Author Archive for Robert Higgs

The U.S. Government Makes a Mockery of the Principal-Agent Relationship

The philosophical and legal foundation of the U.S. government (and some other governments) is that government officials are the agents of the citizens—in the familiar phrase, those who govern have the “consent of the governed.” An agent, of course, is someone I authorize to act on my behalf. For a host of reasons, this doctrine has always been more or less absurd, but its absurdity has been placed in stark relief recently by the government’s mass spying, which violates the Constitution, various statutes, and many official declarations and promises.

Imagine that I have an agent—for example, I currently have a building contractor in Mexico to whom I have given a legal power of attorney to act in specified ways for a specified duration in carrying out various transactions related to the construction of my house there. Now suppose that my agent refuses to give me full information on his activities performed on my behalf and—outrageous as it might seem—undertakes to spy on me. Then, when I challenge his defective agency and his unauthorized actions in court, he has the impudence to defend himself on the grounds that I lack standing to sue him and that the secrets he keeps from me are legally unblemished because they are “state secrets.” Obviously no one would tolerate such an agent; nor would any court uphold such blatant highhandedness.

Unless, of course, my agent—my agent according to the alleged agent, that is, not according to me—happened to be a government, the U.S. government in particular. Indeed, this twisted, sophistical, legal mumbo jumbo has prevailed for more than half a century pretty much without objection. In the past year, Edward Snowden’s revelations about the NSA’s massive spying activities have provoked for the first time substantial public protest and legal challenges to the government’s outrageous conduct in relation to the “principals” (the public) on whose behalf government officials purport to act as agents. Never before has the U.S. government’s sheer imperiousness been placed so clearly on public display.

To repeat, the claim that the rulers act as our agents has always been nonsensical, as Lysander Spooner showed almost a century and a half ago, but its incoherence is now illuminated as never before. If the government acts as my agent, it does so entirely by accident, because no agent that acts without my knowledge, approval, or accountability to me can make a plausible claim to agency. Our rulers may or may not be accurately described as dictators, but in no event may they be accurately described as my agents or as acting with my consent.

[Cross-posted at The Beacon.]

Governor Stevens and I

Isaac_Stevens_-_Brady-HandyWhen Governor Isaac Stevens went around Puget Sound in the mid-1850s making treaties with the Indian tribes to clear the way for an anticipated influx of whites, he found again and again that asking for the tribal chief got him nowhere. The Indians would look around and shrug their shoulders. They had no chiefs. Like many North American Indian tribes, they made communal decisions by consensus, with at most a special influence being exerted by one or two respected elder males.

But Stevens, hellbent on following the treaty-making protocol established among Western nations, plowed ahead, finding someone on each occasion to treat as the chief who would put his X on the treaty to make it official. To make matters worse, the negotiations took place via interpreters who employed the Chinook Jargon, a trade language used by the local Indians to communicate (roughly) with one another, a language with only a few hundred words, a language obviously incapable of facilitating Stevens’s rather delicate negotiations. What the hell: the treaties were written in English, “signed” by some Indian or another, and treated as sufficient by the whites who sought to keep the Indians out of the way as they took over the area and exploited its natural resources.

More than a hundred years later, these phony-baloney treaties became the basis for federal court cases decided in what is known as the Boldt decision, after the judge who handed it down in 1974. In the aftermath of this decision, all hell broke loose because the Indians, who had been catching less than 10 percent of the salmon in Washington waters, were now given a right to harvest half of the salmon. The white fishers went ape.

In the sequel, state and federal regulators attempted to get control of the situation and keep the melee from becoming violent, and in the process I was retained as an economic consultant, first by Washington state and later by the federal Pacific Fishery Management Council, to assist in the process. Fisheries consulting occupied me in one way or another from the mid-1970s to the early 1980s and again in the early 1990s, when I worked for an industry association in connection with federal regulation of the Bering Sea pollock fishery. (For a while, the famous economist Arnold Harberger was part of our team.) Thus is established the connection between Isaac Stevens and me. Ain’t history fascinating!

Cross-posted at The Beacon.

The State is more Dangerous than Anarchy

Most people fear that without government (as we now know it), social and economic conditions would be horrible, with rampant crime, including theft, extortion, robbery, rape, and murder; chronic fighting among warlords and organized criminal gangs; and low rates of saving and investment, hence little or no economic growth, owing to people’s inability to form reliable expectations about the future, even for the intermediate term, in an atmosphere of great threats to private property rights.

Yet, with government (as we now know it), all of these social and economic conditions prevail nonetheless, and many of them, especially the death and destruction caused by war and constant preparation for war and the domestic extortion and threats to private property rights, are institutionalized and carried out on a vast scale that almost certainly could not exist without government’s huge resources to maintain them. Moreover, with a traditional government in place – a government that ruthlessly smashes any rivals for its monopoly of “legitimate” coercion and brooks no competitors to coexist alongside it — people have virtually no ability to protect themselves against the entrenched threats to life, liberty, and property posed by the government itself.

Ah, government, blessed government – all the evils and costs of anarchy — many of them greatly compounded — with none of anarchy’s virtues and benefits and scarcely any of its individual freedoms.

(If the foregoing sounds wildly implausible, please consider my thesis seriously, as spelled out more fully in the lecture below and much more fully in the literature referenced there.)

 

Thinking Is Research, Too!

Bill Parker, an old friend of mine who died in 2000, was director of graduate studies in economics at Yale for thirteen years. He told me once about his struggles with his colleagues, who, he believed, were spending too much time on technique and not enough time on substance in teaching their courses. The recalcitrant colleagues maintained that they were teaching the students how to think, but Bill demurred: the students might be learning how to think, he told his colleagues, but they were not learning anything to think about.

This recollection fits in the same corner of my brain with something my old and deeply cherished friend (and my colleague as a fellow at Oxford University in 1972-72 and earlier in team-teaching a graduate seminar at the University of Washington in the summer of 1969) Max Hartwell told me more than forty years ago. His colleagues, he complained, groused that he did not do enough research, by which they meant the usual cranking out of mathematical-theoretical models and related econometric effluent. Max’s response was to insist that “thinking is research, too!” At the time, occupied as I was in trying to meet the profession’s prevailing expectations, I had my doubts—it seemed like too easy an excuse—yet, as my own career has proceeded, I have become more and more convinced that Max had hit the target at its dead center.

I return to this thought frequently, never more so than when I consider how the economics profession has received—or, in far greater degree, not received—my research and writing on what I call regime uncertainty. I first wrote about this topic in 1997 in an article in the first volume of a new journal that I edited, The Independent Review. Although the article contains some material that noneconomists might not understand immediately, it is for the most part nontechnical. It contains no formal mathematical model and no formal econometric estimation. Yet it does contain a great deal of empirical evidence and, to my mind, an analytical argument that has both theoretical substance and a respectable pedigree.

Although this article did not go entirely unnoticed, the mainstream profession paid little or no attention to it. My fellow Austrian economists seemed to find it persuasive, as did some economic historians, but mainstream macroeconomists, so far as I was aware, remained blissfully oblivious to it for many years. Eventually, during the past few years, a few such mainstream analysts took note of it, usually in passing, even though the topic of policy uncertainty (a subset of my concept of regime uncertainty) has attracted growing interest from macroeconomists as recovery from the contraction of 2007-2009 has proved so slow and, thus far, incomplete.

 

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Mainstream Economists on Policy Uncertainty

Mainstream economics has a tremendous ability to take any substantive idea and transform it into an ooze of technicalities from which an endless stream of competing theoretical and econometric models may be squeezed indefinitely, or until the researchers’ fancy shifts to a newer sexy issue on which they can lavish their talent for pyrotechnics. As the researchers push forward their work, it becomes ever more distant from the empirical realities that first gave rise to it, until eventually it evaporates entirely into a debate over conceptual, methodological, and theoretical issues that wafts like a thin, ethereal fog over the real world from which it arose.

I continue to believe that my idea of regime uncertainty is important for understanding how mixed economies function — or fail to function. However, policy uncertainty is not equivalent to regime uncertainty; the former is only a subset of the latter; and all of the latter is important. I continue to note, without great astonishment, that the paper I wrote on this topic in 1997 has somehow evaded the notice of virtually every mainstream analyst who has leaped into this research pond during the past few years. If only I’d pitched my paper in the form of a formal mathematical model complete with some fancy bells and whistles, it might have attracted more notice.

All Government Policies Succeed in the Long Run

A crazy claim you are probably thinking after reading my title. After all, “failed policies” are a staple of discussions and debates about government actions in the United States. Everybody, regardless of political preferences, has a list of what he regards as the most glaringly failed policies. This way of looking at the matter, however, is all wrong.

People label a policy as a failure because it does not bring about its declared objective. For example, drug policies do not reduce drug use; educational policies do not educate children better; national-security policies do not make Americans more secure; and so forth. The mistake is to take seriously the announced policy objectives, to forget that virtually everything the government does is a fraud. The best way to document the government’s nearly unblemished record of policy success is to follow the money. With very little trouble, you will be able to follow the trail to the individuals and groups who benefit from the policy. Occasionally the true beneficiaries do not benefit in the form of augmented income or wealth, but in other forms of reward, yet the principle remains the same.

When I first studied economics and began to practice as an economist, back in the sixties and seventies, I learned how markets and the market system as a whole operate. With this understanding in mind, I was able to identify a number of reasons why a particular policy might fail: it might be based on insufficient or incorrect information; it might give rise to unintended consequences; it might receive inadequate funding for its implementation; it might be based on unsound theory or mistaken interpretation of historical experience; and so forth.

Analysts who approach the question of failed policies along these avenues can rest assured that they will never lack for new studies to perform and new measures to propose to legislators, regulators, administrators, and judges. For example, if government fiscal or monetary policy fails to stabilize the economy’s growth because it derives from unsound macroeconomic theory, then the analyst attempts to identify the ways in which the received theory is unsound and to formulate a sounder theory, on the basis of which a more successful policy may be carried out. This sort of back and forth between theoretical tinkering and policy appraisal fills many pages in mainstream economics journals.

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Ronald Coase, Professional Odd Man Out

Ronald Coase (1910-2013) died Monday at the age of 102. Since Coase became an economist, in the early 1930s, the economics profession has been altered enormously in fundamental ways. Most notably, perhaps, (1) the degree of analytical formality (especially the mathematical specification of theoretical models) has increased greatly in every part of the field; (2) Keynesian and other types of macro theories have become central parts of economic theory; (3) econometric testing has become an integral part of the profession’s evaluation of its theoretical models; and (4) interest in and writing about economic history and the profession’s greatest contributors in previous eras have waned greatly.

Coase, however, stood completely apart from these developments. Moreover, whereas the typical big-league academic economist cranks out many journal articles each year (and occasionally a book), Coase wrote very little. His stature as an economist rests overwhelmingly on two articles: “The Nature of the Firm” (1937) and “The Problem of Social Cost” (1960). Yet Coase is widely acknowledged to have been one of the twentieth century’s most influential economists. He obviously believed that thinking carefully about important issues was more important than frittering away his efforts in producing a stream of formal pyrotechics with very short half-life.

Too bad so few academic economists followed his example in these regards. (But, then, if they had, they probably would not have received tenure at their universities.)

[Also posted at The Beacon.]

Creative Destruction—The Best Game in Town

In his justly famous 1942 book Capitalism, Socialism and Democracy, Joseph A. Schumpeter described the dynamics of a market economy as a process of “creative destruction.” In his view, innovation—“the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates”—drives this process. Its most important result is that for the first time in history, the mass of the population in developed countries enjoys a standard of living that even the aristocrats of past ages could scarcely have imagined, much less have actually had.

Yet, as Schumpeter sought to express by his pithy term, the process is not merely creative, but also destructive. As a market economy develops, it necessarily brings about an immense variety of changes in particular demands and supplies, and hence it results in losses as well as profits. For those who rely on selling goods or services in declining or disappearing demand, for those whose locations no longer fit well into emerging spatial patterns of production, for those whose techniques of production no longer represent a means of maximizing net revenues, for those whose skills and experience no longer attract eager buyers in the labor markets—for them and countless others, the process of economic development brings anxiety, disappointment, loss, and in some cases ruin.

The losers take little solace in the thought that their economic displacement or demotion by more competitive workers and producers constitutes the heart and soul of a process by which the entire society, on average, becomes richer. And their plight has always attracted legions of critics who correctly blame the market system for the wreckage. It is simply impossible for the process of economic development to operate without losers. A market economy is a profit-and-loss system. Profits signal the desirability (to consumers) of moving resources to new employments; losses signal the desirability (to consumers) of removing resources from current employments. On the one hand, people are drawn by the prospect of heightened economic pleasure; on the other hand, they are repelled by the onset of persistent economic pain. In this way the overall system continually reshapes itself to comport more effectively with the prevailing patterns of demand and supply. Read More→

Is Macroeconomics Really Economics?

The world probably would have been much better off had macroeconomics never been devised. Although I have in mind Keynesian macroeconomics above all, I include other types of macro models as well. I even include, somewhat reluctantly, the whole quantity theory approach descended from David Hume to the Friedmanites, now known as monetarism.

One of monetarism’s aspects that bothered me long before I became an Austrian (of sorts) is its oversimplification of aggregate economic activity. Resting their analysis on (a more or less elaborated version of) the Fisherian equation of exchange, monetarists maintain that changes in nominal aggregate demand (hence movements in either real output or the price level) occur in response to changes in the money stock (absent offsetting changes in the demand for money). To me this idea seemed to be a claim that the money-stock tail can and does wag the aggregate economic dog; that, more specifically, in a situation of sub-capacity real output (“recession” or “depression”), increases in money stock—and only such increases—drive increases in real output and employment.

Because I believed, and still believe, that changes in aggregate output and employment may occur also as a result of changes in other variables (e.g., investors’ perceptions of the future security of their private property rights ["regime uncertainty"]), monetarism always seemed to me to claim an implausibly high degree of explanatory power, some of which might be concealed by spurious empirical correlations between money and total output à la Friedman and Schwartz.

In short, among its many other deficiencies, as spelled out by Mises and his followers, monetarism’s most fundamental flaw is identical to the most fundamental flaw of Keynesian, Post-Keynesian, New Classical, and other theories advanced by macroeconomists during the past seventy or eighty years: not only does the theory leave out critical variables, but it is too simple, being expressed in huge, all-encompassing aggregates that conceal the real economic action taking place within the economic order.

I have written a related lament at great length and in more detail in my little article titled “Recession and Recovery: Six Fundamental Errors of the Current Orthodoxy.”

[Posted originally at The Beacon]

“Neoclassical” Geometry

EUCLIDEAN GEOMETER: Given the standard axioms of Euclidean geometry, I have proved that the interior angles of a triangle always sum to 180 degrees.

AUSTRIAN ECONOMIST: Okay.

MAINSTREAM NEOCLASSICAL ECONOMIST: I regard the proposition that the interior angles of a triangle sum to 180 degrees as a testable hypothesis. I have obtained a $15.8 million grant from the National Science Foundation to conduct a field study. My graduate students will visit 118 countries to measure and record the interior angles of empirically observed triangles. We will then analyze these data with the latest econometric methods to determine whether, at conventional levels of statistical significance, the data warrant rejection of the hypothesis. In view of the subject’s importance, we expect that our report will be published in the American Economic Review or the Journal of Political Economy. Even if we conclude that the data do not warrant rejection of the hypothesis, however, we will continue to regard it as provisional, pending new data and tests that might warrant its rejection.