No One Knows How to Make a Can of Coke

The number of individual nations that could produce a can of Coke is zero

by CHUCK GRIMMETT

Over at Medium, tech pioneer Kevin Ashton unknowingly wrote a tribute to Leonard Read’s classic, I, Pencil.

What Coke Contains begins,

The Vons grocery store two miles from my home in Los Angeles, California sells 12 cans of Coca-Cola for $6.59 — 54 cents each. The tool chain that created this simple product is incomprehensibly complex.

From there Ashton gives a fascinating overview of what it takes to make a can of Coke, in the same style Leonard Read used for the pencil in 1958. I contacted Ashton after a friend shared his piece with me, and it turns out that he didn’t know about I, Pencil beforehand.

He closes with a wonderful hat tip to decentralized knowledge, spontaneous order, and the price system:

The number of individuals who know how to make a can of Coke is zero. The number of individual nations that could produce a can of Coke is zero. This famously American product is not American at all. Invention and creation is something we are all in together. Modern tool chains are so long and complex that they bind us into one people and one planet. They are not only chains of tools, they are also chains of minds: local and foreign, ancient and modern, living and dead — the result of disparate invention and intelligence distributed over time and space. Coca-Cola did not teach the world to sing, no matter what its commercials suggest, yet every can of Coke contains humanity’s choir.

It is great to see these ideas being explored independently. If you haven’t read it yet, here it is:

What Coke Contains

The Vons grocery store two miles from my home in Los Angeles, California sells 12 cans of Coca-Cola for $6.59 — 54 cents each. The tool chain that created this simple product is incomprehensibly complex.

Each can originated in a small town of 4,000 people on the Murray River in Western Australia called Pinjarra. Pinjarra is the site of the world’s largest bauxite mine. Bauxite is surface mined — basically scraped and dug from the top of the ground. The bauxite is crushed and washed with hot sodium hydroxide, which separates it into aluminum hydroxide and waste material called red mud. The aluminum hydroxide is cooled, then heated to over a thousand degrees celsius in a kiln, where it becomes aluminum oxide, or alumina. The alumina is dissolved in a molten substance called cryolite, which is a rare mineral from Greenland, and turned into pure aluminum using electricity in a process called electrolysis. The pure aluminum sinks to the bottom of the molten cryolite, is drained off and placed in a mold. It cools into the shape of a long cylindrical bar. The bar is transported west again, to the Port of Bunbury, and loaded onto a container ship bound for — in the case of Coke for sale in Los Angeles — Long Beach.

Free Trade?

Anything But...

By Pedro Schwartz

In his State of the Union address, President Obama revived a long mooted idea: a Transatlantic Trade and Investment Partnership (TAFTA). The aim of this initiative is to abolish or drastically reduce barriers to trade in goods and services between the United States and the European Union and turn the North Atlantic into a huge single market. The prize is alluring, but the hurdles are high. The Partnership will not be easy to set up, given the complicated regulatory barriers that fence off trade and services and the use that numerous and powerful interest groups make of them. Also, TAFTA may be against international law. The essence of the Treaty establishing the Word Trade Organisation (WTO) is the "most favored nation" principle, so that any advantages granted by the parties in a trade zone stopping short of a full customs union must be extended to all countries having a previous agreement with them. True, this rule is more honored in its breach than in its observance. Witness what Jagdish Bhagwati has called the 'spaghetti bowl' of bilateral trade agreements, shamelessly adopted by advanced countries in thrall of special interests.1 The parlous state of the Doha Round, whose aim is to extend the benefits of trade by an agreed application of the most favored nation rule, is another evidence of general prevarication.

But there is another, more serious obstacle to making a North Atlantic Partnership area a success; TAFTA may go against the laws of economics. Jacob Viner warned that mutually trading concessions within a free market agreement may be trade-diverting rather than trade-creating, and hence to some degree self-defeating. Defenders of free trade zones such as the European Common Market and TAFTA argue that the larger the area, the smaller the negative trade diverting effects on its members—but what about those left out in the cold? Mexico and Canada, who share a trilateral trade agreement with the United States and have signed bilateral agreements with the European Union, have no other way out but to join unconditionally, if they are accepted. They must be content to feed on reheated spaghetti.

The gains from TAFTA

Even before any Partnership, the U.S. economic relationship with the EU is the largest and most complex in the world. According to the Office of the United States Trade Representative, it generates flows of goods and services of some $2.7 billion a day.2 Transatlantic investment is responsible for roughly 6.8 million jobs. A total of 15 million American and European jobs are directly or indirectly linked to transatlantic commercial activity. The stock of U.S. foreign direct investment (FDI) in the EU totaled $2.1 trillion in 2011, and the stock of European FDI in the United States amounted to $1.6 trillion. These figures may be put in perspective by comparing them with the GDP of the areas concerned, to wit, some $15 trillion each.

E Pluribus Duo

America is fast becoming two nations—one English-speaking and one Spanish-speaking

by HEATHER MAC DONALD

Last week, Senator Marco Rubio gave the Republican response to President Obama’s State of the Union speech in Spanish as well as English, the first spokesman for an opposition party to do so. (In the past, the Spanish response was delivered by a specially designated speaker.) Is this a milestone worth pondering? Correct thought on both Right and Left would say: “Absolutely not; it is bigoted even to mention the growing reach of Spanish, a phenomenon which should be of no concern to anyone.” (The English-speaking audience was likely unaware of Rubio’s Spanish speech, which he had prerecorded and which ran simultaneously on Spanish-language networks. It might have been interesting to see the reaction had he delivered the two versions live and in sequence on the major networks.)

Elite indifference to the spread of Spanish may well be justified, but it would be useful if its rationale were fully articulated. It’s not hard to guess why the Left would celebrate Spanish’s increasing prevalence: it dovetails with the project of replacing a common American culture with multiculturalism. It’s much less obvious why some conservatives apparently believe that we should be serene about the matter. Two conceivable justifications come to mind—though neither is persuasive.

First, they might say, the use of Spanish in the public realm is just a temporary phase that will wane as assimilation marches inevitably forward. It would be nice to see some hints that this is happening. Instead, the trend appears to be overwhelmingly in the opposite direction. Daily experience suggests that the following phenomena are only increasing: “oprima numero dos” options in customer-service calls; Spanish signage in transportation hubs; Spanish packaging on consumer items; billboards and subway posters in Spanish; Spanish-language versions of newspapers; and Spanish-language affiliates of cable networks. Does anyone think that in the future fewerpoliticians will deliver their remarks in Spanish? The ability to speak Spanish is a “major advantage” for “potential presidential rivals in 2016,” observes the National Journal.

The Robber Barons

Neither Robbers nor Barons

By David R. Henderson

One of the most prevalent myths about economic freedom is that it inevitably leads to monopolies. Ask people why they believe that, and the odds are high that they will point to the "trusts" of the late 19th century that gained large market shares in their particular industries. These trusts are Exhibit A for most people who hold this view. Ask them for specific names of the villains who ran these trusts, and they are likely to point to such people as Cornelius Vanderbilt and John D. Rockefeller. They even have a label for Vanderbilt, Rockefeller, and others: robber barons.

But a careful reading of the economic research on the "robber barons" leads to a diametrically opposite conclusion: the so-called robber barons were neither robbers nor barons. They didn't rob. Instead, they got their money the old-fashioned way: they earned it. Nor were they barons. The word "baron" is a title of nobility, one typically granted by a king or established by force. But Vanderbilt, Rockefeller, and many of the others referred to as robber barons started their businesses from scratch and were granted no special privileges. Moreover, not only did they earntheir money and not only were they not granted privileges, but they also helped consumers and, in one famous case, destroyed a monopoly.

Consider the case of Cornelius ("Commodore") Vanderbilt. Even the excellent recent book Why Nations Fail, by MIT economics professor Daron Acemoglu and Harvard political scientist and economist James A. Robinson, gets the Vanderbilt story wrong. And not just wrong, but spectacularly wrong. They claim that Vanderbilt was "one of the most notorious" robber barons who "aimed at consolidating monopolies and preventing any potential competitor from entering the market or doing business on an equal footing."

In fact, it was Vanderbilt's competitor, Aaron Ogden, who persuaded the New York state legislature to grant Ogden a legally enforced monopoly on ferry travel between New Jersey and New York. And Vanderbilt was one of the main people who challenged that monopoly. At the tender age of 23, Vanderbilt had become the business manager for a ferry entrepreneur named Thomas Gibbons. Gibbons' goal was to compete with Aaron Ogden by charging low fares. In doing so, they were purposely breaking the law—and helping their passengers save money. In the case Gibbons v. Ogden, the U.S. Supreme Court ruled that, indeed, the New York state government could not legally grant a monopoly on interstate commerce.1 In short, Cornelius Vanderbilt was not a monopoly maker in this case, but a monopoly breaker.

How the White House Let Diplomacy Fail in Afghanistan : The Inside Story of

My time in the Obama administration turned out to be a deeply disillusioning experience

BY VALI NASR 

It was close to midnight on Jan. 20, 2009, and I was about to go to sleep when my iPhone beeped. There was a new text message. It was from Richard Holbrooke. It said, "Are you up, can you talk?" When I called, he told me that Barack Obama had asked him to serve as envoy for Afghanistan and Pakistan. He would work out of the State Department, and he wanted me to join his team. "No one knows this yet. Don't tell anyone. Well, maybe your wife." (The Washington Post reported his appointment the next day.)

I first met Holbrooke, the legendary diplomat best known for making peace in the Balkans and breaking plenty of china along the way, at a 2006 conference in Aspen, Colorado. We sat together at one of the dinners and talked about Iran and Pakistan. Holbrooke ignored the keynote speech, the entertainment that followed, and the food that flowed in between to bombard me with questions. We had many more conversations over the next three years, and after I joined him on Hillary Clinton's presidential campaign in 2007, we spoke frequently by phone.

Now, making his sales pitch, Holbrooke told me that government is the sum of its people. "If you want to change things, you have to get involved. If you want your voice to be heard, then get inside." He knew I preferred to work on the Middle East and in particular Iran. But he had different ideas. "This [Afghanistan and Pakistan] matters more. This is what the president is focused on. This is where you want to be."

He was persuasive, and I knew that we were at a fork in the road. Regardless of what promises candidate Obama made on his way to the White House, Afghanistan now held the future -- his and America's -- in the balance. And it would be a huge challenge. When Obama took office, the war in Afghanistan was already in its eighth year. By then, the fighting had morphed into a full-blown insurgency, and the Taliban juggernaut looked unstoppable. They had adopted a flexible, decentralized military structure and even a national political organization, with shadow governors and district leaders for nearly every Afghan province. America was losing, and the enemy knew it. It was a disaster in the making.

But Holbrooke, who would have been secretary of state had Clinton won the presidency but had been vetoed by Obama to be her deputy when she accepted the State Department job instead, now insisted to me that he relished the chance to take on what he dubbed the "AfPak" portfolio. "Nothing is confirmed, but it is pretty much a done deal," he told me. "If you get any other offers, let me know right away." Then he laughed and said, "If you work for anyone else, I will break your knees. This is going to be fun. We are going to do some good. Now get some sleep."

Two months later, I was at my desk at SRAP, as the office of the special representative for Afghanistan and Pakistan quickly became known. Those first few months were a period of creativity and hope. Holbrooke had carved out a little autonomous principality on the State Department's first floor, filling it with young diplomats, civil servants, and outside experts like me, straight to the job from a tenured post at Tufts University. Scholars, journalists, foreign dignitaries, members of Congress, and administration officials walked in daily to get their fill of how AfPak strategy was shaping up. Even Hollywood got in on SRAP. Angelina Jolie lent a hand to help refugees in Pakistan, and the usually low-key State Department cafeteria was abuzz when Holbrooke sat down for coffee with Natalie Portman to talk Afghanistan.

People started early and worked late into the night, and there was a constant flow of new ideas, like how to cut corruption and absenteeism among the Afghan police by using mobile banking and cell phones to pay salaries; how to use text messaging to raise money for refugees; or how to stop the Taliban from shutting down mobile-phone networks by putting cell towers on military bases. SRAP had more of the feel of an Internet start-up than a buttoned-up State Department office.

Holbrooke encouraged the creative chaos. "I want you to learn nothing from government," he told me. "This place is dead intellectually. It does not produce any ideas; it is all about turf battles and checking the box. Your job is to break through all this. Anyone gives you trouble, come to me." On his first visit to SRAP, Gen. David Petraeus, then Centcom commander, mused, "This is the flattest organization I have ever seen. I guess it works for you."

The New Swedish Model

Our economy will have to look much more like the Greeks’ before we’ll muster the will to follow the example of the Swedes

by SANDY IKEDA

Among policy nerds back in the day, “Swedish model” meant the brand of social democracy practiced in Sweden in the second half of the twentieth century. (Somebody would usually crack wise about Anita Ekberg whenever the phrase was uttered.) But for a very long time, whenever the problems of socialism were discussed, it was common to hear people say as a kind of shut-up argument: “Ah, but socialism works in Sweden; what about the Swedish model?”

Swedish social democracy created an extensive welfare state—including comprehensive health care, generous unemployment benefits, and marginal tax rates commonly in excess of 70 percent. But that followed years of relatively free-market policies in the early twentieth century, which generated impressive economic growth. Government intervention in Sweden didn’t really get going until the 1960s.

The Economist on “Northern Lights”

Interventionists in the United States could learn something from what’s going on now in Sweden (although I fear they won’t). According to a recent spread in The Economist magazine: 

Sweden has reduced public spending as a proportion of GDP from 67 percent in 1993 to 49% today. It could soon have a smaller state than Britain. It has also cut the top marginal tax rate by 27 percentage points since 1983, to 57%, and scrapped a mare’s nest of taxes on property, gifts, wealth and inheritance. This year it is cutting the corporate-tax rate from 26.3% to 22%.

Compare these rates with the U.S. tax rates, under the 2013 tax law, of 39.6 percent on incomes above $400,000 (filing single) and 35 percent on corporations.

But in some sense the current dramatic policy changes in Sweden are just a continuation, after an interruption of several years, of a dis-interventionist trend that began in the 1990s. The “new” Swedish model is not really that new. Indeed, Sweden has climbed to 30th out of 144 countries in economic freedom according to FreetheWorld.com, compared to the United States, which has fallen to 18th, just ahead of Germany (31st) and far outpacing France (47th) and China (107th).

Economic Fascism and the Power Elite

Against Leviathan

by David S. D'Amato

The state—the organization of the political means—is the institution that allows an idle, unproductive class of parasites to live at the expense of ordinary, working people, whose means are industrious activity and consensual exchange in the marketplace. We ought not assume, however, that the indigent segment of society, those who receive social welfare aid from the state, are necessarily foremost among the parasites of the political means. Rather, free-market libertarians from Albert Jay Nock to Murray Rothbard and Butler Shaffer have demonstrated that in the statist economy of theft and wealth redistribution, it is the elite—powerful, entrenched commercial players—who most benefit. Historically and empirically, this phenomenon of elite command of the apparatuses of government is readily apparent and unmistakable in its expression, particularly as regards the twentieth-century American economy. Economic historian Robert Higgs has argued that the American economy developed into a variant of corporatism or “tripartism,” an economic fascism defined by formal collusion between certain key interests and various arms of the state. “Corporatism,” writes Higgs, “faces the problem of factions directly; in effect, it resolves the problem of the people versus the interests by forthrightly declaring that the interests, when properly organized and channeled, are the people” (emphasis added).[1] Like every permutation of the authoritarian idea, the corporatism described by Higgs attempts to submerge the individual within the anatomy of the leviathan state—of which we must now regard many nominally “private” actors as a part.

These firms, in their partnership with the state, are “granted a deliberate, representational monopoly”[2] as payment for a level of control exercised by government. The iron triangles that form the fascist tripartism detailed by Higgs recall the thesis of C. Wright Mills’s groundbreaking sociological study, The Power Elite. In his masterwork, published first in 1956, Mills gives an account of an intermeshed elite made up of a “political directorate,” the “warlords” of the military establishment, and “corporate chieftains” at the helm of Big Business bureaucracies.[3]Hardly resulting from the legitimate free market defended by libertarians, the social and economic problems and crises we see all around us are in fact the moldering fruits of elite statism. And war, as both the engine of an entire economic paradigm and its attendant psychological and sociological substructure, has been the American state’s most preferred expedient, burdening peaceful, productive society with class rule. The permanent war economy, the unremitting exercise in plunder that now makes up a terrifyingly large portion of the economy at large, must necessarily poise itself upon antisocial state-worship. As Vicesimus Knox wrote, “Fear is the principle of all despotic government, and therefore despots make war their first study and delight.”[4] The existence of a corporate command-and-control economy, whose configuration grows out of layered state interventions, depends crucially on popular attitudes regarding the state. Only a public trusting of elite judgment and expertise would abide a system built on just the kinds of subjugation that the American ruling elite hypocritically claimed to defy in two world wars.

Fundamentally related to these insights into the practical relationships between Big Business and Big Government, is the proposal of Rothbard’s short-lived journal, Left and Right. Presenting the journal, Rothbard said that the title “highlights our conviction that the present-day categories of ‘left’ and ‘right’ have become misleading and obsolete.”[5] Left and right designations become particularly troublesome when we consider modern American conservatism as a “barren defense of the status quo.”[6]The concord of war statism reached by the political elite during the twentieth century certainly wasn’t liberal in any coherent or meaningful sense—a near antithesis of the liberalism of which Mises and Hayek regarded themselves as the legatees.

A Triangular Europe

Three Incompatible Conceptions

By Anthony de Jasay

Three incompatible conceptions of Europe are pulling to tear the Union apart. The likely outcome is its survival in muddle.

The germs of a formally united Europe was planted by the ignominious French surrender to Germany at the outset of World War II. At the end of that war France was liberated by Anglo-American power, something the deepest sentiments of the country never forgave the liberators. America got added as a constant object of dislike to the hereditary enemy England, the strength of the visceral hostility to the "Anglo-Saxons" and the free trading and capitalist order embodied by the Anglo-Saxons added to the sense of national panic that went with the loss of great power status, the loss of prestige, influence and the bleak prospect of a second-class future in a wholly alien post-war world.

De Gaulle, a rare master of bluff and the bold, confrontational stance, successfully played on his people's existential panic as well as on the patience of the "Anglo-Saxon" victors to reclaim for France a rank of great power and the confidence fit only for a winner in the war. However, based as this was on assertiveness, rhetoric, and occasional tantrums, the post-war position of France remained precarious. Throughout her history, France in asserting her ambitions, has nearly always overplayed a relatively weak hand and was made to pay a heavy price for it, notably in the two "Hundred Years Wars" in the 15th and 18th centuries that had bled her white in population and wealth. Gaullist posture after World Ward II looked dangerously like the eternal French temptation to overplay the weak hand history had dealt her. Wise heads, with Jean Monnet and Robert Schuman in the lead, saw an alternative at least in embryonic form, in a formally organised European quasi-state under what they believed to be inevitable French leadership. They and many allies, including the Belgian Paul-Henri Spaak and the Italian Alcide de Gasperi, neither of whom was an obvious French agent, set about erecting an increasingly elaborate construction with the avowed purpose of "ever-closer union". Starting with 6 nations, sixty years latter it counts 27 and is still growing as we write.

The first forty years of this project, from the early 1950s to the early 1990s, were shaped by two main forces. One was the deliberately low profile of Germany, penitent for its wartime doings and wholly devoted to performing the Wirtschaftswunder that restored and surpassed her pre-war economic strength. The other was the superior administrative skill and ruthlessness of the French high civil servants who captured the major part of the bureaucratic machinery of the Brussels quasi-government of the nascent European quasi-state. Put together, the two resembled a strong and docile German draft horse ridden by a self-confident mandarin of the French administrative labyrinth. The period was marked by two outstanding presidents of the Brussels machinery: from 1958 to 1967 the scrupulously impartial Walter Hallstein and from 1985 to 1994 Jacques Delors, an able and ruthless Socialist steam-roller, admired in France and detested in England, who served French interests too effectively for France's own good, ultimately giving his country rather a bad name. The Hallstein era was the golden age of the Common Market, the Delors era the age of ever heavier bureaucracy and finally the absurdly ambitious and an unenforceable Maastricht Treaty that drained the European project of its seriousness and credibility.

Until the reunification of Germany, the European project was clearly under French management. Germany was passive and patient and simply lent its weight to what France wished to happen. After reunification, Germany started to have an independent foreign policy. At the same time, the Brussels bureaucracy also began to lose its all-French aspect. In many top posts, English, German, Spanish and other officials replaced Frenchman and English crowded out French as the informal working language. All this has caused alarm in Paris. However, whistling in the dark as is its customary self-defence, the French political class came to repeat more and more insistently that France and Germany were like a married couple, always adopting a joint position toward the rest of Europe and governing it as equal partners.

A Franco-German partnership, as a straight Paris-Berlin line that served as an axis around which everything turned round and round, has become increasingly fictitious from about 2005 onwards. France's ever more evident economic decline and the rock-solid performance of Germany in fair weather and foul has emptied equal partnership of the two of all plausibility. The time has come for the straight line signifying the shared domination of Berlin and Paris to be replaced by a more tricky three-player triangle of Berlin, London and Paris. Each tied to the other two and leaning away from one as it leans toward the other, the equilibrium shifting with every move they made. The triangle is obtuse, with Germany occupying the broad angle, Britain and France the acute ones.

Germany, sincere federalist

Majority opinion in Germany sincerely favours the "ever closer union", the federal version of a united Europe, simply because the federal solution seems to them intrinsically less bad than all others and because it makes a Franco-German war very, very unlikely for at least the next two or three generations. In this, there is no hidden or subconscious ulterior motive. There seems to be no calculation that a federal union would allow Germany as the top dog to exploit the others.

But federalism would, on the contrary, make it difficult for the others to exploit Germany. At present, heavy deficit countries are clamouring for the creation of Eurobonds that would allow them to do their sovereign borrowing with what was in effect a German guarantee, entailing a much lower interest cost than the rate their un-creditworthy signature could command. Taxing, spending and borrowing powers all placed at the federal level would relieve Germany of the nagging demand to show more "solidarity".

France to have it both ways

"Ever closer union", in France's deepest unreasoned, reflexive sentiments, means a Fortress Europe that will stand up to all outsiders (notably to America), protect European industry and agriculture from the free-trading ravages of capitalist liberalism, defend a certain "social model" no less generous with the other fellow's money than the existing French "model" and adopted by all member states, an ever-agile grasp laid on all fields of human endeavour where the long hand of the state can reach a complete system of rules and regulations that leave no vacuum and little free choice, but where everything is either "legal" or "illegal", including "legal" hours of work, terms of employment, shop opening hours, a meticulously regulated compulsory education system and, in sum, an enlightened central authority untiringly searching for whatever it can change for what looks a good idea.

Armen Alchian RIP

The passing of one of the true intellectual giants of the 20th century

Armen Alchian passed away on February 20th at the age of 98.

David Henderson has a wonderful obituary in the WSJ:

What was so important about Alchian's work? There were three aspects. First, he was one of the last economists of his generation to communicate mainly in words and not equations. Second, although economists often use the word "unrigorous" to refer to communication in words rather than math, Alchian was profoundly rigorous, writing clearly and carefully and using basic logic to reach sometimes-startling conclusions. As a result, many of Alchian's papers, even those from the 1950s, are still widely cited.

Third, Alchian is known for his textbook, "University Economics," first published in 1964 and later called "Exchange and Production," coauthored with UCLA colleague William R. Allen. That text is unique in economics. It is much more literary and humorous than any other modern economics textbook that deals with complex issues for an undergraduate audience. Example: "Since the fiasco in the Garden of Eden, most of what we get is by sweat, strain, and anxiety."

Henderson goes on to explain that his favorite Alchian article is:

My personal favorite of his published papers is “The Economic and Social Impact of Free Tuition” (1968). Alchian pointed out that government aid to higher education is a transfer to the relatively rich. That’s because people who can make it through college, even though they may have a low current income, have a high wealth.

He compared subsidizing college to subsidizing drilling expenses for someone sitting on a large pool of oil. The untapped student’s potential is the analogue of the untapped oil. Alchian argued that lack of current income might be a justification for loans to aspiring college students but not for outright subsidies.

Don Boudreaux choses a different article:

My favorite Alchian article is his 1959 study “Costs and Outputs.”  If this article – which, amazingly, Alchian pulled from its forthcoming publication in the American Economic Review in order to put it into a festschrift for Bernard Haley edited by Moses Abramovitz (The Allocation of Economic Resources) – were more widely known and grasped, it would completely upend, and vastly improve, the standard textbook treatment of production costs and cost curves.  Among many other benefits of such an Alchianesque improvement would be that economists would no longer be able so easily to confound themselves, while pleasing the antitrust-plaintiffs’ bar, by using familiar costs curves and concepts (e.g., “AVC”) into supposing that so-called ‘predatory pricing’ is a coherent notion.

My favorite Alchian article is one he coauthored with the great Harold Demsetz (also of UCLA), Armen A. Alchian and Harold Demsetz, Production, Information Costs, and Economic Organization, 62 Am. Econ. Rev. 777 (1972), reprinted in The Economics of Legal Relationships 555 (Henry G. Manne ed. 1975).

In an analysis of how firms deal with agency costs, Alchian and Demsetz offered the useful example of two workers who jointly lift heavy boxes into a truck. The marginal productivity of each worker is very difficult to measure and their joint output cannot be easily separated into individual components. In such situations, obtaining information about a team member’s productivity and appropriately rewarding each team member are very difficult and costly. In the absence of such information, however, the disutility of labor gives each team member an incentive to shirk because the individual’s reward is unlikely to be closely related to conscientiousness.

In any team organization, one must have some ultimate monitor who has sufficient incentives to ensure firm productivity without himself having to be monitored. Otherwise, one ends up with a never ending series of monitors monitoring lower level monitors. Alchian and Demsetz solved this dilemma by consolidating the roles of ultimate monitor and residual claimant. According to Alchian and Demsetz, if the constituent entitled to the firm’s residual income is given final monitoring authority, he is encouraged to detect and punish shirking by the firm’s other inputs because his reward will vary exactly with his success as a monitor.

California Is Becoming a Feudal Society

Low- and middle-income residents are fleeing the state

By ALLYSIA FINLEY

During the Great Depression, some 1.3 million Americans—epitomized by the Joad family in John Steinbeck's "The Grapes of Wrath"—flocked to California from the heartland. To keep out the so-called Okies, the state enacted a law barring indigent migrants (the law was later declared unconstitutional). Los Angeles even set up a border patrol on the city limits. Soon the state may need to build a fence to keep latter-day Joads from leaving.

Over the past two decades, a net 3.4 million people have moved out of California for other states. But contrary to conservative lore, there has been no millionaires' march to Texas or other states with no income tax. In fact, since 2005 California has experienced a net in-migration of households earning more than $200,000, according to the U.S. Census's American Community Survey.

As it happens, most of California's outward-bound migrants are low- to middle-income, with relatively little education: those typically employed in agriculture, construction, manufacturing, hospitality and to some extent natural-resource extraction. Their median household income is about $40,000—two-thirds of the statewide median—and about 95% earn less than $80,000. Only one in 10 has a college degree, compared with 30% of California's population. Roughly 40% of the people leaving are Hispanic.

Even while California's Hispanic population has grown by more than 1.5 million since 2005, thanks to high birth rates and foreign immigration, two Hispanics have moved out for every one that has moved in from another state. By contrast, four Hispanics from other states have settled in Texas and Arizona for every three that have left.

It's not unusual for immigrants or their descendants to move in pursuit of a better life. That's the history of America. But it is ironic that many of the intended beneficiaries of California's liberal government are running for the state line—and that progressive policies appear to be what's driving them away.

For starters, zoning laws, which liberals favor to control "suburban sprawl," have constrained California's housing supply and ratcheted up prices. As Harvard public-policy professor Daniel Shoag documents in a working paper, land restrictions became common in high-income enclaves during the 1970s—coinciding with the burgeoning of California's real-estate bubble—and have increased income-based segregation and inequality.

The Lost Boys

The current elite has abused, as very few elites have abused in the past, the power of trust

By Richard Fernandez 

The situation facing Europe’s old and young illustrate the difficulties of a welfare state in collapse.  First the old. Britain’s establishment has been wracked not only by the pedophilia scandal at the BBC but by scandalous performance of the the National Health Service. The NHS, which its creators boasted would be the ‘envy of the world’, has been found to have been responsible for up to 40,000 preventable deaths under the helm of Sir David Nicholson ^[1], a former member of the Communist Party of Britain. “He was no ordinary revolutionary. He was on the hardline, so-called ‘Tankie’ wing of the party which backed the Kremlin using military action to crush dissident uprisings” — before he acquired a taste for young wives, first class travel and honors.

The stories of the pathetic deaths of the elderly under his care — 1,200 in one hospital alone — have scandalized the British public, especially when it emerged he spent 15 million pounds in taxpayer money to gag and prosecute whistleblowers — often doctors and administrators who could not stomach his policies.

The public money spent on stopping NHS staff from speaking out is almost equivalent to the salaries of around 750 nurses.

The figures were revealed after a two year battle by Conservative MP Steve Barclay, who eventually obtained them after tabling a number of Parliamentary Questions.

The figures show a total of £14.7m of taxpayers’ money was spent on almost 600 compromise agreements, most of which included gagging clauses to silence whistleblowers.

In reality it is the NHS, not James Bond, who has the real government license to kill. Cruelty to the old has become the new normal. It is now as acceptable as that other once unthinkable thing: infanticide. Now it is nothing, just move along. The highest priority of the system is to keep up appearances.

When incompetent doctors amputate limbs unnecessarily or kill patients in horrifying numbers the critics are simply silenced and the Doctor Deaths left to practice their trade — to this day — unmolested. The taxpayer pays for his own noose.

Yet even after the damning reports described a mayhem that would put a major Great War battle to shame, the British political establishment, including the Liberal Democrats, the Conservatives and the Labor party continued to support “Sir” David, presumably because he knew where the bodies were buried, both figuratively and literally. Sir David Nicholson is unconcerned; he’s not even remorseful. Both the Guardian ^[2] and the Telegraph ^[3] — on opposite sides of the political spectrum — registered their disgust. But it is to no avail: the former Communist who boasts of his “passion” for the job will Bury You.

The European Youth will remain outside the Death Pathways for some time yet. But they will spend the time waiting for their turn at affordable, caring and passionate medicine in poverty and hopelessness. With the exception of Germany youth unemployment in Europe is over 20% ^[4]. “A full 62% of young Greeks are out of work, 55% of young Spaniards don’t have jobs, and 38.7% of young Italians aren’t employed.”

The Lost Boys

A whole generation is finished. Like their counterparts a hundred years ago, the European young are being sent to their professional death in millions. The carnage at both ends of the age spectrum — with the old being killed off and the young’s professional lives essentially buried — is a sign that the welfare state, the future on offer to “Julia” and Sandra Fluke, is now an empty box.

Why borders matter

The muddle and mendacity of the EU elite rests on one fundamental misunderstanding

By Theodore Dalrymple 
There is no better way of discrediting an opinion than by attributing it to a psychological quirk or peculiarity. The task is then not to refute it, but to explain it away by reference to its murky psychic origins. For a number of years, doubt about the wisdom of a European project (whose end can only be seen as through a glass, darkly) was attributed by its enthusiasts to precisely such a quirk: one that combined some of the features of mental debility, arachnophobia and borderline personality disorder. One would not be altogether surprised to learn that the European Union had sent lobbyists to Washington to have Euroscepticism included in the forthcoming revised version of the Diagnostic and Statistical Manual of the American Psychiatric Association as a new diagnostic category.

By now, even the most convinced European projectors (to use a Swiftian term) must have noticed that their project is not going swimmingly. But every economic and political phenomenon is capable of more than one interpretation and explanation, and the projectors suggest that the solution to the current difficulties is the granting of even more powers to themselves or to people very like them, that is to say those who conjured up these difficulties in the first place.

For example, an article in Le Monde for 27 August, by Peter Bofinger, Jürgen Habermas and Julian Nida-Rümelin, translated from the German, is headed ‘More than ever, Europe’. It is every bit as stilted as the thought behind it, as if almost every sentence concealed a guilty secret:

There exist only two coherent strategies to overcome the crisis: the return to national currencies in the EU, which will leave each country on its own to face the unpredictable fluctuations of the highly speculative foreign exchange markets, or the institutionalised protection of a common fiscal, economic and social policy, having for its more ambitious goal the recovery of the capacity for influencing the markets that has been lost at national level. To which is also appended, over and above the crisis, the promise of a ‘Social Europe’.

In order to recover that sovereignty ‘of which the markets have robbed them’ Europeans must form a large bloc and mutualise their debts, in the process strengthening European institutions:

The most suitable way for Europe to strengthen its institutions would, perhaps, be to let itself be guided by the idea that the democratic European core must represent the totality of the citizens of the member states of the monetary union, but in such a way that each citizen is represented in his double character as citizen of the reformed Union and citizen of a people associated with the Union – which, under the first aspect, would involve him individually in a direct manner, and under the second, in an indirect way.

With ‘thinkers’ like this (one of them an ex-minister), who needs markets to bring about ruination? Leonid Brezhnev himself could hardly have expressed it better.

Brazil's president fights to win back business

Earth to Brasil : Welcome Back ! 

By Brian Winter
The conversations with Brazil's top business leaders often last two hours, and up to four. President Dilma Rousseff asks detailed questions but otherwise listens intently, staring back with an inscrutable frown that occasionally unnerves her guests.

There is talk of investments, and the need for shared prosperity - a favorite topic of Rousseff's. But in these meetings, the conversation inevitably comes back to the severe bottlenecks that have brought the economy back to earth after a historic boom last decade.
"Brazil needs to focus now on issues like productivity and reducing costs, because that's the only way we can grow in a sustainable fashion," said Marcelo Odebrecht, who runs a global conglomerate that bears his family's name.
"I think we've realized that, and the president is moving in that direction," he said in an interview. "That's her focus - looking at these obstacles, and getting Brazil growing again."
The meetings, which have intensified in recent weeks, are a critical part of Rousseff's efforts to convince Brazilian executives to start investing again and help lift the economy following two straight years of disappointing growth.
The chats with well-known figures such as Odebrecht and mining and energy tycoon Eike Batista come as Rousseff, a Marxist guerrilla in the 1970s who evolved into a pragmatic leftist, struggles with a perception that she is unfriendly or even hostile toward the private sector.
Just past the halfway point of her four-year term, the 65-year-old daughter of a Bulgarian aristocrat has indisputably made many enemies in the business world. She has condemned banks for charging high interest rates, intervened heavily in Brazil's exchange rate, and undertaken contentious reforms such as a cut in electricity rates that wiped billions of dollars from the market value of foreign and locally owned companies.
Rousseff has said all her decisions respected existing contracts and laws, and were necessary to try to return Brazil's economy to its glory days of fast growth in the late 2000s.
Her ability to convince business leaders that's true will be key to the rest of her presidency.
Without a rebound in investment, which has steadily fallen since Rousseff has been in office, Brazil will not have the resources to address supply-side bottlenecks in infrastructure and labor that caused the economy to grow just 0.9 percent in 2012.
A persistent economic slump could, in turn, endanger Rousseff's expected bid for re-election next year.
Reuters spoke with several ministers, presidential aides and business leaders who have participated in the meetings, trying to determine why executives have generally not yet heeded Rousseff's call to take risks and let their "animal spirits" flourish - a reference to a term used by the British economist John Maynard Keynes, one of her favorite historical figures.

Argentina – Another Default Looming?

Managing a coerced economy

Argentina has been frequently in the headlines of late, as it attempts to fend off the court challenges by the so-called 'hold-outs', i.e., investors who have not participated in the rather undignified 'debt restructuring' following the 2001 default. Most of the investors currently holding these bonds are activist 'vulture' funds, who are doing the world a great service by trying to prove that governments are not necessarily above the law when it comes to servicing and repaying their debt. At one point Elliott Capital Management even had an Argentine navy ship confiscated in Ghanaian waters, much to the chagrin of the Kirchner government. Normally, governments will quietly buy these 'pests' off, so as not to damage their standing with current lenders. However, Argentina with its crypto-fascist government and forever ruined reputation seems not to mind the risk.

According to the WSJ: 

“Worries that Argentina is inching closer to default sent the cost of insuring the country's government bonds to their highest level since November and pushed shares in its benchmark index lower.

The move followed remarks made by Argentina's lawyer in a U.S. appeals court hearing in New York on Wednesday, suggesting the government would choose to default if ordered to pay creditors who hadn't agreed to new terms for their debt resulting from the country's 2001 default. The cost to insure $10 million of Argentina's sovereign debt for one year rose to $6.6 million, the highest since the record $8.58 million set in November.

Argentina's Merval stock index fell 3.5% on Thursday, while the price of Argentina bonds due in 2017 fell to 71 cents to the dollar from 79 cents on Wednesday. Investors are no longer "complacent about the possibility of a sovereign default," said Gavan Nolan, credit analyst at Markit in London.

On Wednesday, Argentina asked the Second U.S. Circuit Court of Appeals to set aside a decision by U.S. District Judge Thomas Griesa last year that barred the country from making payments on its restructured debt unless it set aside additional funds for creditors who didn't participate in the restructuring. Judge Griesa awarded about $1.3 billion to a group that includes Elliott Management Corp.'s NML Capital Ltd. and Aurelius Capital Management LP.

U.S. Circuit Judge Reena Raggi questioned Argentina's lawyer, Jonathan Blackman, over the consequences should the court rule against the country. In response, Mr. Blackman said, "we would not voluntarily obey such an order." Analysts said his remarks imply Argentina would opt for default instead. After the hearing, Argentina Vice President Amado Boudou said: "It's not that Argentina won't pay. Argentina will always pay those who entered into the exchange. What Argentina won't do is break its own laws."

An adverse ruling could put Argentina in the position of either refusing to pay holdouts and defaulting on its bonds or paying holdouts and risk that investors who participated in debt restructurings in 2005 and 2010 would then sue the government for similar treatment. Argentina's next payment is due March 31. J.P. Morgan analysts said a ruling from the court is likely within about a month.”  (emphasis added)

There is of course a good reason why Argentina's government is prepared to risk a default: very few foreign lenders are lending it money anyway. This is due to the unpredictable and repressive economic policies the government pursues. Argentina's economy can probably be called a full-blown Zwangswirtschaft by now (literally: a 'coerced economy').

Congress Goes Bipartisan—Against Civil Liberties

The parties collude to defeat accountability for the national-security state

By W. JAMES ANTLE III

Civil liberties are theoretically a bipartisan concern. Conservative Republicans who don’t like Obamacare’s “death panels” should be outraged by presidential kill lists. Liberal Democrats who defend due process ought to be offended by secret surveillance law. Protectors of the First and Second Amendments should have a high regard for the Fourth, Fifth, and Sixth.
Yet restricting civil liberties is what actually commands bipartisan support in Washington. The same Congress that barely averted the fiscal cliff swiftly passed extensions of warrantless wiretapping and indefinite detention, assuring Americans that only the bad guys will be affected but evincing little interest in establishing whether this is really the case.
The same Congress that failed to come up with an agreement to avoid sequestration appears to have bipartisan majorities in favor of profligate drone use at home and abroad. Lawmakers are generally less exercised about the confirmation of likely CIA chief John Brennan than Defense Secretary Chuck Hagel.
At the very time it appears Washington is so dysfunctional that the two parties cannot get anything done, Democrats and Republicans cooperate regularly—when it it comes to jailing, spying on, and meting out extrajudicial punishments in ways that on their face contradict the Bill of Rights.
Senate Majority Leader Harry Reid argued that preserving the Bush administration’s national surveillance program—now for the benefit of the Obama administration—was more important than Christmas. Republican Sen. Saxby Chambliss didn’t even want any amendments.
The Senate overwhelmingly rejected an amendment that would apply the same protections against unlawful search and seizure to emails and text messages that already exist for letters, phone calls, and presumably the carrier pigeon.
Despite deep divisions over taxes and domestic spending, members of both parties tend to sing from the same song sheet about the Patriot Act, the National Defense Authorization Act, and the Foreign Intelligence Surveillance Act amendments.
So much for the Democrats’ bedrock belief in the right to privacy or Republicans’ convictions about limited government.
Civil libertarians are currently a rump caucus in both parties. But they are at least starting to work together. In fact, a critical mass of legislators seeks to use this week’s Brennan vote to extract additional drone memos from the Obama administration.