Why does economics need to be a science?

I've seen some commentary going around the blogosphere about this article by economist Raj Chetty, "Yes, Economics is a Science." I believe there is some merit to the question of whether or not (and what ways) economics is a science. But what's more striking to me is why the question continues to create such a stir.

So that's why I ask the question: what is it about being a "science" that makes us argue over it? My conjecture: modern mythology. Or more precisely, modern messianism.

Here is the messianic myth of the modern age. Once upon a time, we were living in darkness, plagued by superstitious beliefs to which we clung due to indoctrination by authorities. Then, around 400 years ago or so, a revolution was stirred, and science came to show us the light and brought us into a new age of progress. Now, if only we embrace science and reject whatever isn't science, we will continue along the path of enlightenment, so that one day we can all live in peace and prosperity.

The roles of good and evil here are played by understanding on the one hand and bias on the other. Anything which is "science" can help us understand, anything which is not can only obscure. That's why the battle over calling economics a science is so perilously important--if it isn't a science, then it is merely a tool to fuel ideological agendas. But a real science could never do such a thing.

If we reject this myth, then the question becomes less perilously important (though still interesting for other philosophical reasons). Science as we know it today has helped bring about many positive changes, but it is not going to bring about the kingdom of enlightenment. It may be worthwhile at some point to give an argument stating all the reasons why I think this, but my main argument goes something like this. Science, as understood today, is supposed to be objective, in the sense of separating the observer from his biases and forcing him to interpret the facts from a fresh point of view. The problem is that you can't build a better society on a model of separation. Things which could be construed as bias are actually some of the most essential attachments which hold civilization together: family, tradition, empathy, duty, and above all love.

An important corollary of rejecting the messianic myth of scientism: society will not heal itself by adopting the right policies at the level of federal government. If society were merely an object of scientific study, then I suppose it could be engineered to perfection. That is not the case.

Things that make libertarians sound like jerks

Last week I saw a photo with more profound political commentary (one of that endless supply you see on facebook) that went like this:

1,000 dollar monthly Social Security check for Grandma is bankrupting America.

Yet a billionaire not paying taxes is making America prosperous.

Up is Down in America!

Check and mate. At least as far as our instincts are concerned. Clearly the big greedy corporations are controlling everything, and this is evidence that we are the victims of a cruel right-wing ideology of laissez-faire economics.

There are many points where I can agree with my left-wing friends, including when it comes to corporate greed. No one can be naïve about the lengths to which powerful people will go to maintain their power, or wealthy people to maintain their status. Equally important is the realization that people are not perfect, and left to their own devices they often do pretty terrible things to themselves and others. And I also very much agree with the assertion that a society is only just insofar as it is capable of protecting the weak and vulnerable, and helping as much as possible those who are less fortunate.

It is thus with a deep sigh in my chest that I must point out something critically important about billionaires versus Grandma. Yes, it might make me sound like a jerk, because our instincts are not naturally wired this way, but here is a simple fact: billionaires not paying taxes really do help make us prosperous.

Now, before you jump too far ahead of me, please note that I am not saying billionaires have no duty to pay taxes. The duty to pay taxes comes from the cost of certain necessary public services.

However, a sound understanding of our economic system should leave you with no other conclusion than this: on the whole, every dollar of profit made by a business is, in fact, a sign of added prosperity to the society. (Note: the qualification "on the whole" will be very important later.)

I find that this statement runs counter to our instincts, and it is therefore not very widely accepted even though it is the fundamental principle on which our economic system runs. Most people are willing to say that, sure, if you make a lot of money, you must have worked very hard and therefore deserve quite a lot of it. Good for you is a common way to summarize this feeling. After all, we like personal achievement and appreciate an individual's right to benefit from his own work. What isn't at all clear is how this actually helps the rest of us.

By this reasoning, we arrive at the conclusion that there are limits on how much profit a company (or individual) should make. There is only so much that one person can really deserve. Here is where our instincts go totally off track. Because we so firmly believe that the amount of money one makes should be attached to the effort he puts in or merit he possesses, we react with disgust at the idea of one man making in one minute as another man makes in a whole year. Surely no man is that much better than another.

Very few people indeed are so bold in their egoism as to defend such an economic system on the basis of moral merit. What is unfortunately so poorly understood is that individual merit is not the justification for the economic system that brings some people such astounding profits. No, the real justification is--and here I reiterate--that every dollar of additional profit, no matter how great the profits already are, means more prosperity in the society as a whole--not just for him who gained that profit.

Why is this so? There is no point in trying to search for an original explanation, because the right explanation is very simple and by now very old. It is a simple logical deduction from the definition of profit. Profit is nothing other than the price at which something is sold minus the cost to produce it. If the profit is anything greater than zero, this necessarily means the product was more valuable than the cost--the cost being everything that went into producing it. If the product is more valuable than its cost, this necessarily means society is better off for that product existing rather than not existing. QED

The real question is why we have so much trouble accepting the argument. Perhaps the reason we have trouble is that it seems highly impersonal. Can a number with a dollar sign next to it really tell us that society has benefited? Given the number of things we buy for which we later have no use, or the number of times we actually regret having bought something, it is easy to be skeptical of the idea that profit always means a benefit to society.

Here's where that qualification becomes important: "on the whole" means that profit is never a perfect indicator of benefit added. But I submit that there is no perfect indicator of benefit added. Most of our measurements are very imprecise. Money--that horrible, impersonal device for measuring value--has at least the benefit that we are always critical of it. When you realize later that a purchase wasn't very smart, you are careful not to make a similarly bad purchase again, because it's painfully obvious that you only have so much money.

The market will never give us a perfect representation of value, but it is extremely adaptive, correcting its own failures more quickly than any other system comparably large. Contrast this, say, with our system of government, which continues to fail in the same way no matter how much people complain about the same problems over and over.

Thus, the truth is, billionaires, whether or not they pay taxes, do on the whole add value to society so long as they keep producing things people are willing to buy. Paying taxes is something completely independent of this market process. You don't benefit the United States primarily by earning a lot of money and then paying part of it to the government. That idea is simply economic nonsense from beginning to end. The primary way in which you benefit the society around you is by producing things we need or want. And the only way to know what people need and want, in a world so immensely complex and interconnected as ours, is to follow the prices. It may seem impersonal, but I defy anyone to try bartering one on one with 300 million other Americans, much less seven billion people around the world.

Helping Grandma seems much more personal, and therefore we like to think about helping Grandma and not about billionaires making money. The irony is, helping Grandma in this case really is every bit as impersonal as big corporations that make money. If you think that paying a check to the government means you've helped Grandma, I defy you to verify whether that's true. It is truly astounding to me that people are so spiteful of corporations that produce things which they themselves buy, only to be so blindly trusting of politicians who say that their money is really going to help their neighbor.

So now that you're convinced that I am a mean libertarian who has no heart, I want to encourage you by saying that yes; I do think the state has an important role to play in helping Grandma; no, I don't think billionaires should evade taxes; and no, like I said already, I don't think money can measure the value of everything. There are really many things on which I can wholeheartedly agree with progressives, including many of the excesses of modern banking, monstrous corporations, and the catastrophy that awaits our environment if we do nothing to curb pollution. But one thing always comes back to give me a headache when I talk with people on the left, and that is this unrelenting, gut-level suspicion of a very fundamental economic fact: profit is good.

I want to close on a personal note. I, myself, have very little desire for money, and I really have very little ambition for business. As I write this little blog post, I realize that my own instincts run very much counter to the conclusions I've reached about our economic system. Thus, I hope that those who share many of my ideals about a great many political issues will realize that it is not a set of different values that separates us, but only a matter of interpreting the facts. I think those of us with an interest in political questions have an obligation to think both morally and logically about the economic system, because it will not do to simply follow our gut-level feelings. If those who pride themselves on their ability to think rigorously on political questions cannot bring themselves to understand the fundamental importance of profit in a complex economy, the only direction I see left is for society to hand over more and more power to the state. And that can only end in disaster, as it already has in the past.

Unchecked capitalism

I miss this blog. It really makes me sad how little I've written here lately.

Because most of the people I talk to about politics seem to come from a left-leaning perspective, I tend to think a lot about the morality of markets. On the other hand, I can always count on the Catholic Church to keep things interesting by showing a firm, classical opposition to free markets such as that enunciated recently by Pope Francis. Thus I'm reminded that attacks on market liberalism come from both modern, progressive perspectives as well as classical, conservative ones.

As a side note, the one breath of fresh air I get when talking politics while living in France is that the word "liberalism" hasn't changed meanings as it has in America. Thus, while American "liberals" are actually the left, in France "libéralisme" is more associated with the right, at least with regards to the economy. It makes discussions much more clear, since the word is associated with its content, rather than with a political movement.

One thing that's striking about how both the modern left and classical conservatives respond to markets is how amazingly similar it sounds in terms of ideas. That is, you would expect that these two very different ideological groups would have two very differential ideological reasons for critiquing markets. What I hear is impressively similar: markets turn our attention toward the idols of money and greed, and they create a society that abandons the poor and the ideal of greater equality.

But on a good day, both the left and the Catholic Church might even be drawn to admit no other institution than those of property rights and free trade has done a better job in the history of civilization of raising people out of poverty, creating the innovative solutions that lead to better health and higher living standards. Where did it all go wrong?

One of the things I noticed in the article on Pope Francis was this little phrase:

Unchecked capitalism had created “a new, invisible, and at times virtual, tyranny”, said the former Cardinal Jorge Bergoglio.

No, I'm not talking about the thing the Pope actually said. I'm talking about the phrase there at the beginning of the sentence. "Unchecked capitalism." There it is.

For all the historic connection of capitalism with "laissez faire" and the idea of individuals gone wild doing whatever they want with their own money, the truth is that in principle the market is a very restrictive system. It's really in our nature to do almost the opposite of what the market demands: to demand or forcibly take what we feel we deserve, to respect property rights only when it seems good for the rest of us.

What doesn't get said enough in these discussions is that the modern lords of finance have not driven us all to ruin simply by acting on their own behalf. No, they are publicly designated to act on everyone's behalf. Private individuals who gamble their own money and lose are not bailed out. But bankers who gamble everyone's money are bailed out, because it turns out everyone is depending on them.

A system should not be called a "free" market because we see people acting in a free and unrestrained way. This is simply a mistake in terminology. A truly free market is one in which we are all equally restrained by the same rules. Only within the restraints of mutual respect for property rights can we then be allowed to act freely.

The symptoms that Pope Francis points to are real signs that our culture does have a real problem, and the problem is largely that something has been left unchecked. Properly speaking, however, it isn't capitalism that has been left unchecked. It's a few croneys who vie for the backing of society. Wealth is not inherently bad. Getting or securing your wealth by forcing others to support you is bad.

In short, we need to go after the bankers.

The impossibility of economic growth?

Really great blog post by Tom Murphy, who argues that the economics profession is probably mostly deluded when it comes to the assumption that economic growth can continue indefinitely. Reads well, too, because it comes in the form of a dialogue between him (a physicist) and an economist. Main point: there are certainly physical constraints on the possibilities for economic growth, so long as human beings remain here on earth. Energy is limited, and the more energy we consume the more heat we generate. Efficiency also has theoretical limits. What's the end result? The best we can possibly do, in the long run, is converge to a steady state economy--one in which energy consumption and GDP are fixed, and the only chance for "growth" is simply in improving the quality of life that remains for those of us still on this planet.

In my opinion, the convergence to such a steady state may not be pretty. It will be a huge test of our morality when the world's population exceeds a readily sustainable level. I'm thinking wars and eugenics haven't seen their last days. But maybe I'm too cynical.

I agree with Tom's major point, and I think economists are wrong to be unaware of the physics. But I do have two ideas I want to throw out there. One is a question: what means do we have of calculating the natural equilibrium between population size and consumption, scarcity, and overall well-being? I claim that the only real "computer" we have for this is the "catallaxy," as Hayek liked to call it. In other words, the global free market--regulated by property rights and negotiated through individual transactions. The main point is that this global system of organization has a mechanism of adapting to new or undiscovered information, and I think it's probably the only way we have of making the overwhelming set of calculations necessary to ensure humans can still live peacefully on this planet.

Second, I just want to say that, as silly as it can sound, I'm optimistic about space travel. Seriously. And I imagine that one day in the future when we start to truly feel the squeeze on our ability to consume, some scientists might just feel desperate enough to make space travel a more feasible idea. But I admit, optimism can't buy bread.

"Banks are special"

Everyone interested in finance is now talking about the recent announcement by JP Morgan that it somehow managed to lose $2 billion in the past six weeks. In a recent opinion article, Paul Krugman asserts that this is precisely why we need more government regulation:

Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on. [emphasis added]

So do you now understand? Banks are special.

The beef I have with Krugman is not that I think businessmen are superior to government; far from it. No, the beef I have is that I believe, as a hopeful believer in the classical liberal tradition, that our ultimate political goal should be to create a society which is less dependent on people with power, not more dependent. Krugman either thinks there is nothing wrong with a system in which we are forced to pay for the mistakes of cocky financiers, or else he simply thinks such a system is inevitable. I refuse to accept either premise.

As libertarians constantly remind us, if big businesses will at some point inevitably screw us all over, then isn't the same true of big government?

How do we liberate ourselves from a power structure which forces the many to pay for the mistakes of a few? It seems to me we need to reexamine the purpose of law. Almost everyone in contemporary political discourse assumes that one of the major purposes of law is to prevent bad things from happening. So confident are we in our ability to control the world around us, using the incredible technological and political tools developed in the modern era, that we feel certain that someone ought to be able to steer this monstrous ship away from those icebergs. (You'd think we'd actually learn something from the Titanic.)

We need a more chastened approach to law. The purpose of the law is to administer justice. This concept is still not lost on most people. We understand that if we have been wronged, the person who has done the wrong ought to compensate us. It is not possible to change a person's motives, but we can punish bad behavior.

Sometimes, however, the question is not so much whether a person has committed any wrong, but rather who should be responsible for what happened. A man who risks his own money in a business venture has not done any wrong to anyone, and probably has good intentions. However, if the venture goes bad, then justice does not provide him any claim on anyone else's money to reimburse him. He may ask others to be merciful, of course. But is stealing from someone else in order to help this man really an act of mercy? That, in effect, is what the government does whenever it bails out failed businesses. And how much more insulting is this practice, since the businessmen being shown "mercy" hardly deserve our pity!

For this reason, the best way to constrain government is to demand from it only justice, not mercy. The purpose of government is not to "steer the boat," as it were. Its sole purpose is to arbitrate between individuals who will sometimes fall into irreconcilable conflict. Its purpose is to decide the boundaries of responsibility so that individuals aren't forced to pay for the consequences of actions to which they had no prior connection, and then to enforce those boundaries. This is clearly not a trivial task, but it is a fundamentally different task than the one demanded by a majority of the American public today. It has nothing to do with control, but only with justice.

Doubtless someone will say that mercy triumphs over justice. A fine Christian sentiment that is, but mercy can only be shown by someone with power. The vision proposed by America's founders is one in which the government is not an institution of power, but of service to the people. God can have mercy on us because he has some rightful claim on us. If we admit that the government can have mercy on us, we give government a place which only properly belongs to God! Nothing belongs to the government other than what we have given it, or what has been taken from us. What an act of mercy for government to steal from the many in order to give to the few!

Like Krugman, I believe that if government is to insure the banks against all possible failures, it ought to demand that these banks act within the bounds of reason, so that they don't harm the public. But the question is whether the government has the authority to insure the banks in this way. The question is whether anyone has the right to claim a position in society that is "too big to fail," or too important not to be supported by the public. Such a position is what used to be called privilege, before the term came to be abused in modern discourse. The American dream, in my view, was to have a society in which the notion of privilege in this sense was all but totally destroyed.

It is not possible to prevent mistakes. It is not possible to prevent evil. Regulations will only slow down the conscientious. Those who have respect for what is right and prudent will either work around such regulations or ignore them. When people speak of the need to "regulate," they have already assumed that there is such a thing as privilege. And that is a tragedy.

Rather than regulations, we simply need law. "A government of laws, and not of men," as Madison said. In the short run, laws do not prevent evil men from doing evil things, but they do give the common man the power to stand up and be compensated for the wrong done to him. One hopes that in the long run, this has the tendency to prevent evil, since at least people will seek to avoid bad consequences. But what is there to prevent a man from doing as he pleases, when he knows that he has a place of privilege in society, and someone will always pick up after his mistakes?

I don't know how to successfully reform the power structure we have mistakenly built in this great civilization of ours. All I know is what kind of direction we ought to move in. It seems to me that so-called "liberals" like Krugman have abandoned the classical liberal vision of a world without privilege. My only guess is that they have all but abandoned thinking about the long run in favor of using their technocratic abilities to help as many people as they can in the short run. We shall see what is the fruit of their bias.

Libertarianism and Consumerism

Happy Black Friday, everyone. Today is the day when we celebrated the way in which consumerism saves us from all economic woes.

Or not.

Did you know that FDR once changed the day we celebrated Thanksgiving? Since Abraham Lincoln's declaration in 1863, Thanksgiving had always been celebrated on the fourth Thursday in November. So why did FDR change it? You guessed it--to save businesses!

For 75 years after Lincoln issued his Thanksgiving Proclamation, succeeding presidents honored the tradition and annually issued their own Thanksgiving Proclamation, declaring the last Thursday in November as the day of Thanksgiving. However, in 1939, President Franklin D. Roosevelt did not. In 1939, the last Thursday of November was going to be November 30. Retailers complained to FDR that this only left 24 shopping days to Christmas and begged him to push Thanksgiving just one week earlier. It was determined that most people do their Christmas shopping after Thanksgiving and retailers hoped that with an extra week of shopping, people would buy more.

So when FDR announced his Thanksgiving Proclamation in 1939, he declared the date of Thanksgiving to be Thursday, November 23, the second-to-last Thursday of the month.

(Unfortunately, none of FDR's policies ever did quite have the economic impact so many people claim: the Great Depression didn't end until after World War II was over. See also here.)

As a Christian with libertarian leanings, I'm often faced with the question about free markets and consumerism. Is the greatest society we can come up with really one in which people are simply free to pursue their material well-being, without regard for higher values? Obviously not. So why wouldn't I be in favor of a structure of government which keeps the profit motive in check, and which doesn't favor the greedy?

I have spent many words answering these questions in a philosophical way, but one should also notice the historical irony behind these questions. America has never embraced socialism, which according to its strict definition means government-run production. Rather, thanks to the influence of Keynesian economic theory, we have instead embraced corporatism, in which the government takes the role of business partner with the capitalists who produce goods.

Keynesian economics is important here. The vulgar form of this theory (that is, the most common form) is that during an economic recession, the government needs to increase consumption in order to spur producers on to further growth. This consumption-oriented mentality is now pervasive in our culture. The media endlessly parrots the idea that our major economic problem is not enough consumption. Every year reporters constantly fret about how well retailers are doing during the Christmas season. We are made to believe that it is our patriotic duty to spend more and thereby revitalize our economy.

But this idea is no libertarian idea. You will not find it in the writings of Ludwig von Mises, Friedrich Hayek, or Milton Friedman. You will not hear ReasonTV telling you to go out and shop more. Can you imagine Ron Paul saying we need to spend more?

No, the defenders of liberty are always the ones asking just the opposite: we must save so that we can invest; we must invest so that we can grow; only a fool would spend more to buy himself out of debt. (There are exceptions, of course; many worthwhile ventures require a great deal of risk. But it is the general idea that I'm attacking here.) Is there any doubt which philosophical movement is more responsible for the all-pervasive debt we see in our society, both in government and among private citizens? Inflation, easy credit, and increased government spending are all based on the assumption that the short term is everything--and this assumption seems to be the cultural by-product of a philosophy which is skeptical of both freedom and personal responsibility.

Libertarians want all people to free from violence and coercion. We have never promised that we can ever be free from the realities of life. Undoubtedly, people who are free to make their own choices with their excess wealth will often choose to spend it frivolously. This is not an inherently bad thing; would we really want to live in a society in which no one ever used anything without precisely weighing its value? What a dreadfully dull society that would be! But a society which feels compelled to spend beyond its means, which feels it is a God-given right that they should spend excessively year after year, which feels that consumption drives economic growth--that is a society doomed to fall apart.

So while I believe strongly that the government has no right to tell you what to buy or not to buy this holiday season, I am equally convinced that a truly free people would not be so foolish with money as we now see people are. True freedom also means real responsibility, and real responsibility teaches us through the discipline of economic realities. If consumerism was originally the product of economic freedom, its only cure is more freedom--not government sponsored capitalism.

Bastiat on What Is Seen and What Is Not Seen

It is the title of this essay that made F. A. Hayek praise Bastiat's "genius" in making sound economic ideas public. It has been a good read so far. I highly recommend Bastiat to anyone interested in the major political issues of our time, for two reasons. One, he wrote quite a while ago--over a century and a half--and yet the same fallacies he found himself trying to refute are alive and well today. Two, Bastiat is much easier to read than, say, F. A. Hayek or Adam Smith.

The main point of Bastiat's essay is this:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous, for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

Fundamentally, according to Bastiat, although these are my words, good economics is a matter of having the right moral outlook. Often proponents of free markets are accused of one of two things. First, we are sometimes accused of not caring at all about the moral constitution of a society. This is utterly false, and in fact all of the classical arguments in favor of free markets are based on a firm commitment to justice. Indeed, it is really those who oppose free markets who also oppose the kind of logic which justice truly demands, for they insist that the ends can justify the means, that the short run must sometimes take precedence over the long run, and that only visible results are of any consequence.

Second, we are sometimes accused of caring only about the long run and never about "what happens in the meantime." Thus it is thought that we wouldn't care if thousands of people suffered in utter poverty for several years, so long as in the long run we reached the most desirable result. But this complaint is made without taking into account both what is seen and what is not seen. Our desire may be to give everyone enough to live on and not be in poverty; but even though we see the good effects of our well-intentioned programs, we may fail to see all the long term damage we are doing.
For instance, passages like the following express beautifully the fundamental error in "public works" programs (emphasis added):

Let us get to the bottom of things. Money creates an illusion for us. To ask for cooperation, in the form of money, from all the citizens in a common enterprise is, in reality, to ask of them actual physical cooperation, for each one of them procures for himself by his labor the amount he is taxed. Now, if we were to gather together all the citizens and exact their services from them in order to have a piece of work performed that is useful to all, this would be understandable; their recompense would consist in the results of the work itself. But if, after being brought together, they were forced to build roads on which no one would travel, or palaces that no one would live in, all under the pretext of providing work for them, it would seem absurd, and they would certainly be justified in objecting: We will have none of that kind of work. We would rather work for ourselves.

Note that Bastiat does not exclude the possibility that a community might actually agree to work together on something. He simply excludes the idea of taxes paying for public works. Why? Because it is all too easy to take money from people without acknowledging that what you are actually taking from them is their labor--that is, in a sense, their very lives.

It must always be remembered that the free market system is not a zero sum game. If you and I exchange something, that means I must have wanted what you had more than what I had, and you must have wanted what I had more than what you had. Otherwise, one of us is a fool. Thus an exchange means a net positive for both of us. So it is with all voluntary exchanges. That is not to say one never regrets certain purchases or ventures; I do not suggest that life can ever be without risks. But on the whole, it is possible for you to gain, while simultaneously everyone else gains from you as well.

However, it must be equally remembered that forced cooperation is a zero sum game, or perhaps even negative. If the government takes money from me and gives it to someone else, nothing has been gained or lost; the same money is there that was there before. Perhaps it will be used by the other person in a wiser way than I would have. How the government could ever know this, I cannot say. More likely it would turn out just the opposite; people who get something for free tend to be more irresponsible with it. Therefore, rather than an exchange which results in a net positive, government redistribution--whether in the form of handouts or programs or all sorts of other expenditures--results in a wash, a zero, or perhaps even less than a zero. For every dollar the government spends, what remains unseen is what else that dollar might have been spent on by the person from whom the government stole.

Anyway, read the whole essay. It's quite good. Here's an excerpt that might be pertinent for today's discussions about military spending:

A nation is in the same case as a man. When a man wishes to give himself a satisfaction, he has to see whether it is worth what it costs. For a nation, security is the greatest of blessings. If, to acquire it, a hundred thousand men must be mobilized, and a hundred million francs spent, I have nothing to say. It is an enjoyment bought at the price of a sacrifice. Let there be no misunderstanding, then, about the point I wish to make in what I have to say on this subject. A legislator proposes to discharge a hundred thousand men, which will relieve the taxpayers of a hundred million francs in taxes. Suppose we confine ourselves to replying to him: "These one hundred thousand men and these one hundred million francs are indispensable to our national security. It is a sacrifice; but without this sacrifice France would be torn by internal factions or invaded from without." I have no objection here to this argument, which may be true or false as the case may be, but which theoretically does not constitute any economic heresy. The heresy begins when the sacrifice itself is represented as an advantage, because it brings profit to someone.

Jesus and the 1%

From the Gospel according to Luke:

"Blessed are you who are poor, for yours is the kingdom of God.
"Blessed are you who are hungry now, for you will be filled.
"Blessed are you who weep now, for you will laugh. ...
"But woe to you who are rich, for you have received your consolation.
"Woe to you who are full now, for you will be hungry.
"Woe to you who are laughing now, for you will mourn and weep. ...
"But I say to you that listen, Love your enemies, do good to those who hate you, bless those who curse you, pray for those who abuse you." (6:21-28)

...

"Which one of you, having a hundred hseep and losing one of them, does not leave the ninety-nine in the wilderness and go after the one that is lost until he finds it? When he has found it, he lays it on his shoulders and rejoices. And when he comes home, he calls together his friends and neighbors, saying to them, 'Rejoice with me, for I have found my sheep that was lost.' Just so, I tell you, there will be more joy in heaven over one sinner who repents than over ninety-nine righteous persons who need no repentance." (15:4-7)

...

"There is still one thing lacking. Sell all that you own and distribute the money to the poor, and you will have treasure in heaven; then come, follow me." But when he heard this, he became sad; for he was very rich. Jesus looked at him and said, "How hard it is for those who have wealth to enter the kingdom of God! Indeed, it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the kingdom of God."

Those who heard it said, "Then who can be saved?" He replied, "What is impossible for mortals is possible for God." (18:22-27)

...

A man was there named Zacchaeus; he was a chief tax collector and was rich. He was trying to see who Jesus was, but on account of the crowd he could not, because he was short in stature. So he ran ahead and climbed a sycamore tree to see him, because he was going to pass that way. When Jesus came to the place, he looked up and said to him, "Zacchaeus, hurry and come down; for I must stay at your house today." So he hurried down and was happy to welcome him. All who saw it began to grumble and said, "He has gone to be the guest of one who is a sinner." Zacchaeus stood there and said to the Lord, "Look, half of my possessions, Lord, I will give to the poor; and if I have defrauded anyone of anything, I will pay back four times as much." Then Jesus said to him, "Today salvation has come to this house, because he too is a son of Abraham. For the Son of Man came to seek out and to save the lost."

In my opinion it is wise to let Jesus' words speak more than our own, but perhaps I should comment on what I see in these passages. Two observations. First, it is a fact that Jesus said that wealthy people are in real spiritual danger. Christians of a conservative persuasion should not be blithe about this. Note that Jesus doesn't proclaim the salvation has come to Zacchaeus on account of his personal statement of faith, but rather on account of his promised generosity to the poor and repentance from fraud. Greed might be normal, but that doesn't mean we are justified in growing callous towards it. Economic success has a very real dark side.

Second, Jesus did not come to start a crusade against the wealthy, nor did he give in to popular prejudice against tax collectors. Popular dislike of the wealthy is nothing new. Those who are not seen as paying their fair share to society are always treated as outsiders. But just as Jesus welcomes the prostitutes, he also welcomes the tax collectors. Christians on the left are unjustified in viewing the world in terms of class warfare. "Love your enemies," Jesus said. In fact, the ones who actually get accused in the gospels of loving money are the scribes and Pharisees, who make a show of how much they give charitably.

No matter who you are or what side you think you're on, Jesus has something challenging to say to you. It's just always a struggle to get ourselves to realize this.

Milton Friedman on balancing the budget

Milton Friedman, that crazy Tea Party activist (and Nobel Prize winning economist), insisted that balancing the government's budget isn't the real problem. The real fundamental question is, as you can hear at 6:42,

"The real question is, how much are you required to spend, one way or another--directly or indirectly, by taxes, by lending, by inflation--what fraction of your income are you required to devote to have other people spend it, supposedly on your behalf?"

Today it is accepted by virtually everyone that any reasonable person would accept that we need to balance the federal budget by a combination of spending cuts and revenue increases. Of course, that's what normal people must do, so clearly that is what the federal government must do. Thus, to suggest that taxes should not be increased to pay for the federal budget is taken as doctrinaire, the crazed thinking of Tea Party fanatics. Was Milton Friedman, then, simply a fanatic?

As shocking as it sounds to suggest that a great majority of the population is in error, that is unfortunately the case today (as nearly always). The government is not a for-profit business. It is not a household. It does not increase revenue by working harder or by making a better product. If this were how the government increased revenue, I'd be all in favor of it. But let's be clear, that is not what is meant when people so casually suggest "increasing revenue." What is obviously meant is increasing taxes.

Now as Milton Friedman points out in this video, government deficit is already a tax. That money has to be paid off somehow. Make no mistake, when the government spends money, it is always spending your money. The more money the government spends, the more of your money is being spent. In other words, the more the government spends, the less freedom you have.

Unfortunately, conservatives have tried to make the case that we can balance the budget like reasonable businessmen and yet not increase taxes. The government is not a business, and we don't need businessmen running the government. What we need is a government that protects, rather than degrades, our liberty. This can only be done by reducing the amount of money government forces us to spend. Raising taxes is not a morally neutral way of "increasing revenue." It is an immoral act of force, which can only be justified insofar as it is necessary to defend our country and provide a legal system which upholds individual liberty.

There are other options, of course. It is possible, in theory, that the government could charter legitimate businesses, which must play by all the same rules as other businesses in a state of free market competition. From such firms the government could, in theory, generate revenue for various programs it would like to maintain. That is, of course, never how it works in practice. Businesses with government charters almost always get special privileges. But I wanted to mention this, lest anyone think that I am dogmatically opposed to all means of providing public services through the federal government. No, all I am dogmatically opposed to is coercion, which happens every time the government spends your money without asking your permission.

Some links

Today I sent one of my professors a link to a book called The Fall of the Faculty. Here is the description:

Until very recently, American universities were led mainly by their faculties, which viewed intellectual production and pedagogy as the core missions of higher education. Today, as Benjamin Ginsberg warns in this eye-opening, controversial book, "deanlets"--administrators and staffers often without serious academic backgrounds or experience--are setting the educational agenda.

The Fall of the Faculty examines the fallout of rampant administrative blight that now plagues the nation's universities. In the past decade, universities have added layers of administrators and staffers to their payrolls every year even while laying off full-time faculty in increasing numbers--ostensibly because of budget cuts. In a further irony, many of the newly minted--and non-academic--administrators are career managers who downplay the importance of teaching and research, as evidenced by their tireless advocacy for a banal "life skills" curriculum. Consequently, students are denied a more enriching educational experience--one defined by intellectual rigor. Ginsberg also reveals how the legitimate grievances of minority groups and liberal activists, which were traditionally championed by faculty members, have, in the hands of administrators, been reduced to chess pieces in a game of power politics. By embracing initiatives such as affirmative action, the administration gained favor with these groups and legitimized a thinly cloaked gambit to bolster their power over the faculty.

As troubling as this trend has become, there are ways to reverse it. The Fall of the Faculty outlines how we can revamp the system so that real educators can regain their voice in curriculum policy.

I suspect the book may be controversial among university administrators, but not so much among faculty, who will virtually all agree on the diagnosis of today's university system.

In turn, my professor sent me a link to this article from The Economist, entitled, "A sorry story of American trade." Excerpt:

WHEN experts try to ferret out the causes of America’s lost decade, international trade is often cast as the villain. It may in fact be the victim. In the last decade America’s commitment to openness has flagged, and with it, its trade prowess and its appeal as a destination for investment. As international trade and investment have historically been major drivers of productivity, employment, and innovation, this declining engagement with the world may be an important contributor to the malaise that afflicts the economy.

Once again, economic protectionism does the opposite of protect.

XKCD on Basic Economics

Making the rational choice model work in real life, one changed mind at a time.

(The link is here.)

The Tea Party prosperity gospel

Here's how I see recent political events. The "Tea Party" Republicans, reinforced by the media support of Fox News, are kind of like "health-and-wealth" prosperity gospel Christians, who proclaim that if you just have enough faith, God will reward you with material well-being. You can hear it in the Republican debates when candidates confidently proclaim that they can "create" more jobs by keeping taxes low and reducing spending. One would think that this gospel would fall apart if economic growth stagnated under austerity measures; but as with the actual prosperity gospel, this message is backed by a religious fervor that doesn't die easily. That's why conservative politicians are being encouraged to "stand their ground" and not compromise on spending cuts and tax breaks. (Of course, cutting any part of the half trillion dollars per year we spend on foreign wars is out of the question.)

It is not surprising that some people would react against this by advocating a more scientific approach. The Keynesian economists come along with a way we can steer our way out of this economic meltdown, equipped with mathematical formulas and everything. They insist we have to "do something" in order to get out of this mess. Free markets left on their own will always result in this kind of disaster. Faith is worthless. We have to take control ourselves. More spending. More deficit. More incentives. We can't wait for private investment to start up again. After all, in the long run, we're all dead.

In such circumstances the honest advocates of free market institutions must come across as austere old clerics who insist that nothing good comes without suffering. The true defense of free trade has unfortunately very little to do with its short term success; there is absolutely no reason to believe that a free market must cause growth whenever we want it to. There is, on the other hand, enormous evidence from a broad historical perspective that the institutions vital to a free market cause, in the long run, the greatest prosperity. If we live only for the short run, we are bound to turn either to blind faith or to scientific rationalism: our short term fears can only be alleviated, it seems, either by the prosperity gospel or by atheism. (I am being metaphorical here, of course; but I sometimes wonder how much this has to do with actual theology.)

The only way to convince the public that we must not succumb to our short term fears is by demonstrating that the costs of alleviating our short term pain is just too high. An alcoholic may beg you for more liquor to alleviate his hangover, yet even though he is truly in pain, you will not give it to him. You know the booze will ultimately kill him.

If we're going to get out of this stagnation, we're going to have to feel some pain. There is no way government can decrease spending without causing a temporary contraction. Our markets and financial institutions have simply been depending for too long on government backing for cutting loose to have zero effect. We have to be willing to accept these temporary negative effects in favor of long term gains. We cannot live only for the short term.

One final remark. There is no reason why the poor should have to suffer most during this crisis. If we really want the rich to pay their fair share, maybe we should start by liquidating their failed assets (e.g. General Motors) and giving some of that money to the poor. This, after all, would increase consumption, and isn't that what Keynesians want, anyway?

Human capitalism

Interesting interview with Nobel Prize winner Edumund Phelps over at Thought Economics concerning where capitalism is headed in the future. A lot of Phelps's statements echo Tyler Cowen on the Great Stagnation. What I really appreciate about the ideas expressed in this interview is an interest in the fundamentals of economics as a study of human beings, rather than a study of abstract structures.

Excerpts:

So why has productivity slowed down? I think there has been an underlying decline in the rate of innovation in the economy. There's not as much tinkering... not as much dreaming... not as much conceiving new-ways to do things... If we go a level below this and look at the cause of that, we see that a huge amount of short-termism which has crept into the system [emphasis added]. CEOs routinely devote their lives to hitting the next quarterly earnings targets... and that doesn't leave very much time for thinking about the medium term future.

America is a country that has subsidies for almost everything.... education, farming... and hidden subsidies for manufacturing and exporting... you name it! There is very little subsidy, however, for work - and almost no subsidy for innovation. There is a tax-credit and some tax-deductibility for research and development expenditures, but research and development expenditures are confined to a small number of industries- and that's not a huge amount of money. We have to make it easier for a young entrepreneur to start a company... to start his innovative project. We have to make it easier for an established company to start a new innovative project.

Modern capitalism ought not to be viewed as merely a system for producing. [...] More generally, though, western society went from a life in which ordinary people were not much involved in the economy, to one where people were engaged in conceiving new ideas, experimenting, tinkering, exploring new possibilities, experiencing the 'new' - this was an intellectual revolution. I like to amuse myself by pointing out that the arts changed alongside. Music became completely different two or three times after 1815- the visual arts such as painting followed the same trend. Modern capitalism offered a new way of life, not just a higher standard of living.

After the interview, Vikas Shah adds his own thoughts on the matter:

As society progressed through industrialisation- it was unsurprising and (largely) appropriate that our thinking became reductivist, we made machines- and those machines, in turn, made us... The world has, though, evolved and modern civilisation- in its highly globalised form, is as much a knowledge economy as a mechanical one.

...

We have had mechanical-capitalism. Now it's time for human-capitalism.

I think that's exactly right, and I think it points to a huge problem in society's perception of capitalism. The link between the market and materialism is almost rock solid in most people's minds. But the true proponents of capitalism (if we must call it that--it really is an ugly word) have argued that the economy is not about things so much as ideas, and I would hasten to add that ideas should not be reduced down to calculations. Capitalism needs a makeover. Maybe we can start with the name (I certainly wouldn't be the first to suggest this). More substantially, from the bits and pieces I've been reading, I think we need to talk about a serious overhaul of our financial system. Wealth does not equal money. Something is wrong with a society that is convinced otherwise.

"What is Debt?"

That's the title of an interview with economic anthropologist David Graeber (hey that name sounds familiar) on "naked capitalism." Excerpt:

Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

The whole interview is rather fascinating. On the whole, Graeber's argument would appear to strike a blow to capitalism as it has evolved into a modern economic theory. He sharply criticizes the tendency to view all human behavior in terms of exchange. He shows how money evolved from debt, and how debt came from the threat of violence, and how this threat of violence most often came from the State.

How then can capitalism be a necessary condition for a free society, as Milton Friedman so forcefully argued? Well, I think the answer is not to turn to Friedman but rather to Hayek. Many of Graeber's points are good reminders that classical liberals and libertarians can't just construct a society axiomatically from principles such as property rights, without regard for history. But this just leads me back to The Fatal Conceit, which addresses precisely the question of how civilization evolved into the extended order which now holds together by the forces of the market.

While it would certainly be much nicer to think of the "invisible hand" emerging from peaceful developments in human civilization, we need not reject a system merely because of its origins. In fact, that's the whole point of evolution: it may be a grueling process, but what emerges is not the same as what went into the process. For instance, the State may have established money as a way to exercise power over its citizens. However, this is certainly not the only function which money has come to serve. The ability to use existing artifacts for purposes other than those originally intended continues to be a major source of innovation and progress. Under the term "artifacts" we may include both physical objects and abstract artifacts, such as social conventions and morals.

Graeber's point that not all human interaction is exchange is well-taken. Hayek's argument certainly does not rely on this myth. Rather, his argument is that exchange was the vehicle through which interactions with people we don't know could take place. So, for instance, when Graeber says, "Communism is in a way the basis of all social relations – in that if the need is great enough (I’m drowning) or the cost small enough (can I have a light?) everyone will be expected to act that way," Hayek would respond that this works just fine in a situation where you can actually see all the needs. If, however, you want a system in which people all over the world can benefit from the vast human potential that exists scattered among people who have no way of knowing anything about one another, the only system that we know of is that of exchange.

Hayek said that the one contribution he made to the science of economics was to point out how the price system worked as an abstract signal to regulate extended cooperation. If the price system had been intentionally designed for that purpose, he said, it would have been the most astonishingly brilliant achievement of mankind. As history shows, the real story is not so pretty, but the end result is still worth keeping.

That's not to say that the current understanding of debt and money must remain constant. Indeed, we never would have advanced as far as we have without changes in our cultural norms. In a world where so much debt is sovereign debt, I think it's worth taking seriously the idea of debt forgiveness, and what a fresh start could mean for the global economy. We're playing a dangerous game. Libertarians ought to take this very seriously: we can't pretend to live in a world where "property rights" are a fixed concept, and we need to understand the relationship between debt and coercion.

Since I find what he says so profound, I'll let Graeber have the last word on this:

Since antiquity the worst-case scenario that everyone felt would lead to total social breakdown was a major debt crisis; ordinary people would become so indebted to the top one or two percent of the population that they would start selling family members into slavery, or eventually, even themselves.

Well, what happened this time around? Instead of creating some sort of overarching institution to protect debtors, they create these grandiose, world-scale institutions like the IMF or S&P to protect creditors. They essentially declare (in defiance of all traditional economic logic) that no debtor should ever be allowed to default. Needless to say the result is catastrophic. We are experiencing something that to me, at least, looks exactly like what the ancients were most afraid of: a population of debtors skating at the edge of disaster.

We need space aliens to get fiscal stimulus

That's what Paul Krugman says:

Question: if economic activity is focused on solving a problem that doesn't exist, does it really improve the economy?

Common sense tells us no; Paul Krugman tells us yes. The Nobel Prize winner is surely quite brilliant, but sometimes brilliance goes a long way in justifying things that make no sense.

World War II, it is said, got us out of the Great Depression. Just because World War II forced everyone to be employed doesn't mean it added value to the economy. Obviously the opposite happened: people died, and resources were spent on things which have no value except during war time.

So what did get us out of the Great Depression? It turns out there is an explanation that rejects both the New Deal and World War II as possible cures. Robert Higgs argues that 1946 was the turn-around year, owing not to the government spending during the war, but rather to a renewed faith in personal property rights and investment opportunities--the New Deal was over, and so was the war, both of which drew resources away from the civilian economy.

I am not an economist, but I am a firm believer in drawing conclusions about important political issues using good morals and common sense. If someone suggests that a deception may be useful in stimulating the economy, there's something wrong with his theory. If someone suggests that war can be good for the economy, there's something wrong with his theory. If someone suggests that digging random holes in the ground is "better than nothing," there's something wrong with his theory. All of these are violations of either our morals or good common sense, or both.

So no, I don't trust Krugman on this. We don't need space aliens.

(HT: Sheldon Richman and Mary Theroux, who has another post about WWII here.)

The US has lost its "AAA" credit rating

Boo hoo. Here's Reuters' report:

The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday in an unprecedented reversal of fortune for the world's largest economy.

S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the American government, companies and consumers.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.

Probably this is bad for the economy in the short run, but overall, I think there's something healthy about this. It shows that there are checks and balances working on the government from outside. For instance:

Obama administration officials grew increasingly frustrated with the rating agency through the debt limit debate and have accused S&P of changing the goal posts in its downgrade warnings, sources familiar with talks between the administration and the ratings firm have said.

It's nice to know that government still has to answer to people outside of itself.

Unfortunately, this fiscal crisis (as crises tend to do) has had a perverse effect on our political process. In truth, it ought to be during times of plenty that we seek to restore fiscal sanity. It ought to be when the economy is booming that the government seeks to eliminate waste and make difficult long-term budget decisions, which are even more costly to make during a recession. Tragically, it's only now that the private sector is doing poorly and unemployment is high that people are just scared and angry enough to think about fiscal responsibility. It shouldn't take a crisis to make us think about these issues.

Perhaps Alex Tabarrok's "Unbalanced Budget Amendment" is the right idea: make government get a surplus during times of plenty, precisely so that we can go into debt during a recession. Does this not accord with our basic sense of morality? In times of plenty, save for the future; in times of need, be generous with what you have. Now it seems like we have the opposite: government spends a lot when the nation is prosperous, and then it tightens up when things are most desperate!

It will be the undoing of our democracy if we can't figure out how to regulate government's behavior so that it doesn't behave in such an adolescent fashion.

More on the evolution of cooperation

It's fascinating how fascinating scientists find cooperation these days. A recent article in the Economist explains recent attempts to give an evolutionary explanation for basic human civility and generosity toward strangers:

Evidence from economic games played in the laboratory for real money suggests humans are both trusting of those they have no reason to expect they will ever see again, and surprisingly unwilling to cheat them—and that these phenomena are deeply ingrained in the species’s psychology. Existing theories of the evolution of trust depend either on the participants being relatives (and thus sharing genes) or on their relationship being long-term, with each keeping count to make sure the overall benefits of collaboration exceed the costs. Neither applies in the case of passing strangers, and that has led to speculation that something extraordinary, such as a need for extreme collaboration prompted by the emergence of warfare that uses weapons, has happened in recent human evolution to promote the emergence of an instinct for unconditional generosity.

Leda Cosmides and John Tooby, two doyens of the field, who work at the University of California, Santa Barbara, do not agree. They see no need for extraordinary mechanisms and the latest study to come from their group (the actual work was done by Andrew Delton and Max Krasnow, who have just published the results in the Proceedings of the National Academy of Sciences) suggests they are right. It also shows the value of applying common sense to psychological analyses—but then of backing that common sense with some solid mathematical modelling. [emphasis added]

The conclusion that Cosmides and Tooby come to is explained in these words:

For most plausible sets of costs, benefits and chances of future encounters the simulation found that it pays to be trusting, even though you will sometimes be cheated. Which, if you think about it, makes perfect sense. Previous attempts to study the evolution of trust using games have been arranged to make it clear to the participants whether their encounter was a one-off, and drawn their conclusions accordingly. That, though, is hardly realistic. In the real world, although you might guess, based on the circumstances, whether or not you will meet someone again, you cannot know for sure. Moreover, in the ancient world of hunter-gatherers, limited movement meant a second encounter would be much more likely than it is in the populous, modern urban world.

No need, then, for special mechanisms to explain generosity. An open hand to the stranger makes evolutionary as well as moral sense. Except, of course, that those two senses are probably, biologically speaking, the same thing. But that would be the subject of a different article.

Here you see the bias on the part of scientists, that our morals must somehow be ingrained in us biologically. I don't see any proof that this is the case. What about the role of traditions? Arguing that morals evolve biologically is like arguing that language is preconditioned in our DNA--which some argue is true, but I believe is false. Our morals, like our language, would not exist without structures that exist on top of our biology, structures created not purely biologically but also socially. In other words, you have to be taught in order to speak a language, and you have to be taught to have morals.

I don't think we should discount the biological account of certain moral traits; perhaps in some sense it could be enlightening. On the other hand, a computer model does not explain everything. Examining the moral development of actual human beings would be more enlightening.

And then, there is this remark: "Except, of course, that those two senses [evolutionary and moral] are probably, biologically speaking, the same thing." This is one modern assumption I just can't buy: that moral questions are all reducible to empirical questions. Even if, as secular thinkers presume, there is no transcendent purpose for our morals other than that they allow the human species to survive and thrive, this is no way guarantees that we will be able to reduce our moral sense to "evolutionary sense"--that is, we cannot necessarily understand what will, in the long run, lead to the survival and thriving of the human species. In the interest of keeping this post relatively short, I'll refrain from addressing all the questions I see looming over this reduction from moral to empirical.

My final question is this: what will be the philosophical and societal implications of these empirical studies? It would be naive to think that these "findings" are playing on ideologically neutral ground. Are these studies going to be used to attack capitalism? Or perhaps bolster it? I could see the arguments going either way. One might say, "Capitalism makes a false empirical assumption that people are naturally self-interested, so it ought to be dismantled." Or one might say, "See? People left to make their own decisions naturally tend to cooperate, so we ought to give them more economic freedom." Personally, I find both interpretations naive, but naive interpretations tend to drive ideological battles. It will be interesting to see what interpretations emerge from the evolutionary study of morals.

Consumption redistribution

Scott Sumner has a beautifully simple critique of "income redistribution" over at TheMoneyIllusion (a blog which is often technically out of my league). Excerpt:

You can redistribute consumption from the top 1% and give it to average Americans working in a car factory, or a Walmart. But it’s an illusion to think you can redistribute investment from the top 1%, so that average Americans can have a higher living standard. Where do people think the car factory comes from? Or the Walmart building? BTW, this has nothing to do with trickle-down economics, a theory I reject. This is simple accounting. Money put into investment projects isn’t available to boost living standards for the lower classes, unless you don’t do those investment projects.

So what’s available to be redistributed? Basically consumption (including a modest amount of vanity charity.) And that’s it. Now come back to me with the consumption distribution data, and let’s see what that looks like. I predict that consumption inequality is far lower than income inequality. And that consumption inequality is rising at a far slower rate than income inequality. I’m not saying there’s no problem, but it’s way smaller that the progressives imagine, as the data they use is pure nonsense. Consumption inequality is economic inequality. Income inequality is . . . well it’s meaningless gobbletygoop.

I think for a lot of us, it's hard to understand how important capital is to the economy. Most of us probably aren't ever going to own significant amounts of capital. That's probably why it's difficult for us to understand how "income" is any different from "wages." We are inclined to think of income as representing the merit of an employee working faithfully at a steady job. For owners of large amounts of capital, this is not what income is. Income is simply a measure of the productivity of that capital, and it is not meant for mere consumption, but largely for investment in better capital.

It's investment in capital that adds to the wealth of a country. Consumption does not. This is one of the most crucial points which I'm proud to say I actually got from reading Wealth of Nations. I'm not economist, but I know my Adam Smith.

You don't have to read Adam Smith to understand this: If you buy a meal and eat it, you're going to be hungry again; you haven't gained any wealth. If you buy a car, now you have a way of getting to work so you can make more money; you've actually made your life easier, therefore you have more wealth. We are all better off in the long run when people make good investments in capital, because it makes it easier to obtain the things we need to consume.

Once we make this distinction between investment and consumption, then a progressive policy of redistribution can be carried out in a reasonable way. Sumner recommends doing away with all income taxes, both personal and corporate, and moving entirely to a VAT and a progressive payroll tax. We could use that money to support things like school vouchers, catastrophic health insurance, subsidized health savings accounts, and wage subsidies (no minimum wage required, and get rid of occupational licensing!).

If we're going to care for the poor in this country, we need to redistribute some resources; this I take to be a basic moral principle. But this need not come at the cost of hampering long term economic growth, which is in fact essential to improving the circumstances of the poor.

Update: Sumner has a post rigorously explaining why income from capital should not be considered equal to income generally. The link is here.

This made my day

A financial thought experiment

So let's say one year I take out a loan for $50,000. I agree to pay it all back in one year, with interest. Only problem is, by the end of the year, I don't have enough money to pay it off. Let's say I still owe the full $50,000, plus, I don't know, 10% interest; so that's $55,000.

I decide I'll just take out another loan to pay off my debt. Only I start to get clever. I take out a loan for $110,000, and agree to pay it all back by the end of the year, again with 10% interest. I take half of it and pay off the $55,000 I owe. Then for the next year I live on my $55,000 which I have left over. By the end of the year, I owe $110,000 plus 10%, or $121,000.

Perhaps you already know what comes next. I take out a loan for $242,000. Half of it pays off the debt I owe, and half of it pays for what by now is a pretty sweet apartment. By the end of the year, I owe around $266,000. So then I take out a new loan for $532,000, and the next year a loan for about $1.2 million, the next year about $2.6 million, and so on.

Each year, not only am I getting rid of all my past debt, I'm actually getting richer. Twice as rich, as you can see. And I'm not even doing any work. Seriously. I'm living like a king on someone else's money, and I don't even have to produce anything.

The thought experiment assumes that there is no limit on the size of the loan for which I can get approved. It does not assume, however, that interest rates have to be reasonable; it doesn't matter whether I'm paying 10% or 50% at the end of the year. All that matters is that each year I can take out a new loan to pay for past debt and give me something to live on for the next year. If I don't want to be so greedy, I can just keep living on $50,000 a year (for instance); the amount I have to borrow each year will still increase, just not so dramatically.

Question: what's wrong with this? In the real world, I'd never get approved, blah blah blah. But let's just think about it in the abstract. Assume I can always get approved for another loan for as high an amount as I need. What's wrong with this scheme? Each lender I deal with is actually making money off me through interest, so he should have nothing to complain about. I may not be producing anything tangible, but I must be doing something right if I'm happy and people are making money off of me. Right?

Oh, well, I did forget one little thing. Eventually I'm dead. And then the last lender who gave me money won't ever get his money back, unless of course my children after me are able to give it to him. But that's not my problem, right? I mean, after I'm dead, I don't have to worry about money any more.

And maybe I can actually avoid that, anyway. Instead of just spending all the money I borrow each year, I'll actually invest some of it. Putting it in the bank would obviously not get me interest fast enough to keep up with my exponentially increasing loans. So I'll invest in the stock market. Who knows? Maybe I'll get lucky enough on the stock market that my investment will outgrow my debt, and when I'm ready to retire from my life of doing nothing but push money around, I'll be able to pay off all my debt entirely and still have a nice little nest egg so I can spend the rest of my days in peace.

So what's wrong with this? Accepting the assumption that I can always get that new loan, is there anything to be said against this scheme?

Other than, you know, morals and everything. But you know, in the long run we're all dead, anyway.

Addendum: Note well that this thought experiment could easily be modified to say that, instead of looking for larger and larger loans, I'll just look for more and more loans, that is, I'll spread the amount over more and more lenders. The scheme would last as long as I could find enough lenders out there to make it work.