Archive for the 'Economics' Category

Unlike Sean Hannity, you don’t see me calling for the end of liberalism

Final reactions to reading Hayek:

  1. Hayek states, more or less, that the core of any totalitarian movement consists generally of the stupid and brutish types. This unaccountable bit of intellectual snobbery seems to overlook the fact that the early converts and leaders of most of these movements that I know of tend to be petty intellectuals, whether they be failed painters like Hitler, failed poets and philosophers like Mao or failed lawyers like Lenin. The thugs that often accumulate around them from an early stage seem more like opportunists, certainly without the planning ability or long-term goals that can start a true megalomaniacal organization in motion. Indeed, a certain degree of intelligence seems requisite to formulate and persevere with a strategy that stands in revolt against liberal society, alongside ruthlessness and the loyalty to men and ideas that comes from fanaticism. These qualities are the core of any such movement and are certainly distinct from the common loutishness of the brown- or blackshirts. But Hayek in other places seems to be aware of this, noting that the very nature of a totalitarian state seems to select for those who have the desire and ruthlessness to impose their own objectives on all those around them.

  2. I don’t find the moral difference between liberal and dictatorial societies to be essentially the difference between normative and teleological ethics. It is not a matter of totalitarian rulers not having moral values but of being the sole ones vested with moral authority both as the interpreters and objects of ethics. In a liberal society everyone has or should have a free space of action to which they can apply their own code of conduct, but in a totalitarian society no such space exists, which proves catastrophic because, as Hayek suggests, those inclined to abuse authority are most likely to succeed in such a society.

  3. Hayek says things like “freedom can be had only at a price and…as individuals we must be prepared to make severe material sacrifices to preserve our liberty.” For some members and in some cases that may be true, but if it were true in aggregate that there is a necessary trade-off of liberty versus prosperity of this nature it would greatly weaken the value of a liberal society. I understand that he is counselling a certain amount of stoicism as regards the economic system in the face of misfortune, but the evidence indicates to me that economic and political liberty prosperity are strongly correlated and are in fact practically synonymous for society as a whole. One considerable aspect of economic liberty is precisely the opportunity to achieve prosperity, and it seems to me one of the follies of socialism, at least in the pre-war period, was to dissociate the two, a view which Hayek seems to be implicitly endorsing for some strange reason (granted he had at this time perhaps only had the opportunity to observe the oppression and not the poverty wrought by Nazism and communism).

p.s. It seems to be the conventional wisdom that the immediate object of Hayek’s criticism is dated because, whatever the indirect pressures of redistributionary policies and the welfare state, direct state management of major industries is over except in a few backwards outposts like North Korea. It may be true that the citizens of the major countries do not tolerate this anymore in the management of their own affairs, but certain cases like this one suggest that some, perhaps many, are in favor of central planning in areas outside their boundaries that they can dominate. If I were even more cynical than I am I might suggest that the combination of high environmental standards levied by Western countries on foreign products, protectionist economic policies and direct administraton of “aid” in conjunction with the ruling oligarchies of poor countries were deliberately designed to effectively re-colonize the Third World by reducing it to a state of total dependence in such a way as to seem to keep the wealthy countries’ leaders’ hands clean. In any case, the effect would be substantially the same.

The road to academic thraldom

As I am working my way through Hayek, I have two more points to respond to briefly (I apologize, just as I did in the case of Kuhn, for arguing with a book without providing background for those who haven’t read it, but, just as with Kuhn, the book is short and the issues readily comprehensible for almost anyone, I believe). Firstly, he claims that a free society is distinct from a despotic one in that a free society is governed by laws, while a despotic society is governed by arbitrary power. In this case laws are not defined as whatever the government decrees but rather rules based on general principles which are not discriminatory for or against any particular individual or group. I think this mostly valid, but insufficient. One can easily think of social systems, such as Islamic sharia, which are totally consistent, universally applied and yet utterly tyrannical. The problem is their excessive rigidity and all-embracing nature. A society needs a relatively large scope for unregulated action to be truly liberal, and even the actions directly addressed must provide for more than one course of action–in other words restrictive but not proscriptive. Even something as seemingly intuitive and fundamental as “thou shalt not kill,” for example, if taken totally rigidly and proscriptively, would rule out not only war and executions but also accidents and self-defense. Again, I don’t know if this was really an error on Hayek’s part or merely an overly convoluted line of argument, but I believe that at the least it simplifies the issue to imagine the essential dichotomy as being between a society that allows multiple courses of action and one that permits only one.

Secondly, and this is not a point on which I disagree with Hayek but rather one in which I felt the need to add an additional principle to come round to agreement with him, is the always tricky matter of the inherent inequalities in a liberal society that arise from such things as unearned income by way of inheritance and the like. Hayek resolves the issue by casting it as a choice of the lesser of two evils, arguing that there is no impartial means of income redistribution and that whatever the flaws in allowing people to accumulate income they didn’t earn pales by comparison to ceding someone or group the power to determine what income people deserve. This is true as far as it goes, but I still think it pays too much regretful homage to the mirage of equality of wealth and feel that the legitimacy of inheritances and so forth can be more solidly established on the following grounds. In my opinion for a government to forbid or consfiscate these is essentially to outlaw or rather to monopolize generosity. Consider: all gifts are by their nature unearned. Nevertheless the act of giving, or more particularly giving that which one has earned, that is to say altruism, is the highest of human impulses. To confiscate that which is given as a gift is to take on the responsibility of determining who is the most deserving of it and thus to obviate the whole nature of gift-giving. Therefore, to mandate against them is tantamount to forbidding the most virtuous of human acts. To me this is an a priori wrong just in the way that an insistence on “equality” above all else is an equally wrong tribute to envy, the lowest of humans emotions.

Comparing fruits

I have been reading The Road to Serfdom by Friedrich August Hayek recently, quite a reasonable book I find, though one, like John Locke’s work on education, that seems to have suffered the peculiar fate that its ideas have become so influential and entrenched that now they seem anodyne and commonplace. In order to retrench their merit, it perhaps helps to remember that, just as Rousseau was arguing 100 years after Locke that the best education for children was to let them run free through the woodlands (much as perhaps Rousseau’s own abandoned children did), so Paul Samuelson’s book Economics, undoutedly the most influential American economics textbook of the last half-century, in every edition up to the late ’80’s claimed that the Soviet Union proved the capacity of a command economy for dynamism and growth. And so the Haykian thesis that not only prosperity depends upon economic autonomy and the free allocation of resources but also political freedom continues to be well-taken. However, two subsidiary issues trouble me from the very beginning, quite apart from my uneasiness with the vagueness of his terminology, particularly grandiose and multi-faceted terms like “power” and “freedom,” which particularly when discussing complicated historical phenomena make almost any position endlessly debateable. However, I am at pains to reconcile myself to it by keeping in mind that the work is largely polemical, a political pamphlet more than a detailed discussion.

I can’t think of a relatively politically free society that is not commensurately economically liberal, but I am not sure that political freedom is a necessary pre-condition of economic liberalism. Hayek seems to imply that it is when he says of Europe’s commercial development: “The…elaboration of a consistent argument in favor of economic freedom was the outcome of a free growth of economic activity which had been the undesigned and unforseen by-product of political freedom.” Even in connection with this particular case this is quite a debateable point, and while I might agree that British commercial growth, especially in Scotland, did largely follow upon political liberalization and greater autonomy for regions and citizens, for Europe as a whole I think it is considerably less true. The first true commercial state in Europe was the Byzantine Empire, which was as oppressive intellectually and politically as any in the world, with its absolute imperial despotism and rabid enforcement of Christian orthodoxy. The commercial states of Italy largely came about due to its subsequent collapse and the disappearance of Constantinople as the world’s great center of trade. Because the Italian city-states were (at least technically) subject politically to the Holy Roman Empire through the 17th century and intellectually and financially to the Catholic Church, it was only with the money that they received from trade that they were able to fight or pay off their feudal and ecclesiastical enemies. Thus political freedom certainly accompanied the growth of free trade, but it could hardly be called an antecedent. And as a general statement, I think there are even more profound challenges to the theory. The great example today is of course China.

It seems to me that the Chinese have become more free since the advent of the market there (though no doubt less than was hoped), and that this will continue as the country becomes wealthier, if nothing else because money is power in a commercial society and power can obtain a degree of freedom. One might even speculate that if political liberalization does not continue apace then economic growth will slow or even stall. Right now I think the Chinese economy is still in replicant phase, largely reproducing technology and models that already exist in the West. With a certain base of competency and a concentration of resources and energy this is in some ways the simplest phase of economic expansion–even the Soviet Union industrialized in about a decade under Stalin’s lash. But without a great deal of latitude for entrepreneurs this will not probably be sustainable when one gets to the stage of the Western nations, where continued growth depends largely on invention and experimentation. But whether this be or no, political freedom cannot be held to be an antecedent, much less the cause of the economic explosion, even if the market inherently means a degree of freedom in economic affairs.

The second issue is not really an empirical one, but more a matter of valuation. Hayek is very keen to note the importance of individualism for both economic prosperity and political freedom, even going so far as to call it the essential feature of Western civilization, which is true as far as it goes but is still much over-simplified. In any case, he particularly notes Britain and the Low Countries as being for a long time the firmest bastions of individualism in the world. On a personal note, however, I have been to Britain, Belgium and Holland in the course my European travels and find them to be the most disagreeable countries in Europe. Graffiti, trash, crass commercialism, crime and general social hostility are the worst in Europe, and in the case of crime at least that is in fact objectively correlated. They are the most violent countries in Europe if not the world, with the most immigrants and the most meager attempts at assimilation. I find American cities just as bad, but am more comfortable on the whole in the U.S. because the country is less urbanized than those others and so the problem is less universal. In other words, the individualism so lauded by Hayek has a very distinct dark side, one which corresponds to a degree of social atomization I have seen nowhere else in the world and now find a little shocking. I have a feeling from Hayek’s language, particularly his condemnation of “antisocial privileges,” that he would in no way condone this and probably only advanced his notion of individualism in conjunction with the rule of law and on condition that a sense of voluntary obligation to one’s fellow man should replace and prevent coercion. It is nonetheless, whatever Hayek may have believed in or hoped for, the result of a philosophy of individualism without responsibility or obligation which has produced this reprehensible situation, and strangely enough, perhaps it is, just as with Marxism, an underestimation of the selfishness of man which is at the root of the failure. The callous indifference of middle-class life in the West is disappointing enough, but (along with Dalrymple) I find the wasteland of malignant hostility inhabited by the underclass here more appalling even than the wreckage of the former Soviet Union, to the point that I could not call it a true community or even a functional component of the larger society.

p.s. Let me anticipate one objection which I am almost certain is coming. It will be said that the salient feature of the Western underclass is the omnipresence of the welfare state, which seems to be anything but individualist, particularly given how Hayek himself summarizes the promises of “freedom” made by the later socialists, which is more or less a perfect description of welfare policies:

“The new freedom promised, however, was to be freedom from necessity, release from the compulsion of the circumstances which inevitably limit the range of choice of all of us, although for some very much more than for others. Before man could be truly free, the ‘despotism of of physical want’ had to be broken, the ‘restraints of the economic system’ relaxed.”

And so this is true in a way. For the non-welfare recipients in society, it definitely functions as a simple collectivist coercive policy. However, three points in response:

  1. Every country I have been to has some form of welfare, but this does not produce the same levels of violence and hostility in Sweden, in Germany or in Russia that it does in America or Britain or Holland.

  2. The phenomenon of social atomization is not limited to the underclass, it just reaches its most extreme form there, another reason that it seems to me as much of a cultural phenomenon as an economic one.

  3. One has to consider the way in which the welfare state divides people into two societies. As I said, subsidizing it is certainly an unwelcome imposition for me, but my true objection to it is the effect it has on the recipients. One can imagine that the most absolute form of collectivism would posit no rights, only obligations for the individual. The most extreme form of individualism would posit only rights and no responsibilities. The latter is more or less the case in the anarchic yet subsidized world of the Western underclass. The violence and lawlessness that ensue is I feel partly a natural result of the attitude of a class of people who in return for receiving enough to live on comfortably (relative to the rest of the world) are pretty much required to continue breathing, and consequently they evince about as much sense of social obligation as the pre-Revolutionary French aristocracy. Thus welfare is in effect collectivist but philosophically I think it is, while paternalistic, ultimately a perversion of individualism that posits a rather excessive conception of everyone’s economic rights. Just as Hayek demonstrated that the political spectrum is a circle in which the opposite extremes of Nazism and communism almost exactly resemble each other, so the extremes of theoretical individualism and collectivism can result in the near-identical elevation of people to positions of corrupting privilege or power over others. As Aristotle said, virtue generally lies at an equal distance between opposite vices.

Leaky argument version 2.0

I found this article interesting because it is one of the few anti-sweatshop arguments I have heard that takes into account, and seeks to counter, the argument that boycotting sweatshop goods or even seeking to impose higher wage and work standards on sweatshops will result in higher unemployment. Fortunately the author is (implied to be) an economist so there is not too much appeal to hysterical weeping, but there is still something weirdly naïve and a little vacuous in his opinion.

First of all, he claims that it is presumptuous to assume that wage rates completely determine where international companies decide to set up factories, citing the fact that Nike, which manufactures in Indonesia, also has factories in Mexico, where industrial wages are about four times as high. A debateable point: while no doubt it is overall cost that counts, not just labor costs, I would be almost willing to guarantee, without having Nike’s total manufacturing outlay in front of me, that its industrial concentration in Indonesia far exceeds that in Mexico. I know that almost every athletic shoe I have ever owned was either made in Indonesia, the Philippines, or “Indochina” (and occaisonally, back in the ’80’s, Korea). Maybe raising the wages of factory workers in Indonesia from $2 to $2.50 per day would not necessarily result in all the multi-nationals uprooting and moving somewhere else, but it’s pretty hard to argue the general correlation between labor costs and industrial activity, and setting wages into a larger matrix of business costs should make that relationship more clear, not less so, as the author seems to think.

Which leads to a bigger flaw, or at least inanity, of the reasoning herein. The author’s attitude to wage reform is pretty much circular. For instance, he writes:

“Surely, Kristof and his allies are right that imposition of first world wage and hours standards on Asian and African workers would destroy jobs. Cost increases that are too great would cause rising prices and falling demand. But wages can be increased significantly without big price impacts. Sweatshop workers in Asia earn something like $2 a day, perhaps for twelve hours of work. Tratiwoon would love the opportunity for her son to earn that much. But does Kristof have any reason for assuming that, if Indonesian employers were forced to raise pay to, say, $2.25 or even $2.50 a day-leading to a big boost in workers’ living standards-this requirement would be so burdensome that sweatshop workers would lose jobs and join Tratiwoon in the garbage dump?”

By implication, his idea of a good wage reform would be the maximum wage increase which would not adversely affect the companies’ costs enough to fire the workers or leave. Therefore, his argument is essentially that raising wages will not cause workers to lose their jobs if wages are only raised just enough so that the companies do not fire them! This is maybe a pretty nice, humane idea. But he’s definitely kidding himself if he thinks that that is the essence of the anti-sweatshop movement. He writes:

“Today, organizational and financial support for student and consumer organizing comes from the labor movement itself. This gives rise to the charge that the demand for labor standards is not only self-indulgent on the part of spoiled, affluent college students, but is also protectionist, an attempt to keep investment and jobs from migrating to the third world. This charge is silly because the modest wage increases that might result from an effective international standards regime would not cause manufacturers to rethink their global sourcing strategies. No clothing assembler will move back from Jakarta to New York because of a requirement to raise wages from $2 to $2.50 a day.”

Yeah, no shit, but Third World sweatshops are hardly the only possible source of the products they manufacture. But I have talked to plenty of people who are opposed to “sweatshops” that think that the government should forbid the importation of sweatshop products or, barring that, that consumers should boycott them. I have seen ads on sites like the The Onion that advertise “sweatshop-free” clothing “made in downtown L.A.” It is obviously easier on the consumer’s side to simply eschew Third World-produced clothing altogether than to force the companies to move their operations (although the irony is that the U.S. is by no means sweatshop-free, and “made in downtown L.A.” is certainly no guarantee that the product wasn’t made in a sweatshop). Thus opposing sweatshops can dovetail with protectionist economic policy in ways other than the rather implausible possibility that factories will relocate to America from the Third World, and that opposition does not always confine itself within the bounds of the free market.

I should preface the third fallacy, which is practical rather than theoretical, by nonetheless making a theoretical point. After listening and reading all last year to French pundits pulling out their hair over the question of whether socialism or liberalism are better systems for living, I finally concluded that that is an irrelevantly abstract way of thinking about the issue. The issue is not which one is “better” (and on what standard are we all to agree?) but which one will survive. Actually the scenario became all the more acute when I visited Russia, where plenty of people (including Putin, apparently) are still willing to blather on about how disbanding the Soviet Union was a mistake. To which I wanted to reply, what choice was there? The Soviet Union was bankrupt, and continuing on was not an option. I certainly concede that Russia and the international financial institutions have made a lot of mistakes, but one would think that eventually a lurid light would break in upon a darkened understanding and all the grumpy Russian pensioners would realize that the reason (well, one of the reasons) that the country was bankrupt was precisely because of that inviolable and untenable social and economic security for which they are always reminiscing. I bring all of that up merely to suggest that in thinking about these issues it behooves one to be more Darwinist and less utopian in thinking about these things. If something is not viable and sustainable, it doesn’t matter in the least how nicce it would be. Which is why the analogy that the author makes in the article between the “sweatshop era” in the U.S. and the current international scene is rather imperfect. He goes through a great show of facts and figures to demonstrate why the imposition of the minimum wage and various labor regulations in America was helpful to the workers and not harmful to commerce, while neglecting to consider that probably the only reason it didn’t cause major contraction in the industrial sector was that businesses were not yet international enough at that time to move their factories overseas to minimize costs (except maybe to Cuba or Puerto Rico). In those days businesses had to submit to regulation because they had no choice. That is no longer true when a multi-national facing higher costs in Indonesia is being offered all kinds of concessions and bribes to move to Sri Lanka. The author himself acknowledges that “the possibilities are remote that transnational regulation can improve conditions under which third world workers toil,” but fails to be perturbed by the fact that the only other way that, say, the U.S. government can effectively try to regulate international working conditions is through protectionist trade policies. And somehow the embargo on Cuba has failed to teach him that American sanctioning by itself is not sufficient to force even the smallest of countries to do its bidding (well, granted, the Soviet Union bolstering added an equally artifical and opposite factor, but that ended 15 years ago). And so who, basically, is going to enforce these standards even if everyone does agree they are a good idea?

Finally, he sneers at “free-marketers” for opposing wage regulation abroad while not being “noticeably vocal in opposition” to the minimum wage and thinks of that nature domestically. Well, I happen to know plenty of people who are at least partially opposed to the minimum wage and various other guaranteed workers’ benefits in the U.S. for precisely the same reasons. Just because France’s 35-hour work weeks are a national joke doesn’t mean that it doesn’t actually face 10-12% unemployment. It is regularly acknowledged in France that because of that it is virtually impossible to start a small business there, and yet journalists and intellectuals still wander around searching for “le secret du dynamisme” of the American economy as if it were the philosopher’s stone. Here’s a key, three simple words that they teach on the first day of intro. economics: “low entry costs.” And beyond even that, it’s more than a little annoying that these activists throw out wage figures completely out of context, without mentioning an average living wage in the countries concerned. Given that the average yearly income in India is about $1,600, for example, it is almost assured that the programmers making $24,000 per year are doing better than a $100,000 or even $150,000 per year programmer in the U.S., where the average income is about $40,000.

Live Hate

I haven’t really been paying attention to the whole thing, but apparently Bob Geldof is pissed that people are selling Live 8 tickets on eBay:

It is filthy money made on the back of the poorest people on the planet — stick it where it belongs.

Funny, my impression was that Geldof is trying to resurrect his career and record sales on the backs of the poorest people on the planet, but maybe that’s just me.

Of course, it’s silly to claim that eBay or anybody else is making money “on the back of the poorest people on the planet”; I don’t think anybody was planning on sticking up the Red Cross to bid on a ticket.

Now, as I understand it, the tickets were randomly allocated amongst 2 million people who sent in an SMS (at £1.50 a pop) for the opportunity, which meant Geldof & Co. picked up a cool $5 million in revenue. Which, given that the whole Live 8 thing is supposedly about poor people in Africa, you would think would be donated to some Africa-related charity, right? Wrong. Half goes to poor kids in England, and half goes to “cover the cost of staging the concerts” (read: paying the bands). So Live 8, whose “global symbol” is the white band (fittingly, as Colby Cosh points out), wasn’t planning on doing anything for poor people in Africa, other than giving a bunch of aging rockers a chance to feel like they “made a difference”. But scalping tickets on eBay is “filthy money made on the back of the poorest people on the planet”.

Like Joshua Holmes, my question is this: Why the hell didn’t Geldof sell off the Live 8 tickets in the first place (at, say, $100/ticket) rather than practically giving them away?

(150,000 tickets) x ($100/ticket) – ($5 million for various white people) = $10,000,000 surplus

(or, as stated elsewhere: “Clueless, Bob. If you don’t capture the consumer surplus, some other economic actor will.”)

Now, I know the poor Africans are way too noble to be caught up in the bourgeois petty materialism of the West, but don’t you think they’d rather have $10,000,000 than Bob Geldof bitching about “profiteering“?

Update: Be sure to check out Colby Cosh’s National Post column today.