This question could have several interpretations:1. Did lax regulation from the Fed cause banks to take excessive risks?2. Did the sharp increase in interest rates during 2022 cause the crisis?Here I’ll focus on the second question, which itself is highly ambiguous:1. Did a tight money policy at the Fed cause sharply higher interest rates, hurting bank balance sheets?2. Did an easy money policy at the Fed cause sharply higher interest rates, hurting bank balance sheets? In my view, the NeoFisherian model provides the best way of thinking about this issue–it was easy money that triggered the problem.  Market interest rate movements have two components, changes in the natural (or equilibrium) interest rate, and changes in the gap between the natural interest rate and the market interest rate.  I’d estimate that roughly 90% of interest rate movements represent changes in the natural rate, and roughly 10% represent changes in the gap between the natural and market rate. In 2021 and 2022, the Fed adopted a highly expansionary monetary policy, which led to wildly excessive NGDP growth.  The fast NGDP growth pushed the natural interest rate much higher.  In this sense, you could say that the Fed contributed to the higher interest rate environment that damaged bank balance sheets.  The Fed raised its target rate by more than 400 basis points in 2022, and this mostly reflected an increase in the natural interest rate, which itself reflected faster NGDP growth caused by a previous easy money policy. Once the Fed created the extremely rapid NGDP growth, they had few options other than sharply increasing the policy rate (fed funds futures target.)  Some people suggest that the Fed raised rates too fast in 2022.  But if they had raised rates more slowly then inflation and NGDP growth would have accelerated even faster, the natural interest rate would have risen even higher, and the Fed would have eventually been forced into an even higher interest rate policy. The banking crisis would have been even worse. Much of the discussion of this issue is marred by confusion, a lack of understanding of the distinction between changes in the natural interest rate and Fed actions that move the policy rate relative to the natural rate.  Some people don’t seem to understand that the problem was excessive monetary stimulus, not excessively tight money.  Thus the appropriate counterfactual was not to scale back 2022 rates increases from 400 to something like 200 basis points, the appropriate policy would have been to raise rates by 200 basis points in 2021, so that NGDP growth would have been much lower in 2021 and 2022, so that the Fed would not have had to raise rates so high in 2022.  In other words, if you always strive to have NGDP return to a 4% trend line, the natural interest rate will stay at much lower levels, and banks will have fewer problems with their balance sheets.  In theory, fast rising interest rates can be due to either the Fisher/Income effects (fast rising NGDP), or tight money (the policy rate rising relative to the natural rate.) It just so happens that in this case the rising interest rates were mostly due to fast growing NGDP, i.e. easy money.  You don’t solve that problem by holding interest rates below equilibrium, just as you don’t solve the housing problem with rent ceilings. When people blame the crisis on rising interest rates, they are reasoning from a price change.  They need to be more specific.  Was monetary policy too loose in 2022, or too tight?  I say too loose.  Yes, rising interest rates were a problem, but not in the way that most people assume.  At a more basic level, it was the thing that caused the rising interest rates that was the real problem—easy money. One other point.  When I blame banking problems on unstable monetary policy, I am only discussing one factor.  A well-run banking system (as in Canada) can survive NGDP instability.  The US does not have a well-run banking system.  In our system, NGDP instability creates periodic banking crises.  We can fix the banking system or we can fix monetary policy.  Why not fix both?  (0 COMMENTS)

What would you describe as beautiful about a prison? To me, that seems a difficult question. Yet in this episode, returning guest Dwayne Betts helped me to see just how much there- or at least could be. Betts sat down with EconTalk host Russ Roberts to talk beauty, offer an update on his ambitious project to install libraries in prisons, and his new book, Redaction– a collaborative effort of poetry and visual art. “Freedom begins with a book,” is the tagline for Betts’ Freedom Reads program, as well as a fitting tagline for his personal story. Betts recounts how a fellow prisoner slid “The Black Poets” under his cell door, sparking a life transformation that led to Betts committing to being a poet and to making a life which included beauty in prison. (And in a delightful complementary story, to his reading of Sophie’s World and Sophie’s Choice, but that’s a project for another day…) Roberts presses Betts, what does it mean to “reach for beauty?” And how can you appreciate beauty when you’re in an otherwise ugly place? Who is to say who is worthy of a beautiful thing, and who gets to decide that question? Any and every decision you make is a choice, says Betts. We hope you will choose to continue this conversation with us.     1- What examples of joy in prison does Betts point to? What are some other examples of beauty existing within ugly spaces you can think of, and why do you find them beautiful? To what extent is finding beauty simply a matter of paying attention, as Betts suggests?   2- Betts spends a good deal of time describing the shape and construction and the location of the Freedom Reads bookshelves his group places. What are some of the details he thinks are important that surprised you, and why? What does he mean when he says they are trying to “create the opportunity for transformative experiences?” DO you have any ideas about other contexts in which we might usefully employ this way of thinking? Tell us about them!   3- An element of the program that surprised me was learning that when libraries are placed for inmates, they are also placed for the prison’s Corrections Officers, too. Why does Betts insist on this? What does it mean to publicly see someone as a reader? To what extent do you agree with Betts that, “books fundamentally are just so much better at changing people’s minds and the way they see the world than arguments.” How can libraries be both democratic and equitable?   4- The conversation closes with Roberts and Betts each describing what’s magical about books for them. How would you answer this question? What’s a book that has profoundly changed you, and how? (And any books you might suggest we read together?)   Bonus Question: What’s the last poem you memorized, and why? Do you think school kids should still be required to memorize similarly? Why or why  not?   (0 COMMENTS)

  Part of how I used the time during our extensive power outage was to read, by lantern, most of Bruce Caldwell, ed., Mont Pelerin 1947. Published by Hoover Institution Press in 2022, it’s a recounting, with transcripts of the various discussions, of the first meeting of the Mont Pelerin Society at, you guessed it, Mont Pelerin in Switzerland. The highlight for me was the discussion of Germany. Remember that it was 1947 and Ludwig Erhard hadn’t yet abolished price controls. The price controls were still enforced by the Allies, and were leading to widespread barter and close-to-starvation diets. I tell the story at some length in “German Economic Miracle,” in The Concise Encyclopedia of Economics. I found two things interesting: (1) German economist Walter Eucken’s clear thinking about the devastating effects of price controls and (2) the fact that even some of the prominent free-market economists at the meeting weren’t convinced that price controls should have been removed immediately. On point (1):   Eucken: It was very surprising that occupation did not mean the end of the Nazi system. Their price and distribution system was preserved in all detail and with only little change in personnel. (p. 117) Eucken: The rations are so small that nobody, literally nobody, can live on them. (p. 117) Eucken: To compress all this in a slogan, the German economy is undergoing a progressive primitivisation and now corresponds to the economic system of the 6th and 8th centuries. (p. 118) Eucken (after advocating currency reform): Further, if rationing and the price stop are maintained, the only effect will be that there will be no supplies. The official low prices reduce what is available in the market. I believe prices must be allowed to rise but only if at the same time a free market and international trade are resumed. (p. 121)   I confess that I don’t understand two things about his last statement. First, what does he mean by “free market?” I would have thought that in this context it means no price controls, which is covered by “prices must be allowed to rise.” But maybe he’s saying that allowing them to rise is not enough–that they must rise to free-market levels. I don’t know. Second, while of course, international trade should have been resumed and, if resumed, would improve things, why hold up deregulation of prices if international trade is not resumed? On point (2) about economists not being convinced that price controls and/or rationing should be removed immediately. Lionel Robbins: I know of no properly instructed person at home who would argue at this point that the policy of a price stop was a wise policy. But I do not think the consumption rationing system can be removed. But price stop can only be removed on grounds of politics. (p. 124) Karl Brandt (in response to Robbins): I did not intend to comment on the British situation. I would still cling to my notion that the possibility of establishing in Germany a free price market system, particularly with respect to food, without first having replenished the stocks, would absolutely lead to starvation, unless you took a large number of people and fed them on public relief. (p. 124) Caldwell explains in a footnote on p. 124 that “price stop” means “price ceiling.” Robbins was, of course, a prominent economics professor at the London School of Economics. Here’s his bio in David R. Henderson, ed., The Concise Encyclopedia of Economics. Karl Brandt was a German economist who had fled from Germany to the United States in 1933, shortly after Hitler’s election. It’s astounding to me that Brandt didn’t understand that the amount of a good supplied (he calls them “stocks”) will rise if the price is allowed to rise from a price ceiling situation. Eucken, by the way, gives an answer to Brandt that is similar to mine: Eucken: The situation would be different if we had a fixed amount of goods to distribute, but the central problem is the effect on current production. (p. 125) Milton Friedman adds: I think it is a fallacy that a free market is something that rich nations can afford, but that poor nations must do without. I think the U.S. never had any reason to have any rationing or price control at all. (p. 125) Karl Brandt does have one great insight, and his having fled from Germany in 1933 gives him credibility. He states: After destruction of physical assets, the Allies’ policy bought about the destruction of personal capital. That is, if anyone had invested under the Nazis, it was taken for granted that the person was persona gratissima with the Nazis. Rate at which the tribunals work is very slow. Germans talk of “Hitler’s 1000 years’ Reich, 14 years of Nazism, 986 years of denazification. By this slow rate, you are not getting rid of Nazis. And they are not permitted to work. Their children suffer. And the system will have a very bad effect on the children, who will have as a result a hatred of the Allies and of their methods. Fortunately, things turned around dramatically the next year with Erhard’s reforms and so there did not seem to be much resentment of the Allies. (Notice the fact that not all the notes are in sentence form. I’m pretty sure this is because the person taking notes was Dorothy Salter Hahn, the wife of economist Frank Hahn, and people were often talking at lightning speed. Frank Hahn, by the way, did not attend.) Here’s an interesting segment of the Wikipedia entry on Eucken: During the Nazi period, Martin Heidegger became rector (head of Freiburg University) and imposed the regime’s policies. Eucken was vocal in opposing these in the university’s Senat. Some of his lectures in the 1930s resulted in protests from the local Nazi student association.[3] After the Kristallnacht pogrom in 1938, Eucken was one of several Freiburg academics who banded together with several local priests in a so-called Konzil, where they debated the obligation of Christians to fight against tyranny. The Freiburg Circles had links to Dietrich Bonhoeffer and Carl Friedrich Goerdeler, key figures of the resistance against Hitler. Bonhoeffer asked Eucken, Adolf Lampe [de] and Constantin von Dietze to write an appendix to a secret memorandum, in which they worked out a post-war economic and social order. The central planning system of the Nazis was to be replaced with a liberal competitive system. If the attack of 20 July 1944 had succeeded, these plans would have been the basis of a new economic order. After the coup failed, Lampe and von Dietze were arrested and tortured by the Gestapo. Eucken, too, was arrested and interrogated twice but released. Two of his friends were executed.[3] Caldwell ways that Hayek called Eucken “the star of the [Mont Pelerin] conference. (p. 28) In David R. Henderson and Steven Globerman, The Essential UCLA School of Economics, we tell of Jack Hirshleifer’s work on disaster and recovery in postwar Germany. The starvation issue was serious indeed. One final note: On page 35, Caldwell lists the 39 attendees, not counting Dorothy Hahn. I knew 6 of them. HT2 Eric Wakin at Hoover.   (0 COMMENTS)

When physician Walter Freeman died in 1972, he still believed that lobotomies were the best treatment for mental illness. A pioneer in the method, he was a deeply confident and charismatic man who eagerly spread the technique in America, long after the rise of alternative treatments that were less destructive. Listen as journalist Megan McArdle and EconTalk’s […] The post Megan McArdle on the Oedipus Trap appeared first on Econlib.

I have been less active in responding to comments since the evening of March 9. The reason is that at 7 p.m. our power went out and wasn’t restored until March 11 at 9 p.m. Then it went out again from March 13 at 9:30 a.m. to who knows when. I’m writing this at 3 p.m. March 17 and it’s supposed to come on again late on the evening of March 18. I’ll believe it when I see it. Why does this happen? A huge element is nature. Another huge element is government. First, nature. We have a lot of trees with fairly shallow roots. The ground they are in has been softened by rain that is approximately double the amount we normally get by this point in the season. Then we get wind, with or without rain, that blows the trees down on the electric wires. Then a power outage. There are two possible solutions. First, put the wires underground as is happening very slowly in California. Second, cut down the trees before this happens. Now to the second factor, government. Unfortunately, there is a vocal lobby of citizens who believe that as long as trees aren’t diseased, they shouldn’t be cut. They persuade local governments not to allow home owners or Pacific Gas & Electric to cut down healthy trees. It’s because of these citizens’ power that a tree blew over in Pacific Grove (the city I live in) about 10 years ago and killed an elderly woman. Her survivors sued and won approximately $1 million. Ah, you say, but then wouldn’t that have caused citizens to change their tune and not oppose more cutting of healthy trees when they endanger people or could blow over onto electric wires. But if you ask that, you don’t know Californians, or at least a vocal segment of Californians. I think it was after the tree fell and killed the elderly woman that the city government of Pacific Grove hired a forester who came here from Wisconsin. Sounds like a good move, right? One of his first actions was to go around the city looking at city owned property and coming up with a list of trees to be cut. If I recall correctly, the goal he was tasked with was to reduce the probability of future trees falling and killing or injuring people. His list was presented at a city council meeting. Many citizens got up to speak to oppose the cutting of this or that tree. The guy was probably pretty smart and could see where his career as a forester was likely to go in Pacific Grove. The very next morning, the city manager came into his office and found the forester’s letter of resignation. It said words to this effect: “I’m resigning because Pacific Grove has lots of foresters.” (0 COMMENTS)

In a recent Reason magazine interview, Lyn Alden makes a very good point: And Lyn Alden, founder of Lyn Alden Investment Strategies, says “banks are basically highly-leveraged bond funds with payment services attached, and we treat it as normal to keep our savings in them.” She argues that the Federal Reserve makes it nearly impossible for banks to hold the bulk of their customers’ deposits in cash because “regulators want banks to be reasonably safe, but not ‘too safe.’ They want all banks to be leveraged bond funds to a certain degree, and won’t allow safer ones to exist.” Is this really true?  Do regulators refuse to allow ultra-safe banks?  John Cochrane makes the same claim (from a 4-year old blog post): Suppose an entrepreneur came up with a plan for a financial institution that is completely safe — it can never fail, it can never suffer a run, it offers depositors perfect safety with no need for deposit insurance, asset risk regulation, capital requirements, or the rest, and it pays depositors more interest than they can get elsewhere.Narrow banks are such institutions.  They take deposits and invest the proceeds in interest-bearing reserves at the Fed. They pay depositors that interest, less a small profit margin. Pure and simple. Economists have been calling for narrow banks since at least the 1930s.You would think that the Fed would welcome narrow banks with open arms. You would be wrong. Both are referring to the fact that the Fed refuses to approve “narrow banks”, which invest their funds in the safest way possible—accounts at the Federal Reserve. The media focuses on mistakes made by bankers and/or regulators, but the banking system is set up to be unstable.  Our political leaders want banks to take risks.  And when the inevitable happens, there’s a great deal of moral grandstanding. (0 COMMENTS)

Is there a more fitting name for a bank that has taken on too much risk than “Silicon Valley Bank”? Now it has failed, but instead of taking down with it those most responsible, the federal government has stepped in to rescue its explicitly uninsured depositors. The Feds promise “no losses will be borne by the taxpayer,” but they have a funny definition of taxpayer that excludes remaining prudent banks now charged an increased “assessment” by the government- that is definitely not a tax. The federal government is indeed partially responsible for this, playing its typical role as both arsonist and fireman – but not because of a failure of regulation. How many institutions are more regulated than a California bank? (Or to harken back, more regulated than saving and loans associations that failed by the thousand?) Regulators don’t have the insight or incentive to preempt such things but, alas, they have the power to make things worse. Yes, we’ve got yet more moral hazard piled on as we constantly “privatize gains and socialize losses” through bailouts of the biggest risk-takers. But we also have the Federal Reserve artificially holding down interest rates for years in order to goose the economy and make it easier for the government to borrow. With interest rates rising toward market reality, now banks’ balance sheets don’t look so hot. And Silicon Valley Bank tried to outcompete (or just didn’t know what they were doing), taking on far too much risk by assuming low interest rates were forever and failing to hedge a change. A general solution is to get the Fed out of setting interest rates and let bankers figure it out on their own – but there will always be private actors who take on excess risk.  The bible of monetary policy – Walter Bagehot’s Lombard Street – says that it would be best not to have a central bank at all but, if you do have a lender of last resort  – and this is its most famous advice – you lend freely at a high interest rate against good securities. Which is exactly what you’d expect a private lender to do with sufficient capital (indeed, in the United Kingdom at the time, the central bank was private). Illiquid banks get money. Insolvent banks don’t. Silicon Valley Bank tried to get private support and everybody with their own money on the line thought it was too risky. So the taxpayer – sorry, the assessment-payer – inherits the biggest problems in the system. But what of the risk-takers themselves? Silicon Valley Bank’s executives rode the success all the way up and even sold millions of dollars of stock just before receivership. Now the government pledges that executives and owners are wiped out, but they get to keep all their old gains. A classic historical regulation that is the greatest induction to prudence that banking has ever seen is to have personal liability for executives and owners if their bank fails – let the creditors go after who was responsible.  We are also talking about sophisticated business people putting their money in an insolvent bank, partially because they got extra yield or other fringe benefits. As the tech world bemoans finding out how many people are “rooting against tech” – or their woke ideology –  they should realize that some of us are instead rooting for responsibility. We are relying on uninsured depositors to keep bankers honest. But apparently no more.  A traditional thought is that it’s a lie that money can be in two places at once (freely available to you in your checking account AND being lent out by the bank) and so therefore the reserve requirement ought to be not 10% but 100%. In such a situation, absent fraud, every bank is solvent. You have two options: you either have total access to your cash at any time (but probably have to pay for such safety, as you would if you stored money in a safe deposit box) OR you can buy bonds (where you get interest but you don’t have access).  Of course, in the unlikely event we moved back toward asset-backed currencies, a free banking system (especially its Scottish variety at the time of Adam Smith) has proved it can be self-policing even without reserve requirements – private actors then have personal reason to call out the irresponsibility of their peers. In the meantime, we will most likely suffer the vagaries of a system that both props up the government and robs capitalism of its most potent incentives – that anyone might both reap the rewards and suffer the consequences of their own actions.    Grant Starrett is a real estate investor in Murfreesboro, Tennessee. He received his BA in history from Stanford and a JD from Vanderbilt. His writing has been published in the Wall Street Journal, National Review, etc. and he also writes book reviews every couple weeks for a substack distributed through GrantReadsBooks.com (0 COMMENTS)

Many people view economics primarily through the lens of market settings. However, at its core, economics is the human science. Insights from economics can penetrate the realm of emotional intelligence. A recent book, The Courage to Be Disliked, by authors Ichiro Kishimi and Fumitake Koga demonstrate some fundamental economic lessons making their way into the philosophy of happiness. In one chapter, the authors emphasize that feelings of inferiority are personal subjective assumptions. The two main characters reflect upon their physical characteristics.  The teacher was short- and while originally upset about being small, came to appreciate his ability to allow people to relax. His height served his goals in life, allowing him to succeed. He used this example to point out that one’s personal characteristics are not inferior or superior unless people place that value upon themselves. This insight appears to mirror the insights of the Marginal Revolution. One major puzzle in economics was “why value in use” was separated from “value in exchange”. Why are diamonds expensive when water is cheap? Like the teacher, economists recognize that value (and values) are subjective. A good, such as a personality trait, is not beneficial or harmful in a vacuum. Instead, a good’s value depends on the demand of individuals, which change, depending on the attitude of those involved. The idea that valuing oneself is a choice challenges the idea that people are stuck in a cycle of low self-esteem. By contrast, the teacher’s view suggests the primacy of individual choice and agency, of change, rather than stasis. Without a market, systems are unable to take advantage of people’s individual preferences and subjective beliefs. The second economics lesson that’s made its way into the book is that of separating tasks. The teacher claims that those who are “ultimately going to receive the result brought about by the choice that is made”, are those who are responsible for doing tasks. Giving the example of a child, the teacher expresses that the child is ultimately going to face the consequences of deciding whether to study- and should be the one most responsible for doing so. This division of emotional labor speaks to the issue of property rights and the principal-agent problem. People tend to follow their own interests. If they are responsible for making decisions affecting themselves, they are going to act in ways that benefit themselves. Property rights work, combining the responsibilities of the property with the associated benefit. However, when people take on other’s tasks, they decouple responsibility with effect, creating the principal-agent problem. The principal-agent problem takes place when a principal delegates control of assets to an actor who may have different interests. Politicians tend to spend lavishly with taxpayer funds, and renters tend to be more willing to trash rental properties, than the respective owner. This idea culminates towards the end of the book, with the provocative claim that, “freedom is being disliked by other people…. It is proof that you are exercising your freedom and living in freedom”. When one can make unpopular decisions, they live freely. The implication of this claim, interpersonally, is that one needs to be autonomous to be free. In a similar vein, whatever system that’s set up for providing human happiness needs to be elastic enough to allow people to dislike each other, while allowing people to be accountable for their decisions. This lends itself to combining private property with markets is the logical step towards building an emotionally intelligent, happy society.   Isadore Johnson is a campus free speech advocate, an economics and philosophy student, and regional coordinator for Students for Liberty. (0 COMMENTS)

Chances are higher that France is the future of America than the contrary. Hence, even an American should not disregard this post. The featured image shows a big pile of uncollected garbage on boulevard Saint-Michel, in Paris, on Thursday. Many garbage collectors, already assured of a generous state-paid pension at 62, are on strike to protest the increase of the retirement age to 64. Unknown to them is that they may have to retire even later if the bankrupt state pension system is not mended by even deeper reforms. The author of the attempted reform is the centrist president Emmanuel Macron. The political center in France is about where Joe Biden stands on the standard political spectrum in America. The center moves toward where the most political powerful extreme pulls. I will grant that Macron, a former banker, does not match either Biden’s or Trump’s economic ignorance. (As the French Civil Code maxim goes, “À l’impossible nul n’est tenu,” from the Latin Impossibilium nulla obligatio est, which translates into “the impossible is no legal obligation.”) Macron knows that assets below liabilities necessarily implies that the remainder, the owners’ net value (the future retirees’ pension value, in this case), is negative. Two-thirds of French voters are opposed to the reform, that is, they want more of their pensions to be paid by the other third; or they don’t have a clue. Macron realizes this but argues, quite sensibly, that the majority would not want any of the alternatives either, such as higher current or future taxes, lower economic growth, or a more dramatic crash of the pension system along perhaps with general prosperity (see “Macron Government Bypasses France’s National Assembly to Pass Pension Overhaul,” Wall Street Journal, March 16, 2023—especially the accompanying video for Macron’s words). The problem of Social Security in America is only less massive than in the French system. In both countries, the inability of “democratic” choices to deal with the problem is the same. Such is the failure of “democracy” as we know it. Instead of a procedure for changing the rulers without violence or civil war and thus hopefully constraining their self-interest and folly, democracy is viewed as a system in which the majority can “legitimately” decide anything it wants and impose its desires and greed on the minority. (See my forthcoming Econlib review of Friedrich Hayek’s The Political Order of a Free People.) This sort of political philosophy ignores the discoveries of the Public Choice school of economics which has studied phenomena such as the incoherence of unconstrained majoritarian choices, the rational ignorance of the individual voter, and the triumph of organized interests which manipulate puppet politicians and voters. A mob is seldom, if ever, libertarian. Boulevard Saint-Michel in Paris, March 16, 2023Photo credit: Charlotte Lemieux (0 COMMENTS)

Classical liberals tend to be big fans of the argument from evolution. To say that a particular social tradition or market outcome was the result of an evolved process, or an emergent outcome, or a spontaneous order, is to establish a sort of strong presumption in favor of its legitimacy or usefulness. This isn’t meant to be an absolute proof, of course, but it does serve to shift the burden of proof strongly to the advocate of overturning the evolved order. Yet, some on the political left think there is a contradiction in this approach. Classical liberals and libertarians, they point out, are often extremely skeptical and critical of various political institutions like the FDA or the Labor Department. And yet, they argue, these institutions themselves are part of the evolved political order, emerging over time just as market outcomes or social traditions emerge. Shouldn’t this grant these political institutions the same presumption of legitimacy or usefulness that classical liberals grant in these other cases? Short answer, no. But on the off chance you’re interested in a longer answer, let’s shift gears for a second and talk about memes. I don’t mean memes as the term is usually used today, meaning something like “a picture on the internet with a funny caption.” I mean memes as the idea was originally described by Richard Dawkins – a way to model the spread of ideas as though ideas themselves were alive and used human minds to replicate themselves. If you have a handful of minutes to spare, this video does an excellent job describing how the process works, although rather than using the term “meme” it instead refers to “thought germs.” But the idea is the same. What does memetic theory have to do with why the argument from evolution doesn’t apply to political institutions the way it applies to market processes or social traditions? Because it highlights a key point James Buchanan made – specifically, Buchanan’s point about how order is defined by the process of its emergence. This means simply pointing out than an order is emerged or evolved doesn’t have the same implications in all cases. It’s also important to consider the process of evolution which brought that order about in the first place. Different orders evolve under different selection pressures, which is why orders that emerge under a system of public choice will evolve according to a systematically different logic than those evolving under private choice. In the case of memetic theory, ideas most successfully reproduce themselves (that is, are more likely to be shared and spread) when they are emotionally engaging, and especially when they inspire anger. There is no reason to believe, and excellent reasons to doubt, that an evolutionary pressure that causes the most anger-inducing ideas to spread will also produce the ideas that most accurately reflect reality. The fact that an idea has been highly successful at evolving under mimetic evolutionary pressures, especially in the age of social media, gives a strong presumption in favor of discounting its reliability. And the same is true for the evolutionary logic under which state institutions evolve. Anthony de Jasay, in his book Social Contract, Free Ride explains why the argument from evolution (Institutional Darwinism, in his terms) follows a similarly unhappy logic when applied to institutions of the state. He argues that the evolutionary pressures of state institutions create a sort of Institutional Gresham’s Law, where ineffectual and inefficient institutions drive out effective and efficient ones: If institutions were selected for the characteristics favorable to their own survival, as in plain Darwinism, the surviving ones might not well be the ones most conducive to making the host civilization prosper and grow…Their survival and growth, however, are fostered precisely by their inefficiency…For a variety of reasons, we should expect survival-of-the-fittest-to-survive to produce a population of institutions with many monsters and with no bias towards the benign and the instrumentally efficient. When competing for survival, the latter may well be driven out by the former. It is well in line with this expectation that there is no marked tendency in history for societies equipped with benign institutions to “prevail.”…Institutional Darwinism would work in the benign fashion ascribe to it, and “nice” civilizations would spread, if the subject being selected by the environment for its characteristics that best help it to survive were the whole symbiotic set of host society with its complementary institutions. For this to be the case, single parasitic institutions in the set should have to lose more by weakening the host society than they gain by feeding on it. Gresham’s Law would then cease to operate, for “non-nice” institutions would either not survive the adverse feedback they suffer from their own parasitic actions which weakens their host society, or they would change their spots by a process of mutation-cum-selection. There is no evidence whatever to bear out supposition of this sort. Thomas Sowell gave a real-world example of this process when he was interviewed by Salon magazine years ago. He described how early in his career he was working for the federal government, trying to figure out if high unemployment in Puerto Rico was due to minimum wage laws or hurricanes damaging the local sugar crops. He worked out a way to test the competing ideas and reported it to his superiors. This is how he describes their reaction: I expected to be congratulated. And I saw these looks of shock on people’s faces. As if, “This idiot has stumbled on something that’s going to blow the whole game!” To me the question was: Is this law making poor people better off or worse off? That was the not the question the labor department was looking at. About one-third of their budget at that time came from administering the wages and hours laws. They may have chosen to believe that the law was benign, but they certainly weren’t going to engage in any scrutiny of the law. This is an example of institutional Gresham’s Law at work. Given that so much of the Labor Department’s budget is for the purpose of carrying out wage and hour laws, institutional Darwinism would select in favor of a version of the Labor Department that protected their budget by ignoring harm caused by the laws they administered and select against a version of the Labor Department that did the opposite. Similarly, versions of the TSA or FDA that overhype minor or imaginary risks will be selected over versions operating according to a more realistic assessment of risk requiring a lighter touch and a smaller budget. To bring it back to that line from James Buchanan again, order is defined by the process of its emergence. The outcomes of economic competition in a free market operate by a different evolutionary logic than the spread of thought germs, or by the evolution of political institutions. You can’t simply import the argument used for social and economic evolution and apply it to state institutions. Well, I suppose you can, but when that move falls totally flat, you’ll at least know why. (0 COMMENTS)