24 Aug 2009

Two Men Enter, One Man Leaves the Back Door Open

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Earlier I was happy that Paul Krugman had “definitively” (you’ll understand the quotation marks in a sec) said we were in a recovery, since I am predicting that the economy is going to be in the toilet for years. Just to refresh our memories, here’s how Krugman opened his August 21 blog post: “Barara Kiviat asks, is this a recovery or isn’t it? The answer is yes.”

OK, that seems pretty definitive, right? For most people it would be, but not with our Nobel laureate. The very next day he wrote:

Reading comments, I see that some readers think that by saying that we may be in a recovery by the usual definition, even though jobs are still being lost, I’m either (a) shilling for Obama (b) radically changing my views.

Um, no.

And just to reinforce his claim now that we may be in a recovery, Krugman says today (August 24):

Judging from comments I’ve received, there’s still a lot of confusion about how it’s possible to be in economic purgatory, aka a jobless recession. Also, a lot of readers seem to think that by saying that the recession is probably over I’m somehow changing my position from a few weeks ago — when actually something like this is what I’ve been expecting all along.

No Dr. Krugman, I don’t think you’re changing your position from a few weeks ago. I think you changed your position from the previous day.

24 Aug 2009

I’m Starting With the Man in the Mirror

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OK I must confess that this Wonk Room hit piece on my compatriots really ticked me off. I had originally wanted to blog it with the title, “Definition” and the comment, “If you want to know what ‘ad hominem’ means, just check out this Wonk Room piece on the AEA bus tour.”

But then I calmed down a bit, realizing that the Wonk Room piece is really just the mirror image of what Glenn Beck did with Goldman Sachs, which I praised.

So if you truly believed that the Waxman-Markey bill was the last hope for averting global disaster, then yes I can understand that you would think the Wonk Room piece was just adding useful knowledge about your enemies…as opposed to a complete hit piece that has no substantive arguments at all. Because I must admit, Glenn Beck’s hit piece on Goldman didn’t have any arguments at all; it was just giving the biographies of the various players. At other places Beck of course gave his substantive objections to TARP etc., but then again the Wonk Room people would say the same thing about cap and trade.

Now that I’m preaching, let me generalize it a bit: Earlier I mocked Paul Krugman for actually claiming that senior citizens were rioting. But since then, I’ve come to realize that Krugman really doesn’t understand the people at these Town Hall meetings, or the tea parties. After all, Krugman doesn’t get goosebumps thinking about property rights or checks on government power. So when he sees a bunch of angry people mouthing such concerns, he is suspicious and thinks they’re either a bunch of racists or paid stooges of the health insurers.

So, by symmetry, I think people on “our side” should realize that the great masses of Americans who are for health care reform and climate legislation (and it pains me to not put scare quotes around those phrases) aren’t actually closet socialists who want to bring America to its knees. Don’t get me wrong, it is still perfectly consistent to think the elites in Washington are power-hungry liars. I’m just saying that, as ridiculous as Krugman’s paranoia over old people is, that’s how ridiculous some of our side’s rants against Obama fans must seem to people who know that they are really just trying to stem abuses they perceive in the health care system and so forth. They know they’re not socialists, just like we know “our guys” aren’t Nazis.

Ah, and the ultimate irony is that actual socialists (and the particular offshoot of Nazism) were real, and actually did seize control of governments and kill millions of people. Isn’t life funny.

24 Aug 2009

The Innumerate Billy Ocean

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I know this sounds impossible, but I actually don’t like the radio stations in Nashville. And no, it’s not because they play all country. Would you believe that there’s not even a reliable Oldies station? Or how about this–in the entire time I’ve been here (since fall of 2006), I swear I’ve heard maybe three Elvis songs on the radio. I am not exaggerating.

Anyway, out of desperation I stopped my Scan last night when it hit Billy Ocean’s “Suddenly.” And this line jumped out at me:

Girl, you’re everything a man could want, and more
One thousand words are not enough to say what I feel inside
Holding hands as we walk along the shore
Never felt like this before, now you’re all I’m living for.

Say what? I’ve written Mises Daily articles that are a lot longer than that! One thousand words are not enough to say what I feel inside about Paul Krugman.

C’mon Billy, kick it up a notch. Other guys tell their sweethearts they’d walk a thousand miles for them–can you spit out a word per mile?! Or that they’ve been in love for longer than there have been stars up in the heavens. I get the honest approach, but c’mon. You’re not going to hang on to that Caribbean queen at this rate.

23 Aug 2009

Finding an Actual Use for My Game Theory Training

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Although my dissertation was in capital and interest theory, my “field exam” at NYU was in “theory,” which basically meant micro/game theory. This was definitely an example of studying something for its sheer elegance, because I think whenever game theorists pontificate on the actual real world, they usually give horrible advice. (E.g., “Yes, sir, it would be a good idea to build hundreds of nuclear warheads for the U.S. government, but only if we deploy them according to this formula.”)

But yesterday I actually benefited from my years of training. On the radio there was some goofy commercial with kids on a road trip. The kids are bored and the brother says, “Let’s play 20 Questions” and the sister immediately agrees and throws out the first question. So there was no way the brother could have had time to think of his pick, before hearing the question about it.

So that got me to thinking: Would there be an advantage to either player, doing it this way? In other words, if someone says, “Let’s play 20 Questions!” should you immediately blurt out a question, before the person can think up his pick? Or does it give an advantage to the other player, because then he can choose the thing based on your question (and then answer appropriately of course)?

At first, I thought there was no way to really answer this definitively. But then I realized that actually, the answer is straightforward, and all you have to do is make a very weak assumption that wouldn’t even upset Murray Rothbard on a good day.

I leave it to the reader as an exercise.

23 Aug 2009

Bible Contradiction?

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In reference to my post on David vs. Goliath, Gary emailed to ask a riddle: What killed Goliath? Gary thinks it’s obvious, but I don’t. Here’s the link to the chapter again.

23 Aug 2009

Two Men Enter, One Man Leaves: David versus Goliath

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This is one of those Bible stories that has spilled over into secular lore, but the original tale is pretty cool. So here it is, with some parts in bold that I will come back to at the end. Keep in mind that at this point, David is just a punk kid who plays the harp to soothe King Saul (the first king of the Israelites) when the latter is vexed. Not exactly the next Achilles, in the eyes of his older brothers or anyone else for that matter.

1 Now the Philistines gathered their armies together to battle… 2 And Saul and the men of Israel were gathered together, and they encamped in the Valley of Elah, and drew up in battle array against the Philistines. 3 The Philistines stood on a mountain on one side, and Israel stood on a mountain on the other side, with a valley between them.
4 And a champion went out from the camp of the Philistines, named Goliath, from Gath, whose height was six cubits and a span. 5 He had a bronze helmet on his head, and he was armed with a coat of mail, and the weight of the coat was five thousand shekels of bronze. 6 And he had bronze armor on his legs and a bronze javelin between his shoulders. 7 Now the staff of his spear was like a weaver’s beam, and his iron spearhead weighed six hundred shekels; and a shield-bearer went before him. 8 Then he stood and cried out to the armies of Israel, and said to them, “Why have you come out to line up for battle? Am I not a Philistine, and you the servants of Saul? Choose a man for yourselves, and let him come down to me. 9 If he is able to fight with me and kill me, then we will be your servants. But if I prevail against him and kill him, then you shall be our servants and serve us.” 10 And the Philistine said, “I defy the armies of Israel this day; give me a man, that we may fight together.” 11 When Saul and all Israel heard these words of the Philistine, they were dismayed and greatly afraid.
12 Now David was the son of that Ephrathite of Bethlehem Judah, whose name was Jesse, and who had eight sons… 13 The three oldest sons of Jesse had gone to follow Saul to the battle… 14 David was the youngest. And the three oldest followed Saul. 15 But David occasionally went and returned from Saul to feed his father’s sheep at Bethlehem.
16 And the Philistine drew near and presented himself forty days, morning and evening.
17 Then Jesse said to his son David, “Take now for your brothers an ephah of this dried grain and these ten loaves, and run to your brothers at the camp. 18 And carry these ten cheeses to the captain of their thousand, and see how your brothers fare, and bring back news of them.” 19 Now Saul and they and all the men of Israel were in the Valley of Elah, fighting with the Philistines.
20 So David rose early in the morning, left the sheep with a keeper, and took the things and went as Jesse had commanded him. And he came to the camp as the army was going out to the fight and shouting for the battle. 21 For Israel and the Philistines had drawn up in battle array, army against army. 22 And David left his supplies in the hand of the supply keeper, ran to the army, and came and greeted his brothers. 23 Then as he talked with them, there was the champion, the Philistine of Gath, Goliath by name, coming up from the armies of the Philistines; and he spoke according to the same words. So David heard them. 24 And all the men of Israel, when they saw the man, fled from him and were dreadfully afraid. 25 So the men of Israel said, “Have you seen this man who has come up? Surely he has come up to defy Israel; and it shall be that the man who kills him the king will enrich with great riches, will give him his daughter, and give his father’s house exemption from taxes in Israel.”
26 Then David spoke to the men who stood by him, saying, “What shall be done for the man who kills this Philistine and takes away the reproach from Israel? For who is this uncircumcised Philistine, that he should defy the armies of the living God?
27 And the people answered him in this manner, saying, “So shall it be done for the man who kills him.”
28 Now Eliab his oldest brother heard when he spoke to the men; and Eliab’s anger was aroused against David, and he said, “Why did you come down here? And with whom have you left those few sheep in the wilderness? I know your pride and the insolence of your heart, for you have come down to see the battle.”
29 And David said, “What have I done now?
Is there not a cause?” 30 Then he turned from him toward another and said the same thing; and these people answered him as the first ones did.
31 Now when the words which David spoke were heard, they reported them to Saul; and he sent for him. 32 Then David said to Saul, “Let no man’s heart fail because of him; your servant will go and fight with this Philistine.”
33 And Saul said to David, “You are not able to go against this Philistine to fight with him; for you are a youth, and he a man of war from his youth.”
34 But David said to Saul, “Your servant used to keep his father’s sheep, and when a lion or a bear came and took a lamb out of the flock, 35 I went out after it and struck it, and delivered the lamb from its mouth; and when it arose against me, I caught it by its beard, and struck and killed it. 36 Your servant has killed both lion and bear; and this uncircumcised Philistine will be like one of them, seeing he has defied the armies of the living God.” 37 Moreover David said, “The LORD, who delivered me from the paw of the lion and from the paw of the bear, He will deliver me from the hand of this Philistine.”
And Saul said to David, “Go, and the LORD be with you!”
38 So Saul clothed David with his armor, and he put a bronze helmet on his head; he also clothed him with a coat of mail. 39 David fastened his sword to his armor and tried to walk, for he had not tested them. And David said to Saul, “I cannot walk with these, for I have not tested them.” So David took them off.
40 Then he took his staff in his hand; and he chose for himself five smooth stones from the brook, and put them in a shepherd’s bag,
in a pouch which he had, and his sling was in his hand. And he drew near to the Philistine. 41 So the Philistine came, and began drawing near to David, and the man who bore the shield went before him. 42 And when the Philistine looked about and saw David, he disdained him; for he was only a youth, ruddy and good-looking. 43 So the Philistine said to David, “Am I a dog, that you come to me with sticks?” And the Philistine cursed David by his gods. 44 And the Philistine said to David, “Come to me, and I will give your flesh to the birds of the air and the beasts of the field!”
45 Then David said to the Philistine, “You come to me with a sword, with a spear, and with a javelin. But I come to you in the name of the LORD of hosts, the God of the armies of Israel, whom you have defied. 46 This day the LORD will deliver you into my hand, and I will strike you and take your head from you. And this day I will give the carcasses of the camp of the Philistines to the birds of the air and the wild beasts of the earth, that all the earth may know that there is a God in Israel. 47 Then all this assembly shall know that the LORD does not save with sword and spear; for the battle is the LORD’s, and He will give you into our hands.”
48 So it was, when the Philistine arose and came and drew near to meet David, that David hurried and ran toward the army to meet the Philistine. 49 Then David put his hand in his bag and took out a stone; and he slung it and struck the Philistine in his forehead, so that the stone sank into his forehead, and he fell on his face to the earth. 50 So David prevailed over the Philistine with a sling and a stone, and struck the Philistine and killed him. But there was no sword in the hand of David. 51 Therefore David ran and stood over the Philistine, took his sword and drew it out of its sheath and killed him, and cut off his head with it.

To correspond with the parts I’ve put in bold above, here are my comments:

v. 16: Goliath taunted the Israelites for forty days. Can you imagine how demoralizing that would have been, and how everyone on both sides would have known that the Israelites clearly had no match for Goliath?

v. 26: What infuriates David is not that his brothers and the other Israelite soldiers are cowards, but that the pagan (“uncircumcised”) Goliath is insulting the living God.

v. 28-29: David has clearly been the runt of the family his whole life; this makes his courage even more impressive. It would be one thing if the eldest of a noble family thought he had what it took to square off with Goliath. But the youngest of eight brothers, who up till now has been in charge of watching the sheep while the “real men” wage war against Israel’s enemies?

v. 33-37: This is actually a very sympathetic portrayal of King Saul, in contrast to later events. Initially he doesn’t want to let a young kid get slaughtered by Goliath, but then David speaks so boldly that Saul gives it a shot.

v. 38-39: I love this part. Saul thinks he is helping by giving David his armor and other accoutrements of battle, but obviously David can’t fight Goliath in the standard way; he’d get destroyed. David’s advantage is that he can sling a rock while Goliath doesn’t perceive any threat; he needs to be unencumbered when he lets it fly. (For an analogy, the Confederate States should have easily staved off Union attacks, had they relied on unconventional warfare like the colonists used against the British troops. But the Southern generals were trained at West Point and so knew the “proper” way to wage a war was to line your men up in neat columns and march them into the other side’s cannons.)

v. 40: This is an interesting part too. David grabs five stones, even though he kills Goliath with the first one. So it shows that even though David knew the Lord would deliver him victory, he didn’t know exactly how it would play out.

22 Aug 2009

Potpourri

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OK my Firefox browser has accumulated far too many tabs. Time to clean house:

* Bill R. found another neat item in the WSJ from 1930. It seems that back then, they were comparing their slump to the 1920-1921 depression. But they recognized the important difference: “While the 1920-21 depression and stock market pattern has been cited as remarkably similar, some are pointing out that whereas now credit is cheap and market valuation still relatively high, in 1920-21 opposite conditions applied (my emphasis). This is exactly the point I made in this essay.

* Tim Swanson sends along this very helpful New York Fed paper [.pdf] on excess reserves. The authors have a few numerical examples that are really good, if you want to truly understand the relation between balance sheets, loans, reserves, and excess reserves. However, I think the authors fail on their thesis. In particular, in both the intro and conclusion they say, “[W]hile the lending decisions and other activities of banks may result in small changes in the level of required reserves, the vast majority of the newly-created reserves will end up being held as excess reserves almost no matter what banks do.” But this is only true if the central bank keeps ratcheting up the interest rate it pays on excess reserves; the authors’ examples don’t give any other reason (as far as I could tell) for a bank to refrain from lending out excess reserves. So their wording is a bit weird. They are making it sound as if banks can’t really decrease excess reserves, just like banks can’t decrease total reserves. But that’s not right at all; the way you decrease excess reserves is by issuing more loans to bank customers. The authors’ statement, quoted above, is incredibly misleading.

* For those of you who still think Abe Lincoln was a cool guy, let me ask: Did you know that in 1862 Union General Benjamin Butler issued an order to his men “decreeing that any New Orleans woman showing contempt for his occupying troops ‘shall be regarded and held liable to be treated as a woman of the town plying her avocation’ — i.e., the city’s outspokenly Confederate belles were to be treated as prostitutes”? Honest Abe ignored calls to rescind the monstrous order. You do what you have to do, to save the Union.

* Orthopedic surgeon, free marketeer, and fellow Aquinas ’94 alum Matthew DiPaola has started his own blog.

* I must confess, I like the way Mankiw deals with Krugman. And if you’re a real punk, this is your treatment.

* I have been saying that rather than focus purely on theoretical issues, maybe the best way to anticipate what’s coming is to see what the elites are up to. Well that’s exactly what Daniel Estulin claims to have discovered, in his sleuthing around the Bilderberg meetings. Estulin reports that at the May 2009 meeting, the discussion involved a prediction of US unemployment hitting 14% by the end of the year. Unfortunately there were no clues in Estulin’s article as to the direction of the dollar. (One interesting thing is that he talks about the Lisbon Treaty and the problem of my people, the Irish. I don’t know whether to be reassured or horrified that the members of the Bilderberg group have a whole world full of malcontents that they need to knock into line.)

* And finally some comic relief: My wife passes along the following.

22 Aug 2009

Anarchy, the Mafia, and Somalia: Clearing Up the Confusion

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In an earlier entry I posted the concerns of a skeptical reader of my pamphlet Chaos Theory [.pdf]. The event turned into a proverbial town hall meeting, with 47 heated comments as of this writing, not to mention an old guy with a swastika declaring that God would judge me and my anarchist cronies in Auburn. I thought some of the points raised by critics Blackadder and Bobby1011 were worthy of this standalone essay. –RPM

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Anarchy, the Mafia, and Somalia: Clearing Up the Confusion
By Robert P. Murphy

When confronted with a sketch [.pdf] of how a truly voluntary society might work, with private companies providing judicial and defense services along with education and Big Macs, the critic often replies, “That arrangement could never last in the real world. The mafia would take over and become the new government.”

This typical view actually gets things backwards. Contrary to popular belief, the government doesn’t hinder the mafia, it actually helps it. (Note that for this essay, I am going to use “mafia” as shorthand for “organized crime.” I am not impugning Sicilians specifically in this post.)

Stop for a moment and consider which sectors of the economy the mafia occupies. Prostitution, gambling, loan-sharking, narcotics, labor unions, and of course simple robberies and homicides. What do they all share in common? They are activities that are either heavily regulated or downright prohibited by the State. In contrast, in sectors that are relatively free from government interference, the mafia has no foothold.

The classic experiment to show that we’ve put our finger on the true explanation, is alcohol Prohibition. When it was illegal to sell liquor, gangsters such as Al Capone engaged in bootlegging, and shot up other competitors in turf wars. Yet after Prohibition was repealed (in one of the few decent things that FDR did upon taking office), organized crime left the alcohol industry and focused on the remaining sectors that were still prohibited.

Now if the above analysis is correct, and the mafia (and violent gangs in general) thrives only in those areas infested with heavy State intervention, then it seems obvious that market anarchy would emasculate such criminal groups. To put it in other words, as the government legalized more and more sectors, the mafia would have to concentrate its activities in fewer and fewer businesses. In the limit, as everything were legalized (from a State legislative point of view), the mafia would have no special advantages at all. Just as the mafia can’t withstand open competition with Budweiser, it would also lose market share to honest entrepreneurs in judicial and police services, if only the State would lift the ban on producing such services.

A Rival Explanation of the Prohibition Episode

In the comments of a previous post on Free Advice, critics Blackadder and Bobby1011 offered a rival interpretation to my theory above. They argued that I was wrong to interpret the repeal of Prohibition as a reduction in State intervention into the liquor industry. On the contrary, they viewed it as a resumption of government provision of property protection for the producers of alcohol.

I must confess that this alternate explanation took me by surprise; I thought my Prohibition example was airtight, but my critics did at least offer a plausible comeback. However, on balance I still think my interpretation is far superior. This is a crucial point so allow me to belabor it.

I am saying that the mafia benefited from alcohol Prohibition because the police effectively chased away legitimate businessmen from the industry. If the State were to literally declare that Al Capone had a monopoly in Chicago liquor distribution, and sent any competitors to jail, then the price of alcohol in Chicago would shoot up, and Capone would make exorbitant profits. This is obvious. So by the same token, I argue, when the State threatens to put any liquor distributor in jail–but then actually looks the other way when Capone pays bribes–that is economically very similar to the outright, legislated monopoly.

I am using Capone just to make an illustrative point. I haven’t done any particular research on him, but it is certainly true that in modern times, big-time crime families regularly pay the police “protection money.” If any reader doubts this, then he or she really doesn’t understand the first thing about the drug trade. For a low-effort introduction, rent the movie Serpico, which is a great Al Pacino movie based on the true story of a NYC narcotics officer who didn’t want to take dirty money. (Come to think of it, you can rent just about any Al Pacino movie to learn that big-time drug dealers routinely pay off the police.)

The Marginal Costs and Benefits of Violence in Markets

It should be quite obvious empirically that violence goes hand-in-hand with markets that suffer from extensive government prohibition. Again, the classic experiment is alcohol Prohibition. It would be inconceivable that executives at Budweiser would order a drive-by shooting of their rivals at Heineken. Yet when the State stamped out most producers in this industry, killings were common. This insight shows that the gangland turf wars in inner cities today are due to drug prohibition, and not to the intrinsic “craziness” of cocaine selling.

But even though most libertarians recognize the association of government prohibition and violence, its causes are rarely spelled out. Very briefly, the answer is simple: Government prohibition raises the marginal benefits and lowers the marginal costs of using violence against one’s competitors in a particular industry.

Let’s start with the cost side, since that’s easier to grasp. Right now, if you are going to become a cocaine distributor, you are already breaking laws that could send you to prison for life. Moreover, if you’re big enough, you regularly give bag(s) of money to the local police. So on the margin, the cost to you of killing a rival dealer is much lower than it would be if you ran a Thai restaurant. When you’re a normal restaurateur, the worst that the government can do is audit your tax returns. But if you’re a cocaine dealer, if you fall out of the good graces of the cops they can give you life. So it’s really not such a reckless move to kill somebody, when you’re a cocaine dealer, even though it would be insane for a restaurant owner to order a hit of the guy opening a sushi shop down the street. The cocaine dealer already has dirty cops on his payroll, who presumably would be willing to overlook a homicide too for an extra payoff, and the cocaine dealer also is a lot more connected and able to bribe judges should he ever go to trial.

On the other hand, the marginal benefits of violence are much higher for the cocaine dealer than for the Thai restaurateur. Drug dealers aren’t (completely) reckless; they do it for the money. In order to compensate for the huge risk, the monetary returns on dealing cocaine must rise to astronomical levels. (If you like charts, when the government threatens to imprison cocaine sellers, the supply curve shifts way way to the left, whereas the demand curve shifts left but not nearly as much. So the equilibrium price of a kilo of cocaine skyrockets, far above the monetary costs of production.)

Because of the above considerations, the benefit of gaining market share in the cocaine business is huge. Every new customer might mean thousands of extra dollars per month in monetary profits. In sharp contrast, if the Thai owner “steals” a customer from the Japanese restaurant, that might add only $100 per month to the bottom line. This is because there’s a much lower (monetary) profit margin in the restaurant industry. It might make sense for drug dealers to hang around schoolyards, selling their products to kids, or possibly even giving some of it away for free to newcomers (though I don’t know if that really happens, outside of anti-drug commercials). But you never see representatives from General Mills hanging around the monkey bars, selling the single-serve boxes of Cheerios. Because of this huge difference, gaining additional customers means a lot more in the prohibited industry than in the free sector. That’s why killing off a rival–and thereby gaining access to his customers–is so much more profitable in the prohibited sector.

So we see that when the State threatens to imprison the producers of a certain good, it alters the incentives so that violence is now much more lucrative in the industry. Naturally, people in the real world are not simply robotic utility calculators. It’s not so much that the same entrepreneur will be either a hard-nosed businessman, versus a ruthless killer, depending on the DEA’s policies. No, what happens is that people who are predisposed to being cold-blooded killers are allowed to thrive and grow very rich in a society with strict drug laws. So rather than being some isolated sociopath, who kills a guy in a bar for looking at his girlfriend and then goes to jail, instead the asinine drug laws allow this same sociopath to make millions per year selling cocaine, with which he buys automatic weapons and hires cronies, and also buys off the police so he stays on the streets.

Does the State Actually Protect Private Property?

What’s really ironic about the rival theory of Blackadder and Bobby1011 is that it assumes that government is actually good at protecting property rights. In other words, their theory assumes that the honest folks at Budweiser couldn’t compete with Al Capone in 1930, because he would threaten to kill them and the bootlegging people of Bud couldn’t very well call the cops and complain. But once Prohibition was repealed, now all of a sudden the legitimate producers of alcohol could press charges against gangsters for wrecking their stores or for shooting their employees.

I suppose there is a grain of truth to this, but I stress that it really is a grain. We know that the government does a horrible job in every other enterprise it touches, be it education, road paving, electricity provision, and intelligence gathering. But we’re supposed to believe that it does a really great job in protecting people from gangsters? If that’s true, then why the growing reliance on private arbitration efforts? Isn’t it obvious that government courts and police are just as inefficient and counterproductive as everything else the State does?

To truly test the different theories, we need to come up with an activity where the government (a) doesn’t interfere with producers but (b) doesn’t defend the property rights of those same producers. If such areas are rife with theft and violence, then Blackadder and Bobby1011 are right. But if those sectors are generally orderly and peaceful, then I’m right.

I can think of a few examples where I’m right. (Maybe in the comments my critics can counter with examples that suit their theory.) For example, commerce over the internet is hardly regulated. Sure, in principle if you bought a book from a third party through Amazon, and the guy never sent it to you, you could bring him to small claims court. But that’s not what makes the system work. It’s clearly reputational effects, not the threat of government lawsuits.

Other examples are the “Not So Wild Wild West” [.pdf], where prospectors in California respected the claims of earlier arrivals, even though there was (initially) no formal government establishing the property rights. And Ed Stringham has done great work (see his 2002 and 2003 papers [.pdf]) explaining how fairly sophisticated financial markets operated in the 17th century even without official law enforcement.

I can give a personal anecdote here as well. After I graduated a semester early from Hillsdale, I had to kill seven months or so before starting at NYU. So three of us rented an apartment in a very shady neighborhood west of Chicago. One morning I went outside and saw that my truck’s window had been smashed and my CD player stolen. So I went back in, called the cops, and they said they’d send out a car. (I had to warn my one roommate to hide his pot.) But guess what? The cops never showed up. And I daresay no detectives were burning the midnight oil, trying to crack my case wide open.

So in this neighborhood, I think the police really didn’t care too much about protecting the residents’ property rights. And although I guess I can’t really prove it, I’m pretty sure that the mob didn’t run all the grocery stores in the area. Now it may be true that criminal organizations were involved with the bars, but guess what? You need a liquor license to run a bar. But when it came to something that was fairly wide open to competition, like a grocery store or a restaurant, I am pretty sure those were run by legitimate businesspeople, who didn’t use violence to keep out would-be competitors. And this is true, even though I don’t believe the police would have been rushing over to protect these businesspeople from mob harassment.

Confusing Correlation and Causation in Somalia

Besides claiming that the mafia (or insurance companies) would take over and become the new State, critics of my writings on market anarchy will often say, “Well why didn’t your utopia rise out of the ashes in Somalia? History shows that when the State stops providing security services, chaos breaks out.”

I need to wrap this essay up, so I must be brief. But a few quick responses:

* As far as the “lessons of history” go, yes it’s true that a Rothbardian paradise has not developed and proved its stability. But by the very same token, we have not a single example in world history of a stable, limited government. The best attempt was the government set up by James Madison and friends, and we all know how that turned out.

* Somalia is not a fair illustration of what I described above, in terms of a State legalizing more and more activities. No, the government in Somalia fell; it didn’t disband itself because the public became Rothbardians. This is also true in regions in Colombia where the government exercises no authority. It’s not that the State ceded its power, but rather that it was beaten back by a rival gang. To give an analogy, suppose I say that lowering taxes as a share of GDP is good for the economy. Would it really make sense to say, “Well, I agree that after a certain point, if the government takes too much in taxes, that’s bad. But if the government takes too little in taxes, that hurts the economy too. Why, look at Somalia, where central government tax revenues are 0% of GDP. That place is a hellhole. Yet according to your supply-side theories, Somalia should be booming!”

Conclusion

The proponent of market anarchy is making the simple claim that systematic violation of acknowledged property rights does not help a society. Standard economic theory tells us that monopolies enforced through violence (or its threat) lead to lower quality and higher prices; this analysis holds true even when the monopoly refers to judicial, police, and military services. Libertarians generally recognize that the government does a horrible job educating children, maintaining roads, and sending telescopes into space. Why in the world would we want to entrust politicians and bureaucrats with protecting us from thieves and killers? After all, they’re the worst thieves and killers in the world!

Robert P. Murphy holds a Ph.D. in economics from New York University. He is the author of The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009), and is the editor of the blog Free Advice.