Losing respect for presumptions undermines society's immune system against good ideas
Since 2008, sovereign indebtedness and the rolling over of charges onto the
backs of generations to come has gathered momentum. The cruel
"austerity" designed to reduce budget deficit from 8-9 to 3-4 per
cent of national product still represents a fiscal stimulus, albeit a less
feverish one than before. Nevertheless, it is now almost universally condemned
as excessively severe, stifling as it does economic growth that is now
practically at a standstill in Western Europe. Blaming the past for what is
wrong in the present, the apparent inability to grow is now blamed on the
Goldilocks years of deregulation, trade liberalisation and less progressive
income taxation of the so-called Washington Consensus of the two decades prior
to the 2008 crash. For the moment and maybe for some time to come, the
collective wisdom trumpeted in parrot talk(1) is that salvation must lie in bringing back the strong hand of the
state to impose discipline in the market that has proved incapable to look
after itself. The result on the entire Western world, but most conspicuously in
Europe, is an avalanche of legislation, a frenzy of regulation and a mudslide
of directives supposed to bring security to all, to tame risk, to curb
"non-productive" services such as finance and foster
"productive" industry, and to "create" new jobs by
protecting the old ones. Last but by no means least, to make social justice
prevail over the "ultra" or "neo"-liberal aberrations of
recent decades.
The obsessive passion to govern, to tug at every steering wheel, gas pedal
and brake within sight that seems to motivate the political classes and is
trusted to ward off defeat at the next election, feeds on a steady flow of Good
Ideas or, as the saying goes, on ideas that "looked good at the
time". In the near or medium term, we are certain to have massive studies
evaluating the effect of the post-2008 rush of intensive government and its
breathless pursuit of Good Ideas. It is a safe bet that some of these studies,
though hardly more than a half, will ascribe the coma of the European economy,
its inability to put 2008 behind itself and start growing again, to the
insistence of governments to regulate and direct it.
While we wait for these definitive studies to emerge there is ample time to
reflect on the reasons for our readiness to gobble up what the political
classes kept laying before us. Why are we so gullible as to believe that the
ideas that look good today will still look good tomorrow? Has society lost its
supposed conservatism, its immune system, that would resist good ideas, or at
least good ideas of a certain type?
Any social order worthy of the name rests on two elementary components.
One, widely recognised, is a system of rules of reciprocal behaviour, such that
conforming to them is beneficial or at worst neutral to all parties. The rules
are universally beneficial because any potential gain from not conforming to
them is threatened by sanctions administered by those benefiting from
conformity. The model is that nobody steals the neighbour's chicken and
everybody is down on the eventual chicken-thief. The interaction, technically a
convention, is spontaneous and has been first made clear by David Hume, who
used it above all to explain the stability of property and the keeping of
contracts. It is also central to game theory in the explanation of certain
types of equilibria.
Next to the spontaneous rules of justice the other foundation stone of a
well-ordered society is the presumption. The presumption of a state of affairs
S is that S is the case. It is held to be the case until and unless adequate
reason is shown to the contrary.
The only presumption familiar to general opinion is that of innocence;
everyone knows and approves of "innocent until proved guilty". The
public is less aware, and academic opinion is not unanimous about another and
possibly more decisive presumption, that of freedom. Its essentials and its
basis in logic and the theory of knowledge deserve a brief restatement.
The rules of justice place a part of the universe of feasible human acts so
to speak off limits. The remaining sub-universe is the area of freedom. The
acts falling into this area enjoy the presumption of freedom. No rule speaks
against them. However, any such act is open to contestation by a plaintiff who
may have a very wide variety of reasons—reasons of interest, taste, prejudice
or even of poor understanding—to wish the act to lose its freedom, and be
prohibited. The defendant may refute any number of possible reasons without
ever being able to say that no more are left. He cannot refute an indefinite
number. Technically speaking, the plaintiff's complaint is unfalsifiable. Since
the defendant can never conclusively refute it, he cannot be required to do so;
the burden of proof cannot lay on him, but can only be borne by the plaintiff,
the adversary of freedom. His cause gains if he can verify the claim that any
specific reason is sufficiently strong to warrant the suppression of the
freedom in question. The burden of proof lies on him. Unless he succeeds to
discharge it, the presumption of freedom remains in force.
One freedom of obviously vital importance is inherent in ownership.
Possession gives rise to property, for it can be defended, failing other
evidence, in the presumption of good title that prevails unless it is shown to
be false or otherwise invalid by a contestant. Ownership, in turn, involves
such presumptions as free enjoyment of the fruits of property, free choice of
its use and its disposition by sale, gift or bequest. Freedom concerning
property are often and (mistakenly), called "rights", a misnomer that
easily leads to the tacit supposition that property is in the gift of some
higher power, the state or society.
The importance of understanding ownership as a freedom (or perhaps more
precisely, freedoms) and the presumption of good title is obvious. Despite
this, and sometimes precisely because of this, these relations and the logic of
the presumptions that are defending them, are persistently misinterpreted or
simply ignored.
Confusion and unintended consequences are the typical result.
Relatively episodic, claiming hardly more than a page or two in future
economic history books, the current wave of measures in both the European Union
and even in Switzerland against runaway bonuses and other sorts of compensation
paid to top bankers and also some prominent non-bank corporate executives
provide a lesson in how the presumption of freedom is ignored. Cutting down
these hard-to-comprehend sums that look astronomical and undeserved to ordinary
mortals, will lead to upheavals, under-the-table subterfuges and the emigration
of some important corporate decision centres from London and other European
capitals to New York, Hong Kong and Singapore. Other, more complicated effects,
costly to the very countries that are initiating these controls may be expected
but appeasing the furious popular indignation about bosses paying themselves
absurd sums for no apparent reason must have been worth this price.
What nobody chose to ask is how these legislative or regulatory measures
fit into any general order resting on justice and the presumption of freedom.
Corporate executives, however grand, are the employees of the corporation,
hence of the owners of the corporation, however small. It is a strange world
where a third party, finding that the employee is paid too much by his
employer, takes it upon himself to over rule the contract to which employer and
employee, albeit after a fashion, had agreed. It could be argued that the many
small owners of the corporation cannot effectively influence the contract
between their corporation and its executives. The pay of the latter may thus be
fixed by delegation to some sub-committee of the Board and for a variety of
reasons may become heavily biased in favour of the executives and at the
expense of the owners. If this is thought to be the case, the public authority
may take powers to impose rules that the negotiation of executive employment
contracts must follow, considering that protection of the owners of a public
company in the hiring of executives is no less legitimate than their protection
by requiring accounts to be audited. A very high quorum of shareholders may be
made a condition of pay and bonuses. Other devices of making the owners' will
more effective may be employed. All this, however, is different from the
violation of the presumption of freedom that the compulsory imposition of
contract terms implies.
The root of the problem, however, seems to be that public opinion holds an
implicit conviction that even if the presumption of freedom were really a
consequence of justice and logic, the will of the political authority would
always count as strong enough to prevail over it, simply because it was the
will of the political authority which is the will of the people, anything that
"looks a good idea at the time" is assured of being adopted; the
collective choice rule means nothing less than that collective choices rule.
Footnotes
1. See previous articles on "Parrot Talk": "Finance in Parrot Talk
Part I" (November, 2011) and Part II (December, 2011).
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