Grasping Reality with Both Hands 2017-01-17 23:46:39

Live from Planet Gutenberg: The day's book haul. These both look very good. Unfortunately, the first day of classes is absolutely the last day you want your book showing up in my mailbox in the form of a review copy...

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James Kwak (2016): Economism: Bad Economics and the Rise of Inequality (New York: Pantheon: 1101871199)

Daniel Wolff: Grown-Up Anger: The Connected Mysteries of Bob Dylan, Woody Guthrie, and the Calumet Massacre of 1913 (New York: Harper: 0062451693)

Weekend Reading: Belle Waring: If Wishes Were Horses, Beggars Would Ride–A Pony!: Best Weblog Post EVAR (Smackdown/Hoisted)

Clowns (ICP)

A lot of intellectual energy in the early 2000s was a reaction to the installation by a five-to-four vote of a manifestly unqualified president--and the huge wave of justificatory bullshit that the Noise Machine generated around that in the form of clouds of misinformation to hide reality. People with platforms began calling it out, hoping to find other people to talk to to check whether they were being gaslighted or not.

The finest example of this I have ever seen was Belle Waring's Best Weblog Post EVAR from 2004. It's a thing to remember. If aspect of the Reagan presidency were real tragedy, and the entire Bush 43 presidency was tragic farce, what is this about to be?

Belle Waring (2004): If Wishes Were Horses, Beggars Would Ride--A Pony!: "I think Matthew Yglesias' response to Josh Chafetz' exercise in wishful thinking was about right...

...even if Brad DeLong's is more nuanced.

I'd like to note, though, that Chafetz is selling himself short. You see, wishes are totally free. It's like when you can't decide whether to daydream about being a famous Hollywood star or having amazing magical powers. Why not--be a famous Hollywood star with amazing magical powers! Along these lines, John has developed an infallible way to improve any public policy wishes. You just wish for the thing, plus, wish that everyone would have their own pony!

So, in Chafetz' case, he should not only wish that Bush would say a lot of good things about democracy-building and fighting terrorism in a speech written for him by a smart person, he should also wish that Bush should actually mean the things he says and enact policies which reflect this, and he should wish that everyone gets a pony. See?

John came up with this "and a pony" scheme during a discussion we were having about crazy libertarians. (He was bathing Zoë as I told him about the article I'd read, and Zoë chimed in that she wanted to get a pony too. Duly noted.)

Reason recently published a debate held at its 35th anniversary banquet. The flavor of this discussion is indescribable. In its total estrangement from our political and social life today, its wilfull disregard of all known facts about human nature, it resembles nothing so much as a debate over some fine procedural point of end-stage communism, after the state has withered away. Child-care arrangements, let's say. Position A: there will be well run communal creches! Position B: nonsense! the amount of work required from each individual to maintain a perfectly functioning society will be so small that people can care for their own children and those of others on a spontaneous basis, as the need arises!

Allow me to summarize.

Richard A. Epstein: even in the libertarian utopia, some forms of state coercion will be required. If we must assemble 100 plots of land to build a railway which will benefit all, and only 99 owners will sell, then we may need to force a lone holdout to accept a fair price for his land. Similarly, the public enforcement of private rights and the creation of infrastructure will require money, so there will have to be some taxes. [Note to self: no shit, Sherlock.]

Randy Barnett: Not so fast! Let's cross that bridge when we come to it rather than restricting liberty in advance. We'll know a lot more about human liberty in the libertarian utopia, and private entrepreneurs will solve these problems somehow without our needing to grant to governments the dangerous ability to confiscate our property in the name of some nebulous "public good." And as for rights enforcement -- look it's Halley's Comet!

David Friedman: Epstein places too much confidence in his proposed restrictions on government power. Rights could be enforced privately, and imperfect but workable solutions to the holdouts in the railway case could also be found. "To justify taxation we need the additional assumption that rights enforcement cannot be done by the state at a profit, despite historical examples of societies where the right to enforce the law and collect the resulting fines was a marketable asset."

Now, everyone close your eyes and try to imagine a private, profit-making rights-enforcement organization which does not resemble the mafia, a street gang, those pesky fire-fighters/arsonists/looters who used to provide such "services" in old New York and Tokyo, medieval tax-farmers, or a Lendu militia. (In general, if thoughts of the Eastern Congo intrude, I suggest waving them away with the invisible hand and repeating "that's anarcho-capitalism" several times.) Nothing's happening but a buzzing noise, right?

Now try it the wishful thinking way. Just wish that we might all live in a state of perfect liberty, free of taxation and intrusive government, and that we should all be wealthier as well as freer. Now wish that people should, despite that lack of any restraint on their actions such as might be formed by policemen, functioning law courts, the SEC, and so on, not spend all their time screwing each other in predictable ways ranging from ordinary rape, through the selling of fraudulent stocks in non-existent ventures, up to the wholesale dumping of mercury in the public water supplies. (I mean, the general stock of water from which people privately draw.) Awesome huh? But it gets better. Now wish that everyone had a pony. Don't thank me, Thank John.

UPDATE: John wants me to point out that he got the idea from a Calvin and Hobbes strip in which little Susie first wishes that Calvin was nicer, then realizes she might just as well wish for a pony while she's at it. So, thank that Calvin and Hobbes guy, or something.

2ND UPDATE: Thanks to Ben Wolfson for alerting us to the miracle of searchable Calvin and Hobbes! (Now get to work on your abandoned wasteblog, Ben.) Here is the original 'might as well wish for a pony' strip. I humbly submit that it deserves to be a catch-phrase. Just say 'plus a pony' on suitable occasions and watch your opponents whither away like the state itself.

And the references are succumbing to linkrot. So let me fix that:

Brad DeLong (2004): "I Know! George Bush Should Make a Speech!": Matthew Yglesias is overcome with laughter:

Matthew Yglesias: Hahahahahah: This is really very funny.

OxBlog: Posted 8:36 AM by Josh Chafetz: I THINK... [George W. Bush] should make... [a speech] devoted to... the strategic vision behind the war on terror. I want to hear an hour-long address that does the following things:

(1) Discusses the dangers... and why they need to be met with a military response. (2) Defends the Bush Doctrine that regimes that harbor terrorists will be treated as terrorists. (3) Lays out Bush's understanding that despotism and oppression are root causes of terrorism, and explains his vision for international democracy promotion.... (4) Explains how non-military options are also being used to promote these goals.... (5) Explains how the war in Iraq served a number of goals related to the above points.... Saddam was a destabilizing force... brutal... democratization has important cross-border effects....

(6) Is honest about the lack of WMD in Iraq. Promises (and follows up on) a good faith effort to find out why our intelligence was faulty.... (7) Lists the countries that made up our coalition in Iraq. Points out that calling the war "unilateral" is an insult to these allies, many of whom are significant players.... (8) Emphasizes the importance of rebuilding... civil society... not just in Afghanistan and Iraq, but everywhere that seeks to overcome a legacy of despotism and oppression. This is not just the right thing to do, it is also the right way to protect America.

That -- written by Michael Gerson, of course, who is an incredible speechwriter -- is the speech I want to hear. And that kind of bold statement would not only reassure the American people that Bush knows what he's doing (his new ads say that he knows what he wants to do, but they don't tell us), it would also put Kerry on the defensive.

I agree with Yglesias. Josh Chefetz has made a rather large category mistake. Chafetz just wants to hear Bush say that he is doing these things--and when he hears them, he will be happy, for "Michael Gerson... is an incredible speechwriter."

I, by contrast, don't want to hear George W. Bush say he will do these things. I want him to do (some of) these things (and I want him to do somewhat different things). I want to watch him do the following:

  1. Attack the problem of Al-Qaeda and its ilk through a unified response--military, intelligence, law enforcement, and diplomatic.

  2. Not necessarily treat regimes that harbor terrorists as terrorists (Pakistan, Saudi Arabia, South Boston, anyone?), but make them aware that nothing good will happen for them as long as they harbor terrorists, and that invasion is definitely something that we are thinking hard about.

  3. Promote democracy around the world, rather than just pretend to.

  4. Undertake a serious development and global health effort, rather than just pretend to.

  5. Explain the real reasons we attacked Iraq--it wasn't that we failed to realize what Hans Blix's findings meant for the reliability of our intelligence, was it?

  6. Retire the architects of the intelligence debacle--Rumsfeld, Wolfowitz, Cheney, and company. People foolish enough to take exiles' statements at face value don't belong in government.

  7. Apologize to those of our allies who thought that containment and inspections was a successful policy in late 2002 and early 2003.

  8. Put Marshall Plan-scale resources into building civil society in the Middle East, rather than just pretend to.

But there's no chance of any of that, is there? No chance of any real policy change.

So all Josh Chafetz dares hope for is a speech.

Matthew Yglesias (2004): Hahahahahah: "This is really very funny.

UPDATE: Josh snarks my snark but, in all honesty, the thing you've got to understand is that I write serious political commentaries on a daily basis as my job, so here on the personal blog things run toward the low road.

(2004): Unreason: Coercion vs. Consent: A Reason debate on how to think about liberty: "Richard A. Epstein, Randy Barnett, David Friedman, and James P. Pinkerton...

...The following exchange got underway at the Reason 35th anniversary banquet, which was held last November in Los Angeles. Keynote speaker Richard Epstein, the eminent legal theorist and author of the new Skepticism and Freedom, delivered a provocative talk about the foundations of libertarianism titled "The Ambiguities of Reason: Of Large and Small ‘r’s." For the spirited dialogue below, we adapted Epstein’s comments and invited three responses, which are followed by a final comment by Epstein.

The Limits of Liberty: Why we need taxation and eminent domain: Richard A. Epstein:

Perhaps the most fundamental question we face is how to think about liberty. Some libertarians stress the formal power of logic to resolve hard questions. They insist that all rights and duties flow from a necessary conception of individual autonomy or self-rule that allows all individuals to do whatever they wish with their own lives so long as they do not interfere with the like liberties of other individuals. No person may use force or deception against other people, either for his own advantage or for the advantage of third persons.

This moral imperative holds seemingly without regard for its social and economic consequences. Political organizations should adapt to this strong conception of rights and duties, the argument goes, and not yield to whim or fashion. Given this simple premise, individuals may use their own labor to acquire property, to exchange their labor or property with others, or to form complex business, social, and charitable organizations.

This strong intuitive conception of rights and duties tightly corresponds to our ordinary concept of right and wrong behavior. Most people do not seek to order their daily lives by discerning the origins of property in the mists of history; nor do they typically ponder the larger questions of public finance and political organization. But they are taught from birth to be neither bullies nor cheats. In dealing with life-size events, they adhere unswervingly to these simple basic principles. Why then resist their universal application? The content of the rules is clear, and any effort to switch to some calculus that weighs consequences case by case would at best yield indeterminate results, which would in turn heighten overall social insecurity. Better not to scratch beneath the surface. Even if these rules are not necessary truths, we should still treat them as such. Deductive principles order practical affairs well.

Unfortunately, this principle of personal guidance does not supply us with a comprehensive theory of social organization. First, there is the question of philosophical foundations. Can we really support any kind of political order that pays no conscious attention to the consequences it generates? On this point, the ostensibly deductive view is right to shun judging individual actions one case at a time. But this detached form of analysis really should be regarded as a form of closet consequentialism. Setting up public institutions to pass on all individual actions becomes so costly and intrusive that it flunks the standard of good government in just those consequentalist terms. But it is possible to moor this judgment of political structure in a keen appreciation of the mainsprings of human nature, which yields a decidedly mixed picture of the best and worst in human behavior.

We start with the biological observation that no individual could survive in a world of scarce resources without a strong measure of self-interest, one that includes at the very least his own family and close associates. That self-interest can manifest itself in one of two ways when dealing with strangers; through either aggression or cooperation.

The overall social consequences of these two approaches are massively different. With force, one person wins while the other person loses. With cooperation, both persons win. This simple observation underlies the consequentialist explanation for the libertarian preference for agreement over coercion: Take that arrangement that leaves both parties better off than they are under the alternative legal order. Contracts result in joint improvements, such that the greater the ease of contracting, the greater the gains from cooperation. Coercion creates at least one loser for every winner, where the losses (e.g., death, rape, or theft) can be huge relative to the gains on any intuitive interpersonal comparison of utility. When the odds are right, any individual may find it in his interest to use force or deception, but from a social point of view this conduct merits strong condemnation. The basic libertarian imperatives are well-grounded in human nature.

Yet just how far does this insight go in a practical sense? To hang your hat on empirical regularities is to retreat from the language of absolutes and to invite exceptions to general rules. If our ultimate criterion asks what arrangement leaves all parties better off than they are under the next best alternative, there may be cases where the dominance of agreement over coercion should be displaced. In fact, there are: Some contracts are suspect, and some force is justified.

In dealing with ordinary contracts of sale or partnership, we tend to ignore the consequences of these joint efforts on third parties, which any comprehensive social theory should take into account. In most cases, happily, these external effects are positive. Two or more traders not only increase their own wealth and happiness but also expand the opportunities for trade and advancement for others. But a contract to kill a third person has the opposite effect. Indeed, it is precisely because contract yields gains from trade to the participants only that we worry about such agreements, now called conspiracies, because of the threat they pose to the basic rights of liberty and property of others. We are now faced with the difficult practical question of how to identify these rights-threatening arrangements, to punish them if they achieve their object, and, more important, to nip them in the bud.

Concerns about bad contracts are not limited to such situations. Contracts that seek to bribe individuals to violate previous agreements are similarly dangerous. More controversially, contracts that operate in restraint of trade are also possible candidates for special treatment once it is accepted that overall levels of social output are higher under competition than under monopoly. Exactly what should be done with these arrangements, assuming that they can be properly identified, is no easy task, given the political risk that perfectly sensible business arrangements will be attacked by government action -- as is often the case when aggressive competition is branded "predatory" pricing, a dubious appeal to the libertarian norm against predation by the use of force.

Sometimes the strong libertarian synthesis breaks down in the opposite direction. The most conspicuous illustrations are condemnation and taxation, each of which contemplates the use of force against ordinary persons who have neither committed any wrong nor breached any promise. Yet it is in my view impossible to maintain any per se rejection of these two venerable if dangerous institutions, both of which are not only consistent with limited government but required by it.

The libertarian prohibition against force does not take into account the possibility that successful cooperation in key situations can be thwarted by individual holdouts. It will not be possible to build a railroad from point A to point B solely by getting the cooperation of 99 out of 100 private landowners along the way. The last one (indeed all) must be brought into line, and the way to do it is to compel the purchase by paying them the highest value of the land in any alternative use whose value is not dependent on the railroad that is about to be built. The public, including those whose property is condemned, gain the benefit of the railroad, but if compensation is correctly calculated -- a big if -- no individual suffers financial deprivation in the process. State coercion is used to create the win/win situations found in private contracts.

What works in condemnation cases helps explain taxation as well. The public enforcement of private rights and the creation of infrastructure through condemnation both need money that only compulsory exactions can supply. But once the coordination and holdout problems are overcome, much work has to be done to prevent massive abuses from working their way into the system. The flat tax is one sensible limitation on the power of taxation (others can be devised as well), for it allows state funding to vary in amount without picking on one segment of the population.

In sum, the central challenge to any political theory is to devise a set of institutions that first allows and then controls the use of coercion against individual citizens for their own benefit. In light of the justifications that have been put forward here, one could ask the question whether these concessions to state power amount to a backhanded capitulation to the modern welfare state, where any claim of the government to action in the public interest is sufficient to justify state intervention.

The short answer to that question is no. Indeed, there is a strong sense in which exactly the opposite happens. The traditional deductive form of libertarianism allows for state force to protect against aggression and fraud. The more complex version recognizes that state power is also appropriate to overcome holdout problems by the limited use of force. This two-tier inquiry clearly legitimates some forms of government action, but by the same token it makes the case against state intervention stronger in those settings where none of these justifications are available. It is easy to see why the state should keep its hands off the substantive terms of labor contracts in a deductive libertarian world. Hence we should get rid of minimum wage, antidiscrimination law, collective bargaining statutes, and mandatory pension and insurance regulation. Systems of price and rent control similarly go by the boards, as does the full range of tariffs, anti-dumping laws, and other impediments to international trade.

We arrive at the same results even after we recognize the legitimate state role in condemnation and taxation. Unregulated labor and product markets present no coordination and no monopoly problem. The basic libertarian position in favor of competitive markets is thus strengthened by allowing in principle a broader range of state justifications, none of which works in these cases. Removing these ordinary activities from the thrall of government regulation should increase the tax base and thus reduce the need for taxation, while simultaneously increasing the liberty and prosperity of all. The greater level of wealth should in turn reduce the calls for redistribution of wealth by state action, which in turn will reduce if not eliminate much of the welfare state. Government will still be larger than deductive libertarians might want, but it will be far smaller than the current bloated state.

Our limited use of coercion is done with the paradoxical intention of expanding the scope of individual freedom. It is always dangerous business, but it is only with a conscious awareness of how we must both use and limit government power that we shall find the intellectual tools to resist a descent into the all-powerful welfare state. The practical success of our endeavors depends on the ability to avoid not only the dangers of the all-powerful welfare state but also any categorical reluctance to use coercion to initiate forced exchanges that benefit us all.

Richard A. Epstein, the James Parker Hall Distinguished Service Professor of Law at the University of Chicago, is the author, most recently, of Skepticism and Freedom: A Modern Case for Classical Liberalism (University of Chicago Press).

The Lesser Evil: Sometimes the cure is worse than the disease: Randy Barnett:

For most of his career, Richard Epstein has been urging libertarians to expand the exceptions to the prohibition on the use of force beyond self-defense, detention of rights violators, and restitution to include using forced transfers to solve the economic problems of "holdouts" and "free riders." Holdouts would be addressed by eminent domain, free riders by taxation. He justifies both of these expansions on consequentialist grounds.

In his writings on contract law, however, Epstein has insisted that we do not want to make categorical exceptions to contractual enforcement that are so malleable that people can define themselves into them at will. He allows that some agreements can be voided, such as contracts signed under duress or as a result of material misrepresentation, but each justified exception amounts to a direct or indirect way to police force or fraud. As he has written: "The rules in question should not create artificial incentives for parties to lower the level of competence they bring into the marketplace. It is dangerous to allow people to plead their own incompetence in any transaction that they wish, with the benefit of hindsight, to repudiate."

I am not sure he has adequately appreciated how his instincts about contract law defenses apply as well to the categories of free riders and holdouts. It is far too easy to assert the existence of these barriers to trade, and far too difficult to defeat unjust expansions of the use of force when these exceptions are allowed, even if he is right that some such problems are otherwise insoluble. If so, then the cure could well be worse than the disease, and no amount of fancy economic analysis can establish otherwise. The consequence of rent-seeking -- of interest groups using the coercion of the state to acquire unearned benefits for themselves -- matters as much as the consequence of failing to build a road. Ask the residents of Poletown, whose Detroit neighborhood was destroyed by eminent domain to build a General Motors assembly plant. Ask the Atlantic City client of the Institute for Justice who successfully resisted the condemnation of her house to erect a parking lot for Trump Towers.

I know that Epstein’s theory of the Takings Clause would restore the requirement of "public use" that would prevent using eminent domain to transfer rights from A to B, and I agree his approach is better than what we now have. But who’s to say that these takings for the "public good," as opposed to public use, do not increase aggregate welfare? Who’s to say that the welfare created by General Motors remaining in Detroit is not greater than the welfare of the families who must leave their homes? Who’s to say that the parking lot to be used by thousands does not create greater welfare than a house used by just one woman?

Due to limitations on our knowledge, we have little choice but to rely on the principle of freedom of contract to answer these questions, however imperfectly. Unlike self-defense and restitution, exceptions for free riders and holdouts cannot be justified as the enforcement of the rights of others. Authorizing force in defense of individual rights is a necessary evil to address the problem of compliance when persons put their own interests ahead of respect for the rights of others -- rights that are themselves necessary, on consequentialist grounds, to solve the pervasive problems of knowledge and interest. Caution should be our guide in pursuit of better consequences than properly defined individual rights provide.

Of course, to some extent this debate is moot. If we ever get to a libertarian world in which these are the only forms of coercion still existing beyond self-defense, etc.,we will know a lot more about how liberty actually works and how to achieve it politically than we do now. We will be in a much better position to decide whether to abolish these practices along with all the other vestiges of the welfare state. I should live so long.

Why then debate them now? For the same reason Epstein has been harping on these points for decades. We debate the form of the ideal end stage as part of the debate over whether to take any further steps in its direction. Epstein clearly believes that a more sympathetic and defensible end state is one in which these additional exceptions for free riders and holdouts exist. On this, I have always had my doubts.

I do not think that Epstein has ever seriously addressed the alternative ways of solving these problems that have developed historically on the market, and which libertarians propose be extended to address the problem of so-callled "public goods." "Public goods" are more a construct than an artifact of the world. It is often only a lack of imagination by academic economists that prevents them from seeing a solution. Indeed, one of the functions of entrepreneurs, as opposed to academics, is to figure out how to make a public good into an excludable private good.

Such techniques include creating the fencing technology needed to exclude free riders (think of the walls around movie screens and theater stages), tying nonexcludable goods to excludable goods, and such legal devices as conditioned contracts that go into legal effect only when a sufficient number of persons have agreed to pay for a particular project. Holdouts are dealt with by real estate developers assembling parcels of land in a variety of ways. I am not sure anyone can prove that these alternatives to takings and taxation will definitely increase aggregate social welfare. But I am certain no one can prove the opposite either.

This is not to deny that consequences matter, a point on which Epstein and I agree. Indeed, I think there are very few libertarians today for whom consequences are not ultimately the reason why they believe in liberty. The issue is always how best to achieve good consequences. As Epstein notes, making no exception to a general prohibition on the use of force is not an option. Self-defense is an exception, as is forcible compensation, and anyone who studies the common law of torts, contracts, and property knows that other exceptions are built right in to the doctrines that define the liberal conception of several property and freedom of contract.

The remaining dispute is over whether we should expand the exceptions to include holdouts and free riders simply because economic theory seems to suggest that only coercion can deal with them effectively. Epstein is convinced. I am not. I would prefer to jump off that bridge if and when we ever come to it, and only after the alternatives are thoroughly explored. I see no reason, whether tactical or principled, to let economic theory trump liberal rights when experience shows these problems are so often solved by entrepreneurs without benefit of any special license to expropriate the property of others without their consent.

In the end, we must never forget that permitting self-defense, restitution, and preventive actions against standing threats gives rise to the problems of power: enforcement error and abuse. Every additional exception legitimating the use of force, such as taxation and takings, further aggravates these serious social problems. The fact that we must take three steps down a dangerous road does not, by itself, justify taking two more, as Epstein seems to imply. Especially when, unlike force that responds to previous violations of rights, the problems of knowledge and interest surrounding these additional exceptions permit enormous opportunities for rent-seeking by those who can credibly claim to be increasing welfare by pursuing the "public good."

Randy Barnett is the Austin B. Fletcher Professor at Boston University School of Law, and the author of The Structure of Liberty: Justice and the Rule of Law (Oxford). His latest book is Restoring the Lost Constitution: The Presumption of Liberty (Princeton).

Swallowing the Rule: Epstein overestimates the power of his proposed limits on state action: David Friedman:

Like Richard Epstein, I find versions of libertarianism that claim to deduce it by straightforward arguments from fundamental principles unsatisfactory. One reason is that libertarians, like other people, have no convincing arguments to show that their principles are true. Another is that concepts such as rights, property, and coercion are very much more complicated, and less susceptible to simple rules and sharp definitions, then such versions of libertarianism generally suppose.

While we cannot logically derive our values, we have them. So do other people. Fortunately, human values vary a good deal less than one might suppose from reading political philosophers. Few egalitarians would prefer a society where everyone had a real income of $1,000 to one where incomes ranged from $90,000 to $100,000. Few Rawlsians would choose to improve the lot of the world’s worst-off person by one dollar at the cost of massively reducing the welfare of everyone else in the world. And few libertarians, however hard-core in theory, would choose a perfectly free society of desperate poverty over one slightly less free and very much wealthier. Almost everyone, in my experience, values most of the same things, although not with identical weights. It is easy for both libertarians and socialists to claim to support their principles whatever the consequences -- when each group believes the consequences would be, on very nearly all dimensions, the most attractive society the world has ever seen.

If most people have at least roughly similar values, and if libertarians are correct about what sort of society libertarianism would produce, we need not justify our own values in order to argue for libertarianism. All we need do is to show that a libertarian society would be more attractive, by widely shared standards, than any alternative -- wealthier, wiser, freer, more just, better for poor as well as rich. That is, after all, what most libertarians believe.

Having adopted that strategy, I am sympathetic to Epstein’s approach: Derive a legal and political system from the practical requirements for achieving the things humans want to achieve. My disagreement is with his conclusions.

To begin with, he is too pessimistic about the possibility of achieving important objectives without the state. Consider his claim that "the public enforcement of private rights and the creation of infrastructure through condemnation both need money that only compulsory exactions can supply."

The rights half of that claim assumes that private rights must be publicly enforced, despite a considerable number of societies where rights enforcement was produced privately. The infrastructure half assumes that the sort of coordination problems associated with building roads cannot be solved, imperfectly but adequately, by private mechanisms -- despite real-world examples where they have been.

Even if we accept those assumptions, the conclusion still does not follow. To justify taxation we need the additional assumption that rights enforcement cannot be done by the state at a profit, despite historical examples of societies where the right to enforce the law and collect the resulting fines was a marketable asset, and that the government cannot charge enough for the use of its roads to compensate the owners whose land was condemned.

A second general problem with Epstein’s argument is that he overestimates the ability of his proposed rules to constrain state action. He writes: "It is easy to see why the state should keep its hands off the substantive terms of labor contracts in a deductive libertarian world....Systems of price and rent control similarly go by the boards, as does the full range of tariffs, anti-dumping laws, and other impediments to international trade."

In a world with income taxes, the state cannot keep its hands off the substantive terms of labor contracts because it has to define which terms do or do not count as income. And it requires only a moderate degree of economic ingenuity to create coordination arguments for state-imposed restrictions on labor contracts designed to reduce the deadweight burden from taxation or solve subtle problems of adverse selection.

Tariffs are an even clearer case. The infant industry argument for tariffs -- the idea that trade barriers are needed to help a potentially competitive industry get started -- can be, and has been, recast as a coordination argument, in which one’s firms activities in a new industry are alleged to produce external benefits for other firms in the industry. And it is straightforward to show that a country in a monopoly position as either a producer or consumer can use a tariff or export tax to extract monopoly returns from its trading partners.

There are many other examples of government policies that Epstein does not like but that could be defended on his principles, including government involvement in education, in research, and in the production and regulation of information. His exceptions swallow his rule, leaving us with everything up for grabs -- and familiar public choice reasons to expect that far too much of it will be grabbed.

Epstein hopes to prevent this outcome by better institutional design. Perhaps that is the best we can do. But there are at least two other alternatives worth serious consideration.

The first is the extreme version of the libertarian state: no coercion beyond a monopoly on retaliatory force. Such a state will do less well for us than a state that initiates coercion in the rare circumstances where doing so produces large benefits. But it might do considerably better than the realistic alternative: Epstein’s society as we can expect to see it actually implemented, in a world with plentiful arguments for extensive uses of state power and strong incentives to act on them.

The second alternative is to eliminate state coercion by eliminating the state. In that world, some coordination problems will go unsolved, making the result worse than the world that would be produced by a state run by perfectly wise and virtuous libertarians. But eliminating the state also eliminates the largest coordination problem of all: the problem of controlling the state. Given the record so far, that is a more serious problem than how to build roads without the power of eminent domain.

David Friedman is a professor in both the law school and the economics department of Santa Clara University. His first book was The Machinery of Freedom: A Guide to a Radical Capitalism (Open Court). His most recent is Law’s Order: What Economics Has to Do With Law and Why It Matters (Princeton University Press). A draft of his next book, Future Imperfect, can be found on his Web page.

Beyond Economics: Freedom is more than dollars and cents: James P. Pinkerton:

Richard Epstein makes the useful point that libertarianism should be embedded in a practical philosophy, and he offers an elegant two-tier approach to deciding when and where to work toward the laudable goal of "expanding the scope of human freedom." I can’t quibble with his approach to the issues that fall within his purview, but I also can’t help but observe that the most important issues of the day seem to fall outside of that purview. Epstein’s circumscribed approach to libertarian philosophy will, I am afraid, also circumscribe libertarianism’s appeal and influence.

On the biggest issues of the day, Epstein is silent. I looked in vain for words such as drugs, pollution, immigration, foreign policy, terror, Iraq, or even Bush. That, to me, is the definition of a narrow piece. Not that there’s anything wrong with that, but I believe libertarians have an important contribution to make on the hottest of the hot-button issues: drug laws, immigration controls, environmental regulation (including the reality that the United States is involved in a host of international agreements that affect America, no matter what we do), biotech and stem cell research, and, most of all, the "war on terror," which affects everything from civil liberties to federal spending to the ongoing war in Iraq.

By comparison, the issues Epstein wants to grapple with fall mostly within the realm of economics, including the minimum wage, antidiscrimination rules, collective bargaining statutes, mandatory pensions, insurance regulations, price and rent controls, and tariffs. Opposition to all these statist measures is firmly in the libertarian tradition; as Epstein says, it’s all part of his plan to "reduce if not eliminate much of the welfare state."

Yet while it’s fine to pound away on any and all of these issues one more time, I wonder what the ROII -- Return on Intellectual Investment -- will be. Most people, certainly most economists, accept the general proposition that markets work, and so the fight of the future is over applying Smithian wisdom in specific cases. The Institute for Justice, for example, recently filed suit against the Louisiana Horticulture Commission, which cartelizes florists. Such market-freeing cases are important, and Epsteinian thinking can help. But for the most part, the national agenda has shifted away from economics to other issues that seem more pressing. Indeed, the U.S. seems to have settled into a complacent Clinton-Bush consensus that accepts the idea that if the economy is booming, federal revenues ought to be spent -- and then some. Today prospects for reducing, let alone eliminating, the welfare state seem poor.

At the same time, prospects for expanding the warfare state -- which will, in turn, further expand the welfare state -- seem excellent. In today’s America, the spending of blood and treasure for foreign wars -- even those, such as Iraq, that violate international law and are based on government deception -- is practically unquestioned. A government arrogant enough to lie, big time, will never be a modest government. And then, of course, having made more enemies around the world through offensive wars, Washington must spend more on "defense," including homeland defense. Finally, after pledging a welfare state for Iraq (Washington is now a gold rush for lobbyists and contractors brandishing newfound expertise in anything "Middle Eastern"), it will be impossible not to keep and expand the welfare state here at home. Just days after the 1918 armistice that ended World War I, British Prime Minister David Lloyd-George promised "a fit country for heroes to live in." Britain’s subsequent socialist bender proved that it’s possible for a country to win the war and then lose the peace, and thus betray its heroes.

In today’s America, war veterans will soon be granted larger benefits, but such expenditures will only be an overture to the lawsuits some of them are already filing against anyone with a deep pocket. When’s the last time President Bush made a real push against the trial lawyers? He can’t deal with tort reform or any domestic issue because he’s too busy vindicating his foreign policy.

In addition, a government that’s "strong" enough to rearrange the domestic affairs of other nations likely will feel equally confident about continuing to meddle in matters that should be private here at home, be they sexual, medical, or pharmacological. Randolph Bourne was so right: "War is the health of the state."

Some libertarians, of course, endorse the Bush Doctrine, explicitly with their words or implicitly with their silence. They argue, in effect, that the maintenance of freedom here requires us to force others to be free. I disagree with this neo-Rousseauean argument; I predict that if the Bush Doctrineers get their way, our future politics will go the cynical and perhaps dirigiste way of France, as every big-governmentalizing action is justified in the name of la gloire -- oops, I mean "democracy."

By all means, let’s have a debate about American imperialism. My fear is that if we don’t raise our voices, then libertarianism, a la Epstein, could become just a synonym for economics. In which case, we might have prosperity, but we won’t have peace, and we won’t have freedom.

James P. Pinkerton is a columnist for Newsday and He is also a contributor to the Fox News Channel and a fellow at the New America Foundation in Washington, D.C. He worked in the White House under Presidents Ronald Reagan and George H.W. Bush and in the 1980, 1984, 1988, and 1992 presidential campaigns.

A Moderate Responds: Richard A. Epstein

Of the two basic points I made in my initial remarks, one has escaped serious criticism: that the traditional natural law justifications for freedom are not sufficient to sustain the case for individual liberty or for limited government. We are, as it were, all consequentialists now. The particular debates, therefore, are more focused. Randy Barnett and David Friedman claim that any system of forced exchanges is likely to produce more mischief than it eliminates. James Pinkerton argues that any libertarian theory that obsesses on economics runs the risk of losing the large struggles over peace and freedom. Both criticisms deserve responses.

Barnett thinks state coercion is not justified as a means to overcome major coordination problems because the risk of abuse is greater than the potential gains from the method. But his examples do not support that conclusion. Of course, the citizens of Poletown didn’t want to not have their community ravaged for a pittance, nor did Donald Trump’s neighbors want their homes converted to his parking lot. But it is wrong to look at this one feature of the eminent domain equation in isolation. Barnett’s objections to eminent domain depend solely on the unknowable subjective value each person attaches to his or her possessions. But if that point is decisive, then eminent domain is also illegitimate when used to condemn land for national fortifications or public parks, when the public-use criterion cannot be contested at all.

Thus there are several real difficulties with Barnett’s examples. First, the private use in both cases expands eminent domain power where it is least needed. Second, the puny compensation offered systematically ignored the subjective value of the private landowners and the dislocations the taking brought into their lives. Narrow the permissible set of purposes for takings and boost the compensation, and this takings problem will shrink, without using the meat cleaver of incommensurate subjective values to savage eminent domain.

Next Barnett claims we don’t need eminent domain because private ingenuity can overcome holdout problems. But only sometimes. Private developers can use quiet tactics to assemble large parcels, but only because the law turns a blind eye to the low-level frauds that are used to mislead sellers about the buyer’s intentions. But governments acting through public debates and appropriations can’t use the same tactics to assemble land for highways. The history of oil and gas production, with the need to assemble and organize complex network industries, shows how holdout problems can stop development in its tracks. Indeed, the entire structure of property law rests on an implicit set of forced exchanges, which give first possessors, inventors, and writers priority over the rest of the world when astronomical transaction costs block voluntary negotiations. Too often private ingenuity blocks social coordination. It is much more sensible to stick with the more modest proposition that as transaction costs go down, the need for state intervention is reduced.

David Friedman’s remarks are vulnerable to both these and other objections. The societies to which he refers but does not name are small communities, such as medieval Iceland, where tiny numbers and kinship relationships eased the path to social organization. Modern societies have bowed to the inevitability of some taxation, even if they have not done enough to constrain its use.

Again, it is not enough for Friedman to list the instances where state power fails. My own view gives no scope for tariffs because local protection is their raison d’être, notwithstanding all the palaver about infant industries. By contrast, the state sponsorship of scientific research has created public goods; before I ruled the National Science Foundation out of bounds, I would examine the evidence that advances in health have more than repaid their cost. Improve the system, yes; abolish it, no.

Friedman’s pipe dream is that the alternative to limited government is no government at all. Not so. A large society with no central authority offers an open invitation to some sleazy individual to consolidate power in his own name. Constitutional government uses deliberation to expand the base of public support. Friedman’s void at the center promotes totalitarian rule, not individual liberty.

Pinkerton charges me with an excessive preoccupation with economics. In part, I plead guilty to the charge that a short essay did not cover the waterfront and offer this belated response. First, on matters of value, nothing says that only markets matter. Indeed, as Barnett’s comment and my reply to him indicate, one powerful reason for strong property rights is to allow people to pursue their subjective understanding of the good while respecting the like liberties of others. Nothing in my approach privileges certain kinds of preferences over others.

Let me turn next to Pinkerton’s lists of specific issues. Pollution, how it should be attacked and when (at low levels) it should be allowed, lies at the heart of any law and economics program. The drug question also is amenable to that approach. Does drug use impose a peril on nonusers that requires some intervention before the fact? If so, what? Here’s one three part program that might work: 1) abolish drug offenses, 2) remove all state subsidies for rehabilitation, and 3) refuse to reduce criminal responsibility by reason of voluntary drug use. As to terror, we all face the sticky tradeoff between liberty and security, where the only sensible program (even in Barnett’s universe) asks whether additional precautions are more intrusive than beneficial. This is the heart of law and economics. Uncertainty makes utilitarians of us all.

Bush and Iraq are topics on which lawyers don’t have much to say. I can predict what set of rules will help generate responsible political leaders, but I cannot make hard policy choices as a matter of general political theory. Just when should one nation intervene in the affairs of another, be it for humanitarian reasons or by way of anticipatory self-defense? Again, it is a matter of hard tradeoffs. But this is hardly an indictment of my approach. It only shows the great need for statecraft.

Nor does a focus on legal institutions trivialize issues such as character formation, family, or personal life. Here Pinkerton’s criticism of me echoes that which John Stuart Mill made of Jeremy Bentham. Bentham was weak on personal virtues. There’s a reason. Lawyers specialize in the question of how and when to use force. They deal with individuals as strangers, trading partners, family members, and litigants. Professionally, they don’t have any inside track on matters of character, duty, and virtue, however vital.

Any libertarian who thinks you can promote virtue solely by abstaining from force and fraud is smoking some banned substance. Character helps people choose the proper course of conduct among those that are legal. Legal and political theory do themselves a disservice when they poach on questions of personal behavior. They are at their best when they deal with matters of constitutional structure and political power. It’s nice, just this once, to occupy the odd position of being a moderate.

I Have a Weblog!: Productivity! and Polanyi!

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Editing a piece for And sections that I loooooove are getting--rightly getting, I hasten to say: my editors are gods in human form whose judgment is superb--cut and dropped onto the floor.

But I have a weblog!

Productivity: Economists have tried to parcel out in multiplicative fashion the twenty-fold difference in the productivity levels of economies around the world --what factors double prosperity, and what factors increase it by only 10% or so? And they have found robust factors:

  • keeping your children in school--and making sure that the schools are good
  • saving and investing in capital
  • making markets competitive
  • virtuous circle effects, as investment that makes you richer allows you to save and invest more and keep your children in school longer.

But when all that is said and done, fully half of productivity differences seem due not to the machines you work with or the absence of monopoly or longer schooling, but to be simply in the (relatively local) air. People learn things from and are more productive when they are embedded in a successful community of engineering practice. That is the reason that in the early 19th century almost all U.S. textile mills headed for Lowell, MA; why Henry Ford and other auto producers all landed in Detroit; why Silicon Valley is Silicon Valley. An overly strong dollar disrupts the growth and maintenance of these communities of engineering practice that do so much to boost what economists call total factor productivity...

Polanyi: The mid-twentieth century Hungarian sociologist Karl Polanyi wrote that a market economy was a fine thing—it made great sense for individual businesses that made bread or ran streecars had to pass a market-profitability test in order to survive. But, he wrote, a market society is not. Attempting to implement a market society is very dangerous. Why?

  • Because a market society turns finance into a commodity—which means that the industry you work in and the kind of job you get have to in mass pass a market test.
  • Because a market society turns land into a commodity--which means that the community you live in has to in mass pass a market test.
  • Because a market society turns labor into a commodity—which means that attaining the standard of living you expect and feel you deserve has to pass a market test.

And people have very strong feelings about these three. People believe that they have a right to the standard of living they expect and deserve, to working in the particular industry at the kind of job that makes up a key piece of their identify, and to the stability of the community that they are used to. People believe they have rights to these things. Yet in a market society the only rights that matter are property rights.

And those rights are controlled by distant sinister people and forces far from the blood-and-soil realities…

And, in Polanyi’s analysis it least, it is the backlash to the late nineteenth and early twentieth century project of implementing a market society that triggered the totalitarian disasters which he watched and from which he fled.

But I digress…

(Early) Monday Smackdown: The Washington Post and Chris Cillizza

Duncan Black: Eschaton: America's Worst Humans: "Chris Cillizza. I'm sure Cillizza got his career opportunities through nothing other than the pure meritocracy...

...that exists in our free market Nirvana. Certainly he got none of the breaks that blah people do. Still if he wasn't doing this, I don't see how he wouldn't be under a bridge somewhere.

Scott Lemieux: Love Is Always Scarpering, Or Cowering, Or Fawning: "This month’s Cillizza Award for Outstanding Achievement in the Field Of Hackdom goes to… Chris Cillizza:

@TheFix: You should watch this Paul Ryan town hall on CNN. The guy is extremely impressive.

@OnceUponA: It is very difficult to have a working understanding of health policy and simultaneously be impressed by his answers on ACA.

You can watch Ryan’s comments about health care yourself, but they’re evasive gibberish when they’re not outright dishonest. The idea that state high-risk pools — especially at the levels the GOP would plausibly fund them — could effectively cover people with pre-existing conditions is a joke. (More here.) The claim that insurance markets are in a “death spiral” is a flat-out lie. His assertions that the proposed Republican reforms would provide better and cheaper policy options was supported by no detail whatsoever. Ryan, as always, is the anthithesis of impressive, and yet his media reputation as a Real Wonky Man of Seriousity never fades.

To be Scrupulously Fair, Ryan’s primary goal to offer worse or no health insurance to more than 20 million people to pay for upper-class tax cuts does has not, to the best of my knowledge, deviated from best practices in email management.

Reading: Robert Allen (2011): Global Economic History: A Very Short Introduction, chapter 1

Robert Allen (2011): Global Economic History: A Very Short Introduction (New York: Oxford: 0199596654), chapter 1

A lot goes by in a very small number of pages in this chapter:

  • The depth of global poverty in 1500
  • The magnitude of economic growth since 1500
  • The sequencing of economic growth since 1500
  • The divergence of economies since 1500
  • "Reversal of fortune"--the not rich so much as densely populated stay poor; (some of the) less densely populated become rich--with cultural distance from Manchester being the key
  • Exceptions to this general pattern
  • Clues to "why?"

There are two tables and four figures in the chapter. Study them. Memorize them. Internalize them:

  • GDP/capital, 1820-today
  • What bare-bones subsistence baskets consist of
  • Initial prosperity and growth since 1820
  • Percentage distribution of world manufacturing, 1750-2006
  • Laborer wages as a multiple of subsistence, six cities 1325-1875
  • Laborer wages as a multiple of subsistence, London and Beijing 1300-2000

This is the best short précis I have ever seen of "the facts" on global economic growth across time and space since 1500.

Cursor and James s Kindle for Mac 4 Global Economic History A Very Short Introduction Very Short Introductions

Cursor and James s Kindle for Mac 4 Global Economic History A Very Short Introduction Very Short Introductions

Cursor and James s Kindle for Mac 4 Global Economic History A Very Short Introduction Very Short Introductions

Cursor and James s Kindle for Mac 4 Global Economic History A Very Short Introduction Very Short Introductions

Cursor and James s Kindle for Mac 4 Global Economic History A Very Short Introduction Very Short Introductions Cursor and James s Kindle for Mac 4 Global Economic History A Very Short Introduction Very Short Introductions


Reading: Paul David (2005): Clio and the Economics of QWERTY

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These days a lot of energy and effort goes into user interface and user experience design.

And then we have the typewriter keyboard from 150 years ago.

It shows up in remarkably many places.

Is there any reason to think that it is in any sense the best way to lay out an alphabetical interface entry form?


As you read your way through Paul David, look out for the ways he uses the following concepts:

  • path dependence
  • equilibrium
  • "free to choose"
  • lock-in
  • system compatibility
  • system scale economies
  • quasi-irreversibility
  • choices made myopically
  • "QWERTY worlds"

And three more questions:

  1. In the end, does it really matter?
  2. How could we figure out how much it matters, both in particular cases and in the general case?
  3. Which do you think will be the most spoken language in three centuries: English or Mandarin? Why?

Criticisms of Paul David:

  1. All of the research on the superiority of alternative keyboards that was published was done by people who had a strong interest in replacing QWERTY.
  2. You cannot prove that QWERTY is in any sense grossly inefficient.
  3. It must not matter very much or people would have changed it.

I have not yet found anything I can regard as a successful smart and good faith effort's to set out and document any of these three lines of criticism. Why is this so? Or, alternatively, am I wrong? Is one or more of these lines of criticism actually a devastating rebuttal to Paul David?

And how might we tell?


The Story of American Economic History

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Let me start this course about American economic history with a story:

This is a story about a guy born in the late 19th century, in 1879, on the prairie: his family's homestead was 17 miles from the nearest post office. In historical terms, The horse-riding nomads who had dominated the prairie had only recently been driven off by the guns of government soldiers. Agricultural settlement in one of the richest soil regions of the world was well advanced, but frontier life was still raw and uncivilized.

The kid was smart. So at the age of nine his parents decided to send him to the big city for school. He thus grew up in the bustling cosmopolitan big port city undergoing very rapid economic growth and industrialization as it processed and transported the grain and other exports of one of the most fertile agricultural regions of the world.

But the city was Odessa, not Chicago. He was Russian, not American. His name was Lev Davidovitch Bronstein--Lev is either Hebrew for "heart" or Russian for "lion"; Davidovitch is "son of the beloved one"; Bronstein is German or Yiddish for "stone well".

He did eventually wind up in the United States, after being arrested, jailed, and exiled four times; leading one unsuccessful revolution; and rising to the top of the Russian Social Democratic Labor Party. By then he was known as Leon Trotsky—a pseudonym he adopted in 1902 to try to throw the Czarist secret police—the Okhrana—off of his scent, supposedly the name of one of his Czarist jailers. By then he had lived in many places and seen a great deal of the world--Nikolayev, Kherson, Kiev, and Odessa in Ukraine; Moscow and St. Petersburg in European Russia; Alma-Ata in Kazakhstan; Ust-Kut in Siberia, Vienna, Geneva, and Paris, all before being deported from France to Spain and then Spain to New York, where he arrived on January 13, 1917.

But he did not stay in the United States for long. When the Kerenskyites overthrew the Romanov Czar Nikolai II in February 1917 to try to establish a democratic republic in Russia, Trotsky immediately sailed back to his country, departing from New York on March 27, 1917. He then took his place at Vladimir Lenin's right hand in the October Revolution and the construction of the Soviet Union before being purged, exiled, and murdered—stabbed with an ice pick by an NKVD agent soon after moving out of artist Frida Kahlo's house in Mexico City—by Josef Stalin. Russia was his country. Lenin was his friend, leader, and comrade. And Lenin's Majority—Bolshevik—faction of the Russian Social Democratic Labor Party was his cause.

However, later, in 1930 in his autobiography My Life, he would write that he left with regrets that his stay had been so short:

It would be a gross exaggeration to say that I learned much.... The Russian revolution came so soon that I only managed to catch the general life-rhythm of the monster known as New York. I was leaving for Europe, with the feeling of a man who has had only a peep into the foundry in which the fate of man is to be forged...

"The foundry where the fate of humanity is to be forged".

The then-38 year old Trotsky had seen more of the world and its history from more levels than all but a few, and had a brain and education that put him in the very select company of those who could try to grasp and understand it. And Trotsky's judgment was that he; in returning to St. Petersburg and Moscow was returning to a backwater: moving back to the past that was his country from where the future was being made every day.

And Trotsky was right. America has been--since 1776 and perhaps since 1630--the place where the future of humanity has been and is being hammered out. That is why its history--the study of what has happened here--is of general interest to humans wherever they live in the world, and will be of interest to humans long into the future.

Why did I start this lecture with this story?

Why didn't I just say: "America has been--since 1776 and perhaps since 1630--the place where the future of humanity has been and is being hammered out. That is why its history--the study of what has happened here--is of general interest to humans wherever they live in the world, and will be of interest to humans long into the future"; and omit the windup?

First, to stress that my judgment that the history of America is of general rather than parochial interest is shared by one of the smartest and most farsighted human beings of the twentieth century, and one whose politics and understanding of the world are very, very different from mine. My judgment is not mine alone--far from it.

Second, to try to keep you awake: We have here someone who should be sympathetic to you--a young, very smart, man on the make, upwardly mobile and trying to figure out what to do with his life. Plus we have travel, danger, imprisonment, revolution, and murder while reading in his study by a single blow in the back of his head from an ice pick wielded by the lover of his personal secretary and Russian NKVD agent Ramon Mercader.

Third, you won't remember "America has been--since 1776 and perhaps since 1630--the place where the future of humanity has been and is being hammered out. That is why its history--the study of what has happened here--is of general interest to humans wherever they live in the world, and will be of interest to humans long into the future". You will remember the story: You will remember that there was this interesting dude named Trotsky who had a very full life and to whom lots of things happened, and he thought the U.S. and its history was really important--so much so that he left New York to become Lenin's principal deputy and People's Commissar for Foreign Affairs in the Soviet government with some regret.

You see, we are narrative-loving animals. We like stories. It is how we think. We are jumped-up East African Plains Apes, only 3000 generations removed from those who first developed language, trying to understand the world as monkeys with, as Winnie-the-Pooh would say, "very little brain". We are lousy at remembering lists--that is why we need to write them down. We are not much good at retaining sets of information--unless we can, somehow, turn them into a journey or a memory palace. We are excellent, however, at remembering landscapes. And we are fabulous at stories: human characters with believable motivations; beginnings, middles, and endings; hubris and nemesis; cause and effect; villains and heroes.

To place ideas and lessons in the context of a story is a mighty aid to our thinking. And history and its narratives are how we do that.

That is the first BIG IDEA of this course: that you should study history because it is a mental force multiplier for your brain, and that disciplines that do not take a historical approach and ideas that do not admit of a narrative historical presentation are crippling themselves.

There are thirteen other BIG IDEAS to watch out for in this American economic history course. Yes, I know that is too many. Make a list and refer to it.

The BIG IDEAS are:

  1. We are animals that live by narrative—hence by history…
  2. There are three American nationalisms…
    • The City Upon a Hill: “Let it be as it was in New-England…”
    • A place where we can live freely…
    • “But here was Old Kentucky!”
  3. The American project has been astonishingly successful—in Trotsky’s words: “the furnace where the future is being forged…”
  4. But the American project has been much worse than shadowed by plantation slavery and its echoes down the centuries…
  5. One big contributor to the success of the American project has been immigration…
  6. American society has generated a large—in comparative context—but unevenly distributed quantum of liberty…
  7. American society used to deliver an unusually large quantum of opportunity—but not any more…
  8. American society has delivered an unprecedented and unequalled quantum of prosperity
  9. The story of industrialization requires focusing on growth-oriented industrial policy…
  10. The story of industrialization requires focusing on societal well being-oriented industrial policy…
  11. The story of opportunity and prosperity is the story of our two Gilded Ages: their rise, fall, and rise
  12. The apogee of American success is the mid twentieth century era of social democracy
  13. Society has moved from agriculture to industry to post-industrial services, and is now moving on to ?…
  14. Much of what has gone wrong with America can be traced to regional geography—and to the cultures that entrenched themselves in that geography…

Note: Want to learn more about Lev Bronstein--Leon Trotsky? IMHO, the best places to start are with two books: First, the relevant sections of Edmund Wilson (1940): To the Finland Station. Second, Leon Trotsky (1930): My Life.


Readings for Econ 115: 20th Century Economic History

Il Quarto Stato

Last chance to change any of them out. Are these the right readings? Which will fail in their task? What should I replace the ones that will fail with? What things I have not included must be added?

„Globalization“ and „Neoliberalism“

Hoisted from the Archives from the Twentieth Century: "Globalization" and "Neoliberalism": for the Chronicle of Higher Education": pages version at:

From left and right alike we hear something called "globalization" condemned. The forces driving the world economy toward increased economic integration are sinister. On the left politicians like Democratic congressman David Bonior begin speeches by noting three things that come to the U.S. from Mexico--dirty trucks, drugs, and hepatitis. On the right politicians like ex-Republican Pat Buchanan blame a century-old conspiracy to deliver America into the hands of the international bankers--and somehow to Buchanan the bankers are always named Goldman, Sachs, or Rubin; never Morgan or Baker.

In books with titles like The Case Against Free Trade: GATT, NAFTA, and the Globalization of Corporate Power, Ralph Nader and his coauthors tell us that increased international trade and investment are responsible for the ills of the American economy, from disappointing blue-collar wage growth to pesticide-laden fruit. These cries of alarm from left and right about the destructive consequences of rapid international economic integration were a constant part of the background. Then in 1997 and 1998 came the calamitous flight of capital from the previously fast-growing economies of East Asia. The East Asian crisis left almost every observer believing that the global marketplace was baldy out of control. Something was amok, it seemed, when traders in lower Manhattan could cause widespread bankruptcies and unemployment in Bangkok.

The alarming crisis in Asia led to a swelling of the volume of a broad anti-trade chorus. This chorus, in turn, inspired a counter-chorus. Chin-stroking neoliberals apologized for the "excesses" of the market. They agreed that market forces are occasionally a little reckless in their roughhousing. But they stressed--like any owner of a Rotweiller--that if you only realized that you shouldn't make any sudden moves to disturb the animal, you wouldn't get bitten again. Now I am a card-carrying neoliberal: a believer that a bet on increased international economic integration is our best hope for rapidly moving to a truly human world, an advocate of NAFTA and GATT, a former not-very-senior official in the Bentsen and Rubin Treasury Departments, and a believer that those fighting to hold back world economic integration are or are the dupes of foes of global prosperity and liberty.

But I also think that this bet on increased international economic integration is a bet. It is not a sure thing. And I think that it is less important to assure people that it is a good bet (although I think that it is) than to help people distinguish the light from the rhetorical heat. After all, there will be other bets and other policy choices to be made in the future. And to fail to understand what is going on now will diminish our chances of collectively choosing wisely tomorrow. So I want to turn down the volume. I want to approach ideologies of every stripe (including my own) with skepticism. For despite the gallons of ink tha thave been spilled, our understanding of what "globalization" is and what it will do is still primitive. The people whom you can learn the most from aren't those who claim to have the answers, but those who are still working overtime to ask the useful questions.

The critics of free trade aren't necessarily wrong to be critical of the current state of the international economy. But they write tomes that seem to me at least to reveal confusion and fail to enlighten--instead they deepen the surrounding darkness. For example, Rolling Stone columnistWilliam Greider's One World, Ready or Not left me puzzled:.How could it be that when American-based corporations invested abroad, they harm American workers by stealing their jobs, while when German-based corporations invested in Alabama, they harm American workers by exploiting them to earn profits to be transferred back to Germany? What is sauce for the goose must be sauce for the gander.

There are, however, some excellent anti-globalization books:

The granddaddy of them all is Karl Polanyi's (1944) more than half a century-old The Great Transformation. Polanyi--a journalist and refugee born in central Europe whose teaching career included stints at Oxford, Bennington, and Columbia--argued that the market economy erodes the web of relationships that holds human society together. The market for labor pressures people to move around the globe to where they can earn the most--creating strangers in strange lands. The market for consumer goods rewards people for being fortunate or for responding to the incentives--making status a product of market forces rather than the result of social norms or visions of distributive justice. Moreover, Polanyi argued, the market's undermining of social order threatens to destroy the very societal and institutional structures on which the market economy rests.

Now you can disagree with Polanyi, or with his values, but even a card-carrying neoliberal like me finds his arguments hard to dismiss completely. Consider hate crimes committed against Turkish workers and their families in Germany, or women working in New York's garment industry who cannot both provide for their extended families in China and raise their children--and so send their babies back to China to live with their grandmothers. Consider the extent to which special-interest politics means that it is not the government that regulates the market but the market's oligarchs who regulate the governments.

More recent works have provided intriguing updates to Polanyi's argument. The Work of Nations by Robert B. Reich, who went onto become Clinton's Secretary of Labor, focuses on the dangers posed by globalization to America's sense of community and to the political order established by Roosevelt's New Deal. According to Reich, in the future America's blue-collar workers will be unable to share in the relative prosperity made possible by American inventions and America's resources: the need to keep the blue-collar assembly line near the research and design labs is rapidly vanishing. And the only way to reverse growing income inequality is to massively upgrade the educational level and skills of America just as universal high school in the early twentieth century gave America then the most literate and skilled labor force in the world.

Saskia Sassen's (1998) Globalization and Its Discontents speculates on how the "new mobility of people and money" is about to lead to increases in relative inequality within the narrow spaces of modern post-industrial cities. You can applaud migration from the world economy's periphery to the core. I certainly do, as do almost all economists. Few economic processes do more to enrich the world than to move unskilled workers from places were they earn $0.50 an hour to places where they earn $5.00 an hour. And those who move benefit, as their vote-with-their-feet shows. But market forces do not construct the social capital to make high-inequality post-industrial cities truly liveable.

In response to such critiques, the neoliberal political establishment--the Brookings Institution, the Progressive Policy Institute, and the Century Foundation--assures us that critics of increasing international economic integration are suffering from an irrational fear: Globaphobia is what they cal it. International economic integration--driven by rapidly falling transport and communications costs--is both inevitable and beneficial, argue authors Robert Litan (of Brookings), Robert Z. Lawrence (now a member of the Council of Economic Advisers), and Robert J. Shapiro (now Undersecretary for Economic Affairs at the U.S. Departmetn of Commerce). The only question is how quickly governments are going to learn to adjust to that integration, and learn how to benefit from it.

The benefits of this "globalization," according to the neoliberal argument, are threefold:

  • Both the nations comprising the world economy's industrial core and those in the developing periphery benefit massively when the capital-rich core (where interest rates are low) loans to the capital-poor periphery (where interest rates are high).

  • Consumers benefit when lower transport costs and reduced tariffs make goods produced far away more affordable. Producers of goods that are exported gain as well because they sell into a wider market. Producers of goods for home consumption do not gain, but there is nothing like competition from abroad to keep them on their toes, alert to ways in which they can improve efficiency and better satisfy their customers.

  • The more internationalized the world economy, the more use producers in each country can make of commodities and production processes invented elsewhere. Faster diffusion of knowledge raises the level of productivity and technology worldwide.

Thus globalization leads to a richer world, and to a more vibrant and tolerant world as well. Governments should not fight globalization, neoliberals contend. Instead they should embrace it.

To a poor country hoping to develop an industrialized economy, neoliberals outline several incentives to embrace the global market.

  • In the past it might have made sense to impose tariffs to protect so-called "infant industries" or cushion economic instability. But in the information age, an integrated global marketplace will accelerate the transfer of technology. And it is only by accelerating the transfer of technology that poor countries have a chance of growing rapidly.

  • The industrial core has lots of money to lend to the developing periphery. Economies should embrace such inflows of capital, for they provide an opportunity to cut a decade or more off of the half-century process of industrialization.

  • Removing trade barriers reduces the scope of the government. That reducation, in turn, reduces the inevitable corruption, stagnation, and bureaucratic obstacles to growth that have beset developing economies for two generations.

In a sense the neoliberal position is a counsel of despair. Once upon a time development advisors, politicians, economists, and others argued that social democracy was the proper road for developing economies. A strong, active government to build infrastructure and redistribute wealth to ensure that growth would benefit all--or so the argument went. Couple that with high investment (perhaps behind a wall of substantial tariffs) and the private sector would flourish.

But over the past two decades cynicism has set in. A consensus has formed that outside already-developed nations (and indeed inside some of them) an activist developmental state has entailed too many coups, too much corruption, too many business leaders deciding that the road to profits is not capital investment but marrying the C.F.O. to the daughter of the vice-minister of finance.

Neoliberals hope that multinational corporations, financial analysts, bond-fund managers, and bond raters will in the end be able to apply some constructive pressure to improve the situation: better the discipline of the world market than no discipline on less-than-fully-democratic governments at all.

This neoliberal line may sound a little to pat. But it is virtually the only game in town. Critics try to poke holes in it, but the neoliberal stance has no serious challengers these days in policy-making. The "dependency" arguments--that developing economies should fear and tightly manage contact with the industrial core because it would take more than 100% of the gains from trade--have vanished. In 1960 left-wing intellectuals and politicians argued that the close economic links between Batista's Cuba and the United States was impoverishing Cuba. Today everyone--left, right, and center--agrees that it is the lack of close economic links with the U.S. that impoverishing Cuba.

Some others seek to point out the ways in which the idea of globalization has been overhyped. Their research is a useful reality check. Globalization has been overhyped. Globalization theories are always in danger of falling victim to grandiosity. Yet there remains a sense in which debunkers of globalization run the risk of missing the forest for the trees. They focus on the minutiae of the present, at the expense of the trends that would allow them to forecast the future.

Among the best debunkers of the globalizers' position is John Helliwell, a professor of economics at the University of British Columbia. In his book How Much Do National Borders Matter?, Helliwell systematically examines trade linkages among Canadian provinces. He finds that the linkages are many times more extensive than those between the provinces and American states that are just as close as the snowy owl flies: Toronto trades more than ten times as much with Vancouver as with Seattle. The same holds true between the industrial core and the developing periphery. National borders today are still tall barriers to movements of goods, capital, and most of all labor.

Helliwell is right. Globalization has been oversold and its impact overstated.

But what makes his and similar arguments of potentially limited value is that--while correct now--they may not be correct for long. An expert on mail delivery in 1900 might well have stated that the new technology of automobiles was of very limited value in delivering the mail over muddy rural roads. Such an expert would have been correct. But in terms of planning being correct about today is not necessarily being relevant for the planning for tomorrow. The arguments that globalization has been oversold looks good for the decade of the 1990s. It will probably not look good for the decade of the 1930s.

So if you find yourself unsatisfied by isolationist Cassandras and neoliberal Polyannas, and if careful statistic-wielding debunkers seem to speak to today and not to tomorrow, where should one turn?

My primary allegiance is to a fourth group--reformers, call them, who see the economy as resting on sociological and political foundations and capable of being shaped to bring the story of globalization to a relatively happy ending. And among the reformers there are two currents of thought that seem to me to be well worth heeding. The best example of the first current is found by exiting my Berkeley office, walking north ten feet, and knocking on the next office door. Barry J. Eichengreen, my Berkeley colleague, has written two recent books: Globalizing Capital and Toward a New International Financial Architecture. The first explains how we have arrived at the international monetary system that we have, with its floating exchange rates and large international flows of capital. It explains why we see rapid growth among those developing economies that convince Wall Street that they should be growing rapidly, and brutal financial crises when those claims are shown to be unfounded or even called into question.

The second book contains "practical" proposals for reform: recognize the compelling long-term benefits of open capital markets, worry less about guarding against "moral hazard" (economists' term for the skewing of expectations if a past bailout leads investors to expect that future crises will always be met by bailouts), and establish a better safety net to catch nations falling into international financial disarray. There are imperfect institutions that already strive to provide that kind of security for world financial structures--chief among them the IMF. But in Eichengreen's view it has worried too much about opening capital markets and making sure that governments that preside over financial crises are punished and humiliated, and too little about making sure that national governments have the right incentives in advance to diminish the damage that a panic-stricken flight of international capital might do.

Eichengreen has more realistic expectations than do the globalizers, recognizing that the global market economy is "the worst way of allocating resources except for all other forms that have been tried." There are many problems that decentralized markets cannot solve, and that must be resolved by governments if they are to be resolved at all. (A broader perspective, with more points of view but tending toward the same lessons, can be found in Capital Flows and Financial Crises, edited by Miles Kahler.)

The second vein of reform-minded thinking about globalization is best exemplified by Dani Rodrik's Has Globalization Gone too Far? Rodrik, an economist at Harvard's Kennedy School of Government, tries to create a middle ground between leading cheers for the onrush of intenational economic integration and mindlessly condemning such integration in a fit of reactionary nostalgia for a past that never was.

Rodrik fears that developing economy governments that do not carefully manage international economic integration will wind up without the ability to achieve anything like what was achieved in the post-World War II industrial core: the good society (not the great society) and the mixed economy.

The mixed economy taxes income from capital and transfers wealth from market winners to market losers. Globalization, however, raises the mobility of capital and makes it harder for governments to tax profits. Globalization increases competition in the labor market. Most economists (me included) have argued that this increase in labor market conditions has had little impact on the wages of American workers. But Rodrik points out that "...saying that the impact of globalization on advanced-country labor markets is quantitatively rather small... is no different [in standard analytical frameworks] from saying that gains from trade have... been small." He asks economists to put up or shut up: recognize either that the gains from trade or small, that trade has potentially large effects on wages, or that the standard analytical framework is wrong.

He also throws down the gauntlet. He claims that globalization cannot be a replacement for (failed) social democracy in the developing periphery. Instead, he believes that globalization must be assisted by (successful) social democracy if it is to produce a world with a human face.

I do not kinow if Rodrik is right in his analytical challenges to other economists or to neoliberalism. But I know that his challenges are very useful challenges, and that the debate he seeks to open would be a very useful debate.

Capital Flows and Financial Crises, edited by Miles Kahler (Cornell University Press, 1998).

The Case Against Free Trade: GATT, NAFTA, and the Globalization of Corporate Power, by Ralph Nader et al. (Earth Island Press and North Atlantic Books, 1998).

Globaphobia: Confronting Fears About Open Trade, by Gary Burtless, et al. (Brookings Institution: 1998).

Globalizing Capital: A History of the International Monetary System, by Barry J. Eichengreen (Princeton University Press, 1996).

Globalization and Its Discontents, by Saskia Sassen (New York: New Press, 1998).

The Great Transformation, by Karl Polanyi (Beacon Press, 1944).

Has Globalization Gone too Far? by Dani Rodrik (Institute for International Economics, 1997).

How Much Do National Borders Matter? by John Helliwell, (Brookings Institution, 1998).

One World, Ready or Not: The Manic Logic of Global Capitalism, by Wiliam Greider (Simon and Schuster, 1997).

Toward a New International Financial Architecture: A Practical Post-Asia Agenda, by Barry J. Eichengreen (Institute for International Economics, 1999).

The Work of Nations: Preparing Ourselves for Twenty-First Century Capitalism, by Robert B. Reich (A.A. Knopf, 1991).

Was This the Greatest Failure of the Obama Administration?

Preview of Was This the Greatest Failure of the Obama Administration

Not running the table in January 2009 to make a V-shaped recovery all but inevitable, but instead trusting to good luck and the accuracy of the forecast. An obvious mistake then. An obvious mistake now. And I have never heard a good account of why it was made--other than that Obama, Emmanuel, Plouffe, and Axelrod bonded with Geithner, and that Geithner is always "let's do less", no matter how strong the arguments to do more are:

Paul Krugman (2010-07-09): What Went Wrong?: "It’s now obvious that the stimulus was much too small...

...The administration has chosen to deal with this by... condemning Republicans, rightly, for obstructionism, while at the same time claiming, falsely, that we’re still on the right track. How did things end up this way? We’ll never know whether the administration could have passed a bigger plan; we do know that it didn’t try.... It looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long.... [But] even before the severity of the financial crisis was fully apparent, the recent history of recessions suggested that the jobs picture would continue to worsen long after the recession was technically over. And by the winter of 2008-2009, it was obvious that this was the Big One.... Those concerns were what had me fairly frantic....

And here we are. From a strictly economic point of view, we could still fix this: a second big stimulus, plus much more aggressive Fed policy. But politically, we’re stuck: even if the Democrats hold the House in November, they won’t have the votes to do anything major. I’d like to say something uplifting here; but right now I’m feeling pretty bleak.

Paul Krugman (2013-01-06): The Big Fail: "If you had polled... economists... meeting three years ago...

...most of them would surely have predicted that by now we’d be talking about how the great slump ended, not why it still continues. So what went wrong?... Mainly, is the triumph of bad ideas.... Standard [textbook] economics offered good answers, but political leaders—and all too many economists—chose to forget or ignore what they should have known.... A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough. At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.

But it all went wrong in 2010.... Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away.... The warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.” Well, someone was incorrect, all right.... Blanchard and... Leigh... not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake.... The fund was actually less enthusiastic about austerity than other major players. To the extent that it says it was wrong, it’s also saying that everyone else (except those skeptical economists) was even more wrong. And it deserves credit for being willing to rethink its position in the light of evidence. The really bad news is how few other players are doing the same.... The truth is that we’ve just experienced a colossal failure of economic policy—and far too many of those responsible for that failure both retain power and refuse to learn from experience.

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