Category Archives: Economics

Kevin Carson, Creative Destruction, and the Boom-Bust Cycle

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This is probably a waste of time, but I wanted to write about why I think Kevin Carson is wrong in the following passage from his Organization Theory: A Libertarian Perspective. The relevant text can be found here.

Suppose, for the moment, that right-wing libertarians are correct in the exaggerated claims they make for unlimited division of labor and comparative advantage. Suppose that, despite all the evidence in Part One, it really is cheaper for most people to buy most of the things they consume at Wal-Mart, and work for the wages to pay for them. Weigh that against the uncertainty and vulnerability entailed in the quite significant chance of unemployment faced by most people.

As many right-wing libertarians like to remind us, the days of lifetime job security are long past. The “creative destruction” they celebrate means that people in most lines of work can count on downsizing and job changes at the very least several times in a working lifetime, often with prolonged periods of unemployment and debt accumulation between jobs and significant reductions in pay with each move. The sheer hell of it, for the downsized white-collar employee, was depicted by Barbara Ehrenreich in Bait and Switch. From the standpoint of people who work for a living, often mired in credit card debt, keeping their heads above water only by augmenting their purchasing power with the cash value of inflated home equity, a paycheck or two from homelessness or bankruptcy, the flux of the new economy is a lot less exhilarating.

And bear in mind that many of the same people who denigrate artisan or subsistence labor, most notably the Misoids, are not only the same people who celebrate the “creative destruction” that undermines economic security for so many people. They are also the same people who regularly make the most apocalyptic predictions about credit inflation by central banks, the bursting of the housing bubble, and the Misesean “crackup boom.” No little inconsistency when those attitudes are laid side by side.

The first thing I would like to point out is that I don’t know to whom Carson is referring with “the exaggerated claims they make for unlimited division of labor and comparative advantage.” Does anybody say there is no limit to the division of labor? And what does that even mean? In writing this blog post, would I specialize in nouns, while someone else writes the verbs, and so on? This is reminiscent of Carson’s criticism in The Homebrew Industrial Revolution of those who believe the demand for labor is “infinitely upwardly elastic,” whatever that means.

It’s difficult to understand Carson’s understanding of what the limits of the greater productivity from specialization are. It’s apparent he doesn’t think they are zero, since he seems to like barter as a primary method of exchange. But the fact that he likes barter as such suggests that he sees the productive gains from specialization and trade to be minimal.

More to the point, what is this inconsistency he sees in “Misoids”? As far as I can tell, the inconsistency he appears to see is that if Misoids like creative destruction (and the unemployment that results) they should also like (or not have such a problem with) the boom-bust cycle. [I would like to note that the book the above passage is from was published in December of 2008, but the same text was published on his website in 2005. How about the predictive ability of the Miseseans when it came to the bursting of the housing bubble?] But these are quite clearly very different situations.

Let’s consider “creative destruction.” Why might someone celebrate it? I would imagine it is because it signifies technological and productive progress. One could consider the automobile’s replacement of the horse-and-buggy as a primary means of transportation to be “creative destruction”: a new industry replaces another. Consumers, in their own estimation, considered themselves better off by purchasing automobiles instead of buggies. Of course, some individuals, such as the Amish, were not interested in purchasing automobiles and stuck with their buggies. So is creative destruction something to celebrate? If you drive a car instead of a buggy, it would seem so. Of course, it is unfortunate that people employed in the buggy industry had to find another job. But no one celebrating “creative destruction” celebrates this aspect of it.

And, really, what does Carson propose instead? Unless the world is completely static and everything stays the same forever, there will be people who become temporarily unemployed as technologies or consumer preferences change. Every shift of resources to new technologies will mean that employment in other industries have to decrease. There is no getting around this fact. And trying to stop this process makes everyone worse off in the long run. Had the government ensured that the car never replaced the buggy, the computer never replaced the typewriter, the cellphone never replaced the landline, etc., then everyone, even those who became temporarily unemployed, would be much worse off. Thus, I really don’t see what Carson’s problem is here.

Let’s contrast this with the boom-bust cycle fueled by credit expansion. Misoids generally want the government to not intervene to reduce unemployment in the creative destruction scenario, because if they do they delay resources from being allocated to more highly valued uses. Regarding the boom-bust cycle, Misoids want “no further credit expansion.” That is, Misoids don’t want the central bank to fuel the boom in the first place, because this results in malinvestments that must eventually be liquidated. They also don’t want the government to intervene after the boom turns to bust because, here again, trying to keep people employed in occupations that result in losses means that resources could be allocated to higher uses and the state just delays the process.

As such, there is no inconsistency here.

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A Note on Weddings, Economic Efficiency, and Externalities

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Jason Kuznicki, editor of Cato Unbound, offered the following economic analysis of traditionalists’ refusal to offer their services for same-sex weddings:

Traditionalists, who would like to discriminate against gays and lesbians, should be permitted to do so. It’s not that they’re doing anything noble or even efficient. They are behaving both contemptibly and to some degree inefficiently when they discriminate. (Note that they impose externalities on others, for the sake of a benefit that they alone consume, namely the satisfaction that they take in discriminating. If they could take this satisfaction from some other act, the externality might disappear. They might also be better neighbors.) In a better world, this sort of behavior would not exist. But by the very same token, we should not prohibit it – doing so would also shrink the extended economic order, the one from which we all benefit regardless of belief.

I am unsure what standard of economic efficiency Kuznicki is using in this analysis, because none that I can fathom would consider the behavior of the wedding cake bakers (or whomever) to be inefficient.

There is the concept of Pareto efficiency, which holds under the condition that no one can be made better off without making someone else worse off. In this case, the bakers have demonstrated their preference not to participate; thus, they would be worse off by being forced to participate, resulting in an economic loss. The bakers and the betrothed, failing to reach a mutually beneficial agreement, made no transaction. This is not an indication of inefficiency. Rather, the lack of transaction between the bakers and betrothed is Pareto efficient.

There is the Kaldor-Hicks standard, also known as the compensation principle, which is less stringent. It is usually used in policy analysis in an attempt to determine whether a change in policy would be more efficient. With any policy change, there are typically winners and losers; i.e., some are made better off and some are made worse off. The question from a Kaldor-Hicks view is whether the winners are made so better off that they can compensate the losers so that they are better off than they were prior to the policy change. From a Kaldor-Hicks perspective, the lack of transaction between bakers and betrothed is efficient: in order to compensate the bakers for baking the cake (something which they value less than not baking the cake), the betrothed would have to make them an offer such that they would bake the cake willingly. Since they did not make the offer (presumably because the price would be higher than how much they valued the cake), we see that the efficient outcome was for no deal to be made.

Kuznicki argues that by not engaging in the transaction, the bakers are imposing an externality on the betrothed, but this is not what economists would consider an externality. And it leads to absurdities. That is, any hypothetical transaction that doesn’t occur, under Kuznicki’s conception of externality, would involve an externality. Not only that, the non-transaction would be a mutual externality imposition. The grocery store, by selling beer for a higher price than I am willing to pay, would be imposing an externality on me. By the same token, I would be imposing an externality on them by not offering a high enough price for them to willingly sell me beer. By Kuznicki’s conception, one could just as easily argue that the betrothed imposed an externality on the bakers by not offering them enough money such that they would willingly perform the service. Moreover, even on Kuznicki’s own terms (that the bakers are consuming the benefit of discrimination at the expense of the betrothed), they are not doing so for free – the price they paid to do so is the foregone revenue they could have earned if they had baked the cake, and the “recipients” of that foregone revenue are the betrothed. Thus, even if we were to consider this an example of an externality, it is not inefficient because the betrothed were compensated for it.

I’m Disappointed with Scientific American

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In the December 2015 issue of Scientific American, Naomi Oreskes writes,

For the past 30 years the ideology of the unfettered marketplace has so dominated our discourse that most of use can scarcely imagine an alternative way of organizing our affairs. Individuals who try are dismissed as unrealistic, romantic, polemical or (in America) communists.

Like many others, she cites the 2008 financial crisis as the result of “deregulated capitalism” and the blames the Great Depression on “market failure.” She goes on to cite other favorite complaints of those with an anti-market ideology, such as inequality or the environment.

It seems that no matter how much the government will intervene into the economy, the “unfettered,” “deregulated” market will always be the alleged culprit. Indeed, Ms. Oreskes acknowledges the “spectacular government intervention” apparatus that was created after the Great Depression. How can she believe that with the modern regulatory state that creates thousands of new regulations every year that the US economy can accurately be described as laissez-faire? I can see one making an argument that perhaps the currently existing regulatory scheme for various sectors of the economy do not have the optimal rules or that certain regulatory agencies are under-powered. But at what point will the US economy have to be regulated in order for people like Ms. Oreskes to classify them as non-free market?

Furthermore, what I find particularly ironic about Ms. Oreskes’ article (which is called “How to Break the Climate Deadlock” but reads more like an anti-market diatribe) is that she does nothing to reassure those who question the efficacy of government efforts to abate the effects of climate change that their concern is unwarranted. Near the beginning of her essay, she makes a reference to those who suspect that empowering supranational governments to implement grand plans to combat climate change might significantly impact their freedom.However, instead of addressing their concerns (which I think would be more in line with breaking “the climate deadlock”), she seems to confirm them. Instead of explaining how people’s lives wouldn’t need be dramatically changed or how the power of the state wouldn’t need to be greatly expanded, she writes of how we “can scarcely imagine an alternative way of organizing our affairs.” She throws in the red herring of how the absence of state authority “opens the door to tyranny and tragedy.” The title of her article led me to believe that she was going to attempt to bridge the gap and try to foster a legitimate dialogue with those with differing opinions than her own. Her essay did not seem like one written by a level-headed scientist trying to find areas of agreement about climate policy, but an ideologue that should be relegated to the opinion section.

 

Ford paid his workers the equivalent of $15 an hour in 1914. Should that be the minimum wage?

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The following is a comment I wrote on a post published by The Intercept about raising the minimum wage in New York, which argued that since Ford paid his workers the inflation adjusted equivalent of $15 per hour in 1914, a $15 minimum wage would be appropriate today.

I appreciate Mr. Schwarz’s concern for low-skilled workers. We all want everyone to be able to afford a decent living. However, in economics, it is important to separately consider positive and normative questions (though, of course, the former can inform the latter). So part of the positive question in this instance is, what factors determine prices? As Mr. Schwarz alludes to (though expressing contempt for such an idea), and what most economists would say is, price is a function of supply and demand. Employers provide the demand for labor. However, if the price of labor is higher than the marginal productivity of that labor engaged in a certain purpose, employers will generally not hire labor for that purpose because it will result in a loss. Thus, any jobs at which people are employed in which they create less than $15 per hour in productivity will not be profitable with a $15 per hour minimum wage. Perhaps one could make an argument that employers have a certain level of bargaining power (for reasons such as occupational licensure, costs of starting a business, etc.) such that they are able to pay employees less than their marginal productivity, but regardless of this, employers will not pay their employees above their marginal productivity without incurring losses.

Thus, there are some limitations in Mr. Schwarz’s analysis. One is that he has not established that the marginal productivity of Ford employees in 1914 is directly comparable to the marginal productivity of all workers currently making less than $15 per hour. If the marginal productivity of Ford workers then was higher than the marginal productivity of low-skilled workers today, then we are comparing apples to oranges. For similar reasons, there are limitations in comparing a 1914 Model T to a 2015 Ford Fiesta, which are obviously quite different products in terms of technology, comfort, performance, etc. Although value is subjective, there is a good case to be made that, other than for collector purposes, the latter car is much more valuable than the first in terms of actual function (in other words, if Ford made the Model T today with the same physical properties that it had in 1914, it would likely fetch a much lower price than the Fiesta. Therefore, in terms of actual purchasing power, being able to buy a Ford Fiesta is evidence of much greater purchasing power).

The fact that GDP per capita is several times higher now than in 1914 does not mean that a $15 minimum wage will increase the incomes of those with a marginal productivity below $15 an hour, for the reasons mentioned above. No matter how rich an employer is, they will not willingly pay a wage that is greater than a worker’s marginal productivity because they will incur a loss by hiring that worker. The empirical question is whether those workers making less than $15 an hour are being paid significantly less than their marginal productivity. For those whom the answer is no, a minimum wage will not increase their wages if their productivity remains below $15 per hour.

Lynn Parramore Has No Idea How an Economy Works

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I have a professor who likes to send me a lot of opinion pieces from outlets such as Huffington Post, Salon, Upworthy, and MoveOn. A recent one was from Bill Moyers’ website, originally published at Alternet, called, “How Piketty’s Bombshell Book Blows Up Libertarian Fantasies.

The author, Lynn Parramore, really doesn’t have much to say about Picketty’s arguments, but seems to have a lot to say about how mistaken Milton Friedman (whom she calls “Uncle Milty”) and libertarians are about inequality. I’ll try to be as civil as possible when describing it, but I hope you can appreciate the difficulty considering how incredibly arrogant Ms. Parramore is, being essentially an economic illiterate and having the gall to belittle someone who won the Nobel Prize in economics. To be clear, I’m not saying that Nobel Prize winning economists are beyond question, but do we really have to treat our intellectual opponents as if we are ten years old?

I’m not sure why “fantasies” is used in the plural, as Parramore focuses exclusively on inequality, which she says libertarians either deny as a problem or pretend that the market will wave an invisible wand and cure it. Milton Friedman, she says, claims that free markets will lead to less inequality. However, all of this has been proven wrong by experience and Picketty’s book.

How did libertarians get it all so backwards? Well, as Piketty points out, people like Milton Friedman were writing at a time when inequality was indeed less pronounced in the US than it had been in previous eras. But they mistook this happy state of affairs as the magic of capitalism. Actually, it wasn’t the magic of capitalism that reduced inequality during a brief, halcyon period after the New Deal and World War II. It was the forces of various economic shocks plus policies our government put in place to respond to them that changed America from a top-heavy society in the Gilded Age to something more egalitarian in the post-war years.

One of the most frustrating things about having conversations regarding “capitalism” and “socialism” is how different people define them differently and then how they will label countries such as Denmark as socialist and the US as capitalist, even though Denmark rates higher on the Index of Economic Freedom. As Roderick Long has pointed out, these terms obfuscate understanding rather than facilitate it. Indeed, when left-libertarians claim that in a “freed market” inequality would be less, they are contrasting it to the present state of affairs where gigantic banks get bailed out, corporations are given legal privileges, saving money is discouraged through inflation, occupational licensure makes entrepreneurship for many illegal, etc.. When Parramore said that libertarians think free markets would lead to less inequality, what did she think they were comparing it to?

As Piketty notes, people like Milton Friedman, an academic economist, were doing rather well in the economy, likely sitting in the top 10 percent income level, and to them, the economy appeared to be doing just fine and rewarding talents and merits very nicely. But the Friedmans weren’t paying enough attention to how the folks on the rungs above them, particularly the 1 percent and even more so the .01 percent, were beginning to climb into the stratosphere. The people doing that climbing were mostly not academic economists or lawyers or doctors. They were managers of large firms who had begun to award themselves very prodigious salaries.

I have my doubts that Parramore has even bothered to read Friedman before criticizing him. Why, obviously, he was in good shape so he thought everyone must have been! And I’ve always been suspicious that most people who support measures such as the minimum wage have absolutely no idea how wages are determined, that they think employers simply have a pile of money from which they decide how much to pay themselves and how much to pay their employees, and thus a minimum wage will increase the proportion that goes to employees. Parramore’s last sentence seems to confirm this suspicion. Does she really think that managers simply award themselves salaries, and, if so, they just all of a sudden got greedy and decided to give themselves more? It’s reminiscent of the people who blame oil companies for being greedy when gas prices rise. Newsflash: oil companies are always greedy and always trying to charge the profit-maximizing price. Price is independent of their greed.

Wealth gathering at the top creates all sorts of problems. Some of these elites will hoard their wealth and fail to do anything productive with it. Others channel it into harmful activities like speculation, which can throw the economy out of whack. Some increase their wealth by preying on the less well-off. As inequality grows, regular people lose their purchasing power. They go into debt. The economy gets destabilized. (Piketty, and many other economists, count the increase in inequality as one of the reasons the economy blew up in 2007-’08.)

Where to begin? Maybe if Parramore had read Friedman, she would realize that he addressed this very problem of the wealthy hording their wealth and failing to do anything productive with it in Capitalism and Freedom. Part of the reason is the tax code, which encourages the wealthy to treat their wealth more conservatively than they otherwise would. As well, it’s a pretty good chance you’re talking to an economic illiterate when they regard speculation as a necessarily harmful activity “which can throw the economy out of whack.” They have no idea of the actual, useful role that speculation can play. For example, a speculator in agricultural futures can purchase wheat futures from a wheat farmer, guaranteeing the wheat farmer a certain price, no matter what the price of wheat is at harvest time. If the farmer finds this arrangement agreeable, he is benefited in that he shoulders less risk. The speculator shoulders this risk in exchange for the possibility that the price of wheat might be greater at harvest time than what he paid the farmer for it, thus giving him a gain. Of course, he might lose money, but the farmer is still benefited from the decreased risk. Parramore probably doesn’t see this as beneficial because she doesn’t understand what speculation is. Again, it’s pretty similar to when gas prices rise and news pundits blame speculators; they have no idea what they’re talking about. As for “throwing the economy out of whack,” speculation alone doesn’t do this unless fueled by artificial expansions of credit. But Parramore would have no idea about that, since she thinks Alan Greenspan unleashed the era of the free market (!).

Parramore also commits what is possibly the most basic fallacy in economics: the zero-sum fallacy. Just because someone becomes more wealthy does not cause someone else to become less wealthy. As a corollary, it is not the case that increasing inequality causes people to lose purchasing power. Furthermore, decreased purchasing power does not cause people to go into debt. It’s not as if all the people who went into large amounts of debt to buy houses prior to the crash did so because they couldn’t afford another dwelling.

Lastly, I would love to hear the theory by which inequality caused the economy to blow up (according to Don Boudreax, Picketty also thinks trade deficits contributed to the crash. My goodness, what didn’t contribute to the crash?). Extreme wealth inequality has existed throughout all of history, but the business cycle is a rather modern phenomenon. Claims like these seem to suggest that “Pickety and many other economists” have really no idea what caused the crash.

The ironic twist is this: The reason a person like the fictional John Galt would be able to rise from humble beginnings in the 1950s is because the Gilded Age rentiers lost large chunks of their wealth through the shocks of the Great Depression and the deliberate government policies that came in its wake, thus loosening their stranglehold on the economy and society. Galt is able to make his fortune precisely because he lives in a society that isn’t dominated by extreme concentrated wealth and dynasties. Yet the logical outcome of an economy in which there is no attempt made to limit the size of fortunes and promote greater equality is a place in which the most likely way John Galt can make a fortune is to marry an heiress. So it was in the Gilded Age. So it may be very soon in America.

Here again, Parramore demonstrates that she hasn’t the foggiest on how an economy works or how wealth is created. She seems to sincerely believe that one person’s gain is another person’s loss, and so there is no way for anyone to become wealthy without others becoming less wealthy.

I’m about finished, but before I let you go, I want to simply address the matter of inequality itself. As pointed out by Rothbard in Egalitarianism as a Revolt Against Nature, in current public discourse, equality is so highly touted without most people ever feeling a need to justify it in and of itself. I will give Ms. Parramore credit in that she did actually come up with a justification for desiring more wealth equality, even though it was based on a fundamental misunderstanding of economics. I would like to challenge readers of AlterNet and Bill Moyers and other progressive websites to think critically about what they are reading and also learn some economics. Don’t be like Ms. Parramore and think, “Oh, some economist wrote a book confirming my views about the world and now I’m qualified to say how dumb Milton Friedman was.”

Are Organ Shortages Artificial?

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Though perhaps it shouldn’t have, my mind was partially blown a few years ago when I read the book written by Cato Institute health policy experts Michael Cannon and Michael Tanner, Healthy Competition. In it, there is a section describing the economics of organ donations and how organ shortages are entirely created by the government. How?

Well, it’s not the case that the government is keeping us all so safe that there aren’t any available organ donors. Rather, it is because there is a price ceiling for organs: $0. That is,  there is no legal way to accept something of monetary value in exchange for organs. Cannon and Tanner’s argument is that, but for such price controls, there would be no shortages.

This recent video from Reason provides support for such a contention:

If it’s the case that the most needed organ transplant is kidneys, an organ most people can give up and still survive, then it’s not the case that most organ donors have to be waiting around, reluctantly hoping that someone has a fatal accident that leaves their precious organs intact. Thus, it’s more plausible to believe that organ shortages are, indeed, artificial.

Cannon and Tanner also address the rationale behind the prohibition of monetary exchanges for organs. It is supposedly the case that allowing such wealth transfers would deny the dignity of individual life. Furthermore, it would be another way to exploit the poor if organs could be exchanged for money (and that only the rich would have access to organs).

In regards to the first contention, one ought to ask, which alternative shows more respect for the dignity of life? The one that allows life to be extended through the transfer of money or the one that forces people to die in the name of making sure money isn’t being exchanged for life-sustaining organs? The answer seems obvious to me.

Secondly, are the poor more exploited by receiving money for organs that they voluntarily give or when they are forced to receive nothing in return for such tremendous value? And I’m not sure it’s much of a consolation to know that the rich bastard behind you on the organ waiting list is going to die too. Here we have yet another case where human well being is sacrificed upon the altar of egalitarianism. But I don’t think it’s a foregone conclusion that under such a free market health care system that the poor would be worse off (really, how could they be?). Health insurance provided on the free market would likely be specifically for such catastrophic medical emergencies, rather than routine procedures, and would therefore be much more affordable than under the current regime. Furthermore, plans would more likely be purchased by individuals rather than by employers, making it so that one’s insurance is not dependent upon one’s job.

Lastly, I don’t think allowing markets in organ transfers would increase black market organ activity but do just the opposite. Wouldn’t it be nice to say goodbye to waking up in bathtubs full of ice?

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Go Team Venture!

Paying for Choo Choos is Expensive

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I like trains. I’m not sure exactly why. It has been suggested to me that it could be nostalgia, but I don’t think it can be nostalgia from personal experience. The only trains I’ve ridden were in Thailand, and while that is a cheap mode of intercity travel and isn’t too bad for trips that are only a few hours, I was pretty miserable riding overnight in 3rd class. The odor of diesel exhaust and the water closet were constant companions, as was the cold air coming through the windows overnight, as I tried to get some sleep on a hard plastic seat sitting upright. I don’t think it’s nostalgia from personal experience.

Part of it could be that I enjoy the board game Ticket to Ride. It’s highly recommended, as is Hell on Wheels, which not only features the construction of the Union Pacific Railroad but is also sympathetic to a Southron.

However, it just doesn’t seem to be the case that many passenger trains are profitable; most have to be heavily subsidized by the government. I certainly wish this wasn’t the case given my enthusiasm for trains, but I would rather not see huge amounts of money be wasted constructing totally unnecessary rail lines.

Unfortunately, this seems to be the case for California’s High Speed Rail Authority. According to MyGovCost.org, one end of the line is to be in a remote area of San Joaquin Valley, clearly showing that politicians push for these trains, not because they believe that they will act as efficient means of transportation, but because they can then claim they are creating jobs. We recognize that such claims are erroneous, of course, knowing the lesson that Henry Hazlitt taught us. What is seen is all the people working to create these rail lines, but what is unseen are all the jobs that now aren’t going to be created because of the money spent building this rail line, jobs that are far more likely to be sustainable.

It is surprising that the politicians’ handling of finance of the project is considered legal. According to K. Lloyd Billingsley, the voters approved bonds for the project back in 2008 for $43 billion. Now the cost is projected to be $100 billion (and not to be completed until 2033)! CA voters don’t get to vote on the higher price tag. How is this not fraud?

The politicians also care not for either the environment nor property rights. Billingsley: “…one thing stands between the state rail bosses and the property they need: the rightful owners. They are not eager for a train to displace productive farmland. The project would also be environmentally destructive but supporters such as California governor Jerry Brown want to suspend environmental regulations for high-speed rail.”

Thus, the whole thing seems to be a loser all around, except for the politicians and contractors who get to take the money away from taxpayers, who are left with an extremely expensive rail line that few of them are likely to use and will probably have to be subsidized just to operate. It is the boondoggle that keeps on taking.

Help Spread Liberty in Africa

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A friend of mine recently exposed me to what I now find to be a wonderful group: Africa Youth Peace Call. From their website:

We are dedicated to the study and advancement of classical liberalism (libertarianism) in Africa. We try to change peoples’ ideas, opinions, and mode of thinking by research, seminars and publications. AYPC wants to become the leading libertarian organisation in freedom education of young people in Africa.

They conduct a variety of programs that you can see here. You can also donate to their cause here.

It is my contention that any help you can provide them with will benefit Africa far better than any billion spent on foreign aid ever has. Recently, I finished an older, but still relevant book called, “The Revolution in Development Economics,” that was given to me at the Northwest Regional Students for Liberty conference. I think the “revolution” can be summarized as follows:

The field of development economics didn’t really pick up until after World War II, when a bunch of countries that didn’t previously exist now did. Many economists, even Nobel Prize-winning ones such as Paul Samuelson, were confused as to how an economy grows (it is quite astounding that Samuelson believed that third world countries could not lift themselves out of poverty because they produced so little and therefore couldn’t save anything to invest in capital production. But if that’s the case, how could any country have become rich? The ancestors of the wealthiest people at one time had the same amount of capital as third world countries do and yet somehow they were able to save enough to invest in capital production). Many of these economists prescribed a large dose of government planning, including tariffs, import substitution (where favors are given to domestic industry to produce goods that foreign producers clearly have a comparative advantage), forced industrialization, capital controls, and the like. None of this accomplished what it was meant to do. It wasn’t until the collapse of the Soviet Union that it became clear to most economists that central planning was inefficient. Today, most economists accept the idea that free trade leads to economic growth and well-defined property rights tend to lead to resources finding their way to their most highly valued uses (but, of course, not everyone is a full laissez faire-ist yet. Far from it).

Of the papers that were published in the book, one sticks with me in particular: Indigenous African Institutions and Economic Development by Emily Chamlee-Wright. In it she tells the story of women street vendors in Ghana, who established among themselves elaborate methods of mutual aid, including credit associations, mutual protection from police (since vending on the street is officially illegal), and running each other’s stands when one was sick (even direct competitors would do this for each other). The especially frustrating part of the story is how the city council seemed to do everything it could do disrupt the well-being of these women, including the city police taking their cut of these women’s small profits, making it nearly impossible for them to save enough money to lease a shop to store their wares and conduct business legally. But still, these women are able to coordinate their collective actions and oppose some of the worse measures planned by the city council, and seem to thrive considering the conditions under which they are put.

I highly recommend reading Chamlee-Wright’s paper; within it you’ll see why entrepreneurs in Africa could succeed if only they could conduct their business without the undue burden that government currently forces upon them. To further this end, I think giving support to Africa Youth Peace Call is laudatory. Below is a video showing one of their programs, an entrepreneurship camp.

The Limitations of Thought Experiments

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Steve McQueenThis seems to be a thought experiment that is engaged in quite often at the Bleeding Heart Libertarians blog: imagine markets result in less preferable outcomes; would you still support them? The answer that they typically arrive at is “No,” and therefore the justification for markets rests at least partially on consequentialist considerations.

But imaginary scenarios presented to discredit some theory of ethics have never really sat well with me, particularly when I find them to be unrealistic. A ready example of this David Friedman’s critique of Murray Rothbard’s theory of natural rights in The Machinery of Freedom. Friedman is a utilitarian and thus attacks natural rights on such grounds.

One scenario he has us imagine is a gunman opening fire on a crowd in the street. However, there is a rifle sitting in the middle of the street with a sign put there by the strangely sadistic owner of the firearm saying that in the event of an emergency to not touch his rifle. Should his property rights be respected? A second scenario is even more ridiculous, where there is an asteroid heading towards the Earth and the only way to save the world is to steal a man’s briefcase which has a button inside that will destroy the asteroid.

I feel that under such wide latitude in creating objections that are extremely unlikely to ever happen, one can discredit any ethical theory whatsoever. This is why Rothbard rightfully has a chapter in his Ethics of Liberty objecting to lifeboat scenario criticisms. The real test is how an ethical system performs under normal conditions that exist the majority of the time. Read the rest of this entry

Should the Government Pay Its Debts?

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I don’t want it to seem like I think of Bleeding Heart Libertarians as a punching bag. I think they often make interesting points and bring challenges to mainstream libertarianism that its adherents need to be able to grapple with. They also often make for interesting discussion.

An article I would like to discuss today is that of Andrew Cohen’s, called “Shutting Down.” Cohen makes the argument that the government should uphold its contracts to pay those it owes. He puts aside the idea that “taxation is theft” and starts with the premise that if harm prevention and rectification are legitimate functions of government, then taxation is necessary.

He compares government to an individual:

Agent A makes a contract with agent B, agreeing to pay B $X. A overspends and has difficulty paying B. A decides not to pay B. In many cases, we would say this is unacceptable and that A must pay B what is owed. At least, we think, A must go through the proper channels to declare bankruptcy if A is to not pay B what A owes B. This would be unfortunate, we are told, but bankruptcy law is needed to allow for the proper running of the economy.

Today, the U.S. government is agent A.

He goes on:

People who were promised paychecks will not get them. Some will get them late. Some will get smaller paychecks (due to furlough time). Some of these people will face tremendous difficulty. I think it fair to say they will be harmed–having planned their lives given the promise of a regular paycheck, they have legitimate expectations that are being set back. Perhaps the government should not have hired those people in the first place (after all, they are “non-essential” personnel!). But the fact is they were hired and treating them this way is wrong and makes a mockery of contract.

Cohen admits that most of what the government considers “essential” and therefore won’t be affected by the shutdown has little to do with harm prevention or rectification. I feel like that fact makes it so that the government is unjustified in taxing people to pay these debts, since the government is going beyond Cohen’s role for government. Clearly, if taxation is not theft if it pays for legitimate government functions, it ought to be considered theft if it pays for something outside legitimate functions.

But, for Cohen, even criminal enterprises ought to honor their contracts:

Put the point this way: a mobster might be wrong to extract protection money from a business, but that does not make it any less wrong for the mobster to fail to protect that business in time of need. We don’t say “wait, the mobster doesn’t have to live up to its agreement because it was wrong to make the agreement in the first place.” I think most of us think 2 things: (a) the mobster should not have extracted the protection money in the first place and (b) the mobster owes the business protection. Similarly, I think the government should not have hired people to do non-essential jobs (by which I mean any jobs not needed for harm prevention and rectification) in the first place but that because it did, the government* owes those people their salaries on the regular pay days.

I find this to be a tragically poor analogy. The protection money is involuntarily coming from a business (analogous to tax revenue) and the mobster ought to protect that business in exchange (but is that really analogous to what the federal government uses its money to do?). What if that tax revenue is to pay a federal employee for something nobody would voluntarily pay for, such as an NSA employee spying on the American people or a drone operator killing children overseas? A more accurate analogy would then be the mobster paying his hitmen for the contracts he made with them. Honestly, I am more than fine with NSA agents and drone operators not being paid.

Most would agree that people should pay their debts, but they wouldn’t approve of someone stealing from others in order to be able to do so. Even if we assume the idea that taxation is not theft, so much of what the federal government does has nothing to do with Cohen’s defined role for government (indeed, if we consider the US Constitution to be the federal government’s contract with the states regarding its role, it must honor that contract before it has any obligation to pay for employees whose jobs explicitly violate it). Thus,  Cohen’s point is rendered moot: in reality, the employees having delayed, reduced, or even no paychecks do not serve Cohen’s role for legitimate government functions. Even if government ought to honor its contracts with them, that does not give it the right to tax others to pay for its debts. Otherwise, the government is not limited in its powers.