A Liberty Classic Book Review of The Reason of Rules: Constitutional Political Economy, by Geoffrey Brennan and James M. Buchanan.1 Geoffrey Brennan and James Buchanan’s The Reason of Rules is remarkable. It is an important book, and the questions that the authors wrestle with are massive. When so much academic work feels as though it is answering smaller questions in more precise ways, coming across something so ambitious is inspiring. The Reason of Rules does not present a simple argument. Because of this, there is much in it that I cannot cover. I will therefore dispense with some public choice orthodoxies—the defenses of Homo economicus, the importance of behavioral symmetry, and the like. Instead, I will highlight what I see as the three pillars of the book: why rules matter, how Brennan and Buchanan evaluate the “goodness” of rules, and what the prospects are for changing constitutional rules. Reasons for Rules Life is better together. By taking advantage of specialization and the division of labor2, the wealth generated by modern economies defies comprehension. But this level of prosperity is not the default state for humanity. The reason we can achieve such high standards of living is because of the market rules we follow. The study of rules is the core pre-occupation of Brennan and Buchanan—rules are in the book’s title, after all. But Brennan and Buchanan understand what many social scientists seem to miss. Rules are not just important—they are the most important things when it comes to understanding civilization. To quote the authors: At their most fundamental level, rules find their reason in the never-ending desire of people to live together in peace and harmony, without the continuing Hobbesian war of each against all. How can social order be established and preserved? All social science and philosophy must address this question, either directly or indirectly.—The Reason of Rules, p. xv Rules matter because they allow productive interaction to occur between individuals with divergent motivations. Different rules can also lead to dramatically different outcomes—even if the individuals operating within those rules are the same. Because different rules lead to starkly different equilibria, their importance should be obvious. Yet Brennan and Buchanan are not asking social scientists to study how individuals make choices within rules. Rather, they are considering how we can decide upon the meta-rules that govern political orders. That is, their concern is about how we can choose and evaluate rules themselves—including rules about how we make rules! Thus, their topic of inquiry is not about ordinary politics. Rather, Brennan and Buchanan are thinking about rules at the constitutional level, and they encourage their readers to adopt a constitutionalist perspective. Enter the Contractarian Constitutionalism can take many forms. The conservative endorses constitutional rules because they have the weight of tradition behind them. Others may view constitutional rules as important for the protection of rights we know to be good and true. Natural rights classical liberals will see the appeal. “There is no external standard that we can use to evaluate whether the rules we have are ‘good.’ There are no political truths out here, waiting to be discovered.” The Reason of Rules eschews these approaches for a contractarian perspective3. More accurately, it is Buchanan who rejects these other viewpoints—the lengths that he takes his contractarianism to are ones that his co-author does not wholly endorse4. The contractarianism of The Reason of Rules is rooted in one assumption that Buchanan cannot deviate from: individuals are the ultimate sources of value when it comes to rules. There is no external standard that we can use to evaluate whether the rules we have are “good.” There are no political truths out here, waiting to be discovered. This assertion is why politics as exchange is so important for constitutional political economy. Economics majors are taught every year that we know a trade between two individuals is mutually beneficial because both parties agree to it. Constitutional political economy takes this logic and applies it to the selection of rules that govern group behavior. Rules can be said to be beneficial if they are voluntarily agreed to by all those who live under them. Thus, unanimous agreement is indispensable in the contractarian framework. If we take Buchanan’s individualist and exchange points seriously, we have no other option. Unless constitutional rules could have been agreed upon unanimously, the contractarianism of The Reason of Rules leaves us unable to evaluate their goodness or badness. This unanimity requirement—even if applied conceptually—may seem hopelessly naïve, but it is here where the distinction between choices among rules rather than choices about alternatives within rules comes to the fore. When deciding on different sets of rules, there is inherent uncertainty in knowing the effects these rules will have on one’s distributional position. Because of this uncertainty, the scope for agreement on rules is substantially increased. Whether this is enough to salvage the reliance on unanimity is an open question. Rules in Real Life Brennan and Buchanan start their practical analysis rules at the individual level. Individuals may want their behavior to be bound by rules due to temporal difficulties that arise with choice. Decisions made in one period will undoubtedly influence the choices we make in subsequent periods, and when one introduces the idea of preferences about preferences, the importance of rules becomes obvious. Consider the following example. I am a notorious night owl. I would like to be the kind of person who wakes up early to write, so I implement a rule: no laptop after 10:00 PM. If the rule operates correctly, my behavior is constrained: night owl Scott cannot spoil the plans of early-riser Scott. Here, the rule solves a temporal inconsistency. The case for rules is even stronger in collective choice. As Brennan and Buchanan argue, rules become more important when individuals know that they are not the only ones acting. When the unpredictability of others is added to the mix, the value of constraining rules rises considerably. Constraints on what others can do serve to guard against adverse outcomes. Stymying the tyranny of the majority comes to mind. The lack of rules can explain some of the “failures” we see in modern democracies. Chapters 6 and 8 examine some of these. Take, for instance, the high levels of inflation the United States experienced in the 1970s. Economics lent credence to the idea that unanticipated inflation could cause a temporary bump in employment. However, this increase was just that—temporary. Economists recognized that inflationary stimulus was not a route to higher rates of employment. When the economic costs of inflation are accounted for, reductions in inflation may be desirable. But from the perspective of politicians, this may be a non-starter. Reductions in inflation would be accompanied by temporary increases in unemployment. But while these temporary increases may eventually dissipate, this is cold comfort to the political decision-maker—especially when their competitors may promise inflationary policies that lead to temporary boosts in employment! The temporal difficulty raises its head again: given the short-termism of politics, no politician or decision-maker seeking to keep their office or win re-appointment would support the policies needed to reduce inflation. Brennan and Buchanan propose that the only way out of this mess is a rule-based one. If discretionary power can be taken off the table, then political decision-makers may feel more comfortable taking the long-term perspective regarding inflation. If they cannot be undercut in the future by competitors using re-inflation as a tactic, the dilemma appears to be solved. Rules are a way this can be done. Bullets to Bite The Reason of Rules is not just an important book because it advances our academic understanding of rules. Brennan and Buchanan take their arguments and try to show how they can cash out in real improvements for those outside the ivory tower. This is most clear in the final chapter of the book, “Is Constitutional Revolution Possible in Democracy”? As they write, “We do not live in the best of all possible constitutional worlds, and here we examine the possibility of escaping into a different one” (p. 150). It is easy to guess what sorts of improvements Brennan and Buchanan can imagine—their discussions in chapters 6 and 8 come to mind. But what is extraordinary is their commitment to the contractarian framework. Brennan and Buchanan do not claim that they know what the right constitutional rules are. Rather, they see their role as only identifying proposals that can secure general agreement. Once again, agreement by citizens in a democratic society is the only evaluative standard they will accept. But this insistence may take their analysis to some uncomfortable places. As rules change, individuals will be able to predict how their situations will be affected. John Rawls’ veil of ignorance5, or even the weaker veil of uncertainty6, does not fully obtain when the rule-making rubber hits the road. If individuals see themselves as harmed by changes in the rules, they will not consent to these changes. The set of rule changes that do not result in some party or parties suffering distributional losses is likely a null one, so the prospects for rule changes may seem dim. But all is not lost for the contractarian—”politics as exchange” can come to the rescue. If mutually beneficial rule changes exist, there must be some constellation of side payments or compromises that can compensate those who will be harmed. Essentially, finding ways to pay off the “losers” from rule changes can buy their agreement, allowing constitutional improvements to be made. This involves biting some very hard bullets. Being willing to negotiate with those who are harmed by constitutional changes implies treating their current claims as if they were legitimate, and in the real world, this is unlikely to be the case. Brennan and Buchanan give the hypothetical example of land reform. One can imagine a situation where changes to land holdings would have financial benefits, but to bring these changes about, current landowners who will give up their holdings must be compensated. If those landowners had acquired their property in unjust ways—forcible confiscation, for example—the contractarian method would advocate for paying off those who had acquired things through ill means! For many of us, this is untenable. Contractarian agreement is unlikely to be reached, and other “solutions”—such as the forcible taking of the land—may be advocated for. Reasons for Fear This means it may be tempting to discard the contractarian enterprise. But doing so invites pitfalls. If the unanimity standard is abandoned, something else must replace it. Alternatives are easy to find: external standards of rightness or wrongness are plentiful. However, accepting something akin to a political “truth” as the way to judge constitutional rules may have deleterious consequences for democracy. If we know the “right” answers, what is the point of deliberation? The appeal of running roughshod over our fellows to implement what we “know” to be the right set of rules may be too tempting to resist. Second, the contractarian approach to rules can help minimize the risk of Hobbesian war. True, Hobbes deploys the state of nature as an analytical foil rather than a historical reality, but if the changing of rules by discussion is off the table, then the only options available for constitutional revolution may be actual revolution or civil war. Brennan and Buchanan hint at this—if consensus cannot be reached, then violence may be the only way that things can be changed. When the devastation of such conflicts is considered, one can be forgiven for attempting to find ways to avoid them at all costs. To the extent that the contractarian lens gives us a bias for discussion rather than drastic action, there may be much to recommend—even for those who are not willing to fully abandon external value standards. Reasons for Hope The Reason of Rules is the definitive statement on constitutional political economy. But more importantly, the book offers communities—not just social scientists—tools to help us live even better together. Yes, the political economist has disciplinary training that can help them predict the functioning of rules, but this does not make them authorities on what the right rules are. That judgment must lie with all citizens. Once again, agreement is the standard by which we judge constitutional rules. For more on these topics, see A Conversation with James M. Buchanan, Parts I and II. Intellectual Portrait Series. Introduction, by Amy Willis. “James Buchanan: An Assessment,” by Geoffrey Brennan, Peter J. Boettke, Steven Horwitz, Loren E. Lomasky, Edward Peter Stringham, and Viktor J. Vanberg. Online Library of Liberty, March 2013. Don Boudreaux on Public Choice. EconTalk. “Constitutional Democracy: Is Democracy Limited by Constitutional Rules?” by Pierre Lemieux. Library of Economics and Liberty, January 2, 2023. Brennan and Buchanan do not offer a counsel of despair. The continued existence of government failures indicates there are still benefits to be had from examining the functioning of alternate rules. This means that The Reason of Rules still has relevance today. The challenge of democratic constitutional revolution is still waiting to be picked up by today’s political economists. But how we go about this “revolution” is crucial. The most important insight in The Reason of Rules may be the continued insistence that knowledge of “optimal” policies is denied to even the best of economists. The rule changes we make are only good so far as they are endorsed by our fellow citizens. Democratic decision-making is therefore not just important for normative reasons. It may be a methodological necessity. Economists who do not truck with this contractarian “democracy”—at least at the level of constitutional rules—will do so at their own peril. Footnotes [1] Geoffrey Brennan and James M. Buchanan, The Reason of Rules: Constitutional Political Economy (Cambridge University Press, 1985; Liberty Fund, 2000), Library of Economics and Liberty. Also available at the Liberty Fund Book Catalog: https://about.libertyfund.org/books/the-reason-of-rules/. [2] Division of Labor and Specialization. Econlib Guide. [3] Cudd, Ann and Seena Eftekhari, “Contractarianism,” The Stanford Encyclopedia of Philosophy (Winter 2021 Edition), Edward N. Zalta (ed.) [4] See footnote 2 on page 43, where Brennan registers his reservations. [5] Rawls, J. 1971 [1999]. A Theory of Justice, pg. 11. Cambridge; Harvard University Press. [6] Buchanan, J. M. and Tullock, G. 1962 [1999]. The Calculus of Consent, pgs. 78-79. Indianapolis: Liberty Fund. *M. Scott King earned his PhD in Economics at George Mason University in 2021, and is a graduate fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics. He is currently the Probasco Post-Doctoral Research Fellow with the Gary W. Rollins College of Business at the University of Tennessee at Chattanooga. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Book Review of What We Owe the Future, by William MacAskill.1 An issue that has long divided scholars is the question of how much weight to give to the interests of future generations, especially when making decisions of significant public importance. On one side of this issue there have been those like the University of Chicago law professor Eric Posner, who essentially argue that future citizens should receive no weight in decisions made today. In a democracy, it is argued, only the interests of currently living, voting citizens are considered. They can, if they so choose, take the welfare of future citizens into account, but it is their right not to do so as well. On the other hand, there are those, like the late influential philosopher Derek Parfit, who take the view that future citizens should receive as much weight as those alive today. Future generations are not around to express their preferences to us, and we should do our best to accommodate what we think they might want or care about. Moreover, the time period in which a person lives does not dictate their degree of humanity, so granting them anything other than equal weight amounts to an injustice. Among philosophers today, the Parfitian view appears common. The Oxford philosopher John Broome takes a similar position, arguing we should not “discount the future” in a manner akin to discounting cash flows in accounting. This perspective remains rare among economists, however, who tend to hold views much closer to the Posner position, although not always for the same reasons. Economists tend to view discounting in social policy as a natural extension of the necessity to discount in financial analysis. They are taught to respect individuals’ preferences, too. Absent market failures, these preferences should result in rationally self-interested behavior that leads to an efficient allocation of resources, according to standard textbook treatments. Therefore, because many people exhibit a natural time preference, analysts should incorporate those preferences into their analysis. It is under this backdrop of disagreement that Oxford philosopher Will MacAskill has released an important book, What We Owe the Future, which makes an unabashed case for “longtermism.” Longtermism is a philosophy that advocates taking an extremely long-run view on ethical questions and for placing great weight on the interests of future people. Aside from being a professor, MacAskill is a leader of the Effective Altruism movement, which argues for evidence-based philanthropy, and is also a co-founder of the nonprofit 80,000 Hours, which offers advice to young people about how to best use their careers for good. What We Owe the Future is the clearest, best-argued case for why we should care about future generations yet made. Already, it is making waves in the media, and its message is likely to resonate with the brightest young people—those who yearn to make a difference with their lives. We should take this book very, very seriously. At the same time, there is lots to disagree with in it, especially for those who value individual liberty and free markets. MacAskill is an advocate for caution. He argues we should be spending much more time—and presumably money—trying to make new technologies safer. In that sense he is an advocate, not of progress, but for slowing down progress in the name of safety. This is especially true with respect to artificial intelligence, but AI is far from the only technology he is concerned about. And while he seems to support deregulation in some areas, for example by allowing human challenge trials to test new medicines, I suspect he would like to see much more regulation of other technologies. Even so, MacAskill’s new book is a breath of fresh air. It does not feel arcane or overly academic, and it does not get mired in technical debates, like those typically found in academic discussions of discounting. Rather than pick fights with economists, he smartly sticks to philosophy, which is what he does best. This is the kind of book that has the potential to change people’s minds, even if it doesn’t have that impact on everyone. What We Owe the Future begins by laying out the philosophical case for treating future citizens equally to ourselves. MacAskill recites a famous example from Parfit about a girl walking in the forest who cuts her foot on a piece of glass. Should it matter when this event happens—today or 100 years from now—if the pain experienced is the same? MacAskill believes, like Parfit, that the timing of the event is irrelevant from a moral point of view. MacAskill goes on to explain how value systems in society can become locked in, and how this can work in the direction of either good or evil. Slavery was a horrific institution that was accepted for many thousands of years. Even some of the greatest minds in human history accepted the institution of slavery, highlighting the hold that deeply engrained value systems have on our thinking. MacAskill credits the abolitionist movement with bending society’s values towards justice, demonstrating that moral progress is indeed possible in this world, even if it is very hard to achieve. MacAskill argues that the arrival of artificial general intelligence (AGI)—technology that will enable machines to perform tasks as well or better than humans—will create a scenario whereby there is another potential for a long-run lock-in of values. Whoever designs AGI at its inception will determine how the technology responds in situations with important ethical implications. Once these machines are let out into the world, it will be very hard to contain or change them since, by definition, they will be smarter than most people. Experts disagree on when AGI will arrive, but some believe it could be as soon as the next few decades or even the next few years. If this is the case, MacAskill believes we live at a particularly important moment in human history. Much of What We Owe the Future centers around catastrophic risks, an issue that receives considerable attention in the longtermist community. Risks associated with AGI, runaway global warming, asteroid collisions, pandemics (including from the use of biological weapons), and nuclear war are explored at length. These are risks that could cause catastrophes that plausibly lead to the annihilation of the human race or to a permanent return to pre-industrial standards of living. MacAskill argues for taking a careful, analytic approach to potentially dangerous new technologies, in some cases delaying their use and implementation for extended periods of time or indefinitely until technologies are understood well enough so they can be controlled. The book also includes a lengthy section on animal rights, including a fascinating discussion of ways to account for animal wellbeing in a utilitarian framework. There is a chapter on population ethics, which involves questions about the optimal human population size in a society. It is perhaps the best introduction to this topic so far written. Unanswered questions MacAskill makes a lucid and persuasive case for longtermism. Where the book could have been stronger is with respect to practical application. The ethics of longtermism are clear and—to be honest—fairly anodyne. Making the philosophical case for discriminating against future generations, or indeed any class of people, would have been harder. In fact, anyone who even vaguely believes in equality could be forgiven for walking away from this book thinking they are a longtermist. But this may not actually be the case. MacAskill himself lives an extremely ascetic life, giving much of his money to charity and various causes. As a utilitarian, he apparently believes this is consistent with increasing wellbeing in society. I give him credit for doing what he thinks is right, but his lifestyle is also very much outside the mainstream of societal norms. It’s much easier to preach longtermism than it is to practice it, and even if MacAskill has the psychological wherewithal to live this way, most people will not. In fact, the demands a longtermist philosophy puts on society are one of the primary reasons relatively few economists hold the view that all generations should be treated equally, for example in a cost-benefit analysis. The economist Kenneth Arrow is probably most famous for this view, having argued that fairer treatment of future generations could require investing two-thirds or more of current national income, which seems devilishly high to many people. For this reason, it’s not even obvious that giving away most of one’s money to charity is the right approach under a longtermist view. Many of the charities associated with MacAskill and the effective altruism movement, quite admirably, give resources to the poor in developing countries. This is consistent with a utilitarianism that emphasizes present wellbeing, but it is probably not consistent with longtermism. “As compelling as it is to provide malaria bed nets to poor children in Africa, investing most of one’s spare income in financial markets may technically be the more longtermist approach.” As compelling as it is to provide malaria bed nets to poor children in Africa, investing most of one’s spare income in financial markets may technically be the more longtermist approach. The accumulation of wealth will translate into higher living standards for later generations, and probably a more technologically advanced civilization as well. Thus, an ascetic lifestyle may still be warranted if one is to be a longtermist, but the aim of sacrificing is not to help those barely living at subsistence level today. Instead, it becomes to accumulate wealth to leave behind after we are gone. To be fair, the 80,000 Hour organization MacAskill is involved in does endorse a philosophy called “earning to give,” which involves spending the early part of one’s career making a lot of money and then donating most of one’s wealth to philanthropic causes later in life. But even if one waits to give away their money, there will still be the opportunity cost of giving it away in that one likely foregoes even higher returns in financial markets. There may be ways to combine the two goals of helping the poor and making society richer, but very often they will be at odds with one another. Despite these philosophical inconsistencies, few would have a problem with MacAskill’s charity. Large parts of his giving just don’t seem to be motivated by longtermism and may even be at odds with it. His precautionary approach to dealing with catastrophic risks is more philosophically consistent, but still problematic in some ways. He is willing to wait extremely long periods of time—potentially sacrificing opportunities and wellbeing for many generations of individuals—so that society can get a handle on potentially dangerous technologies. Perhaps such an approach could prevent widespread catastrophe, but how does one go about deciding which risks to focus on? Philosophers like Nick Bostrom have come up with arguments for how paperclips could destroy the world through out-of-control artificial intelligence. The example is meant to be illustrative, but it highlights how there is almost no technology that is truly safe. Moreover, some dangerous technologies can be used for good. Should the invention of nuclear weapons have been delayed if the alternative had been the allies losing World War II? And what about imagined risks that aren’t real, such as those associated with genetically modified foods or vaccines? Blocking these technologies would entail substantial costs to humanity for little or no benefit. Another problem we face in society today is policy paralysis, as evidenced by our inability to build infrastructure, as well as a slowdown in global innovation. What society needs more than anything now is a call to action, not a call for more deliberating. MacAskill runs the risk of providing intellectual firepower for further complacency and stagnation. The question of resilience is also barely mentioned in the book. As Nassim Taleb explained in his book Anti-Fragile: Things That Gain from Disorder, a culture that grows too accustomed to avoiding risk may never develop the skills needed to cope with it once it eventually arises. Conclusion For more on these topics, see Charity, by Russell Roberts. Concise Encyclopedia of Economics. Will MacAskill on Longtermism and What We Owe the Future. EconTalk. William MacAskill on Effective Altruism and Doing Good Better. EconTalk. Nassim Nicholas Taleb on Antifragility. EconTalk. “What We Owe the Future” is an outstanding achievement. Anyone interested in questions of intergenerational justice, existential risks, artificial intelligence, and animal rights should read it. Indeed, the book runs the gamut as far as cutting-edge philosophical questions are concerned. It’s a fascinating introduction to these topics, and I suspect many readers will find MacAskill’s answers not only convincing, but inspirational. However, there remain reasons to be skeptical that the philosophical system advocated for in this book is the best prescription for society to follow. The book sometimes reads like promotional material to lure smart, ambitious young people into the longtermist movement. It may even succeed in doing so. But I wish MacAskill were more straightforward with these readers about the sacrifices his philosophical system entails. Whether we can meet the high standard he sets for us is an open question. On the other hand, for the longtermist, we have plenty of time to wait for the answer. References Parfit, Derek. Reasons and Persons, Oxford University Press, 1984. Posner, Eric A. “Agencies Should Ignore Distant-Future Generations,” University of Chicago Law School, Chicago Unbound. Originally published in The University of Chicago Law Review, Vol. 74, No. 1, Symposium: Intergenerational Equity and Discounting (Winter, 2007), pp. 139-143. Footnotes [1] William MacAskill, What We Owe the Future. * James Broughel is As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

… [this book] originated, strange to say, as a study of the history of the international bond market. I came to realize in the course of my research, however, that the bond between creditor and debtor was only one of many bonds I needed to consider; and that in many ways the bond market was interesting precisely because it concerned itself with these other bonds as well: above all, the usually implicit contractual bonds between the ruler and ruled, the elected and the electors, but also bonds—more often (though not always) contractual—between states. ——Niall Ferguson, The Cash Nexus: Money and Power in the Modern World, 1700-20001 p. 20 Niall Ferguson’s The Cash Nexus, published in 2001, convinced me that the way that economists approach central banking, monetary policy, and financial regulation was incomplete and misleading. I came away from the book thinking that all elements of financial policy are geared toward the goal of enabling the government to allocate credit to its preferred uses, especially its own spending. The focus of government on credit allocation receives no attention in economics textbooks. Ignoring this fundamental purpose of financial policy, economists act as if central banks exist solely to conduct monetary policy for stabilization purpose. The textbooks, if they do not completely overlook financial regulation, mention it in a hand-wavy way as helping to keep the financial system sound. In an alternate history of economic thought, the paradigm that emerges from The Cash Nexus would have kicked off a substantial research program in financial policy. This research program might have been sufficiently fruitful that the 2022 Nobel Prize in economics would have gone to its leading scholars and perhaps Niall Ferguson as well. Instead, that honor went to Ben Bernanke, Douglas Diamond, and Philip Dybvig, whose insights I regard as pedestrian in comparison. But in fact, there was no such follow-on research program. Ferguson’s framework was never filled in. Had economists absorbed Ferguson’s approach to thinking about financial policy, the financial crisis of 2008 might not have caught them with their pants down. Also, we might have arrived at a different interpretation of the policy response, especially the “quantitative easing” undertaken by the Fed. We might have a better understanding of the strengths and weaknesses of our present financial situation. A Product of Its Time The Cash Nexus takes a historical and institutional view of the development of government finance and central banking. Even as I find its approach relevant for understanding government involvement in financial markets today, the current context is quite different from what Ferguson would have foreseen. To understand why, I think it helps to see the book as a product of its time. Although its copyright date is 2001, The Cash Nexus evidently was put to bed early in 2000. In chapter 10, “Bubble and Busts: Stock Markets in the Long Run,” the latest data point given is from February 2000. The book makes no mention of the market meltdown that got underway with the collapse of the “dotcom” stocks, beginning in March of 2000. This crash would have been a very relevant event to include in the book had the publication process allowed for it. Other events that took place after the book’s publication include: • the terrorist attacks of 9/11/2001 • the invasions of Afghanistan and Iraq • the widespread acceptance of the euro (it was launched in 1999, but it was regarded as a bold experiment, not necessarily destined to succeed. Ferguson refers to it as “the EMU,” for European Monetary Unit, which was how this novel currency was known at the time.) • the financial crisis of 2008 and the response to that crisis, including bank bailouts, the Dodd-Frank legislation, and “quantitative easing.” • the protest movements of Occupy Wall Street and the Tea Party • the populist shocks in 2016 of Donald Trump’s election and the vote for Brexit • the pandemic starting in early 2020 and the fiscal and monetary response • Russia’s invasion of Ukraine and the imposition of economic sanctions by the West in response • movements by the Trump and Biden Administrations in the direction of “decoupling” the American economy from China • a surge in inflation in 2022, leading the Fed to sharply raise interest rates Financial considerations, and what Ferguson calls “the usually implicit contractual bonds between the ruler and the ruled,” were heavily implicated in all these events. But an environment of adverse shocks and reactions against globalization were not what was foreseen in 1999. Instead, 1999 might have been the peak year for the perceived triumph of capitalist democracy, which was how many people interpreted Francis Fukuyama’s End of History, published in 1992. Tony Blair, who became Britain’s Prime Minister in 1997, and Bill Clinton, who became President in 1993, represented the triumph of the elite centrist approach to political economy. Economists were praising central bank independence as the antidote to inflation. They saw a solution for economic development embodied in the “Washington consensus” of free trade, deregulation, and democratic institutions. “As of 1999, prosperity, globalization, movements toward democracy, and elite centrist politics were the norm. In that context, what Ferguson called ‘the square of power’ (tax bureaucracy, legislature, government debt, central bank) apparently had arrived at a benign equilibrium.” As of 1999, prosperity, globalization, movements toward democracy, and elite centrist politics were the norm. In that context, what Ferguson called “the square of power” (tax bureaucracy, legislature, government debt, central bank) apparently had arrived at a benign equilibrium. If The Cash Nexus did not include a clarion call to undertake new research on how governments could establish a sound financial footing, that might have been because of this sense of having reached an end state. The interesting problems appeared to be solved. During the Clinton Administration, the United States seemed capable of becoming the world’s policeman. Ferguson wrote, Under President Clinton, the aims of American foreign policy were extended beyond the defense of allied states—the number of which has increased as a result of NATO enlargement—to include the termination of civil wars in a number of politically sensitive regions, and the occasional use of military force to protect the rights of persecuted minorities in certain countries. p. 394. Although George W. Bush campaigned against this interventionist approach, and he seemed inclined to focus on domestic policy, his Presidency turned out otherwise. He will instead be remembered as the President who, in the aftermath of 9/11, initiated the invasions of Afghanistan and Iraq. President Clinton had allowed his more progressive economic proposals to be vetoed by financial markets, because of their potential adverse consequence for the interest rate on government debt. This provoked Clinton’s adviser James Carville to complain that if he could be reincarnated into a position of power, he would want to come back as the bond market. From World War Two until 1980, the ratio of federal government debt to GDP declined from about 100 percent to just 30 percent. This was largely because inflation and growth in real GDP diluted the debt/GDP ratio, even though the budget was in deficit most years. It was under President Clinton that the government budget of the United States last ran a surplus. Ferguson wrote that “The Clinton surpluses of the late 1990s have raised the prospect of substantial if not total repayment of the federal debt.” (p. 127) Ferguson was far from the only observer contemplating a future with a debt/GDP ratio of zero or less. During the debates over tax-cut proposals made by President Bush in 2001, Federal Reserve Chairman Alan Greenspan chimed in with support for the proposals. His argument was that without federal debt, monetary policy would be impossible to conduct, because it consists of buying or selling government bonds to increase or decrease the money supply, respectively. Ergo, tax cuts were needed in order to prevent the disappearance of government debt. In hindsight, this ridiculous argument came to be refuted, as under Greenspan’s successor the Fed showed that it could purchase mortgage securities just as readily as government bonds. Furthermore, no one need to have been concerned about the government paying off its debt. By now, the debt/GDP ratio has returned to World War Two levels. The twenty-first century would see new norms for conducting fiscal policy. In January 2008, Larry Summers spoke for most economists and policy makers of his generation when he said that fiscal stimulus should be “timely, targeted, and temporary.” Instead, we had fiscal blowouts in response to both the financial crisis of 2008 and the pandemic of 2020. Moreover, once those crises had passed, there seemed to be no inclination to shrink the debt tumor. The War-Making Machine Ferguson argued that throughout history states have periodically engaged in war. War requires resources. Military innovation has made war increasingly capital intensive. Therefore, the states that survived were those that were good at mobilizing resources in times of war. This meant the creation of institutions for raising funds. In order to mobilize resources, the government must be able to collect taxes. Ferguson wrote that this is best undertaken with a tax-collection bureaucracy. Tax collection requires compliance. Rulers found that compliance was easier if taxes were approved by an assembly representing constituents. In medieval times, the assemblies were composed of feudal lords. In more modern economies, the range of represented constituencies expanded, and along with it the range of those eligible to participate in electing representatives. On this view, countries became increasingly democratic in order to enable rulers to collect more taxes. Times of war require more revenue than times of peace. Governments that could borrow during wartime and repay debt afterward could be more successful in war. Ferguson argues that government’s ability to issue securities became an important factor affecting a state’s ability to wage war. Successful governments were able to come up with debt instruments and commitment mechanisms that were attractive to investors. In order to borrow during times of war, government needs large financial institutions that can underwrite its securities. Ultimately, states arrived at the idea of a central bank to ensure the stable functioning of a market for government debt. But states still needed large private underwriters. In the United States, these were known as the “primary dealers,” which purchased securities issued by the Treasury and through which the Federal Reserve Bank of New York conducted open market operations. As Ferguson pointed out, the institutions that emerged to finance war evolved to achieve other ends. Representative assemblies made states more responsive to the desires of the public, leading to the creation of the welfare state. The proportion of tax revenue dedicated to social insurance steadily increased. Over the past century, the public has come to expect government to manage the overall state of the economy. Peacetime government borrowing increased during times of recession. Central banks were tasked with raising the money supply enough to mitigate recessions without raising it too quickly to stoke inflation. Financial regulations and government backing of financial institutions were introduced in order to try to make saving and investing more secure for consumers. Recently, governments went on a spending binge to “combat the pandemic” as if they were fighting a war. When the state began to backstop financial institutions, by providing deposit insurance for example, this gave government the ability to influence the direction of investment. Regulations are used to steer capital toward purposes favored by government. Mortgage lending was an important example, and in the United States taxpayers were put at risk. The Savings & Loan Crisis As part of the New Deal, the government created the Federal Housing Administration (FHA), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Bank Board (FHLBB). The latter did not lend directly to consumers, but it provided backing to the savings and loan industry, which became the main source of mortgage funds. FHA, Fannie Mae, and the S&Ls were encouraged to offer 30-year, fixed-rate, level-payment, amortizing mortgages, in lieu of the short-term balloon mortgages that suffered widespread defaults in the 1920s and in the Great Depression. By the 1970s, the 30-year fixed-rate mortgage itself caused distress, as inflation and interest rates rose. Households were financially secure, but lenders found that their cost of funds rose while the income from outstanding mortgages stayed constant. Had their balance sheets carried assets at current market values, most S&Ls would have been bankrupt by the end of the 1970s. Government officials did their best to keep troubled institutions going. Fannie Mae, although technically bankrupt by 1982, was kept alive long enough to recover when interest rates finally declined in the latter part of the 1980s. Even though the market value of older mortgage loans held by S&Ls was barely more than half their book value, FHLBB allowed S&Ls to report as assets on their balance sheets the full book value of those loans. But losses at the S&Ls worsened, in spite of attempts by the FHLBB to keep them afloat. These attempts included the creation of the Federal Home Loan Mortgage Corporation (Freddie Mac), which helped bankrupt S&Ls maintain fictional solvency by exchanging securities for loans in portfolio without the FHLBB requiring the S&Ls to mark to market the securities on their books, which were trading at prices far below the book values used by the S&Ls. The longer that the policy of “extend and pretend” was followed, the deeper in the hole the industry fell. The end result was that Congress had to vote substantial funds for a bailout to pay off depositors at the failed savings and loans. The 2008 Financial Crisis In reaction to the S&L crisis, regulators introduced capital requirements for depository institutions (primarily banks, now that the savings and loan industry had been decimated) that used risk weights. For the riskiest types of assets permitted, including mortgage loans, the requirement was that $8 in capital had to back each $100 in assets. But other assets—including mortgage securities issued by Freddie Mac and Fannie Mae—were given lower capital requirements, and government debt was assigned the lowest capital requirement of all. For capital efficiency purposes, banks now had a strong incentive to sell to Freddie and Fannie any mortgage deemed “investment quality” by those agencies. In effect, those two government-sponsored enterprises were used to allocate capital toward mortgage loans bundled into securities. For banks, commercial lending and “non-conforming” mortgage loans were relatively disfavored by the risk-based capital regulations. In 2001, risk-based capital requirements were changed under what was called the Recourse Rule. Private investment banks, mostly on Wall Street, were given the ability to issue mortgage securities that could be given low risk weights if held by commercial banks. To do so, the securities had to be carved into “tranches” in which the portions that were the last to bear losses in case of default received AA or AAA bond ratings and were considered suitable for banks, while the remaining tranches that were the first to bear losses were held by other investors. Under the Recourse Rule, the low-risk tranches in these complex Collateralized Mortgage Obligations (CMOs) enabled banks to hold assets backed by mortgage loans that were not of investment quality (subprime loans), while enjoying the advantages of low capital requirements. Dealers that made markets in these low-risk securities were able to use them as collateral for repurchase agreements (repos), which are short-term loans that dealers use to finance their security inventories. Expanded mortgage lending fueled a boom in house prices, which collapsed in 2007. By 2008, it became evident that the risk in CMOs was much higher than the bond rating agencies had calculated. This threatened the solvency of some banks that had large mortgage security portfolios. But the most devastating impact was on securities dealers. In the repo market, even highly-rated mortgage securities became unacceptable as collateral. Most of the major investment banks could not roll over their repo loans, and they sought mergers with commercial banks, with the encouragement of regulators. Previously, investment banking had been separated from commercial banking by the Depression-era Glass-Steagall Act, but in the crisis Glass-Steagall was buried. Even so, one investment bank, Lehman Brothers, was unable to come up with a rescue partner, and its bankruptcy brought the financial crisis to a boil. The Treasury and the Fed determined that funds were needed for a large-scale financial bailout, which became known as the Troubled Asset Relief Program, or TARP. Officials sold this $800 billion bailout to the press and in turn to the public as a way to prevent a collapse of retail banking as had occurred in the 1930s. But I believe that most banks (and therefore most households) would have escaped unscathed without a bailout. Only a few of the large banks that participated heavily in the repo market were in danger. The government’s real concern, I believe, was with the dealers in mortgage securities, the largest of which were also the primary dealers in the Treasury security market. Bailout funds that went into the financial sector (some of the taxpayer largesse went to other special interests, including auto manufacturers) mostly went to the banks that absorbed the primary dealers. The government was worried about the primary dealers in its own securities, not about households’ savings accounts. After 2008, bank regulators and the Dodd-Frank financial reform act discouraged mortgage lending by imposing strict credit standards for mortgage origination. The effect was to end the favorable status of housing in capital allocation. Households found it much harder to qualify for mortgages. Housing starts remained depressed for more than a decade. A shortage of housing emerged, causing rents and prices to rise faster than overall inflation. Much of the capital that did not go to finance housing went instead to finance large government deficits, especially during the pandemic years of 2020-2022. Some investment also went into other financial assets. In the decade between the financial crisis and the pandemic, there was a surge in stock prices, bond prices, valuations of firms funded by venture capital, and cryptocurrencies. The True Meaning of Quantitative Easing If the bank bailouts of 2008 have been widely misinterpreted, then so has another policy adopted in 2008, known as Quantitative Easing (QE). As I suggested above, the bank bailouts were undertaken to protect the primary dealers in government securities, not household deposits. Quantitative easing was explained as a way to expand the money supply at “the zero bound.” Instead, it should be interpreted as a form of debt management. The “zero bound” story to explain QE is that once short-term interest rates approached zero, the Fed had to purchase other securities, including long-term treasuries and mortgage securities, in order to undertake further monetary expansion. But the actual way that QE was undertaken is not consistent with this story. Rather than use QE to expand bank lending and the money supply, the Fed introduced a policy of paying interest on reserves (IOR) in order to induce banks to hold onto reserves rather than lend them out. If the Fed had truly wanted the money supply to expand, it would not have introduced IOR. At the “zero bound,” IOR would have been zero. Years later, the Fed expanded its balance sheet further with what it called reverse repurchase agreements. It was funding its portfolio the way that a securities dealer would, with short-term borrowing in the repo market. With IOR and reverse repo, the Fed was paying a short-term interest rate to fund purchases of long-term securities. The interest rate that it paid was always above zero. There was never any “zero bound.” A better way to understand QE is to view it as debt management, overriding the Treasury. The Treasury would issue a mix of long-term debt and short-term debt. By buying the long-term debt and financing it with short-term borrowing, the Fed was converting the Treasury’s long-term debt into short-term debt. Ultimately, the Treasury and the Fed are both agencies of the government, and we can view their actions in combination. Economist John Cochrane uses the metaphor that the government has two pockets. With its right pocket (Treasury), it issued some long-term debt. With its left pocket (the Fed) the government converted that long-term debt into short-term debt. Until 2022, QE helped lower the government’s overall interest costs without having the Treasury withdraw from the long-term bond market altogether. Thus, QE helped to avoid atrophy in that market. But when interest rates rose in 2022, the government overall was stuck with more short-term debt and higher interest costs than it would have had without QE. The Fed in fact incurred large losses as the short-term interest rates that it had to pay for IOR and reverse repo rose above the rates it was receiving on its long-term Treasuries and mortgage securities. I am suggesting that we view the TARP program in 2008 and the Fed’s subsequent QE through a Cash Nexus lens. The government’s top priority is to ensure that its ability to borrow is never interrupted. TARP kept the primary dealers intact; and QE kept the long-term debt market functioning, while allowing the government to take advantage of the lower cost of short-term debt—at least until the need to confront the outbreak of inflation in 2022 caused QE to backfire from a debt management perspective. Recent Developments and the Square of Power As of early 2023, a number of recent developments served to illustrate the ongoing relevance of Ferguson’s “square of power” model. Recall that the square includes the tax-collecting bureaucracy and note that prior to the 2022 election, the Democratic Congress approved President Biden’s request to appropriate funds for a big increase in hiring by the Internal Revenue Service. The next pillar is a representative legislature, and the Democrats’ loss of the House sets up conflicts with the Biden Administration over fiscal policy, and even the appropriation for more IRS agents is up for negotiation. As many countries stretch their borrowing to unprecedented levels, the third pillar of the government debt market is wobbly. In the United Kingdom, a revolt by bond investors vetoed Prime Minister Truss’ proposals for supply-side tax cuts, terminating her short-lived premiership. Finally, in America, the fourth pillar—the central bank—had spent months engaged in a delicate balancing act. On the one hand, interest rates had to rise dramatically in order to curb inflation. On the other hand, the rate increases had to be gradual and well telegraphed ahead of time in order to avoid catching primary dealers and other large institutions unprepared, which would have caused distress at those key institutions. Another recent development was the collapse of many businesses associated with cryptocurrencies—most dramatically FTX and Alameda, two entities controlled by Sam Bankman-Fried who became notorious as an accused swindler. This development illustrates a major take-away from The Cash Nexus: among the “other bonds” in which the bond market is embedded is the bond between banks and government. The government needs banks in order to ensure that credit is available for its own spending and other favored uses. And banks need government in order to be able to perform their function of holding risky, long-term assets and issuing riskless, short-term liabilities so that households and businesses can do the opposite: hold riskless, short-term assets (like checking account deposits) while issuing risky, long-term liabilities (like mortgages). Government enables banks to do this through a combination of enforcement of debt contracts, explicit backing of financial institutions (deposit insurance, borrowing privileges such as the Fed’s Discount Window), implicit backing (“too big to fail”), and regulatory enforcement intended to reassure the public that they are protected against fraud or reckless behavior. The cryptocurrency sector lacked government protection. Many crypto enthusiasts do not want it, because they would prefer not to be corrupted by or beholden to governments. But the chaos that hit the market in 2022 makes the prospects for a separation of finance from state seem remote. Readers of The Cash Nexus would not be surprised. For more on these topics, see The 2008 Financial Crisis, by Arnold Kling. Concise Encyclopedia of Economics. Government Growth, by Robert Higgs. Concise Encyclopedia of Economics. Savings and Loan Crisis, by Bert Ely. Concise Encyclopedia of Economics. Arnold Kling on Freddie and Fannie and the Recent History of the U.S. Housing Market. EconTalk. “Present at the Destruction,” by Arnold Kling. Library of Economics and Liberty, April 3, 2017. The Cash Nexus bids us to consider the linkage between finance and government. Both banks and government must be perceived as long-lasting in order to function. You might have no problem eating at a restaurant or buying at a clothing store that may have to go out of business next month. But you would not take your banking business to an institution that is at high risk of failure. And you would not feel a need to obey a government that is likely to be overthrown soon. Support from financial institutions helps governments convince citizens of their staying power. And support from government helps financial institutions convince citizens to trust them with their savings. Footnotes [1] Niall Ferguson, The Cash Nexus: Money and Power in the Modern World, 1700-2000. Paperback. Basic Books, 2002. The hardcover was published in 2001 under the title The Cash Nexus: Economics and Politics from the Age of Warfare Through the Age of Welfare. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Olson’s major insight in the second half of the book was about how Stalin managed to be a stationary bandit in the Soviet Union while still confiscating a huge amount of the wealth. By nationalizing land and virtually all forms of capital, Stalin took for the state a large part of the wealth created. He also kept wages artificially low for a given position and set of skills, while having a fairly low marginal tax rate. The wealth effect of this policy was that because people were poorer than otherwise, they demanded less leisure, which is, after all, a normal good, and thus worked more. The substitution effect of having low rather than high marginal tax rates was that people also worked more. But over the long run, Olson pointed out, managers, bureaucrats, and workers “shared control . . . over the state enterprises that were the principal source of tax receipts.” By the late 1980s, “virtually no resources were passed on to the Soviet government.” The most important factor behind the collapse of communism, Olson concluded, “was that the communist governments were broke.” Communism, moreover, gave entrepreneurs very little incentive to replace or reallocate capital. So when communism ended, what was left of the capital stock was a very low-value carcass. Olson cited a 1991 study[3] by George Akerlof, et al., that found that “only 8 percent of the East German workers [in East German conglomerates] were producing goods whose value in international markets covered even the variable costs” of production. Olson also noted that because East Germany’s economy was thought to be the most successful of the European communist economies, the Soviet Union was probably even in worse shape. The low value of the capital stock, argued Olson, helped explain why managers and workers in large state enterprises resisted privatization: “their enterprises could not be viable in a competitive marketplace and would not be maintained in a rational economy.” This is from the newly published biography of Mancur Olson in David R. Henderson, ed. The Concise Encyclopedia of Economics. I enjoyed reading The Logic of Collective Action after over 50 years and reading for the first time the whole of The Rise and Decline of Nations and his last book, Power and Prosperity. The discussion above is of Power and Prosperity. Read the whole thing and notice the discussion of Avinash Dixit’s too-narrow reading of The Logic of Collective Action and the mention of William H. Hutt’s work on South Africa. Thanks to Tyler Cowen for reminding me to include the discussion of Sweden. (0 COMMENTS)

Since at least Adam Smith, the common wisdom has been that the transition from hunter-gathering to farming allowed the creation of the State. Farming, so went the theory, led to agricultural surplus, and that surplus is the prerequisite for taxation and a State. But economist Omer Moav of Reichman University argues that it wasn’t farming […] The post Omer Moav on the Emergence of the State appeared first on Econlib.

Raghuram Rajan recently offered some advice on monetary policy regimes: [T]he balance of risks suggests that central banks should reemphasize their mandate to combat high inflation, using standard tools such as interest rate policy. What if inflation is too low? Perhaps, as with COVID-19, we should learn to live with it and avoid tools like quantitative easing that have questionably positive effects on real activity; distort credit, asset prices, and liquidity; and are hard to exit. Arguably, so long as low inflation does not collapse into a deflationary spiral, central banks should not fret excessively about it. Decades of low inflation are not what slowed Japan’s growth and labor productivity. Aging and a shrinking labor force are more to blame. I think it’s a mistake to adopt asymmetrical policy targeting, where you combat above target inflation and tolerate below target inflation.  Better to set a target path (preferably NGDP) and eliminate deviations in either direction. But here I’d like to focus on a different issue.  While Rajan doesn’t say this explicitly, his comment implies that tolerating low inflation is an alternative to quantitative easing (QE).  In my view, toleration of very low inflation is a cause of QE.  To see why, let’s review a few concepts in monetary economics: 1. The demand for base money (as a share of GDP) is negatively related to the trend rate of inflation/NGDP growth.  Prior to 2008, most developed countries had monetary bases of roughly 5% to 10% of GDP.  In extreme cases of very high inflation, base demand can fall to 1% or 2% of GDP.  At the opposite extreme, countries with very low inflation (such as Japan and Switzerland) have base/GDP ratios exceeding 100% of GDP. 2.  In a technical sense, central banks do not have to accommodate high base demand with QE policies.  But if they fail to do so, a country can fall into severe deflation, as we saw in the early 1930s in the US.  Thus in a political sense, a high base demand as a share of GDP almost forces central banks to engage in lots of QE.  The central banks of Switzerland and Japan are not left wing organizations.  They are (small c) conservative.  They have accumulated large balance sheets as a way of meeting a high demand for base money, and thus preventing outright deflation. Rajan is correct that Japan has adapted to a regime of low inflation (although the initial adjustment process during the 1990s was somewhat painful.) But I don’t think the example of Japan shows what Rajan seems to think it shows.  In the long run, Japanese success in maintaining a very low inflation environment has required much more extensive QE policies than those adopted by either the Fed or the ECB. Toleration of very low inflation is not an alternative to QE; in the long run it’s the primary cause of QE.  There is a close analogy with monetary policy and interest rates.  On any given day, a cut in the central bank’s interest rate target is expansionary (for any given natural rate of interest).  But over the longer run, a central bank with a contractionary policy regime that leads to low inflation will end up with lower nominal interest rates than a central bank that tolerates a high trend rate of inflation. In the long run, there are three regimes that central bankers can choose from: Regime A:  Very low trend inflation.  Very low nominal interest rates.  Lots of QE and a large central bank balance sheet.  (Japan and Switzerland are examples.) Regime B:  Moderate trend inflation.  Moderate nominal interest rates.  Very little QE and a moderate size balance sheet.  (The US prior to 2008.) Regime C:  High trend inflation.  High nominal interest rates.  Substantial QE (financing budget deficits), but small central bank balance sheets as a share of GDP.  (Argentina and Turkey.) PS.  Yes, the payment of interest on reserves complicates this picture somewhat, leading to larger CB balance sheets for any given trend rate of inflation.  But IOR is a policy choice.  (Unwise, in my view.) (0 COMMENTS)

What do Madonna, Tom Brady, David Ortiz, Jimmy Fallon, Gwyneth Paltrow and Kim Kardashian have in common? Yes, they are all famous, but that’s not it. Rather, it is the fact that they have all been the subject of lawsuits against them for their endorsement of crypto currency. It would appear that the plaintiffs lost money in their investments, and they blame these celebrities for misinforming them. If justice were to prevail, those wasting the courts’ time in this manner should be severely penalized for bringing frivolous lawsuits; at the very least, they ought to be compelled to pay the legal costs of these high profile defendants. Endorsing something is merely giving an opinion, and doing so is part and parcel of free speech. Now that this right is under attack by wokist cancellers, it is more important than ever that we defend, to the utmost, what few free speech rights are left to us. Penalizing endorsers is open to all sorts of reductios ad absurdum. Who else gives of their opinions, for a fee, and whose implicit advice might upon occasion, backfire. Perhaps the most mistaken endorsers are the meteorologists. Sometimes, it seems as if they flip coins before giving their diagnoses of what is in store for us. But many people depend upon their prognostications, and lose money when (I was about to say “if” but I corrected myself) they are in error. But these people are just the tip of the proverbial iceberg. Who else gives out advice for a fee and has deep enough pockets to be profitably sued? Accountants advice clients about how to ward off the IRS; sometimes they are in error. Lawyers give guidance. Whenever a lawsuit goes to court, both sides cannot win; the loser can bring suit. One does not necessarily think of doctors, dentists, psychologists as giving out instruction; but they all do, and are thus vulnerable to lawsuits, when in error. The less said about financial advisors the better. They will be on the front lines of this new intellectual war, if it gets off the ground. I, too, in writing this essay, can be subjected to legal attack. I am among many others who are giving direction for public policy in the legal realm. Please don’t sue me. What about the owners of the periodical for which I am now writing? They are in the same boat with me (misery loves company). If we stretch things not too unreasonably, it is possible to bring into this practically every participant in the economy. The grocer, for example, stands by his wares. He is in effect endorsing them. If they boomerang, he can be found guilty of the exact same “crime” as those celebrities named above. Pretty much anyone selling anything at all can be reached by this not unreasonable interpretation. If we stretch matters a bit, just a little bit, what about those beautiful models who stand by, and sometimes caress, new automobiles at their releases? They too, it might well be argued, are with their beauty endorsing these cars. Certainly they rivet attention on these new vehicles. No, this latest attack must be nipped in the bud, if we are to retain any modicum of our much under attack nowadays free speech rights. Yes, it is commercial free speech in this case, but there is no warrant to denigrate them vis a vis political or intellectual discourse. Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans and is co-author of the 2015 book Water Capitalism: The Case for Privatizing Oceans, Rivers, Lakes, and Aquifers. New York City, N.Y.: Lexington Books, Rowman and Littlefield (with Peter Lothian Nelson ). (0 COMMENTS)

My friend Jeff Hummel sent me a link to a recent 28-minute interview that DW News did late last month with Jeffrey Sonnenfeld of the Yale School of Management. Jeff asked me to evaluate it. I find it highly credible. The big bottom line: Russia’s economy is in the tank and the reason many of us have thought differently is that Putin literally makes up the numbers. Here are some highlights: 2:00: Rosstat, Russia’s official agency that estimates GDP, stated that the economy contracted by only 2.1% in 2022. 2:14: The interviewer says that the IMF expects the Russian economy to grow by 0.3%. 3:00: Sonnenfeld says that the World Bank and others get their information from Rosstat. One little problem is that Rosstat has had a change of leadership 3 times. Why? Sonnenfeld says it’s because Putin is looking for lackeys (my word) who will state the data he wants stated. 3:30: As a member of the IMF and the World Bank, Russia is required to submit data to the IMF and World Bank. “They are not submitting.” By the second quarter of 2022, Russia stopped submitting the data. 4:00: Putin wakes up in the morning and decides what the GDP should be. (My economic historian’s mind clicked in here. I remember reading, in John Flynn’s book on FDR titled The Roosevelt Myth, that after FDR took the U.S. off gold, he woke up in the morning and decided what the price of gold would be. Here’s the relevant segment from that book: Thereafter each day Morgenthau and Roosevelt met, with Jesse Jones, head of the RFC, present, to fix the price of gold. They gathered around Roosevelt’s bed in the morning as he ate his eggs. Then “Henny-Penny” and Roosevelt decided the price of gold for that day. One day they wished to raise the price. Roosevelt settled the point. Make it 21 cents, he ruled. That is a lucky number- three times seven. And so it was done. That night Morgenthau wrote in his diary: “If people knew how we fixed the price of gold they would be frightened.” Why do these things seem to happen in the morning? 4:45: The Russian economy is in a tailspin. 5:40: Every key industrial sector is down. The auto industry is down 99%. 6:30: The work force is even more of a government work force than it was before the war. While Sonnenfeld doesn’t say it explicitly, it is clear that he understands that that’s not good. 7:10: Thousands of refrigerators are being torn apart to harvest chips that can be used by the military. [I had recently heard this from another friend who follows the Russian economy.] 9:45: Russia is losing money on energy. He goes into this later in detail after about the 19:20 point. 10:45: Ruble (not ruple—his pronunciation) is not being traded. 12:10: Yellen, Raimondo, and Blinken all say that Sonnenfeld’s team has informed them on this. 12:40: Companies that have pulled out of Russia. 16:14: Koch Industries has pulled out and gone from a grade of F to A. 17:30: Companies should not only accept a loss but should accept a complete write-down and “it won’t cost them a penny.” In case you think Sonnenfeld is pulling a Kramer (the Seinfeld character) and saying they “write it off,” he’s not. What he’s getting at, without using the term, is sunk cost. They recognize that an asset that is valued on their books at $X is really worth approximately 0. And by getting out, they avoid further losses. 18:14: Doing good and doing well are not antithetical. 19:20: The economics of Russia’s oil supply. Why Russia is at best breaking even. 20:30: Russia’s economy is smaller than that of Chile. 21:15: Russia cannot gain back its business in Western Europe even after all this is over. Fascinating story about liquefied natural gas. The market comes through. 23:20: Putin can’t sell natural gas to India and China because he doesn’t have the pipelines he would need. 25:25: The mayor of Moscow, until he was silenced, admitted in April that hundreds of thousands of idled workers “were in the streets with nothing to do.” 25:50: 3 million highly sophisticated workers have fled Russia. [DRH comment: Biden should allow a bunch of them in. They wouldn’t go on welfare and would help us.] This is one of the most informative videos I’ve seen in months. I have one concern, and it’s not about the truth of Sonnenfeld’s statements. I put a high probability on the idea that he’s correct. No, the concern is that he seems to celebrate implicitly the destruction of the Russian economy. But Putin’s not suffering. It’s Joe Six-Pack, or maybe Sergei Vodka Bottle who’s suffering. Also, Sonnenfeld and I both agree that Vladimir Putin is an evil man. What does an evil man with nuclear weapons do when he’s going down? That concerns me. (1 COMMENTS)

It is barely an exaggeration to say that governments as we know them are discriminatory by definition. A current government crusade confirms that. The claim by the federal government and some state governments is that the Second Amendment can be legally discriminatory because it was so historically. A Wall Street Journal story summarizes the issue, which might look surreal to our contemporaries who haven’t reflected on it (“Old Racist Gun Laws Enter Modern-Day Legal Battles,” February 27, 2023): Historical, racist gun laws are taking on new relevance in legal battles over modern-day gun regulations. … In the 1700s and 1800s, states across the country passed laws to keep guns out of the hands of slaves, free Black people, Native Americans and Catholics. Such discriminatory gun restrictions would be unconstitutional today, but they have entered the gun-rights debate as judges look to apply the Supreme Court’s decision last June that said gun restrictions must be anchored in historical traditions. … “[S]ome of these classifications—such as those based on race or religion—are abhorrent,” U.S. prosecutors told a federal appeals court last fall in a brief defending the disarmament of convicted domestic abusers. “They nevertheless show that the Framers understood that legislatures could make such judgments to categorically disarm groups of people deemed to be dangerous.” Lawyers representing the State of California added virtue—their conception of virtue—to the conditions for Second Amendment protection by claiming that their survey of historical statutes buttresses their assertion that the state’s background-check law is “rooted in the historical tradition—dating back to the founding—of disarming groups of people perceived to be dangerous or unvirtuous.” The supporters of the new discrimination crusade effectively argue that there is good and bad discrimination: racial discrimination is bad, but many other forms of government discrimination are good, depending probably on what is wanted by “society,” that is, the majority of society, or the majority of those who votes or shout the loudest, or in reality the temporary majority or horse-trading minorities of elected representatives, or the bureaucrats. The racist or otherwise discriminatory character of gun regulation has been known to American legal scholars for half a century (see, for example, Don B. Kates, Jr., editor, Firearms and Violence: Issues of Public Policy, 1984). In England, by the 19th century if not before, all discrimination had disappeared from “the right of the Englishman to keep arms for his own defence” (see notably the book of Colin Greenwood, Firearms Control: A Study of Armed Crime and Firearms Control in England and Wales [Routledge & Kegan Paul, 1972]); and Joyce Malcolm (To Keep and Bear Arms: The Origins of an Anglo-American Right [Harvard University Press, 1994]). When I said that the essentially discriminatory state is “barely an exaggeration,” the qualification was meant to acknowledge one theory of government that does not depend on the desirability of discrimination. A central part of the classical-liberal ideal forbids discrimination by political authority through a strict conception of the rule of law. In a 1932 article, “The Pursuit of Economic Freedom,” John Hicks, the economic theorist and Nobel laureate, expressed this idea in a moderate way that must be difficult to understand today: The Manchester Liberals believed in Free Trade not only on the ground of Fairness among Englishmen, but also on the ground of Fairness between Englishmen and foreigners. The State, so they held, ought not to discriminate among its own citizens; also it ought not to discriminate between its own citizens and others. It is true that most classical-liberal theorists believed that the principle of non-discrimination had limits. The general theme is that non-discrimination is exceptionally allowed toward individuals who don’t share or have violated the liberal ethics of social relations. Such limits obviously apply to imprisoned criminals, but they are also invoked against potential immigrants who are likely to throw off balance the equilibrium of a free society. In this perspective James Buchanan, laureate of the 1986 Nobel Prize in economics, argued that a “nondiscriminatory immigration policy” is misguided although, of course, free trade in goods and services should remain free. Friedrich Hayek, a 1974 Nobel economics laureate, supports this kind of limit; in the third volume of his Law, Legislation, and Liberty, he writes, in a related context: We must face the fact that we here encounter a limit to the universal application of those liberal principles of policy which the existing facts of the present world make unavoidable. These limits do not constitute fatal flaws in the argument since they imply merely that, 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. Of course, such exceptional limitations must be motivated and consistent with one’s general theory of the social world. I don’t think the opponents to the Second Amendment, who are mainly so-called progressives, have a theory to reconcile their anti-racism with their otherwise wall-to-wall love of government discrimination. Hayek’s own approval of “restrictions on the sale of dangerous goods (such as arms, explosives, poisons and drugs)” was not, in my opinion, seriously justified and, as far as I know, he only once mentioned any issue with the Second Amendment. At any rate, potentially justifiable limits to the exercise of Second Amendment rights are very far from what the progressives are currently after, which is cancellation of these rights for individuals guilty of non-violent crimes or even just deemed likely to commit future crimes. Even the life prohibition for convicted felons who have served their punishments is debatable. Imagine if the First, Fourth, or Fifth Amendments were applied that way. Mission creep has been especially enthusiastic in that area. One out of 13 American adults has a felony record. As far as domestic violence is concerned, its definition has continuously expanded. A misdemeanor conviction for “domestic violence” now means the cancellation of Second-Amendment protection. Sometimes, a mere accusation is enough to restrict one’s rights under the Second Amendment. Economist Anthony de Jasay, who defined himself as a classical liberal (I played with the idea that he may have been a conservative anarchist instead), argued that the state cannot avoid governing, which means discriminating among its citizens, “taking sides” for some against others (see my Econlib article, “An Unavoidable Theory of the State”). The state, de Jasay argued, cannot please everybody, and [w]hen the state cannot please everybody, it will choose whom it had better please. He meant that the state had better please its most powerful supporting clientèles. The optimistic way to look at this circus of professed anti-racists invoking racist laws to protect other diktats of their authoritarianism is that they have finally been caught up in their irreparable contradictions. (1 COMMENTS)

The Schweizer Monat is probably the oldest conservative-libertarian publications in Europe. Perhaps not surprisingly, it is a Swiss-German magazine: Germans seem to be more inclined to keep reading traditional newspapers (and books) than us Latins. The latest issue is now online, and the website includes the English version of a couple of articles. I was very impressed by an interview with Lenore Skenazy, which I think is very relevant for parents but also for teachers, university professors and anybody who wants to play the educator role. It illuminates some of the frightening challenges we face today. Here’s a slice: You need bad experiences to develop as a human being. There are some things that are fragile, like a glass that breaks if you drop it. Then there are things that are resilient, like a ball, which bounces back if you drop it. And then there are things that are antifragile, like bones: they need some resistance to get stronger. This is the idea of Nassim Taleb. Just one illustration: Everybody’s getting sick now after Covid, because we’ve been covering our faces for so long that we didn’t develop antibodies against other viruses out there. Similarly, children are antifragile. It’s interesting to observe how children grow: Their bodies grow very fast until the age of about seven. Then the growth slows down until 12, and then there’s another growth spurt. I think it’s during this period of slow growth where the growth of everything else is occurring: when you take little risks, try new things, figure out who your friends are and find out what you really like to do. It’s not that the door closes after that, but that’s when Mother Nature expects you to be becoming the person you are to be. If, during all this time, someone else takes care of everything for you, this stunts the development of those human muscles when they’re supposed to be growing. Did the Covid lockdowns affect overprotected kids differently than others? We did a survey in the beginning of the pandemic and asked parents what their kids were doing. They said that the kids were helping out around the house more and had found new all sorts of new things they could do: drawing, riding a bike, playing guitar – one girl even mentioned that she learned about Bitcoin. When the kids suddenly had unstructured time, they had to fill it up. At the beginning, it was sort of the flourishing of an old-fashioned childhood. And then? When remote schooling started, parents began spending a ton of time right next to their kids, just in case the kids had a question or there was a problem with Zoom. What I’ve heard from teachers is that when the kids came back to school, it was as if they had been in suspended animation for a couple of years. The maturing of social skills, which was already atrophying before Covid, had gotten worse. Read the whole thing. (0 COMMENTS)