Small groups vs Large groups

Another really good ‘libertarian’ idea to consider is the difference between:

  1. interaction with our friends and family
  2. interaction with society at large.

The free marketeer does not necessarily want to apply the rules of one interaction to the other. e.g. They do not believe that parents should charge their children for home cooked meals. We can (and should) keep these as two distinct ways of interacting.

I can understand why ‘outsiders’ to the liberty movement might think of libertarianism as being cold and harsh, because they’re used to thinking that society should be playing under the same rules that we should be using for friends/family interaction. Instead, libertarians are not against the idea of being kind and doing things for free for family and friends, it’s just that these ideas don’t transpose well to the society level interaction.

See Don Boudreaux’s explanation of this concept here:

Also relevant is Steve Horwitz’s article on “libertarian parenting”: What is “Libertarian Parenting”? at FEE

Roundabout production and agio theory

I recently read Bob Murphy’s interest rate dissertation titled “Unanticipated Intertemporal Change in Theories of Interest” which you can read here. The fundamental idea of Bohm-Bawerk or the “nub and kernel” is that “Present goods are, as a rule, worth more than future goods of equal quality and quantity”.

Bohm-Bawerk spelled out three causes for the interest rate:

  1. Our expectation of being richer in the future
  2. Psychological reasons for discounting future satisfaction
  3. “Roundabout production” being more physically productive

Roundabout production

The explanation of Bohm-Bawerk’s idea of “roundabout productivity” was really useful to me and helps clear up why we should expect the interest rate to be positive. The example used to explain it is here:

Let us suppose, for instance, that in the year 1956, we control the disposal of a certain quantity of means of production, say, 30 days’ or one month’s labor. In terms of the foregoing statements we can make certain assumptions. We shall assume then, that if the month’s labor is expended in its least productive form of momentary, hand-to-mouth production, it will turn out only 100 units of product. But if it is expended in a production process covering one year, it will turn out 200 units though of course not until the year 1957. Similarly in a two-year production period it will turn out 280 units for 1958, and so on in ascending progression. It could perhaps be 350 units for 1959, 400 units for 1960, 440 for 1961, 470 for 1962 and finally 500 units for 1963.

B B table

So we can see that ‘present time’ is superior to future time because by using present time effectively, we can produce things that produce things faster (capital goods) – and this all helps to multiply our future productivity. So I think this really helps explain why it is quite nonsensical to speak as though the interest rate could go negative.

This is summarised by Murphy here:

And finally, there is a third cause of the agio on present goods, namely the greater physical productivity of roundabout processes. Thus, even if we neglect the first cause by supposing that an apple will yield the same (instantaneous) utility now as it will next year, and even if we neglect the second cause by supposing that present utility is regarded on an equal footing as future utility, it would still be the case that a present apple is preferred to an apple next year. This is because the present apple may be consumed now in order to ‘free up’ labor that would otherwise be devoted to a short production process (e.g. picking an apple off a tree), and which may now instead be devoted to a one-year production process which yields more than one apple next year.

Murphy goes on to explain some problems with ‘the real approach’ to interest rate theory, and advances his own idea in relation to interest theory. The connection between interest rates and money is emphasised, with money being the institution that helps us cope with uncertainties of the future, in turn creating a tendency for positive nominal rates.

No ‘pristine’ free market

Here’s an interesting variation on the “No True Scotsman” fallacy: people who are anti-free market will try to rule out typical examples that libertarian/free marketers bring up. The common examples are Hong Kong, Singapore, Taiwan and Ireland as nations that pursued free market policies. See Dan Mitchell’s post on economic convergence here.

So what’s going on here? It’s that these people don’t want to admit that less government works a lot better than big statism – so they will backwards rationalise and try to find ways in which these countries are “not a perfect pristine free market therefore you can’t use that example”. So for example with Singapore, they will say:

Singapore has government owned media, airlines, public transport, investment firm, property developers, power companies, telecoms & internet (fibre to the premises), cleaners (highest # cleaners per capita in the world), every square kilometer of land is centrally planned decades in advance and most of it is Government owned, most people live in public housing, and almost everyone has a public education.

How would a libertarian respond? By pointing out that despite all the above, Singapore is still one of the most free market countries in the world. See Heritage index.

heritageThe real truth is that even in the USA, which is typically seen as the world’s most ‘obvious’ example of capitalism – the USA is still highly regulated and controlled / “crony capitalist”. They have centrally controlled money and banking, IP laws, huge occupational licensing laws, very heavy health care and health insurance regulation just to name a few. The USA is arguably less free market than HK and Singapore!

When we’re trying to do these comparisons, here’s what we should be paying attention to: Did the country move towards a free market or towards big government? Compare that against countries that moved towards big government, and look at the results. See Dan Mitchell’s blog post comparisons here:

And if you want some real-world examples of how nations with good policy “de-converge” from nations with bad policy, here’s a partial list.

* Chile vs. Argentina vs. Venezuela

* Hong Kong vs. Cuba

* North Korea vs. South Korea

* Cuba vs. Chile

* Ukraine vs. Poland

* Hong Kong vs. Argentina

* Singapore vs. Jamaica

* United States vs. Hong Kong and Singapore

Want to ‘win’ a debate? Just impose an impossibly/arbitrarily high standard for the other person and deny any possible examples they bring up. Now if you’re actually interested in the truth, then perhaps drop the ego and honestly examine the examples.

For the record, I do think HK is a better example than Singapore as it is closer (but still not perfectly libertarian). Anyway, you’ve now got some of the data and history here, so have a look for yourself and decide.

Not ‘solutions’, but tradeoffs

A deep seated mentality problem with how the ‘anointed’ view the world, is that they forget the crucial importance of tradeoffs. They think more in terms of categorical “solutions”, usually believing that they are well placed to make decisions on behalf of society because of their superior wisdom. But is it wise to think this way?

See Thomas Sowell on page 133 of Visions of the Anointed:

A simple example may illustrate concretely the difference between seeking a solution and seeking a trade-off. When a baby was killed in a tragic airplane crash in 1989 by being ripped out of its mother’s arms by the force of the impact and being sent hurtling through the cabin, a political “solution” was proposed by having a federal law requiring babies to be strapped into their own seats on airplanes. But a study by economists indicated that such a law, requiring parents to purchase an extra seat, would divert a portion of the traffic to cheaper alternative modes of transportation on the ground – most of which have higher mortality rates than airplanes. Over a period of a decade, there would be an estimated saving of one baby’s life in airplane crashes, a loss of nine lives in alternative ground transportation, and an additional cost of $3 billion.

Few people would regard this as a reasonable trade-off. But it is only by analyzing the issue as a trade-off that we avoid the dangerous and deceptive appearances of a “solution”. 

Also, remember that completely wiping out one particular problem, might carry with it the cost of leaving other problems in a more dire condition.

John Hasnas on market failure

Here is a great talk by John Hasnas on the topic of market failure and market regulation:

Some points from the video that are very insightful:

  • Don’t think of the free market as unregulated, instead think of it as being regulated by individual social and ethical beliefs.
  • Recharacterise regulation in your mind – it doesn’t necessarily serve ‘society’ or the common good, it really only serves the most dominant political interest at the time.
  • His anecdote re: the BP spill at the end is very useful as it really illustrates his point that tort law and civil liability (which are more market based) would not have permitted drilling there, but it was only because of government law and a captured government regulator that permitted BP to drill there.

IP and Government science – risk of copycats overrated

Part of the case for government intervention to create mandated intellectual property (monopoly) rights, or for government science, rests on the ‘copycat’ risk. The case for intervention might go like this: An innovator spends time and money to create a new science or product, which is then swiftly copied by somebody else for a mere fraction of the cost. Now because everybody is scared that someone will ‘copycat’ them, they won’t have as much incentive to try and innovate and dream up new products, services and technologies. The argument then goes that society on the whole is poorer without IP laws, or without government science.

But is this what actually happens in the real world? Terence Kealey presents a counter to the above argument in his book, The Economic Laws of Scientific Research under the section “The Costs of Second-Mover Research” page 228:

The biggest myth in science funding is that published science is freely available. It is not. Access to it is extremely expensive. Consider an analogy with the law. No one assumes that legal knowledge is freely available. Anyone could, if they wished, consult the law books and journals to defend themselves in court, but it would take years to master the law and the court-room lore that is never published, so people employ lawyers and pay them for their accumulated expertise. So it is with science. It takes years of training before a scientist can read research papers properly and understand their implication for the future. It takes hours, every week, to read all the new research papers, to assimilate them and to integrate them into a future research strategy. As discussed above, so important is the collection and integration of scientific data, that successful companies see it as the prime role of their scientists. And the accumulated expertise that enables scientists to collect and interpret data does not come cheap.

Also relevant is this journal article version, see Modelling science as a contribution good.


Free market underprovision of basic science?

Part of the argument that government science is necessary is that private firms or other donors will not fund basic science. But this isn’t true! See Terence Kealey’s The Economic Laws of Scientific Research, page 225:

Unfortunately for the theories of Nelson and Arrow, companies do, in practice, fund basic science comprehensively. Moreover, they find it highly profitable. Two major surveys by Mansfield and Griliches have shown that the more basic science a company performs, the more likely it is to grow and to outperform its competitors. Mansfield studied 16 major American oil and chemical companies for the years 1960-76, and he showed that all those firms invested in pure science; crucially, the more a firm invested in basic science, the greater its productivity grew.