PayPal’s Private Governance

Government bureaucracy has fewer incentives to be responsive to the needs of market participants

by EDWARD STRINGHAM

The nine most terrifying words in the English language are, "I'm from the government and I'm here to help."                                             – Ronald Reagan

Markets have a long history of generating rules and enforcement mechanisms from within (endogenously) rather than requiring market participants to wait for the State. Instead of attributing the success of markets to government bureaucrats and elected officials, we should instead thank PayPal founders like Peter Thiel, Max Levchin, and other providers of private governance who help make markets work.  

PayPal was founded in 1999 to facilitate payments between any two parties with an email address. No costly credit card accounts or merchant terminals were needed. What PayPal did not foresee was the degree of fraud it would be subjected to. Fraudsters from all over the world would hack into accounts and transfer small amounts of money out of each one. By 2001 PayPal had gross revenue of $14 million per year, but was losing $10 million per month to fraudsters. At first the company went to the government to stop the fraud and recover the money. But in short order PayPal realized that relying on the government to solve its problems was hopeless. 

Instead, PayPal gave the FBI evidence, but noticed that the government was not exactly up to date on the latest technology and would ask the company questions like, “What’s a banner ad?,” according to one PayPal executive who spoke with me. The government had little ability to identify who the anonymous fraudsters were, and when PayPal identified them there was a “dispute between the FBI office in San Jose and San Francisco over which of them had jurisdiction over Kazakhstan.” The government simply lacked the expertise to do anything to protect this new kind of market. And one can only wonder what perverse incentives lead the FBI to quibble about jurisdictions before actually solving the case.

An Infinite Amount of Money

In the long run you'll be all dead

By John Mauldin 

The three major blocs of the developed world are careening toward a debt-fueled denouement that will play out over years rather than in a single moment. And contrary to some opinion, there is no certain ending. There are multiple paths still available to Europe and especially the US, though admittedly none of them are bright and carefree. There are very few paths available to Japan, as they have skipped too far down the yellow brick road of debt. None of Japan’s remaining paths have good endings. In the US, even as numerous voices declaim on the crisis that awaits if we don’t act, there is seemingly no collective will to actually do anything as yet. Perhaps it will take… a crisis. In Europe, the peripheral countries can already be said to be in crisis.

This week we will look at the mindset that ignores warning signs, and reflect on a hard-to-believe comment from Mayor Bloomberg of New York. It is a teaching moment that does not bode well for my hopeful outcome in the US. Meanwhile in Europe, the risks have been heightened with the recent vote in Italy. We must remember that Italy is the world’s third-largest issuer of bonds – its problems matter on the world stage. While it may all be molto divertente for those of us sitting on the sidelines, the potential consequences

An Infinite Amount of Money
I am often asked, “How can anyone not see the problems of growing debt in the US? Why can’t we get a consensus to change?”

Part of the problem is that too many in power just don’t see the impending crisis that you and I see, or at least they don’t see the need to act now. That is changing – or so I thought until I read a most inexplicable statement by the billionaire entrepreneur mayor of NYC, Michael Bloomberg. This is the sort of thing that causes me to despair. Here we have a supposedly (well, relatively) fiscally conservative politician, someone who is no stranger to financial circles, giving us these off-the-cuff remarks last week, commenting on whether sequestration will affect the NYC budget:

“It depends on how long,” Mr. Bloomberg said on his weekly WOR radio show with John Gambling. “If it lasts a few weeks, no. If it [lasts longer], yeah. We get 10 or 12 percent of our budget from the federal government, not all of that is going to be cut back, but there would be effects – not good effects. But in the context of, ‘Is anything going to change tomorrow? Are we going to run out of money tomorrow?’ I’m sure I’ll get that question at the [next] press conference. No.”

Furthermore, while saying the federal deficit does indeed need to be curtailed, Mr. Bloomberg argued the United States could owe “an infinite amount of money”and there is no specific amount that would cause the country to default.

The Institutions-Intensive Economy

Describing our contemporary economic world

By Arnold Kling

Today, a modern market economy with its ever-finer division of labor depends on a constantly expanding network of trade. It requires an intricate web of social institutions to coordinate the working of markets and firms across various boundaries. At a time when the modern economy is becoming increasingly institutions-intensive, the reduction of economics to price theory is troubling enough. It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics on the working of the economy.1

Ronald Coase, the world's oldest active economist, here aptly describes the economy in the age of the Internet, giving us the expression "institutions-intensive." His famous contributions to the theory of how bargaining might address externalities and how the boundaries of the firm depend on relative institutional effectiveness turn out to be preludes to the sort of economic analysis that is needed today.

Over the course of Coase's lifetime, the locus of economic activity has been shifting, from the farm to the factory floor to the office and even to "the cloud." With each step, the concept of property has become more difficult to define, the economic entities have become more difficult to locate in time and place, the proportion of wealth that is intangible has risen, and earnings have become increasingly contingent on social constructs rather than on individual attributes.

According to Bureau of Labor Statistics data, in every year between 1939 and 1956, the proportion of total employees in the nonfarm sector classified as "manufacturing production and nonsupervisory workers" was over twenty-five percent. This figure has been falling steadily, until in the last four years it has averaged just six percent.

The plunge in manufacturing production work is indicative of the declining share of economic activity that is measurable. One hundred years ago, the output of an individual farm worker was quantifiable. In principle, farm workers could be paid on the basis of specific, tangible accomplishments—pounds of apples picked, bushels of wheat harvested, etc. The same holds for pre-industrial manufacturing, where it was possible to pay for piece work.

Inside a large 20th century factory, the output of the individual worker was not as readily measured. Total output was still quantifiable, but one could not attribute a ton of steel or a shipment of refrigerators to an individual worker. Factory workers are paid to be in a particular place at a particular time. They clock in, clock out, and get paid by the hour.

In the decades following World War II, as the share of employment on the factory floor declined, what increased was clerical work. Secretaries, sales clerks, and telephone operators, like factory workers, are paid to be in a particular place at a particular time. They might receive a biweekly salary, but they are expected to work set hours.

With the advent of the Internet, work is no longer necessarily fixed in time and space. Someone can answer email on a smart phone at any time, in any location. A friend of mine in sales and support for an educational software company is typical. Because his clients span the globe, he can be called at any time of day or night. Neither they nor his boss know where he is when he picks up the phone. Usually, he is in his basement office, but sometimes he is out of town at a conference or on a family vacation. As more workers hold jobs whose contours are shaped by the Internet, the once well-defined concept of "hours worked" becomes much less precise.

The rehabilitation game

How our political class set criminals free and then cover up the consequences

By Theodore Dalrymple 

‘They pretend to pay us and we pretend to work,’ said the Soviet worker in the good old days; the British criminal could nowadays say with equal reason, ‘They pretend to punish us and we pretend to reform.’

Recent statistics show that two thirds of young criminals ordered to wear electronic tags break their court orders almost with impunity. Nothing could better reveal the hall of mirrors that the British criminal justice system long ago became than the response of Keith Vaz, the chairman of the House of Commons all-party Home Affairs Committee, to very similar news last year. ‘The public,’ he said, ‘must be convinced that community sentences are an effective form of punishment.’

In other words, the problem is not how to make community sentences work, but how to create the misleading public impression that they do. This has for decades been the ruling imperative of that great friend to the British criminal, the Home Office (and now the Ministry of Justice). It struggles might and main not to reduce criminality but to reduce the public’s supposedly neurotic fear of crime, and it does so by sowing confusion — confusion with a roseate glow.

Forked-tonguery remains the order of the day among the British political class. Who does not remember Mr Blair’s ‘Tough on crime, tough on the causes of crime’? In an interview with the Daily Telegraph this month, the Justice Secretary, Chris Grayling, said that he would like to see longer prison sentences for hardened criminals while also arguing for the use of more electronic tagging, only a matter of five days before he announced the closure of seven prisons as a cost-cutting measure and only a few more days before figures showing the uselessness of electronic tagging were issued from his own department. I’ve known burglars more honest and straightforward than British politicians: who, incidentally, are overwhelmingly the largest single cause of crime in this country.

Let me give a small example of the obfuscatory official methods used to confuse the public. For quite a long time the Home Office recorded the two-year reconviction rate of people given community sentences. Suddenly, and without warning or explanation, it started to publish the three-month ‘reoffending’ rate. Why the change?

First, criminologists say it made genuine comparison almost impossible: were things getting better, worse, or remaining the same? Nevertheless, the impression of improvement was created because the reoffending figure for the shorter period was, naturally enough, lower (10 per cent) than for the longer period (50-plus per cent). Ten per cent doesn’t sound quite so bad.

Second, and more sinister, the new terminology — reoffending rather than reconviction rate — was in effect a deliberate lie. The two rates would be the same if, and only if, the police solved every recorded crime, instead of 28 per cent of such crimes (and a much lower rate of all crimes, since not all are recorded).

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.