Archives: December 2008

Anthony de Jasay on the financial crisis

In his recent columns on the 2008 financial crisis, the economist and political philosopher Anthony de Jasay discusses a number of topics including the uninformed, sensational and self-fulfilling reporting of the mainstream media about the current economic climate, the non-trivial contribution of government regulation to the financial crisis, and the consequentialist thinking about the economy that is at the root of calls for government intervention.

Most, if not all, government policies involve economics. This fact alone explains the prominent place economics has in news reporting and the intense politicization of the science of economics. But this not does necessarily make the general public and politicians more informed about economics: “Complex questions of biochemistry are usually discussed by biochemists and those in civil engineering by civil engineers…Media men need not know much, but they know that good news is no news,” writes de Jasay. And, as has been documented by the economist Bryan Caplan, rationally irrational voters hold systematically biased beliefs about economics, whose views are again reflected by the politicians they elect for office.

De Jasay further writes:

It is barely thinkable, to put it mildly, that either the discount rate, or the sum of probability-weighted future profits, or their time pattern between fat and lean years, or all three together, should change sufficiently in less than a year to cut the value of all European companies by a half. Can we all be out of our minds?

Maybe we are, as the elasticity of expectations is greater than 1, fueled by a climate of media and politics-induced panic, which produces public policy responses that produce more panic and uncertainty, leading to even greater elasticity, etc.

One of the saddest and most depressing aspects of the 2007-2008 financial breakdowns is that panic was generated without sufficient objective grounds for it and without the intention to do so. The American mortgage default problem caused a loss to the lenders, mostly banks, estimated at just under 1 trillion dollars. This was in major part also zero-sum, for there was no destruction of real wealth and no loss of current production of goods and services; the mortgaged homes were still standing and were lived in by the original borrowers or could be rented out if foreclosed. The trillion-dollar loss was really a redistribution of existing wealth, painful but not catastrophic, nor really large in relation to a 14 trillion dollar American economy. – Trials and Tribulations of a Hybrid System

Is it possible that the panic mode was not so much induced by the state of the economy but was triggered by the redistribution of existing wealth that followed the meltdown of the housing and financial markets? The politics  surrounding the government bailout plans (“too big to fail”), seem to indicate this was a contributing factor. There is an urgent need for some insightful public choice analysis of the financial meltdown and the government’s response.

De Jasay reviews a number of the factors that contributed to the financial crisis such as low interests rates (although de Jasay does not single out the Fed), the pressure to issues mortgages to households that could not afford them,  Basel II and mark-to-market-accounting regulations, saying about the latter two:

The interaction of the two rules generated a vicious circle that reinforced itself with every turn. The whole scenario illustrates the potential of hybrid systems, such as the actual set of liberal elements mixed with dirigiste ones, for making a moderately bad initial disequilibrium into something very much worse…In a “pure” liberal system, durable success and profit maximization depend on gaining and retaining the confidence of depositors and other creditors. In a “pure” dirigiste system, it is not the customers that must be satisfied, but the regulators. In any hybrid system between the two, it may not be possible to satisfy either the customers or the regulators.

In his column Trudging Down the Third Way, de Jasay ultimately lays the blame at the crass consequentialist thinking that is dominating public debate about the financial crisis. Instead of respecting contract and property, “the economy” is perceived as a tool that needs to be manipulated to produce specific political goals such as  economic growth and redistribution of income.  It should not be a surprise, then, that a (perceived) crisis in the economy produces panic in politicians. The renewed calls for more regulation is often accompanied with statements that laissez faire capitalism has failed. How the heavily regulated economies of contemporary Western countries can be perceived as anything else than mixed economies ruled by pressure group interests and economic populism remains a mystery.

The New Deal disaster

The conventional wisdom is that Franklin Roosevelt’s New Deal got the United States out of the Great Depression. The most obvious objection to this view would be epistemological in nature. How do we know what would have happened without the New Deal? Strictly speaking, we cannot know this through empirical means. This feature of evaluating public policy presents a major problem for any kind of political consequentialism.

A related question is what constitutes a solution. How should a delayed recovery but healthier economy be compared to a faster recovery with negative consequences in the long run? It should not be assumed that the solution that produces the fastest recovery is the best solution.

On the website of the Ludwig von Mises Institute, David Gordon reviews Burton Folsom’s New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America.

Should the government create jobs because businessmen are too reluctant to invest?

Folsom ably dispatches this Keynesian canard. If businessmen were reluctant to invest, precisely the antibusiness attitude of the Roosevelt administration was in large part responsible. Roosevelt supported confiscatory rates of taxation; small wonder, then, that investors were reluctant to embark on new projects.

A similar point about regime uncertainty has been made by Robert Higgs.

But how to explain the popularity of Roosevelt?

…Folsom has a deeper explanation. Roosevelt manipulated welfare programs, especially jobs under the WPA, to gain votes…Folsom here uses to good advantage a long-forgotten book, Who Were the Eleven Million? by David Lawrence, the founder and editor of US News & World Report. Through a county-by-county analysis of the 1936 election, Lawrence showed that voting for Roosevelt varied directly with the patronage and jobs extended.

Gordon does find fault in Folsom’s book for ignoring the Austrian view of  business cycles. This is interesting because in contemporary discussions about the current financial meltdown, the majority of “pro-market” economists do not seem to find much fault with the Fed either. But one does not have to completely subscribe to the Austrian Business Cycle Theory (ABCT) to observe the highly political role the Fed currently plays in the management of the crisis. Neither does one have to be an Austrian economist to question the rationale for central banking and a fiat currency.

Market fundamentalism

A recent trend in progressive thinking is to accuse opponents of “market fundamentalism.” That seems to be a smart rhetorical tactic because a) it rides on the wave of concerns about any kind of fundamentalism, and b) the phrase appeals to people’s reasonableness. After all, if two ways of “organizing society” are available, only a complete fanatic would advocate markets over government in all cases.

A major problem with the phrase market fundamentalism is that it simply assumes that to be reasonable one cannot advocate the most extreme position on an issue. But as many historians can point out, views that would have been considered extreme or fundamentalist hundreds of years ago have become mainstream in contemporary society. Furthermore, with some creativity any position can be phrased to be a middle of the road view. “Surely you agree that shooting political opponents is the moderate policy between not prosecuting them at all and torturing them.” Finally, the pejorative use of fundamentalism can backfire  at progressives. With similar arguments, conservatives can argue that liberals hold fundamentalist views on other issues such as human nature and society (all nurture, no nature).

But perhaps the biggest problem with the accusation of market fundamentalism is that facts or arguments have been made irrelevant in favor of appeals to reasonableness. Does it even matter if there are logical, empirical, or moral arguments to prefer markets over government? One argument to generally prefer markets over government is that for a voter the cost of being irrational is close to zero. Another argument (and observation) is that we should get better results from competition than from monopoly, even if both mechanisms are not perfect. And last, but not least, logical and epistemological arguments favor the presumption of liberty, and thus markets over government.

One effective response to the accusation of market fundamentalism is to ask why the only alternative to government is a free market. For most people who have been accused of market fundamentalism the crucial distinction is not between government and market but between voluntary and coerced acts.

The lure of accusing someone of market fundamentalism is so strong that it does not even seem to matter anymore if someone is a market fundamentalist in order to be called one. As Bryan Caplan notes in his book The Myth of the Rational Voter: Why Democracies Choose Bad Policies, “a standard rhetorical tactic is to equate modest reductions in the role of government with the elimination of government regulation altogether.” If the accusation of market fundamentalism is supposed to have any meaning at all, only a handful of economists or political thinkers could be labeled as true market fundamentalists. But the frequent use of the phrase would suggest that individuals like Murray Rothbard and Anthony de Jasay are dominating public thinking about markets.

But what about “democratic fundamentalism?” In the chapter on market fundamentalism Caplan writes:

A person who said, “All the ills of markets can be cured by more markets” would be lampooned as the worst sort of market fundamentalist. Why the double standard? Because unlike market fundamentalism, democratic fundamentalism is widespread. In polite company, you can make fun of the worshipers of Zeus, but not Christians or Jews. Similarly, it is socially acceptable to make fun of market fundamentalism, but not democratic fundamentalism, because market fundamentalists are scarce, and democratic fundamentalists are all around us.

The Myth of the Rational Voter is a major antidote to such democratic fundamentalism. Although a small minority of people object to democratic politics because all government is coercive and redistributive, the economic verdict that democracy fails because voters not do not face strong incentives to correct bias is likely to be more credible to most people, including economists.

The presumption of liberty

Perhaps no political philosopher has done as much painstaking work to review the legitimacy and need for political authority as Anthony de Jasay.  What makes de Jasay’s work stand out is his ability to engage with the technical arguments of political economists and philosophers without sacrificing common sense. For example, de Jasay understands the complications of enforcing contracts without a state but never loses sight of the obvious point that a hypothetical contract to establish a state cannot be treated as an actual contract.

Anthony de Jasay is a patient thinker; his work makes the advocates of government look like raving fanatics, too impatient to appreciate the value of contract and convention, substituting coercion for agreement without examining their arguments and/or the operation of markets in great detail.

Unlike many other thinkers in this tradition, de Jasay is not a system builder. The bulk of his work involves the examination of arguments for government and the mechanisms of its operation when it exists. The lack of a normative case for liberty is not an omission, however, but deliberate. As should be evident from writings such as “Frog’s legs, shared ends, and the rationality of politics” (PDF) and “Values and the Social Order” (both reprinted in the book Against Politics), as a non-cognitivist, de Jasay does not find justificationism in ethics and political philosophy credible. Although the values we hold are often means to other (higher) values, going down the line we will arrive at a point where arbitrary, subjective preferences are the sole remaining reason for believing in something. This non-cognitivist position is not necessarily harmful to the cause of liberty because it undermines most, if not all, arguments in favor of political authority.

De Jasay believes that the decomposition of liberalism in the 20th century reflects “a design that positively invited tinkering.” As argued in great detail in his Choice, Contract and Consent: A Restatement of Liberalism, the progressive loss of rigor in liberal thinking reflects a tension between its two elements; maximization of a goal (freedom) and observance of a rule (no harm):

With regard to both freedom and the interests across which it must not trespass, one can only take positions that are ultimately subjective, ‘unprovable’, supported by intrinsically unwinnable, contestable, but unrebuttable arguments. Within these loose limits, disparate content can be read into freedom and nearly any interest can be claimed to be sufficient ground for an inviolable right.

A recurrent theme in de Jasay’s oeuvre is that liberty should be presumed, not because we have a “right” to it, or because it is the most important value or goal, but because it follows from the requirements of epistemology and logic. His current thinking on this has culminated in an essay called Freedom from a Mainly Logical Perspective (2005).  In a nutshell, the argument (as I understand it), goes as follows:

There are two basic means of evaluating the truth of a statement, verification and falsification. The  preferred choice between these two means should reflect the nature of the proposition at hand. If a claim is made that someone is not free to do something, the burden should be on the person who challenges that freedom. The reason for this is that the challenger needs only a strong enough case that at least one reason against the act in question is valid. If the burden of proof would rest on the person whose freedom is contested, the number of arguments that need to be falsified in order to prove that there is no good reason against it would be impractically large, or even infinite:

Even if an action is not challenged for ulterior motives or out of sheer busybodiness, the formal requirement to show that it would cause no harm and breach no obligation (i.e., that no one’s right could be opposed to it) is sufficient to stop any and all action and freeze everyone in impotent mobility. (Before Resorting to Politics)

The philosopher of science and critical rationalist Gerard Radnitzky was so impressed with de Jasay’s case for the presumption of liberty that he stated that “for the first time the political philosophy of libertarianism and of classical liberalism has gotten a solid base in logic and epistemology.” Instead of appealing to a person’s preference for liberty, logic dictates that liberty should be presumed:

Jasay’s argument entails the request to any rational being, in particular to legislators, not to request (in sincerity) what is logically impossible (like falsifying the objector’s claim that there is an obstacle to my doing X, when the list of obstacles is denumerably infinite or de facto inconsistent). This has nothing to do with value judgments: the logically impossible is literally “unthinkable,” since thinking and logic are two sides of the same coin. “Ought implies Can” is a descriptive statement. (Against Politics, for “Ordered Anarchy” (PDF))

The presumption of liberty is in harmony with the fundamental rules of action in Roman and common law in which the accused is considered innocent until proven guilty, and possession gives rise to title unless the evidence proves otherwise.  Far from being a trivial principle, it is an antidote against the “rightsism” that pervades contemporary political culture:

“Rightsism” purports solemnly to recognize that people have “rights” to do certain specific things and that certain other things ought not to be done to them. On closer analysis, these “rights” turn out to be the exceptions to a tacitly understood general rule that everything else is forbidden; for if it were not, announcing “rights” to engage in free acts would be redundant and pointless. The silliness that underlies “rightsism”, and the appalling effect it exerts upon the political climate, illustrates how far the looseness of current liberal thought can drift away from a more strict structure that would serve the cause of liberty instead of stifling it in pomposity and confusion. (Liberalism, Loose or Strict (PDF))

If having a “right to liberty” is an incoherent concept, and rights can limit freedom, what is the source of rights? Here de Jasay argues that the source of rights is contract; “the deontology of rights is their epistemology.” Leaving to the side the concept of “natural rights,” we can distinguish between rights that are created by political authority or rights that reflect contract. In both cases, the right of  one person corresponds to an obligation of another person (or persons). But whereas rights that reflect contract can be confirmed by the bearer of the obligation, this is often not the case with the rights that are created through the political process. Such rights are imposed through power and not acknowledged by both the right holder and the bearer of the obligation.

Does this mean that strict liberals cannot loyally accept the government of their country as legitimate, and are in effect advocating anarchy? Logically, the answer to both questions must be “yes,” but it is a “yes” whose practical consequences are necessarily constrained by the realities of our social condition. (Liberalism, Loose or Strict (PDF))

But who is going to determine when a liberty causes a harm or breaches a contract? It appears that de Jasay prefers these questions to be answered by common law and convention instead of government. Although such sponteaneous order may be “inefficient,” and sometimes “unfair,” this should be prefered over the political process which is intrinsically redistributive and nonunanimous. Without the prospect to secure private gain from the political process and to socialize its costs, the presumption of liberty may be secure for practical reasons as well.

The bell curve of individual choice

What is the relationship between individual choice and collective choice? What should be the domain over which a democracy chooses? Prevailing answers to these questions are an important factor affecting the size of government. One argument why imperfect foresight should favor limited government, or no government at all, involves the difference between how individual and collective choices shape a social state of affairs. As the political philosopher Anthony de Jasay writes in his essay “Is Limited Government Possible? (reprinted in the book Against Politics):

When a social state of affairs, instead of being collectively decided, is left to emerge from a large number of individual decisions, the effects of the latter tend to be normally distributed: a few prove disastrous, a few are superbly good, and most are middling. The likelihood of the resulting state of affairs being totally disastrous or wholly superb is negligible. When, however, one collective choice is responsible for a state of affairs, no normal distribution can be relied upon. A single wrong decision that “seemed a good idea at the time” suffices to cause disaster. (…) This is an argument for limiting the capacity of government to produce change; an argument which, if it does not appeal to everyone, should at least appeal to the mistrustful, the cautious, and the worldly-wise.”

A related and positive argument for allowing individual choice to prevail over collective choice is that the complex interplay of individual choice in a competitive environment will produce individual and “collective” outcomes that could not have been imagined by public policy makers. It is hard not to note the parallels of such a perspective and biological evolution.

De Jasay’s argument raises an important question. How do we evaluate whether a certain public policy  has produced a state of affairs that is a total disaster? One option is to compare it to what theoretically might have been possible. But a more realistic and popular answer is to compare it to the state of affairs in societies where such public policies were absent.

But this raises a troubling scenario for advocates of individual choice and competition. How can we properly evaluate the outcome of a policy when there is no society left that has not adopted it? As recent responses to real or imagined crises have shown, the dominant response to a failure of collective choice is not to curtail public choice, but to increase it and encourage “co-operation” and “coordination” between governments.

If the logic of collective choice puts us on the high road to one government, one policy, one currency, one central bank etc., how will we ever know by means of empirical observation that our policies are a disaster ? Would we trust a  biochemist who persistently claims to have produced a superior form of life after obliterating all competition between evolved and competing lifeforms?

Why do we support collective choice? Perhaps one reason is that we overestimate the effect of collective choice on our lives, are addicted to discussions about it, and underestimate the effect of individual choice. For most problems, “unilateral” individual choice is a more effective means to produce “change” than engaging in politics.  Problems that are not of this nature often involve the desire to make a person do something that he would not have done without compulsion.