Leading the Revival of Individualism & Self Reliance
Road To Serfdom

Venezuela On The Road To Serfdom: Part 1

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“Venezuela is the current poster child of interventionist failure”

When looking at the quality of the media coverage of Venezuela’s crisis and the interpretations of the factors that caused it, the superficiality of most analyses quickly becomes apparent. The explanations offered by many “experts” and commentators largely ignore the country’s history and fail to take into account the pre-existing political and economic dynamics that heavily contributed to, if not predetermined, Venezuela’s current predicament.

To understand these factors and the long road that led to the present crisis, I turned to José Niño, a Venezuelan-American writer, political operative and policy analyst, whose extensive research and deep understanding of the country’s history have armed him with the right tools to separate fact from fiction and political wishful thinking from hard economic realities.

Interview with José Niño:

Claudio Grass (CG): Mainstream international coverage of the crisis in Venezuela earnestly started only about 3-4 years ago. Most analyses blamed declining oil prices and provided very little context as to the status quo before the escalation of the crisis, to the point that the average news consumer couldn’t be blamed for thinking it was all a flash-crash mainly caused by external factors that couldn’t be helped. Do you believe this narrative is accurate?

José Niño (JN): I don’t believe it at all. Contrary to many conventional narratives, Venezuela’s problems go back decades, even before Hugo Chávez and Nicolás Maduro came into the picture. The problem is that people have very short-sighted analyses and interpretations of political events.

Based on my research over the years, I can say that Venezuela’s institutional and cultural decline began in the 1970s with the nationalization of its oil industry and the state’s rapid encroachment into the economy. The last 50 years of Venezuelan economic history have been filled with sub-optimal economic interventions.

However, the recent abuses under Chávez and Maduro were much more profound and accelerationist in nature, hence the country’s recent implosion. Nevertheless, we can’t ignore previous decades of abuses. We have to remember that Venezuela was classified as an economic growth disaster by Charles Jones in his “Introduction to Economic Growth”. It was one of the few countries that actually got poorer from the late 1950s until the late 1990s. In fact, the average per capita GDP in Venezuela was higher in 1958 than in 1998.

Source: IMF, CSIS

CG: Many people, lacking the historical understanding of Venezuela’s story, might find it surprising, but there was a time when the country was a formidable economic leader and it wasn’t that long ago. After the end for WWII until the 70s, the levels of prosperity, productivity, growth and overall wealth accumulation were enviable, without the support of skyrocketing oil prices. What drove this economic boom and what does this period say about the conventional understanding of the “resource curse”?

JN: Pre-oil nationalization, Venezuela was quite market-oriented. Taxes were relatively low, spending was in check, and there was a very small managerial state. Obviously, there were no wholesale expropriations of industries as well. Interestingly enough, Venezuela was late to the central banking party. It launched its Central Bank in 1939. These factors also attracted skilled European labor from countries such as Italy, Portugal, and Spain from the 1930s until the 1960s.

From the 1910s until 1970, Venezuela went through a profound economic transformation that nearly put it in First World status. Funny enough, oil prices were not very high during these periods, especially the 1950s, where Venezuela enjoyed tremendous growth.

Once government intervention came into the picture, the country slowly started to go off the rails. When we look back, Venezuela’s decline has more of a “government curse” than a “resource course”. A good deal of oil-rich states have not suffered the same fate as Venezuela and that is no coincidence. Policy matters and collapses are the outcomes of deliberate policies.

CG: What role did the Hugo Chávez years play in setting the stage for today’s economic deterioration? Did his reforms make it inevitable or do you think it could have been avoided?

JN: Chávez represented the accelerationist phase of the Venezuelan collapse story.
Ironically, he campaigned on a relatively centrist, anti-crony capitalism platform in 1998. He denounced the excesses of the post-1958 social democratic order and even described Cuban leader Fidel Castro as a dictator.

However, once in power, things started to change. The failed 2002 coup attempt against his government really radicalized him, especially when rumors emerged that the CIA assisted in this coup. He had the perfect boogieman to mobilize his radical force and so began the next radical phase of the Venezuelan economy.

The nature of the Venezuelan state was fundamentally altered in the 1970s, as the government nationalized the oil industry and turned the country into a petro state. Since then, government intervention in all facets—central banking, controls, subsidies, wage policies, etc.—grew unchecked. The 90s saw half-hearted attempts to make certain reforms from the IMF—marginal spending cuts, new VAT tax, and tariff reductions— but they did not go far enough in terms of oil privatization, spending cuts, or at the least the creation of a sovereign wealth fund. Institutional inertia and a culture that was dependent on the petro state made any type of market reform impossible.

In fact, the president conducting the IMF reforms, Carlos Andrés Pérez, was impeached for corruption by his own party as he was trying to liberalize the economy. The radicals within Pérez’s party where that scared of those lukewarm market reforms.

Also, it did not help that inflation was never tamed during the late 1980s and 1990s. Fun fact, the last time inflation was in the single digits in Venezuela was in 1983. All in all, Chávez continued the previous economic errors, but also introduced authoritarian governance into the equation.

CG: Let’s turn to the state of civil liberties in the country for a moment. Numerous reports clearly show the spike in authoritarian measures, confiscations, violations of property, civil and human rights and the government’s brutal suppression of dissent. Do you believe that this deterioration happened quickly, as the Maduro government suddenly recognized the urgent threats to its authority? Or was it more of a frog-in-boiling-water process, where the gradual limitations to civil liberties and property rights began long before the current crisis?

JN: The Chávez-Maduro era was the most repressive phase of Venezuela’s economic collapse, given the authoritarian nature of the Chavista coalition. There’s a really huge authoritarian streak among Chavistas and they do have a visceral hatred for the upper-middle and upper classes. Chávez took a more boiling frog approach, but the Maduro regime has been more dramatic in certain respects given challenges to his authority and increased international pressure.

Venezuela also has a lot of internal problems with crime and overall lawlessness. So, the government will respond authoritatively at times to demonstrate that it’s still boss.
That being said, the Venezuelan regime is probably one of the least repressive socialist regimes when comparing them to their 20th-century predecessors. I think social media and phone access have kept the government in check and limited their ability to commit repressive acts.

In the upcoming second part of this interview, we turn to the topic of hyperinflation and we also discuss the lessons that Venezuela’s story offers for the increasingly polarized Western democracies going forward.

Claudio Grass, Hünenberg See, Switzerland

www.claudiograss.ch

Community Is One Of The Pillars Of A Free Society That Is Crumbling Under The Pressure From The Centralizing State.

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In his recent book, economist Raghuram Rajan argues that a well-balanced society rests on three pillars. One pillar is competitive markets. Another pillar is an effective but limited state (by which he means central government). A third pillar is vibrant local communities. The thesis of The Third Pillar is that contemporary society suffers a weakness in the third pillar of community.

Rajan takes care to spell out what he means by community. While there can be communities that are linked by kinship, occupation, or beliefs, he sees the traditional neighborhood as the most significant community.

In the preface, he introduces the community as a source of political action to constrain the other pillars. But Rajan soon moves beyond this narrow view of the value of communities.

  • They offer their members a sense of identity, a sense of place and belonging that will survive the trials and tribulations of modern life. They do this through stories, customs, rituals, relationships, and joint celebrations or mourning so that when faced with a choice between self-interest and community interest, or between community members and others, members are more inclined to put their own community first. Often, communities inculcate shared values and goals in members, as well as imbue in them a sense of personal utility from various actions that benefit the community. (page 5)

I would say that communities facilitate personal interactions and relationships. In contrast, markets and government facilitate impersonal transactions and relationships.

I would add that economic progress consists of increased specialization and trade. This inherently cuts into the role of communities, as households use markets to provide goods and services that in an isolated village would be provided by relatives, neighbors, or their own unpaid labor. As just one example, today fewer people mow their own lawns and fewer still pay the neighbor’s son to mow their lawn.

Markets work well when they are open, highly competitive, and specialized. But Rajan points out that communities require the opposite:

  • Community relationships are built when members have limited choices… Relationships, and thus communities, become more fragile when the available set of choices expands… (p. 15)
  • Relationships work better if partners interact over multiple activities—if one’s neighbor is not just a source of the odd gardening tool but also helps deliver our child, we are likely to have stronger bonds. However, this requires the community not to have specialists… As the community grows larger, therefore, we can call the professional midwife when the child is being born or the professional fire service when a cat is stuck up a tree, instead of our neighbor. (page 17)
“When people believe, correctly or not, that the state will take care of problems, they lose their motivation to mobilize as a community.”

Rajan points out that the state as well as the market can crowd out communities. When people believe, correctly or not, that the state will take care of problems, they lose their motivation to mobilize as a community.

Of course, community solidarity can shade into insularity. Community members may sacrifice the benefits of interacting with strangers or adopting new norms and practices.

  • Most obviously, communities can prohibit or restrict contacts between their members and the outside, especially if such contacts can infuse new and uncomfortable ideas or make members more economically independent of the community. (page 18)

He adds,

  • Such restrictions are not imposed solely to protect the community, they also protect the powerful in the community. (page 19)

Reading this sentence made me think of the small community of scholars at the apex of the economics profession. Their norms and practices serve to preserve the power base of the economics departments of MIT, Harvard, and the University of Chicago, but there may be some intellectual sacrifice as a result. Rajan himself was famously scorned by the insular community of Federal Reserve economists when in 2005 he warned of weaknesses in the financial system.2

Rajan offers a historical narrative of the process by which states and markets superseded communities. In short, rulers found that by encouraging competition and protecting individual property, they could have stronger economies and greater tax revenues. Entrepreneurs and merchants found that by supporting the state they could in turn obtain greater freedom to pursue and retain profits.

Thus, Rajan sees an effective state and a competitive market as emerging in tandem. But there is a constant risk that the disease of cronyism will infect a modern society.

  • The private sector cannot be independent when it is largely reliant on the state for profits—when the state controls entry through regulation or licensing; elevates industry profits through protective tariffs; directs substantial military or government advertising contracts to favored firms; or turns a selective and convenient blind eye to the takeovers and predatory practices that lead to monopolization of industry. (page 108)

Rajan praises the Progressive movement for fighting against the monopolization and cronyism of the Gilded Age. But he faults Progressives for encouraging centralization and consolidation in education. In the nineteenth century,

  • The United States had a schooling system that was locally funded and locally controlled, free to all, nonsectarian, and increasingly professional. (page 121)

But this has changed.

  • Of the over two hundred thousand one-room schools in 1915, only twelve hundred were open in 1975. (page 124)

Population shifts and changes in the economics of schooling account for some of this. But Progressive attitudes also undermined local education.

  • Woodrow Wilson, who was president of Princeton University before he became president of the United States, stated while speaking of his students, “Our problem is not merely to help the students adjust themselves to world life. Our problem is to make them as unlike their fathers as we can.” Such attitudes could not help but diffuse through the professional educational bureaucracy… local control diminished further. The gap in views between parents and the professional bureaucracy widened. (page 125)

Rajan’s narrative of the past 75 years in the United States is roughly as follows: The federal government took on more of its proper responsibilities to provide social insurance. In the aftermath of the Second World War, markets expanded as the U.S. economy became more integrated internally and with the rest of the world. But by the 1970s, the U.S. government was trying to do too much and creating too many distortions and inefficiencies. By the early 1980s, policy makers were focused on increasing economic efficiency, and by deregulating they unleashed economic growth that was uneven, unequal, and unstable.

The contemporary legacy of this unbalanced economic growth includes many workers with poor job prospects. They are in turn embedded in a vicious cycle of weak communities failing to accumulate human capital, leading to worsening job prospects, even weaker communities, etc.

For a solution to this vicious cycle, Rajan envisions a central government that provides local communities with financial support but without the bureaucratic controls that come with current programs. He would like to see communities develop the leadership and initiative to implement local solutions to their problems.

Misunderstanding the Universal Basic Income

In discussions of the idea of a Universal Basic Income (UBI), many people, including some of its supporters, treat it as a policy aimed at supporting people who cannot or will not work. Unfortunately, Rajan reinforces this notion.

  • UBI essentially assumes that most people will not have a job, and there will be no point in them searching or one or attempting to retrain themselves since no new jobs will be possible. (page 323)

My analysis, which I believe is consistent with fairly basic economics, would say the opposite. Our existing income support programs, including food stamps, unemployment insurance, housing subsidies, and so on, all phase out as people return to work. If they were replaced by a UBI, the incentive to work would be greatly increased.3

Perhaps when it comes to encouraging work the UBI is too subtle, and some other policy, such as an employment subsidy—or simply a reduction in the payroll tax—would work better. But Rajan’s mis-characterization of the economics of a UBI is not helpful.

The Ideological Pillars

In my view, The Third Pillar suffers from an inadequate treatment of ideology in supporting or undermining community. Rajan pays no heed to the longstanding battles between the right and the left, in which the former sought to defend community and the latter treated it with contempt.

One can think of each of the three pillars as having an ideological base. The strongest support for the market comes from libertarian ideology. The strongest support for the state comes from progressive ideology. And I would argue that the strongest support for community comes from (socially) conservative ideology.

Rajan’s attitude toward populism is scornful, and perhaps properly so. But I was troubled by this remark:

  • Populism, at its core, is a cry for help, sheathed in a demand for respect. (page 217)

One could argue that a demand for respect is somewhat justified. Barack Obama spoke of people as “bitter, clinging to their guns and religions.” Hillary Clinton described them as “a basket of deplorables.” Other phrases that are hardly respectful include “toxic masculinity,” which carries further Gloria Steinem’s famous remark that “A woman needs a man like a fish needs a bicycle.”

Rajan’s own “cry for help” formulation is equally condescending and demeaning.

Also demeaning is his suggestion that laid-off manufacturing workers have the option,

  • … to go back to college to acquire or refresh their managerial, professional, or technical capabilities. This requires investment of time and money, but pays off eventually in higher salaries and greater job security.

This implies that there are people who don’t go back to college because they are lazy and/or impatient. But where is the evidence that the people whose jobs disappear actually do achieve higher job salaries and greater job security by going back to college?

Early in the book, Rajan writes,

  • Natural or economic catastrophes and technological progress are the big drivers of societal change. (page 41)

This materialist determinism afflicts many economists. I think that we are wiser if instead we allow for beliefs, especially shared beliefs, to act in their own right as a causal force in human affairs. Indeed, if ideas do not matter, then why bother writing this sort of book?

But later, Rajan allows for a causal role for ideology. He takes a dark view of the role played libertarianism in the 1980s.

  • Thatcher [the British Prime Minister during the 1980s] did not believe in the value of community, preferring individuals and families to navigate the world alone. She had a vision of an individualistic market economy, shepherded by a strong but limited state, with no real place for social structures, the community, that might balance the two…
  • The Conservative and Libertarian academics and intellectuals who had been preaching in the wilderness since the Depression did not expect to ever have the ear of policy makers. Now that they had it, they did not want to let it stray. Their reaction to the postwar state overreach was often ideological, and sometimes untainted by the realities of the world. (page 166)

Rajan thus reinforces the standard anti-market view of Progressives, focusing entirely on the conflict between the market and communities. He ignores a vast and deep conservative literature on the conflict between the state and communities. The names Robert Nisbet and Yuval Levin do not appear in the index to The Third Pillar.4

The conservative narrative for the breakdown of community does not rely on economic inequality as the sole driver. Conservatives emphasize family breakdown, and they blame Progressive ideology. They point out that liberalized divorce laws, single motherhood, and the decline of religious affiliation have contributed to social breakdown, particularly among lower-income households. (Rajan does cite Ross Douthat and Reihan Salam on the adverse impact of divorce on lower-income households.)

Conservatives also see the Progressive approach to fighting poverty as undermining families and community. A single woman with children and a low income is eligible for many government benefits. Should she marry a man who also earns a low annual salary, she will lose those benefits. For her, the economic value of marriage is much attenuated.

Finally, conservatives have long valued Tocqueville’s America of voluntary associations. They believe that when government takes over functions like social insurance and poverty relief from churches or voluntary service organizations, it takes away some of the purpose for affiliating with these institutions, causing them to lose membership and support. In short, conservatives see community-based institutions as having been enfeebled not by the market but by the state.

Rajan suggests,

  • … following the principle of subsidiarity strictly—powers should stay at the most decentralized level consistent with their effective use. Empowerment will force each one to take some responsibility, and make it harder to succumb to apathy or finger pointing. It will allow groups the possibility of maintaining identity, cultural continuity, and cohesiveness. (page 285)

But Rajan does not get into any specific implications for which decisions might be left to communities or which federal programs would be eliminated with responsibilities handed down to lower levels. Were he were to make any specific proposals, chances are that his allies would be limited to conservatives.

If Rajan is correct that in order to thrive, a society needs a balance of the three pillars of the market, the state, and the community, then I would argue that it needs a balance of the three intellectual bases of progressivism, conservativism, and libertarianism. The overwhelming dominance of progressives in academia strikes me as dangerous. The Raghuram Rajans of the world could benefit from more direct interaction with conservatives.

Economics For Individuals:Your Brain Power Is Scarce. Don’t Waste It On Deciding Which Soda To Buy.

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Harvard behavioral economist Sendhil Mullainathan confessed in a 2017 New York Times commentary that he has long succumbed to a disturbing choice failure, drinking a carton of Diet Cokes daily and never even trying another “equivalent,” though cheaper, diet cola. He expressed confidence that he should correct his failure for financial reasons: “As a frugal economist, I’m well aware that switching to a generic brand would save me money, not just once but daily, for weeks and years to come. Yet I only drink Diet Coke. I’ve never even sampled generic soda.”

Mullainathan explained that he had not corrected his errant ways because the money saved would be inconsequential, and he could well afford to stick with “this little extravagance.” Still, he insists, “I’m clearly making an error, one that reveals a deeper decision-making bias whose cumulative cost is sizable: Like most people, I conduct relatively few experiments in my personal life, in both small and big things.”

Mullainathan believes he has found a choice bias that undercuts the standard economist’s claim that people are rational. But has he? At first glance, his choice not to experiment doesn’t make sense. But I think Mullainathan is more rational than he thinks he is. Why? Because the critically scarce resource, which he doesn’t mention, is his brain. Our brains seek to optimize the allocation of their own internal resources, which are mainly neurons and energy. A full understanding of rationality should include economizing on using one’s brain.

Rationality and Habitual Choices

Mullainathan assures readers that his own and others’ added choice experimentation would clearly be rational and welfare-enhancing because the downside is limited, “while the potential gains are disproportionately large.” As support, he notes that almost half of consumer choices are, like his, habitual. And, in context, he clearly is suggesting that there’s something wrong with habitual choices.

Researchers have discovered that people often stick with their choices. Mullainathan adds another example, writing, “[M]any people persist in buying branded products even when equivalent generics are available.”3 But is there something categorically wrong with habitual choices? Habits may indeed result in decisions without contemplation and with errors, but habit formation need not be an irrational decision process.

Scarcity and Brain-Focused Economics

I report on Mullainathan’s commentary because it reflects problems that often crop up in behavioral research. I suggest that a brain-focused foundation for economics—organized around the premise that the human brain rationally seeks to optimize use of its own internal scarce resources in pursuit of its own goals—can help economists, both neoclassical and behavioral, to understand people’s choices better than through the lens of biases or irrationalities.

I see three problems with Mullainathan’s thinking.

First, it’s true that one of conventional economists’ founding premises is perfect rationality. But consider a brain-focused perspective. The brain simply does not have the capacity to deal with all the demands on its limited resources all the time without error. The brain can economize on its resources by adopting decision rules (algorithms and heuristics, which are favored behavioral constructs). We know that the frequent application of some rules will lead to errors, but those rules can still make economic sense to neoclassical, if not also to many behavioral, economists.

As with rules for baseball games and within constitutions, as well as rules-of-thumb in carpentry, less-than-perfect decision heuristics can lead to welfare improvements: the gains from the “good” decisions can often more than offset the losses from the “bad” ones. Moreover, simply by not considering all decisions carefully and, instead, applying a rule, we can free our mental resources to improve athletic performance, to increase the rationality of the many decisions that we make daily, or even to correct other rules proven to be unnecessarily flawed.

Of course, some rules and heuristics can, on balance, undercut welfare, but they can be corrected and may well be if the corrections make economic sense. Some rules and heuristics might not be corrected because the required drain on the brain’s neuronal and energy resources can have greater welfare losses than the losses from continued mistaken decisions. This kind of thinking doesn’t rule out irrational rules and heuristics, but it certainly narrows their prevalence and suggests that researchers should pause before declaring isolated decisions “irrational.”

The second problem is Mullainathan’s claim that his choice error indicates a general problem of people not experimenting broadly. Does his claim have the general validity he asserts (especially when he professes to have never experimented with alternative diet sodas, although he seems to know their relative merits)? Experimentation abounds in nature. Honey bees and hummingbirds spend their lives experimenting, with their survival often hanging in the balance as they trade off risk and search costs in pursuit of food and mates. Humans’ hunter-gatherer ancestors surely did much the same, leaving subsequent generations with a predisposition to forage (a form of experimentation), not only for products themselves, but also for others’ assessments of the products they have tried. When people go shopping, they appear engrossed in forms of experimentation—for example, feeling the fabric of various clothing items and accepting squirts of different lotions. Many people experiment with potential mates. People even think through alternative ways that conversations might unfold before they have them.

Indeed, one of the reasons for experimentation is the uncertainties that behaviorists, correctly, insist abound. And, indeed, experimentation often reduces uncertainties. One reason for malls and department stores within malls is not only to reduce search costs for known goods, but also to lower experimentation costs, thereby converting many uncertainties to manageable risks.

If people were as disinclined to experiment as Mullainathan suggests, it would be hard to explain the sizable worldwide fashion industry that constantly churns out various styles, colors, and textures in its clothing lines. The electronics industry similarly continues to upgrade (and downgrade) a multitude of variations in its products. The advertising industry spends nearly $200 billion annually in the United States, fully one percent of Gross Domestic Product, much of it on the presumption that many consumers can be persuaded to “experiment.”

Firms convert some market uncertainties to manageable risks by developing portfolios of products, knowing that some products will fail. The human brain does much the same with decision portfolios, bounded by its evolved resource and processing constraints, as well as by decision budgets (or what behavioral economist Richard H. Thaler calls “mental accounts”5).

No one should expect consumers, operating within the rationality limits of their brains, to be totally flexible in their choices, trying every new product line that is launched. But it doesn’t follow that Mullainathan has identified another broad-based choice failure that undercuts welfare. Indeed, the opposite can be true. Decision mistakes grounded in decision rules can result in more mental resources being available for more-important decisions, making us better off.

Go back to Mullainathan’s example of diet soda. He could make a mental note to try other sodas. Let’s say that the probability that he would find a cheaper soda that’s as good as Diet Coke is 1 in 10. Assume that he would save $4.00 a week on the cheaper brand. That’s $200 a year over, say, the next 30 years, for an overall saving of $6,000 (assuming a zero interest rate; for a more realistic positive interest rate, the saving would be less). So his expected value of trying the other diet soda is $600.6 Professor Mullainathan is a chaired professor at Harvard University, which means that his salary is probably at least $200,000, and his consulting rate is probably at least $600 an hour. So he can make, in 2 hours, enough to earn $600 after tax. Would those two hours be better spent thinking about and trying a different diet soda or thinking harder about a consulting client’s problem?

The relevant issue for consumers is not whether they make failed choices or even miss undertaking experiments that could lead to improved purchases. The relevant question is this: when scarcity (mental) constraints prevail, are consumers’ brains’ decision portfolios across a vast number of decisions (including product and commute choices), on balance, more competitive, beneficial, and economical than achievable alternative portfolios?

Mullainathan suggests that his problem is a failure to experiment. I suspect he likely does more experimentation than he indicates by focusing on his Diet Coke habit. After all, his column—like so much of the give-and-take of academic discourse—is something of an experiment in sharing new thinking on a wider audience. I suspect that it would be better for him to indicate that he has likely depleted his “mental account” for experimentation on more productive endeavors.

The third problem is that Mullainathan may not know as much about consumer choices and the resistance to change as he intimates. He claims that consumers, in general, stay with their choices even when “equivalent generic options are available.” But equivalence is in the eye of the beholder. After all, one of the pillars of economic thinking is that values and tastes are subjective.

Drawing equivalence among goods is also a strong claim coming from a behaviorist, who likely agrees that “frames” (and “anchors”) are endemic to choices and surely vary substantially over a large number of people and their particular local circumstances. Obviously, many people drink different generic diet sodas, given that Coke and Pepsi have less than half the market—and that all sodas have declined by more than a fourth over the past dozen years, in favor of water and tea. Might Mullainathan’s choice failure be far less general than he suggests and understandable from the perspective of the brain’s limited resources?

The more general point is that putting some choices on automatic pilot can free up neurons and energy to be used in weighing a multitude of other, more important bodily and external decisions more carefully. Hence, habits can enhance the efficiency and rationality of the brain’s overall decision making, both internal and external, and can add in many unseen ways to human welfare—and this can be true even when habits occasionally, or even often, lead to decision errors.

Mullainathan cites a study that found that commuters saved an average of just under seven minutes when, because of station closings, they were forced to take alternative routes for two days. In spite of their time savings, when the stations reopened, only about 5 percent stayed with their new routes. Mullainathan suggests that our difficulty with experimenting is that experimentation can be “painful.” But pain is hardly a prohibitive obstacle. People do many things that come with pain, for example, running marathons. Is it possible that it’s painful enough that experimenting just isn’t worth it? Moreover, notice the other important part of the study’s finding: about 95% of commuters returned to their old route. So even though they had had a chance to experiment—and the pain was a sunk cost—they decided that they liked the old routes better. Maybe they returned to their old routes because the routes were less costly in time and outlays or more pleasant, or both. From a brain-focused view of the commuting-choice problem, the commuters’ propensity to stay with their old routes becomes more understandable for two major reasons: commuters’ brains have limited resources and consumers simply may not be willing—rationally so—to be actively involved in every choice on products and in experimenting, and they can’t be. The riders may have decided to apply their scarce mental resources, including decision-making time, to an array of choices that Mullainathan has never considered.

In addition, because of the brain’s scarcity of neurons and energy, it is unlikely to waste its time on trivial (or “inconsequential”) differences in the costs and benefits of particular decisions when it has an array of other decisions that may provide greater net gains. Proof that a new route saves time is hardly proof that the brain has, on balance, made mistakes across its many allocation decisions. In short, the human brain is unlikely to consider many decisions in isolation, as Mullainathan suggests it should.

Concluding Comments

The chief lesson? Behaviorists often lay out the evidence on the brain’s “bounded rationality,” but report people’s decisions, such as the choice of sodas or travel routes, in isolation from one another. That perspective should cause behaviorists to think twice before declaring findings from isolated experiments to be “biases,” “errors,” or “irrationalities.” That may be so when conventional economists’ premise of perfect rationality in human decision making is the standard for judgment. But it may not be so when the brain’s own internal level of rationality is optimized, given its evolved resource and processing constraints.

Richard McKenzie is the Walter B. Gerken Professor (emeritus) in the Merage School of Business at the University of California, Irvine.

UN Predicts Living Standards Up, Mortality Rates Down In Predicted Climate Change Scenarios.

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An Earth scientist’s recent article making the rounds on social media highlights a terrifying conversation he had with “a very senior member” of the IPCC, which is the UN’s body devoted to studying climate science. The upshot of their conversation was that millions of people will die from climate change, a conclusion that leads the author to lament that humans have created a consumption-driven civilization that is “hell-bent on destroying itself.”

As with most such alarmist rhetoric, there is little to document these sweeping claims—even if we restrict ourselves to “official” sources of information, including the IPCC reports themselves. The historical record does not justify panic, but instead should lead us to expect continued progress for humanity, so long as the normal operation of voluntary market interactions continues without significant political interference to sabotage it.

Here is the opening hook from James Dyke’s article, in which he grabs the reader with an apocalyptic conversation:

It was the spring of 2011, and I had managed to corner a very senior member of the Intergovernmental Panel on Climate Change (IPCC) during a coffee break at a workshop…

The IPCC reviews the vast amounts of science being generated around climate change and produces assessment reports every four years. Given the impact the IPPC’s findings can have on policy and industry, great care is made to carefully present and communicate its scientific findings. So I wasn’t expecting much when I straight out asked him how much warming he thought we were going to achieve before we manage to make the required cuts to greenhouse gas emissions.

“Oh, I think we’re heading towards 3°C at least,” he said.

…

“But what about the many millions of people directly threatened,” I went on. “Those living in low-lying nations, the farmers affected by abrupt changes in weather, kids exposed to new diseases?”

He gave a sigh, paused for a few seconds, and a sad, resigned smile crept over his face. He then simply said: “They will die.”

Putting aside the creepiness of someone smiling as he predicts millions of deaths—sort of like a James Bond villain—we must inquire: How plausible are these warnings? Does the climate change literature actually support such bold projections?

As it turns out, the answer is “no.” It is certainly true that there are many particular dangers regarding climate change, which could have deleterious consequences on human welfare (broadly defined). But in order to conclude that millions—or even billions, as the author of the article states in his concluding remarks—of deaths hang in the balance, we have to grossly exaggerate all of the various mechanisms and scenarios, and we have to assume that humans do nothing to adapt to the changing circumstances over the course of decades.

In reality, it is much more likely that humans will adapt to whatever changes the climate brings them in the coming decades, and that various measures of human well-being—including not just GDP but also life expectancy and declining mortality rates from various ailments—will continue to improve. The voluntary market economy is an excellent general-purpose solution to the challenges facing humanity, including the handling of whatever curveballs climate change might throw.

Unfortunately, it is difficult to come up with a statistic such as, “How many excess deaths does the IPCC predict from climate change by the year 2100, if governments don’t take further action?” If you consult the AR5, which is the latest IPCC report, and look at chapter 11 (Working Group II) on the impacts of climate change on human health, you will see various trouble areas and figures concerning at-risk populations, but nothing so crisp as to allow us to evaluate the casual claims of millions of deaths.

However, the IPCC chapter does tell us upfront:

The Fourth Assessment Report (AR4) pointed to dramatic improvement in life expectancy in most parts of the world in the 20th century, and this trend has continued through the first decade of the 21st century (Wang et al., 2012). Rapid progress in a few countries (especially China) has dominated global averages, but most countries have benefited from substantial reductions in mortality. There remain sizable and avoidable inequalities in life expectancy within and between nations in terms of education, income, and ethnicity (Beaglehole and Bonita, 2008) and in some countries, official statistics are so patchy in quality and coverage that it is difficult to draw firm conclusions about health trends (Byass, 2010). Years lived with disability have tended to increase in most countries (Salomon et al., 2012).

If economic development continues as forecast, it is expected that mortality rates will continue to fall in most countries; the World Health Organization (WHO) estimates the global burden of disease (measured in disability-adjusted life years per capita) will decrease by 30% by 2030, compared with 2004 (WHO, 2008a). The underlying causes of global poor health are expected to change substantially, with much greater prominence of chronic diseases and injury; nevertheless, the major infectious diseases of adults and children will remain important in some regions, particularly sub-Saharan Africa and South Asia (Hughes et al., 2011). [IPCC Fifth Assessment Report, Working Group II, Chapter 11, bold added.]

Later in that same chapter, we see the following table, which is illustrative of the general pattern when it comes to long-term projections about climate change harms to humanity:

Source: IPCC AR5, Working Group II, Chapter 11

As the table indicates, the absolute number (let alone the percentage of the population) of undernourished children in all developing countries, even with climate change, is projected (with certain assumptions) to drop by 9.4 million from the year 2000 to 2050. It’s true that the number increases in sub-Saharan African, but it falls in every other region. (It also rises in sub-Saharan Africa even without climate change.) We should also keep in mind that UN projections assume the populations in 26 African countries will at least double by 2050, meaning that the percentage of children who are malnourished still drops even in sub-Saharan Africa and even with climate change, according to the UN’s estimates.

As I have explained—most recently in this article—when it comes to climate change, the big projected damages don’t occur until many decades into the future. But for those people, standard economic growth will have raised their baseline standard of living by so much, that even if the UN-endorsed best-guess projections of climate change are accurate, those humans will still be much better off than we are today.

To see more evidence of this pattern, consider the following chart depicting mortality from various causes, created by Our World in Data using data from the Institute for Health Metrics and Evaluation (IHME), 2018:

table-2-1-768x509.png

As the chart indicates, the death rates from various types of causes have fallen sharply around the world, particularly those from communicable diseases, and all within the last 20 years—when climate change was ostensibly becoming a deadly problem for humanity that only “deniers” could ignore.

For another line of evidence, let me show you a table where the UN did give us some measures of “aggregate” damages from climate change. Specifically, in chapter 10 of the AR5 we see the following table summarizing the climate change economics literature on the subject:

Table-3.png

Source: Table 10.B.1, IPCC AR5, Working Group II, p. 82.

As the table summarizes, even for warming of three degrees Celsius, all but one of the studies predicted non-alarming amounts of damage. (I discuss the table more in this article.) Now I should emphasize that although the impacts are measured in GDP terms, these damage estimates include things like impacts on human health and mortality. It isn’t simply a measured reduction in the flow of TV output because some of the factories are under the sea.

In any event, it should be clear from the table that—contrary to James Dyke—we should not expect millions, let alone billions (!), of people to die from climate change. Even if climate change proceeds as the peer-reviewed literature assumes in the most pessimistic emissions scenarios, it will probably merely mean that people in the year 2100 will only be a lot richer than we are, as opposed to a whole lot richer.

Now it’s true, nobody can guarantee that there won’t be a climate change catastrophe. But we must realize that at least several of the featured studies warning of huge negative impacts are based on obviously flawed assumptions.

Oren Cass provides us with some examples. One study looked at the increase in mortality in a cold, northern US city during a particularly brutal summer, and then extrapolated to show a staggering number of excess heat deaths decades down the road, when such “bad summers” were more common. Yet in the projections, the northern cities were no hotter than southern US cities are right now, and yes these southern cities don’t have nearly the same heat death rate as is projected for the northern cities decades down the road.

What is happening here should be obvious after a moment’s reflection: A northern city like Philadelphia is not adapted to hot summer the way Houston or Las Vegas is. But if climate change did indeed make such temperatures the norm—over the course of several decades —then the residents of the northern cities would adapt. The most alarming of the projections of climate change damages rely on naïve assumptions about human adaptability.

They would install more air conditioning, and the people born in the year (say) 2080 would be much better able physically to cope with higher temperatures in 2100 than the people alive today.This is also the general response I would give the issue of sea-level rise. I think that much of the rhetoric here is overblown, but even to the extent that it is true, we don’t need to worry about millions of people literally dying. Even if true, this is a problem that will manifest itself over several generations. If certain coastal regions are truly threatened, then in the worst case humans will stop building (and eventually even repairing) the houses and businesses near the rising seas. Humans can gradually move out of these (sinking) neighborhoods and go further inland, through a process of attrition rather than mass migration in the face of a tidal wave.

The climate change alarmists are given a free pass to throw out the most absurd rhetoric, such as a recent author’s warning that potentially billions of people could die because of human-caused climate change. Yet despite their claimed fidelity to the “consensus science,” such claims are not supported by the UN’s own climate change reports.

The most alarming of the projections of climate change damages rely on naïve assumptions about human adaptability. Even if we stipulate the basic projections made in the most recent IPCC assessment, what “unchecked” climate change will probably mean is that our great-grandkids will see a smaller increase in their standard of living than they otherwise would have, if some of the carbon dioxide in the atmosphere could have been costlessly removed. Such a possible outcome is no reason to panic, and it doesn’t justify massive government intervention in the energy or transportation sectors.

This article first appeared at mises.org

The Culture Of Entrepreneurship Promises An Exciting Breakout From Government, Corporatism And Dependency.

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The science of economics has a big problem with vocabulary. It attempts to capture complex concepts in single words and phrases, which only serve to confuse and befuddle and cause arguments. To take a current example, the word “socialism”, for an economist, means state ownership of the means of production (which, in itself, is a good example of clunkiness in economic terminology). But when the country and its journalists and its bloggers argue about socialism and who is or is not a socialist, they’re not arguing about who owns the means of production. They’re arguing about forcible redistribution of people’s income by government, and about the top-down imposition of all-encompassing resource allocation schemes like Green New Deal and Government Health Care. They’re arguing about the role and scope of government and what it means to be free. “Ownership of the means of production” doesn’t help us understand the issues to any great extent.

The opposite of socialism is entrepreneurship. This is another word that comes from economics, and is even harder to define than socialism. The definition of entrepreneurship at the Library Of Economics And Liberty (econlib.org) is 2000 words long. Within those 2000 words, there are references to the many disagreements between economists as to what entrepreneurship really means.

Let’s propose that, instead of defining entrepreneurship, we examine it as a complex and multi-faceted system of individual and social human behavior, and identify its consequences.

Entrepreneurship is the system for the generation of betterment for all in a society characterized wholly or partially by both collaboration and private property.

Entrepreneurship is action. Entrepreneurial individuals, teams or groups are alert to situations where their fellow citizens are dissatisfied with current conditions – when they feel things could be better. Entrepreneurs see this as an economic opportunity: if they take action to devise a new, different and better offering than is currently available, people might buy it to improve their condition, delivering a profit to the entrepreneur. Entrepreneurs do take that action – that’s what separates them from others. There’s a risk in acting. It takes time to design and produce the new offering; the finished product or service may not be as good as the entrepreneur imagined in the design phase; the selling price may not be right; the consumer may have changed preferences over time and no longer wants this new solution, instead preferring someone else’s offering. But whatever the outcome for the individual entrepreneur, the system is a win-win. The consumer ultimately has the choice of the various new offerings, and at least one entrepreneur is rewarded, and society is better off. The entrepreneurs who were not chosen by the consumer in this case will redirect their efforts in another direction until they find the right exchange in which they can reap the reward of the marketplace.

The nature of the entrepreneurial system is that both consumers and producers experience reward when one responds to the other in a way that aligns what the consumer wants with what the entrepreneur can provide. It’s a collaborative win-win, and society (i.e. all the producers and consumers rolled up) progresses and improves. Consumers are more satisfied. Entrepreneurs are more fulfilled. GDP per capita rises. The world gets better.

The system works for everyone.

The econlib.org encyclopedia entry on entrepreneurship informs us that widely cited studies conclude that between one third and one-half of the differences in economic growth rates across countries, states and localities can be explained by differing rates of entrepreneurial activity. Economic growth is the economists’ way of saying “things get better for everybody”.

That’s because the goal of entrepreneurs is to help customers towards better lives, in which they experience feelings of greater satisfaction. When they succeed, the entrepreneurs get paid, i.e. achieve the monetary reward of profit. And they, too, also feel greater satisfaction: a sense of achievement and the expanded horizons that come with success. Entrepreneurs’ personal pursuit of higher aspirations results in consumers’ attainment of higher levels of satisfaction and happiness. Everybody wins.

Entrepreneurship blossoms in a culture that supports it and admires it.

Entrepreneurship requires an institutional and cultural framework in which it can blossom. Primarily, it thrives in political and economic systems that protect and secure private property rights. The entrepreneur must have control over private property in order to transform it into new offerings and solutions for consumers to choose and enjoy. In this case, private property includes their own personal effort and ideas, physical resources and capital, and money to invest.

More broadly, entrepreneurship thrives in a framework of economic freedom: low taxes, minimal regulation constraining entrepreneurial imagination, and an unbiased and rapidly-functioning judicial system to resolve any contract disputes that arise. Empirically, the level of entrepreneurial activity in a country correlates closely with the Economic Freedom Index, a measure of the existence of premarket institutions.

There’s also an important element of how we think about feel about and talk about entrepreneurs and business’s role in our culture. If the culture tags the successful entrepreneur as an exploiter rather than a hero, and emphasizes the inequity of outcomes – some succeed, some don’t – rather than the achievement of those who establish and grow successful firms, then society will turn against those who bring betterment. We must, as Professor Deirdre McCloskey insists, assign dignity to our entrepreneurs.

The main barriers to entrepreneurial productivity are governments and corporatism.

Government action – regulations, subsidies, tariffs, taxes, manipulation of labor markets and financial markets, and so much more – impedes entrepreneurship. Governments limit the scope of entrepreneurial imagination and freedom, by restricting what is possible. They divert the productive efforts of entrepreneurs through taxation, which is the confiscation of the fruits of productivity so that they can be put to unproductive uses. They restrict productivity via regulatory constraints, such as the limitations on the location of new production facilities (think solar energy farms) and the distribution of produced goods (think interstate electricity distribution). Government, by its very nature, is anti-entrepreneurial.

As government gets bigger and more interventionist, it brings into existence new barriers to entrepreneurship. Entrepreneurial action can take place at any organizational scale – single employee companies, small businesses and venture-funded startups, and within medium and large-sized businesses. But, as Michael Munger explains, government distorts the incentives for entrepreneurship by creating conditions in which a dollar invested in lobbying can provide a greater return than a dollar invested in R&D and innovation. If a large corporation can secure the passage of a bill or a regulation or a tax or a tariff that is favorable to its business and unfavorable to competitors, domestic or foreign, it will be tempted to make that investment. R&D is starved, innovation is slowed or stopped, and incumbent corporations are insulated from the creative destruction that entrepreneurs generate and which raises consumer satisfaction through innovative improvement.

If we can restrict government and reduce its level of regulatory and fiscal activity, we will enjoy a double boost in economic productivity because the temptation for corporations to spend money cozying up to regulators and legislators will be reduced, if not removed, and the level of investment in entrepreneurial innovation will be increased.

Entrepreneurship is the antidote to the culture of dependency.

At the level of individual behavior and attitude, the culture of entrepreneurship can be energizing, motivating and fulfilling in ways that the current culture industry of state schools, leftist media and welfare state socialism can never emulate. The entire cultural edifice of government and its associated institutions is dependency. This culture insists that individuals can not be successful without state assistance, welfare, subsidies, and regulatory control. Since our children are continuously and exclusively indoctrinated in this dependency framework from the earliest age in state schools, it is not surprising that most of them never get to experience the joys and rewards of entrepreneurial striving. They feel that they must depend on others, especially the welfare bureaucrats, to achieve whatever goals they are capable of conceiving. As a result, self-reliance, imagination, resourcefulness and entrepreneurial energy are under-developed attributes among our young population. The long-term drift towards suffocating hopelessness and helplessness sometimes feels irreversible.

Yet the spirit of entrepreneurship has not been fully extinguished. We still have some entrepreneurial heroes, despite the cultural repudiation of “millionaires and billionaires”. We still have some supportive branches of our institutional framework, including local small business groups, entrepreneurial business school courses, private online education, incubators, venture capital, private loan platforms, and exchange platforms like Upwork and Angie’s List. Perhaps someday, we’ll be able to extend that list to include pro-entrepreneurship public policy.

Until that day, let’s celebrate every entrepreneur who breaks out from statism, corporatism and dependency.

Nationalism Arises Because The Federal Government Has Broken Trust With Citizens.

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No one saw it coming—that the next big thing of the 21st century would be the nation-state, an idea from the 17th. Yet it has suddenly become a global phenomenon—a driving force of politics in the U.S. and around the world and the subject of intense intellectual debate. The news has even come to Harvard, where a professor of history has written a book about American nationhood, and a professor of economics says that “there is something special about the nation-state—it creates reciprocal obligations that don’t exist across national borders.”

There is, to be sure, a resistance. One salvo against the organizers of this week’s National Conservatism Conference in Washington accuses us of injecting “a malignant form of nationalism . . . into the American body politic” and said we “need to be mercilessly defeated on the battlefield of ideas as if September 1, 1939”—the day Germany invaded Poland—“were approaching.”

But in general, the mood has moved through the stages of grief from denial to anger to acceptance—acceptance that the nation-state is alive and well, not about to die and make way for global progressivism. To wit:

• The race card and the Nazi card have been played so promiscuously against nationalism proponents that they have lost most of their power. The accusers keep flailing away, but at this point they are only complicating efforts to isolate and condemn the actual white supremacists and anti-Semites in our midst.

• Some liberals acknowledge—or even insist—that fraternal affections and group loyalties are natural and potentially even worthy. Some even show hints of recognizing that social customs and national traditions are a firmer foundation for political order than the ideology of atomized, free-floating individual autonomy.

• Beyond the world of political activists and intellectuals, these propositions have wide appeal, grounded in everyday experience. Even in the midst of all the scare talk, pollster Scott Rasmussen reports that a substantial majority of Americans—yes, even suburban women—have a favorable view of “nationalism” and “America nationalism.”

So we political conservatives, who have been aroused in our own way by the nationalist awakening, have a great opportunity to recast, enlarge and proselytize our ideas. It’s time to move beyond dueling litanies of the nation-state’s past glories on the one hand and horrors on the other.

Let me draw an analogy from earlier awakenings—the religious Great Awakenings that swept over America in the 18th and 19th centuries. In the American colonies and early U.S., the new religious impulses were much more populist, participatory, and enthusiastic than what had come before, and posited a new relationship between God and his people and among his people. Many feared that the awakenings were dangerous and divisive, that they threatened to rekindle the old intolerant religious hatreds and bloodshed that had brought so many to the New World in the first place.

Yet as it turned out, the secular consequences of the awakenings were unifying and enlarging, galvanizing the American nation. For one thing, they brought many women and black Americans to Christian practice and belief. Beginning in the 1730s, the First Great Awakening—with its emphasis on personal responsibility and self-rule—was an important antecedent to the American Revolution, the Declaration of Independence and the Constitution. The 19th-century Second Great Awakening, with its emphasis on moral obligation and social justice, was a vital impetus to the abolition of slavery.

I am not suggesting a direct lineage from those awakenings to today’s. The 2010s are no more similar to the 1730s and 1830s than to the 1930s. There are, however, two important parallels. First, both religion and nation are neither threats nor panaceas but something more fundamental. They are central arenas of human endeavor—institutional embodiments of human understanding and aspiration, of human excellence and folly. To oppose them is to oppose human nature. To say that the nationalist hatreds of the past oblige us to reject a political order of independent nations is akin to saying that the Crusades and Wars of Religion make atheism the only viable belief system.

Some people do say these things, but they are making empty debaters’ points. They ignore the intrinsic claims of nationalism and religion and the circumstances of human existence that give rise to them. The circumstances that gave rise to today’s nationalist awakening, at least in the West, have nothing to do with suppressing minorities or invading foreign lands. Instead, the new nationalism is a revolt against the failures and weaknesses of modern nation-states. It is neither intolerant nor triumphalist but rather is defensive, grounded in well-justified apprehensions of political and institutional decline.

In America, the nationalist claim is that the federal government has abdicated basic responsibilities and broken trust with large numbers of citizens:

• It has failed to secure the national borders and provide regular procedures for immigration and assimilation.

• It has delegated lawmaking to foreign and international bodies, and domestic bureaucracies, that have scant regard for the interests and values of many of our fellow citizens.

• It has acquiesced in, or actively promoted, the splintering of the nation into contending racial, religious and other groups and has favored some at the expense of others.

• It has neglected core American principles and traditions—separation of powers, due process, the presumption of innocence, local prerogative, freedom of association—allowing them to atrophy or be subjected to political conditions.

These claims are closely aligned with traditional conservative precepts, although conservative politicians and activists have not always adhered to them in recent decades. That is why the nationalist awakening is a conservative awakening, too, and presents distinct opportunities for those of our persuasion.

Which brings me to the second parallel with the Great Awakenings. Adamant revivalist energies, while unruly and disruptive, may be precursors to social enlargement and a new sense of collective purpose. I am choosing my words carefully and did not say “national unity” and “cohesion”—that has never been the American Way, outside wars and similar crises, and it never could be. All we need is a serviceable consensus on the essentials of American identity and character, sufficiently broad and representative for the tasks of cultural and political reform.

The national conservatism we are developing is going to have some hard edges and provoke some clever counterattacks and dismissals. The rancor proves the seriousness of the challenge we face. As the Danish physicist-poet Piet Hein wrote: “Problems worthy of attack / Prove their worth by fighting back.”

But the American nation is not only vast, heterogeneous and fractious but also tough, resilient and practical. The ideas conservative nationalists are developing have broad transcultural potential. Modern progressivism has turned against essential precepts of the American liberal tradition, such as equal opportunity and freedom of inquiry, religion and enterprise. We are assimilating them into conservatism, and old-fashioned liberals cannot help but notice.

An important virtue of the nation-state is that it is a constraint. The contemporary peaceable nation takes what it is given—its borders and territory and resources, its citizens and tribes, its affinities and antagonisms, its history and traditions and ways of getting along—and makes the most of them. The order of independent nation-states addresses international problems by working with the positions and interests of individual nations as they are. Many idealists would prefer to avoid these constraints by operating through stateless, single-minded political structures.

One of the most arresting features of modern life in the rich democracies is the pervasive rejection of the idea of natural constraint. One sees this throughout culture high and low, social relations, and politics and government. Where a boundary exists, it is there to be transgressed. Where a hardship exists, it must be because of an injustice, which we can remedy if only we have the will. Today’s recipe for success and happiness is not to manage within limits and accommodate constraints, but to keep one’s options open. The newest frontier is the notion that even your sex is an option, and the sooner young children are informed of this, the better.

I do not know where this impulse came from. Perhaps wealth and technology have relieved so many age-old constraints that we have come to imagine we can live with no constraint at all. Whatever the cause, it is a revolt against reality. Resources are limited. Lasting achievement is possible only within a structure. My own favorite field, economics, is out of favor these days, but it has at least one profound truth, that of opportunity cost: Everything we do necessarily involves not doing something else.

The illusion of unlimited optionality has been especially damaging in government and politics. A dramatic recent instance came in the Democrats’ presidential primary debates, where many candidates favored both open borders and free health care for everyone who shows up. This would plainly amount to the abolition of the United States. Still, the proponents would say in all earnestness that they have ingenious plans to make it work.

That is an extreme instance of the phenomenon that every social problem or inconvenience summons forth costly new spending or regulatory solutions, with hardly a care to where the resources will come from or what other problems will be slighted. It is a bipartisan phenomenon, and it has left us with a massively indebted government that spends trillions of borrowed dollars on our immediate needs, with the bills kited to future generations.

The American nation-state is rich, powerful and less constrained than any other, yet it is much more constrained than we have led ourselves to believe. Thinking of ourselves as a nation-state is, as Peter Thiel has observed, a means of unromantic self-knowledge. National conservatism, by directing our attention to our nation as it is—warts, wonders and all—is a means of reminding ourselves of our dependence on one another in the here and now, and of facing up to the constraints that are the sources of productive freedom.

Mr. DeMuth is a distinguished fellow at the Hudson Institute. This is adapted from a speech he delivered at the National Conservatism Conference.

This article first appeared in the Wall street Journal online.

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The Right to Repair: Shouldn’t Americans Have the Right to Fix Their Own Stuff?

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If you’ve ever felt the hurt of shelling out $200 to fix your MacBook or repair your broken iPhone screen, then you might know how important it is to break the monopolistic hold huge corporations have on the world of consumer product maintenance, which is where the right to repair comes in.

Is Bernie Right about Repair?

Recently, Senator Bernie Sanders unveiled his plans to overhaul the agriculture sector and “Revitalize Rural America” on his 2020 presidential campaign website. While much of the text in this section is predictable and on brand for Sanders—who blames the business sector and capitalism for most problems – there is one area that stands out: his stance on the issue of the right to repair.

“In rural America today, farmers can’t even repair their own tractors or other equipment because of the greed of companies like John Deere,” the site reads. It then promises that, if elected, Sanders will “pass a national right-to-repair law that gives every farmer in America full rights over the machinery they buy.”

Sanders may be wrong on a number of issues, but when it comes to a consumer’s right to repair, he is absolutely correct. And while he may not recognize it, his stance on this issue is actually more aligned with free-market economics than it is with democratic socialism.

What Is The Right to Repair?

For anyone unfamiliar with the term, “right to repair” refers to each individual’s right to fix or alter their own purchased property without having to go directly through the manufacturer to do so. Often times, this means paying high costs or facing negative consequences—like a voided warranty—if repairs are made by a third-party or by the individual consumer themselves.

Today, many have to pay a large fee just to have their equipment digitally unlocked by John Deere before it can be fixed.

It might seem almost absurd that the “right to repair” is even an issue, especially since many of us have routinely attempted, to varying degrees of success, to fix many of our own household appliances and devices. Yet, many corporations and companies from PlayStation to Apple have erected barriers that make it harder for consumers to repair the property that belongs to them.

As Wired explains:

Increasingly, companies use a variety of tactics to block access to repair. Companies either don’t sell replacement parts, or they sell them at big markups. They don’t make repair information, such as manuals or schematics, publicly available or open-source. They manipulate the software so that if you get unauthorized repairs done, the device locks until the manufacturer unlocks it. This forces the customer to take any problem to the original manufacturers, who can charge whatever they want. This also means the manufacturing companies have all the cards to decide if, when, and how much it costs to fix something.

John Deere, who Sanders mentions specifically because of the role the company plays in the agricultural sector, has been a huge culprit of inhibiting a consumer’s right to fix what is rightfully theirs, which has caused major financial burdens for farmers.

As farming equipment has become more sophisticated and tech-reliant, it has become increasingly more difficult for farmers to perform their own repairs. Today, many have to pay a large fee just to have their equipment digitally unlocked by John Deere before it can be fixed. And if they cannot afford to pay the manufacturer’s price, they are unable to use their equipment to earn a living. However, John Deere is just one company of many utilizing this strategy.

But Wait, There’s More!

Another company inhibiting a consumer’s right to repair is Apple. Apple relies on what are called “End User License Agreements” to monopolize the repair of its products. If you’ve ever noticed that some iPhone repair establishments boast of being an “Apple Authorized Dealer,” this means a shop has had to pay a fee to Apple in order to be given the authority to repair its products, effectively monopolizing who is allowed to fix Apple products.

Unfortunately, a consumer does consent to the terms of the contract when buying a product with a manufacturer’s warranty.

This causes prices to go up for consumers who are limited as to where they can take their devices to be repaired. For those who choose to go to an unauthorized dealer, their warranties with Apple become void.

In addition to Apple and John Deere, the video game industry is also guilty of impeding the right to repair. They do this by attempting to control who is allowed to repair their gaming consoles. In 2017, The Entertainment Software Association, a trade organization that includes Sony, Microsoft, Nintendo, and others, worked diligently to block legislative efforts in support of right to repair legislation in Nebraska. Additionally, both Sony and Microsoft have “tamper-proof” stickers on their consoles, which warn the user that their warranty is void if they attempt to fix their device themselves.

Although this is most certainly a slimy move by many corporations to void warranties, make extra money on repairs, and force consumers to buy completely new products, a consumer does, in fact, consent to the terms of the contract when buying a product with a manufacturer’s warranty.

More Headaches

However, this situation became especially frustrating when both the PlayStation 3 and the Xbox 360 had significant, widespread problems that left many consoles broken and useless to users. While Xbox 360s plagued by the infamous “red ring of death” were refurbished free of charge, so long as consumers were willing to send back their machines to Microsoft for repairs, PlayStation 3 consoles cost $200 to be fixed.

The flaws in both systems did not sit well with the gaming community, who were unimpressed with the handling of the situation. Had independent parties been allowed to fix these consoles, both companies might have saved themselves from angry consumers who were dealing with a manufacturing flaw and not a problem born of their own doing.

Interestingly enough, these “tamper-proof” stickers are actually illegal under a federal law called the 1975 Magnuson-Moss Warranty. However, most consumers cannot afford to pay all the legal costs associated with taking these giant corporations to court. And thus, most never challenge the warranties. Not to mention, so long as no one is being physically harmed, passing legislation that restricts how a private company can conduct business is not an ideal solution, even if its actions are shady.

Lexmark, the printer company, took the fight against the right to repair even further than these other companies, eventually arguing its case in front of the Supreme Court in 2017. Everyone with a printer knows that it is exorbitantly expensive to replace the ink cartridges. Impression Products wanted to help consumers save money by refilling their existing Lexmark printer ink cartridges with toner instead of having to buy an entirely new cartridge.

Lexmark had placed a chip in its single-use cartridges that rendered them useless if a consumer attempted to refill it with ink. Impression Products, along with other small companies, found a way to disable the chip and refill the cartridges at a low cost.

Impression Products’ innovative solution to a frustrating consumer problem didn’t sit well with Lexmark, who sued for patent infringement and fought the company all the way to the highest court in the land. Unfortunately for Lexmark, the court ruled against it, declaring that the company’s patent rights were exhausted with the first sale of its toner cartridges and that consumers had every right to alter or fix property they rightfully owned.

Bernie Is Right, But for the Wrong Reasons

To some extent, Sanders is correct to call out corporate greed over the struggle for a consumer’s right to repair. Many corporations resort to shady tactics in order to charge consumers more to fix their products or force them to buy entirely new products, as Lexmark has demonstrated.

However, whether Sanders and his supporters realize it or not, above all, the argument in favor of the right to repair is actually an argument in favor of private property rights—something democratic socialists are typically against.

Once a product is purchased and money exchanges hands, the consumer becomes the sole owner of said property. This gives them the right to alter or repair a product in any manner they see fit. If manufacturers can literally remotely lock you out of your own property for having “unauthorized” repairs done, effectively holding your property hostage until you take it to an authorized dealer or until you pay their ransom to get it back, then whose property is it?

Sanders might not be a fan of big corporations, but the antidote to corporate greed is actually found within free market principles, like an individual’s right to do as they will with their own private property.

 

Photo by Christopher Groff on Unsplash

Neither The Left Nor The Right Understand What Stimulates Economic Growth. Hint: It’s Not The Fed.

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When the 21st century began, “internet cafes” were a thing. Hard as it may be for some to imagine now, bricks and mortar businesses existed into which individuals would enter with an eye on renting both a laptop and internet time.

The subsequent explosion of Wi-Fi and smartphone usage quickly rendered the internet café of the early 2000s unnecessary in short order. What was once a growing sector of the U.S. economy quickly fell into a major recession, only to disappear altogether.

This small piece of business history rates mention in consideration of the bipartisan belief that the Federal Reserve must act fast to allegedly stave off recession. As a New York Times editorial put it last week, “the argument for a rate cut is that the Fed should try to extend this economic expansion, which is now the longest period of uninterrupted growth in American history.” On the right, myriad arguments have been made (including by President Trump himself) that the Fed’s supposed “tight” monetary policy is the source of slower growth, and that rate cuts are necessary to extend the boom.

Translated to readers, left and right are both saying “you didn’t build that,” that the economy is reliant on the Fed’s ongoing fine-tuning via rate machinations. It’s easy to see why the left would take potshots at the most dynamic economy in the world, but it’s more than odd to see Trump and so many Trump partisans make such a weird case.

But first, it’s useful to backtrack. Recessions are painful, which is a statement of the obvious. At the same time, economies aren’t some blob that can be massaged. Economies are just people. During recessionary periods many people realize errors; hiring mistakes, bad habits developed, lousy investments – the list is long.

Somewhere around 2005 investors started to realize that their investments in internet cafes were set to be exposed as foolhardy by market forces. No doubt recognition of the errors was painful, but it also drove progress.

Which raises questions about fighting recessions? Have left and right lost their collective mind? If we ignore that there’s nothing about “growth” in the Constitution, and if we ignore just how overstated is the Fed’s ability to influence the economy as is (more on that in a bit), why on earth would both sides cheer on the fighting of recession or slower growth? Implicit in their extraordinary emotion is that the Federal Reserve should use its powers to help individuals, businesses and investors to delay correction of what’s not working. Translated, left and right are clamoring for stagnation.

After that, can we at least try to be serious about the Fed as “recession fighter”? It’s repeated regularly in this column that the Fed channels its way overstated influence through a U.S. banking system that is increasingly small as a percentage of total credit. To believe that the Fed and the banks it supposedly liquefies can boost overall economic growth is the equivalent of the federal government offering up a big loan to ABC, CBS and NBC in order to boost the television economy. Ok, but so much of the television we watch nowadays has little to do with the Big Three. The Fed is influencing what is small, and shrinking.

Taking this further, banks nowadays pay how much for deposits? At this point readers might check to see what they’re earning on their money market and savings accounts parked at banks. 2 or 2 ½%? Whatever the number, it is low. What that should tell anyone with a pulse is that the banks the Fed projects its influence through are being more than conservative at the moment with money in their control. If not, as in if they were taking big risks, they would be paying much more in pursuit of savers. That’s all well and good that banks are being careful, they must be conservative with monies in their care since they’re lending in order to earn income streams on loans made prudently, but it’s a reminder that banks have little to do with the growth of the most dynamic economy on earth.

In short, even if the Fed could or can liquefy banks, the act of doing so is superfluous. More specifically, there are already big pools of money out there eager to be directed toward the kind of lending done by banks. Assuming the Fed weren’t eager to liquefy them via lower rates, it’s no reach to say that well-run banks with good lending prospects toward the bluest of blue chip borrowers could easily expand their lending capacity in the markets themselves. Basically banks don’t need the Fed to enable the conservative allocation of money exchangeable for resources. Stating what should be obvious, if the economy is weak then conservative banks won’t revive it.

More on resources, it’s shooting fish in a crowded barrel to say that the Fed cannot create the resources that people and businesses borrow money to attain. This is worth repeating again and again amid all the hysteria about the Fed pursuing “monetary ease” to allegedly stimulate the economy. The Fed can do no such thing. We borrow money for what it can be exchanged for. Money itself is a non sequitur of the highest order absent goods to exchange it for. It’s just a reminder that borrowing can’t be stimulated by the Fed. Production is what always and everywhere precedes borrowing. That’s why it’s so disturbing to see so many supply-siders cheer on so-called Fed ease. Such cheerleading refutes Say’s Law. Production first, then consumption. Just the same, production first, then borrowing. Production is what enables borrowing, not price controls that supply siders have historically rejected.

Oh well, the Fed can’t alter reality. It can’t simply because just as investment powers economic growth, so does realization of error on the part of investors render credit tighter. Painful as the latter is, it’s necessary. Think internet cafes. Alleged Fed “ease” thankfully won’t perpetuate today’s equivalent of the internet café, or anything else presently being rejected in the marketplace. Thank goodness.

The main thing is that what stimulates economic growth isn’t central bankers, but instead great ideas brought to the market by great people, only for what’s great to be matched with intrepid capital. It’s a beautiful thing, but decidedly something that cannot be centrally planned, or made to happen cheaply through rate machinations by central banks. The left perhaps have never understood this (see their worship of government planning of economic outcomes), the right used to understand it, but now doesn’t. Next up surely has to be Trump channeling Richard Nixon with “We’re all central planners now!” That’s too bad.

John Tamny is editor of RealClearMarkets, and Director of the Center for Economic Freedom at FreedomWorks.

Like Most Things Politicians Do, Virtue Signaling Is Non-Logical Action.

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The phrase “virtue signaling,” coined in 2010, caught on because it well describes a behaviors very common in social media. It describes the expression of disgust or favor in an attempt to display one’s moral loftiness and superiority of those holding a contrary view. It is accompanied with little to no impactful action. One only need to poke a  “Like” button or tweet out one’s displeasure. No reasoned argument is necessary. It is simply a superficial effort to jockey for moral positioning even though the expression itself contributes little or no actual change in the big scheme of things.

Virtue signaling is widespread in politics. Politicians and activists marshal nice-sounding buzzwords and publicity campaigns to broadcast their overwhelming concern for the poorest and marginalized of society. While the accusation of virtue signaling tends to be hurled against progressives, it is not exclusive to the Left. Those on the Right are equally guilty of hollow appeals to patriotism like “Make America Great Again” or “Fair Trade” even when the results of the advocated policies are the opposite.

Yet why do we witness such behavior most commonly in politics? In democratic politics, we rarely have to bear the consequences of our view individually. Voters champion, condemn, and vote for political issues in “bundles” as offered by political parties. Resulting policy failures can hardly be said to be the fault of any one entity, the same way we can easily say that McDonald’s should bear the responsibility of a contaminated Big Mac. The institutional environment of democracies is such that the consequences to our actions are externalized to others. In other words, virtue signaling is rampant because it is cheap or even costless.

Since neither politician, activist, nor voter are held responsible for our actions when a policy goes wrong, blame (or praise for that matter) is also highly distributed. This distribution of blame then diminishes the responsibility of those who might plausibly be held most culpable for the bad consequences.

In contrast, virtue signaling is less common in market environments because blame for bad decisions can be easily be traced back to the decision-maker. Failure to put their money where their mouth is, and entrepreneurs bear the full consequences of their action or inaction. Empty claims of moral virtue have little value.

To be sure, businesses and corporations do make moralizing claims through marketing and advertising campaigns, as seen by displays of corporate social responsibility. The difference is that virtue signaling in markets is far more expensive (and therefore less pervasive) because it needs to be backed up with action for it to have impact.

Suppose Walmart supercenters were tomorrow draped with environmentally-conscious slogans of “Going Green” and “Saving The Planet”. They would not be able to reap the social benefits of appearing environmentally friendly for long if this new corporate branding were just empty talk. Its operations would actually have to reflect such a corporate message, by incentivizing consumers to bring their own plastic bags or replacing its delivery vehicles with fuel-efficient vehicles for instance.

The Italian economist Vilfredo Pareto made a crucial distinction between logical and non-logical action where the former is defined as when there is a direct connection between the action undertaken and the consequences that result from that action. Logical actions are undertaken predominantly in a market environment because market prices enable a comparative assessment of judgment through a process of time in decision-making. We observe the price of that plane ticket as it rises and falls. We make a cost-benefit analysis of other modes of transportation. We take some time, and eventually make up our mind on the purchase, using our own resources to express a judgment.

In contrast, non-logical action resides in the domain where there is no clear connection between action and outcome. This is ubiquitous in non-market environments such as politics where market mechanisms are lacking. Absent prices that allow comparative evaluations, the rationale behind our political decision-making is often subjected to ideological guides and justifications. This is not to say that the action was stupid or irrational. By non-logical, we simply mean that there are no coherent causal relationships between the actions we take in pursuit of our intended results. We look to thought leaders to tell us what the “correct” answers are to unfamiliar policy issues. We cast our votes and identify politically along the lines of political messaging that resonates with our ideological sentiments.

In the absence of such mechanisms to guide our action, it is hardly surprising that virtue signaling has surfaced as an alternative guide to action. Politicians perform ostentatious displays of publicity and political activists take to social media with grand condemnations of “social injustice” because there is social currency to be gained from doing so. In the realm of non-logical action, political figures compete to supply ideological images that best appeal to our sentiments because that is the currency of the game. The rules of the game call for it.

Market institutions like prices and a profit-loss calculus play a useful role in disciplining any flagrant kind of empty virtue signaling. So the next time you witness overt moral posturing, remember that these people are simply responding to the rules of politics. Without them, cheap talk becomes currency, and cheap talk will be in high supply.

Politicians Spend Profligately Today, And Stick Our Children And Grandchildren With The Bill.

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Who bears the burden of government indebtedness? Prior to the Keynesian revolution in the mid-20th century, most economists understood that the burden of government (or “public”) debt falls on those citizens who, in the future, must repay the debt. The funds for such repayment can come in the future from higher taxes, from reduced government expenditures on programs other than debt servicing, or from some combination of the two.

But Keynesianism destroyed this consensus. According to what my late Nobel-laureate colleague James Buchanan called the “new orthodoxy” about government debt, all such debt that is owed to fellow citizens – that is, debt that “we owe to ourselves” – is no burden at all upon the generations who must service and repay it.

Three Prongs of the Keynesian Orthodoxy

There are three prongs to this Keynesian orthodoxy. The first prong is rooted in the Keynesian insistence that the main driver of economic activity is the volume of total spending, or what economists call “aggregate demand.” And so if American citizen Smith is taxed an extra $1,000 in order to retire a $1,000 U.S. government bond held by American citizen Jones, there’s no reason to believe that total spending in the American economy will change. While Smith’s spending will fall because his after-tax income falls by $1,000, Jones’s spending will rise upon his receipt of this $1,000. Retiring the debt, therefore, has no effect on economic activity as a whole.

(Because people in, say, France who hold bonds issued by the U.S. government redeem those bonds for U.S. dollars – and because those dollars will eventually be spent in the United States – the commonplace qualification that government debt is no burden “if we owe it to ourselves” is actually unnecessary. This detail, however, need not detain us.)

The second prong of the Keynesian orthodoxy is that the burden on society of government debt is shouldered at each of the moments when programs that are funded with debt are undertaken. If, say, Uncle Sam borrows $10 billion to build 100 F-35 fighter jets today, all of the labor, metals, plastics, and other real resources that would otherwise have been used differently are consumed today to produce the fleet of fighter planes. The 100 commercial jet liners – or the 500,000 automobiles, or the 10,000,000 sets of patio furniture, or some quantity of whatever – that would otherwise have been built are not built. Society today gets 100 F-35s in exchange for giving up whatever else would have been, but was not, built and consumed.

The third prong is that government deficit financing imposes no burden – none! – at any time at all, on anyone at all, when it is done during periods of unemployment. According to Keynesians, if Uncle Sam borrows $10 billion to build a fleet of F-35 fighter planes (or whatever) during a recession, nothing is sacrificed. Keynesians assume that all of the labor and other resources used to build the planes would otherwise have remained in involuntary idleness. And so by pulling those resources out of their unwelcomed idleness, the debt-financed production of the F-35s actually cost nothing at all!

Keynesians believe that during recessions lunches really are free.

This last prong of the Keynesian treatment of government deficit-financing is the most well-known and controversial of the three. It’s also the most far-fetched. If correct, one of the keystones of economics – namely, the ubiquity and inescapability of scarcity – is cast aside and, along with it, the wisdom of heeding lessons taught by economists from Adam Smith in the 18th century through Vernon Smith in the 21st. Yet although incorrect, I hereby ignore this third prong by assuming that the economy is at full employment.

Debt Financing by Government Imposes Burdens on Future Generations

Even at full employment, however, the claim that deficit financing today imposes no burden on future generations is mistaken. Explaining this incorrectness was among the earliest of Jim Buchanan’s many theoretical breakthroughs.

It’s true, of course, that when government borrows money to build fighter jets today it diverts resources away from the production of other goods and services. But – and here’s Buchanan’s key insight – the creditors who today lend money to the government do so voluntarily. As Buchanan explained in his 1958 book, Public Principles of Public Debt, each of these creditors expects to be made better off – in the form of repayment in the future of principal and interest – by his or her purchase of government bonds.

And so while these creditors do indeed reduce their ability to consume goods and services today, their expectation of higher future consumption makes this sacrifice, for them, worthwhile. These creditors, as such, thus are clearly not the people who pay for the fighter jets. These creditors do not bear the burden of supplying government with these new military weapons.

So who does bear the burden of this debt? Buchanan’s correct answer is this: the taxpayers who repay the debt. These taxpayers, in order to transfer resources to the creditors, are compelled to reduce their consumption when payments on government bonds come due. If the bonds all come due one year after they are issued, the burden of financing this debt falls on taxpayers one year later. If instead no payments of interest or principal are due on the bonds until 30 years after they are issued, then the burden of this debt falls on taxpayers starting 30 years hence.

Buchanan noted that future-generations’ bearing of the burden of government debt does not necessarily mean that debt financing was a bad deal for these taxpayers. It’s possible for the government to spend its borrowed funds in ways that taxpayers in the future find to be worth the higher tax bill. If the borrowed funds are indeed spent in this prudent manner, then the debt financing is economically justified.

But Buchanan also showed that this possibility is not a probability. The reason was nicely summarized by the Royal Swedish Academy of Sciences in its announcement of Buchanan’s Nobel Prize: “He showed how debt financing dissolves the relation between expenditures and taxes in the decision-making process.”

In effect, debt financing allows government to spend money today while foisting the tab on future taxpayers – many of whom, literally, aren’t yet born. Politicians eager to win votes are thus prone to borrow and spend excessively because borrowing allows the current generation to free-ride on the incomes of future generations.

Unfortunately, too few people bother to think carefully through the economics of government taxing, spending, and borrowing decisions, yet everyone can easily see the programs funded with today’s expenditures.

Today’s looming fiscal mess is the predictable consequence of politicians’ ability to spend today and to stick our children and grandchildren with the bill.

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University

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