Posts filed under ‘Classical Liberalism’
Phelps on Personal Knowledge
| Peter Klein |
I thought I had a scoop with this Phelps item on entrepreneurship, but he makes many of the same points in an essay, “Dynamic Capitalism,” on today’s WSJ editorial page. Here’s a passage of particular interest to O&M readers: (more…)
Open Letter to a Technology Entrepreneur: No More Handouts
| Peter Klein |
Vinod Khosla is a co-founder of Sun Microsystems, general partner at Kleiner, Perkins, Caufield, and Byers, and one of the world’s top venture capitalists. He is also a strong advocate for ethanol and co-chair of the campaign for California’s Proposition 87, a ballot initiative to tax oil companies to subsidize research on alternative fuels. Shikha Dalmia castigates Khosla for relying on government, rather than the market, to pick winners in technology markets.
Inviting the government to meddle in the affairs of private business is never a good idea, and if anyone should understand this, it is you. You reportedly left your country because of its hostile business environment and thrived spectacularly in this land of (semi) free enterprise, co-founding Sun Microsystems — one of the most successful computer companies on the planet. . . . But, with all due respect, even a man of your stellar track record can’t simply will markets to do his bidding; an economy is not a machine that can be manipulated according to its maker’s grand designs. If it were, India’s central planners would have made rivers of energy flow into every Indian home. . . .
Some commentators have suggested that your support for Prop 87 is a rent-seeking move, meant to boost your recent investments in ethanol by debilitating competitors. I don’t buy that. Yet, the issue is, if ethanol has all the advantages you says it does — if it is renewable, cleaner, less volatile, more reliable, easily transportable etc. — surely you of all people could convince enough investors to cough up the $4 billion that Prop 87 would raise. Are you not turning to taxpayers because you don’t want to assume that kind of risk — and can’t convince fellow investors to either?
HT: Lynne Kiesling
The Dismal Science
| David Gordon |
Everyone knows that Thomas Carlyle called economics the “dismal science”, but the context in which he did so is surprising. Sandra Peart and David Levy point out in The “Vanity of the Philosopher”: From Equality to Hierarchy in Postclassical Economics (University of Michigan Press, 2005), that Carlyle thought economics was “dismal” because the classical economists opposed slavery. Adam Smith and his successors supported a broadly utilitarian philosophy in which everyone was taken to be equally capable of happiness. Carlyle and other defenders of hierarchy condemned the economists for what they regarded as dangerous nonsense.
The supporters of hierarchy appealed to the new science of evolutionary biology to support their position. Darwin himself favored the perfection of the race rather than happiness as the standard of ethics; and although he did not reject sympathy for the unfortunate, he feared its malign effects. (Peart and Levy do not mention, though, that Darwin was on the opposite side from Carlyle in the controversy over Governor Eyre’s brutal suppression of a black revolt in Jamaica.) Francis Galton and other supporters of eugenics criticized the classical economists for ignoring the differences in quality among people: the state, in their view, should make efforts to obtain a “better” population. (more…)
Beauty and Politics
| Nicolai Foss |
Most of us classical liberals tend to think of politics as largely ugly. But apparently beauty is more important in politics than competence, intelligence, likability, or trustworthiness (not that it is surprising that these may not be that important ….). Check this fascinating new paper.
Is the Corporation a Creature of the State?
| Peter Klein |
Piet-Hein van Eeghen argues in the Journal of Libertarian Studies (1, 2) that the corporation’s “entity status” — from which attributes such as limited liability and perpetuity are derived — is an artificial product of state intervention, a feature of the commercial landscape that wouldn’t exist in a truly free market. I think Eeghen is wrong, partly for failing to distinguish between limited contractual liability (which is achievable through contract) and limited tort liability (which isn’t). Limited contractual liability was a standard feature of joint-stock companies long before limited liability became the default rule in English common and statutory law, as Henry Hansmann (among others) has pointed out.
Anyway, for an interesting and lively debate on the corporation’s status in the free market, see this exchange (and the links therein) between Sean Gabb and Stephan Kinsella.
Earmarks and Transparency
| Peter Klein |
The US Congress is under increasing pressure to curb “earmarking,” the practice of inserting appropriations for special projects — typically in the sponsoring member’s home district — into general funding bills. Last week Congress passed a bill authorizing the creation of a public, online, searchable database of federal grants, contracts, and earmarks, listing all sponsors, on the theory that greater transparency will reduce the number of frivolous or corrupt awards for legislators’ favorite pet projects.
As several commentators have pointed out, such a database may add little value, because it’s already easy to figure out who sponsored a particular earmark, simply by looking at whose district the money goes to.
In some cases, however, it’s even easier: the sponsor puts his name on the project. The University of Missouri recently dedicated the Christopher S. Bond Life Sciences Center, a $60 million facility (at right) devoted to interdisciplinary research in the life sciences. Christopher “Kit” Bond is Missouri’s senior senator and member of the Senate Appropriations Committee. Bond personally provided $34 million of the center’s budget through Congressional earmarks. It’s a beautiful building, not far from my office. Bond’s name is right on the front, above the main door, in case anyone entering the building should forget where the money came from.
Paper on Freedom and Entrepreneurship
| Nicolai Foss |
With Christian Bjørnskov I have written “Economic Freedom and Entrepreneurial Activity: Some Cross-Country Evidence. Here is the abstract:
While much attention has been devoted to analyzing how the institutional framework and entrepreneurship impact growth, how economic policy and institutional design affect entrepreneurship appears to be much less analyzed. We try to explain cross-country differences in the level of entrepreneurship by differences in economic policy and institutional design. Specifically, we use the measures of economic freedom to ask which elements of economic policy making and the institutional framework that are responsible for the supply of entrepreneurship (our data on entrepreneurship are derived from the Global Entrepreneurship Monitor). The combination of these two datasets is unique in the literature. We find that the size of government is negatively correlated with entrepreneurial activity but that sound money is positively correlated with entrepreneurial activity. Other measures of economic freedom are not significantly correlated with entrepreneurship.
Drop me a mail if you want a copy.
Does Bounded Rationality Justify Paternalism?
| Peter Klein |
Herbert Simon’s notion of “bounded rationality” has long been an important concept in organization theory (March and Simon, 1958; Cyert and March, 1963). More recently, bounded rationality is invoked by Oliver Williamson to explain why real-world contracts are incomplete, and why specialized “governance structures” are needed to handle the coordination and incentive problems produced by unanticipated change. But does bounded rationality have political implications?
John Cassidy’s recent New Yorker article on “neuroeconomics” suggests that because of bounded rationality, and cognitive biases more generally, individuals cannot be trusted to act in their own best interests, and that paternalistic measures such as forced savings and mandatory “cooling off” periods before making large purchases protect people from making foolish and irrational decisions.
Ed Glaeser doesn’t buy it: “[F]laws in human cognition should make us more, not less, wary about trusting government decisionmaking. After all, if humans make mistakes in market transactions, then they will make at least as many mistakes in electing representatives, and those representatives will likely make mistakes when policymaking.” He’s right, of course — a straightforward application of comparative institutional analysis. (Via Russ Roberts)
NB: For some implications of bounded rationality for the modern theory of the firm see this article.
Update: Listen to Glaeser discuss “soft paternalism” here.
Economic Literacy in Fiction
| Peter Klein |
I blogged previously about the silly and boring political economy of the Star Trek universe (quoting Tim Cavanaugh’s brilliant line about Captain Kirk as “an interstellar Gen. Tommy Franks”). For those nerdy, libertarian sci-fi fans out there I offer now this analysis of the economic organization of Star Trek: Deep Space 9.
Speaking of high culture, what about that community in M. Night Shyamalan’s The Village? It’s a small town in the wilderness, completely cut off from the social division of labor, and yet the inhabitants have decent (19th-century) technology — buildings, tools, clothing, etc. (If you’ve seen the film, you know that the inhabitants actually have more advanced technological knowledge than they pretend to have, but still….) There is specialization within the village, and a little private property, but no evidence of money, prices, or exchange. How do they survive? Don’t these villagers know that trade is better than autarky? How do they solve the calculation problem? I can willingly suspend my disbelief only so far.
Classical Liberalism and Cultural Conservatism
| Peter Klein |
Astute readers will have noticed this blog’s professed interest in both classical liberalism (or libertarianism) and cultural conservatism. But are they compatible? Classical liberals are often portrayed as social and cultural libertines, products of the Enlightenment, modernism, and the secular revolt of Reason against traditional moral authority. Indeed, responding to an earlier post on the political leanings of sociologists, a commentator wrote: “I am honestly curious about how you square the rational ambitions of classical liberalism with the irrational conservative ideals on ‘orthodox Christianity’ and reliance on Authority?”
The answer is simple: classical liberalism is a political doctrine, and cultural conservatism is, well, a cultural doctrine — more precisely, a set of social, cultural, and moral beliefs or principles. (more…)
Down With Spitzer
| Peter Klein |
Professor Bainbridge reviews Brooke Masters’s biography of Eliot Spitzer:
A fair reading of Eliot Spitzer’s record as presented by Masters suggests that he is both a genuine cause crusader and a career political hack. Spitzer has consistently used — and abused — his authority as New York attorney general to level sweeping accusations against a wide swath of American business. In some cases, like the proverbial stopped clock, he got it right. In a lot of cases, however, the much ballyhooed charges got a lot of press attention but then quietly went away. Indeed, on the few occasions he’s taken one of these high profile business cases to trial, he’s lost at least as often as he’s won. Instead, his record consists mainly of using media pressure to extort settlements from frightened executives.
Oh, and by the way, down with Giuliani too.
Think Globally, Act Locally: Shop at Wal-Mart
| Peter Klein |
Michael Strong, who heads the FLOW project, explains:
Between 1990 and 2002 more than 174 million people escaped poverty in China, about 1.2 million per month. With an estimated $23 billion in Chinese exports in 2005 (out of a total of $713 billion in manufacturing exports), Wal-Mart might well be single-handedly responsible for bringing about 38,000 people out of poverty in China each month, about 460,000 per year.
Read the whole thing here. And get some of these cool wristbands from the Adam Smith Institute: “I buy goods from poorer countries.”
Silly Things Nobel Prize Winners Say
| Nicolai Foss |
It is comforting to us ordinary mortals that Nobel Prize winners in economics have contributed their share of nonsense. Here at O&M we hope to make the Silly Things etc. post a regularly occurring feature. Today’s quotation is from Douglass C. North’s recent Understanding the Process of Economic Change (2005: 122):
Economists of a libertarian persuasion have for some time labored under the delusion that there is something called laissez faire and that once there are in place “efficient” property rights and the rule of law the economy will perform well without further adjustment. The scandals involving Enron, Dynergy, WorldCom, and others in 2001-2002 should have laid such a delusion to rest.
NYU Journal of Law and Liberty
| Peter Klein |
The NYU Journal of Law and Liberty is a new journal focusing on classical liberal legal scholarship. Volume 1, Number 1 revisits Lochner v. New York, the landmark 1905 case that defended the freedom of contract and became, to its critics, a hated symbol of heartless, dog-eat-dog capitalism. (During the New Deal the word “Lochner” meant about what “Enron” means today.) Volume 1, Number 2 contains an interesting piece by Mario Rizzo, “The Problem of Moral Dirigisme: A New Argument Against Moralistic Legislation,” which opens thusly:
This Article applies a theory of rational choice to moral decision making. In this theory, agents act primarily on local and personal knowledge to instantiate moral principles, virtues, and moral goods. The State may seek to prevent them from acting as they independently determine by prescribing or proscribing certain conduct by formal legal means. If its purpose is to ensure that people act morally or become better persons, we call this “moral dirigisme.” Our thesis is that the need to use decentralized knowledge to determine the moral status of an act makes the task of the moral dirigiste well-nigh impossible.
Joel Klein, Monopolist
| Peter Klein |
Joel Klein does not have a well-developed sense of irony. As Clinton Administration antitrust czar, he became a household name with his relentless pursuit of Microsoft, a $40 billion company with 70,000 employees in 100 countries. Today Klein heads the New York City public school system, a conglomeration of 1,450 schools with 136,000 employees, 1.1 million students, and a $15 billion operating budget. Oh, did I mention that it’s a monopoly? Not a private company with a large market share, but an actual monopoly, an organization protected from competition by an exclusive government franchise.
Klein was Distinguished Executive Speaker at tonight’s Academy of Management Convocation, which I attended. The speech was disappointing — not because of Klein’s political philosophy, which I don’t share — but because it was a shallow, fluffy talk about “leadership,” “accountability,” “change agents,” and the like. (I did enjoy his voice, however, a smoother version of Jimmy Durante’s.) (more…)
Private and Public Investment in R&D, Crime-Prevention Division
| Peter Klein |
Further to Nicolai’s post on terrorists and cops: Government security officials have attenuated incentives not only for effort, but also for innovation. Just yesterday I read about the new Volvo S80, which has a special key fob that beeps when someone is hiding in the locked car (using a heartbeat sensor). Can you imagine the police coming up with that?
More generally, Bruce Benson offers compelling evidence, in his 1998 book To Serve and Protect, that the reduction in crime in the US over the last decade and a half owes little to improved police protection, but is due instead to increased investments in private security. (See also Benson’s short piece “Why Crime Declines.”)
Scarcity without Prices
| Richard Langlois |
Yesterday’s New York Times carried an op-ed by Stephen L. Sass, a professor of materials science at Cornell. Writing in the context of high oil prices, Sass makes the point that scarcity of materials has long driven humans to find and make use of alternative materials. He argues that a scarcity of tin led denizens of the Bronze Age to figure out how to smelt iron, just as a scarcity of charcoal impelled the British to figure out how to use coal to make steel. I read the piece eagerly, thinking I might use it in my upcoming introductory economics course — until I got to the last paragraph. Here Sass draws the implication that we need a Manhattan Project to develop alternatives to oil. (more…)
Mises University
| Peter Klein |
For the past several years I have had the pleasure of lecturing at the Mises University, a week-long instructional seminar on Austrian economics and related disciplines. I never expected to see a favorable write-up in the Wall Street Journal, but here it is:
Sweet Home Alabama
By KYLE WINGFIELD
August 4, 2006Auburn, Alabama
Growing up, I never thought of Alabama as a beacon of academia. Living in its capital city of Montgomery for two years didn’t exactly change my mind. It wasn’t until I moved to Europe that I realized the Heart of Dixie was a wellspring of sensible economic thinking.
One by one, I met young, capitalist Continentals who had studied in Auburn. Not at Auburn University, mind you, which is Alabama’s largest college but is associated more with physical specimens like Bo Jackson than with free-market philosophers. Rather, they had flocked to the Ludwig von Mises Institute, a think tank located just off campus that preaches the works of Hayek, Rothbard and other economists from the Austrian School — including, of course, the institute’s namesake.
An Agency-Theoretic Analysis of the State
| Peter Klein |
Tim Swanson recommends this series by Michael Rozeff, “The State as an Organization” (part 1, part 2, part 3). Rozeff is a Rochester-trained financial economist (currently Louis M. Jacobs Chair of Financial Planning and Control at the University at Buffalo) and not surprisingly, his analysis is an agency-theoretic one. The main point is that the mechanisms that mitigate agency problems in firms — competition in the product market, the market for corporate control, discipline from suppliers of capital, the market for managers, etc. — are largely absent in governments. Writes Rozeff:
States are organizations whose composition, aims and methods depend on the institutions the society uses to control agency costs. The classical liberal vision was of a contractual state cleverly arranged so as to keep agency costs low. The ideal contractual state is an organization that, like a corporation, is owned by its principals, who are the citizens. Commissioned by them, the state’s aims are to dispense law and justice which includes protecting the resources or property of its owners. . . .
With weaker controls over agency costs, we observe instead varieties of the predatory state. Here the state moves toward becoming an autonomous organization, more like a company owned and operated by one person or a small group of persons but without outside stockholders. Its residual claimants are its members. They are the owners. Citizens do not own the predatory state. They are the prey.
The Power of Ideas . . . ?
| Peter Klein |
Back to sociologists and economists. Brayden King says the leftward bias of academic sociology is largely due to selection. I think the same is true for economics. That is, crunchy, communitarian, big-government progressives are more likely to specialize in sociology or community development, while pro-market, steel-and-concrete individualist libertarians and conservatives are more likely to choose economics or finance.
What does this say, however, about the power of ideas to influence political beliefs? If scholars select into one scientific discipline or another based on prior commitment to a particular social and political worldview, then what generates those worldviews in the first place? Is it possible to change hearts and minds with reason and evidence?
Hayek reports that he started out a Fabian-style socialist but was converted to laissez-faire after reading Mises’s Socialism in 1922. Hayek says the same is true of Lionel Robbins, Bertil Ohlin, and Wilhelm Roepke. These cases seem highly exceptional, however. Can readers suggest other examples? In particular, are there any cases of free-marketeers converting to socialism or interventionism through the study of sociology?
Organizations and Markets 
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