A Liberty Classic Book Review of Interventionism: An Economic Analysis, by Ludwig von Mises.1 Can government intervention work? The answer to this question is concisely, yet comprehensively answered in Ludwig von Mises’s Interventionism: An Economic Analysis, first written in German in 1940 and originally translated by Thomas Francis McManus and Heinrich Bund. According to Mises, government intervention does not work because it causes unintended or otherwise undesirable consequences according to the objectives stated by its own proponents. While there can be no doubt that Mises was a strong proponent of a free-market economy and limited government, the failure of government intervention to work is not a normative indictment of government intervention, per se. The failure of government intervention to achieve its stated objectives is neither a critique of its objectives nor of the intent of the regulators themselves (Mises 2011, p. 12). Rather, Mises’s argument is a positive analysis of how regulations in the form of taxes, subsidies, tariffs, quotas, price controls, licensing, etc., fail on their own terms. In order to understand Mises’s theory of interventionism, we must not only distinguish an interventionist economy from capitalism and socialism, but also how Mises’s economic analysis of interventionism relates to the “invisible hand” of the market process. According to Mises, capitalism is an economic system defined by a particular of set of institutions, which include private property in the means of production (i.e. land, labor, and capital) and freedom of contract under the rule of law. A capitalist system is governed by the demands of consumers for goods and services, which in turn guide entrepreneurs to direct the means of production according to their most valued consumer uses. The buying (and abstaining from buying) of final goods by consumers, and the buying (and abstaining from buying) of the means of production by entrepreneurs, generates a system of market prices that coordinates the activities of producers, as well as profit (and loss) signals to transmit information when they have (or have not) used the means of production in a manner that satisfies the most valued human wants. The emergence of social cooperation under the division of labor is Adam Smith’s “invisible hand” in action. A socialist economic system is one in which private property and free-market money pricing in the means of production are abolished. Whether labelled as communism or fascism, socialism of any variety implies that the means of production are governed not by consumer demands but dictated by government orders. Private property and free money pricing are effectively abolished. For Mises, the question of whether a capitalist system is superior to a socialist system, in terms of increasing the overall welfare of society, is not predicated on the possibility of either system eliminating entrepreneurial error and economic waste. Rather, given that error of decision-making will always exist in an uncertain world, the relevant question is which system will incentivize individuals to identify that an economic error has been made and learn from it. Without private property, money prices, and profit-and-loss signals, a government bureaucrat directing production “will be like the captain of a ship to sail the high seas without the resources of science or art of navigation” (Mises 2011, p. 9). By abolishing the invisible hand of the market process, the result of implementing socialism, pushed to its logical outcome, can only be the substitution of the visible hand of totalitarianism. However, Mises draws a distinction between the institutional preconditions of capitalism and socialism to highlight the distinct features of interventionism, or what Mises also refers to as a “hampered market economy” (2011, p. 10). As the name suggests, interventionism is not synonymous with socialism, but refers to an economic system in which the government, or a de facto regulatory authority backed by government force, interferes with the operation of the market economy without eliminating it altogether. Interventions in the form taxes, subsidies, monopoly privileges, or price controls are issued directly by government officials, or indirectly by a regulatory authority, forcing entrepreneurs to employ the means of production different from the way in which they would have been in an unhampered market. “Do not these interventions perhaps produce results which, from the government’s point of view, appear even less desirable than the conditions in the free-market economy which it seeks to change?” (Mises 2011, p. 11). The answer rests on understanding the relationship between interventionism and the invisible hand, which has been best restated by Milton and Rose Friedman in Free to Choose (1980). Capturing what Mises had argued 40 years prior, Friedman and Friedman write, in “the government sphere, as in the market, there seems to be an invisible hand, but it operates in precisely the opposite direction from Adam Smith’s: an individual who intends only to serve the public interest by fostering government intervention is ‘led by an invisible hand to promote’ private interests, ‘which was no part of his intention'” (Friedman and Friedman 1980, pp. 5-6). “… the act of intervening into the market process, however well-intended it may be, implies redirecting the means of production with the deliberate result of benefiting one group of individuals at the expense of another.” Mises illustrates not only the economic consequences of interventionism, but also its social and political ramifications. In order to understand the process by which interventionism generates unintended or otherwise undesirable consequences by its proponents, Mises highlights two points. First, if government intervention is intended to eliminate what are regarded as undesirable consequences of an unhampered market process, it must distort the institutional precondition upon which an unhampered market is based: private property. Secondly, the act of intervening into the market process, however well-intended it may be, implies redirecting the means of production with the deliberate result of benefiting one group of individuals at the expense of another. Such an act of intervention, by definition, is a means for the creation of special privileges (Mises 2011, p. 21). For example, tariffs aimed at promoting the general welfare of nation, in terms of securing domestic production of a good or service and preventing job loss in a particular industry, cannot do so without creating an artificial scarcity and a special monopoly privilege for that industry and its workers. Consumers must pay higher prices as a result of this monopoly privilege, leaving them with less income to spend on other goods and services, thereby placing these other industries and its workers at a disadvantage. The overall effect is contrary to the intent of promoting the general welfare. Pushed to its logical conclusion, therefore, “a comprehensive tariff system can only decrease the satisfaction of all” (Mises 2011, p. 78), as illustrated in the U.S. by the undesirable consequences of the Smoot-Hawley Tariff of 1930, which deepened the Great Depression. Other forms of intervention, such as inflation, regarded as a measure intended to benefit impoverished debtors at the expense of rich creditors, has the opposite effect, particularly when the “rich have invested their wealth in plants, warehouses, houses, estates, and common stock and consequently are debtors more often than creditors” (Mises 2011, p. 41). These undesirable consequences of interventionism, particularly in the case of price controls, illustrate how its intended effects are predicated on a false dichotomy between consumers and producers in the market process. The nature of the market process is one in which buyers compete against buyers by offering higher prices for a good or service, and sellers compete against sellers by offering lower prices for a good or service. However, every seller is a consumer when they purchase the means of production and other intermediate goods required for final production. Thus, the market process is one in which buyers and sellers are cooperating by exchanging their property rights, not competing with each other, and this holds just as well in a labor market when producers compete against each other to provide capital to raise the productivity of workers, allowing workers to sell their labor at higher (rather than lower) wages. The nature of price controls, however, undermines the social cooperation of the market process and generate the dynamics of interventionism, resulting in buyers cooperating for privileges against sellers (such as in the case rent controls) and sellers cooperating for privileges against buyers (as in the case minimum wages). However, competition for privileges, by definition, can never be in the general interest of either buyers or sellers. For example, in the case of minimum wages, which may intend to raise the wages of workers, has the undesirable effect of benefiting some group of workers who remain employed at higher wages, leaving another group of workers unemployed. For Mises, then, it is no accident that by restricting the supply of labor, trade union workers are proponents of higher minimum wages (2011, pp. 32-34). Producers of final goods and services are consumers of labor, and therefore the law of demand applies to the labor market as it does to any market. What is even more important for understanding the deleterious effects of interventionism is not just the seen desired effects, but the unseen undesirable effects. Suppose, for example, the government regards the market price of milk as undesirably high, setting a price control with the aim of making milk more affordable for final consumption. Cows not only produce milk, but also other dairy products, such as butter, yogurt, or cheese. The undesirable result of a price ceiling on milk will be that more cows will be made available for producing other dairy products. Less milk will be made available to the market contrary to the intent of the price ceiling. The government regulator is now left with two choices: either the price ceiling can be removed to eliminate its undesirable consequences; or, the regulator can intervene once again to mitigate the unintended consequences of the price ceiling, such as placing restrictions on the amount of milk available for dairy products, so that more milk will be made available for final consumption. However, if the regulator regards the return to the unhampered market as undesirable, then the regulator is left with no choice other than to continue this process of intervention for subsequent unintended consequences. The logical outcome will be government control of land, labor and capital to prevent resources from being repurposed to uses other than raising dairy cows. Such an example illustrates an important lesson made by Mises: interventionism, if pushed further consistently and persistently, must lead toward socialism (Mises 2011, pp. 28-29, 80). But, such an outcome is not inevitable unless public opinion changes regarding government intervention (Mises 2011, p. 12). Mises’s Interventionism should not be read as the last word as to why government intervention fails to work. Rather, as illustrated by a growth of literature building on the theoretical insights of Mises (see Lavoie 1982, Sanford 2005, and Boettke, Lesson, Coyne 2007), Interventionism provides an essential input into a progressive research agenda for understanding the dynamics of interventionism across time and place, including agricultural policy (Rajagopalan 2023), international trade policy (Smith 2022), and the provision of public goods (Candela and Geloso 2020). For more on these topics, see “Ludwig von Mises’ Decisive Blows Against Interventionism,“ by Walter Block. Library of Economics and Liberty, Nov. 1, 2021. Peter Boettke on Mises. EconTalk. “Adam Smith on Capitalism and the Common Good,” by Erik W. Matson. Library of Economics and Liberty, Dec. 7, 2020. Interventionism also clarifies some misleading claims regarding public policy. The case against government intervention, and in favor of a free-market capitalism, is not synonymous with favoring “deregulation” when we understand that capitalism by its very definition implies the existence of a built-in, regulatory mechanism: private property itself. Moreover, Interventionism illustrates that, contrary to popular opinion, the case in favor of a private-property capitalist system is not synonymous with privileging the interests of capitalists. Rather, the “particular interests of the entrepreneurs and capitalists also demand interventionism to protect them against the competition of more efficient and active men. The free development of the market economy is to be recommended, not in the interest of the rich, but in the interest of the masses of the people” (2011, p. 81). Therefore, to the extent that interference into a private-property rights framework distorts the incentives and knowledge embodied in market prices as well as profit-and-loss signals, interventionism cannot be the cure to correct for alleged maladies identified with capitalism, such as monopoly power, macroeconomic instability, mass unemployment, artificial scarcities, etc. Rather, interventionism is the very cause of such maladies, specifically by distorting private property and serving as a means to create monopoly privileges for the benefit of special interest groups. References Boettke, Peter J., Coyne, Christopher J., and Peter T. Leeson. (2007). “Saving Government Failure Theory from Itself: Recasting Political Economy from an Austrian Perspective.” Constitutional Political Economy, vol. 18, no. 2, 127-143. Candela, Rosolino A., and Vincent J. Geloso. 2020. “The Lighthouse Debate and the Dynamics of Interventionism.” The Review of Austrian Economics vol. 33, no. 3, pp. 289-314. Friedman, Milton and Rose Friedman. (1980). Free to Choose: A Personal Statement. New York: Harcourt Brace Jovanovich. Ikeda, Sanford. 2005. “The Dynamics of Interventionism.” Advances in Austrian Economics, vol. 8, pp. 21-57. Lavoie, Don C. (1982). “The Development of the Misesian Theory of Interventionism.” In Israel M. Kirzner (Ed.), Method, Process, and Austrian Economics: Essays in Honor of Ludwig von Mises (pp. 169-183). Lexington, MA: Lexington Books. Mises, Ludwig von. (2011). Interventionism: An Economic Analysis. Indianapolis: Liberty Fund. Rajagopalan, Shruti. 2023. “Mises’s Dynamics of Interventionism: Lessons from Indian Agriculture.” Southern Economic Journal vol. 89, no. 3, pp. 657-679. Smith, Nathaniel W. (2022). “A Robust Analysis of Trade Policy: The Chicken and Softwood Lumber Wars.” Journal of Entrepreneurship and Public Policy vol. 11, no. 2/3, pp. 273-291. Footnotes [1] Interventionism: An Economic Analysis, by Ludwig von Mises. Liberty Fund, Inc. Also available free online at the Online Library of Liberty: Interventionism: An Economic Analysis, by Ludwig von Mises. * Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Program Director of Academic and Student Programs at the Mercatus Center at George Mason University. (0 COMMENTS)

They operate according to rules we can never fully understand. They can be unreliable, uncontrollable, and misaligned with human values. They’re fast becoming as intelligent as humans–and they’re exclusively in the hands of profit-seeking tech companies. “They,” of course, are the latest versions of AI, which herald, according to neuroscientist and writer Erik Hoel, a species-level […] The post Erik Hoel on the Threat to Humanity from AI appeared first on Econlib.

Here’s the Financial Times: As bank runs spread, it has become clear that anyone who questions a government rescue for those caught underfoot will be tarred as a latter-day liquidationist, like those who advised Herbert Hoover to let businesses fail after the crash of 1929. Liquidationist is now challenging fascist as the most inaccurately thrown insult in politics. The new consensus in the “respectable” media seems to be roughly the following: 1. Billionaires should be free to move deposits from one bank to another by pushing a few buttons on an iPhone, merely in response to rumors of balance sheet problems. 2.  Even though billionaires have been repeatedly told that deposits above $250,000 are not insured by FDIC, there should be special taxpayer funded bailouts of billion dollar deposits anytime a recklessly undiversified bank gets into trouble. 3.  Anyone who claims that billionaires should be held accountable for their actions is an anti-social “liquidationist”. Unfortunately, the term “liquidationist” conflates two completely unrelated claims: 1.  The view that firms going bankrupt should not be bailed out by the government. 2.  The view that central banks should not inject large quantities of liquidity if that is necessary to prevent a fall in NGDP. I am a liquidationist in the first sense of the term, but not the second. BTW, there are recent articles by Tyler Cowen and Clive Crook suggesting that occasional banking instability is almost inevitable, at least if we wish to have a financial system that finances investment.  I don’t actually disagree with most of the specific points made in these two Bloomberg columns, but I worry about the framing.  Yes, banking instability is almost inevitable, but the quantity of banking instability is very much related to the type of banking system, which is a product of regulation.  Thus while Tyler is right that “regulation” cannot fix the problem created by moral hazard, he somewhat glosses over the role of regulation in creating moral hazard.   The US banking system has frequent banking crises, while the Canadian system does not.  That’s not because Canada got lucky.  Canada’s system is less susceptible to moral hazard for a very good reason.  It lacks the thousands of small and mid-sized undiversified banks seen in the US.  Those structural differences are due to different regulatory framework.  Our regulations strongly encouraged the formation of small and mid-sized regional banks, making our system fragile.  Canada is quite comfortable having a system dominated by large highly diversified banks. Given enough time, even Canada may eventually face some sort of banking problems.  But it is almost certain that the US will continue to experience much more frequent banking crises than Canada.  If Congress wishes to find a culprit then they merely need to look in the mirror.  This is the system Congress created, and the one they are trying to entrench with even more misguided regulations. At one point Tyler says: “To be clear, I am not arguing for zero regulation.” I am arguing for zero regulation, if zero regulation also means no FDIC and no anti-trust actions against bank mergers. Speaking of liquidationists, here’s the underrated Andrew Mellon (which the quote above implicitly refers to), standing between one of our best and one of our worst presidents: Thanks him next time you visit the National Gallery in DC. (1 COMMENTS)

It is a strange idea that we are the stewards of the earth. It is not clear who is “we” and which part of that “we” is a steward of which part of the earth; or which part of “we” is the owner of what the other part merely stewards. As the term has no technical economic meaning, let’s defer to Merriam-Webster, who defines a steward is an employee who manages somebody else’s property or caters to somebody else’s needs: one employed in a large household or estate to manage domestic concerns (such as the supervision of servants, collection of rents, and keeping of accounts) … an employee on a ship, airplane, bus, or train who manages the provisioning of food and attends passengers In the current issue of Regulation, I review of Mark T. Mitchell’s recent book Plutocratic Socialism. On the stewardship issue, I write: Mitchell argues that a property “owner” is the steward of future generations. But it is one thing to argue, as George Mason University economist Tyler Cowen does, that the welfare of future generations must not be discounted at the market interest rate … it is quite another to say that individuals of future generations own what current individuals now think is theirs. If individuals of future generations are wealthier than we are, it would be a redistribution from the poor to the rich. Among Mitchell’s economic errors is the claim that an individual’s utility maximization leads to a situation where “the horizon of my concerns extends no further than the horizon of my own life or the duration of my desires.” As a matter of fact, many people spend money on their children and accumulate capital to leave an inheritance, sometimes to charities. It is, of course, not true that the rate at which an individual discounts the future is close to infinity. Moreover, the owner of capital who wants to consume it does that by selling it to another individual whose discount rate is lower. When an impatient owner wants to consume the future returns of his capital now, he merely transfers it to a new owner. In other words, from all we know about our world, the market is the best possible steward. Nobody burns downs a forest he owns, which means a forest that he may sell, if it has a positive market value—that is, if it is expected to yield returns that someone in the future is likely to want. We could argue that humans are ultimately the stewards of God’s creation, as Mitchell is also tempted to believe. This line of thought would lead us to theological issue whose relevance for the study of society is not immediately obvious. Why would God need stewards? Is he not powerful enough to take care of his creation? In order to do what with it—especially toward the end, we might add? It is true that many humans who have some idea or intuition of their little place in time and space are aesthetically or sentimentally attached to, and intellectually intrigued by, the universe around them. Many have children and a potentially very long descendance (Et nati natorum, et qui nascentur ab illis, that is, “And the children of his children, and those who will be born from them,” as Virgil wrote so poetically in Aeneid), which binds them to the future. But how could that make you or I a general steward in any practical sense? Anyway, why would God prefer, if this verb applies, coercion and violence over voluntary social relations and the market? (2 COMMENTS)

It is a strange idea that we are the stewards of the earth. It is not clear who is “we” and which part of that “we” is a steward of which part of the earth; or which part of “we” is the owner of what the other part merely stewards. As the term has no technical economic meaning, let’s defer to Merriam-Webster, who defines a steward is an employee who manages somebody else’s property or caters to somebody else’s needs: one employed in a large household or estate to manage domestic concerns (such as the supervision of servants, collection of rents, and keeping of accounts) … an employee on a ship, airplane, bus, or train who manages the provisioning of food and attends passengers In the current issue of Regulation, I review of Mark T. Mitchell’s recent book Plutocratic Socialism. On the stewardship issue, I write: Mitchell argues that a property “owner” is the steward of future generations. But it is one thing to argue, as George Mason University economist Tyler Cowen does, that the welfare of future generations must not be discounted at the market interest rate … it is quite another to say that individuals of future generations own what current individuals now think is theirs. If individuals of future generations are wealthier than we are, it would be a redistribution from the poor to the rich. Among Mitchell’s economic errors is the claim that an individual’s utility maximization leads to a situation where “the horizon of my concerns extends no further than the horizon of my own life or the duration of my desires.” As a matter of fact, many people spend money on their children and accumulate capital to leave an inheritance, sometimes to charities. It is, of course, not true that the rate at which an individual discounts the future is close to infinity. Moreover, the owner of capital who wants to consume it does that by selling it to another individual whose discount rate is lower. When an impatient owner wants to consume the future returns of his capital now, he merely transfers it to a new owner. In other words, from all we know about our world, the market is the best possible steward. Nobody burns downs a forest he owns, which means a forest that he may sell, if it has a positive market value—that is, if it is expected to yield returns that someone in the future is likely to want. We could argue that humans are ultimately the stewards of God’s creation, as Mitchell is also tempted to believe. This line of thought would lead us to theological issue whose relevance for the study of society is not immediately obvious. Why would God need stewards? Is he not powerful enough to take care of his creation? In order to do what with it—especially toward the end, we might add? It is true that many humans who have some idea or intuition of their little place in time and space are aesthetically or sentimentally attached to, and intellectually intrigued by, the universe around them. Many have children and a potentially very long descendance (Et nati natorum, et qui nascentur ab illis, that is, “And the children of his children, and those who will be born from them,” as Virgil wrote so poetically in Aeneid), which binds them to the future. But how could that make you or I a general steward in any practical sense? Anyway, why would God prefer, if this verb applies, coercion and violence over voluntary social relations and the market? (21 COMMENTS)

I’ve been at odds with many people on the right, many on the left, and many in the approximate center for some time now. But various things I’ve learned have convinced me that many of them were right and I was wrong. Here are some. Bomb fentanyl factories in Mexico I’ve run into a number of people who want the U.S. government to bomb fentanyl factories in Mexico. Although I haven’t written about it, I’ve opposed this on both moral and practical grounds. But I’m now convinced that the people who produce fentanyl are bad people even if they’re producing for good consumers who want it. And I think the history of U.S. foreign policy shows that bombing people in other countries is highly effective and has few negative unintended consequences. Impose tougher sanctions on Iran Earlier this week, I argued that economic sanctions on Iran harm a lot of normal, non-political Iranians. I still believe that. But I’ve now come to the view that such sanctions are justified because Iranians have a choice to overthrow their government. If they haven’t done so, that’s their problem. I am still struggling, though, with one of the apparent implications of my new view: when our government kills tens of thousands of innocent people in other countries, as, by the way, the Iranian government hasn’t done to us, are people in those other countries justified in getting their governments to prohibit trade with us even if it means that we go without needed goods? Tax the rich more to make them pay their fair share Even though the rich, at least as defined by high income, pay a higher percent of their income in taxes than the rest of us, they should be taxed even more. They’re not paying their fair share because a lot of their income is based on theft from the rest of us. My source on this is that noted 19th century French economist Honoré de Balzac, who noted wisely that “Behind every great fortune lies a great crime.” Along with Thomas Piketty, I’m sure he studied the data carefully before reaching that conclusion. Ban Tik Tok Many people today advocate banning Tik Tok because of their fear that it collects data from users and sends it to China’s government. And the Chinese government will almost certainly use this data against us and can do more harm to us with these data than the U.S. government is likely to do to us with the data it collects. So ban Tik Tok. And since we also have reason to think that various federal agencies are following us on Twitter and Facebook, ban Twitter and Facebook while we’re at it. Bring back manufacturing jobs While it’s true that real manufacturing output in the United States is only 5% below its 2007 peak, the downside is that the number of manufacturing jobs in June 2019 was a whopping 35 percent below its peak in June 1979. We need more manufacturing jobs because manufacturing was one of the main contributors to the U.S. middle class. So the U.S. government should impose 10 to 20% tariff rates on all imports of manufactured goods. Doing so would cause both manufacturing output and manufacturing jobs will increase. Tyler Cowen and the Great Barrington Declaration I was fairly harsh in my treatment of Tyler Cowen in 2020 (here, here, here, and here) for what seemed to be his lack of concern for people who suffered from extensive lockdowns. He was very critical of Jay Bhattacharya and of the Great Barrington Declaration that Jay helped write. It came out later that one of the reasons Tyler was critical was that the American Institute of Economic Research (AIER), the place where the GBD was written, employed Jeffrey Tucker at the time. While it’s true that Tucker was neither author nor editor of the GBD, his presence at AIER when the GBD was written makes the GBD suspect. I’ve really come around to the view that guilt by association and, especially, guilt by distant association, is more appropriate than I once believed it to be. For more on how I’ve changed my mind in the past, see this. (0 COMMENTS)

I’ve written before about finding the ideas of economics in works of fiction. I’ve also described how I find F. A. Hayek’s distinction between law and legislation to be a key insight in understanding how the world works. In this system, legislation is the written, articulated, deliberately constructed rule book, while law is the unwritten, evolved, unarticulated (but not inarticulate!), tacitly understood rules which guide behavior. So are there any examples of this distinction to be found in fiction? Delightfully, yes. Leo Tolstoy wrote about it well in his novel War and Peace. He describes a scene where a young lieutenant, Boris, is coming to speak to Prince Andrei, who is the son of a famous general and serving as a captain in the army. Tolstoy writes: When he entered, Prince Andrei, his eyes drooping contemptuously (with that peculiar expression of polite wariness which plainly says ‘if it were not my duty I would not talk to you for a moment’), was listening to an old Russian general with decorations, who stood very erect, almost on tiptop, with a soldier’s obsequious expression on his purple face, reporting something. “Very well, then, be so good as to wait,” said Prince Andrei to the general in Russian, speaking with the French intonation he affected when he wished to speak contemptuously, and noting Boris, Prince Andrei, paying no more heed to the general who ran after him imploring him to hear something more, nodded and turned to him with a cheerful smile. At that moment Boris clearly realized what he had before surmised, that in the army, besides the subordination and the discipline prescribed in the military code, which he and the others knew in the regiment, there was another, more important system, which made this tight-laced, purple-faced general wait respectfully while Captain Prince Andrei for his own pleasure chose to chat with Lieutenant Drubetskoy. More than ever Boris resolved to serve in the future not according to the written code, but under this unwritten law. He felt now that merely by having been recommended to Prince Andrei he had already risen above the general who at the front had the power to annihilate him, a mere lieutenant of the Guards. Here, in discovering the existence of this “other, more important system,” Boris was discovering how the unwritten law of the military was different from the written legislation found in official rules and regulations. The law wasn’t something that could be looked up in a book, and it wasn’t ever explicitly described or even fully understood by everyone. And the law had a flexibility and evolving character to it which the official regulations lacked. Boris realized that the best way forward for him was to act in accordance with the unwritten law, rather than the written legislation. Having spent nearly a decade in the Marine Corps, this definitely reflects my experience. As you gain experience in the military, you start to recognize the difference between what the regulations say, and how things are actually done. A common source of amusement was laughing at the expense of “boots” (a moniker usually signifying someone fresh out of boot camp with no real experience) who still do everything “by the numbers” – that is, who do everything according to the official rules and regulations. When you come out of boot camp, you’ve had these rules and regulations drilled into your head, and it’s probably not an exaggeration to say nobody knows the official rules better or more thoroughly than someone freshly graduated from boot camp. And this is also why boots were viewed as being comically ignorant – because all they knew were the written rules, which in reality meant they knew nothing. To very badly paraphrase John Stuart Mill, he who knows only the official rules of a system knows little of that. Of course, this isn’t unique to the military. In every job I’ve had since then, there have always been unwritten rules permeating the background. Learning and understanding those rules have always proved crucial to being successful. Chances are you, dear reader, have also noticed something similar in your experiences as well. If so, do share some examples in the comments – it’s always fascinating to be able to see what’s behind the veil.   (0 COMMENTS)

As you may know, I’ve long advocated the abolition of federal deposit insurance. I believe that a free market would provide people with safe places to store wealth, such as narrow banks and MMMFs that invest in T-bills. But my proposal is not politically feasible, at least for the foreseeable future.Josh Hendrickson has a post entitled: How Can We Align the Interests of Bank Shareholders with Depositors? It addresses moral hazard in a way that seems more politically feasible than abolishing FDIC: This raises a natural question. If shareholders prefer more volatile assets and depositors prefer less volatile assets, how can the preferences of depositors and shareholders be aligned to avoid the insolvency risk just described?Historically, shareholders of banks were subject to multiple liability. The most common version of this seems to have been double liability. The way that this worked is that a shareholder would buy X dollars worth of stock in the bank. If the bank become insolvent, not only did the shareholder lose his X dollars, but the shareholder was also responsible for compensating depositors using up to X additional dollars of the shareholder’s own personal wealth. This is referred to as double liability since a shareholder investing X dollars in the bank would have a maximum loss of 2X dollars.It is easy to see how this sort of arrangement would help to navigate the conflicting visions of depositors and shareholders with regards to what banks should do. Multiple liability aligns the financial incentives of the shareholders with those of the depositors by making shareholders responsible for depositor losses. I like that idea.  I’m no expert on banking, but what about simply requiring people (and institutions) that purchase bank stock to make and hold deposits in the bank that are equal to the size of their equity purchase.  If you buy $1 million in Republic Bank stock, you must also deposit $1 million into Republic Bank and hold it there until you sell your stock.  In that case, the FDIC could continue insuring ordinary deposits, but these special deposits of bank shareholders would be uninsured.  (Shareholders could hold other insured deposits, apart for these uninsured accounts.)   From the shareholder perspective, this would double the cost of a bank failure, and reduce the incentive to take excessive risks.  It’s also an approach that utilizes market forces.  When it comes to regulation, bureaucrats will never be able to anticipate all of the different ways that a bank might screw up.  In this proposal, the market is automatically moving banks closer to alignment with uninsured depositors. PS.  This picture shows the FDIC headquarters.  Ironically, my old employer (Mercatus Center) is right next door.) (0 COMMENTS)

Is it better to have more or less population in your country and the world? I ask the question in a short article in the Summer issue of Regulation. I review a few economic and philosophical arguments on both sides of the debate. On the one hand, we have known a certain type of currently recycled environmental argument: In his 1968 book The Population Bomb, Stanford biologist Paul Ehrlich warned that an exploding world population was hitting resource constraints and that, within a decade, food and water scarcity would result in a billion or more people starving to death. Governments, he opined, should work toward an optimal world population of 1.5 billion. … In 1965, the New Republic announced that the “world population has passed food supply,” and that world hunger would be “the single most important fact in the final third of the 20th Century.” On the other hand, I dismiss is the utilitarian claim that a larger population is better because it means more “utility” (in the economic sense). One of my replies is follows the very interesting article of The Economist on “population ethics”: A non‐​existent individual cannot be included in any utility calculus because there is no “he” (or “she”) to include. Even if no utility calculus is possible, however, political-economy suggests a moral presumption that a larger population is beneficial to most individuals: It is a good guess that the more numerous is mankind, the larger the opportunities for beneficial exchange, which includes all sorts of voluntary relations between individuals. At any rate, there is no reason to believe that the topic should be a political matter: There is no reason to believe that the size of mankind should be the province of collective choices—which are, in practice, government choices. … Like in so many other areas, economics (albeit with some minimal value judgements of the sort “live and let live”) suggests that a superior alternative is usually available: individual choices in a general context of liberty. Let each potential parent decide, or agree on, what will be the number of his or her own children. These individual choices should determine the number of humans, instead of a certain group of individuals “collectively” deciding how many children families should have. (0 COMMENTS)

In 1980, Margaret Thatcher’s Conservative government passed its famous Housing Act. This gave five million council house tenants in England and Wales the ‘Right to Buy’ their house from their local authority at a discount reflecting rent previously paid. For Thatcher, it was the perfect mix of ideological and practical politics. It made ‘public’ assets private with the handy consequence that owners of their own properties were more likely to vote Conservative than were tenants of government owned properties. Proposing the bill, Environment Secretary Michael Heseltine said it “lays the foundations for one of the most important social revolutions of this century”. Indeed, 1982 saw 200,000 council houses sold to their tenants and by 1987, more than 1,000,000 had been sold. Home ownership grew from 55% of the population in 1980 to 67% by the time Thatcher left office in 1990. The Act was not universally popular; indeed, it remains controversial. At the time of its passage, Labour Shadow Cabinet member Gerald Kaufman said it would “not provide a single new home and [would] deprive many homeless people or families living in tower blocks from getting suitable accommodation”. It remains an article of faith on the British left that the high cost of housing in Britain today is, in not inconsiderable degree, a result of the Housing Act. In his 2014 book Engels’ England, Matthew Engel meets a Labour councillor who identifies the “major issue” facing his region as “Council housing”: People come to me and say, “What about my son and daughter? They can’t get on the housing list.” So I say, “You bought your council house, didn’t you? That’s why. We’ve hardly got any.”’ Of course, it has never been clear how the Act – which simply transferred the ownership of some portion of Britain’s existing housing stock from government to the individuals living in it – reduced the overall stock of housing available. In Engel’s Labour councillor’s case, the fact that those parents bought their council house is not the reason it is unavailable for their children to live in: it is unavailable for them to live in because the parents are still living in it. Even if the house was still owned by the council, the parents would still be living in it and it would still be unavailable for the children to live in. But that shortage of housing is a definite social, economic, and political problem. A new report by the Centre For Cities titled The housebuilding crisis: The UK’s 4 million missing homes claims that: Compared to the average European country, Britain today has a backlog of 4.3 million homes that are missing from the national housing market as they were never built. Why? The origins of the crisis lie in one of the two dramatic changes to housing policy in the United Kingdom that occurred just after the Second World War. One was that council housing became much more important, accounting for roughly half of all new homes built in the post-war period. The other was the introduction of a new discretionary planning system in England with the Town and Country Planning Act 1947, which continues to form the basis for planning across the UK in the present day. These two changes are at the centre of political debate on the housing crisis today, with both put forward as competing explanations of Britain’s severe housing shortage. One explanation is focused on the introduction of Right to Buy and the subsequent decline of council housebuilding in the 1980s. The other explanation emphasises that England’s discretionary planning system reduces the supply of new homes through its case-by-case decision-making process for granting planning permission. The report’s authors, “Using newly available data on housing,” find “that Britain’s housing shortage began at the beginning of the post-war period, not at its conclusion.” In other words, it is Britain’s discretionary planning system which is to blame for a house not being built for those two kids to live in, not the Housing Act which enabled their parents to buy a place they already inhabited. This finding has major policy implications. The solution usually offered to Britain’s housing crisis is a vast program of council house – or ‘social housing’ – construction. On the contrary, the authors note, what is needed is: “Replacing the discretionary planning system with a new rules-based, flexible zoning system… [and] Increasing private sector housebuilding…” Britain’s housing crisis is government made. Not by the Housing Act, which merely transferred ownership of some of the existing housing stock, but by the Town and Country Planning Act which made it incredibly difficult to expand that stock. The market should be allowed to help clean up the mess made by government.   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)