When the means become the end. “It’s too easy to drive in this city,” says Los Angeles Metro CEO Phil Washington, referring to the city that is often ranked as one of the most congested in the world. Washington’s solution to declining bus ridership is to convert many of the lanes on major streets to exclusive bus lanes, thus increasing congestion and, he hopes, forcing a few people out of their cars. Cities all over the country are proposing such “bus‐​rapid transit” projects, which sound good on paper until you realize that most of them will make congestion worse, not better. Other proposals call for reducing the amount of parking available to drivers, forcing them to ride transit instead. This is from Randal O’Toole, “Dying Transit Industry Grasps for Solutions,” Cato at Liberty, December 8, 2021. The whole thing, which is not long, is worth reading. (0 COMMENTS)

During the 1930s, almost no one believed that the Fed caused the Great Depression. After a pathbreaking study of Milton Friedman and Anna Schwartz, published in 1963, the economics profession gradually changed its view. By 2002, even a top Fed official like Ben Bernanke conceded to Friedman: Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again. Now Paul Krugman is contesting this view, in a new column in the NYT: Friedman’s claim that monetary policy caused the Depression was central to his whole argument that governments, not the private sector, are responsible for economic instability, that depressions are caused by governments, not the private sector. . . . And during the Depression, the monetary base didn’t shrink as the economy cratered — it actually grew, a lot: Friedman and Krugman don’t disagree about the basic data for the monetary base, or the broader aggregates such as M1 and M2.  Rather they disagree with how to interpret that data.  I disagree slightly with Friedman’s views, but much more strongly with Krugman’s views.  Here’s what actually happened, using the monetary base as a policy metric: 1. In 1929 the Fed tried to institute a tight money policy, in order to restrain the stock market boom.  At first they failed.  But in the fall of 1929, they raised their target rate to 6%, an astoundingly high level for an economy experiencing zero inflation.  The monetary base immediately began declining, falling by over 7% between October 1929 and October 1930.  By that time, industrial production had already fallen more than 27% below its July 1929 peak.  The economy was now in a deep depression.  Contrary to popular imagination, there was no financial crisis during the first year of the Great Depression—it was 100% tight money. 2. Krugman’s comment about the monetary base refers to the period after October 1930.  A mild banking crisis began in November 1930, and then much more severe crises in 1931, 1932 and early 1933.  This caused a large increase in currency hoarding by the public, as there was no deposit insurance at that time.  This is where Krugman’s interpretation differs from Friedman (and me).  The Fed was created primarily to supply adequate liquidity in times of banking distress.  Before it was created, the banking industry had ways of dealing with financial crises that were certainly not optimal, but crudely effective.  JP Morgan famously helped to quickly end the 1907 crisis, for instance.  After responsibility for this duty was given to the Fed, it failed miserably.  The financial crisis of the early 1930s was far worse than anything that came before the Fed was created.  Although the Fed did inject some extra liquidity—increasing the monetary base—it was far too little to be effective.  Friedman and Schwartz also note that the Fed also took counterproductive steps such as dramatically raising interest rates (by 200 basis points) at the worst possible time—in the fall of 1931.  So it wasn’t all “errors of omission”. [As an aside, the real problem in the US was unit-banking regulations, which explains was less heavily regulated Canada avoided banking crises.  But that’s another topic.] There is no doubt in my mind that the Great Contraction of 1929-33, when NGDP fell roughly in half, was caused by tight money.  The Great Depression tells us absolutely nothing about the supposed “inherent instability of capitalism”, whatever that meaningless expression is supposed to mean.  (Unstable under what monetary regime?)  Nonetheless, I do have some reservations with Friedman’s interpretation.  The Great Depression was global, and while the Fed’s role was very important (and destructive), so was that of the Bank of France, which hoarded large quantities of gold.  But the mistakes of the Bank of France would have had far less impact if it were not for the Fed’s tragically misguided tight money policy of 1929.  It was that policy that indirectly set in motion a series of events (US bank panics, German debt crisis, UK leaving gold), which explain much of the massive French gold hoarding.  Later in his life, Friedman conceded that he should have paid more attention to the role of the Bank of France (and other gold bloc members such as Switzerland, Belgium, Netherlands, etc.) There is an uncanny similarity between the causes of the Great Depression, and the causes of the far milder Great Recession of 2008-09.  As with the depression of the 1930s, the recession that began in December 2007 was triggered by a tight money policy that cased the growth rate of the monetary base to slow sharply.  As in the 1930s, roughly a year into the 2008 recession a severe banking crisis caused a big increase in base money demand.  As in the 1930s, the Fed partially accommodated that increased demand, but not fully.  As in the 1930s, the Fed instituted a foolish policy that increased the demand for base money (higher reserve requirements in 1936-37, IOR in 2008.)  As in the 1930s, there were bond-buying programs, and as in the 1930s the program was made much less effective by communication that led the public to see it as temporary policy that would not lead to higher inflation. I don’t mean to suggest the mistakes in 2008 were anywhere near as bad as in the 1930s; indeed the Fed also did much better than the ECB during the Great Recession.  But the mistakes were similar in nature, despite being much less severe. You can dismiss my critique of the Fed as the raving of a monetary crank.  I don’t care.  All I care about is that the Fed seemed to quietly accept much of the market monetarist critique, and in 2020 did what we said they should have done back in 2008—commit to quickly returning prices and/or NGDP back to the previous trend line.  And it worked—NGDP is right back on trend and jobs are easy to find, unlike in the early 2010s.  (Maybe they overshot a bit, but at least they avoided a long period of a weak job market.)   (0 COMMENTS)

The inflationary policies of Turkish president Recep Tayyip Erdogan confirm two standard economic predictions. First, increasing the money supply, other things being equal, causes inflation. Second, the weakening of independent countervailing institutions by a dictator or would-be dictator will lead to policies entirely focused on the latter’s self-interest. Erdogan’s central bank has been buying assets with newly created money in order to push interest rates down. (Other policy instruments may also have been used.) Erdogan wants low interests because, like Trump, he believes that they boost the economy and, thus, his popularity with voters. He apparently also wants to signal his Islamic colors by following this religion’s prohibition of usury. Not surprisingly, annual inflation runs at between 21% and, according to Professor Steve Hanke of John Hopkins University, 83% per year (see Steve Hanke, “A Way for Turkey’s Erdogan to Have His Cake and Eat It Too,” National Review, December 1, 2021—I don’t like the title much as it obscures the fact that Erdogan is eating the people’s cake). Another expected consequence has been a crash of the Turkish lira, which dropped 45% since the beginning of this year. Not only does a larger supply of a currency on the foreign exchange market push its value down (ceteris paribus), but investors will switch to other currencies and invest in countries with higher interest rates. Moreover, investors will fear continuing devaluation and dump more of the currency, accelerating the downward spiral. Many ordinary Turks are “rushing to trade their shrinking wages for dollars and gold,” tempting the government into imposing exchange controls. Many fear a bank run. These expected consequences are apparently not expected by Mr. Erdogan, who is defending his own intuitive economic theories—much as Trump did, even if the latter was better restrained by American institutions. Erdogan believes that interest rates cause inflation. It is useful for a dictator to have some knowledge of economics or sufficient wisdom to hire or believe advisors and officials who do. Erdogan has been firing all those—including three central bank governors in less than years—and replaced them with blindly loyal and ignorant yes men. In the meantime, the standard of living of ordinary Turks is in free fall and discontent is mounting. The Wall Street Journal reports that officials from Erdogan’s party have also called on Turks to eat less, sacrificing for the good of the country. This leads us to the second lesson of Erdogan’s monetary policy. Precisely to prevent one man (including woman, of course) from running his own little self-interested policies on the back of common people, independent institutions have evolved and been tweaked to control the strongman’s power: notably a legislative branch, a state bureaucracy, an independent judiciary, a semi-independent central bank, not to mention strong private organizations. Mr. Erdogan has spent many years defanging these countervailing powers, to the point where his whims and obsessions meet little opposition. Both with Mr. Trump (who said in 2019 he was a “big fan” or Erdogan, who had done “a fantastic job to [sic] the people of Turkey”) and with his successor in the White House thus far, Americans are lucky that countervailing powers are holding up—more or less. (0 COMMENTS)

Wikipedia’s article on gender bias on Wikipedia is fascinating at the meta-level.   It starts with basic facts: In a 2018 survey covering 12 language versions of Wikipedia and some other Wikimedia Foundation projects, 90% of contributors reported their gender as male, 8.8% as female, and 1% as other. Among contributors to the English Wikipedia, 13.6% identified as female and 1.7% as other.[5] Other studies since 2011, mostly focused on the English Wikipedia, have estimated the percentage of female editors at up to 20%.[3][6] Wikipedia’s articles about women are less likely to be included, expanded, neutral, and detailed.[7][8] A 2021 study found that, in April 2017, 41% of biographies nominated for deletion were women despite only 17% of published biographies being women.[9]  Then we have a section on “Causes” – potential explanations for editors’ gender imbalance, anchored by Sue Gardner’s nine-point list: A lack of user-friendliness in the editing interface. Not having enough free time. A lack of self-confidence. Aversion to conflict and an unwillingness to participate in lengthy edit wars. Belief that their contributions are too likely to be reverted or deleted. Some find its overall atmosphere misogynistic. Wikipedia culture is sexual in ways they find off-putting. Being addressed as male is off-putting to women whose primary language has grammatical gender. Fewer opportunities for social relationships and a welcoming tone compared to other sites. Conspicuously absent from the list of possible causes is the default explanation, also known as the “obvious explanation” and the “common-sense explanation.”  Namely: On average, men enjoy editing Wikipedia much more than women do.  While the vast majority of both genders would find editing Wikipedia boring, the small minority of males who like creating and correcting articles on technical topics for free vastly outnumbers the even smaller minority of women who like creating and correcting articles on technical topics for free.   The only time the article even mentions the default explanation is not in the Causes sections, but way down in “Reactions,” when it allows Heather Mac Donald to state the default explanation without further commentary: The most straightforward explanation for the differing rates of participation in Wikipedia—and the one that conforms to everyday experience—is that, on average, males and females have different interests and preferred ways of spending their free time. What makes all this fascinating at the meta-level?  Well, riddle me this: When you’re writing an encyclopedia article on X, why on Earth would you virtually fail to even mention the default explanation for X?  Even if the default explanation happens to be wrong, you would expect authors to clearly state, “The default explanation, surprisingly, turns out to be wrong.  Here’s why.”  So what’s going on?  Getting meta, there is a default explanation for the failure to mention something’s default explanation.  Namely: Fear.  Since the default explanation is what immediately comes to mind, people naturally blurt it out.  Unless, of course, they bite their tongues lest they get their heads bitten off. This is most obvious for religion.  If someone claims a miracle happened, the default explanation (as Hume pointed out) is that the “miracle” is bogus.  The speaker is either deceived or a deceiver.  If no one voices this default explanation, the reason is probably that they fear religious wrath. The same goes for politics.  If someone claims that Our Dear Leader is the greatest man who ever lived, the default explanation is that this is absurd hyperbole.  The speaker is either deceived or a deceiver.  If no one voices this default explanation, the reason is probably that they fear political wrath. And this, I warrant, is precisely what’s going on in Wikipedia’s article on gender bias on Wikipedia.  The default explanation is that the gender “bias” is no bias at all, but a reflection of the different ways that men and women like to spend their free time.  And the default explanation for the failure to even mention this default explanation is fear.  Fear of what?  Of feminist wrath, the wrath of their allies, and the feigned wrath of all the other people who hope to avoid becoming their targets. Of course, I’m open to the possibility that this default explanation is wrong.  But if we don’t default to the default, that’s strong evidence in favor of the default.  And if calling it the default provokes a wave of anger, that’s practically settles the issue in the default’s favor. (0 COMMENTS)

One of the enduring myths of higher education is that the vast majority of professors are protected by tenure and have jobs for life, and so they are therefore free to research, teach, or speak openly about controversial ideas without fear of professional retaliation. This may have been the case 50 years ago — maybe even 30 years ago — but is far less common today because of seismic changes in how colleges recruit and staff their faculty ranks. Today, three out of every four faculty are employed off the tenure track, and nearly half are part-time faculty, often known as “adjunct” professors, who work on short-term contracts with no guarantee of renewal. That employment arrangement, which The Los Angeles Times recently called “adjunctification” in a scathing editorial published last week, allows universities to end a contingent faculty member’s contract for no reason, for a good reason, or for a bad reason. These are the opening two paragraphs of Jordan Howell and Adam Steinbaugh, “How adjunctification undermines academic freedom, and what FIRE is doing to help,” FIRE, December 6, 2021. FIRE is the Foundation for Individual Rights in Education. In “The Myth of ‘Adjunctification’ and Disappearing Tenure in Higher Ed,” American Institute for Economic Research, December 7, 2021, Phil W. Magness challenges their data. He does a nice job of that and so I won’t repeat his analysis here. But Phil also points out that FIRE seems to have shifted its focus somewhat from defense of academic freedom to “academic labor activism.” The authors don’t ever come out in favor of tenure but the tone of the piece suggests that they think tenure is something that FIRE should push for. For example, after discussing the precariousness of employment as an adjunct without tenure, the authors ask: Can academic freedom survive under these conditions? They don’t answer that question but in context it appears that they think the answer is no. FIRE started as an organization that defended academic freedom for faculty and students on campuses and did a first-rate job of that for over a decade. But it appears to now be in the business of telling colleges and universities what kinds of employment contracts they should have. Moreover, the two FIRE authors don’t seem to recognize trade0ffs in employment contracts. Howell and Steinbaugh write: For adjunct faculty, unstable employment and the ever-present threat of contract nonrenewal means not only economic hardship because of wage insecurity, but also academic hardship. Simply speaking one’s mind in a public forum carries the risk of retaliation. But imagine a world in which there is no tenure. Isn’t it likely that wages (salaries) would be even higher than they are now for strong performers? And yes, they’re right that there probably would be more risk of retaliation for a faculty member speaking his or her mind. But some faculty members would willingly give up tenure and take that risk, especially if they were strong performers. Moreover, as Magness points out, the authors seem to ignore opportunity costs (Bastiat’s unseen) and unintended consequences. He writes: We hear about faculty speech controversies when a currently employed professor – whether tenured or not – loses his or her job for saying something that makes them [sic] a target for punitive action. What we do not see, however, are the faculty who never get hired in the first place because the tenure system allows the dominant political faction within a department to veto any applicant from a minority viewpoint. Nor do we see the faculty who find ideological roadblocks to career advancement due to the tenure system’s many chokepoints, and political uses of them by a left-leaning majority to reward allies and penalize opponents. As a result, tenure is at best a mixed bag – sometimes it protects the already-employed, but at other times it means that candidates with unpopular views are never offered employment or promotion in the first place. On the one hand, we have articles like those by Howell and Steinbaugh that cause me to be critical of FIRE. On the other hand, we still see FIRE performing magnificently, as in its recent defense of a professor who researches people who are sexually attracted to minors but don’t act on that attraction. (Parenthetically, even though I often enjoy Gutfeld on Fox News Channel, I was stunned by his and his guests’ recent apparent inability to distinguish among three things: (1) those who are attracted to minors; (2) those who act on that attraction; and (3) those who research people who are attracted to minors.) Also FIRE has been outspoken against the extreme measures taken during the Obama administration on sexual harassment. So there’s a lot of good there. This is the time of year when I choose the charities I’m going to give money to. Ever since 2003, I’ve given money (not a large amount) to FIRE. I’ve never hesitated before. While I’m still leaning in favor of giving my usual three-figure contribution, this is the first time I’ve been torn. (0 COMMENTS)

The Financial Times has an article discussing Honduras’s relations with the US, Taiwan and China. As is usually the case with this respected publication, the tone of the article is quite serious. It is only when you begin to think about what you are reading that doubts creep in. Honduras is also strategically important to the US, as it hosts the Joint Task Force Bravo air base, Washington’s most important military unit for fighting Latin American drug networks. That sounds pretty serious, but what does it actually mean? Is the US military “fighting” drug lords or is it facilitating their business? Let’s back up and ask why drugs lords earn enormous profits. Most agricultural products are not particularly profitable, why are drugs different? The best answer is that unlike with corn or wheat, coca leaf producers have the US military fighting against them. That makes their product extremely expensive, and this causes the profits to be extremely high. Of course these are just accounting profits; adjusted for risk of death or imprisonment the drug trade is not unusually profitable. Nonetheless, the US military helps insure enormous dollar profits for drug lords.  Drug lords would be horrified if we ended the drug war. “Of course, US influence is waning and China’s increasing,” said Antonio Hsiang, a Taiwanese professor at the National Academy of Political and Strategic Studies in Chile and editor of a new book on Taiwan’s relations with Latin America. “Even though the US is a major aid donor to Honduras, corruption is so severe that the Honduran people do not see much of that.” Honduras is one of the poorest countries in the Western hemisphere. So at first glance it sounds good that the US provides lots of foreign aid. But notice that the public sees very little of that aid. So where does all the money go? The article suggests that it doesn’t go to “the Honduran people” due to “corruption”; so perhaps the money is going to corrupt officials in the government? So now we have a US military that is enriching “drug lords” and a US Treasury that is financing corruption in Honduras. Xiomara Castro, the leftist politician elected president of the central American country last week, pledged during her campaign to establish diplomatic relations with China, which would reduce Taipei’s diplomatic allies to just 14. . . . But since El Salvador made the switch in 2018, the US has pushed back. Washington recalled its ambassador and put Salvadoran officials it accused of corrupt and undemocratic practices in support of Beijing on a sanctions list. Some analysts believe the US will do anything to keep Honduras from getting close with China. So what’s wrong with pressuring our aid recipients to take our side on foreign policy questions? In the past, I’ve criticized the US for bullying smaller countries. Thus we threatened trade sanction against Ecuador when they disagreed with the US on an obscure UN resolution on breast-feeding. (No, I’m not joking.) But let’s say I’m wrong.  Suppose it is only natural for big countries to pressure smaller countries to take their side on important foreign policy questions. In that case, what possible objection could I have to US policy toward Honduras? Here’s the problem. Those 14 countries that have formal diplomatic relations with Taiwan do not include the US. Indeed, in 1979 the US recognized Beijing as the sole legitimate government of China. This is often called our “one China policy”. We are not bullying Honduras to agree with our official policy on China, we are bullying Honduras to disagree with our official policy on China. Of course the US does favor Taiwan over China in an unofficial sense, and perhaps for good reason. Taiwan’s government is far superior to the government in Mainland China, by any reasonable criterion. You might say that we are bullying Honduras to support Taiwan because we are too cowardly to do so ourselves. We are afraid of angering China, but not afraid of angering Honduras. That’s just how the world works.  Do as we say, not as we do. But did the FT explain the grotesque irony of the US position? Not that I can see—the article didn’t even mention that we were trying to force Honduras to do adopt a policy that is the exact opposite of our own policy.  “The US will not let Honduras go because it is crucial for homeland security,” said Antonio Yang, a Taiwanese Latin America expert and honorary professor at the National Defence University in Tegucigalpa. “Crucial” is an interesting adjective. Germany is a crucial European ally to the US. Japan is a crucial East Asian ally. Canada is a crucial North American ally. You might even argue that Panama is a crucial Central American ally.  Honduras? Hmm . . . Luis Larach, who has businesses in tourism, energy and real estate, thinks Honduras should focus on nearshoring — trying to attract US companies to move factories to the region from Asia — to drive economic growth. “You don’t need to have a lot of information to figure out that our big potential for development is with the United States,” he said. “The historic diplomatic relations with Taiwan have been good for our country and our region and, I think, should continue.” The FT is a serious newspaper, much like the NYT or WSJ. It’s not “The Onion”. But the more I think about what I’m reading, the more confused I get. Honduras has a per capita GDP of $2500, very poor even by Central American standards. They just elected a left wing leader who plans to shut down the charter city project. What do they mean by “potential for development”? In what sense does Honduras have any potential at all? Vietnam has potential. Bangladesh has potential. But Honduras? And how have diplomatic relations with Taiwan been good for Honduras? Perhaps they received some foreign aid, but wouldn’t Mainland China also provide foreign aid? The US does lots of trade with Taiwan despite its decision to shift diplomatic recognition to Beijing. When I was young, I assumed that the foreign policy experts I saw on TV must know what they are talking about. (Especially when they had central European accents.) But as I got older and saw one US foreign policy fiasco after another, I began to wonder. Is foreign policy expertise actually a thing? How would we know? If I’m tired and read this FT article quickly, it all seems quite reasonable, quite respectable. But if I slow down and start to think about what I’m reading, then I feel like I’m in a madhouse—none of it makes any sense at all. (0 COMMENTS)

During Covid, the U.S. reverted to our old tradition of federalism – and then embraced gubernatorial dictatorship.  As  result of this strange and shocking institutional revolution, the U.S. witnessed a dramatic rise in policy variance.  Some parts of the U.S., like Florida and Texas, returned to near-normalcy in a matter of months.  Others, like California and New York, became and remain soft police states. We’ve now spent the better part of two years arguing about which states have the best policies.  Due to this resurgence of federalism, however, U.S. residents can do much more than bicker.  They can opt for self-help.  If you think Covid policy in your area is too strict, you can move to a laxer state.  If you think Covid policy in your area is too lax, you can move to a stricter state.  To this extent, you’re free to choose. Logically speaking, net migration could easily flow from lax states to strict states.  (“Get me out of this death trap!”)  But at least to me, it seems like the opposite is the case.  Lots of people move from strict states to lax states.  Hardly anyone goes the other way. The obvious counter, however, is that I live in an anti-lockdown bubble.  In total, I’ve spent about five months of Covid away from home, always in search of greater freedom and sociability.  It’s only natural, then, that I would know a lot of freedom-seekers – and hardly ever meet security-seekers.  Indeed, since security-seekers keep to themselves, they rarely even meet each other. What’s really going on?  As usual, no decent data googles, so I decided to run some informal surveys.  Results: How many people do you personally know who have moved in order to live with fewer Covid rules? — Bryan Caplan (@bryan_caplan) November 30, 2021 How many people do you personally know who have moved in order to live with more Covid rules? — Bryan Caplan (@bryan_caplan) November 30, 2021 22% of people know someone who migrated for laxer rules, but only 7% know someone who migrated for stricter rules, for a ratio of over 3:1.  Quite consistent with my experience.  Assuming the difference is genuine, what explains it?  The leading possibilities: 1. Young people are more intrinsically willing to move, and are net losers from Covid regs because they’re low risk. 2. Deep down, people care more about freedom than security.  Since actions speak louder than words, people’s rhetoric (and voting) are much more pro-regulation than their locational decisions.  This arguably violates Hanania’s rule that the left cares more about politics than the right, but still seems plausible. 3. Risk-averse want more Covid regs.  But risk-averse people also dislike change, and moving is a huge life change.  As a result, the people with the most to gain from moving to Covid-strict states are the most reluctant to move anywhere. If you know of any relevant evidence, I’m all ears.   (0 COMMENTS)

In the summer of 1982, I was a special assistant to assistant secretary of labor John Cogan. That summer, the U.S. was still in the midst of the 1981-82 recession. When you’re in it, you don’t know how long you’re in it and you don’t know you’re out of it until at least a few months after you are. That meant that there was strong pressure to renew the federal extension of unemployment benefits. On the other hand, there was a reasonable case to be made that the extension of unemployment benefits was extending the recession. The Senate had a bipartisan proposal to the extend the federal extension (an additional 13 weeks, if I recall correctly) of unemployment benefits. The Reagan administration opposed this extension and John Cogan was tasked to write and deliver the testimony on this before the Senate Finance Committee. The Republicans were in the majority in the Senate and so Bob Dole was chairman of Senate Finance. I helped Cogan write the testimony. I think we made the argument in the testimony that extending the benefits would keep unemployment higher than otherwise. As a kind of reward, I got to go and sit behind him when he testified, close enough that I could whisper thoughts into his ear. We got slammed. It wasn’t just that no one on either side of the aisle who was on the Senate Finance Committee agreed with us. It was that (and I learned later that this was par for the course) their way of expressing disagreement was to be nasty. So Democrat Bill Bradley was nasty; Democrat Russell Long was nasty; and Republican Bob Dole was nasty. I kept whispering comebacks into Cogan’s ear but he didn’t bite on any of them. A former student of mine from Santa Clara University, Ken Kam, was in town and I had told him that he might want to attend and see how we did. He did attend and afterward he told me words to the effect, “I agreed with you guys on the policy but even I hated you by the end.” I had thought to check my watch when our turn came and again when it ended. I had thought, given the treatment we received, that we had been there 2 hours. The actual time: 26 minutes. By the way, none of this means that I hold Dole in contempt. Indeed, from everything I know, I liked him substantially more than the median Senator. I think he was a sharp man with a sharp wit and he had some integrity. (0 COMMENTS)

In debates, I’ve had colleagues on the left sneer at me: “You need to read Thomas Hobbes!” That’s not wrong; we should all read Hobbes. He thought that human quarrels could not be solved by promises to cooperate. His 1651 summary was pithy: “Covenants, without the sword, are but words and of no strength to secure a man at all.”  Hobbes thought that the only way to assure cooperation was to constitute a sovereign, or “Leviathan.” Paradoxically, then, people who wanted to freely contract with each other for mutual benefit should favor a powerful, coercive state. Hobbes has a point; the ability to make credible commitments is an indispensable component of a society if citizens are to be free and responsible. If two parties cannot agree on an enforceable arrangement for mutual benefit, they are harmed by their inability to arrange to be coerced. But Hobbes was wrong to insist that only the sovereign monarch could be the source of the contingent coercion that secures covenants. One alternative might be the use of adversarial contests to determine which “team” of political actors will run the state monopoly. North, Wallis, and Weingast (2007) claimed that the abuse of coercive power can be constrained by an open access order, with free competition. The potential for incumbent state actors to do harm is limited by the threat of replacement, because the open access order is open to entry from alternative aspirants to adjudicate disputes and enforce agreements. The question, then, is how to sustain an open access order where the institution of the state has a monopoly on the legitimate use of force.  To be fair to Hobbes, he had lived through a period that was catastrophically violent and chaotic; further, he had no examples of republican governance to reason from. Further, Hobbes had no examples of the kind of emergent institutions emphasized by classical liberals such as Friedrich Hayek and Elinor Ostrom. But in the 21st century, it has become increasingly clear that concentrating all the coercive powers of contract enforcement in a monopoly state is not necessary for workable voluntary exchange and large-scale cooperation. What is required is that open access orders be maintained on many dimensions, using a particular set of institutions that allow innovation in forms of monitoring and enforcement. The surprising conclusion of this argument is that the solution has been in our grasp for decades- in fact, for centuries. The solution is exactly the constitutional forms suggested by classical liberalism, enabled by new forms of technology such as smart contracts and block chain generation of consensus and dispute resolution. The simplest way to think of it is that improved technology and decentralized mechanisms for organizing cooperation have for the first time made classical liberalism feasible on a broad scale. Government, as my dissertation adviser Douglass North often pointed out, was at best a way of reducing the transaction costs of achieving the gains of cooperation. But the innovations in managing transaction costs have made that old top-down form of governance obsolete. The result is both innovation and disruption on a scale that has been seen only rarely in human history. The source of the innovation, and the disruption, is a set of rules that allow permissionless innovation. But we no longer live in a Hobbesian world. We live in a world where the emergent institutions fostered by classical liberalism can solve the Hobbesian problem better than the state. We need to make that argument directly: the state is obsolete, because we can do better than an unaccountable Leviathan. As Emily Chamlee-Wright has argued, “Liberalism is a set of institutions that embody a fiction: we are all each other’s dignified equals.”  Why a “fiction”?  As Hayek put it: From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time. (Constitution of Liberty, p. 87) You may ask me, “What new forms will contracts and voluntary coercion take?” My answer is that I don’t know, and it’s very important that I don’t need to know. Long live classical liberalism, and the permissionless innovation in self-governance that it fosters.   Michael Munger teaches at Duke University and is Director of the interdisciplinary program in Philosophy, Politics, and Economics (PPE) at Duke University. He is a frequent guest on EconTalk. Read more of Michael Munger’s writing at Archive.   (0 COMMENTS)

Professor Israel M. Kirzner, more than any other economist of the Austrian School (and among economists in general) since the second half of the 20th century, has revived our understanding of the systematic role of the entrepreneur as the driving force of the market as a process of discovery, error correction, and learning (Kirzner 1973). The economist’s task, according to Kirzner (1963 [2011], p. 10), in “explaining what has happened in the real world, or in predicting the likely consequences in the real world of a particular event, the economist thus combines theory with empirical fact.” Thus, economic theory itself is not reality; rather, it is a tool for understanding reality. Its importance rests not only on the internal validity of its propositions, but also, more importantly, on the soundness and applicability of its propositions to understanding the manner in which economic history has unfolded. Indeed, Professor Kirzner’s work has been recognized and applied not only in economic theory but also in the study of entrepreneurship, business economics, and economic management, for which he was awarded The International Award for Entrepreneurship and Small Business Research in 2006. True to his own understanding of his work, Kirzner was puzzled at being so honored, given his scholarship explains that the source of economic development can be found in the entrepreneurial market process, not to explain the secrets of successful entrepreneurship itself (see Kirzner 2009, pp. 145—146). Nevertheless, the historical application of Kirznerian entrepreneurship to understanding the process of economic development remains relatively neglected. To the extent that entrepreneurial explanations of economic development have been applied to historical case studies, the predominant account is one that was first expounded by Joseph Schumpeter (1934). Kirzner’s theoretical exposition of the entrepreneurial market process has important empirical implications for providing a more complete understanding of the rise of modern economic growth, beginning first in Western Europe. This basis for my argument, ironically, comes from one of the main sources of the continued emphasis of Schumpeterian entrepreneurship in economic development today, and exposes the deficiency of Schumpeterian entrepreneurship through a Kirznerian lens, but without referencing Kirzner himself. The source to which I’m referring is William Baumol’s “Entrepreneurship: Productive, Unproductive, and Destructive” (1990).1 Though there is evidence to corroborate the fact that scholars have taken inspiration from, and built upon, Baumol’s Schumpeterian framework (see for example Li, Feng, and Jiang 2006; Henrekson and Sanandaji 2012; Aeeni, Motavaseli, Sakhardi, and Dehkordi 2019), it does not immediately follow (nor would I argue) that the relative neglect of Kirzner can be attributed to either an error of omission, or even commission, by Baumol. Nevertheless, my hope here is to use Baumol’s own argument to establish a Kirznerian basis for future research in economic development, and to propose a correct understanding of Baumol’s framework, which is far more Kirznerian than has been understood. Before doing so, it is important to briefly outline the accounts of entrepreneurship by Joseph Schumpeter and Israel Kirzner, respectively. The Schumpeterian account of entrepreneurship emphasizes the creation of profit opportunities through technological innovation. Economic development, according to Joseph Schumpeter, “is a distinct phenomenon, entirely foreign to what may be observed in… the tendency towards equilibrium” (1934, p. 64). Therefore, the Schumpeterian entrepreneur is an innovator who has a disequilibrating effect on the market process. The Kirznerian account of entrepreneurship, however, has an equilibrating effect on the market process. In effect, the Kirznerian entrepreneur is an arbitrageur who seizes previously unnoticed profit opportunities by realizing the existence of disequilibrium due to prior entrepreneurial errors in the allocation of resources. When he perceives such inefficiency from unrealized gains from trade, the Kirznerian entrepreneur captures pure profit and exhausts gains from trade by redirecting resources from less valued consumer uses to more valued consumer uses. “Given that, for most of its history, Europe was both a cultural and technological backwater compared to China, this empirical fact presents a puzzle that cannot be explained solely by a Schumpeterian account of entrepreneurship.” Baumol’s central claim is that the relative allocation of entrepreneurship between productive, unproductive, or destructive activities “depends heavily on the rules of the game—the reward structure in the economy—that happen to prevail” (1990, p. 894). Thus, entrepreneurship is ubiquitous, but its manifestation is institutionally contingent (Boettke and Coyne 2003). By his own admission, however, the Schumpeterian entrepreneur, according to Baumol, is an incomplete understanding for explaining, in the words of Eric Jones, “The European Miracle” (1981 [2003]). Given that, for most of its history, Europe was both a cultural and technological backwater compared to China, this empirical fact presents a puzzle that cannot be explained solely by a Schumpeterian account of entrepreneurship. This is admitted by Baumol, who provides a Kirznerian answer as to why this is the case: To derive more substantive results from an analysis of the allocation of entrepreneurial resources, it is necessary to expand Schumpeter’s list, whose main deficiency seems to be that it does not go far enough. For example, it does not explicitly encompass innovative acts of technology transfer that take advantage of opportunities to introduce already-available technology (usually with some modification to adapt it to local conditions) to geographic locales whose suitability for the purpose had previously gone unrecognized or at least unused (Baumol 1990, p. 897). The unintended, and unexpected, economic transition of the West from subsistence to exchange was fundamentally predicated on creative arbitrage, namely (as Baumol puts it), innovative acts of technology transfer by arbitraging it from one geographic location (with a less valued use) to another geographic location (with a more valued use). These creative acts of arbitrage were facilitated by Kirznerian productive entrepreneurship, which had been uniquely adopted to the commercial demands of European commerce, and facilitated by political fragmentation and interjurisdictional competition. The result of jurisdictional competition, which redirected the relative allocation of entrepreneurship toward productive activities, expanded the scope of productive specialization and exchange through adoption of existing technology that created the conditions for economic calculation. As Rosenberg and Birdzell state this point: The very idea of varying and changing what one did in response to calculations of future consequences and present conditions of supply and demand lay outside the normal pattern of medieval life. Calculation is the crucial word here. The possibility of calculation, of assessing prospective magnitudes of cost and revenue and the probability of alternative outcomes in a novel enterprise, of profiting from judicious buying and selling… rather than from diligent service to one’s lord or from industriously plying one’s trade, was wholly alien to the customary order of feudal society (emphasis original; 1986, p. 53). For more on these topics, see “Competition and Entrepreneurship: The Fountainhead of the Contemporary Austrian School,” by Steven Horwitz, Library of Economics and Liberty, December 7, 2020; and the EconTalk podcast episode Thomas McCraw on Schumpeter, Innovation, and Creative Destruction. See also “A Conversation with Israel Kirzner”, a video interview at Econlib; and the biography Israel Kirzner in the Concise Encyclopedia of Economics. Just to name a few such technological adoptions which were arbitraged from existing technology from China, but “created” for the unique commercial purposes in Europe, include bills of exchange and double-entry bookkeeping. Werner Sombart, professor of the Austrian economist Ludwig Lachmann, has gone so far as to say that “One cannot imagine what capitalism would be without double-entry bookkeeping” (1953, p. 38). Thus, the technologies that were adopted to Europe were transformed to create something that had not otherwise been seen in humanity before on such a wide scale: the transformation of competition from a form of violence to competition in the form of productive specialization and exchange. The resulting transition from poverty to wealth is a fundamentally a Kirznerian story, one that economic historians can discover, learn from, and use as an intellectual profit opportunity to correct for existing misinterpretations in economic history. Footnotes [1] Baumol as well was the 2003 recipient of the International Award for Entrepreneurship and Small Business Research. References Aeeni, Zeynab, Mahmoud Motavaseli, Kamal Sakhardi, and Ali Mobini Dehkordi. (2019). “Baumol’s Theory of Entrepreneurial Allocation: A Systematic Review and Research Agenda.” European Research on Management and Business Economics 25(1): 30-37. Baumol, William J. (1990). “Entrepreneurship: Productive, Unproductive, and Destructive.” Journal of Political Economy 98(5): 893-921. Boettke, Peter J., and Christopher J. Coyne. 2003. “Entrepreneurship and Development: Cause or Consequence?” Advances in Austrian Economics 6: 67-87. Candela, Rosolino A., Peter J. Jacobsen, and Kacey Reeves. (2020). “Malcom McLean, Containerization, and Entrepreneurship.” The Review of Austrian Economics Henrekson, Magnus, and Tino Sanandaji, eds. (2012). Institutional Entrepreneurship. Northampton: Edward Elgar. Jones, Eric. (1981 [2003]). The European Miracle: Environments, Economies, and Geopolitics in the History of Europe and Asia. New York: Cambridge University Press. Kirzner, Israel M. (1963 [2011]). The Collected Works of Israel M. Kirzner: Market Theory and the Price System, edited by Peter J. Boettke and Frédéric Sautet. Indianapolis: Liberty Fund. Kirzner, Israel M. (1973). Competition and Entrepreneurship. Chicago: University of Chicago Press. Kirzner, Israel M. (2009). The Alert and Creative Entrepreneur: A Clarification. Small Business Economics 32(2): 145-152. Li, David Daokui, Feng, Junxin, and Hongping Jiang. (2006). “Institutional Entrepreneurs.” The American Economic Review 96(2): 358—362. Rosenberg, Nathan, and L.E. Birdzell, Jr. (1986). How the West Grew Rich: The Economic Transformation of the Industrial World. New York: Basic Books. Schumpeter, Joseph A. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge: Harvard University Press. Sombart, Werner. (1953). “Medieval and Modern Commercial Enterprise.” In Frederic C. Lane and Jelle C. Riemersma, eds., Enterprise and Secular Change: Readings in Economic History (pp. 25-40). Homewood: Richard D. Irwin. * Rosolino Candela is a Senior Research Fellow and a Program Director of Academic and Student Programs, as well as a Senior Fellow of the F.A. Hayek Program for Advanced Study in Philosophy, Politics and Economics at the Mercatus Center. (0 COMMENTS)