Seriously, FDA? The Food and Drug Administration decided yesterday to strictly limit”who can receive Johnson & Johnson’s COVID-19 vaccine.” Why? Because of “the ongoing risk of rare but serious blood clots.” How rare but serious? Matthew Perrone and Lauren Neergaard, in “FDA restricts J&J’s COVID-19 due to blood clot risk,” msn.com, May 5, 2022, write: Federal scientists identified 60 cases, including nine that were fatal, as of mid-March. That amounts to one blood clot case per 3.23 million J&J shots administered, the FDA said Thursday. The vaccine will carry a starker warning about potential “long-term and debilitating health consequences” of the side effect. Since 9 out of the 60 were fatal, that amounts to 1 death from a blood clot out of 21.5 million shots. What’s next? The Department of Transportation telling us not to drive because there are 1.34 fatalities for every 100 million vehicles traveled? (0 COMMENTS)

I often use the analogy of steering a bus when discussing monetary policy. A rise in the equilibrium or “natural” rate of interest is like a bend in the road. The Fed must adjust its policy rate to keep the economy from going off into a ditch.  But this analogy only goes so far. The Fed’s most important duty is not to adjust interest rates to changes in the natural rate, rather it’s to reduce instability in the natural rate of interest with a better monetary policy regime.  To return to the bus analogy; it’s as if the bus driver both steers the bus and changes the path of the road. In late 2021, the Fed moved away from average inflation targeting.  The uncertainty created by this policy shift caused the natural rate of interest to become much more unstable than otherwise.  That was by far the Fed’s biggest policy mistake, not its failure to raise rates in a timely fashion. Milton Friedman favored increasing the money supply at a constant rate.  This is not because he believed that velocity was stable; indeed his research showed it was often rather unstable.  Rather he believed that the volatility of velocity was caused by unstable monetary policy.  Friedman hoped that if the Fed stabilized the growth rate of the money supply, then over time the velocity of circulation would also become more stable.  In other words, he wanted to straighten the road.  In this monetarist framework, the instability of velocity plays the same role as an unstable natural rate of interest plays in the Keynesian interest rate approach to policy. I am unimpressed with most of the discussion of what went wrong with monetary policy. I see pundits obsessing over steering mistakes, and overlooking the far more important problem of how the Fed took a fairly straight road and made it much more twisty by abandoning FAIT.  That was the Fed’s biggest policy mistake. The Fed isn’t just making bad decisions; it is making it harder for Fed official to make good decisions.  The Fed is now the Fed’s own worst enemy, creating a macroeconomic environment where it’s much harder to know where to set interest rates or the money supply. In 2021, I thought that the Fed had adopted something like level targeting.  I was wrong.   (0 COMMENTS)

Do the Central Planners Give a Damn? I have a cottage at Minaki, Ontario, which is down the Winnipeg River from the Lake of the Woods. Under a treaty between Canada and the United States, the Lake of the Woods can’t go above a certain level. The reason is that part of the Lake of the Woods is in Canada and part is in the United States. So when it gets close to that level, the government opens the dam at the north end of the lake to let the water flow downstream. We downstream people, therefore, are at the mercy of the authorities who open the dam. What would be a reasonable way to both comply with the treaty and look out for the people downstream? It would be to see what’s happening with snowfall in the winter and, on that basis, predict what will happen to runoff. And then if the estimate is that the spring runoff will be high, start releasing early and not wait until May. But here’s what they’re doing. One quote is precious: Since April 20, water levels on Lake of the Woods have risen by roughly 25”, while levels on the Winnipeg River have risen by about 67” since early April. The rise in levels has been driven by the area breaking numerous precipitation and snowfall records throughout the winter. (emphasis added.) On a site of Minaki residents and cottage goers that I follow on Facebook, a year-round Minaki resident put it well: Yup you could not have had a clue what was going to happen with all the snow last winter, could you? Let’s guess at a dry spring and hold all the water back because the lake is too low. Trust the science. We are in Ottawa and know what’s going on. Well said. The picture above is of the Lake of the Woods, which is partly in Manitoba and Ontario and partly in Minnesota. (0 COMMENTS)

On April 20, I attended a talk given at Stanford University by Canadian psychologist Jordan Peterson. It started with a one-hour taping of an interview of Peterson by master interviewer Peter Robinson. Then it went to Q&A. The interview, part of the series “Uncommon Knowledge,” is here. In a later post, I want to challenge something he said in Q&A that I had thought was in the interview but wasn’t. Here are some highlights. On how we got to wokeness so quickly. 14:15: Two streams of thought. First the post-modern stream, which he agrees with, is one part of it. 17:30: This is the part of the post-modern stream he agrees with: “We see the world through a narrative framework.” Perhaps I missed it, but he didn’t mention the second stream that led to wokeness. Peterson is not that linear and I found it more frustrating than a lot of the audience seemed to. But seeing the video over, I had a very different reaction: I found him charming and lovable. I wanted to hug him numerous times. 19:20: How businesses get diverted by wokesters. 20:55: The weaponization of guilt. 23:00: Science depends on the concept of the divine. 28:20: No difference between free speech and free thought. 41:30: Justin Trudeau is a narcissist. His challenge to Trudeau: What if you don’t know what you’re doing? 42:40: Peterson, as a Canadian, observing U.S. culture and its ability to revive from dark places. You’ve got to watch this. He said it beautifully. I got goose bumps. I whispered to my friend Charley that Peterson had put his finger on why I love my adopted country so much. 43:40: Ray Dalio on China. Yuck! 45:00: Peter Robinson quotes Dostoevsky on why people fear freedom and challenges Peterson to answer it. 45:50: Confronting these challenges is difficult but necessary. 46:50: You need allies, which is what universities are supposed to be giving you. 47:20: Free trade as an eternal verity. 53:45: Peterson has spent time trying to understand what motivated a guard at Auschwitz. He thinks that you can get ordinary people to do those things and even enjoy them. Part of what drives them is envy. 55:00: “Never forget” the holocaust should mean don’t let it happen again. 56:00: Instead of activism put your own house in order. 59:10: In response to Peter’s request for a redemptive sentence to tell 18 and 19 year olds coming into college, Peterson says “Don’t be thinking that your ambition is corrupt.” 1:00:30: “You son of a bitch.” You have to watch this to get it. 1:01:40: In a very emotional ending in which Peterson is on the edge of tears, in talking about what universities are doing with their anti-human messages to young people, he says, “You have no idea how many people that’s killing.”   (0 COMMENTS)

If Republican means nothing else than non-Democrat and Democrat nothing else than non-Republican, then Republican means nothing else than Republican and Democrat nothing else than Democrat. The demonstration is straightforward. The hypotheses in the conditional part of the above sentence implies that Republican is non-non-Republican, that is, Republican is Republican. A similar demonstration can show that Democrat is Democrat. The identity principle “A is A” prevents one from building castles on contradiction sand, but it does not tell us anything useful about A—including whether or not to vote for A. The median voter theorem is one way to make practical sense of that. In this perspective, the Republican Party and the Democratic Party are intentionally nearly identical because each is trying to capture the median voter  (or the median voter group) at the middle of the political spectrum. Given certain assumptions, no one cannot get more than  50% of the vote without the median voter. But then, why do the two parties vociferously claim to be different? I prefer the hypothesis of economist Daniel Kian Mc Kiernan: I suppose that people who try to define both terms “Democrat” and “Republican” or “left” and “right” negatively are tribalists who don’t want simply to say “us” and “everybody else”. A practical implication is that not too much meaning or normative value should be attached to elections where all candidates say, “We are us; vote for us and we will do what you want.” James Buchanan’s and Gordon Tullock’s constitutional political economy correctly argues, only unanimity has normative value. If unanimity is impossible even at the level or general and abstract rules, anarchy is the only ethical solution, at least in theory, as Anthony de Jasay argues. (0 COMMENTS)

The Mercatus Center has just published a new symposium looking at how Milton Friedman might have reacted to recent monetary policy issues.  Here is a list of the papers: Essays Beckworth, David. “What Would Milton Friedman Say about Financial Stability?” April 2022. Hendrickson, Joshua. “What Would Milton Friedman Say about the Coordination of Monetary and Fiscal Policy?” April 2022. Horan, Patrick. “What Would Milton Friedman Say about the Fed’s New Framework?” April 2022. Ireland, Peter. “What Would Milton Friedman Say about the Recent Surge in Money Growth?” April 2022. Probst, Julius. “What Would Milton Friedman Say about Business Cycles? The Plucking Model View.” April 2022 Sumner, Scott. “What Would Milton Friedman Say about Market Monetarism?” April 2022. In his paper, Julius Probst discusses Friedman’s view of what’s called the “plucking model” of the business cycle: A building block of modern macroeconomic theory is that economic activity tends to bounce around above and below the sustainable speed limit of the economy. This understanding of a symmetric business cycle, where the economy moves around the so-called natural rate of output and unemployment, drives decision-making in many central banks today. An alternative view of the business cycle is Milton Friedman’s plucking model. It sees the economy following the natural rate of output and unemployment during normal times and deviating only during recessions—that is, economic activity can only weaken below its full potential. There are no artificial booms but only shortfalls from full employment and natural output. Recent history and much empirical evidence increasingly favors the plucking model over the standard macroeconomic view. The plucking model also has huge implications for macroeconomic risk management and macroeconomic policy. It suggests that we need to aggressively counter recessions and minimize shortfalls from potential output, especially if there are scarring effects (known as hysteresis) that damage the economy’s capacity to produce goods and services in the long run. My own view is somewhere in between the standard symmetric business cycle model and the plucking model.  I believe that the business cycle is highly asymmetric, with output falling sharply below potential during recessions and rising only slightly above potential during booms.  But I would not go so far as to claim there is no such thing as output above potential. Although the plucking model and the natural rate model are often seen as being in conflict, I believe that both are useful models, both are useful approximations of reality. Should the Fed “aggressively counter recessions”?  That depends.  A stimulative policy is often appropriate during recessions, but that’s not because the Fed should be targeting employment or output, rather because aggressively countering NGDP shortfalls would often have the additional effect of aggressively countering recessions. But not always.  In 1970, 1974, 1980, and 1982, the US experienced recessions that coincided with reasonable NGDP growth.  The Fed should not have aggressively countered those recessions, and instead should have maintained 5% NGDP growth—even if it made the recession worse. (0 COMMENTS)

This is my final post on Cecilia Rouse’s talk last Thursday on Biden’s Economic policies. Part I is here and Part II is here. 30:00: Many people say that the increased child care tax credit and the enhanced unemployment benefits were a disincentive to work. “The evidence on that is not as strong as one might think, at least theoretically. I’m not going to say that there was no impact on labor supply.” But, she added, the evidence on the effect of enhanced unemployment insurance is “fairly mixed.” “In any event,” she added, “that’s been gone since September.” I’m skeptical. She also thinks that restoring the increased child care tax credit, which expired in December, is “an investment in children” and doesn’t reduce labor supply much unless the most extreme estimates of labor supply elasticity are the right ones. In short, she admits that the increased child care tax credit could substantially reduce labor supply. 31:00: The disability system, which Professor Duggan has looked at, could be playing a role in damping down labor supply, especially for men. Yes, Duggan has done some good work on this. 32:10: Ukraine; sanctions in Russia. 33:00: We’re already seeing impact on gas prices. My question: impact of what? She doesn’t say. Isn’t it the impact, in part, of U.S. and other governments’ restrictions of oil from Russia, which really have reduced the world supply of oil, contrary to my initial thought that the Russians would respond by selling it elsewhere? 33:15: She says that 70% of last month’s increase in CPI is due to energy and that’s attributable to Russia’s incursion into Ukraine. Really? How did that reduce supply? She doesn’t seem to want to admit that it was the U.S. and other governments’ actions in response to the Russian invasion reduced that supply. 33:30: The sanctions may be playing a role here. So she finally admits it. 34:10: “The President believes” that this is about standing up for democracy. I’m wondering if Rouse is doing what I did when I was asked what I believed and it was different from the views of my boss, former CEA chair, Martin Feldstein, believed. I answered, “The chairman believes.” 35:00: Concerned about hunger and famine, given the reduction in food output from Ukraine and Russia. 35:20: Her explanation about why she thinks there’s a “market failure” with regard to children that requires government support. Pretty iffy. 39:40: The Paycheck Protection Program was a small part of CARES. Hmm. When I look on line, I see that it was $659 billion. That strikes as a substantial part of the CARES Act. 40:50: “The speed with which we shut down this economy was stunning.” I wish she hadn’t said it with what appeared to be such pride. 45:50: The budget deficit. Mark Zandi has attempted to estimate what would have happened [I think she means to GDP, not debt and deficits] without Trump’s CARES Act and Biden’s American Rescue Plan, and “that doesn’t look very pretty at all.” 46:08: Tax reform in 2017 “was not very helpful.” I discussed this in my Part I. 50:00: She lays out a central planner’s perspective on where we place the wind farms, the charging stations, how do help the auto industry so the workers displaced from gasoline-powered vehicles are the ones who are making electric vehicles. My reaction: Yikes! That’s a lot of central planning. 50:25: “That involves more industrial policy than economists are used to thinking about.” Isn’t it more that it involves more industrial policy than economists think is good? We’ve thought about it–and most of us have rejected it. 53:50: “We need to have an FDA that can more readily approve the new generations of vaccines.” Yay, Cecilia! 1:01:17: “This government likes to have to intervene; it gives them something to do.” What she’s getting at is that we need more automatic stabilizers in our fiscal policy rather than having Congress and the President adjust with lags. I call this the George Shultz mistake. If I recall correctly, when he was Secretary of Labor, he noticed that Congress added unemployment insurance benefits during recessions. He thought it made sense to have some of those benefits kick in when the unemployment rate or the insured unemployment rate (I’ve forgotten which) hit at a certain level. Again, IIRC, he persuaded Nixon to push for such a change and Congress passed it. Little problem: Go back to what Cecilia said: The government likes to intervene. So in future recessions, the automatic kicking in of extended unemployment insurance benefits became the baseline and Congress, which likes to do things and likes being seen to do things, did things: namely, add even more weeks of unemployment  benefits.(I’m saying all this from memory of what I observed up close when I was in the Reagan Labor Department in the first half of 1982,which was the worst part of the recession.) (0 COMMENTS)

In a democracy, some people say that politicians represent the will of the people. While many people see politicians as slimy, they think that voters can keep them in line through periodic elections. After all, if a politician acts badly, we can “vote the bastards out!” However, real-world voters face a set of constraints that limit the effectiveness of electoral feedback. Public choice theorists have documented these constraints extensively, but today I want to discuss just three such constraints. Let’s call them the ABCs of Electoral Politics. A is for Asymmetric information Ideal theories of democratic politics suggest that voters use their vote to hold government officials accountable. If politicians misbehave, voters can vote against them. If bureaucrats misbehave, then politicians hold those bureaucrats accountable, or risk being voted out by voters. But if voters are going to hold officials accountable for misconduct, they first need to know about the misconduct. That poses a challenge because real-world democracies are characterized by asymmetric information. Consider the relationship between a voter and a politician. The politician will know more about what’s happening in government than the voter. This information asymmetry creates an opportunity for the politician to act opportunistically, perhaps by implementing policies that benefit special interests at the expense of voters. This is an example of a principal-agent problem. The politician is meant to act on behalf of the voter, as the voter’s agent. But due to information asymmetries, there is room for the politician to act against the voter’s interests. In real-world governments, there are multiple layers of principal-agent problems. In addition to the relationship between voters and politicians, there is also the relationship between politicians and bureaucrats. Just as politicians are supposed to act on behalf of voters but may instead act opportunistically, bureaucrats are supposed to act on behalf of politicians but may instead act opportunistically. Bureaucrats have specialized knowledge about their bureaus that politicians lack, which creates information asymmetries. This creates space for opportunism by bureaucrats. These problems of opportunism and asymmetric information become more severe when bureaucrats have monopoly control over the release of information about their activities. This problem is most acute in the national security state, where officials can easily classify information, thereby rendering it illegal to share that information with the public and sometimes even with politicians. Abigail R. Hall and Christopher J. Coyne discuss this problem at length in their book Manufacturing Militarism: U.S. Government Propaganda in the War on Terror, which I previously reviewed for EconLib. Hall, Coyne, and I also discussed the role whistleblowers can play in alleviating these problems in our paper Sounding the Alarm: The Political Economy of Whistleblowing in the U.S. Security State. While these issues are most severe when politicians and bureaucrats can act secretly, asymmetric information limits the value of voter feedback across all policy arenas. It turns out that what you don’t know can hurt you. B is for Bundling Even when voters do know about a political action they find unacceptable or upsetting, their ability to offer feedback by voting is still limited. One reason for this is that in most elections issues are bundled. When you vote for a presidential, congressional, gubernatorial, or mayoral candidate, you are not voting in a referendum on any specific policy issue. Instead, you are voting to elect a politician, who will then have increased power to act on all their policy preferences. There is no way to signal that you are voting for a particular candidate based on their foreign policy views but disagree with their views on financial regulation. This poses problems, because a voter might know about some action or policy by an incumbent politician that they strongly condemn. However, while they strongly oppose the politician on that issue, they may disagree with the politician’s opponent even more strongly on another issue. They may therefore feel that they cannot in good conscience vote against the incumbent, even though they would like to offer negative feedback. Politicians use their power to influence a wide variety of issues, including foreign policy, fiscal policy, environmental regulation, parks and recreation, public health, and many more. The list is potentially endless. Given the diversity of issues that politicians influence, a voter who cares about policy must vote based on a complex bundle of positions rather than offering neat, legible feedback regarding any specific issue. This means that electoral feedback is a rather noisy signal. C is for Counterfactuals Voters face an additional difficulty. They can never directly observe what might have happened had an election gone the other way. For example, pro-peace voter might be disappointed by a candidate’s foreign policy, but still credibly wonder whether the other candidate may have been even more aggressive abroad. Or a voter may be disappointed in economic activity during a given politician’s presidency but have no way to discern how much of that can be credibly attributed to the president. As David Friedman explains in The Machinery of Freedom: When you elect a politician, you buy nothing but promises. You may know how one politician ran the country for the past four years, but not how his competitor might have run it. You can compare 1968 Fords, Chryslers, and Volkswagens, but nobody will ever be able to compare the Nixon administration of 1968 with the Humphrey and Wallace administrations of the same year. It is as if we had only Fords from 1920 to 1928, Chryslers from 1928 to 1936, and then had to decide what firm would make a better car for the next four years. Perhaps an expert automotive engineer could make an educated guess as to whether Ford had used the technology of 1920 to satisfy the demands of 1920 better than Chrysler had used the technology of 1928 to satisfy the demands of 1928. The rest of us might just as well flip a coin. If you throw in Volkswagen or American Motors, which had not made any cars in America but wanted to, the situation becomes still worse. Each of us would have to know every firm intimately in order to have any reasonable basis for deciding which we preferred. In the same way, in order to judge a politician who has held office, one must consider not only how his administration turned out but the influence of a multitude of relevant factors over which he had no control, ranging from the makeup of Congress to the weather at harvest time. (page 69) In other words, voters have no way to compare a politician they have observed with a plausible counterfactual situation involving other candidates. This substantially limits a voter’s ability to offer informed feedback through voting. These are just a few of the public choice problems that limit voter feedback. To understand these types of issues more fully, you should read more about public choice theory. But knowing the ABCs of electoral politics is a good start for understanding real world democracies.   Nathan P. Goodman is a Postdoctoral Fellow in the Department of Economics at New York University. His research interests include defense and peace economics, self-governance, public choice, institutional analysis, and Austrian economics. (1 COMMENTS)

Yesterday I posted on the Zoom talk that Biden CEA chair Cecilia Rouse gave to a Stanford audience last Thursday. Here’s Part II. Part III will come tomorrow. 11:40: Rouse notes the dramatic drop in compensation in the labor market from February 2020 to April 2020, “when we asked everybody to go home.” Not quite accurate. There wasn’t a lot of “asking” going on. It was mainly telling. While I found Rouse to be someone I would find very likeable if I met her, I see that she has already picked up, in just over 13 months on the job, this government-speak way of describing government coercion.  13:58: Rouse deals with the real GDP growth numbers that had just come in that morning at -1.4 percent on an annual basis. She states that imports subtract from GDP. I’m sure she knows that that’s not literally true; she’s simply explaining the arithmetic. She points that one of the factors was reduced investment in inventories and another was reduced government spending (yay!). She also notes that consumption and investment expenditures grew at a 3.7 percent annual rate and so the news isn’t that bad. I agree. Incidentally, I pointed this out to someone at pickleball who is almost spring loaded to criticize Biden but who also “gets” economics—and he got it. 15:50: The computer systems that are used to pay out unemployment insurance in many states are “quite antiquated.” “They run on software such as COBOL and FORTRAN.” Yes, really. FORTRAN was created in 1957, COBOL in 1959. That meant that it wasn’t easy to have a federal program giving federal unemployment benefits to people without giving way too much to many. She admits what a number of establishment economists admitted at the time, namely, that plussing up people’s state unemployment benefit with additional federal benefits of $600 per week gave millions of people more money in unemployment than they had earned while employed. Rouse concludes that “our unemployment system needs some investment.” True. And are many of the state governments doing that? She didn’t say. 18:00: Discussion of vaccines and positive externalities. Cost per life saved of $50K, assuming that the number of lives saved in the U.S. is one million. (I’m quite skeptical of her million lives saved number.) But the $50K is trivial relative to value of life. I haven’t checked her data. 21:00: Climate change. 22:00: Rouse implicitly attributes increase in wildfires to climate change. 23:20: Rouse says, using British data, that there’s not a big tradeoff between economic growth and using carbon taxes to reduce carbon usage. 24:00: Increased inequality. 27:20: Immigration can play an important role in expanding the labor force. Immigrants often are innovators. Also they are often complementary with U.S. labor, increasing productivity. The CEA estimates that due to Trump’s immigration policies and the pandemic, we have about one million fewer immigrants than we otherwise would have had. 28:30: Administration can make reforms without Congress by catching up on renewing green cards and ensuring an adequate number of H-2B visas and H1-B visas. To maintain our economic growth, we’re going to have to welcome immigrants. Good for her. As I noted, Part III is tomorrow. (0 COMMENTS)

What relationship, if any, exists between the right to private property and social justice? The concept of social justice has been, and continues to be, an elusive one, particularly because this concept has been broadened to encompass a wide variety of issues, including corporate social irresponsibility, environmental degradation, financial chaos, systemic racial and ethnic discrimination, and distribution of income. To the extent that the definition of social justice continues to expand the umbrella of issues it encompasses, casting an ever-wider shadow over the legitimacy of the free market, I argue that it becomes ever more important not to ignore questions of social justice. Therefore, my hope here is to establish not only the complementarity between private property and social justice, but also establish that private property is the precondition for the discovery of what is socially just in the first place. Among scholars working in the classical liberal tradition, the extent to which social justice has been treated as a meaningful concept has varied. F.A. Hayek famously argued that a market system based on private property, “in which each is allowed to use his knowledge for his own purposes the concept of ‘social justice’ is necessarily empty and meaningless” (1976, p. 69). Moreover, “no system of rules of just individual conduct, and therefore no free action of the individuals, could produce any principle of distributive justice” (1976, p. 69). While not denying the importance of Hayek’s claim, Israel Kirzner has argued that “it seems to be that important additional insights must be introduced in order to fully appreciate the flaws in the standard treatments of social justice under capitalism” (Kirzner 1989 [2016], p. 12). Kirzner states that “the question of social justice under capitalism is seen as the question of distributive justice” (Kirzner 1989 [2016], p. 11). Stefanie Haeffele and Virgil Storr have recently argued that social justice “is a meaningful concept. To the extent that the socioeconomic system in a country favors some and not others, either because it systematically rewards some characteristics (e.g., hard work, inventiveness, intelligence, etc.) that are not equally distributed or it privileges some groups (e.g., based on economic power, political capital, demographic characteristics, etc.), it is appropriate to question the justness of the system and its results.” Consistent with Haeffele and Storr’s broader point, I adopt the definition used by Douglas Rasmussen, who argues that social justice “can be seen as nothing other than giving a man his due” (1974, p. 307). More importantly for my argument here, “the determination of what a man has due is a function of social, moral criterion—namely the concept of rights” (Rasmussen 1974, p. 307) enforced by a political or legal order. My purpose here is neither to refute the reality nor the gravity of any social injustice befallen on any individual, or group of individuals. Rather, my point is to suggest that if we are to identify a proper solution to any problem of social injustice, then we must first clarify what is the source of such social injustice. Moreover, to the extent that individuals associate a free market as a source of social injustice, such a conclusion is fundamentally based on a misleading premise, namely that the right to private property is synonymous with privilege. However, the case of the free market, going back to Adam Smith, has always been predicated on the notion that private property is a social liability, not a private privilege.1 Therefore, to the extent that the terrible consequences of the Financial Crisis of 2008 or the BP Oil Spill of 2010—or any other historical example cited as exemplifying a matter of social injustice—were caused by government privilege, but mistakenly associated with free markets, not only creates a dangerous conflation between private property and privilege. More importantly, it also creates further aversion in reclaiming the institutional framework necessary for securing a society of free and responsible individuals. As Lord Acton has stated this point, “a people averse to the institution of private property is without the first element of freedom” (Dalberg-Acton 1907, p. 297). The point here is not to suggest private property guarantees a social panacea to problems of social injustice, nor that markets are the perfect solution to remedying social injustice. If injustice occurs because a particular individual or group of individuals are faced with a consequence of another’s action that was not due to them, then the concept of a “perfect market” is an oxymoron, since such a world implies no social conflict, and therefore irrelevant to problems of social justice. Therefore, the distinction between a perfect market and an imperfect market is a false dichotomy. Instead, it is crucial to begin with questions of social justice, and their relationship to the free market, with the notion that markets are in fact imperfect, but not in the sense of being “flawed” or “sub-optimal” compared to some ideal notion of perfection. Rather, by simply reframing our notion of the word “imperfect,” what follows is a radical reframing of the narrative often told regarding the relationship between the free market and social justice. Rather than saying that the free market is flawed, suboptimal, or non-ideal, another way to interpret the meaning of “imperfect” is an act or process that is not thoroughly done, or incomplete.2 Thus, the narrative often told about free markets, whether its proponents have regarded it as an efficient system of allocating resources, or whether its opponents regard it as a dysfunctional mechanism conducive to financial chaos, environmental decay, or exploitation, paint an incomplete picture of the issue at hand, namely that any economic outcome, whether it is regarded as socially just or unjust, must be first discovered. Just as the outcome of a game cannot be known without first playing the game and understanding the rules of the game, whether an economic outcome is regarded as socially just depends upon first discovering that outcome, and understanding what individuals are incentivized to discover and learn, given the set of rules governing a particular market in question. Thus, the relevant issue is not whether market processes are socially just or unjust compared to a particular ideal standard, but whether market processes incentivize individuals to learn what is socially just. According to F.A. Hayek, liberty “not only means that the individual has both the opportunity and burden of choice; it also means that he must bear the consequences of his actions and will receive praise or blame for them. Liberty and responsibility are inseparable” (Hayek 1960, p. 71). Such a definition not only illustrates why the right to private property is not only the cornerstone of liberty. More importantly, it also alludes to the notion that fundamental nature of private property as a social relationship is not to physically assign goods and services to individuals, but to assign the consequences of action over goods and services, both negative and positive, in relation to others. The enforcement of private property rights imply that individuals are accountable and liable for their decisions when private property rights are well-defined. The introduction and abrupt discontinuation of the Edsel model (1958-1960) by Ford Motor Company illustrates the point of private property in terms of a set of social relations. When Henry Ford II decided to produce its Edsel model, resources first had to be purchased and workers had to be paid before it accrued any revenue from selling any Edsels. In effect, by acquiring property rights over resources required to mass produce Edsels, Henry Ford II incurred a social liability to use those resources for prospective customers in a manner that would create more value to such customers than in alternative productive activities. If successful, Ford Motor Company would have accrued profits, communicating to the company that it created value for Edsel drivers. In reality, however, the significant losses incurred as result of producing Edsels implied that Ford was using the resources they purchased in a socially irresponsible manner, meaning they failed to utilize the resources purchased on the market in a manner that was responsive to the demand of its customers, as well as the potential customers of the alternative products those resources could have been used to create. However, such social irresponsibility did not imply a lack of social liability, since Ford learned quickly to discontinue the production of Edsels, given that consumers communicated this in the form of losses. “The critical lynchpin between private property and social justice is that private property establishes the conditions for social responsibility by creating liability over the benefits as well as the costs of one’s decision in relation to others.” What does this all have to do with the relationship between private property and social justice? The critical lynchpin between private property and social justice is that private property establishes the conditions for social responsibility by creating liability over the benefits as well as the costs of one’s decision in relation to others. To the extent that private property and individual responsibility are reciprocal to one another, social justice emerges as a result of individuals having to bear the consequence of their actions. Therefore, private property establishes the preconditions of social justice, namely by facilitating the creation of the context-specific knowledge necessary to learn what is due to each individual. The concept of a privilege, however, whether it is social, legal, or political in nature, implies the physical assignment of a good or service independent of bearing the full responsibility, or consequences, of one’s choices over the use of a particular good or service. Thus, to the extent that private property has been associated with social injustice, this conclusion is premised on a conflation between private property and privilege. For example, Adam Smith was an adamant critic of the social injustices associated with colonialism, imperialism, and slavery. The source he attributed to such injustice was not private property, but the creation of privilege that precluded the perpetrators of social injustice the full social liability for their unjust actions, both economically in terms of the loss of potential economic wealth as well as morally in terms of violating the natural right of individuals to flourish and actualize their personal destinies (see Easterly 2021). Proponents of the free market, going back to Adam Smith, have consistently argued that a market economy, properly understood as an institutional framework of private property and freedom of contract under the rule of law, is a means of eliminating, not establishing privilege, and therefore a means of liberating individuals from social injustice. The importance of this subtle distinction between private property and privilege applies not only to economics, but also has important legal and philosophical implications pertaining to the social justice of the free market. Violations of the rule of law unleash what I refer to as the unholy trinity of government intervention. That is, any violation of the rule of law implies that political or legal privileges cannot be granted without (1) creating a special advantage to one group of individuals, (2) creating a special disadvantage to another group of individuals while (3) simultaneously granting discretionary power to those political actors who are in the position to grant such privileges. Such a violation in the rule of law results in a transformation of private property into privilege, and a corresponding transformation of free-market competition into crony-capitalist competition. Such a metamorphosis, in turn, degenerates the market into a competitive race for privileges that shields firms from liability over the full costs of their decision-making and subsidizes irresponsible behavior. The conflation between private property and privilege, and the corresponding conflation between free-market competition and crony-capitalist competition, has led to the false conclusion that private property is the source of social injustices, whether they be associated with financial chaos, environmental degradation, systemic discrimination, or an unfair distribution of income through exploitation. The reality is quite the opposite. An example used to illustrate the deleterious environmental consequences of the free market was the 2010 BP Oil Spill in the Gulf of Mexico (also known as the Deepwater Horizon oil spill). Again, to the extent that such offshore drilling resulted in a social injustice associated with environmental degradation, then diagnosing the problem as one of “deregulation” is analogous to diagnosing a flu by treating the sneezes that follow from such illness. If “deregulation” was the culprit, then this was because BP operated in a legal environment where the profits of oil drilling were privatized, but the expected social liability of an oil spill was socialized. However, the privatization of profits and socialization of costs is not the definition of private property, but characteristic of a social injustice due to special privilege. Regulatory discretion by policy officials transformed a system of private property into a system of privilege through the Oil Pollution Act of 1990, which capped the liability over damage claims from third parties to $75 million, an insignificant amount compared to the billions of dollars in liable damages to third parties resulting from the BP Oil Spill. Capping liability created a situation that capped the social responsibility of oil companies, setting the expectation that they could engage in deep-water drilling without having to pay the full consequences of any subsequent environmental damages. Indeed, to the extent that the environmental degradation is regarded as a social injustice, it is because taxpayers, not oil companies, were expected to foot the bill of any subsequent liabilities. However, the source of such social irresponsibility, and the resulting social injustice of environmental degradation, can be traced to the granting of privilege, not the enforcement of private property. Had private property rights been enforced through the threat of costly lawsuits, the social expectation would have been set that BP, or any oil company, would have been liable for environmental damages. Instead, the Oil Pollution Act had the effect of eliminating a free market, specifically by removing the social liability that private property rights would have concentrated on BP, making it far less likely for this disaster to have happened. The point here is not to suggest that private property rights would have guaranteed that such an oil spill would not have happened. However, to attribute the BP Oil Spill to a free market, then such a criticism can only be made in the context in which free markets exist, specifically where private property rights are well-defined and well-enforced. The point here is not to argue that the relevance of private property is to guarantee social justice before market activity takes place. Such a comparison of markets to a context populated by perfect human beings with perfect foreknowledge misses the point that what is socially just requires context-specific knowledge that is discovered only in a context where imperfect individuals are liable for their actions. Thus, social justice is contingent on the ability of individuals to learn and correct for socially unjust behavior by being fully liable for any socially irresponsible behavior and discovering what is due to each individual. Even if we are to concede that the right to private property establishes the institutional conditions that hold individuals accountable for their actions, one might still object that a defense of private property does not necessarily imply a justification of the distribution of income that unfolds through market transactions. Even if firms are held fully accountable to their actions under private property, their source of profits might be regarded as, at best, resulting from “unearned” speculation or, at worst, outright exploitation, either of their workers or their customers. However, the enforcement of private property implies that the only way in which firms can compete for profit is by creating social value where it had not previously existed, not exploiting existing wealth from other individuals. For example, the forerunner of what is known today as Bank of America was originally founded in San Francisco as the Bank of Italy by an Italian American named Amadeo Giannini. An alert and creative entrepreneur, Giannini used his particular knowledge of the Italian immigrant community in San Francisco to provide financial services. Though the profit motive in the financial market did not guarantee that Italian Americans would face the social injustice of ethnic discrimination, competition in the banking system created high-powered incentives for Giannini to learn from the failure of other bankers and realize the potential profits of serving Italian Americans in San Francisco foregone by his competitors. Giannini was able to realize such foregone profits by providing financial services to Italian Americans where they had been otherwise neglected. Thus, a system of private property rights set in motion a process of error-correction, discovery, and learning, from which Gianni was able to amass his wealth, but in a manner that created social justice where it had not previously existed, specifically by discovering an opportunity to serve a disadvantaged group of immigrants and giving them the dignity to which they were due. For more on these topics, see Free Market, by Murray N. Rothbard. Concise Encyclopedia of Economics. “Property or Property ‘Rights’,” by Anthony de Jasay. Econlib, Jan. 6, 2014. “How Property Rights Solve Problems,” by David R. Henderson. Econlib, Apr. 2, 2012. Free markets are indeed imperfect, but the whole point for their existence is to discover how we are able to serve our fellow human beings, most of whom we do not even know, in a peaceful and productive manner, and rendering each of them what they are due, both economically and morally. Thus, the “imperfection” of the market process is to discover how social justice can become complete. Rearticulating the case for a society of free and responsible individuals requires that we first understand that its institutional cornerstone, namely private property, is not synonymous with privilege. Moreover, clarifying this conflation illustrates that the source of social injustice has been the granting of privilege, rather than the enforcement of private property, which has established the conditions for realizing social justice. References Dalberg-Acton, John Emerich Edward. (1907). The History of Freedom and Other Essays. London: Macmillan. Easterly, William. (2021). “Progress by Consent: Adam Smith as Development Economist.” The Review of Austrian Economics, vol. 34, no. 2, pp. 179-201. Haeffele, Stefanie, and Virgil Henry Storr. (2019). “Is Social Justice a Mirage?” The Independent Review: A Journal of Political Economy, vol. 24, no. 1, pp. 145-154. Hayek, F.A. (1960). The Constitution of Liberty. Chicago: University of Chicago Press. Hayek, F.A. (1976). Law, Legislation and Liberty, Vol. 2: The Mirage of Social Justice. Chicago: University of Chicago Press. Kirzner, Israel M. (1989 [2016]). The Collected Works of Israel M. Kirzner: Discovery, Capitalism and Distributive Justice (edited by Peter J. Boettke and Frédéric Sautet). Indianapolis: Liberty Fund. Rasmussen, Douglas B. (1974). “A Critique of Rawls’ Theory of Justice.” The Personalist, vol. 55, no. 3, pp. 303-318. Footnotes [1] See my May 13, 2021 EconLog post, “The Right to Private Property Implies a Social Liability Not a Private Privilege,” for more on this. [2] See my May 18, 2020 EconLog post, “Are Markets Imperfect? Of course, but that’s the point”, for more on this. *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. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)