Mr. Greenspan Doth Protest Too Much

UPDATED BELOW

Alan Greenspan, former chairman of the Federal Reserve, disputes the assertion — made by many, including John Taylor of Stanford University — that

had the Federal Reserve from 2003-2005 kept short-term interest rates at the levels implied by [the] “Taylor Rule,” “it would have prevented this housing boom and bust. “

Mr. Greenspan continues:

Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have “prevented” the housing bubble. All things considered, I personally prefer Milton Friedman’s performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: “There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind.”

It is unseemly for Mr. Greenspan to invoke Milton Friedman in this matter, given that Mr. Friedman died in 2006 and, therefore, did not live to see the debacle in the mortgage market.

More to the point, it is impossible to “decouple” financial markets from one another. Imagine trying to decouple the price of gasoline from the price of crude oil. The federal funds rate is determined by the Fed’s open market operations, that is, through the Fed’s expansion or contraction of the money supply. It is true that the only immediate effect of the federal funds rate is on the rate of interest at which banks borrow from and lend to each other. But those rate changes and the underlying changes in the money supply have ripple effects throughout financial markets.

Rates on long-term instruments, such as mortgages, “decouple” from the federal funds rate only when there is a shock to the market for those long-term instruments. The shock, in the case of the mortgage market, was a drop in the value of real-estate, followed by a squeeze on borrowers (primarily on sub-prime borrowers), followed by a jump in the incidence of defaults, followed by a sudden drop in the value of sub-prime mortgages and the derivatives created from them, etc., etc., etc.

But before that shock, the mortgage rate (like the rates of other financial instruments) had tracked the ups and downs of the federal funds rate:

Selected interest rates
Source: Federal Reserve Statistical Release H.15, Selected Interest Rates (annual data)

The recent divergence between the federal funds rate and the mortgage rate did not occur until 2008, that is, until after the collapse of the real-estate bubble — a bubble that was caused in large part by the Fed’s easing of interest rates from January 2001 to June 2004.

UPDATE: For corroboration of my analysis, see Robert Murphy’s “Greenspan’s Bogus Defense” (published April 8, 2009).

UPDATE 2: Now, Secretary of the Treasury Geithner avers that “monetary policy around the world was too loose too long.” Notice how Geithner tries to take the heat off the Fed by focusing on “the world.” But, as the WSJ piece (linked above) points out, Geithner is

still too quick to pass the buck from the Fed to other central banks. The European Central Bank was much tighter than the Fed throughout this period. The Fed was by far the major monetary player because much of the world was on a dollar standard, with its monetary policy linked to the Fed’s. That was true of China, most of Asia and the Middle East.

The Fed’s loose policy from 2003 to 2005 created the commodity and credit bubbles that made these countries flush with dollars. Given their low domestic propensity to consume, these countries then recycled those dollars back into dollar-denominated assets, such as Treasurys and real-estate-related assets such as Fannie Mae securities. The Fed itself had created the surplus dollars that kept long rates low and undermined for a substantial period its belated attempts to tighten.

Mr. Geithner’s concession is important nonetheless because before he moved to Treasury he was vice chairman of the Fed’s Open Market Committee that sets monetary policy. His comments mark a break with the steadfast refusal of Fed Chairmen Alan Greenspan and Ben Bernanke to admit any responsibility. They prefer to blame bankers and what they call the “global savings glut,” as if the Fed had nothing to do with creating that glut.

UPDATE 3: John Taylor links to more evidence for the Fed’s influence on interest rates.

In the Long Run We Are All Poorer

The title of this post is a play on John Maynard Keynes’s famous line, “in the long run we are all dead,” which was not a defense of government spending during the Great Depression. The line comes from  Keynes’s Tract on Monetary Reform, which he published in 1923, years before the Depression. Keynes was in fact writing about the need for government action against inflation.

This post, as its title may suggest, complements an earlier post, “Are We Mortgaging Our Children’s Future?” As I say there, Obama’s economic plan (if it can be called that)

doesn’t simply “mortgage our children’s future.”  It does a lot more than that. Like all government spending that isn’t undertaken for the protection of Americans from foreign and domestic predators, the [Obama plan] mortgages our present, our future, our children’s future, and their children’s future, ad infinitum. The real problem isn’t the size of the national debt, it’s the size of government….

…Obama[‘s] initiatives…will stimulate a massive growth in the size and intrusiveness of government.

Here, I begin with links to three papers about the multiplier effect of government spending:

“Is Government Spending Too Easy an Answer?” (N. Gregory Mankiw)

“Government Spending Is No Free Lunch” (Robert J. Barro)

“New Keynsian versus Old Keynsian Government Spending Multipliers” (John F. Cogan, et al.)

The bottom line: Increases in government spending probably have a much smaller multiplier (stimulative) effect than claimed by the administration; the effect may well be negative. That is, increases in government spending probably will crowd out private consumption and investment, both in the near term (when spending increases are supposed to spur private consumption and investment) and in the long run (as the increases become permanent).

Next, I offer a baker’s dozen links to commentary about Obama’s economic policies and their implications:

“Stocks Hate Obeynomics” (Forbes.com)

“The Left’s Grip on the American Economy” (Forbes.com)

“Obama’s $646 Billion Cap-and-Trade Green Tax” (James Pethokoukis)

“The Obama Revolution: Paid for by the people” (Opinion Journal)

“The 2% Illusion: Take everything they earn and it still won’t be enough” (Opinion Journal)

“Obama Proposes a European U.S.” (Charles Krauthammer)

“Federal Outlays as a Percentage of GDP” (N. Gregory Mankiw)

“Obama Lied; the Economy Died” (Tony Blankley)

“The Great Non Sequitur: The sleight of Hand behind Obama’s Agenda” (Charles Krauthammer)

“Neither Moderate Nor Centrist” (Peter Robinson)

“Obama’s Radicalism Is Killing the Dow” (Michael J. Boskin)

“Even Worse than the Great Depression” (Donald Luskin)

“Obama’s Left Turn” (Stuart Taylor)

Taylor sums it up, thusly:

…I now worry that [Obama] may be deepening what looks more and more like a depression and may engineer so much spending, debt, and government control of the economy as to leave most Americans permanently less prosperous and less free.

Precisely.

There is a bit of hope, in the unlikely form of public opinion. Obama’s approval index (percentage of respondents strongly approving minus percentage strongly disapproving) has gone from a high of +30 on January 22 to a low of +6 (as of March 9). If economic logic doesn’t sway Obama, perhaps he can be swayed by public opinion — though I very much doubt it, given his long-standing adherence to economic and political extremism. (For example, his voting record as a senator placed him among the most “liberal,” i.e., statist, members of the U.S. Senate.)

Where are we headed then? The stock market — for all of its exaggerated swings — does a pretty good job of reflecting expectations about the country’s future economic performance. Witness the performance of the S&P 500:

Real S&P 500, updatedReal S&P price index derived from annual closing prices of the S&P 500 Composite Index, as reconstructed by Global Financial Data, Inc. (no longer publicly available), and GDP deflator (Louis D. Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?” MeasuringWorth, 2008. URL: http://www.measuringworth.org/usgdp/).

The now-enviably stable post-Civil War trend was broken in the early 1900s, when the “progressive” agenda began to take hold — most notably with the passage of the Food and Drug Act and the vindictive application of the Sherman Antitrust Act by Theodore Roosevelt. It has been all downhill since, with the ratification of the Sixteenth Amendment (enabling the federal government to tax incomes); the passage of the Clayton Antitrust Act (a more draconian version of the Sherman Act, which also set the stage for unionism); World War I (a high-taxing, big-spending, command-economy operation that whet the appetite of future New Dealers); a respite (the boom of the 1920s, which was owed to the Harding-Coolidge laissez-faire policy toward the economy); and the Great Depression and World War II (truly tragic events that imbued in the nation a false belief in the efficacy of the big-spending, high-taxing, regulating, welfare state that we now “enjoy”).

Yes, stock prices have continued to rise, on the whole, but they have fluctuated wildly around a trend that is about 50 percent below the trend that prevailed from 1870 to the early 1900s. Such is the destructive power of the regulatory-welfare state.

The reaction of the stock market to Obama’s ascendancy since May 2008 — when he locked up the Democrat nomination — suggests that we have entered an era of even-lower stock prices. I have indicated the onset of this new era by plotting the values for 2008 and 2009 (to date) in red. Lower stock prices would be bad enough, in and of themselves, but what they betoken is the looming economic catastrophe that surely will result if Obama and his ilk persist in their oppressive program of spending, taxing, and regulating.

Eugene Fama and Kenneth French (distinguished financial economists at the University of Chicago) get it almost right:

Government intervention affects the market in two ways. First, it affects the level of expected future profitability, which has direct effects on stock prices. Second, government intervention and uncertainty about the government’s future actions change the risk of expected future profits, which affects stock prices by raising or lowering the discount rates for expected future profits, and thus raising or lowering expected stock returns. Our view is that the rhetoric and sweeping initiatives of the new administration have lowered market expectations of future profitability, and the uncertainty about government policies has increased the risk of expected future profits. Both effects have contributed to the lower stock prices we have seen as the policies of the new administration have unfolded. If the market has it right (that is, if the market is efficient) all this is built into current stock prices, and expected returns are higher going forward.

Future returns may be positive, over the long run, but those returns — and economic output — will be lower than they would have been, absent Obamanomics.

Positive Rights and Cosmic Justice

POSITIVE RIGHTS

An understanding of positive rights begins with negative rights. The classic formulation of negative rights is given in the Declaration of Independence:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

Life, liberty, and happiness are negative rights, to the extent that each of us does nothing in our pursuit and enjoyment of them to impinge on the life, liberty, and happiness of others. That my life, liberty, and happiness might make you unhappy because you are hateful, spiteful, or envious is your doing, not mine. Negative rights, therefore, are those which each of us can enjoy without imposing costs on others.

Yes, a tax-funded state must exist for the protection of negative rights — for reasons that I will address in future posts. But as long as the state protects negative rights evenhandedly, and imposes the costs of doing so evenhandedly, its citizens are better off than they would be if there were no state to protect their negative rights.

Positive rights arise when the state goes beyond the protection of negative rights; that is, when it grants benefits to some citizens — benefits that must, inevitably, come at the expense of other citizens. Affirmative action is one example of a positive right. Through affirmative action, some persons obtain jobs and promotions at the expense of other, better-qualified persons and, therefore, to the detriment of employers and consumers. There are so many positive rights that an exhaustive list of them would run to hundreds of pages. A short, alphabetical list of examples will have to do:

  • Agricultural subsidies
  • Bailouts for auto makers
  • “Fair housing” laws
  • Funding for the “arts”
  • Legalization of strikes
  • Licensing to restrict entry into certain occupations and businesses
  • Medicaid
  • Medicare
  • Minimum wage
  • Social Security
  • Tax-exempt status for certain organizations
  • Tax-supported stadiums

It is ironic, but predictable, that many positive rights have negative consequences for their intended beneficiaries, in addition to the negative consequences they have for the rest of us. Given the plethora of positive rights, perhaps we all suffer their consequences equally, but that those consequences are negative ones I have no doubt.

COSMIC JUSTICE

Believers in positive rights seek “cosmic justice” (though they may not realize it). What is cosmic justice? I like this example from Thomas Sowell’s speech, “The Quest for Cosmic Justice“:

A fight in which both boxers observe the Marquis of Queensberry rules would be a fair fight, according to traditional standards of fairness, irrespective of whether the contestants were of equal skill, strength, experience or other factors likely to affect the outcome– and irrespective of whether that outcome was a hard-fought draw or a completely one-sided beating.

This would not, however, be a fair fight within the framework of those seeking “social justice,” if the competing fighters came into the ring with very different prospects of success — especially if these differences were due to factors beyond their control….

In a sense, proponents of “social justice” are unduly modest. What they are seeking to correct are not merely the deficiencies of society, but of the cosmos. What they call social justice encompasses far more than any given society is causally responsible for. Crusaders for social justice seek to correct not merely the sins of man but the oversights of God or the accidents of history. What they are really seeking is a universe tailor-made to their vision of equality. They are seeking cosmic justice.

In an earlier post, I say:

The seekers of cosmic justice are not content to allow individuals to accomplish what they can, given their genes, their acquired traits, their parents’ wealth (or lack of it), where they were born, when they live, and so on. Rather, those who seek cosmic justice cling to the Rawlsian notion that no one “deserves” better “luck” than anyone else. But “deserves” and “luck” (like “greed”) are emotive, value-laden terms. Those terms suggest (as they are meant to) that there is some kind of great lottery in the sky, in which each of us participates, and that some of us hold winning tickets — which equally “deserving” others might just have well held, were it not for “luck.”

This is not what happens, of course. Humankind simply is varied in its genetic composition, personality traits, accumulated wealth, geographic distribution, etc. Consider a person who is born in the United States of brilliant, wealthy parents — and who inherits their brilliance, cultivates his inheritance (genetic and financial), and goes on to live a life of accomplishment and wealth, while doing no harm and great good to others. Such a person is neither “lucky” nor less “deserving” than anyone else. He merely is who he is, and he does what he does. There is no question of desert or luck.

As Anthony de Jasay writes in “Risk, Value, and Externality,”

Stripped of rhetoric, an act of social justice (a) deliberately increases the relative share…of the worse-off in total income, and (b) in achieving (a) it redresses part or all of an injustice…. This implies that some people being worse off than others is an injustice and that it must be redressed. However, redress can only be effected at the expense of the better-off; but it is not evident that they have committed the injustice in the first place. Consequently, nor is it clear why the better-off should be under an obligation to redress it….

There is the view, acknowledged by de Jasay, that the better-off are better off merely because of luck. But, as he points out,

Nature never stops throwing good luck at some and bad luck at others, no sooner are [social] injustices redressed than some people are again better off than others. An economy of voluntary exchanges is inherently inegalitarian….Striving for social justice, then, turns out to be a ceaseless combat against luck, a striving for the unattainable, sterilized economy that has built-in mechanisms….for offsetting the misdeeds of Nature.

Most seekers of cosmic justice simply claim that they want only what is “fair” for those who “deserve better.” They overlook or simply choose to ignore the evidence that the quest for cosmic justice harms those whom it is intended to benefit. I address that matter in the section “Does Redistribution Work?.”

Then there are those who claim that redistribution can be made to work because it is possible to calibrate well-being across individuals, thereby maximizing “social welfare.” I address that claim in the section “The Roots of Redistribution: Class Warfare and Arrogance.”

But, first, some  arguments for and against positive rights.

POSITIVE RIGHTS, ROUND ONE

Philosopher and Mill scholar Joe Miller (formerly of Bellum et Mores) supports positive rights:

…I still hold on to one core insight of liberalism: respect for autonomy means more than just non-interference. I can have all sorts of freedoms from various things, but those freedoms don’t mean a damn thing if I’m too cold/sick/hungry/stupid/isolated to exercise them. And I remain convinced that, at least for right now, the only way to ensure that everyone has the shelter, medicine, food, education, and access needed to enjoy his/her freedom is through some form of redistribution. Insisting that you redistribute part of your wealth is no more a violation of your autonomy than is insisting that you refrain from hitting me in the nose. Both hitting me in the nose and refusing to help those too poor to exercise their freedoms are violations of autonomy.

Joe is far from alone in his views, of course. His co-believers are legion. Consider, for example, George Lakoff (about whom I have written here). Lakoff, too, is a proponent of positive rights, which he propounds in Whose Freedom?: The Battle over America’s Most Important Idea. Anthony Dick, writing at NRO Online, reviews Lakoff’s book:

“Freedom is being able to achieve purposes,” [Lakoff] writes, “either because nothing is stopping you or because you have the requisite capacities, or both.” He elaborates with a barrage of italics: “Freedom is the freedom to go as far as you can in life, to get what you want in life, or to achieve what you can in life.” This, he explains, means that freedom has a significant positive component: “Freedom requires not just the absence of impediments to motion but also the presence of access….Freedom may thus require creating access, which may involve building.” What Lakoff is describing, in other words, is a type of “positive freedom,” in the sense that it requires the provision of certain goods and services to citizens to ensure that they have the capacity to achieve their goals. On this view, you aren’t “free” unless you have been provided with what you need in order to be successful….

Lakoff’s conception of freedom is thus in direct conflict with that of the Founders. When government seeks to provide entitlements for some in the name of “positive freedom,” it must necessarily interfere in the lives of others. This is because all government action is predicated on taxation and coercion, which by definition entail infringements on liberty. The state can’t give a welfare check to one person without taking money from someone else; it can’t fund a Social Security system without forcing people to pay into it.

People who don’t have food or health care or education have not been deprived of freedom. What they lack is not freedom but material goods and services. This is a matter of vocabulary, not ideology. The court of common word usage simply rejects Lakoff’s claim that being free means having the capacity to achieve one’s aims.

Roger Scruton, in the “Philosophical Appendix” of his The Meaning of Conservatism, says this:

What, then, is meant by the ‘freedom of the individual’? I shall distinguish two kinds of liberal answer to this question, which I shall call, respectively, ‘desire based’ and ‘autonomy based’ liberalism. The first argues that people are free to the extent that they can satisfy thier desires. The modality of ths ‘can’ is, of course, a major problem. More importantly, however, such an answer implies nothing about the value of freedom, and to take it as the basis for political theory is to risk the most absurd conclusions. By this criterion the citizens of Huxley’s Brave New World offer a paradigm of freedom: for they live in a world designed expressly for the gratification of their every wish. A desire-based liberalism could justify the most abject slavery — provided only that the slaves are induced, by whatever method, to desire their own condition.

Joe Miller’s defense of positive rights could be dismissed simply by noting — as does Anthony Dick — the contradiction inherent in the concept of positive rights. It is simply illogical to say that “Insisting that you redistribute part of your wealth is no…violation of your autonomy.” Such insistence, at the behest of the state, can be nothing other than a violation of “your autonomy,” that is, the autonomy of the person whose wealth (or income) is being redistributed. Joe’s formulation also could be dismissed simply by noting — as Roger Scruton suggests — that an agenda of positive rights means that the state can enslave (or at least enthrall) its subjects by dictating the conditions of their existence.

POSITIVE RIGHTS, ROUND TWO

In response, Joe Miller essays another defense of positive freedom:

I might even go so far as to hold that positive freedom is more important than theoretical (or, in philosopher-speak, negative) freedom. This is not to say that I don’t value negative freedom; rather, positive freedom entails negative freedom. After all, I can have X as a member of the set of things I can actually do if and only if no one is using a gun (whether figurative or literal) to prevent me from doing X.

Why positive freedom rather than negative? Or rather, why positive freedom rather than only negative? I’m not sure that I’ve anything more than a deep-seated intuition. It strikes me as somehow empty and hollow to walk up to someone wasting away from disease and say, “Hey, you know, you’re free to do anything you’d like.”…

As with any sort of fundamental disagreement over basic terms, this one has serious implications. One of those implications is that liberals and libertarians often talk past one another. In academic philosophy, for example, the term “autonomy” is used to refer to positive freedom. Libertarians, however, frequently use the term, “autonomy” as a synonym for negative freedom. Because we use the term in different ways, liberals and libertarians often end up with the frustrating feeling of having beaten their respective heads against the wall when they interact.

When I say, “Of course redistribution is consistent with autonomy,” I mean that it’s consistent with a notion of positive freedom. Forcing you to give your money to someone else is no different from forcing you to stop hitting the person. Failure to provide certain of his basic needs is exactly as wrong as clubbing him over the head. Both violate his autonomy.

To which the libertarian responds, “Redistribution is obviously a violation of autonomy. After all, you’re using a gun to force someone to give up his money. How could that not be a violation of his autonomy.”

The fact is, both claims are right. But they are both right only because the interlocuters are, in effect, equivocating on the word “autonomy”. If the term means positive freedom, then the liberal is right. If autonomy means only negative freedom, then the libertarian is right.

Joe doesn’t really advance a new argument. Rather, he restates his old one, but in a way that better exposes its flaws. Here is Joe’s argument, with all of its assumptions made explicit:

1. Autonomy is necessary in order to do as one will toward one’s ends, though one may not do harm to others in the service of those ends.

2. Autonomy is not possible unless one possesses some minimal degree of health, wealth, income, etc. “Minimal” must be defined by someone, of course, and liberals stand ready to do the job.

3. But autonomy is not served by having too much wealth or income — or the things they can buy, such as health. “Too much” must be defined by someone, of course, and liberals stand ready to do that job, as well. (This is how liberals, in general, square their lip service to the harm principle with the actual doing of harm in the name of autonomy — which is done by taking wealth and income from some persons and giving it to others.)

4. Liberals’ arrogant willingness to play at being gods — by defining “minimal” and “too much,” and by ignoring the harm done to some for the benefit of others — rests on these deeper (and usually unacknowledged) assumptions:

  • One person’s well-being can be measured against another person’s well-being through interpersonal comparisons of utility.
  • There is a kind of cosmic justice — or social welfare function — that is advanced by harming some persons for the benefit of other persons. That is, a benefit cancels a harm — at least when the benefit and harm are decided by liberals.
  • Taking wealth and income from those who have “too much” does not, on balance, harm those who have “too little” by dampening economic growth and voluntary charity. (That it does do those things is a point I will address in a later part of this series.)

(The first and second assumptions enable Joe to assert that “positive freedom entails negative freedom.” To Joe, there is one big “welfare pie” in sky, in which we all somehow share — despite the obvious fact that A is made worse off when some of his wealth or income is confiscated and given to B.)

5. Given the foregoing, liberals see it as necessary and desirable to redistribute wealth and income from persons who have “too much” to persons who have “too little” — or “too little” of the things that wealth and income can buy. Otherwise, those who have “too little” wealth or income (or the things they can buy) would enjoy only “theoretical” freedom. But the use of the word “theoretical” is a rhetorical trick, a bit of verbal sleight-of-hand. It implies, without proof, that anyone who does not enjoy a certain “minimal” state of health, wealth, etc. — as “minimal” is defined by a liberal — simply lacks the wherewithal to strive toward ends that he or she values. And that brings us back to point 1.

The liberal argument for redistribution, therefore, is really a circular argument intended to justify liberals’ particular sense of fitting outcomes. Liberalism is paternalism run rampant, with these implications and consequences:

  • Everyone is both a potential beneficiary of and contributor to positive freedom. Whether one becomes a beneficiary or contributor depends on liberals’ arbitrary and capricious criteria for deservingness.
  • Liberal control of the apparatus of the state therefore results in myriad abuses of state power in the name of “compassion” — cheap compassion paid for by taxpayers, to be sure.
  • On the whole and over the long run — the effect of liberalism is to harm rather than help its intended beneficiaries.

DOES REDISTRIBUTION WORK?

The redistribution of income (and thus of wealth) is an integral function of the regulatory-welfare state (i.e., big government). Redistribution not only harms those who are taxed for that purpose but it also does not lastingly help its intended beneficiaries. In fact, it works to their detriment in the long run.

Liberals are unable to grasp that reality because they, more than most Americans, suffer from economic ignorance. Because of economic ignorance, liberals are unable to grasp the subtle, corrosive effects of big government on those things that drive economic progress: invention, innovation, entrepreneurship, the saving that funds those activities, and the hard work that enables the rest.

We Americans are far better off materially than our antecedents of a century ago — but very few of us (especially liberals) understand how much better off we would in the absence of big government. In this post, for example, I assessed how much worse off Americans will be a generation hence because of big government. The bottom line (all GDP estimates are in year 2000 dollars):

  • Had the economy continued to grow after 1907 at the 1790-1907 rate, real GDP in 2006 would have been $32 trillion, vice the actual value of $11 trillion.
  • Thus my earlier work, linked above, vastly understates the deadweight loss owed to big government: I had estimated that loss at 40 percent of potential GDP; it was, in fact, about two-thirds of potential GDP.
  • Had the economy continued to grow after 1907 at the 1790-1907 rate, real GDP in 2035 (a generation hence) would be $108 trillion (in year 2000 dollars).
  • If the economy continues to grow at the 1970-2006 rate, real GDP in 2035 will be $30 trillion (in year 2000 dollars).
  • However, growth is very likely to be less than 3.1% annually, given the advent of a new New Deal-Great Society under a new, anti-business, pro-regulation Democrat regime.
  • Thus the average American will “enjoy” (at best) about 28 percent of the income that would be his absent the advent of the regulatory-welfare state.

In sum, redistribution does not work. As part of liberalism’s “package deal” (tax, regulate, spend, and elect) it harms those whom it is supposed to help by undermining economic growth and thus depriving Joe Miller’s “cold/sick/hungry/stupid/isolated” of jobs and (for those who simply cannot support themselves) vast amounts of voluntary charity.

THE ROOTS OF REDISTRIBUTION: CLASS WARFARE AND ARROGANCE

Liberals wage class warfare on behalf of the “cold/sick/hungry/stupid/isolated” and any “oppressed” or “disadvantaged” group (i.e., one that is not white, male, employed without benefit of affirmative action, law-abiding, and heterosexual). It is a wonder that Jews remain, for the most part, in the liberal camp, but that habitual tendency may arise from liberal guilt (see below).

Liberal politicians are abetted in their cause by the votes that they attract from those groups on whose behalf they wage class warfare. Liberals and their constituencies, for the most part, do not understand the undesirable economic consequences of redistribution. There are many, of course, who simply choose not to understand — choosing class warfare over reason.

It is strange that liberals can claim to believe in the benefits of intellectual liberty (the competition of ideas) but not in the benefits of economic liberty. Liberals’ token adherence to intellectual liberty often is hypocritical. (Consider campus speech codes, for example.) In any event:

  • Liberals prize talk (especially when it is their kind of talk). But talk is cheap. Economic achievement requires action, not talk. The liberal imagination cannot value that which it does not understand.
  • Rich liberals either don’t understand how they came to be rich (if they did so on their own) and/or they feel guilty about their wealth. They are therefore quite willing to infringe the autonomy of others (through taxation) in the service of their ignorance and their consciences.
  • Liberals, who claim to prize autonomy, are nevertheless quite willing to tell others how to lead their lives. Witness the decades of regulation and taxation imposed upon Americans by “compassionate” liberals.
  • Liberals are quite willing to decide precisely who is deserving of “compassion” and who is not. That is, they (and only they) are fit to decide where to draw the dividing lines between those who are “too cold/sick/hungry/stupid/isolated” and those who are not.

In other words, liberals are strong believers in positive rights and, therefore, dispensers of cosmic justice. It is liberals who empower the state to dictate the redistribution of income, even though redistribution is a violation of the very autonomy that liberals claim to value. Liberals are willing and ready to draw arbitrary lines between those who (in their view) deserve more income and those who deserve less of it. And liberals are more than willing and ready to use the power of the state to enforce their arbitrariness.

By the same token, liberals are unwilling to allow free institutions to determine who fares well and who fares poorly. And their unwillingness to do so undermines the ability of those free institutions to enable the “cold/sick/hungry/stupid/isolated” to better their lot by their own efforts, and to care for those who are unable to do so.

Some proponents of positive rights (e.g., Joe Miller) nevertheless defend their position by asserting that they are not drawing arbitrary lines between those who deserve more and those who deserve less. For it is possible (according to Joe, among others) to make valid interpersonal comparisons of utility (hereafter interpersonal utility comparisons, or IUCs). The implication is that the ability to make valid IUCs enables someone (them? bureaucrats? politicians?) to make valid judgments about how to redistribute income so as to foster the maximization of a social welfare function (SWF), that is, to exact cosmic justice. (Joe does not refer to the SWF, but there is no point in making IUCs unless it is for the purpose of increasing the value of the SWF.)

The validity of the SWF, then, depends on these assumptions:

  • It is possible to make interpersonal utility comparisons (IUCs), that is, to determine whether and when it hurts X less than it benefits Y when the state takes a dollar from X and gives it to Y.
  • Having done that, the seekers of cosmic justice are able to conclude that the Xs should be forced to give certain amounts of their income to the Ys.
  • Making the Xs worse off doesn’t, in the longer run, also make the Ys worse off than they would have been absent redistribution. (This critical assumption is flat wrong, as discussed above.)

All of this is arrogant moonshine. Yes, one may safely assume that Y will be made happier if you give him more money or the things that money can buy. So what? Almost everyone is happier with more money or the things it can buy. (I except the exceptional: monks and the like.) And those who don’t want the money or the things it can buy can make themselves happier by giving it away.

What one cannot know and can never measure is how much happier more money makes Y and how much less happy less money makes X. Some proponents of IUCs point to the possibility of measuring brain activity, as if such measurement could or should be made — and made in “real time” — and as if such measurements could somehow be quantified. We know that brains differ in systematic ways (as between men and women, for instance), and we know a lot about the ways in which they are different, but we do not know (and cannot know) precisely how much happier or less happy a person is made — or would be made — by a change in his income or wealth. Happiness is a feeling. It varies from person to person, and for a particular person it varies from moment to moment and day to day, even for a given stimulus. (For more about the impossibility of making IUCs, see these posts by Glen Whitman of Agoraphilia. For more about measuring happiness, see these posts by Arnold Kling of EconLog.)

One answer to such objections is that an individual’s utility must diminish at the margin. (After all, diminishing marginal utility, DMU, is a key postulate of microeconomic theory.) Therefore, the Xs of the world must be “sated” by having “so much” money, whereas the Ys remain relatively “unsated.”

If that were true, why would Bill Gates, Warren Buffet, and partners in Wall Street investment banks (not to mention most of you who are reading this) seek to make more money and amass more wealth? Perhaps the likes of Gates and Buffet do so because they want to engage in philanthropy on a grand scale. But their happiness is being served by making others happy through philanthropy; the wealthier they are, the happier they can make others and themselves.*

Most of us, I suspect, simply become happier as we accrue wealth because. But how much wealth is “enough” for one person? I cannot answer that question for you; you cannot answer it for me. (I may have a DMU for automobiles, cashew nuts, and movies, but not for wealth, in and of itself.) And that’s the bottom line: However much we humans may have in common, each of is happy (or unhappy) in his own way and for his own peculiar reasons.

In any event, even if individual utilities (states of happiness) could be measured, there is no such thing as the social welfare function: X’s and Y’s utilities are not interchangeable. Taking income from X makes X less happy. Giving some of X’s income to Y may make Y happier (in the short run), but it does not make X happier. It is the height of arrogance for anyone — liberal, fascist, communist, or whatever — to assert that making X less happy is worth it if it makes Y happier.

CONCLUSION

There is a liberal urge to exact cosmic justice through positive rights — primarily redistribution in various forms. But redistribution harms those whom it is intended to help because it curtails economic growth and discourages work.

The urge to exact cosmic justice arises from arrogance, that is, from a penchant for dictating economic outcomes (and social relationships) that cannot be justified by pseudo-scientific appeals to interpersonal utility comparisons or the social welfare function.

If there is anything unjust or unfair in this world, it is the effort to exact cosmic justice. Robert Nozick put it this way in Anarchy, State, and Utopia:

We are not in the position of children who have been given portions of pie by someone who now makes last-minute adjustments to rectify careless cutting. There is no central distribution, no person or group entitled to control all the resources, jointly deciding how they are to be doled out. What each person gets, he gets from others who give to him in exchange for something, or as a gift. In a free society, diverse persons control different resources, and new holdings arise out of the voluntary exchanges and actions of persons. (Quoted by Gregory Mankiw in “Fair Taxes? Depends on What You Mean by Fair,” The New York Times, July 15, 2007.)

Greed, Cosmic Justice, and Social Welfare

GREED

We have heard much about “greed” in connection with the current financial crisis and recession. It seems that “greedy” lenders and financial intermediaries granted sub-prime mortgages to persons of low credit-worthiness and then infected the financial system by securitizing those risky mortgages and peddling them around to investors.

Why don’t we hear about the “greed” of the borrowers who entered into those sub-prime mortgages, and who enjoyed (and still enjoy, in most cases) better housing than they would otherwise have occupied. Why don’t we hear about the “greed” of the politicians who (seeking to curry favor and votes from certain groups) pressured Fannie Mae and Freddie Mac (and through them, mortgage lenders) to make mortgages more readily available to low-income borrowers (i.e., to make riskier loans)?

When does the desire to have more (e.g., a bigger house, a higher income) stop being the “American Dream” and become “greed”? Why is it good for a low-income person to inhabit a house that he can’t really afford but bad for a high-income person to inhabit a house that he can afford, and whose investments and entrepreneurship have helped the low-income person strive toward the “American Dream”?

The answer, of course, is that “greed” is whatever a politician, pundit, or other purveyor of economic envy says it is. “Greed” is invoked not to explain financial success but to denigrate those who have attained it (only to lose it, in some cases), as if they had attained it at the expense of those who have failed to attain it (thus far, at least). Except in the (relatively rare) cases of outright theft and fraud, financial success is not attained at anyone else’s expense; economics is not a zero-sum game.

COSMIC JUSTICE

The habit of castigating the motives of the financially successful and then penalizing their success by taxing them disproportionately appeals not only to envy and economic ignorance but also to what Thomas Sowell calls cosmic justice. The seekers of cosmic justice are not content to allow individuals to accomplish what they can, given their genes, their acquired traits, their parents’ wealth (or lack of it), where they were born, when they live, and so on. Rather, those who seek cosmic justice cling to the Rawlsian notion that no one “deserves” better “luck” than anyone else. But “deserves” and “luck” (like “greed”) are emotive, value-laden terms. Those terms suggest (as they are meant to) that there is some kind of great lottery in the sky, in which each of us participates, and that some of us hold winning tickets — which equally “deserving” others might just have well held, were it not for “luck.”

This is not what happens, of course. Humankind simply is varied in its genetic composition, personality traits, accumulated wealth, geographic distribution, etc. Consider a person who is born in the United States of brilliant, wealthy parents — and who inherits their brilliance, cultivates his inheritance (genetic and financial), and goes on to live a life of accomplishment and wealth, while doing no harm and great good to others. Such a person is neither “lucky” nor less “deserving” than anyone else. He merely is who he is, and he does what he does. There is no question of desert or luck.

Such reasoning does not dissuade those who seek cosmic justice. Many of the seekers are found among the “80 percent,” and it is their chosen lot to envy the other “20 percent,” that is, those persons whose brains, talent, money, and/or drive yield them a disproportionate — but not undeserved — degree of fortune, fame, and power. The influential seekers of cosmic justice are to be found among the  “20 percent.” It is they who use their wealth, fame, and position to enforce cosmic justice in the service (variously) of misplaced guilt, economic ignorance, and power-lust. (Altruism — another emotive, value-laden term — does not come into play, for reasons discussed here and here.)

Some combination of misplaced guilt, economic ignorance, and power-lust motivates our law-makers. (Their self-proclaimed “compassion” is bought on the cheap, with taxpayers’ money.) They accrue power by pandering to their fellow seekers of cosmic justice. Thus they have saddled us with progressive taxation, affirmative action, and a plethora of other disincentivizing, relationship-shattering, market-distorting policies. It is supremely ironic that those policies have made all of us (except perhaps politicians, bureaucrats, and thieves) far worse off than we would be if government were to get out of the cosmic-justice business. (See this, for example.)

SOCIAL WELFARE

Some proponents of cosmic justice appeal to the notion of social welfare (even some economists, who should know better) . Their appeal rests on two mistaken beliefs:

  • There is such a thing as social welfare.
  • Transferring income and wealth from the richer to the poorer enhances social welfare because redistribution helps the poorer more than it hurts the richer.

Having disposed elsewhere of the second belief, I now address the first one. I begin with a question posed by Arnold Kling:

Does the usefulness of the concept of a social welfare function stand or fall on its mathematical properties?

My answer: One can write equations until kingdom come, but no equation can make one person’s happiness cancel another person’s unhappiness.

The notion of a social welfare function arises from John Stuart Mill’s utilitarianism, which is best captured in the phrase “the greatest good for the greatest number” or, more precisely “the greatest amount of happiness altogether.” (See “Adler on Mill’s Utilitarianism” at the Adler Archive of The Radical Academy.)

From this facile philosophy (not Mill’s only one) grew the ludicrous idea that it might be possible to quantify each person’s happiness and, then, to arrive at an aggregate measure of total happiness for everyone (or at least everyone in England). Utilitarianism, as a philosophy, has gone the way of Communism: It is discredited but many people still cling to it, under other names.

Today’s usual name for utilitarianism is cost-benefit analysis. Governments often subject proposed projects and regulations (e.g., new highway construction, automobile safety requirements) to cost-benefit analysis. The theory of cost-benefit analysis is simple: If the expected benefits from a government project or regulation are greater than its expected costs, the project or regulation is economically justified.

Here is the problem with cost-benefit analysis — which is the problem with utilitarianism: One person’s benefit cannot be compared with another person’s cost. Suppose, for example, the City of Los Angeles were to conduct a cost-benefit analysis that “proved” the wisdom of constructing yet another freeway through the city in order to reduce the commuting time of workers who drive into the city from the suburbs. In order to construct the freeway, the city must exercise its power of eminent domain and take residential and commercial property, paying “just compensation,” of course. But “just compensation” for a forced taking cannot be “just” — not when property is being wrenched from often-unwilling “sellers” at prices they would not accept voluntarily. Not when those “sellers” (or their lessees) must face the additional financial and psychic costs of relocating their homes and businesses, of losing (in some cases) decades-old connections with friends, neighbors, customers, and suppliers.

How can a supposedly rational economist, politician, pundit, or “liberal” imagine that the benefits accruing to some persons (commuters, welfare recipients, etc.) somehow cancel the losses of other persons (taxpayers, property owners, etc.)? There is no valid mathematics in which A’s greater happiness cancels B’s greater unhappiness.

Yet, that is how cost-benefit analysis (utilitarianism) works, if not explcitly then implicitly. It is the spirit of utilitarianism (not to mention power-lust, arrogance, and ignorance) which enables Barack Obama and his ilk throughout the land to impose their will upon us — to our lasting detriment.

The Causes of Economic Growth

President Obama proposes (unsurprisingly) to “soak the rich,” which is a flawed prescription for making the government’s ends meet, and yet another insult to the body economic.

The well-being of all Americans is best assured by a vibrant and growing economy, a necessary condition of which is the prospect of ever-greater rewards at the top end of the income scale. Leftists, in their zeal to redistribute income, aim to penalize “the rich” for being richer than the rest of us; the result is to penalize all of us by thwarting economic growth, which has these several causes:

1. Hard work

The tradeoff here is with “non-work” activities, and the tradeoff can be costly. But those who choose wisely in sacrificing non-work activities then acquire additional cash income, which can be used to offset the loss of non-work time and/or to improve the tools of one’s trade.

2. Smart work

Working smarter requires education, specialized training, and on-the-job learning. Today’s workers are (on the whole) more productive than their predecessors because the education, training, and on-the-job learning of today’s workers incorporates lessons learned by their predecessors.

3. Saving and investment

Resources that are saved (not used to produce consumption goods) can flow into investment (services and goods such as pharmaceutical research and development, advanced computer and telecommunications technologies). It is investment that enables the production of new, more, and better consumer goods with a given amount of labor. (Government investment is an inferior alternative to private investment.)

4. Invention, innovation, and entrepreneurship

These are the primary activities through which saving becomes investment, usually via the medium of financial institutions. Inventors, innovators, and entrepreneurs (along with shareholders, creditors, and financial intermediaries) accept the risks associated with failure and the rewards of success. It is the prospect of rewards that encourages invention, innovation, and entrepreneurship — and the benefits they bestow on workers and consumers. (Invention, innovation, and entrepreneurship — like work — are “socially responsible” activities because the pursuit of gain is motivated by the satisfaction of wants.)

5. Trading

If A makes bread and B makes butter — and if both prefer buttered bread — both benefit from trade. Where they produce bread and butter matters not; A and B could be neighbors, live in different parts of the United States, or one of them could live in a different country. In any event, both are made better off through voluntary exchange.

6. Population growth

Given the foregoing, a larger population means more people to work “hard” and “smart”; more output that can be saved and invested; more inventors, innovators, and entrepreneurs whose activities can be leveraged into greater per-capita output; and a multiplication of opportunities for beneficial voluntary exchange.

7. The rule of law under a minimal state

Predation — whether by individuals, mobs, or government — discourages everything that fosters economic growth. The more that government tries to direct the economy, the less it will grow and satisfy human wants.

Further reading:
Why Outsourcing Is Good: A Simple Lesson for Liberal Yuppies
Trade Deficit Hysteria
Brains Sans Borders
The Main Causes of Prosperity
Straight Thinking about Business Cycles
Understanding Economic Growth
The Population Mystery
The Economy Works, in Spite of Zany Economists
What Economics Isn’t
Why Government Spending Is Inherently Inflationary
Understanding Outsourcing
A Simple Fallacy
Ten Commandments of Economics
More Commandments of Economics
Three Truths for Central Planners
Bits of Economic Wisdom
Productivity Growth and Tax Cuts
Zero-Sum Thinking
Economist, Heal Thyself
Liberty, General Welfare, and the State
Monopoly and the General Welfare
Trade, Government Spending, and Economic Growth
Toward a Capital Theory of Value
Things to Come
And much more, here.

Are We Mortgaging Our Children’s Future?

Or, what will the “stimulus package” stimulate?

Congressional Democrats used to depict George W. Bush’s tax-rate reductions as fiscally irresponsible. The real problem, for Democrats, wasn’t that tax cuts might cause the national debt to swell. The real problem, for Democrats, was the prospect of having less money to spend on things that Democrats like to spend money on.

Now that Democrats control the White House and both houses of Congress, fiscal irresponsibility is all the rage (among Democrats). It seems that an increase in the national debt isn’t fiscally irresponsible if (a) it results from Democrat policies and (b) it’s caused not by lower taxes but by huge government spending programs.

Predictably, some Republicans have reverted to the old GOP line that deficit spending mortgages our children’s future (or some such thing).  The flaws in this assertion are exposed very nicely here, by professional economists.

However, the suggestion that the national debt represents inter-generational theft does hint at an essential truth. The burgeoning size and influence of government (which is the cause of the burgeoning national debt) amounts to theft — period:

1. Government spending (whether financed by taxes, borrowing, or money creation) commandeers resources that could have been used to produce goods and services in the private sector. Government spending diverts those resources to uses deemed “beneficial” not by producers and consumers but by politicians and interest groups.

2. Some of the commandeered resources are devoted to the payment of government employees for the purpose of making work for them, which includes the  writing and enforcement of regulations that hinder economic growth. Other resources are commandeered for the purpose of transferring purchasing power from productive members of society to less-productive and unproductive ones, thus penalizing and discouraging the traits that drive economic growth: hard work, thrift, innovation, and entrepreneurship.

3. The net effect  — near-term and long-run — is to reduce total economic output below what it could have been.

In other words, the “stimulus package” doesn’t simply “mortgage our children’s future.”  It does a lot more than that. Like all government spending that isn’t undertaken for the protection of Americans from foreign and domestic predators, the “stimulus package” mortgages our present, our future, our children’s future, and their children’s future, ad infinitum. The real problem isn’t the size of the national debt, it’s the size of government.

The best way to stimulate the economy is to reduce the tax and regulatory burdens that stifle hard work, thrift, innovation, and entrepreneurship — words that don’t seem to be in Democrats’ vocabulary. On the contrary, Democrats (Barack Obama, in particular) are bent on increasing the tax and regulatory burdens on Americans, especially those upon whom growth most depends.

As Friedrich Hayek explains, in The Constitution of Liberty,

the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.

The answer to the question asked at the beginning of this post: The “stimulus package” (and other Obama initiatives) will stimulate a massive growth in the size and intrusiveness of government. Greg Mankiw agrees (here and here, for example).

Further reading:
Curing Debt Hysteria in One Easy Lesson
The Real Meaning of the National Debt
Debt Hysteria, Revisited
Why Government Spending Is Inherently Inflationary
Joe Stiglitz, Ig-Nobelist
A Simple Fallacy
Ten Commandments of Economics
Professor Buchanan Makes a Slight Mistake
More Commandments of Economics
Productivity Growth and Tax Cuts
Risk and Regulation
Liberty, General Welfare, and the State
Do Future Generations Pay for Deficits?
The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
And much more, here.

Giving Back

In the latter years of my tenure at a tax-funded think-tank, our CEO established a “community service” program so that our professional staff of well-paid, mostly white, economists, mathematicians, and scientists could “give back to the community.” The “community” to which the aforementioned professionals gave “service” did not, of course, comprise well-paid, white professionals.

I am confident that the targets of our CEO’s “social consciousness” paid only a minuscule fraction of the taxes that funded the nicely appointed offices, high salaries, and generous benefits enjoyed by our professionals. “Giving back” to the “community” that actually supported them would have involved mowing lawns, tutoring, and babysitting for mostly white, middle- and upper-income professionals in other parts of the D.C. area than the one selected by our CEO as the “community” to which to “give back.”

If the services provided by our professional staff in exchange for their splendid offices, salaries, and benefits had been worth their weight in taxes, there would have been no need for those professionals to “give back” to any community. Taxpayers would have received their money’s worth, and that would have been that.

Our CEO either felt guilty about his huge office, princely salary, and obscene benefits or he thought that the think-tank wasn’t giving taxpayers fair value for their money. As he would have been the last person in the United States to admit that the think-tank wasn’t delivering fair value, I can only conclude that his yearning to “give back” arose from feelings of guilt, which he projected onto his employees — many of whom undoubtedly had similar feelings. For, even as the CEO pressed his employees to “give back,” he sought to justify the spending of more tax dollars on better quarters and higher compensation for the think-tank and its employees (himself included, of course).

Feelings of guilt aren’t confined to those who feed at the public trough, of course. CEOs and senior executives of large corporations have a good thing going for themselves — which they owe to their chummy relations with boards of directors — and they know it. Thus the impetus for private-sector “giving back.”

In summary, “giving back to the community” is either an unnecessary act — because “the community” already has received fair value for its money — or it is emblematic of guilt. In the first instance, “giving back” is really an act of charity, which comes at the expense of those who pay for a company’s products (i.e., taxpayers or consumers). In the second instance, “giving back” is really a false act of contrition and an inadequate, misdirected form of atonement for executive avarice.

Having said all of that, I must add this: In the era of bailouts that is now upon us, there is much to be said for “giving back” by bankers, U.S. auto makers, members of the UAW, and defaulting mortgagors — to name a few of the recent and prospective additions to the already vast roster of government clients. That these new clients, like their predecesssors, will not “give back” is, of course, a foregone conclusion.

Moreover, if the present regime has its way there will be some kind of “national service” program which (through tax incentives if not downright conscription) will divert resources from useful (i.e., marketable) ends to “socially conscious” (i.e., government-dictated) ones. “National service,” in other words, is assuredly not a means of “giving back.” It is, rather, a means of taking away — of stealing time and opportunities from those who are conscripted into it, of stealing money from those whose incomes are conscripted (taxed) to support it.

The End of Slavery in the United States

This post commemorates the 200th anniversary of Abraham Lincoln’s birth by revisiting two long-debated questions about the Civil War: Was it fought over the issue of slavery? Would slavery have ended in the United States, even if the Confederacy had not been defeated?

WAS THE CIVIL WAR ABOUT SLAVERY?

The war was about slavery, in a roundabout way:

  • The mainly agrarian South wanted low tariffs on manufactured goods because high tariffs meant that Southerners had to pay higher prices for manufactured goods. The North wanted high tariffs to protect its new manufacturing industries.
  • Slave labor was fundamental to Southern agrarianism. Abolition was largely a Northern phenomenon.
  • Anti-Northern feelings among Southern elites had been running high for decades. With the rise of the Republican Party, Southerners faced not only the continued prospect of Northern economic dominance but also the prospect that slavery would be abolished. The declarations of the causes of secession issued by four seceding States — Georgia, Mississippi, South Carolina, and Texas — leave no doubt that anti-abolition, pro-slavery sentiment fueled secession. Mississippi’s declaration, for example, puts this at the top of the list of reasons for secession:

    Our position is thoroughly identified with the institution of slavery– the greatest material interest of the world. Its labor supplies the product which constitutes by far the largest and most important portions of commerce of the earth.

    In sum, the election of Abraham Lincoln posed an imminent threat to the Southern “way of life,” in which slavery was an essential ingredient.

  • War was inevitable, given the South’s aversion to the North’s economic and abolitionist agenda, on the one hand, and Lincoln’s determination to preserve the Union, on the other hand.

The North’s victory in the Civil War meant an end to slavery in the United States, even though ending slavery was, in Lincoln’s view, secondary to preserving the Union. According to one account of a failed peace parley in January 1865 — an account that is somewhat disingenuous about the South’s interest in preserving slavery — Lincoln

stated that it was never his intention to interfere with slavery in the states where it already existed and he would not have done so during the war, except that it became a military necessity. He had always been in favor of prohibiting the extension of slavery into the territories but never thought immediate emancipation in the states where it already existed was practical. He thought there would be “many evils attending” the immediate ending of slavery in those states.

Be that as it may, the government of the United States did take advantage of the Civil War to eradicate slavery, first partially through the Emancipation Proclamation, then fully through the Thirteenth, Fourteenth, and Fifteenth Amendments to the Constitution.

Slavery’s demise, as a byproduct of the Civil War, raises two questions:

  • Might not slavery have ended, regardless of the Civil War or its outcome?
  • Is slavery an indelible stain on American history?

WITH RESPECT TO SLAVERY, WAS THE CIVIL WAR NECESSARY?

There are those who argue that if the North had fought the Civil War over slavery, it had fought an unnecessary war because economic forces would eventually have put an end to slavery. There are others who argue that slavery would not have succumbed to economic forces. Crucial to the debate between the two camps is the validity (or invalidity) of Robert Fogel and Stanley Engerman’s cliometric study, Time on the Cross: The Economics of American Negro Slavery (1974), which makes a case that slavery would not have succumbed to economic forces. Fogel and Engerman’s study, however, is fraught with errors. Thomas J. DiLorenzo explains some of those errors:

. . . Fogel and Engerman’s . . . reliance on . . . the price of slaves . . . as “evidence” that slavery could not have been ended peacefully is poor economics. . . . For one thing, the Fugitive Slave Act socialized the enforcement costs of slavery, thereby artificially inflating slave prices. Abolition of the Act, as would have been the reality had the Southern states been allowed to leave in peace would have caused slave prices to plummet and quickened the institutionÂ’s demise. That, coupled with a serious effort to do what every nation on the face of the earth did to end slavery during the nineteenth century – compensated emancipation – could have ended slavery peacefully. Great Britain did it in just six years time, and Americans could have followed their lead.. . .

[T]he high price of slaves . . . in 1860 created strong incentives for Southern farmers to find substitutes in the form of free labor and mechanized agriculture. It also increased the expected profitability of mechanized agriculture, so that the producers of that equipment were motivated to develop and market it in the South. This is what happens in any industry where there are rapidly-rising prices of factors of production of any kind. As Mark Thornton wrote in “Slavery, Profitability, and the Market Process” (Review of Austrian Economics, vol. 7, No. 2, 1994), by 1860 “slavery was fleeing from both the competition of free labor and urbanization towards the isolated virgin lands of the Southwest.” Gunderson does not cite any literature past 1974 on this point, so he is probably unaware of such facts.

[T]here is a difference between slave labor being “efficient” for the slave owner and its effect on society as a whole. Of course slavery was profitable to slave owners. This government-supported system helped them confiscate the fruits of the slaves’ labor. But since slave labor is inherently less efficient than free labor, and since so many resources had to be devoted to enforcing the system — most of which were the result of government interventions such as the Fugitive Slave Act, mandatory slave patrol laws, and laws that prohibited manumission — the system imposed huge burdens (”dead weight loss,” in the language of economics) on the rest of society. Free laborers and non-slave owners in the South (at least 80 percent of the adult population) were the primary victims of these government-imposed costs, and would have been a natural political constituency for their eventual abolition. As Hummel concluded, “In real terms, the entire southern economy, including both whites and blacks, was less prosperous” overall because of slavery.

There was net internal migration from South to North, confirming the fact that free laborers in the South were also indirectly exploited by the slave system which forced them into lower-paying jobs. . . .

DiLorenzo — an anarcho-libertarian who despises Abraham Lincoln and is rabidly pro-secession (column archive) — may strike you as a biased source, even though he seems to have facts and logic on his side, in this instance. But we need not rely on DiLorenzo. Fogel and Engerman’s thesis has been attacked, on its merits, from many quarters. Here, for example, are excerpts of a review essay by Thomas L. Haskell, “The True and Tragical History of ‘Time on the Cross’ ” (fee required), from The New York Review of Books (October 2, 1975):

The flaws of Time on the Cross are not confined to its parts but extend to its conceptual heart: the efficiency calculation. No finding raised more eyebrows than the dramatic claim that slaves, through their personal diligence and enthusiastic commitment to the work ethic, made southern agriculture 35 percent more efficient than the family farms of the North. My own nonspecialist’s doubts about this contention . . . have been amply confirmed (and superseded in expertise and weight of evidence) by the work of a half-dozen economic historians.

Fogel and Engerman should have known from the beginning that any comparison of regional efficiency in the antebellum period was fraught with breathtaking difficulties. The basis for their comparison, a rather controversial economist’s tool known as the “geometric index of total factor productivity,” gives results whose interpretation is debatable in even the most conventional applications. . . .

Since the index is based on market value it reflects not only the performance of producers (which is what we have in mind when we talk about productive efficiency) but also the behavior of consumers, whose eagerness for the product helps to determine its market value. Consumer behavior is clearly irrelevant to productive efficiency and the index is misleading to the extent that it is influenced by this factor.

In short, the index is sensitive to demand: if two producers organize their work in equally rational ways, work equally hard, and even produce equal amounts of physical output, the so-called “efficiency” index may nonetheless rank one producer more “efficient” than the other because his product is in greater demand. As David and Temin observe, this is not the accepted meaning of “efficiency.”

Given the sensitivity of the index to demand and the heavy demand for the South’s principal crop, cotton, the index by itself is utterly incapable of justifying the chief inference that Fogel and Engerman drew from it—that slaves must have been hard-working Horatio Alger types and their masters skilled scientific managers. Gavin Wright confirms that the efficiency gap has more to do with voracious consumer demand for cotton than with any Herculean feats of productivity by southern producers. . . .

The bias introduced by cotton demand is only the most obvious of the flaws in the efficiency calculation. Even apart from the inherent frailties of the index in this especially difficult application, Fogel and Engerman’s use of it rests on some extremely dubious assumptions. The choice of 1860 as a typical year for measurement has been sharply questioned. So has the authors’ proposition that an acre of northern farmland was on average 2.5 times better in quality than southern farmland. This extraordinary assumption alone is enough to guarantee a finding of southern superiority in productivity. . . .

Lance Davis of the California Institute of Technology, a prominent cliometrician, singled out the efficiency calculation as the least plausible argument of a generally unpersuasive book. He estimated that Fogel and Engerman’s chances of successfully defending the efficiency finding were about one in ten. This is a telling judgment from the man who introduced the term “New Economic History,” who once called Fogel’s railroad study a “great book,” and who even crowned Fogel himself as “the best” of the cliometricians nine years ago. The efficiency calculation has been closely scrutinized not only by Davis, Wright, Temin, and Paul David, but also by Stanley Lebergott of Wesleyan, Harold Woodman of Purdue, Jay Mandle of Temple, and Frank B. Tipton, Jr. and Clarence E. Walker, both of Wesleyan. No one has a kind word to say for it.

Haskell certainly wasn’t offering an apology for slavery or for any other form of oppression. Nor am I. Slavery was evil, but it existed. The question facing our forbears was how best to eradicate it and then improve the lot of those who had been enslaved. With the advantage of hindsight a case can be made that America’s blacks would be better off today if their ancestors had been freed and integrated into society voluntarily — through economic forces if not social ones. But that is merely hindsight. Regardless of Lincoln’s motivation for prosecuting the Civil War, that war brought an end to slavery. And that — thankfully — is that.

Moreover, Lincoln-hater DiLorenzo gives us good reason to believe that slavery would have died hard in the South. DiLorenzo wants the best of both worlds. He wants to prove that the Civil War was not fought (by the North) because of slavery, and also to prove that the Civil War was fought (by the North) unnecessarily because economic forces would have put an (eventual) end to slavery. The second proposition is inconsistent with the first. DiLorenzo’s inconsistency arises because he is a pro-secessionist who also has the good grace to oppose slavery. He must therefore resort to alternative history in order to justify his secessionist views. His alternative history (sampled above) is that economic forces would have brought an end to slavery in the South, absent the Civil War. But would they have done so? Perhaps eventually, but not for an unconscionably long time.

Economic forces arise from human nature. One facet of human nature is a “taste” that manifests itself in the oppression of “inferior” races (e.g., blacks, Jews, Tutsis, Hutus). Such a “taste” can override “rational” (i.e., wealth-maximizing) forces. The post-Civil War history of race in the South suggests very strongly that slavery would have died hard in the South. Thomas Sowell examines a slice of that history:

The death of Rosa Parks has reminded us of her place in history, as the black woman whose refusal to give up her seat on a bus to a white man, in accordance with the Jim Crow laws of Alabama, became the spark that ignited the civil rights movement of the 1950s and 1960s.

Most people do not know the rest of the story, however. Why was there racially segregated seating on public transportation in the first place? “Racism” some will say — and there was certainly plenty of racism in the South, going back for centuries. But racially segregated seating on streetcars and buses in the South did not go back for centuries.

Far from existing from time immemorial, as many have assumed, racially segregated seating in public transportation began in the South in the late 19th and early 20th centuries.

Those who see government as the solution to social problems may be surprised to learn that it was government which created this problem. Many, if not most, municipal transit systems were privately owned in the 19th century and the private owners of these systems had no incentive to segregate the races.

These owners may have been racists themselves but they were in business to make a profit — and you don’t make a profit by alienating a lot of your customers. There was not enough market demand for Jim Crow seating on municipal transit to bring it about.

It was politics that segregated the races because the incentives of the political process are different from the incentives of the economic process. Both blacks and whites spent money to ride the buses but, after the disenfranchisement of black voters in the late 19th and early 20th century, only whites counted in the political process.

It was not necessary for an overwhelming majority of the white voters to demand racial segregation. If some did and the others didn’t care, that was sufficient politically, because what blacks wanted did not count politically after they lost the vote.

The incentives of the economic system and the incentives of the political system were not only different, they clashed. . . .

The “incentives of the political system” — a “taste” for racial oppression, in other words — dominated Southern politics until the 1960s. And that was in a defeated South. The determination of Southern political leaders to defend slavery in the first place, and then to salvage the remnants of slavery through Jim Crow, is strong evidence that economic forces might not have been allowed to operate freely in the South, at least not for a long time. The evil (take note, Mr. DiLorenzo) was to be found in Southern political leaders, not in the White House.

Opponents of slavery, unarmed as they were with “sophisticated” (and flawed) cliometric techniques, saw the evil in slavery and eradicated it when they had the opportunity to do so. Uncertain gradualism in the defense of liberty is no virtue. Opportunistic abolitionism in the defense of liberty is far from a vice.

THE STAIN OF SLAVERY

The fact that slavery existed in the United States for so long is taken by some — especially those of the Left, here and abroad — as evidence that white-male-capitalist-dominated-America is evil incarnate. But slavery in the United States was ended when white, male capitalists still dominated America, whereas slavery still exists in non-white areas of the world.

Strident critics of the United States nevertheless persist in saying that the existence in the United States of slavery (or any other “evil,” real or imagined) means that the U.S. was and is no better than, say, the fascistic Third Reich. (Leftists don’t like to remind us about the longer-lived and equally fascistic USSR.) Such assertions studiously ignore the fact that most Americans always have been freer than the subjects of Hitler and Stalin. The economic forces that could eventually have brought an end to slavery in the United States would not have been allowed to operate in Nazi Germany or the Soviet Union — or in Communist China, Cuba, Saddam’s Iraq, North Korea, and other dictatorial regimes of the kind that Leftists often have defended and even idealized as “progressive” and even “freedom-loving.” Nor should it go without notice that Nazi Germany and the USSR met their demise at the hands of the “militaristic” United States.

It is supremely ironic that Leftists — who like to attack the United States as “fascistic” and “militaristic” — are proponents of government interventions in private affairs that are confiscatory and stifling in their effects on economic output. All working persons in the United States — and all who depend on them — are in thrall to the “plantation owners” who run our affairs from the Capitol in Washington, the various State capitols, and sundry municipal buildings. The Left applauds that thralldom and agitates for its intensification.

Yes, the fact that slavery existed in the United States for so long is a stain on the history of the United States, but it is not an indelible stain. To err is human, which must come as news to the Left, with its penchant for judging its enemies (mainly conservative, white, American males) by superhuman standards of conduct, while seeking to impose its utopian social and economic order through the power of the state. The Left’s cynicism stands in stark contrast to the vision of the Framers, who sought “a more perfect Union” by enabling the free exchange of ideas and goods.

On Liberty

This inaugural post is in two parts: “What Liberty Is Not” and “What Liberty Is.” This post is a springboard for future posts, which will explore politics, economics, and their interplay from a libertarian-conservative perspective.

WHAT LIBERTY IS NOT

Who can doubt that many people have forgotten, for very obvious reasons, Mill’s qualifications of personal sovereignty, namely that it applies to conduct that “merely concerns himself”?

— Theodore Dalrymple, In Praise of Prejudice:
The Necessity of Preconceived Ideas

Liberty is not license, as the saying goes, for what should be an obvious reason: Unrestrained behavior is bound, at some point, to intrude on those who do not wish to partake of it, or its consequences. The intrusion may be direct, as in the case of a wild party that devolves into a brawl and thence to the destruction of property. Or the intrusion may be indirect, as in the gradual weakening of social norms that had contained (if not stifled) licentious behavior and, therefore, its consequences.

Nor is liberty found in anarchy, which is an open invitation to thuggery. This is true even in free-market anarchism, a Utopian scheme in which the state is replaced by private institutions offering police protection, justice, and other defense services. There is nothing in free-market anarchism to prevent contractual bargains of the vilest sort: murder by the low bidder, for example. Who could stand in the way of such a contract and its execution if the parties to it can summon more force than any objector?

John Stuart Mill, in On Liberty (1869), preaches neither license nor anarchy, or so it seems. He offers a deceptively benign description of liberty:

It comprises, first, the inward domain of consciousness; demanding liberty of conscience, in the most comprehensive sense; liberty of thought and feeling; absolute freedom of opinion and sentiment on all subjects, practical or speculative, scientific, moral, or theological. The liberty of expressing and publishing opinions may seem to fall under a different principle, since it belongs to that part of the conduct of an individual which concerns other people; but, being almost of as much importance as the liberty of thought itself, and resting in great part on the same reasons, is practically inseparable from it. Secondly, the principle requires liberty of tastes and pursuits; of framing the plan of our life to suit our own character; of doing as we like, subject to such consequences as may follow: without impediment from our fellow-creatures, so long as what we do does not harm them, even though they should think our conduct foolish, perverse, or wrong. Thirdly, from this liberty of each individual, follows the liberty, within the same limits, of combination among individuals; freedom to unite, for any purpose not involving harm to others: the persons combining being supposed to be of full age, and not forced or deceived.[1]

That description, strangely, follows Mill’s prescription for the realization of liberty, which is his “harm principle” beloved of both libertarians and modern liberals (i.e., leftists). It is as if Mill began with the harm principle in mind, then concocted a description of liberty to justify it. The “devil”, in this case, lies not in the details but in the harm principle:

That principle is, that the sole end for which mankind are warranted, individually or collectively in interfering with the liberty of action of any of their number, is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.[2]

Given the individualistic thrust of this passage and the surrounding text, the only plausible interpretation of the harm principle is as follows: An individual may do as he pleases, as long as he does not believe that he is causing harm to others.[3] That is Mill’s prescription for liberty. It is, in fact, an invitation to license and anarchy.

Libertarians and leftists, even those who claim to reject license and anarchy, embrace the harm principle, for all of its simple-mindedness. Theodore Dalrymple writes:

It has long been an objection to Mill that, except for the anchorite in the Syrian desert who subsists on honey and locusts, no man is an island (and even an anchorite may have a mother who is disappointed by her son’s choice of career); and therefore that the smallest of his acts may have some impact or consequences for others. If one amends the [harm] principle to take that part of a man’s conduct that concerns principally himself, rather than only himself, one will be left with endless and insoluble disputes as to which part of his conduct that is….

But, as the great historian Lord Acton said, “Ideas have a radiation and development, an ancestry and posterity of their own, in which men play the part of godfathers and godmothers more than that of legitimate parents.” Who can doubt that many people have forgotten, for very obvious reasons, Mill’s qualifications of personal sovereignty, namely that it applies to conduct that “merely concerns himself”?[4]

The main appeal of On Liberty to libertarians and leftists is Mill’s defense of conduct that (in his view) “only” offends social norms:

Society can and does execute its own mandates: and if it issues wrong mandates instead of right, or any mandates at all in things with which it ought not to meddle, it practises a social tyranny more formidable than many kinds of political oppression, since, though not usually upheld by such extreme penalties, it leaves fewer means of escape, penetrating much more deeply into the details of life, and enslaving the soul itself. Protection, therefore, against the tyranny of the magistrate is not enough: there needs protection also against the tyranny of the prevailing opinion and feeling; against the tendency of society to impose, by other means than civil penalties, its own ideas and practices as rules of conduct on those who dissent from them; to fetter the development, and, if possible, prevent the formation, of any individuality not in harmony with its ways, and compel all characters to fashion themselves upon the model of its own. There is a limit to the legitimate interference of collective opinion with individual independence: and to find that limit, and maintain it against encroachment, is as indispensable to a good condition of human affairs, as protection against political despotism.[5]

Thus Mill rejects the enforcement of social norms, “except [in] a few of the most obvious cases,”[6] by either the state or “society”. Lest anyone mistake Mill’s position, he expands on it a few paragraphs later:

These are good reasons for remonstrating with [a person who acts contrary to social custom], or reasoning with him, or persuading him, or entreating him, but not for compelling him, or visiting him with any evil [including social censure] in case he do otherwise. To justify that, the conduct from which it is desired to deter him, must be calculated to produce evil to some one else. The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.[7]

In Mill’s usage, “calculated” means “intended”.[8] By that logic, which is implicit throughout On Liberty, an individual is except in “a few of the most obvious cases” a law unto himself, and may do as he pleases as long as he believes (or claims to believe) that his conduct is not harmful to others.

Mill’s bias against the enforcement of social norms, in all but a few “obvious cases” (murder? theft? rape?), ignores the civilizing influence of those norms. That influence is of no account to Mill, as Dalrymple explains:

For Mill, custom is an evil that is the principle obstruction to progress and moral improvement, and its group on society is so strong that originality, unconventionality, and rebellion against it are goods in themselves, irrespective of their actual content. The man who flouts a convention ipso facto raises society from its torpor and lets everyone know that there are different, and better, ways of doing things. The more such people there are, the greater the likelihood of progress….

Of radical evil, in which the [twentieth] century was to abound, [Mill] has nothing to say, and therefore he had no idea that a mania for progress could result in its very antithesis, or that some defense against such radical evil, of which the commission was not possible without the co-operation and participation of many men, was necessary. The abandonment of customary restraint and inverted moral prejudice was not necessarily followed by improvement.[9]

There is a high price to be paid for the blind rejection of long-standing social norms, whether by individuals, organized groups, legislatures, or courts wishing to “do their own thing”, exact “social justice”, make life “fair”, or just “shake things up” for the sake of doing so. The price is liberty.

WHAT LIBERTY IS

A man at liberty is a person neither in chains, under confinement, nor intimidated like a slave by the fear of punishment…. [T]o consider inability of soaring to the clouds like the eagle, of living under the water like the whale, of making ourselves king or pope, as a want of liberty, would be ridiculous.

— Claude Adrien Helvétius, Essays on the Mind and Its Several Faculties

 License and anarchy, even in John Stuart Mill’s deceptive packaging of them, are antithetical to liberty. For it is the general observance of social norms that enables a people to enjoy liberty, which is:

peaceful, willing coexistence and its concomitant: beneficially cooperative behavior

That, simply stated, is liberty or something as close to it as can be found on Earth. It encompasses the Founders’ three desiderata “Life, Liberty, and the pursuit of Happiness” thusly:

Liberty is impossible without life, or where one lives in constant fear of one’s life.

Liberty therefore requires peaceful coexistence with one’s fellows, even if it must be ensured by force of arms.

Liberty is meaningless unless all are able to pursue happiness, that is, to cooperate (as they will) in mutually beneficial undertakings.

True liberty must be “ordered liberty”, in that it cannot arise from license or anarchy, as prescribed by Mill or his more radical progeny (e.g. Murray Rothbard). Nor can liberty arise from modern leftism, which has been diagnosed, quite rightly, as a superficially benign kind of fascism.[10]

Mill’s prescription for the attainment of liberty (the harm principle) focuses on what the individual may do. Anarchists and Objectivists seize on Mill’s prescription because they are preoccupied with individualism, as opposed to liberty, a concept they invoke ritually without understanding it. Leftists pay lip service to Mill’s prescription because it seems to justify unfettered pursuit of their personal preferences (whatever those might be). Leftists then demonstrate their lack of principle by contradictorily and unabashedly using the state to impose their preferences on others, especially for the adolescent thrill of subverting social norms.

A valid prescription for the attainment of liberty focuses on what liberty is, and the proper role of the state in securing it. Liberty, as I describe it, requires four things:

  • the general observance of social norms and, accordingly, their enforcement through social censure;
  • an accountable, minimal state, dedicated to the protection of its citizens;
  • voice, the opportunity for dissent from social norms and laws (though not the right to have one’s dissent honored); and
  • exit, the right to leave one’s neighborhood, city, State, or country without prejudice.

I will have more to say about those four points in future posts. Here, I will say a bit more about the role of the state, which is important to the effectiveness of my prescription for liberty The state’s proper role is negative, in the main. The state may not:

  • tax citizens more than is necessary to protect them from enemies, foreign and domestic;[11]
  • enable predatory or parasitic behavior among the populace;[12]
  • compel anyone to observe social norms, except those that the state enforces for the protection of all citizens;
  • interfere in the voluntary evolution or operation of social norms, except as those might impinge on voice or exit;
  • bar exit or impose a cost on it, except as necessary to execute justice and defend the nation; or
  • consistently overstep its rightful authority.

Consistent violation of rightful authority exposes the state to overthrow by political action or rebellion, as necessary.

If that prescription seems familiar, it is because of its provenance in the Declaration of Independence and United States Constitution.

It is true that the power of the state is prone to abuse. And the state must sometimes act against the preferences of some citizens (even a majority of them), for not everyone can agree at all times about the proper and necessary scope of state action in matters of justice and defense. But the state is a necessary bulwark against anarchy. The relevant issue is not whether to empower a state but how much power to give it and how to contain that power.

Reflexive opposition to the idea of the state is not libertarian; it is Utopian. The issue is not whether to have a state, but how to harness it in the service of liberty.

*     *     *

[1] On Liberty (1869), Chapter I, paragraph 12. (All citations of On Liberty refer to the version at Bartleby.com: http://www.bartelby.com/130/index.html.)

[2] On Liberty (1869), Chapter I, paragraph 9.

[3] As I show below, I am not misreading the quoted passage.

[4] In Praise of Prejudice: The Necessity of Preconceived Ideas (2007), pp. 44-5.

[5] On Liberty, Chapter I, paragraph 5. See also Chapter IV: On the Limits to the Authority of Society over the Individual, paragraph 3.

[6] On Liberty. Chapter I, paragraph 6.

[7] On Liberty, Chapter I, paragraph 9.

[8] See, for example, Mill’s use of “calculated” in Chapter IV, paragraph 19.

[9] In Praise of Prejudice, pp. 57-8.

[10] See, for example, Jonah Goldberg’s Liberal Fascism (2007).

[11] This allows a few (and only a few) positive acts on the part of the state: the maintenance and use of national-defense forces, the administration of justice through police and courts.

[12] There are predators other than murderers, thieves, etc. There are, for example, those who would use the coercive power of the state (e.g., legal bans on smoking in private establishments, licensing laws) to deny liberty to others, sometimes on behalf of parasites. Parasites benefit from coercive power state power, and depend on it instead of depending on their own efforts. Parasites, who can be classes of individuals or corporations, benefit from such things as affirmative action, income redistribution and regulatory protection from competitors.

[13] Voice does not include such acts as subornation, incitation, or treason, which undermine defense and justice. And no one, not even members of the press, should be shielded from prosecution for such acts.

Timely Trivia Question

One person administered the presidential oath of office nine times (a record). Who was that person, and to which presidents did he administer the oath? Scroll down for the answer.

John Marshall, Chief Justice of the United States from 1801 to 1835, administered the oath to Thomas Jefferson in 1801 and 1805, James Madison in 1809 and 1813, James Monroe in 1817 and 1821, John Quincy Adams in 1825, and Andrew Jackson in 1829 and 1833.

Roger B. Taney, Marshall’s successor as Chief Justice (1836 to 1864), administered the oath of office seven times. Warren E. Burger (Chief Justice from 1969 to 1986) administered the oath six times.

For more trivia about inauguration day, go here.

Math Puzzler

Here is the problem (from Misha Lemeshko, via Eugene Volokh):

8809 = 6
7111 = 0
2172 = 0
6666 = 4
1111 = 0
3213 = 0
7662 = 2
9312 = 1
0000 = 4
2222 = 0
3333 = 0
5555 = 0
8193 = 3
8096 = 5
7777 = 0
9999 = 4
7756 = 1
6855 = 3
9881 = 5
5531 = 0

2581 = ?

I found the general and specific solutions to the problem after pondering it for about 15 minutes. Can you do it?

If you’ve given up, or want to check your answers against mine, scroll down.

Specific solution: 2581 = 2, because…

General solution: The value of a string of numbers comprising the integers 0, 1, 2, 3, 5, 6, 7, 8, 9 is equal to the sum of the values of the integers contained in the string, where the value assigned to each integer is equal to the number of closed curves contained in it. Thus: 0 = 1, 2 = 0, 3 = 0, 5 = 0, 6 = 1, 7 = 0, 8 = 2, and 9 = 1. Therefore, for example, 0000 = 4 because each integer in the string has 1 closed curve; that is, 1 + 1 + 1 + 1 = 4.

Note that the preceding general solution omits the integer 4. Why? There is no way of determining the value of 4 because it doesn’t occur in Lemeshko’s list of strings. If, however, the value of 4 were known to be 0 (e.g., 8884 = 6, 1114 = 0), the general solution would be as follows: The value of a string of numbers comprising the integers 0 through 9 is equal to the sum of the values of the integers contained in the string, where the value assigned to each integer is equal to the number of closed curves contained in it. Thus: 0 = 1, 2 = 0, 3 = 0, 4 = 0, 5 = 0, 6 = 1, 7 = 0, 8 = 2, and 9 = 1. Therefore, for example, 4444 = 0 (0 + 0 + 0 + 0 = 0) because 4 (in standard typography) contains a closed area but not a closed curve.

If, however, the value of 4 were known to be 1 (e.g., 8884 = 7, or 1114 =1), the general solution would be as follows: The value of a string of numbers comprising the integers 0 through 9 is equal to the sum of the values of the integers contained in the string, where the value assigned to each integer is equal to the number of closed areas contained in it. Thus: 0 = 1, 2 = 0, 3 = 0, 4 = 1, 5 = 0, 6 = 1, 7 = 0, 8 = 2, and 9 = 1. Therefore, for example, 4444 = 4 because each integer in the string has 1 closed area; that is, 1 + 1 + 1 + 1 = 4.

A Logical Fallacy

The sub-hed of an article at City Journal asks “If human beings are naturally risk-averse, then what the heck happened on Wall Street?” The question can be expressed in the following syllogism:

Major premise: All humans are risk-averse.

Minor premise: Humans work on Wall Street (i.e., financial markets).

Conclusion: The humans who work on Wall Street are risk-averse.

It should be obvious to the casual observer that both the major premise and conclusion are false.

The article, by the way, is spot-on. Don’t be deceived by its flawed sub-hed.

The Fed and Business Cycles

Given the recent (official) announcement that the U.S. has been in recession since December 2007, I decided to look at the record of business cycles compiled by the National Bureau of Economic Research. The following graphs depict the length of expansions and contractions (and the trends in both), before and since the creation of the Federal Reserve System in 1913.

Source: “Business Cycle Expansions and Contractions,” National Bureau of Economic Research.

It seems that the creation of the Fed might have had a stabilizing effect on business cycles. (How much of an effect is impossible to tell, given the many other variables at work.)

But…the graphs don’t depict the relative severity of the various contractions. It is worth noting that the worst of them all — the Great Depression — occurred after the creation of the Fed and, in part, because of actions taken by the Fed. (A note to the history-challenged: The Great Depression began in September 1929 and ended only because of America’s entry into World War II.)

In any event, the long-run cost of economic stability has been high. (See this and this, for example.)

By Their Musical Preferences Ye Shall Know Them

Marginal Revolution has become an increasingly “marginal” blog because its dominant contributor, Tyler Cowen, has become increasingly incoherent. It turns out that Cowen is a fan of Elliott Carter, who writes incoherent “music,” of which many samples can be heard here.

Neither sound economics nor good music is consistent with incoherence. Therefore, I have scratched Marginal Revolution from my reading list, just as years ago I scratched my copy of a chamber-music LP to eradicate an unlistenable piece by Elliott Carter.

Maddux to the Hall?

Greg Maddux, who is about to announce his retirement from baseball, is a cinch for election to the Hall of Fame: 355 wins, .610 winning average, ERA+ of 132. But Maddux, like recently-retired Mike Mussina, shouldn’t be ranked with the “immortals” — the 16 Hall of Fame pitchers whose excellence, in my view, ranks them above their peers. (See this post and this post for relevant background.)

Maddux had only two 20-win seasons, which is why he isn’t an “immortal” pitcher, in my book. Roger Clemens, Maddux’s contemporary, had six 20-win seasons (in addition to his 354 wins, .658 winning average, ERA+ of 143), which would make him an “immortal” but for the strong suspicion that his career totals were inflated by steroids and HGH. (It is, by the way, a strong suspicion that cannot be confirmed by statistical evidence.)

P.S. (12/08/08) The election of Joe Gordon to the Hall of Fame is a joke, by my reckoning.

My Crystal Ball

From a post at my old blog, dated January 16, 2008:

On November 14, 2007, I wrote:

Is it possible that the current bull market reached a temporary peak in May of this year, and is now descending toward a secondary bottom that it will not reach for a few years?

This was my tentative answer, then:

A reversal that lasts a year or two seems entirely possible to me.

My less tentative answer, now, is that the stock market (as measured by the Dow Jones Wilshire 5000 Composite Index) has crossed into “bear country.” That is, it has met the two conditions which indicate a “correction” or bear market that will last for months or years:

  • the index has dropped below its 250-trading-day average, and
  • the 250-day average is moving downward (if imperceptibly)….

P.S. [added March 12, 2008] By my reckoning, every downturn in the 250-day average since 1970 has signaled every recession since 1970.

It’s been obvious for months that we’re in a bear market. It’s now also obvious (to the National Bureau of Economic Research) that we’re in a recession and have been since January of this year (a “peak” in economic activity having occurred in December 2007).

Macroeconomics and Microeconomics: Part I

Macroeconomics (the study of aggregate economic activity), in most expositions of it that I have seen, fails on two counts. First, macroeconomics usually ignores or accounts inadequately for microeconomic behavior, that is, the behavior of individual persons and firms. Second, it aggregates that which cannot be aggregated, namely, disparate forms of economic activity performed by disparate actors.

Regarding the first point, macro without micro is meaningless. Macroeconomic aggregates have no independent existence.

Secondly, an aggregate is meaningless if it represents disparate phenomena. A foot (measure of distance) is a meaningful measure only if it represents a collection of inches (or fractions thereof); a pound (measure of weight) is meaningful only if it represents a collection of ounces (or fractions thereof); and so on. But a foot is a foot, and a pound is a pound; the two cannot be aggregated because they measure different things. (Yes, there is in physics a measure of force known as the foot-pound, which “is the amount of energy expended when a force of one pound acts through a distance of one foot along the direction of the force.” But “foot-pound” is something distinct from “foot” and “pound”; it is a measure of force, not a way of making length and weight commensurate.)

This post illustrates both points. Consider A and B, who have discovered, through trial and error, that each can have more clothing and more food if they specialize: A in the manufacture of clothing, B in the production of food.

Our primitive pair also has discovered a “just right” balance in the amount and allocation of clothing and food that they make and consume. Through voluntary exchange (bargaining), they have found a jointly satisfactory balance of production and consumption. A makes “just enough” clothing so that he can cover himself adequately, keep some clothing on hand for emergencies, trade the balance to B for “just enough” food, and enjoy “just enough” leisure. B does likewise with food. Both A and B might like to have more clothing and/or food, but both are doing as well as they can do in a voluntary relationship.

A and B’s respective decisions and actions are microeconomic; the sum of their decisions, macroeconomic. The microeconomic picture might look like this:

  • A produces 10 units of clothing a week, 5 of which he trades to B for 5 units of food a week, 4 of which he uses each week, and 1 of which he saves for an emergency.
  • B, like A, uses 4 units of clothing each week and saves 1 for an emergency.
  • B produces 10 units of food a week, 5 of which she trades to A for 5 units of clothing a week, 4 of which she consumes each week, and 1 of which she saves for an emergency.
  • A, like B, consumes 4 units of food each week and saves 1 for an emergency.

Given the microeconomic picture, it is trivial to depict the macroeconomic situation:

  • Gross weekly output = 10 units of clothing and 10 units of food
  • Weekly consumption = 8 units of clothing and 8 units of food
  • Weekly saving = 2 units of clothing and 2 units of food

You will note that the macroeconomic metrics add no useful information; they merely summarize the salient facts of A and B’s economic lives — though not the essential facts of their lives, which include (but are far from limited to) the degree of satisfaction that A and B derive from their economic activities.

The customary way of getting around the aggregation problem is to sum the dollar value of microeconomic activity. But this method simply masks the aggregation problem by assuming that it is possible to add the marginal valuations (i.e., prices) of disparate products and services being bought and sold at disparate moments in time by disparate individuals and firms for disparate purposes. One might as well add two bananas to two apples and call the result four bapples. The essential problem is that A, B, and everyone else will derive different types and levels of enjoyment from clothing and food (both of which come in many forms), not to mention the vast array of other kinds of goods and services that are bought and sold. (For a long disquisition on this point, go here.)

In sum, macroeconomic concepts (e.g., aggregate demand) are not exogenous entities that exist independently of microeconomic activity. At best, they are ambiguous, qualitative proxies for a host of disparate microeconomic activities.

In future installments I will cover such topics as recession and fiscal policy.

Putting Risks in Perspective

According to the Centers for Disease Control, about eight-tenths of one percent of Americans died in 2005 (the most recent year for which CDC has published death rates). That’s about 800 persons (825.9 to be precise) out of every 100,000.

To put that number in perspective, imagine a dozen dozen eggs (i.e., a gross of eggs, for those who still know the numeric meaning of “gross”). Only about one of those eggs is broken in the span of a year, in spite of all of the hazards to which the eggs are exposed.

Remember that analogy the next time you read or hear about the “threats” posed by heart disease, cancer, Alzheimer’s, motor-vehicle accidents, firearms, etc., etc., etc. The combined effect of all such “threats” is close to nil; more than 99 percent of Americans survive every year, and more than 70 percent of those who don’t survive are old (age 65 and older). But that’s not the kind of “news” of that sells advertising.

(For much more about mortality in the United States, go here.)

November 22, 1963

I have said all that I wish to say about November 22, 1963, as a political event, and about JFK’s performance as president. My purpose here is simply to mark what ranks as the third-most shocking day of my lifetime. The most shocking, because I remember it all too well, is September 11, 2001. The second-most shocking, which I remember not at all (because I was so young), is December 7, 1941.

JFK’s assassination was a mighty shock for two reasons:

  • It had been 62 years since the assassination of a president (William McKinley, 1901).
  • There was, in the early 1960s, less of the intense political polarization that would now render a president’s assassination almost unsurprising.

Why Settle for a Theoretical Estimate…

…of the Laffer Curve, when you can have the real thing? The author of the first-linked item suggests that the amount of income remaining in private hands is maximized at an overall tax rate of 25 percent. My empirically-based estimate (second link) puts the private-income maximizing tax rate at 15 percent. The latter figure is a practical minimum:

The normal peacetime burden of government spending between the end of the Civil War and the eve of the Great Depression ranged from 5 to 10 percent of GDP,1 enough to maintain law and order and to provide minimal “social services.” To that I would add 5 to 10 percent for the kind of defense that we need in these parlous times. (See this post, for example.)

You can’t have a vibrant economy without law, order, and defense from foreign enemies.