A Book Review of Law, Legislation, and Liberty, by Friedrich A. Hayek. Jeremy Shearmur, editor.1 Friedrich Hayek’s trilogy Law, Legislation, and Liberty, published in three separate volumes in 1973, 1976, and 1979, was recently republished in a single book under the careful editorship of Jeremy Shearmur. The last volume of the original trilogy2 covers Chapters 12 to 18 of the Shearmur edition. This last part is what I review here.” Hayek tells us that the book is concerned with “the limits that a free society must place upon the coercive powers of government.” The political order of a free people consists in a system of government limited by law in order to protect a self-regulated (or “spontaneous”) order in which each individual can use his own information to pursue his own purposes or goals. As I indicated in my review of volume 1, Hayek saw the freedom to use one’s information for one’s own purposes as the very definition of individual liberty.) Unlimited Democracy, Totalitarian Democracy The first broad argument of the book is that democracy has diverged from its original ideal and degenerated into an unlimited and totalitarian democracy. Unlimited democratic power can be traced back to the decline of Athenian democracy at the end of the 5th century BC when, as Aristotle noticed, “the emancipated people became a tyrant.” In a similar way, the British Parliament became sovereign, that is, theoretically omnipotent, in 1766, when it “explicitly rejected the idea that in its particular decisions it was bound to observe any general rules not of its own making.” Liberal democracy originally referred simply to “a method of procedure for determining government decisions” or, more practically, for getting rid of governments without bloodshed. Democracy was a protection against tyranny. It is an error to view democracy not as “a procedure for arriving at agreement on common action,” but instead “to give it a substantive content prescribing what the aim of those activities ought to be.” The current, unlimited democracy leads to rent-seeking (competition for government privileges), the triumph of special interest groups, and legal corruption. The cause is that a government with unlimited powers “cannot refuse to exercise them,” so everybody will rush to the public trough. As we know from Mancur Olson,3 the most concentrated interests, which are more efficient at organizing to lobby governments, will usually win the competition in the tilted political field. Given their own interests in winning elections, political parties become mere “coalitions of organized interests,” horse-trading favors and privileges for their respective electoral clientèles. Any group left behind and powerful enough will, in turn, ask for compensating favors. An unlimited democratic government is thus constantly blackmailed and corrupted by special interests. The resulting bundle of interventions and privileges will correspond “to nobody’s opinion of what is right, and to no principles.” And no particular voter may find the whole package in his own interests. Interestingly, Hayek’s ideas here are close to anarcho-liberal Anthony de Jasay’s theory of the self-destructive but unavoidable attempts by the democratic state to satisfy conflicting interests, which cannot all be satisfied because everyone is politically trying to get ahead and on top of others.4 (Chronologically, of course, it is more likely that de Jasay was influenced by Hayek than the other way around.) Hayek argues that social conflict can be avoided not through many interests vying to capture the majority, but “only by agreement on general rules.” Here, Hayek resembles more Nobel laureate economist James Buchanan, whose contractarian theory is based on unanimous consent to general rules. 5 In Hayek, however, it is not always clear whose consent is required. Legislating Vs. Governing The essential division of power in a liberal democracy is between legislation and government (taking the latter term in the narrow sense of deciding and enacting public policy) or, we may say, between legislating and governing. Laws are the general and uniform rules necessary to delimit the boundaries of the equally protected domain of individuals in an autoregulated order. They equally apply to everybody, including the state and its agents. The only exception is the right of governments to raise uniform taxes under the law. Such is Hayek’s demanding interpretation of rule of law. The current division of power between the executive and the legislative is ineffectual. The fact is that “our supposedly constitutional democracies” have acquired an arbitrary power not bound by laws. Legislative and executive bodies impose collective goals to individuals, while each should be free to pursue his own purposes limited only by negative laws limiting the means used. The government “ought to be conducted according to principles approved by the majority of the people,” but that does not mean “government by the unrestricted will of the majority.” Legislating is the adoption or recognition of general laws that constrain everybody including the government. Governing is “the administration of the resources and machinery placed at the disposal of government.” The two functions are so different that they cannot be filled by the same elected assembly. A distinct Legislative Assembly should represent “pre-existing opinions” of “what is right and wrong.” “A society of free men presupposes that all power is limited by the common beliefs which made them join,” writes Hayek in a contractarian-like manner that the reader may not expect under his pen. Legislation must aim at “helping unknown people for their equally unknown purposes.” A separate Governmental Assembly would play the current role of parliaments or houses of Congress as we know them. Hayek believed that the tasks of governing “cannot be strictly tied to rules,” which is why its powers “ought always be limited in extent and scope, namely confined to the administration of a sharply circumscribed range of means entrusted to its care.” These limits are established by legislation (and, we must suppose, by court decisions based on the common law6). Still a Lot of Government The second broad argument of the book is that the public sector must not be restricted to certain functions but must be seen as covering anything that the government is asked to do, provided again that it remains subject to the same general laws that apply to ordinary individuals. The only special power of the government is to levy taxes approved by voters. Hayek seems to favor an equal proportional burden for all citizens, all taxes being considered. The taxpayer will know in advance his share in the cost of any new expenditure and will not be able to get something at somebody else’s expense.” Hayek warns us that he is “far from advocating” a minimal state. Government activities can be categorized as (1) the enforcement of laws; (2) national security; and (3) the provision of “a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market.” That covers a wide domain of intervention. Hayek believes that national security activities “cannot be strictly bound by general rules” and that “the executive must be given far-reaching discretionary powers.” Worryingly, Hayek includes in security “possibly internal insurrection” and such things as “natural disasters” and “epidemics.” During the recent epidemic, we have seen how elastic is that sort of mission. Hayek even suggests that a “national service,” that is, temporary conscription in peacetime, could be imposed. Doesn’t it seem that even a strictly conceived rule of law could be bent to serve Leviathan? Like other classical liberals including Milton Friedman and James Buchanan, Hayek favored “a certain minimum income for everyone, or a sort of floor below which nobody need fall.” He sees such a measure as compensating a common risk in the Great Society, where ” the individual no longer has specific claims on the members of the particular small group into which he was born.” This sort of program cannot realistically be offered to everyone on earth and implies a limit on immigration. Some “facts of the present world,” Hayek argues, constrain the liberal ideal of non-discrimination. He does not see this as a failure of liberal principles, but part of a more general exception: “like tolerance in particular, liberal principles can be consistently applied only to those who themselves obey liberal principles, and cannot always be extended to those who do not.” James Buchanan argued along the same lines, perhaps more forcefully.7 I might add that the problem is not simple. Government services cover the provision, or at least the financing, of “collective goods” (public goods) and the control of externalities. Collective goods, Hayek tells us, must be “wanted by all or at least by a considerable majority” or perhaps “a large majority” or just a local majority, or “a section of the population sufficiently numerous to make its weight felt politically.” One may wonder if this majoritarian fuzziness, especially in the last characterization, would not reproduce the illiberal attributes of the current democracy. Hayek tells us that the provision of public goods can be considered “a sort of exchange” in which some individuals finance the public goods that others want in exchange for having their preferred ones financed by the others. He recognizes that each individual must feel that the whole package is worth to him more than his total tax contributions. Another question: Don’t we risk falling again in the democratic horse-trading blamed before? A strong requirement of Hayek’s theory is that a government may not claim a monopoly on any of its services, whether it be postal services or the issuance of money. Hayek was especially interested in the latter topic, arguing for the individual freedom to use any currency, including private moneys.8 This is the only way to prevent one’s own government from devaluating the money people rely on. A government may intervene in any other field, subject to general laws and to never claiming a monopoly. Hayek’s theory allows for much potential regulation. He does not object to “certain requirements of safety and health” and “the restrictions on the sale of certain dangerous goods (such as arms, explosives, poisons and drugs).” I suspect that Hayek did not seriously reflect on the old “right of the Englishman to keep arms for his own defence” 9 and the benefits, practical and symbolic, of the Second Amendment. Hayek also suggests that eminent domain is acceptable if defined by “general rules of law,” but he recognizes there a conflict with the “the basic principles of a libertarian order”: “[W]e still lack adequate theoretical principles for a satisfactory solution of some of the problems in this field.” All that seems to leave much leeway to Leviathan. The Case of Competition and Antitrust A whole chapter of The Political Order of a Free People is devoted to the nature of competition and to a critique of antitrust regulation. “Competition,” Hayek argues, “is a discovery procedure”—for finding how to produce goods and services at the lowest possible cost. If we could predict the outcome of competition, we would not need it. Competition does need to be “perfect,” that is, to produce a situation where no producer can affect the market price. An omniscient and perfectly benevolent dictator could not do better than ordinary market competition even if not perfect. On a free market, the size of businesses, the degree of concentration of an industry, and even a monopoly do not matter. Forcing businesses to behave as if they were perfectly competitive is impossible because nobody has the information necessary to determine the lowest cost. Moreover, curbing the size of larger business organizations “cannot be achieved without conferring a discretionary and arbitrary power on some authority.” Unchallengeable monopolies are usually those established or protected by government. The solution is of course to deprive government of the power to claim or grant such privileges. Hayek believes that all agreements in restraint of trade should simply be legally unenforceable. But he also thought that monopoly becomes harmful when it is allowed to price discriminate in order to maintain its market power. The only example he gives is a monopoly “offering specially favorable terms to customers only in that limited region in which a newcomer at first will be able to compete.” This sort of behavior would be prohibited, preferably through allowing harmed competitors to sue for multiple damages. But wouldn’t the fear of being sued prevent a monopoly from charging differential prices, which is often efficient? A Model Constitution? The penultimate chapter of the book suggests what a modal constitution would look like. Perhaps to avoid the charge of constructivism, Hayek explained that he did not want his model to replace any “established constitutional tradition,” but thought it could be of use to newly democratic countries and to international organizations—even if “it is doubtful whether we can, or even whether we should, create a supra-national government beyond some pure service agencies.” Moreover, the government being an organization, not a spontaneous order, is “of necessity the product of intellectual design.” Is this so obvious? For Hayek, anyway, a constitution is chiefly concerned with the internal organization of the state. The basic clause of the constitution would state that government coercion can be used “only in accordance with the recognized rules of just conduct designed to define and protect the individual domain of each” and “intended to be applied to an unknown number of future instances.” The constitution would also contain a definition of law along these lines. Hayek also favored a “special clause” to forbid a government monopoly on the issuance of money. The rest of the constitution would deal with the internal structure of the state. As we already saw, Hayek believes that the problem of effectively limiting the powers of government can be solved “only by dividing the supreme power between two distinct democratically elected assemblies.” Adding a semi-permanent body for drawing the constitution and amending it when needed, we have “a three-tiered system of elected bodies.” An independent constitutional court would resolve jurisdictional disputes. Where does sovereignty resides? “[N]owhere,” Hayek answers, “unless it temporally resides in the hands of the constitutional-making or constitution-amending body.” Hayek goes into much detail about how the two assemblies would be constituted and elected. We don’t need to get into this here, except to note that the Legislative Assembly would be composed of mature men and women between 45 and 60 years of age and elected for terms of 15 years. Legislation is a serious matter. Hayek’s constitution would incorporate vast emergency powers—even if he admits that emergencies have always been a good excuse to erode individual liberty! The constitution could be “temporarily suspended” by the Legislative Assembly when the long-run preservation of the free society is threatened. Liberalism is a worthy ideal. “The only moral principle which has ever made the growth of an advanced civilization possible,” Hayek reminds us, “was the principle of individual freedom, which means that the individual is guided in his decisions by rules of just conduct and not by specific commands.” The question is whether Hayek’s proposed implementation of the rule of law is sufficient to protect individuals against tyranny. But one cannot seriously ponder this question without reading him. Footnotes [1] F.A. Hayek, Law, Legislation, and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy, edited by Jeremy Shearmur (Chicago: University of Chicago Press, 2022). [2] The Political Order of a Free People (University of Chicago Press, 1979). [3] Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Harvard University Press, 1965, 1971). [4] Anthony de Jasay, The State (1985) (Liberty Fund, 1997). Printed copy available through the Liberty Fund book catalog. See also my review “An Unavoidable Theory of the State,” Library of Economics and Liberty, June 4, 2018. [5] See James M. Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (Liberty Fund, 1999; University of Michigan Press, 1962), and my review, “The State Is Us (Perhaps), But Beware of It!” Econlib, January 3, 2022; James M. Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (University of Chicago Press, 1975; Liberty Fund, 2000), and my review, “Lessons and Challenges in The Limits of Liberty,” Library of Economics and Liberty, November 5, 2018; and Geoffrey Brennan and James Buchanan, The Reason of Rules: Constitutional Political Economy (Cambridge University Press, 1985; Liberty Fund, 2000), and my review, “Constitutional Democracy: Is Democracy Limited by Constitutional Rules?” Econlib, January 2, 2023. [6] On the common law, see the first Volume 1 of the trilogy, that is, the first part of the Shearmur edition. [7] James M. Buchanan, Why I, Too, Am Not a Conservative: The Normative Vision of Classical Liberalism (Edward Elgar Publishers, 2006). [8] See also Hayek’s Denationalization of Money, 2nd Edition (Institute of Economic Affairs, 1978). [9] Colin Greenwood, Firearms Control: A Study of Armed Crime and Firearms Control in England and Wales (Routledge & Kegan Paul, 1972). Joyce Malcolm, To Keep and Bear Arms: The Origins of an Anglo-American Right (Harvard University Press, 1994). *Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. He blogs on EconLog. He lives in Maine. E-mail: PL@pierrelemieux.com. For more articles by Pierre Lemieux, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

  Today, May 1, is May Day. It is celebrated by communists in many countries. So I thought it would be a good idea to take stock and see where we are on the road to the communist ideal. In The Communist Manifesto, Karl Marx and Friedrich Engels laid out 10 interim measures on the way to communism. They wrote: The proletariat will use its political supremacy to wrest, by degree, all capital from the bourgeoisie, to centralise all instruments of production in the hands of the State, i.e., of the proletariat organised as the ruling class; and to increase the total productive forces as rapidly as possible. Of course, in the beginning, this cannot be effected except by means of despotic inroads on the rights of property, and on the conditions of bourgeois production; by means of measures, therefore, which appear economically insufficient and untenable, but which, in the course of the movement, outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionising the mode of production. These measures will, of course, be different in different countries. Nevertheless, in most advanced countries, the following will be pretty generally applicable. 1. Abolition of property in land and application of all rents of land to public purposes. 2. A heavy progressive or graduated income tax. 3. Abolition of all rights of inheritance. 4. Confiscation of the property of all emigrants and rebels. 5. Centralisation of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly. 6. Centralisation of the means of communication and transport in the hands of the State. 7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan. 8. Equal liability of all to work. Establishment of industrial armies, especially for agriculture. 9. Combination of agriculture with manufacturing industries; gradual abolition of all the distinction between town and country by a more equable distribution of the populace over the country. 10. Free education for all children in public schools. Abolition of children’s factory labour in its present form. Combination of education with industrial production, &c, &c. Where are we on these measures in the United States? Although we are not close to abolition of property in land, governments at various levels prevent people from using their land for many peaceful purposes, e.g., housing, often prevent owners from evicting tenants, and sometimes use eminent domain to take people’s land forcibly. At the federal level and in many states such as New York and California, we do have a very heavy progressive, or graduated, tax. As a result, tax rates on income from work range from 0 percent to over 50 percent. We still have strong rights on inheritance although the federal government does take a big chunk of inheritances that exceed $12.92 million. The tax rate for amounts above that threshold start at 18% and rise to 40%. We seem to have mainly dodged a bullet on this one. Although there is still lots of private credit, much of it is in the hands of the state and much of private credit is regulated heavily by the state. Much of communication and much of transportation is decentralized, but much of it is centrally regulated. Think FCC for communication and FAA, TSA, Amtrak, and government roads for transportation. We have avoided most of this. Fortunately there are no industrial armies and there is no conscription, except for juries. Indeed, people often get financially penalized with lower welfare payments and zero unemployment benefits when they do work. We have pretty much avoided this. Marx and Engels would be pretty happy about this one because there are universal government schools for which people pay zero in tuition but heavily in taxes, the size of which has nothing to do with whether one has kids in these government schools. (0 COMMENTS)

While operating on a 16-year-old girl who suffered from severe seizures, neurosurgeon Itzhak Fried stumbled on the region of the brain that makes us laugh. To neuroscientist Patrick House, Fried’s ability to produce laughter surgically raises deep and disconcerting questions about how the brain works. Join Fried, House, and EconTalk’s Russ Roberts for a live broadcast […] The post Patrick House and Itzhak Fried on the Brain’s Mysteries appeared first on Econlib.

The price of flying from the US to China has risen very sharply in recent years. The primary cause is economic nationalism. Here’s the Financial Times: The US has offered to grant Chinese airlines the same number of weekly flights between both countries as American carriers — but only if they agree not to fly over Russia, according to six people familiar with the talks. Moscow banned US carriers from flying over the country after Washington prohibited Russian airlines from flying to the US in the wake of Russia’s full-scale invasion of Ukraine. Chinese airlines are not banned from Russian airspace. US carriers have 12 weekly flights to China, while Chinese airlines have eight to the US. The American carriers face higher fuel costs than their Chinese rivals whose routes over Russia to the US are much shorter. Some pundits defend economic nationalism on “national security” grounds.  And yet that argument obviously does not apply to commercial airline flights.  Nor is this about a mythical “level playing field”, as the punitive action is aimed at Chinese airlines, not those of other countries that fly over Russia: The Chinese official said another reason not to accept the US condition about circumventing Russia was that airlines from other countries, such as India and the UAE, flew over Russia without facing repercussions in the US. Russia’s ban on US airlines flying over their territory does give China a comparative advantage—but so what?  A warm climate gives Honduran banana producers a comparative advantage over Minnesota banana producers.  Consumers benefit when they can buy from the cheapest producers.  So does society as a whole. If the US government got its way, large quantities of jet fuel would be consumed for no good reason.  What happened to climate change as a goal of the Biden administration?  Is protecting the profits of US airlines more important than climate change? And what happened to this mutually agreed upon goal? The Chinese diplomat added that Xi and Biden had agreed on the need for more people-to-people exchanges between the countries when the leaders met at the G20 summit in Bali in November and stressed that more flights were needed to meet that goal. Is discouraging interaction between the people of the world’s two greatest powers the best way to promote world peace? I am frustrated by the frequent references to “national security”.  Very little of US protectionism relates to sensitive areas.  For instance, the Trump/Biden tariffs on Chinese goods were imposed with the expressed aim of reducing the US current account deficit.  They failed miserably, because the deficit is caused by saving/investment imbalances, not a lack of tariffs. PS.  Larry Summers has a good twitter thread on how we are overdoing economic nationalism.  Here’s an excerpt: PPS.  I hope to visit China later this year—if I can afford a ticket.  As of now, I’d probably have to first fly to a third country, such as Japan. (0 COMMENTS)

In the zeitgeist, “marginalized” seems to mean any group that a mainstram speaker must love. A loved group is typically a set of individuals who deserve some privileges required by “social justice” as understood in the chattering classes, who complain of “micro-aggressions,” and who are not sufficiently empowered to boss others around. By a strange reversal of their root meaning (“at the margin”), “marginal” and “marginalized” now often refer to those who are the current bien-pensants. For example, I read an apparently innocuous explanation in a Wall Street Journal report (“Tucker Carlson’s Vulgar, Offensive Messages About Colleagues Helped Seal His Fate at Fox News,” April 26, 2023—my): On air, Mr. Carlson had turned up the volume on commentary that had expanded beyond a conservative viewpoint on politics into more of an attack on marginalized groups. From what I know about him, I don’t share Mr. Carlson’s contempt of truth nor most of his intuitions. Nor would I want to be associated with leftwing or rightwing bigotry, ignorance, and authoritarianism. But although I grant that many nuances are involved, I suggest that we should stick with the standard definition of “marginal.” In that perspective, marginal is neither necessarily bad nor necessarily good. And the most “marginalized” group is certainly the set of individuals who are not part of any politically influential faction and who have a strong preference to be left alone when they want to, who are happy to live and let live. Moreover, “marginalized,” from the verb “marginalize,” implies some actor and some action against the marginalized. Despite John Stuart Mill’s idea that “society” can be oppressive, collective action through the state is the most effective marginalizer. Government dictats are to social pressure what aggressions are to micro-aggressions. In an interesting conversation with Hartmut Kliemt, Anthony de Jasay said, “What economics does for you is it teaches you to think.” He had a point, even if we should admit that other disciplines, if well taught, also help learning how to think, although not necessarily about social matters. A necessary, but obviously not sufficient, condition of rational thinking requires to use words that have a clear meaning. (0 COMMENTS)

A few months back, I did a MoneyIllusion post that discussed a fantastical airport project mentioned in an old Life magazine. The same issue (from March 18, 1946), has a few other articles worth thinking about. Here’s one example: The phrase “iron curtain” brought back a lot of memories.  It was a term one often heard back in the 1960s.  When the Berlin Wall came down in 1989, I recall being mildly surprised to learn that it had gone up as recently as 1961.  I suppose that as a young person in the 1960s I thought in concrete terms, and mentally conflated the (metaphorical) “Iron Curtain” of 1946 and the (physical) Berlin Wall built in 1961.  If you’ll allow me to indulge in a few meandering observations about time, I’ll eventually derive a few policy implications. In 1989, I was 34 years old.  It seemed like the Berlin Wall had been there forever, and I never expected to see it come down. I was too young to follow world affairs in 1961, and thus had no memory of the 16-year period after WWII when there was an “Iron Curtain” but East Germans were still free to travel to the West.  As one gets older, time seems to pass more rapidly.  Today, the Berlin Wall has already been down for longer than it was up.  My 96-year old mother probably doesn’t recall the wall as lasting as long as I perceived it to last, as she was already 35 years old when it went up.  And to my daughter, it’s just a footnote in the boring history of the 1900s:  Berlin Wall (1961-89).  For me, it was a formative experience. Back in 1965, I was a ten-year old boy playing WWII games, at a time when WWII seemed like ancient history.  The Vietnam War was already underway, and WWII wasn’t even the previous war (recall Korea).  Today, the Iraq War doesn’t seem so long ago to me.  Time is subjective. Policy problems that seem insolvable to one generation, are just a footnote to the next.  I recall when there was a long struggle to contain Soviet expansionism in the third world.  Then there wasn’t.  This was immediately followed by worry over Japan’s increasing economic power.  That concern faded just as quickly.  Later there was expected to be a long struggle against Islamic terrorism, a struggle that was mostly over (in America) long before we realized that it had ended.  I’m not quite sure what we worry about today.  The left seems worried about right wing militias trying to overturn elections, while the right worries that woke schools will indoctrinate our children.  And almost everyone worries about China and Russia. Because of the way that we perceive time, when we are in the midst of a problem we don’t tend to perceive it as a blip in history, which will soon be replaced by another set of concerns.  For this reason, there can be real benefit to foreign policies that “kick the can down the road”, if we are able to avoid outright war.  Today, it seems as though places like Russia, China, Iran, North Korea, Cuba and Venezuela will never become free.  But who knows what the world will look like in another 30 years. The same issue of Life magazine also has a long article by Joe Kennedy (JFK’s dad), discussing foreign policy.  Some of his takes haven’t held up well: Others have held up extremely well: Replace “Communism” with “fascism” and that almost perfectly describes Putin’s Russia.  As does this: We avoided war with the Soviet Union through a policy of containment, and I hope that we can avoid war with Russia in a similar way.  Let’s hope that at some point in the future, Kennedy’s description of Russia seems just as out of date as his 1946 comments on China. PS.  For my generation, the Berlin Wall discredited communism.  Yes, America has a wall on its southern border, but (although counterproductive) it’s not there to keep people from escaping a flawed system in America.  It’s to keep people from escaping to America.  Some democratic countries had (misguided) policies that banned foreign travel during Covid, but these “walls” were seen as temporary. The Berlin Wall was different. Back when I was young, the Berlin Wall was seen as permanent, in much the way that the division of Korea seems permanent to the millennial generation.  When the Churchill made his speech in 1946, it was not obvious to every thinking person that the Soviet Union was an evil empire.  Just a year earlier they were our ally, playing a major role in defeating Nazi Germany (and to a lesser extent Japan.)  The Berlin Wall was such a perfect expression of failed tyranny that even poorly informed Americans understood the true nature of the Soviet Empire. In retrospect, 1961 was the beginning of the end for communism, the point at which it became obvious that it was failed regime. Reading old magazines and newspapers is an interesting way of learning about history.  By reading the NYT from 1929-1938, I gained a great deal of insight into the US during the Great Depression, an insight I never would have gained from history books. PS.  I originally wrote this post in January.  In February, The Economist made a similar observation: Those still feeling dour should take courage from recent experience. For all the considerable difficulties of the past decade or so, global trade as a share of GDP has only retreated a little from the peak it reached in 2008. Recent history demonstrates, moreover, that nothing in geopolitics is for ever—and trends which look inexorable come to an end. The cold war divided the world and then, suddenly, it did not. Supreme confidence in the inevitable spread of democracy was displaced by the worry that an authoritarian China would dominate the globe, which is now barely a worry at all. The stalemate between America and China will one day be old news, perhaps sooner than most currently think. Mistakes led the world to its current uncertain state, it is true. And more mistakes will certainly be made. But the past shows only what has gone wrong, not what will. It is by remembering this that we find the wisdom to do better.   (0 COMMENTS)

When the Washington state Supreme Court says it’s not. But in 2021, the [Washington] state legislature ignored the plain language of the constitution, plus decades of precedent, to impose a special 7 percent tax on one type of income, capital gains. That blows through the constitutional strictures in two ways. First, as we pretty much all learned in first grade if not earlier, seven is greater than one. Second, because the tax is on the part of a capital gain that is above $250,000, it’s not uniform. So you would think the state’s Supreme Court would easily bat down that tax. If so, you would be wrong. On March 24, the Supreme Court voted, by a lop-sided 7-2 margin, to uphold the constitutionality of the tax. How did the seven justices—I use that word loosely—justify their decision? Simple. They claimed that a tax on income was really an excise tax. Debra L. Stephens, one of the justices, wrote, “The tax is constitutional as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.” Excuse me? If it were an excise tax, it would be levied on the sale of an asset. But the plain language of the law that the justices upheld says that it’s levied on capital gains. This is from my latest piece for the Institute for Policy Innovation, “When Is Income Not Income?” TaxBytes, April 27, 2023. Read the whole thing, which is not long. (0 COMMENTS)

We’ve long been told how much we can learn from our mistakes. (This week’s guest even wrote a book about it!) But what if a mistake is so awful, not only do we not learn from it, we can’t even live with it. This is the sort of mistake Washington Post columnist Megan McArdle calls an Oedipus trap. In this episode, EconTalk host Russ Roberts welcomes McArdle back to discuss this trap, describing some fascinating examples. In their conversation about confronting our errors and the challenge of confirmation bias, McArdle shares the story of Dr. Walter Freeman a “pioneer” in using lobotomies to treat mental illness. Despite overwhelming evidence to the contrary, Freeman died convinced of their efficacy. He even spent the last years of his life tracking down and corresponding with his lobotomy patients, thinking he’d found “proof” of his success. How could he have been so wrong? While I’m not going to ask if you’ve ever fallen into an Oedipus trap (as if you would know!!!), we would love to hear your reactions to this conversation. Share your responses to the prompts below in the comments, or use them to start your own conversation offline. Let’s keep the conversation going.     1- In recounting the story of Freeman, McArdle says, “One of the things that comes out of a lobotomy is a different idea about informed consent.” What does she mean? Were there “satisfied customers?” To what extent should we consider Freeman an entrepreneur?   2- McArdle cautions listeners, “…we should remember that it is easy to pass judgment when we have alternatives.” She also points to the continuing mysterious nature of health care. (Remember Semmelweis and the midwives!) While all this is true, we might still want to consider safeguards to avoid the Oedipus trap. What might such safeguards look like? Are they more internally or externally oriented?   3- Roberts changes course to consider the Oedipus trap as it relates to politicians. How often have politicians (or perhaps military leaders) made decisions that if they reconsidered they could not love with? Did Truman ever (publicly) regret dropping the atomic bomb, for example? Perhaps in many similar cases, the foregone alternative is equally unthinkable. Still. can you answer Roberts’ challenge and think of a major such event that was later- again publicly- regretted?   4-McArdle says that avoiding or getting out of the Oedipus trap is hard because the people who can resist that pull and see the thing that is true, even if it is going to be socially costly for them and psychologically costly for all of the people around them, tend not to be pleasant people. Why do you think this is? Roberts wonders about other dissenters, troublemakers, and contrarians- all pejorative terms. To what extent do those who shatter the status quo tend to be outsiders?   5- What’s wrong with “Following the Science,” according to McArdle and Roberts? To what extent do you agree that the higher the stakes, the less likely people are to follow the consensus? Explain.     (0 COMMENTS)

J.P. Morgan CEO Jamie Dimon is making international headlines with his recent claim that the current U.S. banking crisis is “not yet over, and even when it is behind us, there will be repercussions from it for years to come.” With Congress’s ongoing excessive spending and the Federal Reserve’s continued monetary mischief, Dimon’s prediction seems pretty safe.  Following the collapse of Silicon Valley Bank (SVB), Signature Bank and Silvergate shut down shortly thereafter. Depositors with uninsured amounts above the Federal Deposit Insurance Corporation’s (FDIC) insured amount of $250,000 at both banks withdrew large sums, forcing the banks to sell assets that had lost significant value. Silvergate voluntarily liquidated itself, while bank regulators forcibly closed Signature Bank.  While the specific circumstances of SVB’s collapse may be unique, the factors contributing to its failure are not. SVB, Signature, and countless other banks that have yet to make headlines invested in risky assets such as environmental, social, and governance (ESG) initiatives and less risky assets such as government securities. These actions were fueled by government interventions in the economy that pumped excess liquidity into the market, creating an artificial “boom.” Since early 2020, Congress has added more than $7 trillion to the national debt, and the Federal Reserve helped keep interest rates artificially low. This resulted in a flood of liquidity that found its way into the banking system, which led to banks taking on those less profitable investments, particularly interest-rate-sensitive government bonds. But banks weren’t prepared for the Fed to change its interest rate tune, raising its target for the federal funds rate from 0 percent to the latest range of 4.75 percent to 5 percent, and for those assets to lose significant value so quickly. This made these banks take a huge hit to their balance sheet when they marked-to-market those assets, and they didn’t have sufficient capital in a fractional reserve banking system to fund deposit withdrawals, hence bank runs.   Now, we’re witnessing the beginnings of the inevitable bust that follows a prolonged “boom” fueled by government actions that just redistributed resources while distorting markets. Perhaps the worst part in all of this is that the Treasury, Fed, and FDIC are creating moral hazard for banks by insuring many deposits at big, “systemically important” banks. This has created a shift of deposits from smaller regional banks to bigger banks, given this guarantee for now. Therefore, there’s more reason for bigger banks to take on more risks with this backstop and flood of new deposits at the expense of smaller banks and the economy. To make matters worst, the Fed recently added even more liquidity to the market. After reducing its balance sheet by about $700 billion from its peak of $9 trillion in April 2022, the Fed added $400 billion to provide loans to financial institutions. Its balance sheet is now down about $100 billion since then to $8.6 trillion, or only 4.4 percent below its record high last year, when it should be down substantially more to get ahold of inflation.  The Fed’s balance sheet provides a good indicator of inflation, which has started to improve, but including the aberrations in the Fed’s balance sheet and underlying inflationary indicators in the food and services sectors, inflation could easily stay elevated at a much higher rate than the Fed’s preferred 2 percent average for much longer. Adding to the pressure on the banking sector includes how the Atlanta Fed’s GDPNow estimate for inflation-adjusted GDP in the first quarter of 2023 is only 2.5 percent (and Blue Chip consensus estimate is 1.5 percent) as of April 14. This is after less than 1 percent growth from the fourth quarter of 2021 to the fourth quarter of 2022, which is the slowest growth during a year of recovery in decades. This will exacerbate problems at banks if Americans can’t pay their bills.  And we’re likely to see even higher interest rates soon, even though the Fed expects to raise rates just one more time this year. Based on the well-respected Taylor rule, which calculates a federal funds rate target based on inflation and output gaps, the Cleveland Fed’s Taylor rule utility suggests at least a 6 percent federal funds rate target. This would further devalue the government securities on banks’ balance sheets.  So strap up, Americans, as we’re in for a bumpy ride in the banking sector and overall economy. Only by allowing people to exchange freely with limited government interference that simply sets the rules of the game but is a referee thereafter, not a participant, can we better avoid these boom and bust cycles in the banking sector and across the economy that threaten our freedom and prosperity.  A big part of this will be to unleash the banking sector from excessive regulations like those imposed by Dodd-Frank after the financial crisis. There should also be an effort to not increase the FDIC’s insured amount by $250,000, as depositors should also take losses if they’re not doing their due diligence to research where they deposit their funds. And there should be support for increasing capital requirements by banks in the marketplace rather than policy avoiding some of the problems with fractional reserve banking.  Finally, the Fed should be led by a monetary rule, like the Taylor rule, and Congress by a fiscal rule, like the Responsible American Budget, to remove the discretion that plagues our economic activity and future. If not, there will be many more “booms” and busts and many more failures from government actions over time. We must let free people succeed and fail, as failure is essential for us to learn lessons, or we will keep making the same mistakes. But we should be eliminating government failures by ultimately shrinking government and ending the Fed.   Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC, senior fellow at Young Americans for Liberty, and chief economist or senior fellow at multiple think tanks across the country. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on Twitter @VanceGinn.   (0 COMMENTS)

In the same chapter of Friedrich Hayek’s Law, Legislation, and Liberty that I discussed two days ago, Hayek has some excellent discussion of the benefits of competition and on the optimal size of firms. The benefits of competition Competition, if not prevented, tends to bring about a state of affairs in which: first, everything will be produced which somebody knows how to produce and which he can sell profitably at a price at which buyers will prefer it to the available alternatives; second, everything that is being produced is produced by persons who can do so at least as cheaply as anybody else who is not producing it; and third that everything will be sold at prices lower than, or at least, as low as, those at which it could be sold by someone who in fact does not do so. (p. 74) I stated in our Liberty Fund colloquium that this was a beautiful, succinct statement of the benefits of competition. Fellow participant David Friedman pointed out that the first one is not quite true. He noted that the argument against monopoly is that it underproduces even though more could be sold at a profit (just a lower profit.) I immediately agreed with David. Still, the second clause of the first point is spot on, as are the second and third points. It’s possible that Hayek could avoid David Friedman’s criticism by pointing out that he uses the word “tends.” Also, in the paragraph that follows, Hayek writes that this state of affairs “is approached remarkably closely in all fields where competition is not prevented by government or where governments do not tolerate such prevention by private persons or organizations.” So Hayek admits that it’s close, not necessarily all the way. Hayek also points out that only a market can bring about this situation. On the optimal size of firms The most effective size of the individual firm is as much one of the unknowns to be discovered by the market process as the prices, quantities or qualities of the goods to be produced and sold. (p.78) Hayek goes on to explain that the optimal size will depend on technology and economic conditions, both of which are “ever-changing.” Hayek then lays out how size is often an antidote to the power of size, writing: It may well be that, say, in the electrical industry of one country, no other corporation has the strength or the staying power to ‘take on’ an established giant intent upon defending its de facto monopoly of some of the products. But as the development of the great automobile or chemical concerns in the USA shows, they have no compunction about encroaching on such fields in which the backing of large resources is essential to make the prospects of entry promising. Size has thus become the most effective antidote to the power of size. (p. 79)   (0 COMMENTS)