and losers, it is a basic moral obligation for those participating in the system that they agree to make sure the losers do not lose access to vital needs.
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Interesting. I feel as I have been convicted of being the most moderate Rand hater in the comments. No one has taken Rand’s position, yet we all wax on about how horrible she is — maybe this explains the power of her arguments, third rate or not. I simply claimed that no none of the three less moderate critics than I were being fair to her argument, that is stating it as she stated it.
The IMF, WTO are not government agencies, which should be obvious by the failure to answer the question, what government to they represent. They are precisely what I have claimed are examples of reputation mechanisms and regulation by the same type of sanctions, grandstanding, and rhetoric that any business owner has at his or her disposal. Imagine a skate park that lets kids skate with no safety protection. Absent laws, the park might still have a reason to minimize broken bones by requiring protection. I don’t think it is I who has embraced the straw man.
Which brings me to another assertion — where did I say that the two other commenter advocated a world government? I said, “I know, you are thinking — we need a one world government to be a regulator.” Which is unfair to put words in people’s minds. To the extent that I anticipated what I thought would be the only response to the example, I overstep. I apologize.
In talking about “dated” examples, we have to assume that either institutions have changed or that people have. Here you seem to assert, as I would the continuity of humanity over time — so we agree. Institutions have changed.
Who cares what Tea Partiers think, unless you grant them the same level of sophistication of dialog as participants on this blog — why do you care if they have made an attempt to have a coherent argument? What I fear is the power of a mob, but I also understand that mobs form because of perceived (or possibly real) grievances. Perhaps we should investigate these on some other thread.
I have no issue with your statement, “Sometimes government stepping in does make people better off.” But you will notice that this is a much more moderate claim than what your other posters have claimed. I have no problem with your statement as long as you agree that sometimes government really makes a mess of things and then the case for further tinkering is increased. If you want me to sign up for the notion that scientific government planning is the ultimate goal of government (and by extension all true democracies), I will be happy to be quite candid in my reaction to that notion.
On another note. I am trained as an economist, I therefore reject the notion of “common good” as a flimsy distinction. It is not a criteria as much as a sentiment. In order for us to know what is the common good we have to aggregate preferences. There is an entire discipline in economics that is focused on the failure of this assumption, social choice. I do not mean to say that we can’t do anything. I just don’t want our reason for choosing one option over the other to be other-worldly.
What is nice is that we both agree that Draco would be a bad ruler for a liberal society. We dispute details, but we agree. I would suggest that dictatorship in any form is illiberal. Maybe there is a liberal dictator, but I think I would have to deontologically oppose such a claim, so no argument is necessary.
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Thanks, by the way, for your participation on our blog. It is great to have a trained economist perspective along with what is typically more philosophical perspectives.
Correct me if I am wrong, but the WTO and IMF, while not themselves govts, are associations of govts. In other words, these are not organizations of private merchants. Rather they are institutions which seek to coordinate economic polices across states. They are, in that sense, governmental organizations since the policies of the WTO regulate the markets (through govts) and so make them, in that sense, unlike the Suffolk Bank example you provided.
I heaped scorn on Rand because I have been hearing about her a lot lately from some of my students. I probably over-read your posts in light of other conversations with other people.
One point: I disagree with you regarding the common good. I am not a libertarian. In fact, as someone who is pretty conservative, I hate libertarianism and consider it almost wicked. My biggest gripe is that it has an entirely inadequate anthropology. (Rand is a useful punching bag on this point). Libertarians have an extreme social contract view. Individuals hold rights prior to other relations or obligations as atomic individuals. Morality and law are dependent upon the contract.
To my mind, that is bad philosophical anthropology. I am Aristotelian on these matters – man is by a social and political animal (we could also couch this in terms of a “relational ontology of the self” that Vince would like from Buber and Levinas). The social contract does not create society, the law, morality and so on. We are always already formed in thick social relationships and have corresponding obligations as a result.
As such, I reject both libertarian politics and economic theory. Friedman is just wrong when he argues that the economic sphere is amoral. Politics and economics are ultimately about the good. The excellence of political leadership is prudence, using law and government as an instrument which will enhance human flourishing and the common good. Now no doubt sometimes our public policies are not prudent, and are driven by sentimentality and “compassion” rather than intelligence. But this just means we need more prudence, not less regulation per se.
Below is a link to a useful article that talks about the differences between Aristotelian conservatives and libertarians. Aristotle would say that those who say political economy has nothing to do with the good don’t understand morality or politics. Modern economics have largely severed themselves from this tradition and do wholly quantitative analysis, so it would not be surprising if they struggle to articulate the human good. Since it cannot be quantified it is dismissed as “sentiment”, but that view is deeply unfair to both Platonic and Aristotelian political traditions.
http://www.firstthings.com/blogs/firstthoughts/2009/10/07/social-conservatives-libertarians-and-aristotle/
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First, your last post is quite enjoyable. That is to say it lightened my spirit and made be think of things in a new way. This is the primary reason I have been following your blog for the past year or so after knowing I would be coming to Logan. First time to comment.
I have never considered the distinction between libertarianism and Aristotelian conservatives. I will be happy to take that in.
I think the Suffolk bank and the WTO have more in common than not. We may be debating different margins. In short of a full blown economics lecture, I am content to just recognize that the issue is disputed.
On names of movements, what are Burkeans when you take out rigidity of social class — I think that is what I am.
I would pick a minor point with you on defining man. I have some sympathy with the notion that man in isolation is not man (but perhaps that is because my wife has been out of town for a week). However, I think the libertarians have some ground that the irreducible component of man is the individual. I don’t buy the “property rights” especially in the tradition of natural law. I like Locke, but I don’t think that he has truth, just useful phenomenal approximations of truth (I hope I am using that right, shadows that none-the-less let us tell a story).
Oh — and the final bone that I can’t stop picking. The amoral distinction is a way that science is done. We economists use morals all the time. We also think they are great fix effect variables, that is to say they are not random. We call these institutions. However, we don’t think that one can moral his way into a description of human behavior. We say people respond to incentives. Since, like many things, we reduce morals to non-pecuniary incentives, they complicate our models. But we don’t see any reason as a scientist to provide our audience with our personal opinions about morals. That is something we are far more comfortable having the other disciplines do.
What I do worry about is the power that is implicit in political claims. Political science tends to want to change incentives. When I hear philosophers talk about the common good, I think of idyllic pastures and 16th century British poetry. When I hear political scientists talk of the common good I see jack boots and blood. Why? Because using the concept of the political animal to coerce other people is something that economists see as welfare destruction. That is to say that people’s preferences are not being met, sometimes it is because these people are denied the means they need to live a good life. Ultimately, preferences rest in the individual. The ideas of the good life come from no more reduced source. I recognize the tautology, but I don’t know any other way of setting up the criteria. If we assume, as many good philosophers do, that the irreducible component is something greater than the individual, I start to worry. Rawls starts here. I have sympathy for him. He says, to paraphrase, that we stand on the backs of giants — that is we all are born into a system of government, into a society. However, if we take this seriously we still don’t have a theory of endogenous change. What I would like to do, as an economist, is to better understand the endognenity. How do we get better (or worse) systems. My priors and my experience suggest that rampant increases in regulation will move the wrong direction. It is an empirical question, yes, but the sample size is always one. I think taking seriously the notion that the WTO and the Suffolk bank are indeed the same is one step toward understanding that causal claim.
I will be happy to discuss sometime the theory of cartel, the economics of regulation, and other public choice issues. But I can at least say what I said earlier. There is nothing about the seal of the United States that makes an agency a good regulator. I fear any description of good regulation that requires the implicit threat of violence that that seal might represent. If you can’t set up a clearinghouse without the threat of prison, then you don’t have a good set of rules.
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Lots to think about there. One quick thought on your last paragraph (before I get back to grading!):
“Words evidently do have the power to encourage and stimulate young men of generous mind, and while they can cause a character well-born and truly enamored of what is noble to be possessed of virtue, they do not have the capacity to turn the common run of people to goodness and nobility. For the natural tendency of most people is to be swayed not by a sense of shame but by fear, and to refrain from acting basely not because it is disgraceful, but because of the punishment it brings.” Aristotle, Nicomachean Ethics X.9 (1179b)
The law has to carry a stick, because of this “natural tendency of man” to “fall away” from himself – to not seek the good that is good for him. Since the character of most is ill-formed, shame (an internal principle) does not move, rather fear of punishment does.
You probably don’t like the sound of that too much. But that said, Aristotle suggests a considerably more moderate exercise of power than Plato (see the Republic). But freedom (in the modern sense of autonomy) is not an absolute value for Aristotle. This is something of a paternalistic view of politics, since the law comes to be a shaper of souls (statecraft is soulcraft).
Are you on the USU faculty? Sometime next year we should have you give a talk on philosophy and economics to our Philosophy Club.
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I heard a quote on NPR today that seemed relevant to this conversation:
“Bill Cohen, the former Republican senator from Maine, once said government is the enemy until you need a friend. We condemn regulation and then turn around [when troubles arise] and say, where was the government?”
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I will be quick as well.
Bentham is a hero of mine, not only because he was a reformer and a caricature of the economist, but because his motivation was simple. He thought that law should be different for thieves than it was for murderer’s and when he began to study law it was not. He changed that.
I hope there is a time where the threat of government coercion is considered as arcane and despotic as hanging a 12 year old for pick-pocketing. I would prefer to just let evil firms be exposed and go out of business. Hopefully, with transparency, this occurs at the point at which their crimes are early in the process of turning malignant. We have much work to do, but this is my version of the the common good.
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Michael,
You’re only free to walk the street care-free because government coercion has secured for you the reasonable assurance to life, liberty and the pursuit of happiness. The “endowed by their creator” part was probably pure rhetoric even when the declaration was drafted, but since I’m an atheist I can assert the objective statement that the only reason you are safe is because government has elevated us all above the pack. Law is government coercion; military security is government coercion. The only reason we aren’t engaged in constant combat with the elemental forces of nature and savage elements of our own nature is because we have created a greater forces that can withstand them in contest, and that greater force is government. So, please, you’re the one who lobbied against baseless assertion. Your liberty doesn’t “just happen.” Do you think it drops from trees like lemon drops and lollipops? Rights are equivalent to enforcement of rights. There are no rights without it. All rights are coerced. If you don’t get this fundamental premise, then you’re going to blow it on everything else.
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@Hunt
What are you trying to get at? You’re just reiterating social contract arguments for government (these are commonly employed by a lot of libertarians.) I hope you are not trying to argue that since right enforcement is funded by coercion that all coercion henceforth is justified, because that’s an obvious non-sequitur.
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*rights enforcement.
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One short opinion on Randism, Objectivism, and in a related way American Libertarianism. (Libertarianism can of course be either leftist or rightist, there are communist Libertarians and Anarchist Libertarians. I’m talking about the “right” variety.)
Rousseau attempted to conceptually salvage the classical “citizen” from the disposal chute Locke put him in, but apparently to no avail. Rand and to a lesser extent American rightist Libertarians want to continue to embalm the ancient Greek notion of citizen and replace it with the primacy of individualism. But democracy is not compatible with radical individualism. This is one glaring issue the American right is not willing to deal with. Democracy is predicated on the classical notion of “the citizen” and citizen identification, not individualism and certainly not radical individualism. Nobody wants to be caught admitting to being anti-democratic (except the lunatic fringe), but it is quite evident that Libertarianism/Anarchism are inherently anti-democratic.
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…you might say that Americans in general never really “got” the spirit of democracy. The impression I often get is that those right of center think collective action is always tantamount to merging with the Borg. The problem is that democracy is a pretty hight level concept, and Americans are rapidly getting too dumb to support it.
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Hunt — You open with your most outrageous claim: “You’re only free to walk the street care-free because government coercion has secured for you the reasonable assurance to life, liberty and the pursuit of happiness.”
I don’t have any idea why you believe that, but you don’t even bother making an argument. I will just return the favor, no — you are very far from the truth.
I think you will notice that I already pointed to situations in the past where people have made similarly outrageous claims. For example, we have to hang 12 year old pick pockets otherwise you wouldn’t be able to walk down the street. Naked aggression comes in many guises. But naked aggression is NOT liberty. I reject your claim as strongly as possible.
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Also Hunt, any conversation that supposes we are all smarter than the average American, and they couldn’t understand our lofty ideas, means that 1)I have to be an elitist to engage that argument, 2) If I disagree with you I am stupid — these are not good principles of debate, so I will assume we are not engaged in that activity.
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Vince, I think a wonderful requirement for regulation is to reduce chaos. I still don’t think we can assume a particular agent of enforcement. We should consider comparative institutional analysis, with your minimize chaos criterion.
I think that the Cairo vs. Salt Lake example is good. However, I don’t think the government paycheck is what makes the difference. If that were the case the Oklahoma Transit Authority would be running a road like Cairo, right? Or isn’t the road in Cairo a government owned road?
All I have been saying is that people on this thread have assumed that the legitimacy of the “official” or de jure state is needed to have good regulation. This is a fallacy that we all should confront and reject.
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Michael, your example (the 12 year old gallows victim) is all the support my argument needs. He could curse the harshness of his judgment all the way up the hanging noose and insist on his natural right or God-given right to life, but in the end, in any sense that matters (the concrete one), he has no right to life because there isn’t anyone or anything there to enforce it. He could proclaim his rights right up to when the trap door opened beneath him; it wouldn’t make much difference, would it? Rights are not ethereal ideals just to be recognized, whence they pop into existence. They are created by enforcing them. We all know this, once we’re woken from blind slumber.
I’m guessing you’re a bit right of center. These days it’s become the trend to bash the American left for a kind of totalitarianism (see, for instance Jonah Goldberg’s “Liberal Fascism”). This is really a hollow complaint, as I’m trying to illustrate — manufactured as it is by muddled and frankly utopian right wing idealism. Coercive forces are the only thing between you and the jungle, and no productive discussion of “government coercion” can commence until we admit it.
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I disagree that the rights are “created by enforcing them”. Ironically, Hunt strikes a libertarian tone with that view of rights (that rights are dependent on the social contract). See my post above on libertarianism vs Aristotelian conservatism).
That said, I agree with Hunt that natural rights are largely toothless (they are real, but toothless) without some kind of enforcement mechanism. But I think Michael would agree with that claim. His point (if I am understanding him correctly) is that we need not think that the state is the only or the best mechanism for this enforcement / regulation. I must confess that I remain unconvinced, but I would be interested in hearing more about what and how other mechanisms would work better.
(I googled Michael and it looks like he is an Econ or Finance prof in the USU College of Business — perhaps he would give a talk on this next year for the Philosophy Club?).
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Hunt, I don’t know who you are arguing with, I don’t see any common ground.
Kleiner,
Sorry I didn’t respond to that invitation earlier. We will certainly work something out. Even if I don’t have much to offer your club, I would certainly like to participate more in those events where it would be appropriate to offer my input.
I think you are characterizing my position correctly. I think it is a very small and very true point for all that it then suggests about the errors in thinking which we have been grown accustomed to.
Ideas matter, we don’t disagree here. However, I think biting the false dichotomy between “state” and private is a big concession to a world without liberty. Hunt seems to understand this, but then does not follow his own logic. He agrees, killing a 12 year old is not liberty. Rather than find common ground, we resort again to the dichotomy — anyone who disagrees with a position must be right of center. My own response tends to be, anyone that obscures this debate in favor of bigger government must be a fascist. But, I recognize that this is not a fair statement. I feel as if the arms race begins, my label is more graphic and emotion invoking than the other person’s.
What we are talking about here is information. Which system is better at collecting and distributing information about fraud? I posted a couple of days ago a simple equation: B = R + E; which is in the spirit of the Aristotelean view of money. It is also my best defense of Smith’s view of that issue. There is a rate of interest that reflects the return that investors require in order to make money available, A time value. There is a rate that they require for risk. I simplified both of these under risk, because time in some meaningful way is risk. However, we could easily split this further. Then there is the Excess return. The return over-and-above what someone else would be willing to offer for that same risk. This risk has nothing to do with scarcity of capital — it has to do with access to the market, some restriction to competition. We expect this portion of the equation to rise the more restrictive the regulatory regime, the more requirements that are placed on entry, and the more access to political power that is prerequisite to participation as an official member of the cartel.
I made the claim that this is what Aristotle would have understood. If I understand Smith’s Aristotelian framework well. B = R in a market that is working well. Smith calculated R based on historical averages and allowed that it should change based on the degree of commercial society that existed in the relevant market at that time. He noted that it has been 20% some places (less civilized than Scotland) but in 1776, it should have been 5% for England. So, his solution was to cap the interest rate (B). This means that there would be no increase in interest rate to usurious levels. Now, this is where Smith’s argument gets tricky. He thought that interest rates rose above this amount because of greed, lenders made bad bets in order to get greater rates of interest. He pointed to the South Sea Bubble (of which our financial crisis has nothing on). So his cap would work here as well, right?
So, me, an economist immediately looks for the unintended consequence. Any time we restrict the operation of supply and demand there is some consequence. No free lunch, after all. So where does that occur? Smith seems to think it would just slow growth, and that was OK. Maybe he was a good Burkean, to be mildly anachronistic. Bentham disagreed. He thought that the pain of the law would be felt by the entrant, not the incumbent. He said, when markets are so regulated, that there are no risks taken, people give bets to those that are not risks — only the current industrialists would get loans. New entrepreneurs would not have access to capital markets in this regime. The usury law was nothing else but a way to protect the oligopoly of the incumbent merchants.
So let us revisit our equation: B = R + E — if R decreases (only proven ventures are allowed access to capital markets) and B is held low or constant — what is happening to E?
Regulation distorts the flow of resources. If we don’t recognize this, we are arguing in a vacuum. Now, I see two ways out of this: 1) good static capital markets are desirable. There has been too much progress in the world and even Rawls accepts a steady state. 2) The regulation that we propose will of course have some of this effect, but over time it eliminates bubbles which is SO VERY DESIRABLE that the lose of growth is dominated by this trade-off.
Both of these are preferences. Let us be clear about that. So once we agree about the mechanics of the system, we can consistently chose sides. However, I suggest that we consider the steady state much more ripe with corruption and cheating than anything possible in the world of well functioning capital markets. I could even argue that bubbles are worse in the steady state world. All we need to know in such a restricted market is who has the ear of the ruler. This plutocracy may be desirable to some, but I am not one of them. I find it odd that both sides fear the same demon, but we don’t ever admit we are on the same side. We have the same undesirable outcome in mind, but for my perspective the one that blindly embraces regulation through the state is the one that more speedily approaches the undesirable outcome.
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To recap, I was responding to your desire to see an end to government coercion. I claimed that “government coercion” is what provides our rights, not just something that enforces them (though it necessarily does that too, since they are equivalent processes). So far, in rebuttal, you haven’t provided a clue as to where you think rights come from. You can provide your own rights, to the limit of your capacity to enforced them.
If you want you can claim natural right or right delegated from God, but as I said, these provide no evident enforcement and there is every reason to believe they’re smoke and mirrors.
Did slaves have rights of liberty before emancipation? No. Why not? Because there was no power sufficient to provide them. Did they even have many rights during Jim Crow? No, because even if liberty was written in the law, it went unacknowledged by social, institutional or governmental behavior, in effect, it was not enforced until the civil rights struggle.
Only the most starry eyed idealist (and fool) would say that blacks had the right to free speech and the right to date and marry who they pleased in, say, 1930. So what eventually provided them? For that matter, what provides your right to watch TV at night without worrying that a militia might break down your door and take your home and possessions?
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Enjoy these cartoons. A pretty good review of Libertarianism.
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A pretty good review of Libertarianism.
A pretty good strawman and emotional appeal against libertarianism.
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Vince,
I do follow your thinking, but I don’t take your claims. For example, you seem to think that government saved us from “Social Darwinism.” In the majority of human history there has been some type of government. I claim that capitalism saved us from these types of government where all the evils you mention like slavery existed. It was not capitalism that brought us slavery, it was government. The modern world is much much much better with capitalism than anything you can find elsewhere. We keep glorifying the Greeks, despite their owning of slaves. The difference is capital, in a world with lots of capital, slavery is not attractive. I challenge you to think about this a little more without just taking for granted the silly rhetoric about 19th century America.
Hunt –?
Kleiner: You correctly called me out on putting words into Vince’s head. Now he has explicitly advocated a one world government. I feel a bit less immoderate now.
I have arrived at the conclusion that no one but me on this thread would embrace Tocqueville’s description of the merits of American Democracy. I can’t follow Hunt’s claims. Vince seems to reject it. And I will just leave the question for Kleiner.
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We disagree at a definitional level.
Regulation of affairs already exists without a world government. To advocate one body that regulates is to advocate a one-world government. As it stands I see meaningful incoherence in your statement of protest.
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Vince,
I still have trouble following what you mean by governance.
1) What the government does
2) Regulation that merely sets out rules of the game. A guy in a striped shirt “governs” every football game.
3) A clearinghouse that denies membership to all that don’t meet stated requirements.
4) An agency that sets out units and measures and offers standard assessment of these. They could then regulate who uses these measures by allowing people to use a seal of approval when they meet guidelines. They could use the law to file complaints against those that cheat.
5) the court — common law
6) the legislature — statuary law
7) A boat’s captain who confines a troublesome person to their quarters.
8) A teacher who gives a grade
9) A person who refuses to stop at a rest-stop when one person in the car requests it
10) a person whose primary employment is the education and cultural indoctrination of young kids.
…For starters.
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Micheal,
I just have to say that I have thoroughly enjoyed this thread. As you have provided a far more robust defense than I could have, of what seems to me to be correct, I stayed on the sideline.
A question I still have, and that has always lingered, is where does a system of rights fit into a Hayek/Ostrom type of framework? I just finished up a paper on V. Ostrom, and he completely avoids a discussion of rights, instead claiming a type of de facto system of rights is inherent upon observance of the Golden Rule.
Which brings me to the more general question of how rights, which I want to understand in some sort idealistic manner, fit into the developmental framework of classical liberalism? Smith provided a wonderful explanation for the development of human morals, but he did so with the understanding of some greater realist framework in the background. Musn’t rights provide a similar sort of fundamental base upon which the free societies begin to adapt, innovate, develop? What am I missing? Thanks
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Andrew,
I am not by trade a philosopher (although the philosophers were kind enough to share their disciplinary title in my degree). That said, I will make an attempt to answer your questions from what limited philosophy I have read. I go to Kierkegaard. Why? Because he is the first (and I think the best existentialist — Maybe Prof. Huenemann can make a case for Nietzsche of which I would simply have to defer).
Another reason is that if we take the economist’s tool of the methodological individual seriously, where else can we go to think clearly about the foundation of the modern world through the larger role of the individual?
I again have no proof for this claim, but I understand that Fichte + Marx + Kierkegaard = Hegel. That should mean for example that Hegel – Marx – Fichte = Kierkegaard (by definition — I hope this use of formula irritates, it should I am being very silly in proposing this method). Another more discipline way of stating this would be that there were three “students” of Hegel that each rejected a plank of his grand system.
Kirekegaard rejected the collectivist portion of German philosophy at the time. Maybe it is because he was a radical, he given special permission to defend his “dissertation” in his native tongue (in his own country) rather than the traditional German. So he had a stake in rejecting aggregation as a provincial.
So he diagnosed the problem in an extremely readable and short tract, “The Present Age.” This essay argued that there were three “dialectics.” These were the ancient, the Christian, and the dialectic of the present age.
The ancient was a relationship of leader and follower. The King on the battlefield stood behind hundreds of warriors that were willing to die for him, assuming no one put an Arrow in his eye (as in 1066). This defined the relationship of feudal society. Kierkegaard was content to generalize that this was the relationship of man to man before “Christianity” (here the term is used a methodological distinction). Person A related to person B through common allegiance to the same King. Where Kings were different, people are assumed not to have much in common. Where they were the same, we have the antecedent of Nationalism.
The Christian dialectic, Kierkegaard argues, changes this. Because people assume the presence of a personal God (I am convinced Kierkegaard drew very little distinction between real and imaginary for the purposes of describing human behavior) They were all necessarily equal. The “King” was an ethereal concept. Sure it could be abused, but the basic form of the dialectic was the commonality of man. All men have something in common because they are all the creation of the same God (regardless of who that turned out to be). This is why Christianity was dismissed by the Roman elites as being a slave religion, for example. They had little use for a religion that rejected the hierarchy.
I think Ostrom recognizes this. We can look up passages in his book where he cites Voeglin (in the index) and confirm that he speaks of religion in the way I have just described the “Christian” dialectic.
The final dialectic was “the dialectic of the present age.” Basically the description of this dialectic is the mob. What the mob is for today it will be against tomorrow. To the extent that we fully understand this point through Ken Arrow’s paper on the impossibility of social choice, then we simply recognize that Kierkegaard had this point already in 1848 (Ironic I think because that year is better remembered for Marx).
I think Ostrom, the husband of the Nobel Laureate, is unappreciated in terms of understanding the Tocquevillean problem. I have been ridiculed for reading Voeglin (one of my professors every time he sees me says, “immanentize the eschaton” despite the fact that I didn’t even know the connection to 1980s republican thought before he told me about it.) The question is deep and complex. I think it is better suited to blogs where we all are humbled by our inability to express the concepts at the appropriate level of complexity. I think for the most part this is one, which is why it is of interest. I for one am unsure if I get all the ramifications, but I am trying.
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My politics is full of tensions. I think this is necessarily the state of affairs in political discourse – there are no easy answers and one always has to negotiate competing goods. This is why prudence is the highest value in politics.
Let me start with something from Pope Benedict: “The social question has become a radically anthropological question.” Economic questions are increasingly anthropological questions, questions about the nature and value of man. What I want is a humane socio-political economy that respects the dignity of the human person and the common good. It is my view that unconstrained capitalism has the tendency to treat human beings as things or commodities. This error leads Christian humanists, like me, to “oppose the various trends of materialist and economistic thought” (JPII, Laborem Exercens 27).
I do not think there is a necessary conflict between capital and labor, but I am committed to a priority of labor over capital. My reason is quite simple – there is a primacy of persons over things. This entails a rejection of absolute claims to private property – private property rights are always subordinate to the right to common use, to the fact that goods are meant for everyone. However, as a prudential judgment (as all political and economic judgments are), there are very few cases where private property rights can be seriously abridged. In other words, it is almost always the case that private property is a prudential good. I am not a socialist. I think a priori socialization of means of production frustrates human freedom and creativity. So I am going to be a kind of free market capitalist. But this free market will require some moderating influence, lest it fall into the tendency to treat persons as mere commodities.
So we are left with two issues:
a) Prudentially, where is regulation a good? I have already suggested a few things in this blog stream. I think it is good that water is socialized rather than allowed to be bought and sold on an entirely free market. I also think, being mindful of the tendency of capitalism to treat persons as things, that certain rights need to be protected. A quick list: the right to a just wage, right to safe working conditions that do not violate our dignity, the right of labor to organize and strike, etc.
b) The second issue seems to be the one where we are having a difficult time getting consensus. What will be the “regulating force”? I think the view that the market itself can regulate (through some invisible hand that always brings about the good) is simply naive. Michael seems to disagree, and he appeals to de Tocqueville in defense. Now Tocqueville is the greatest commentator ever on American democracy, and I am quite sympathetic with his views. But it is worth noting that, in his view, the condition of the possibility of American democratic capitalism was a thick religious sense and ethic. In other words, free markets function without regulation only when the people are virtuous, only when there exists some kind of public religious constraint.
But while de Tocqueville thought that democracy in America was largely predicated on its religious sense (which he credited America’s largely Protestant religious ethic), he was more than a little baffled by the Protestantism of America, and predicted that America would become more Catholic. Here is, I think, the point – you need a thick religious morality to allow for something like unregulated capitalism and democracy. Protestantism is not, in my view, capable of providing this reliably over time. Why? Because Protestantism is a fundamentally modern project and is a a sibling of libertarianism – it shares the same bad atomistic individualism philosophical anthropology. (By the way, Michael, as much as I love Kierkegaard this is going to be my complaint with him. And Vince, come home to Rome). Protestantism has energy, but does not have the metaphysics or anthropology necessary for transmission over time. Tocqueville agreed, thinking that foundation of Protestantism is too weak to sustain democracy. Like the modern project generally, it will eventually fail (de Tocqueville predicted the end of Protestantism). Tocqueville thought there would eventually be a simple choice – become Catholic or abandon faith altogether. He predicted that American society would come to be split, basically, between secular atheists and Catholics. Tocqueville was optimistic (depending on your point of view), predicting that American democratic capitalism would thrive because he thought America would become more Catholic.
But we all know the story. Instead of America becoming more Catholic, American Catholicism has become more Protestant. One way in which we see this trend is the increasing “privitization” of the religious sense. As the public square becomes secularized, Americans (even religious Americans) increasingly see religion as only having legitimacy in the private sphere. In Tocqueville’s view, this is a doomsday trend. A public constraint in democratic society, provided by a thick Christianity (ie Catholicism), is a necessary condition for the flourishing of democratic capitalism. This religious public constraint is needed “to purify, to regulate, and to restrain the excessive and exclusive taste for well-being that men feel in periods of equality.” (Tocqueville, Democracy in America).
So given this, now what? Well, we are in a messy situation in need of delicate prudential judgments. So prepare for some wishy-washy-ness. I’ll lean on Pope Benedict.
On the one hand, he promotes a “world political authority”:
“In the face of the unrelenting growth of global interdependence, there is a strongly felt need, even in the midst of a global recession, for a reform of the United Nations Organization, and likewise of economic institutions and international finance, so that the concept of the family of nations can acquire real teeth. One also senses the urgent need to find innovative ways of implementing the principle of the responsibility to protect and of giving poorer nations an effective voice in shared decision-making. This seems necessary in order to arrive at a political, juridical and economic order which can increase and give direction to international cooperation for the development of all peoples in solidarity. To manage the global economy; to revive economies hit by the crisis; to avoid any deterioration of the present crisis and the greater imbalances that would result; to bring about integral and timely disarmament, food security and peace; to guarantee the protection of the environment and to regulate migration: for all this, there is urgent need of a true world political authority, as my predecessor Blessed John XXIII indicated some years ago. Such an authority would need to be regulated by law, to observe consistently the principles of subsidiarity and solidarity, to seek to establish the common good, and to make a commitment to securing authentic integral human development inspired by the values of charity in truth.” (Pope Benedict, Charity in Truth)
Michael won’t like that much. But this is moderated, both in that encyclical and in others, by a healthy skepticism regarding the power of government to respond to these problems that are “not primarily of the material order.” “Institutions by themselves are not enough” because, like individuals, they can easily become corrupt. Furthermore, real moral progress “involves a free assumption of responsibility in solidarity by everyone”, and this is the sort of thing that is actually frustrated by state power and coercion. So I am not a statist. Here is Pope Benedict again, this time cautioning us about the state,
“The State which would provide everything, absorbing everything into itself, would ultimately become a mere bureaucracy incapable of guaranteeing the very thing which the suffering person – every person – needs: namely, loving personal concern. We do not need a State which regulates and controls everything, but a State which, in accordance with the principle of subsidiarity, generously acknowledges and supports initiatives arising from the different social forces and combines spontaneity with closeness to those in need.” (Deus Caritas Est)
So, again, we are faced with tensions and competing goods and interests. Navigating such waters requires prudence. I find myself somewhere in between “hypercapitalism” and socialism. I am, at the end of the day, some kind of a welfare state capitalist. I think most of us are, most of our political disagreements concern matters of degree. Generally I find myself closer to conservative politics than liberal, if only because of the principle subsidiarity (the principle that nothing should be done by larger and more complex organizations which can be done just as well by smaller and simpler organizations). This stands as a pretty stout principle of limiting government, but it is not an absolute principle. I am not a libertarian, and my Aristotelian impulses give government and law a soul-crafting place in society. Again, since politics is governed by prudence, I think there are few absolute principles. But I am increasingly convinced (as is, apparently, the Pope), that the reality of a globalized economic reality will require government action at the national and international level. But this needs to be tempered in the most serious way by a recognition that states can have a tendency to “absorb everything into themselves”.
Here is maybe a nutshell of this: how do we balance the “freedom to” (libertarian concern) with the “freedom from” (the classical view) and the “freedom for” (Christian view)?
How is that for a yes and a no and a both and an and?! :) And what, you might be wondering, might that look like? Well, we philosophers are good at saying what should be done, not how to do it!
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Before I respond, I just want to say I concur with the sentiment of this statement. Also, I apologize for the length, but I wanted to respond in detail to a detailed post.
The claim that economics is materialist is something that I share sympathy for, but I don’t think is a necessary concept. Economics, at least the way we teach non-majors, is subjective. Economists are very liberal (in the liberal-arts or classical liberal sense) because they are forced to take preferences seriously. There is nothing about capitalism that exacerbates immorality. It is a means, not an ends. People that treat it as an ends fall for the same fallacy that is emphasized by the phrase, the LOVE of money is the root of all evil. No good economist confuses money with value. People do this. I pose the following question: If I want you to wash my car and I offer to pay you for it, is that an abuse? If I instead, offer to refrain from locking you up – is that better or worse than offering to pay you? There are different ways to get people to do what you would like. It seems unlikely that an economist would think; I want person X to wash my car. Typically we think, I would like my car washed. Politics, as it allows for preference over means, opens up questions of morality much more readily than does economics.
I should state here that there is a very important distinction between plutocracy and capitalism. For all the abuses we heap on capitalism, these are not a function of the system of moving items from less valued to more highly valued places. When you complain about the abuses of capitalism, you complain about outcomes, that the process of moving value from lower to higher valued uses is distorted. If you impose a deontological preference on outcome, you make the problem aggregated and not individual, but you can’t claim that it is not an economic problem by the definition that an economist would give. We have to change the definition to claim that ground.
Marx famously reduced all capital to previous investments of labor. This allowed him to see the formation of capital as a labor investment and the return which did not return to labor as exploitation. People have also reduced all labor to capital investment. It is as simple as observing a mother with her child, there is an incredible investment being made. These distinctions are flimsy at best, but helpful. Again, I assert that proper economics takes the individual seriously because we can get no less aggregated source of preference, which is the driving component of all analysis in economics. I can only say that unfortunately people are treated as commodities by people who don’t have a respect for humanity. There is nothing about capitalism that makes this the case, it is a failure of morality in a post-industrial world, sure. We can have more morality if we get the incentives (rules) correct. So we go back to the regulation debate.
I love the water example. London is the most famous example of private vs. public water. Those water sources that were owned were less likely to be contaminated or spread disease than the common source ones. During a whole period of London’s history the differential human suffering between the “capitalist” market and the Lockean common was clear. Werner Trusken studies this if you are interested.
For your list, I see political issues more often used to justify restrictions of market in the favor of owners of capital than I see violations in the market that work against the least well off. I am treated less like a thing at Wal-mart than the DMV. I am sure you have heard this example and dismissed it; but I have never heard a coherent reason why one would do so. Competition, particularly the economic sub-category of “monopolistic competition “ increases unit cost but also increases diversity of means to the economic end – utility. We see that even with some limits on competition, competition provides a strong incentive to make people better off relative to monopoly, which I argue does not exist without a monopoly geographic provider of violence, AKA government.
On Tocqueville: I share Vincent Ostrom’s concern with religion. He recognizes the risk when we see “mystery” as a decreasing function of progress (a trade-off). He says, “Critical reflection leads me to believe that an awareness of such mysteries [idiosyncratic interaction of “people” and “place”] is a necessity in the constitution of order in democratic societies.” – V. Ostrom To this extent religion and statecraft were opposed, but separate things. If religion is extra-rational and government is rational, we are on good ground to make such a distinction. As religion declines, we get a government that is mixed once again. The importance of the mystery and transubstantiation of “hope” in the modern liturgy of political discourse fails the separation of church and state in a way not seen since the 16th century in the Anglo-Saxon world. We should make our “mysteries” explicit in terms of domain. I fear a world where religion is presumed to be dead and yet orients all action in a new guise. I would gladly take a politician who is a Sunday moralist and a Monday-Friday rationalist. We lose something when these blur.
My wife and I are nominally Catholic, she is by race (by which I mean being born in Cologne, Germany), and I am because we believe our (the two of us) morals should be arbitrated by some other authority than ourselves (I remain outside of communion). Morals that are not binding on action are not morals, right? But I would never submit to a government mandate of morals. The Catholic church has no claim on my liberty, they can only persuade. I make a decision every time I agree to participate. This is essentially a market process. If the product the church is selling does not offer the advertised benefit, I do not participate, or I switch. Adam Smith in book V of the wealth of nations famously said that American style Protestantism through competition would lead to a “pure and rational religion that has been the goal of philosophers of all ages.” There is some debate as to what he meant by this. Is it natural rights, or is it just another way to claim that religion would evaporate without a state sanction supporting it? What is happening now? Are we in any better place to judge that experiment than he was?
On Kierkegaard, I just want to be clear that he compares the individual with the mob. This may bias his conclusion, sure. But given the three dialectics he describes, I think he is right internal to his own argument, that the atomistic approach is better than the mob approach. We can transcend his argument, sure. But I just want to make sure we agree about the internal consistency.
I think that to the extent that I made the claim that modern politics is more like a religion than a rational discourse, we have become catholic in that sense, i.e. orthodox. I am making an old economist trick – assuming there is a constant preference for “mystery” and the decline of demand for private religion has simply shifted into a substitute – “state.” Clearly, one could argue that “mystery” is an inferior good, that would mean: as we get wealthier in terms of goods, leisure, health, and average intelligence, that “mystery” is demanded less in favor of increases in something like rationality. I just don’t see the evidence for that.
I think your chosen quote to Benedict is very apropos given the way this discussion has gone. Andrew introduced Ostrom, probably dependant of my mention of Tocqueville since he has studied both Ostroms’ work in some detail. However, the Tocqeuvillian message that I would get across is that religion’s role is to certainly hold up shining ideals of what man can be, but the real meat of the process is community. We know this in military science. People don’t die for their nation, they die for a buddy. They die for Uncle Joe, so that he will not think they are a coward. The psychology of human behavior is limited by human imagination. I cannot imagine my impact on more than 20 or so people. Therefore, I think concepts of Utah and America are strange phenomena. It makes sense then why the pope would want to moderate that claim. He might have two goals – one to give people something to strive for, to be good Christians and two, to recognize that corruption enters where human imagination ends. I can steal only from those that I don’t fully understand as human. Andrew brought up Smith earlier, I tend to think he is the best writer on this matter (Theory of Moral Sentiments).
If I may, I would like to be very bold and substitute “plutocracy” for your use of hypercapitalism. If you let me do that, I will then be even bolder and say that true capitalism lies somewhere other than plutocracy or socialism (but not necessarily on the spectrum between). I agree with your principle of subsidiary. I now understand more about our differences. I try not to conflate law and government. I think government has good opportunistic reasons for being the main law broker. I think all governments start with the need to manage feuds, specifically those that end in murder. If Al murders Bill and Cathy murders Al in revenge, then George has a right to murder Cathy? Government becomes a theoretical third party. We provide an executioner, Zeb, who is very removed from the feud. If evidence is collected to convince the community that the original murder warrants capital redress, then Zeb executes Al. Cathy rests her case at the community level and agrees to be bound by the outcome of that decision ex ante. I think this articulation might seem to atomistic to you, but I will make the claim that it is formed from an embedded social context of interrelation among human individuals (I would hope to have common ground with Rawls here). However, I have not introduced aggregation through blurring a distinction. What if Al and Bill are in the same family, but Cathy is Bill’s wife. We don’t assume genetics are the origination of the social interaction, which I tend to fear is a mistake that some Greeks made. I do not know Aristotle’s take on this, but I have some inkling that he was a nationalist by my standards due to his popularity in his own time.
I like the tension. I would not want to be in charge. I am content to value the time in which I live. I am much happier in a post-industrial society than I believe I would have been even in such wealthy epochs as 16th century England or 1st Century BC Rome. If Rawlsian babies were sitting on Rawlsian clouds I think they would prefer our society to Ancient Greece. I recognize that I can only speak for myself.
I do want to acknowledge the previous point about corporations. Corporations, specifically limited liability in the United States has a fascinating history. It was created in the 1840s because of many government failures to provide transportation infrastructure. It was an expedient solution to a problem, and there is no reason that it should exist in its present form besides for the legal precedent that sets up incentives. I totally agree that corporations appear to be excessively large (decreasing returns to scale). However, I think I can defend the case that this is because of the privilege that was created by government. I also recognize that I say all regulatory failures are government failures. Simply starting at this point in our analysis I think would be a useful if imperfect shadow of the truth.
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If what you are saying is that there is a subject-object problem in social choice, I am with you.
However, I don’t necessarily follow the logic of the argument. I don’t think you can use Kierkegard to get fascist conclusions (sticks and primarily BUNDLES). Again, I am not a philosopher, but I would think that existentialism and fascism are very different concepts.
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Again — definitions are important
Conclusions:
1) reject individualism
2) believe that a strong community is the metric to judge a state
3) is a third position, an alternative to capitalism and socialism
But quite literally you use the analogy of sticks which is where the word is derived. The roman word means bundle, referring to the bundle of sticks around an ax used to smash people that are not part of the community.
I am OK with debating the merits of fascism, but let us be clear with our labels.
I also don’t know Burber. Again, not a philosopher. I argued that Kirekegaard was relevant to the individualist idea because this was a plank of the Hegelian system that was removed in his own philosophy. I argued that he was the first of the moderns to recognize the problem of a state without a King. This same problem is the root of social choice in Ken Arrow’s article — this article basically said that you can’t have transitivity (consistent preferences) and non-dictatorship at the aggregate level (more than one person, typically more than three creates an even more complex problem).
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The economist that likes GDP numbers claims that they are the best approximation of welfare. An economist would be glad to have the government spend the money they are spending to collect GDP numbers on something much more closely resembling actual welfare, but these numbers are harder to collect. There is a trade-off between efficiency and robustness.
In some countries where governments are unmitigatedly corrupt (or poor — or both), economists might use something like electricity use to proxy for GDP. The link between using electricity and overall happiness actually turns out to be a better measure than you would think.
Don’t think the economist is never aware of the loss of information in his model. Sure there are some of us that miss that part of the lesson, or forget in our desire to publish more. However, the assumptions are explicit none-the-less.
A good applied economist would say, “What do you want me to measure.” and then try to find a proxy.
Not all economics is statistical. We need to say that.
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See, it is these bits that fascinate me about philosophy. There is no argument here, just a claim about the internal “goodness” of some concept. I am perfectly willing to admit that if you strip all the games away from economics you will find ex nihilo assumptions, but these seem so naked standing here on their own.
1) electricity is bad — or more specifically increasing access of electricity to people would be bad. We have a theory that says what people want is actually against the interest of mankind. These are the conclusions that I fear. I imagine people deciding that we need to keep India poor to keep air quality better for rich people in the US. This was formalized under the “Dependency Theory” but I have never confronted a possible advocate of the pejorative connotations of such a theory.
2) Again, population growth is bad? Tell that to the European nations and Japan that are going through demographic crisis now because population growth rates are negative. Increase in wealth of a nation makes raising a child more of an expense relatively. But you might want to investigate the systematic problems of negative population growth before you get too sure about policy conclusions.
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I AM attempting to be tongue-in cheek here. Sorry if my last few responses seem harsh.
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I agree that this would be a good empirical question.
“It might be interesting to examine just the well developed half of local communities and see if there is a second trend and an eventual saturation of that relationship.”
I will just say that the methodological position remains unchanged, that with subjectivity we assume that people’s actions demonstrate what makes them better off. The relationship might weaken (in fact we expect it to — law of diminishing marginal utility).
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I have nothing to really pick at on that one except for the claim of primacy. I totally disagree.
I think we understand the difference in the methodological positions which we separately hold. I am not sure we can get any closer to agreement than this.
I listed ten examples of governance, we can pick at all of them, but I think it would be silly to assert that because the NFL exists in the US that it owes its governance structure primarily to the “community.” I think such a concept of community is a lie, and one that is used in very evil ways, right?
Recall that I said that I can only imagine my personal impact on others to about 20 people. These might be the people I would fight for (in a way that might severely injure me). Anything beyond that — concepts like the State of Utah are shadows on the wall. We can talk about them, but they have no meaning outside of a social context.
If you and I together capture an enemy of the state of Utah and you kill him. I might not try to kill you because I agree with your announced concept that he was an enemy of the state. However, if you rest assured that we both agree that Kleiner (for instance) is an enemy of the state, you would be surprised when I subdued you and brought you to the local law merchant (Logan Police).
In my field we try to model human behavior. So I talk about these things in that way — what do I expect someone to do given what I know about their preferences and the relative scarcities of those things that contribute to their utility? We compare rules as to how they affect incentives. We view rules as variables — it is all very utilitarian and probably repulsive to those that have a priori views of what is good. I recognize that.
Didn’t “the community” assert that Socrates corrupted the youth? Is this the type of primacy that you are looking for?
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I’m most closely aligned with what Vince said about regulation as a beneficial distortion of market. It’s very important to reject the connotation of “coercion” as a universal bugaboo; this is pedantry of the lowest form. Not all coercion is bad, and that is my sole point. As Kleiner said, what is contested is how agents will be coerced to productive ends. Will it be through laws and explicit regulation?, will it be through market forces? And by the way, there is no guarantee that market coercion will be any more fair than explicit government regulation (and a lot of evidence to say it won’t). The greatest trick Adam Smith ever played on humanity was to convince us that giving free rein to markets, subordinating ourselves to them, was in our best interest. No matter how mutated and monstrous they become there seem to a never-ending stream of acolytes available to compound this fraud, but a moment’s thought is enough to show that it was a theory when proposed and very arguable today. (Can anyone say “Bopal”?) Michael assures us that one day in the misty future markets will self-correct so excellently that bad eggs will be thrown out before they can stink the place up too much. (Why do I have the impression that this will happen when shit starts to smell good?)
If you make business your idol fetish it will always appear beyond reproach when really it is beyond the pale. That is an unacceptably unexamined arbitrary proclamation. I also confirm Kleiner’s opinion that even the most holy of holies, property rights, are not inviolable when they cross human value and dignity.
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Hunt, I think I finally understand a point that I can agree with. Coercion exists.
Don’t misunderstand, I never claimed anything different. I just know enough history to know coercion is inversely correlated with increase in capitalism. I won’t even debate you on the causality, at least at the moment.
Don’t conflate laws and the state. There is no reason to take two important concepts and blur them.
[Evidence is not evidence that is not submitted as evidence; i.e. there is plenty of evidence that you are wrong about your claim that there is evidence.]
Be careful talking about Smith — I think you mean Bernard Mandeville here. I can point you to TMS to read more on how Smith distinguishes himself form Mandeville.
Michael does no such thing. Michael claims that history shows us increases in rationality correspond with clear understanding of relative value brought about by the price mechanism as a “telecommunication network.” This is because Michael has read and understood Hayek’s “Use of Knowledge in Society.”
For whatever you want to say about plutocracy, you are simply wrong about capitalism.
Property rights are needed to have any understanding of human value and dignity. The idea of the individual is so closely linked to the idea of self-ownership. If you reject this concept how can you wax poetic about slavery and its eventual abolition? There seems to be a major contradiction here.
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[Evidence is not evidence that is not submitted as evidence; i.e. there is plenty of evidence that you are wrong about your claim that there is evidence.]
Hmmm, seems to me you’ve made a few unsupported assertions along the way, but if you want to hold me to a higher standard, fine.
Let’s use your example of monopoly. Sans regulation, what, in the free market, is there to prevent it? While on the topic, your claim that government service is monopoly is only true in the loosest meaning of “monopoly.” “Government monopoly,” at least in representative democracy indicates that the controlling enterprise is the people. That’s a little hard to square with monopoly. Once again, “gov monopoly” is a useful bugaboo to demonize, but it’s yet another calumny in the right wing grab-bag of smoke and mirror effects.
Unregulated capitalism with limited government IS plutocracy. And I in turn won’t debate you on the causality, but I think it’s pretty easy to figure.
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Hunt I am trying to get you to make logical claims.
Monopoly cannot exist without 1) barriers to entry or 2) sufficient product differentiation that serves consumer demand.
Using a state militia, or organized mafia if you so choose to describe it, is a way to restrict entry.
Saying that a tree is required for a stick, does not mean that all trees are baseball bats. Your last statement seems to jump around.
My specific claim to causality was related to correlation. Correlation and causality are not the same. But you don’t address the correlation claim — how do we even get to the debate about causation?
What correlation do you claim? You are not making a formally similar argument.
I am really trying here to find common ground. A little help please?
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Let me try to guess what you mean:
1) capitalism is a requirement for force
2) limited government allows one particular group to have a monopoly of force?
It seems like you are confusing capitalism with access to the monopoly of force. This is what plutocracy is. Limited government is a protection against expanding scale of force use by those with access to government.
If I am correct in interpreting what you meant to argue, I think it is clearly wrong.
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Okay, perhaps you didn’t give us you assurance, but you did say:
I would prefer to just let evil firms be exposed and go out of business. Hopefully, with transparency, this occurs at the point at which their crimes are early in the process of turning malignant. We have much work to do, but this is my version of the the common good.
What makes you think a free market is going to be at all transparent? Transparency is the product of coerced (there’s that word again) disclosure of information. I mean, I appreciate your sentiment. I wish on a falling star that one day I can dance with fairies and eat sugar plums, but…
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No.
“Transparency is the product of coerced … disclosure of information”
That doesn’t make sense.
You seem to claim that I am not explaining a causal process. However, you have not offered any reason to believe that your “sugar plum” government is any better than the status quo (or anarchy for that matter). I have, in fact, argued that mechanisms of exchange provide transparency — Read “Use of Knowledge in society” (this is some of the evidence that I “didn’t” provide)
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I find it very odd that you believe beating someone to get them to tell you the truth is a better process than making it in their interest to be forthcoming.
I do not believe that you could hold this view, so I will assume you have incorrectly stated your case.
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Then maybe I’m defining transparency differently than you. Perhaps Hayek makes an air-tight case for divining every impact a business might have on competitors, the environment and society just by analyzing commerce. I’ll have to read the book. My experience is that businesses reveal what they see is in their interest to reveal, unless compelled otherwise.
Note: Apologies for where my comments appear. In general I hate nested comments so I usually always append them.
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It is an article.
This part makes sense
“My experience is that businesses reveal what they see is in their interest to reveal…”
We were engaged in a conversation about regulation (private vs. public) and how best to make sharing information in a business’s interest (or a person’s interest for that matter).
This part seems wrong: “unless compelled otherwise.” — You don’t support this part at all. Again, you seem to hang your whole case on the fact that business functions like a government. That somehow the firm has no incentives and does what it likes.
The way I make myself better off is to find a way to make someone else better off. This is the principle of exchange. You don’t offer any reason to believe that this is untrue about exchange. Now — I cannot imagine why we are having such a hard time agreeing that making exchange voluntary and mutually beneficial is a good thing. You seem to think that by hurting other people you can make everyone better off. This is not something that makes sense to me.
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You’re trying to say that barriers to entry are never endogenous to the market? I’m thinking of, for instance, Standard Oil Trust in the Gilded Age (that is, what you chided Vince for mentioning and dismissed as historical rhetoric.)
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Make a claim that makes sense. Trying to get me to agree to “never” claims is strange.
What are you claiming about Standard Oil — and where did Vince use this case?
Please elaborate.
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As far as a definition of Monopoly, both a standard textbook would help and a survey of the definition available on the internet. “Barriers to entry” represents a standard category in monopoly. If you review what I said —
“Monopoly cannot exist without 1) barriers to entry or 2) sufficient product differentiation that serves consumer demand.”
I then claimed what you seem to miss and which is very standard in all monopoly theory — government as we understand it as a geographic monopoly of force IS a barrier to entry when they use that force to restrict who can compete.
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Oh brother, I think what we have here is a failure to communicate.
Here’s Vince:
I really do ‘thank the Lord’ for the labor union movement of last century and for the progressive presidents who protected us from market forces. I do recognize problems with both but those problems can be thoughtfully fixed. O what a hell on earth the free markets gave us at the end of the 1800′s. Save us from Social Darwinism — it’s just not my type of socialism.
He was not specifically talking about Standard Oil, just the “Gilded Age,” the closest approximation to a free market there has been, and an unmitigated disaster.
Here’s you:
The modern world is much much much better with capitalism than anything you can find elsewhere. We keep glorifying the Greeks, despite their owning of slaves. The difference is capital, in a world with lots of capital, slavery is not attractive. I challenge you to think about this a little more without just taking for granted the silly rhetoric about 19th century America.
As an economist, you must know of the shenanigans of SO in the 19th century? Please tell me it is so.
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First, what does this mean?
“As an economist, you must know of the shenanigans of SO in the 19th century? Please tell me it is so.”
Try again, please.
Second — you did not find a place where Standard Oil was mentioned by Vince. I find it disingenuous to leap from Herbert Spenser to Standard Oil without making even one factual claim.
What is your claim about Standard Oil — you must have a claim, why are you so reluctant to make one. Please tell me you have an actual fact that you are basing your criticism of Standard Oil on — “Please tell me it is so”
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Vince,
You are not making any claims here. Let us stick just with Standard Oil (since you both like that example so much). What did they do that you detest so much?
They increased quantity of oil, they innovated cracking to use more parts of oil, they negotiated lower prices for shipping and brought greater and greater amounts of consumer goods to more and more people during the whole of their operation. Where is the evil? Where is the abuse? What specifically do you claim here other than some poetic notion of getting too wealthy?
I don’t expect you to buy the utilitarian argument — but there is no reason to bite the zero sum fallacy either. I agree that the anti-trust story is a very interesting morality play, but it is still bad economics (not to mention bad history).
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Vince,
You make it difficult to take you seriously by claiming that I get my history from Beck. Thank you for for the insult, I better understand the level of discourse that we are having.
“…it was nearly zero sum for workers.” — REALLY? You think the Gilded age was a period of constant wealth for the worker? Really? Incomes for the lowest workers were not rising? It was NOT one of the greatest periods of increased welfare ever? The increase in opportunity and the decrease in misery were not stunning? The super returns to industrialization and the the reduction in cost of all the goods that consumers buy were NOT going down?
I don’t know where you get your history, but it doesn’t make sense to me.
The joke is that the anti-trust regulation was introduced by other competitors because they wanted the government to decrease competition in the industries — the “Robber” Barrons were making it difficult for folks with friends in the government. They were making a product that was TOO good, too cheap. You are right that this is similar to what Wal-Mart currently does. Anyone that complains about Wal-Mart lowering prices should have to live in a world without Wal-Mart and leave the rest of us alone. Please, make yourself miserable, but don’t take the rest of us down with you.
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I have to do stuff, but will return later. I’m in the Hawaiian time zone so I could keep this up until (your) dawn.
Grateful for the entertaining discussion.
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The irony is that the Sherman Antitrust Act of 1890 that eventually killed the trusts (20 years later) used language like “prohibition of restraint of trade” as justification. The neoclassical liberal propaganda of the last 30 years has been so successful it has actually created a massive blind spot in our own history. There are still droves of Americans who think regulation is the great economic Satan, even though we ran the unfettered capitalism experiment over a century ago, and it was a disaster.
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I’ll retract that a little. It wasn’t an unmitigated disaster. The great trusts achieved a certain level of efficiency and massive production. They built the railroads and the bridges, etc. It was probably less destructive than the kind of fascism that results from government and industrial collusion. The very fact that they were able to be terminated says a great deal, and perhaps distinguishes them from the case today, where corporations literally rule the world and seem to be wholly invincible to anything but market vagary. I see the Gilded Age as one of great immaturity, though the peons living it probably wouldn’t have been so charitable.
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We do teach about him. The only one qualified to teach a whole class on him is Dr. Israelsen.
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Thanks Vince,
It does all depend on where you focus your attention, doesn’t it: from the Gilded Age to Walmart, it’s all golden (if you will) when one cherry-picks results. You might call this the Marie Antoinette school of economics. It’s all duck soup when you’re not a Chinese factory slave or a Walmart drone, sorry, associate. As long as we can buy our cheap crap, the ends justify the means. (So much for deontology.) Michael will probably say that since the Chinese worker and WM “associate” freely choose their fate, no harm, no foul. To me, that’s yet more smoke and mirrors. Again, the superficial veneer of plausibility, the impression of “truthiness,” until you think about it, whereupon its quite easy to see that this is merely an excuse to exploit people. You help people out of misery by offering them a tolerable existence, not a marginally less miserable existence — that is the very definition of exploitation. Walmart purports to have created a kind of boot-strap mechanism that pulls people out of poverty. Poor people can also enjoy Walmart low prices, yet they are low because Walmart is perpetuating poverty. It’s a kind of perpetual misery machine — helping poor people while creating more of them. At some point I hope someone calls economic (and thermodynamic) foul on it.
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Hunt,
You need to confine your claims to reality. Your misery machine, capitalism makes people less miserable.
The Chinese right now are becoming richer, freer, more liberal than they have been in several generations. In some meaningful ways more so than they have been in all of their wonderful and bright history.
You claim the ground of moral superiority, but you don’t have to explain the causal process.
I never claimed that no one was hurt. I never claimed that unskilled labor was not forced to get skills. However — I will claim that a society of skilled laborers is happier than a society of unskilled laborers. This was part of the transition.
You claim causality — unions formed and CAUSED better working conditions. I have a different understanding of causality. Richer people form unions of skilled workers which have better working conditions (typically to bar competition from low skilled workers). As someone who has spent time reading the evidence and working through the models, I am convinced of my understanding.
Just be careful that it is I that has an ideological bone in this game. Your whole argument rests on the idea that I am either misled or misleading. If that were not to be true, how else might we explain our disagreement?
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Let me step out of the role of defender of the market. Let me defend government for a second. I have already explained my origin of government story. It has to do with murder. The “state” or community is a devise to end feud.
Now, if government is a good thing, which I have to this point claimed that it is merely expedient, but If I assume it is good — why would you want to dilute or expand that “goodness?” What is the proper realm if you take government as the starting point.
I have implicitly started from the atomistic approach. But what are the alternatives? How do we start, methodologically and analytically from the aggregate? We must recognize limits to government. The individualist approach assumes that government is bound to improve the lot of its citizens otherwise the citizens recognize breach of contract and eliminate the cancer of their government. In the aggregate methodology the “Volk” and “Reich” are indistinguishable. Where is the line between what is allowed and what is not?
I would be happy to weaken my own position and claim that the methodological individual is an expedient claim about how to limit the tyranny of the mob. We have covered this ground. Does it really change my argument if I am making my claims in full recognition that man apart is not man? I think I would still be required to
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My preference would be break down the either/or division between public and private sector, if that could ever be done on an honorable and, most of all practical basis. Having to pay payroll tax when you don’t, in principle, agree with Soc. Security is mob tyranny in a real way. But it’s justified (if not justifiable) as a practical matter. If it were voluntary I think we can all see how things would turn out. There would be some who refused to pay it, yet planned poorly. In the end, the fed. gov. would have to dole out SS to these people anyway. Soon it would become precedent that payroll tax was optional and the benefit would still be given. The system would collapse. In a sense, human psychology dictates that a system like SS be all or nothing. The alternative is to submit to the (minority) opinion that SS is tyrannous and ban it, cancelling the massive benefit seen by the majority. You might call this “tyranny of the minority,” that because a small percent of the citizenry disagree with a social programs, they can never go forward. It’s important to acknowledge that these people have areal grievance. Ironically, it’s humanitarian consideration, a “moral hazard” argument, that prevents the perfect solution. If we could harden our hearts to allow destitute seniors to die in the gutter, it would be possible to implement an opt-in SS system. In fact, it is the many ways that public systems are bound to values other than the bottom line that denies public models the flexibility of business models. The facelessness of business allows it to operate in modes other than (moral) governance. Health insurance companies don’t care if granny dies in a gutter; however we do, and we are the voice of democratic government.
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I have considered for some time the problem that comes from assuming that humans have a mistaken but otherwise rational process of thought. I appreciate your patience with me on this.
For example, as I have valued my sleep more I have looked for ways to make my sleeping experience better. A model is presented. The more thread count per inch on a sheet — the better. It seems to be this way because the greater number of threads listed on the front of the package the higher the price. I can assume this relates to the process of weaving more threads. Afterall, why would they take greater effort if the reward were not sublime?
Given that this model, I buy what I can afford and use the thread count to break ties between similarly priced sheets.
However, I get the sheets home and I discover that I don’t like the ones with a higher thread count. I was mistaken about the attributes. I do not want a higher thread count, this feature just makes the sheet feel like a t-shirt. I want a stiffer sheet that is well finished, i.e. is made with good thread rather than more threads.
What do I learn about this? I fear that if I had a version of history that said capitalism was bad I would assume that the market is misleading me. This is not the case given my priors. The market facilitated what I thought I wanted. I set out to get higher thread count. It turns out that I would prefer some optimal number of threads per inch at around 250. Any higher than this and the sheet gets tangled around me when I sleep, forgoing the whole benefit that I wanted in the first place. I learned and now I can move into the more optimal product. The good life is one step closer.
It makes no sense to assume that there is a correct thread count for sheets. There is no reason to assume that higher thread count is better. I can only assume that some people desire a very very soft sheet. For these people the sheets are better. There is no reason to remove options of others for me to learn what I like. I had a model of how to make a decision that failed and that I then corrected. The market facilitates this process. Just because I failed on my first attempt, does not mean that I was taken advantage of or mislead. I didn’t seek the necessary information.
One possible solution is for an expert to chose my sheet for me. This expert would limit my choices so that I don’t make the mistake. I think that this argument is clearly wrong in the sheet case. However, I make a big leap and say that it is a formally similar argument at the level of bank regulation.
How can I make such a leap. Well, the truth is that I cannot. The important feature of my failure to generalize is WHY I cannot generalize. The reason I cannot generalize is that the world is made up of many actors and the rationality assumption breaks down very quickly as we aggregate. When I fail to discover that the thread count that I want is maximized at 250, I suffer a very small loss. When the entire nation discovers that they agree with me and were similarly mistaken, the sum of this loss is huge, but still small in comparison to all the many actions of a complex and rich economy. The sheet industry was in a period of mal-investment and will go through a adjustment, some sheet companies will go out of business and this will be painful for the investors, workers, and managers.
When banks discover that loan instruments and the assumptions behind them are flawed. (This flaw is: the assumption that diversification of mortgage portfolios have eliminated the majority of the risk inherent in real estate investment. Please keep in mind that no systematic drop in housing prices had occurred before this at the national level because there was no systematic bubble in real estate at the national level — Galbraith explains in his book, “The Great Crash” how the real estate bubble in Florida helped lead to the great depression, I have long maintained that this most recent crash is a formally similar series of events almost exactly like the story Galbraith tells). When we discover that the instruments are indeed the equivalent of the fallacy I made with my thread count assumption, we see that there are huge pains to be felt. Not only at a primary level, those that made the bad investments, but at the secondary level — other investors and banks that were counting on getting paid by those banks, but also on a tertiary level and so on and so forth (all investors of the banks that relied on the bank that made the mistake are hurt). This is the problem of systemic risk. Banks are large an interconnected, so mistakes are painful. (the regulation assumption suggests that these mistakes will be repeated in the same form)
Vince does a very good job at grasping at the instinct behind this problem. Corporate regulation is flawed. For whatever reason firms are two big to identify these problems. However, I have been picking on the methodological assumptions that he is making and the way in which he gets to his conclusions. I think there is important insight in thinking thorough these cases deliberately and outlining a causal process, logically. However, it is a bit more tedious and requires much more work.
Where we still disagree is the process of articulating good rules for governance. Having an expert decide is much different than having a profit motivated company create a safer and better product to lure the justifiably skeptical consumer back. The example my students like is the one of fast food. Think about what happens when a restaurant causes food poisoning. How does coercion to make them fix this mistake work? Don’t they have an incentive to fix it in order to stay in business (don’t assume that there would not be food critics that toured kitchens and published ratings of restaurant in the absence of food boards, there is a market for information, even without a monopoly in that market. I will simply assume that this is one of many possible regulation schemes).
Vince and Hunt seem to think that all restaurants work because they fear the city’s health inspector. I think restaurants work because of reciprocity and mutual benefit. In a world where I can know that my favorite restaurant is one that has a reputation of not making people sick, the same restaurant has an incentive to compete on this margin.
We don’t disagree about the merits of rules, we just disagree about the nature of Vince and Hunts claims that the goodness of rules comes from who the enforcer is. My mother used to get frustrated at me questioning her. She said, “obey me because I am your mother.” She did not mean that. She meant, “I am concerned about your best interests and have designed the best rules I know how to help you succeed.” — this is an empirical claim. I would always react to the first, but as I better understood the second I tried to follow the spirit of the rules out of love. I think Vince and Hunt have a vision of government that is more like my frustrated mother, rather than my loving mother. Sometimes my mother was wrong. When she was frustrated she was less likely to realize this. When we assume government is intrinsically good and not simply an expedient, I fear that we remove the only discipline my mother would have had to try NOT to be frustrated.
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Very interesting stuff, Michael! Your perspective is really helpful.
For my part, I don’t think govt is “intrinsically good”. Most of our social lives (politics, economy, family choices, etc) are matters of prudence – weighing out conditional goods against other conditional goods. So I am a moderate in this debate. I see govt regulation as sometimes being a prudential good, sometimes not.
Here is a quick question: the market inherent regulator is both preemptive and reactionary. A restaurant run by rationally self-interested people will – with or without a govt health inspector – try to serve non-poisoned food to build a good reputation (preemptive). The market inherent regulator is also reactive – when word gets out that company X is doing something bad, that will harm company X and will cause other companies in the industry to change practices.
Okay. But do you think there are any issues that require more robust preemptive regulative principle than the market can provide?
Here is an example: environmental controls. A company might be willing to risk severe environmental pollution for the sake of profit. It will not always be the case that environmentally sound practices are in the interest of a company, either short or long term. (Note that I also do not think we can simply rely on liability laws to internalize the costs of environmental damage to the companies). The market might react but it would be, as it were, too late. Bottom line is that I don’t really trust the “invisible hand” to ensure sound environmental practices, because accumulated capital from one region can be reinvested in another region (pollute the land here, then pick up and move to another region, etc etc).
Is this, then, an example of a case where we would want some non-market entity (and the government looks like a good candidate) to ensure, preemptively, better practices?
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I think you have hit the issue square here.
Economist have a silly little argument that they introduce called, “externalities.”
What is required for externalities is
1) An actor
2) A decision
3) An unintended consequence.
It is to these ends that property rights are introduced to reduce unintended consequences. In a perfect world a meter would exist on my tailpipe and measure the production of environmental harm. Without the technology (and we are just simply lacking tools, information, and measurement here — it is possible in principle) we turn to some regulatory agency to try to approximate this measure given the limited tools and information that they have. There really is no difference between someone who owned a valley just like ours (and leased property to individuals and firms) and the structure of the Cache Valley county government.
Now one organization has “civil” motivations and the other has “private” motivations. If we lived in the imaginary valley, we would actually expect the owner to profit maximize — whatever that means. We would have different outcomes on a variety of issues (I am thinking Singapore in my mind). For example, I doubt the air quality issue would have such extremes. If an owner thought that s/he could increase the profitability of the imaginary valley by imposing sanctions on driving during inversions, they would do it. This follows the same logic that a shopping mall owner (developer) makes when he locates the food court in the center of the mall, as opposed to the very end. We can only distinguish the set of incentives that each different type of ownership has. The extreme case is where public-spiritedness is the sole motivation for government. If we assume this, we have a very idealistic notion of government.
Now back to your question. Do private markets that are disaggregated and contain unintended effects solve problems like pollution? They can’t. It is simply not possible without a set of rules. This is why I spent so much time arguing that there was a distinction between rules and “civic” authority. Some group has to get together and agree to rules, to write a contract in order to eliminate the problem of pollution by setting up some idea of how much each person’s actions contribute to the overall harm. (I assume we don’t have to debate the notion that the optimal level of pollution is greater than zero, for instance I exhale carbon dioxide. I would not agree that zero carbon dioxide emissions are optimal).
What I have picked up from public choice is to realize that there are no “two hat” arguments where people act on the behalf of the civic authority by changing their nature at the threshold of the municipal building. When I run my business, I am self-interested. When I vote in committee for Cache County, I am doing so according to my own interest (how it effects my business, the ability to get re-elected, or in the case of biking trails — if I ride a bike).
By collapsing the distinction between government and firms I argue that we can better understand the scale necessary to eliminate unintended consequences. It is not necessary to appeal to community standards to understand why Smith’s Marketplace would want to expel a naked shopper. They want to do it because it is bad for business (presumably). The community standard issue becomes objective through the subjective decision making process to either take a stand against naked shoppers or not. If the owner chooses incorrectly, the business might fail (depending on the sensitivity of the issue relative to the bundle offered by the owner).
There may be an approach where Cache County has a say in this matter, but the process of deciding has no simple test (at first blush). Las Vegas has made bank on having quite the opposite community standard against nudity in businesses, how did this come about?
All we have to do is look at the emigration from California to Colorado (1990s) to Arizona, to Utah, to Texas to understand that the choices that government has made make it less profitable for California to operate the way they would like to based on political ideology.
We may lament this when we picture what we would like to see in the world. My job is just to describe the way incentives help to understand the mess California has gotten itself in. I am perfectly fine with arguments that say for example: Women not wearing hoop-skirts has decreased the romance in modern society. I can talk about how a tax on wearing pants or tight skirts would help to achieve this. However, I am still talking about imposing my own views on others. If seeing women’s knees is considered an externality (like pollution), then we are certainly justified in trying to get the owners of the valley to change the existing rules. What I think is particularly egregious about doing that at a federal level is leaving becomes less and less of an option to exit.
This is all a very long winded way to say that I am looking for a limit to aggregation. I argue that liberty is lost at a rate that is convexly increasing (the slope is increasing as we increase) as a function of the aggregation of government. I suspect if I could convince Vince that government is no more than a very special type of corporation, that he would see the similarity between our arguments about aggregation.
I have some major issues with the special “civic” role that we endow government with in this context. I am a hopeless skeptic however. I see the argument for murder. The argument for pollution is an expedient one that implicitly assumes that when technology increases to the point where I can monitor everyone’s carbon emissions government would then turn that over to a private authority.
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I don’t see where the motivation to have “rules” would be. The omni-ownership solution to the problem of externality still doesn’t address Kleiner’s objection. You could conceivably privatize literally everything in on the planet, including the seas, the air we breathe, etc. It would be immensely impractical, but it would solve the externality problem in terms of liability. There’s still no reason to believe it would be an optimal solution. By rote calculation it might still be within a firm’s interest to pollute, etc. Michael seems to faithfully satisfied with whatever falls out of the omni-privatization scheme. And this is on top of another fundamental problem, one that seems to contradict Michaels desire to address things at the least aggregate level. We’re mostly talking about the impact of the most powerful entities in our economy, the corporations. These are themselves aggregate constructs; the individual works within them. There is a disconnect between the rational actions of a corporate entity and what composes it, the individual. Think for a moment about what happened at Goldman Sachs. A single trader saw fit to short sell a horrible investment that he had designed to fail. Now, how does malfeasance like this come into the purview of “Goldman Sachs,” anthropomorphic market player? It doesn’t, of course, unless you think this was a rational move.
What I’m saying is that I’m skeptical that omni-ownership is even a coherent scheme. My impression is you’re going to find a raft of elements like malfeasance that are going to require rule sets (regulation) that are going to require laws and penal systems, oversight, democratic decision making… You get the idea, a snowball effect, leading to…you guessed it, government, and probably not small government either. I’m starting to appreciate Vince’s idea that government size is actually a reflection of business size and complexity. Of the things said so far that seems to have the widest explanatory power.
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Hunt,
Again you didn’t read my argument, aren’t representing it well, claim nothing, and assume that I am arguing for a particular ideology.
Well done, you have given me nothing to argue with you about.
I have no idea what you mean by Omni-Government, so I will define it — bugaboo.
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Sorry: Omni-ownership.
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Help flesh out your suggestion, Michael. I admit that I am not quite seeing it myself.
I think all agree with this:
“Do private markets that are disaggregated and contain unintended effects solve problems like pollution? They can’t. It is simply not possible without a set of rules.” (this from a Michael post).
The question is then: what entity is going to be the rule-maker? Michael said,
“This is why I spent so much time arguing that there was a distinction between rules and “civic” authority. Some group has to get together and agree to rules, to write a contract in order to eliminate the problem of pollution by setting up some idea of how much each person’s actions contribute to the overall harm.”
Here are some questions:
Who has a seat at this “civic authority” that will have to get together to make rules? Property owners only? Does labor have a seat at that table?
How is this civic authority different from what we now call “government” (our representative democracy) – which I take to be a place where a collection of people representing various interests come together to try to haggle out some basic rules for society. How would their rules be different than laws or regulations?
In short, I don’t see how this changes much. What we still need is prudence – the prudence to avoid unnecessary laws (see the Smith naked shopper example), the prudence to avoid laws rooted in legal moralism that are a threat to liberty (see hoop skirt law). So what we would want is a civic authority which operates on the principle of subsidiarity where everyone’s interests are represented and which is capable of making prudent decisions regarding what rules we should make to govern our common lives since the market cannot do it alone.
But I feel like I am completely missing your point, Michael. In other words, I am not sure I yet understand what you mean by “collapsing of government and firm”.
Are you familiar with the various civic renewal movements? Is this the sort of thing you are talking about?
http://www.cpn.org/crm/essays/declaration.html
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I had a much a entirely different response prepared that I trashed, maybe I will add more later. Sorry for not being shorter.
First, just a minor point really, but the included quote above was not mine, it is missing a word: “collapsing the distinction between government and firms”
This statement gives me hope, “In short, I don’t see how this changes much.” Hope, to the extent that it follows a passage in your post that suggests to me you have eliminated the distinction between government and firm in terms of motivational and omniscience assumptions.
The “seat” at the table part does mitigate some of this hope, however. I really don’t care much for defending the market, it employs the distinction that I am trying to disabuse — but I find myself doing it anyhow because I have the impression that some basic concept is being overlooked.
[Insert your least favorite tea party rhetoric here and conflate it with what I have said about abuse of power].
I am trying to challenge your assumptions, but I don’t have a clean picture of them. You say, “How is this civic authority different from what we now call ‘government’ (our representative democracy) – which I take to be a place where a collection of people representing various interests come together to try to haggle out some basic rules for society.”
I don’t think I ever claimed a distinction, right?
I talked about civic authority in the case of pollution. Given that ends in the market are not expedient for eliminating unintended consequences, I said that a temporary concession is made to solve the problem through people banning together in groups and talking about how to impose their will on others. This has a couple of desirable features for me 1) it allows us to treat government as having both core and
periphery functions. The firm’s most essential core function is to handle murder. This is why it the firm has a monopoly on violence. 2) it eliminates the savior rhetoric that has too often been associated with the idea of government.
[BTW it is absolutely unfair to take my example of Cache county in an alternative world where it is owned by one person and assume that anyone would have an incentive to destroy it an move on – this is an incoherent critique, if a firm bought land and then created a bio hazard, they would lose the value of the land at least, they would presumably damage others who would have a reason to confront them — You MUST tell an externality story to make this case and there isn’t one given]
The reason a health board exists is that it is a good idea to get information out to consumers about restaurant. In DC I never went to a place that I didn’t check the blogs on first, the restaurant reviews. In this market the savvy internet users far exceed the local health board’s ability to get information out about good restaurant. It is also a completely different kind of information (better). I worked in food service long enough to know that the health board does not catch all things — so we are comparing an imperfect system with another imperfect one. Citing evidence either way is a shouting match. My only goal here was to take the chauvinism about government regulation down a notch when Vince followed my first comment on this thread.
I have tried a couple of times to bring the conversation to Smith’s Aristotelean methodology on usury. There is a great paper, In Medio Stat Virtus, that made this link known to me (Paganelli, 2003). I have argued in my working papers that Bentham pointed out a major flaw in Smith’s system here.
Other questions that I have failed to address?
You say that the market cannot govern alone. Again, part of me is pleased to see you use the language of our debate to talk about market governance, but the other part of me sinks when I read that you think it cannot do it alone. I will admit that there are very real problems with cycles and human psychology. But to say that the market couldn’t govern is to misspeak. It would govern, but it would be a completely different affair entirely. The anarcho-capitalist vision (again, please no conflating me with the argument I report) is not the way you describe it and it would be unfair to serious thinkers to simply dismiss them on grounds other than their own.
What does a world look like that has no U.S. Federal Government? It certainly does not look like a Hobbesian world. Why, because you can’t dismiss my argument by claiming that I only accept atomistic solutions, I don’t. Seeing the world made of individuals does not mean that I have no place for groups. I will have to try again to convince you that the ability of a group to meet the needs of its members is a concave function with group size and the pain inflicted on those that are synthesized increases in a convex function with group size. In other words aggregation of preference through even the most well-intended political process has real costs and very few benefits after only a few people get together. This is true for the vast majority of things, but is less true for things that the state excels in (like responding to murder and preventing feuds). On the other side, choice of ice cream is a bad thing for political process. It was once said that the Soviet Union was poor in all things but Vodka and Caviar. This is great if you that is all what you want.
For me, I love the variety offered by the market for ice cream. I love that I bought A1 flavored Beef Jerky a few months ago. I constantly walk around celebrating all the wonderful things people have created and taken the trouble to put in my local grocery story on the slightest chance that it makes me happier as measured by my willingness to cover the costs of their production and marketing. While I graded tests and thought about our blog discussion today, someone did manual labor in my yard. We are both better of ex post.
We already have instances where women’s knees are not allowed to be shown. We just don’t have official laws. I don’t follow you that there is something about the hoop skirt law that is a special threat to liberty, it is just one that we feel is particularly ridiculous. It is a limit on human action, sure. So are many things done for the common good. If we were clearer about that, maybe we would appear to disagree a little less. Laws that are used to enforce preference (rather than help coordinate human action) are a little slice of evil in my world. Markets can’t enforce preferences, disagreement with this I would take as a misunderstanding of what a market is. Markets do a great job of coordinating.
This thread has circled around Vince’s claim, that “The free market of Ayn Rand only makes winners out of companies with sociopath CEOs.” I take issue with the idea that:
It “only makes winners out of companies with sociopath CEOs” —
1) I have just finished arguing that it makes many winners that are not sociopaths.
2) that a market is not free that makes people worse off than they were without it
This argument is a straw man. Yet we keep coming back to it as if it were fact. If I have done anything here I have explained that there is great nobility in participating in markets. I don’t particularly think that the nobility of public service needs any additional praise. I happen to think that there are many evil motivations that have been ignored or simply falsely attributed to the market that really reside in politics or “civic” affairs. You can read my claims again. I am fairly certain that I never claimed that governments shouldn’t exist. I have consistently claimed that governments are corrupt, preference destroying, and open to unlimited fascism without the constant vigilance of free people against the power grabs of would be tyrants. Compared to the wildest abuses of the market the standard fare of governments (war, for example) are far worse. I find it absurd that some blame capitalism for hurting unskilled workers in the 19th century (by eliminating unskilled jobs and replacing them with much higher paying and human dignity amplifying skilled jobs), yet the same people champion a system that calls what it does to countless human beings, “collateral damage.” I am sorry if I simply laugh off the aspersions of my vision of the world (and how it is sometimes abused) in the face of the alternative which is so ghastly I cannot comprehend it fully and still keep all of my humanity.
I get taken to task for being a market egalitarian (my own name for it) because it does not exist in a pure form. But I am ridiculed by people that champion democracy, which in its pure form is one of the worst systems of government possible. Let us be honest here about what we are advocating. I have argued that the system I am against is plutocracy. I characterize much of what I have debated against here as plutocracy, that is it sets up a system where there is a rule by an elite moneyed interest. I have argued that the recent regulations against banks serve these ends (both of my posts above where I share the equation B = R + E spell this out).
We both want monied interests to be neutered, but we disagree about how best to do this. Am I correct in assuming this common ground?
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I think the comments here are getting too complex to really respond to. Michael’s last large comment was almost impossible to parse, though I’m sure he understood perfectly well what he was trying to say. For the most part I’m still trying to tell where Michael is coming from. You’ve left a few indicators that you may be Austrian school (malinvestment needs to be purged by the market; Krugman calls this the “hangover” theory). Perhaps you’re an anarcho-capitalist? As Kleiner hints, we are not taking enough time to explain things in stepwise fashion. So, I’ll make shorter steps.
The “tragedy of the commons” results from the tendency of firms to externalize cost. Common property of the people is degraded because it is in nobody’s interest to sustain them (except “the people” themselves who would be powerless to do so without regulation). An anarcho-capitalist’s solution is simple elimination of “the commons” by privatizing everything. In theory, externalization would be impossible, since every cost avoided by one agent would be a cost incurred by another, and that other would sue for those expenses. You might, for instance, get away with dumping garbage on public lands, but it would be hard to dump it on your neighbor’s without him making you clean it up. This is what I’m calling “omni-ownership.” Everything is owned by somebody. There can be no “tragedy of the commons,” there are no “commons.”
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Again with the labels. I am trying my best to avoid canned arguments.
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Actually, this is wrong: “The ‘tragedy of the commons’ results from the tendency of firms to externalize cost”
You make the firm the actor. Firms exist for no other reason but to internalize costs.
The tragedy of the commons is a an explanation of what happens when individuals have an incentive to over produce on a common relative to its sustainable rate. The to the individual is positive despite the return to the group is negative. The example is about sheep farming on a common meadow and is an explanation of why enclosure and property rights were an improvement over the commons for society.
As far as omni-ownership, I believe it already exists, just some owned land has less direct incentives for people to care for it. The land that is dumped on is not cared about because no one can benefit by preventing the dumping in excess of the cost of vigilance. Of course we can dump on our neighbor’s land in the middle of the night when he is not watching, we might even get away with it once. What really limits action is what means the neighbor has to retaliate.
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Ah, I see, per Kleiner’s quotes, that Micheal couldn’t be an anarchist. My apologies, but he seems to have a George Will-like tendency to sprinkle radical sounding statements amongst more reasonable argument.
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I have a similar problem.
Any examples?
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I was going to say the same thing. I think all of our “tribal languages” are getting in the way. I am as guilty of this as anyone. But my head is particularly thick when it comes to economist jargon. I don’t even understand my TIAA-CREF statements!
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I can offer two services, 1) to identify if it is in fact common economic jargon, 2) to expand — I just need examples.
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Michael’s correct that I was a little hasty in summarizing the tragedy of the commons. It is not the case that it is in nobody’s interest to maintain commons in a sustainable rate. It is the case that nobody has an incentive to do so, in an economic, game theoretic sense. Maintenance of the commons as an equal allocation by each enterprise may not be a Nash equilibrium (even though it may be Pareto optimal (*footnote)), though each firm may profit by its use. Maintenance of the commons requires either alteration of the game (a change of the payoff matrix) or external rules (government regulation or negotiated contract). As a concession to Michael, I’m completely willing to admit that problems like this can be resolved through contract agreement. However, it’s hard to see how contract agreement between business entities can guarantee satisfactory outcome to “the people,” unless “the people” are also party to the contract. (Think, for instance, about just how publicly satisfying an environmental contract solely between BP and Exxon might be.) As Kleiner says, how is this thing, even if we call it, say, “the people’s interest corporation,” different than government? It seems that as long as the public inhabits the same space as the private, the public must have a voice in how the private operates — and I think limiting that simply to how the public engages with the market is making an unjustifiable concession. Why should we even allow unvetted firms to enter market without collectively approving them? It’s only by decades long business propaganda that we’ve been programmed to believe that we have no right to yea or neigh, and we should have that right. It all boils down to who, exactly, is calling the shots here. Are people in charge, or is business?
(*techy footnote) The entire contest between regulation/contract can be viewed as disputing how best to move from Nash Equilibriums to Pareto optima. It’s easier to simply mandate the rules of a game and have the result turn into an optimal solution, while crafting a contract allowing this to happen spontaneously is far more difficult. In this way, Michael is correct to say that government can be viewed as an expedient. The questions are, 1) for every government expedient, does there really exist an equivalent contract?, and 2) would the contract solution really have any tangible benefit, or is it merely an academic point that would only serve to salve the egos of people who hate government?
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I think we may have the grounds here for real accord.
What I get from your post is that markets are not always the outcome that is desirable as measured by what appeals to the common sense of the community. I have no problem with that idea. To those ends politics aggregates these preferences of the community and uses another means to impose ends outside of the market. I am still in agreement, if you are.
Now we compare the two means. One bites the problem of the tragedy of the commons and the other is sometimes associated with distortions because property rights and contracts are imperfect. I would just argue that voting is a perfect example of the tragedy of the commons. I have no reason to get good information because it is impossible statistically for my vote to change the outcome of the election (Kevin Costner movies aside). So the only way that we create a market which will work is to have better contracts.
(I see no reason why you should not still be with me here).
Now, government is one way to have more articulated contracts. This is what I mean by being expedient. If you got from what I said that government is never an improvement at the margin, I apologize. (However, I am thinking about the arch change instead of the point change).
One of the papers in my dissertation discussed the appeal of short-term intervention. I was mainly interested in how modern economic theory does a poor job of articulating the problem. This was a very important debate in the 1960s and 1970s. I don’t know if you are aware, but blood markets existed during this time. Think back to 1963 — there was no Medicare and no Medicaid. It was out of this that the health care industry became much more regulated.
Why? (but doesn’t it seem so obvious?) — Sure. I recognize the intuition that health care for everyone is a wonderful thing. On a scale of the abuses of government it seems fairly benign. However, what are the costs? As an economist I look at the unintended consequences. I am content to help explore these unintended consequences and better understand them. I do not offer specific policy advise.
So blood. History: Blood markets increase quantity supplied. However, it wasn’t until 1968 that we knew there was a link between certain demographics and higher rates of hepatitis. We also couldn’t test hepatitis until an autopsy. So didn’t the market absorb this information and correct for the problem? No. Why (and this is the most important question)? Because hospitals were subject to liability laws. Because people were naming hospitals in liability suits when their loved ones received hepatitis from a blood transfusion at that hospital, the AMA had an incentive to lobby for a change in the law. They argued that markets were inherently evil. They argued, using Richard Titmuss’s claims (a popular book at the time), that to eliminate the problem of hepatitis we should remove ALL profit incentive from health care. So starting in Illinois and continuing to other states and eventually the federal level in 1974 hospitals were granted “due care protection” as long as they did not use blood from blood banks that used monetary compensation to recruit blood donations.
Due care protection means that you cannot win a suit against a hospital if they give you hepatitis. This was a great outcome for hospitals because it reduced the amount of money they had to spend on lawyers. It is a horrible outcome for the consumer at least to the extent that they have no recourse and hospitals have less of an incentive to monitor blood.
Ironically the first successful trials of hepatitis B test were run around this time. The eventual Nobel prize winner had just solved the problem. By creating a screening test for blood hepatitis was now able to be tested. The legislation was outdated, but the public choice outcome was already enshrined in law. Do you think we removed the “due care” protection for the hospitals after the problem was gone? No. Now we live in a world where a pint of blood is worth several hundred dollars, but only the hospitals can sell this to one another. It seems that there is no problem with pricing blood, it is just a problem to let college students to benefit from the sale. Seems like a strange outcome to me.
The unintended consequences of the well meaning regulation were to create advantages for the hospitals. Rather than fixing the market, the statues and regulatory agencies were used to reduce competition, to create protections for the incumbents (existing hospitals). I think that more often then not regulation messes things up more than it fixes a problem. Temporary gains aside, the complexity of the laws are a protection to the monied interests. This is especially true in a society that requires a high priced lawyer to gain access to the system of rights. I see a two-tiered system. The “us” who don’t have access and the monied interest who have lawyers negotiate on their behalf. A complex system breeds plutocracy, so I claim.
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Also, I am not very sure about this idea of “the people” to the extent that it is a useful fiction, how do you put this idea to use?
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OK — so it is not that government regulation increases the need for higher lending rates, but everything else that you say seems right.
The “B” portion is what we observe, it is the interest rate that we want to “cap” so that we eliminate usury. To use Kleiner’s original post this breaks down into two parts, I just rename them according to the economic concepts.
Rather than say that things are natural and unnatural, I said risk compensating and excess. There are slight nuances, but for purposes of bridging we can run the parallel arguments.
So when you restrict access to a market you lower the competition. To the extent that competition has the effect of allowing access to the market by people who are engaging in “natural” interactions, i.e. creating value for each other. The interest rate helps to reward this tendency — but not all interest rates.
Think about the kid whose grandmother opens a savings account for him. The goal here is to teach delayed gratification, a quite useful concept. If the kid learns instead that the key to power is to learn to make resources sterile. Then we have a perversion of the lesson.
Now comes the public choice argument. That is: the fallacy of regulation. Because access is restricted, the level of “natural” competition decreases. The unnatural competition therefore is free to increase. As these two parts one waining and the other waxing occur the observed rate of interest seems to stay the same (remember that we can only legislate B, because it is the only one we observe). We have the foundations for a perversion in the markets.
To the extent that I am wrong here in critiquing Smith, then Smith can be redeemed on the same grounds that Aristotle is redeemed. But that would make Smith’s argument for the market much more complex than what we have previously alluded to.
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I think I see the problem.
I am not idealizing markets. I simply see a lack of understanding of the power of human flourishing that they create. Without some understanding of this, we are too quick to assume government will improve on markets.
There are specific cases where rules help to increase flourishing, but this is by no means a blind advocacy of all rules.
I think we still go back to our default pictures of the world. I assume that people seek to interact with others in order to make themselves better off.
The others in this thread seem to assume that “the people,” “the social animal,” or some other aggregate exists prior to the individual. That we are embedded in a social context, I have no problem with. That this social context is anthropomorphic or rational I do have a problem with. I just don’t know enough about Barth to parse the comments there. What does he buy us beyond Kierkegaard?
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I love all the agreement!
Vince, have you heard of Wilhelm Roepke? I get the sense that you might have. He is a market socialist in the Austrian School(see why I hate labels).
He, from what I can gather he believes that Athens was great. He wanted to limit the scale of operations because, I gather he believed that communities self-regulated but this broke down at scale. [basically if we are evolutionary designed to be tribal, our tribal instincts are counter-productive at some scale]
Ludwig von Mises once said to Roepke, “Your ideas are very interesting, but in order for your plan to work have you finished the list of people that we would have to shoot in the head.” In order to account for the diminished means society would have absent a global division of labor, we necessarily have to address the question of who is surplus? Who do we eliminate?
This was a piece of rhetoric designed to dismiss Roepke. Is there any way that we can save his ideas?
http://en.wikipedia.org/wiki/Wilhelm_Roepke
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Vince,
I can point you to Bentham’s attempts to defend usury. “The Defense of Usury” I find it quite entertaining and written much more like moral philosophy than modern economics. Just skimming the table of contents here should give you an idea of the important arguments.
http://www.econlib.org/library/Bentham/bnthUs.html
Bentham worries that we get none of the advantages that are claimed and lose some things that most people overlook.
This essay gets mentioned by everyone including Keynes. But then most don’t really deal with his argument. Some consider him extreme, others are more nuanced.
To my mind, Bentham is a reformer that is trying to explain the endogeneity of the problem of reform. If you restrict access to capital markets then you interfere with the process of endogenous change. Bentham sees this as a real cost. Considering the issues that he is interested in, legal reform, women’s suffrage, gay rights, etc. We have to at least consider that he saw something here, even if he overstates his case.
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