Institutions

Monetary Nationalism

Mario Rizzo Hayek, Institutions, monetary policy, Monetary Theory ,

by Jerry O’Driscoll

I recently read Money, Markets and Sovereignty by Benn Steil and Manuel Hinds. I highly recommend it. The jacket blurb accurately summarizes the book’s importance: “Benn Steil and Manuel Hinds offer the most powerful defense of economic liberalism since F. A. Hayek published The Road to Serfdom more than sixty years ago.”

Steil and Hinds focus on the institutional underpinnings of liberalism: the rule of law, globalization (free trade and free movement of capital) and commodity money. Their arguments on all points are powerful. Their argument on money runs against the grain of modern monetary theory. They rely heavily on history to buttress their arguments.

Reading the book motivated me to reread Hayek’s Monetary Nationalism and International Stability, upon which a good part of their monetary analysis is based. Though written in 1937, the book makes a powerful argument against the international monetary arrangements of the last 40 years: the 182 national fiat currencies.

Hayek argues the benefits of national fiat currency are largely illusory, and fiat money introduces problems unknown under the gold standard. For instance, Hayek, and Steil and Hinds explain why short-run capital flows can be destabilizing in a fiat money system, while they are stabilizing in a commodity standard. The two works follow the Misesian strategy of criticizing policies (or institutions) by demonstrating that they produce results different from or even the opposite of those intended by their advocates.

This year’s Cato monetary conference (November 16, 2011) will focus on monetary reform. Instead of a keynote address by a senior Fed official (a hallmark of past conferences), the opening address will be by Ron Paul. Panel I will be “Rethinking the Global Fiat Money System.” Chaired by Mary O’Grady of the Wall Street Journal, the panel will consist of Benn Steil, George Melloan and myself.

Look to the Long Run

Mario Rizzo Institutions, political philosophy

by Mario Rizzo

I have been away in France for almost two weeks. I missed the “earthquake” and Hurricane Irene for I which am very happy.

What being away reminds me is that if you follow the day-to-day news you can easily get bogged down in the small events — though they seem big and important at the time — and fail to see the bigger picture. Every little nervous twitch by the those in power becomes our daily obesession.

Blogs contribute to this because you must make your comment right away because the public attention moves to something else. But if there is any lesson to be learned from classical liberalism is that we ought to focus on the long run. It is really only the long run that we have any hope to change. Most of the propositions of economics apply to the long run — as Milton Friedman taught “fine tuning” is a fool’s errand. What we know about the institutions conducive to the free society and to prosperity apply mainly in the long run.

This the both the strength and the weeakness of the liberal doctrine. People demand short-run solutions but there are only long-run answers. This is why government needs to be constrained to a long-run focus. It is also why it can never be constrained permanently and why the struggle for economic progress and freedom is eternal.

“Enjoy” the daily news but don’t mistake it for something important. It generally is not.

Now which newspaper would hire me with that philosophy?

Spending Cuts and Politics of Bureaucracy

chidemkurdas Fiscal Policy, Institutions, political philosophy, Public Choice , , ,

by Chidem Kurdas

I just read The Politics of Bureaucracy by Gordon Tullock, one of the best books written on the behavior of bureaucrats. Although originally published in 1965, it remains very much relevant today, especially as the debt deal currently in Congress could bring spending caps on programs administered by numerous bureaucracies. These entities implement policy changes, yet efforts to rein in government spending or impose new regulation typically pay little or no attention to their behavior.

Professor Tullock derives his insights from the basic observation that when embedded in an administrative hierarchy that is supposed to serve some – typically vague – public interest, people remain individuals; they still have their own preferences and interests. This is nicely expressed in the foreword by James Buchanan, who paraphrases Adam Smith’s well-known dictum about the butcher, the brewer or the baker. I will further paraphrase his take on Smith: “It is not from the benevolence of the bureaucrats that we expect our budget savings and better rules, but from their regard to their own interest.” Continue reading →

Austrian Law and Economics: The Definitive Collection

Mario Rizzo Announcement, Economics, Institutions, Law

by Mario Rizzo

Edward Elgar has announced the publication of a two-volume collection of Austrian law and economics articles. The marks the first definitive collection of articles in this field. It is a book for your university or public library. Please recommend it! 

THE BIG BOOK

 
Edited by Mario J. Rizzo, Department of Economics, New York University, US

August 2011 1,488 pp Hardback 978 1 84542 753 5 Regular Price $790.00  Web Price $711.00 

Description
The use of economics to study law was pioneered by the Austrian School of Economics. The nineteenth century founders of the school believed that economics could contribute to understanding the spontaneous development of common law as well as the nature of legal rights. For this insightful two-volume collection Mario Rizzo has selected key papers from today’s vibrant Austrian School, focusing on the study of property, market-chosen law, slippery-slope analysis, entrepreneurship, institutions, decentralized social knowledge, and the evolution of legal institutions.
These volumes represent the cutting-edge Austrian contributions to economics and will be an essential reference source for both students and researchers. Continue reading →

Soros and Open Society in America

chidemkurdas Democracy, Institutions, political philosophy , ,

by Chidem Kurdas

George Soros originally intended to wind down his Open Society Foundations at the end of his life but changed his mind. This worldwide network of activist groups – to whom he has given more than $8 billion and named after Karl Popper’s classic The Open Society and Its Enemies – is to continue operating after he’s gone.

In Eastern Europe, the network helped undermine communist regimes and bring about freer societies. The main mission ascribed by Mr. Soros is to hold governments accountable in countries that lack civil institutions. It has to be a bitter irony that he sees the United States, the long-time home of many such institutions, in serious danger of ceasing to be an open society, given the increasingly manipulative and deceptive public discourse.

He was an early and aggressive backer of Barack Obama apparently in the belief that the then presidential candidate would stop the dangerous trend. Now he is disappointed. Continue reading →

Freeing Marriage from Church and State

Mario Rizzo contract law, Institutions, Law

by Mario Rizzo

The passage of a same-sex marriage bill in New York State is to be welcomed by all those who advocate freedom of contract. But now further steps must be taken on the road to free marriage from state interference.

The content of the commitment that people make to each other under the rubric of marriage should be up to individual choice, although I have no object to a standard-form contract for those who may find choices confusing. And secondly the existence or non-existence of a marriage should not be a condition for tax or any kind of welfare-state privileges. Continue reading →

Japan Reveals Regulatory Trap

chidemkurdas Development, Institutions, Public Choice, Regulation , ,

by Chidem Kurdas

Once upon a time, people tried to explain the post-war “Japanese Miracle” of rapid growth. Then in the current century, the puzzle shifted to Japanese stagnation since 1990. The lesson from these two distinct phases of Japanese history is germane for current American policy.

Chalmers Johnson’s influential book, MITI and the Japanese Miracle (1982), examined how the powerful Ministry of International Trade and Industry had guided and regulated the economy.  MITI implemented industrial policy in what Mr. Johnson called a defining characteristic ofJapan, namely close collaboration between politicians, economic bureaucrats and big business.

MITI’s successor, the Ministry of Economy, Trade and Industry, promoted the use of nuclear power. The ongoing problems at Fukushima Daiichi nuclear plant threw new light on METI. The plant’s operator, Tokyo Electric Power Co., is a monopoly fostered by regulators. The government announced that the Nuclear and Industrial Safety Agency will now be separated from the Ministry, to give it greater independence.  Continue reading →

Moral Trial and Error

Mario Rizzo Ethics, evolution, Hayek, Institutions

by Mario Rizzo

The recent discussion-thread at the blog Coordination Problem regarding a Hayekian case for same-sex marriage got me thinking more generally about moral evolution.

In a market there is a process of trial and error. New products or methods of production come into existence. Some fail; others succeed. Some speculators make successful predictions of the future course of prices; others make mistakes. In general, the filter for these decisions is the profit and loss mechanism.

F.A. Hayek famously argued that the evolution of institutions, including moral and legal rules, follows a similar course, that is, trial and error. And yet the analogy with market processes is far from perfect. How do we view the trial and error process of moral rules? What is the filtering mechanism?

Right off, let me say that I do not have definite answers to these questions. I simply have some relevant thoughts. Continue reading →

Kissinger on Bismarck

chidemkurdas Democracy, history, Institutions, paternalism, US Constitution , , ,

by Chidem Kurdas

A man described as both great and evil, Otto von Bismarck-Schönhausen makes a fascinating study,  as Jonathan Steinberg’s Bismarck: A Life demonstrates.  Henry Kissinger reviewed this biography in the New York Times Book Review, highlighting the diplomatic and political victories the unifier of Germany won through nimble maneuvers.

The review is a bravura tribute from one practitioner of realpolitik to another. Yet a closer look at Bismarck raises doubts as to realpolitik.

While admiring Bismarck’s subtle power games, Mr. Kissinger  admits that the result lacked institutional balance and “sowed the seeds of Germany’s 20th century tragedies.” But he takes issue with the connection Mr. Steinberg draws from Bismarck to Hitler. Kissinger points to the contrast between the two characters. “Bismarck was a rationalist, Hitler a romantic nihilist,” he writes. “Hitler left a vacuum. Bismarck left a state strong enough to overcome catastrophic defeats …”

Nevertheless, Bismarck’s actions led to those catastrophes. Continue reading →

Medieval Capitalism

Mario Rizzo Development, economic history, Institutions ,

by Jerry O’Driscoll  

Randall Collins is a distinguished sociologist and Weber scholar. In Weberian Sociological Theory (Cambridge University Press, 1986), Collins re-examines Weber’s contributions. It is a book favorable to Weber. In chapter 3, “The Weberian revolution of the High Middle Ages,” he employs Weber’s analysis to demonstrate that it was in medieval Europe that capitalism and modernity developed. “…The Middle Ages experienced the key institutional revolution, … the basis of capitalism was laid then rather than later, and that at its heart was the organization of the Catholic Church itself” (45).

Consider my post inspired by Gene Callahan’s earlier one. My interest is not in interpreting Weber, but understanding the history of the market economy. But much of the discussion in the prior post centered on interpreting Weber. Collins is relevant because he establishes the position I argued from a Weberian perspective. Continue reading →

Public Unions vs. the Real Underdog

chidemkurdas Democracy, Institutions, Law, Public Choice, Taxes, Uncategorized , , , ,

by Chidem Kurdas

Wisconsin governor Scott Walker successfully made the financial case to limit collective bargaining by public unions. Not only have the unions imposed an immense burden on taxpayers, present and future, but they create bureaucratic rigidities that cause dysfunction and, in financial crunches, layoffs of promising employees.

Yet in recent weeks it has become noticeable that these points fail to persuade many Americans.  The Wisconsin bill that just passed and similar reforms in other states face furious opposition, including appeals to the public.  Perhaps it’s not a bad idea to highlight another aspect of government unions, in addition to the purely economic issues.

We need to understand why part of the public supports unions. The best explanation that I’ve seen is from Richard Epstein in Free Markets Under Siege, a 2005 book that analyzes unions and agricultural price supports as examples of cartels in different markets.  These cartels impose social costs and require special dispensation from antitrust law. Why did the rest of the population accept the costs?  “Never underestimate the enhanced political sympathy when the underdog seeks to gain state power,” Professor Epstein points out. Continue reading →

Constitution Bashers’ Internet Fallacy

chidemkurdas history, Institutions, Law, New Deal, Regulation, US Constitution , , , , ,

by Chidem Kurdas

There’s a ferocious backlash against the Tea Party’s reverence for the U.S. Constitution. Court decisions against ObamaCare’s compulsory health insurance provision have further stoked the hostility.

One common and obvious line of attack is that the Constitution is old-fashioned and out of synch with our world of satellites and Twitter. Continue reading →

Why Are Medical Offices in the IT Paleolithic?

gcallah Institutions, medical care, Uncategorized

by Gene Callahan

As a social theorist, I find it always interesting, and a useful exercise, to try to arrive at a good explanation for some social anomaly. But sometimes I find myself at a loss, and here is such an instance: Why, oh why, when we go to a medical office, do we write the exact same info on three of four different pieces of paper? Why are we even writing on paper? I mean, if there is one thing that computers have unambiguously improved, isn’t it the storage of routine information like this? Why can tiny St. Francis College, where I teach, in about one minute set me up so that I am receiving Continue reading →

Egypt Best Case Scenario via Korea

chidemkurdas Democracy, Development, history, Institutions, Public Choice , , , ,

By Young Back Choi and Chidem Kurdas

Compared to the turmoil in the Middle East, South Korea appears to be an oasis of calm. But as recently as 20 or so years ago you could  still smell tear gas on the streets of Seoul. Violent demonstrations shook the city for decades—-making it look like Cairo today.

Despite continuing tensions with North Korea, Seoul is now relatively peaceful and the economy is humming along. How did South Korea get out of the cycle of angry protests and government repression?  Continue reading →

The Good Sense of Ronald Coase

Mario Rizzo Economics, Institutions, Links

by Mario Rizzo  

Ronald Coase was recently interviewed by Wang Ning on the occasion of Coase’s 100th birthday and to discuss the Ronald Coase Society in China. There is a good deal that is interesting about the interview, especially to those interested in China. However, here I’d like to point to a number of statements Coase makes of more general interest. Continue reading →

Happy Birthday Ronald Coase

Mario Rizzo Announcement, Institutions
Ronald Coase is 100 years old today

by Mario Rizzo

There are few economists who are as important to the development of economics as Ronald Coase. It is important that young economists who, in their now almost-universally inadequate education, take the time to familiarize themselves with his contributions. This is best done directly through his own well-written articles rather than through the literature about him. It is perhaps unfortunate that George Stigler labeled Coase’s analysis in “The Problem of Social Cost” a theorem — the Coase Theorem. This has given rise to all manner of misunderstandings, including the incredibly ignorant remark I once heard from a graduate student, mocking the theorem-status of the analysis. That was some years ago. Today most students at the top economics have never been exposed to Coase’s work.

I look at Coase’s work on property rights as establishing an analytical framework rather than a set of policy conclusions. I believe that a new, exciting area of application of Coase’s perspective lies in the study of what some economists are calling internalities. An internality is a cost (or benefit) that a individual imposes on his future selves as as side-effect of activity today. Thus, for example, I may eat potato chips today getting pleasure but then impose some health cost on my future self. Some economists have proposed an internality tax to “correct” the situation. In a previous post I analyze this issue and present some references, including a great piece by Glen Whitman.

I wish Ronald Coase a happy birthday and thank him for making economics a better discipline.

(HT: David Boaz)

Reform the Monetary System?

Andreas Hoffmann Financial Markets, Institutions, monetary policy ,

by Andreas Hoffmann*

Most economists agree that the latest crisis was caused by risk-taking incentives (competition for profits, wrong ratings, false policies, moral hazard) along with financial innovations that allowed banks to lend excessively. While monetary policy prevented, for better or worse, a collapse of the financial system, an increasing number of economists also agree that it is not possible to safeguard the financial system over and over again. There are limits to intervention. Therefore we have to find a way to deal with the very causes of the crisis. Continue reading →

Two Visions Fuel Political Attacks

chidemkurdas Hayek, history, Institutions, medical care, paternalism, US Constitution , , , , , ,

by Chidem Kurdas

Apparently left-liberal pundits are convinced that people oppose government expansion either out of stupidity or cupidity—not, say, out of a sincere belief in freedom. The oft-repeated story is that ignorant and misguided masses are being led by greedy business interests. Paul Krugman’s recent column is one of  many examples in the genre where billionaires intent on ravaging the country provide the bucks while clueless Tea Partiers provide grass roots brawn.

The best insight regarding this type of criticism comes from Thomas Sowell, whose analysis of two distinct visions of human nature puts current attacks into long-term perspective. Jerry O’Driscoll referred to this work in his comment on anti-intellectualism, a charge often levied by the same left-liberal critics.

In A Conflict of Visions: Ideological Origins of Political Struggles (published 1987, new edition 2007), Professor Sowell contrasted two fundamental views that go back several centuries. Continue reading →

Limited Purpose Banking?

Mario Rizzo Financial Markets, Institutions, Regulation , ,

by Jerry O’Driscoll  

The following is a book review from the Cato Journal, Vol. 30, No. 3 (Fall 2010).  

Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking Laurence J. Kotlikoff      (Hoboken, N.J.: John Wiley & Sons, 2010, 241 pp.)  

Chapter 1 of the book is titled “It’s a Horrible Mess,” and in it Laurence Kotlikoff, a professor of economics at Boston University, reminds the reader of the breadth, depth, and horror of the global financial crisis. It is a cure for the dispassionate observer of events, an indictment that would send all but those with ice water in their veins to sign up for the Tea Party Express. The book is a particularly well-written account of the crisis that begins in housing finance, spreads throughout the financial system, and then throughout the real economy. The crisis hit in tsunami-like waves beginning in 2007 and continued into 2009.  

In Kotlikoff’s words, “We thought we had well-functioning banking and insurance companies with competent directors, world-class managers, responsible regulators, and incorruptible rating companies. But overnight, we it learned it was a sham.”   Continue reading →

Lament for Conservatism

Mario Rizzo Institutions, political philosophy, Slippery Slope

by Mario Rizzo  

In today’s New York Times David Brooks argues that conservatives need to plan for “the day after tomorrow.” Tomorrow there will be the revolt against out-of-control government and that is good. But the day after America must return to its traditional non-ideological pragmatism about government. We need to solve problems as we find them. Government used in wise ways can be very helpful.   

But what are these pragmatic government policies? Was it not one “fix” after another with little thought to the kind of society being created that has produced what we have today. I have no objection to “pragmatism” if it is a far-seeing pragmatism that looks to consequences – both indirect and complex.  

The conservative reaction against “ideology” is a total misconception. A “good” ideology is a philosophy that focuses our attention on the long-run, Bastiat’s “unseen,” and the fundamental values of a free society. Most of all, however, it helps us focus on those rules that act to resist the special interests who would undermine the structure of a free society, one issue at a time.  

This ideology is classical liberalism. If we truly understand how things went wrong in the over the past many decades, we would see that non-ideological pragmatism does not inspire confidence.

China Catch-Up and Two Freedoms

chidemkurdas Democracy, Development, history, Institutions, private property ,

by Chidem Kurdas

China is expected to produce more than Japan this year, thereby becoming the world’s second largest economy after the US.   Chinese annual output is only $5 trillion compared to American $15 trillion and per person income is only a fraction of the US, but it is clear that China is catching up.

We’re witnesses to a gigantic experiment in political economy. Here is an authoritarian government that apparently recognizes the superiority of free markets, private property and individual enterprise in organizing an economy. It has lifted the shackles off industry and commerce, to an extent, so as to benefit from these powerful forces. Thus China is growing at phenomenal rates.

But freedom of expression and political dissent remains suppressed even as economic freedom expands. In the ever-resonant words of Milton Friedman, “Economic freedom is an essential requisite for political freedom. By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised.” Continue reading →

Constitutionalism: Point/Counter-Point

chidemkurdas Democracy, history, Institutions, Law, Public Choice, Regulation, US Constitution, Welfare State , , , ,

By Chidem Kurdas and Thomas McQuade

In our previous post, Thomas argued that voter feedback is weak in constraining the exercise of legislative power. Chidem countered that the other fundamental constraint, the constitution, is therefore all-important. Commentators were divided, with cogent arguments pro and con. We continue this discussion.

Chidem:  Constitutionalism is the idea of subjecting political power to rules that stand above that power. The concept took a long time to develop and became effective only in some societies. Its roots go back to the Magna Carta of 1215 in which King John of England accepted limits to his authority and an earlier Charter of Liberties. Today’s struggles about the US Constitution are but another chapter in this long history.

Public choice pioneer and Nobel-prize winner James Buchanan powerfully made the constitutionalist case. Geoffrey Brennan and Buchanan offer this definition in The Reason of Rules (1985): “the essence of the constitutionalist approach is that political action (including the making of laws) be conducted according to certain rules (or meta-rules).”

In the alternative view, majority voting is the ultimate source of morally legitimate political power and there should be no constraints on it.  Buchanan and Roger Congleton (Politics by Principle, Not Interest, 1998) argue that in the absence of meta-rules politics devolves into majority-seeking deals where some benefit at the expense of others.   Continue reading →

Executive Compensation as Lottery Prize

chidemkurdas entrepreneurship, Financial Markets, Institutions, psychology , , , ,

by Chidem Kurdas

Last week the WSJ published a list of the past decade’s best-paid chief executives. You might nod approvingly at some names but gag at others. In the former group is Steve Jobs of Apple, whose company’s share value grew by about 11-fold in the period from 2000 to 2009. In the latter category is Richard Fuld, the last chief executive of Lehman Brothers, whose $457 million compensation during the decade is hard to swallow given what happened to Lehman. 

It is notable that these compensation figures consist almost entirely of the value of company shares the executives received via stock options or as restricted stock. It is stock awards that account for the big numbers, starting with the $1.84 billion that won Larry Ellison of Oracle the top spot in the ranking. Cash salaries by comparison are miniscule.

The obvious argument in favor of stock options is that they  give executives incentive to work at boosting share value—thereby serving the owners of the company. But do they really have to be given such large blocks of stock? Smaller amounts of stock are likely sufficient incentive. Continue reading →

Understanding Politics: Point/Counter-Point

chidemkurdas Democracy, history, Institutions, Law, Public Choice, US Constitution

by Thomas McQuade and Chidem Kurdas

Our previous post and the ensuing discussion raised points for and against the appropriateness of understanding markets as complex adaptive systems. We discuss here whether the same approach can say something useful about modern political systems, taking the US as the illustrative example.

Thomas: I think it could be useful to apply concepts from complex systems to understand governmental arrangements. I’ll concentrate here – with a very broad brush – on the legislative branch. Congress and its agencies can be seen as a social arrangement in which the participants pursue their particular aims via repeated, structured interactions. This process adapts to inputs from voters, lobbyists, and others. A body of legislation and associated directives is an emergent effect.

Two interrelated aspects of this particular system stand out immediately—its concentration of power and the relatively weak feedback constraining the exercise of this power. In these respects, it differs markedly from markets and science.  Continue reading →

Understanding Markets: Point/Counter-Point

chidemkurdas entrepreneurship, Hayek, Institutions, Law, private property, Regulation, science, Uncategorized ,

by Thomas McQuade and Chidem Kurdas

Though it should be obvious to all that markets are of immense benefit to humanity, any appreciation of these institutions is almost always hedged with a perceived need to constrain and regulate—in short, to subject them to conscious outside control.  The reasoning is understandable: the unconstrained pursuit of self-interest can only lead to chaos.

But the preference for constraint through centralized direction betrays a profound misunderstanding of the way markets work.   

Can we explain that claim any better than the volumes already written on the topic?  We find that, when we discuss the issue, we agree on the basics, but differ in emphasis and details—and details matter.  Here is part of our discussion, in point/counter-point format. Continue reading →