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.

21 Aug 2009

Arnold Kling Find His Inner Austrian

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Arnold Kling has a great post on the importance of heterogeneity in macroeconomic theory:

I think it is misleading to speak of the output gap. It is part of what I call “hydraulic macro,” which thinks of the economy as producing a single good with a single type of labor and a single type of capital…

…I think that the simplifying assumption of homogeneous output, labor, and capital is…dangerous. My claim (which is not original with me–it is recognizably Austrian) is that a recession can be thought of as a recalculation. Imagine a central planner who decides to radically change plans. He has a huge recalculation to make in order to figure out where to allocate labor and capital. He says to some people, “Wait a minute. I am thinking. Some of you just have to stand idle while I figure this out.”

The market economy is like that central planner. We are undergoing a Great Recalculation.

In conventional, hydraulic macro, we think in terms of this one good called GDP, and the output gap is the difference between how much of this GDP stuff we could produce if everybody were working and how much we are actually producing with all the unemployment over and above “normal.” We assume that “normal” unemployment, which is structural and frictional, is some roughly constant fraction of the labor force.

The way I look at things, we have a huge amount of structural and frictional unemployment these days. There is very little cyclical unemployment–limited to autos and household durable goods. If you measure the output gap using my definition of cyclical unemployment, then the output gap is tiny.

But I think it is better to drop the concept of the output gap altogether. Let us just say that we are in the middle of a Great Recalculation. Before the housing bubble popped and we figured out that our housing and financial sectors were messed up, we had something like full employment. Now, we need a Great Recalculation to figure out a new allocation of skills and jobs that gets us back to full employment. Because we got so messed up before, it will take years for the recalculation to be completed. Meanwhile, if you insist on thinking in terms of a large output gap, you are talking about an imaginary world in which the Recalculation takes place instantaneously. What you are not talking about is a gap that can be closed with government action, unless the government miraculously does the Recalculation faster and more effectively than the market.

21 Aug 2009

Two Men Enter, One Man Leaves: More on Krugman vs. Murphy

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Now it’s official: Krugman has definitively said we are in a recovery. (In his previous writing, he technically didn’t say we were, just that it seemed as if we were, and if we were it was because of Big Government.)

Now what’s ironic in all this is that even if unemployment is in double digits for 2010 through 2013–which it very well might be–Krugman would actually weasel out of the post I’ve linked to above. He would say, “Yes this is unfolding exactly as I predicted. Real GDP started rising again for a few quarters in the summer of 2009, and I said at the time that it would be a jobless recovery.”

So just to be clear, when I say we are nowhere near coming out of this, I mean it in the same way as an economist speaking in 1932. Yes, the official recession dating of the NBER shows that there were two recessions in the 1930s–one from 1929-1933, and another from 1937-1938.

But c’mon, that’s ridiculous. We all know that “the Great Depression” lasted from 1929 until at least World War II. (And readers of Bob Higgs know that it actually lasted through World War II.)

When it comes to dating business cycles, I am a man of the people. If a tenth of the labor force can’t find work, the economy is broken. Don’t let those MIT economists like Krugman fool you with their fancy jargon.

21 Aug 2009

Reader Contest! Who Can Predict Krugman’s Response?

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This is pretty exciting, as far as these things go. Usually the Wall Street Journal doesn’t allow an op ed writer to respond to somebody else’s op ed, except in the most indirect ways. But Alan Reynolds’ piece today opens as if it’s one of my Mises.org Daily Articles:

‘So it seems that we aren’t going to have a second Great Depression after all,” wrote New York Times columnist Paul Krugman last week. “What saved us? The answer, basically, is Big Government. . . . [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.”

This is certainly a novel theory of the business cycle. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts.

Well, I actually take that back. My articles tell you what the punchline is, within the first two paragraphs.

Anyway, Reynolds does a good job explaining that there is basically no empirical support for the claim that deficit spending avoids (or cushions) recessions, or for the opposite claim that the Great Depression was caused by inadequate spending. My favorite part:

Proponents of Big Government can’t say we avoided the next Great Depression due to hypothetical stimulus money that is mostly unspent. So they argue it’s more important that the federal government merely continued spending and didn’t “slash” spending as in the early 1930s. But the federal government didn’t slash spending in the early ’30s. Federal spending rose by 6.2% in 1930, 7.7% in 1931 and 30.2% in 1932. Since prices were falling, real increases in federal spending were huge during the Hoover years.

As of 10:30 PM EST Friday night, Krugman hadn’t responded on his blog to Reynolds.

So let’s have another Reader Contest. Whoever can come up with the closest approximation to Krugman’s response (and it must be time-stamped before his answer, of course) will get a free copy of the book that made Reynolds’ case months ago.

Let me take up the two most obvious answers: (1) Krugman ignores Reynolds. (2) Krugman brings up the recovery with FDR’s inauguration (and slightly higher deficit spending), and then the collapse when FDR tried to rein in the deficit. I.e. Krugman might play the Romer card, demonstrating that he really needs to read the Mises Daily.

I’m actually not predicting that Krugman will do either of the above. In a clear violation of rational expectations, Krugman’s responses continue to surprise me. For example, when Barro wrote a WSJ article saying that the multiplier was very low during World War II, Krugman came back and basically said, “What are you talking about? No Keynesian ever claimed that wartime deficit spending got us out of the Great Depression.” Could anyone have predicted that?

21 Aug 2009

Limited Government In Post-Invasion Iraq

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In his last guest essay, Edward Gonzalez explained why post-invasion Iraq made him question the feasibility of Rothbardian free-market anarchy. In this post, Gonzalez describes a case where limited government–as opposed to brutal strongman rule–emerged out of the chaos after Saddam’s regime fell.–RPM

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Limited Government in the al Anbar Province of Iraq
by Edward Gonzalez

In a deployment to Iraq, I served in a number of villages in the al Anbar Province of Iraq. All these villages were dealing in their own ways with the consequences of war. Organized crime, terrorism, murder and intimidation campaigns were just a few negative aspects I witnessed while on deployment. I also witnessed some very encouraging scenes in the form of communities uniting in order to provide for their security. Although there is obviously a very large difference between the modern day United States and a farming village in Iraq, I believe the actions I witnessed merit examination, for in my opinion they represent both community and government at its most basic level.

There was a village where I served that developed a system of limited government that I believed to be just. It was a small fishing and farming village along the Euphrates River. This village had a collection of honest, intelligent elders, the most senior of which was the Sheik. Although it was a farming and fishing village, the Sheik owned four rock quarries. He had been running the quarries since he was a young man. He was older; my best guess is early 70s, had four wives, seven children, over a dozen grandchildren, and was a natural leader and entrepreneur. This village was also thrown into chaos in the early months of the war. Al Qaeda cells had made a home in their small village and killed a great many people. I visited a mass grave site that used to be the favorite execution spot of the extremists. I don’t know at what point, but the Sheik did eventually take action.

He gathered the families together and convinced them it was time to retake their town. He outfitted every fighting age male with a rifle, and the Sheik’s eldest son, who was in his mid thirties, led the battle to throw al Qaeda out of their village. The town was retaken. Here, the community decided to take collective, violent action in order to protect their lives and property. That collective action was the birth of their government.

I arrived at this village almost a year later. The system the elders had set up was truly impressive. Every young man was a police officer. Once a week each man had the responsibility of one patrol which usually lasted three to four hours. Apart from that one duty, the rest of the week the young men did their normal jobs of farming, fishing, or working at the rock quarry. There were only three full-time police officers who manned the radio at the police station, a small building with no furniture at which the patrols met. The Sheik’s youngest son, who was 17, was the main radio operator. The people of the village paid no taxes, aside from the “time tax,” all the young men had to pay in a weekly patrol. The Sheik supported the only three full time police officers. The Sheik’s oldest son served as the Captain of the police, but his full time job was running the family rock quarries, and he only went to the police station to plan patrols and check in with his baby brother once in a while. However, in case of attack, every one knew he ran the show.

The elders of the village gathered at least once a week to discuss village business. In truth, they gathered almost every night to drink tea. During these meetings, if anything of importance needed to be decided all the men would give their opinion and a collective decision was made. There was no official vote per se, but the amount of people present made it easy to tell what direction the majority was leaning.

The Sheik was the village judge. When neighbors had disputes they went to see him. He was recognized as the wisest, shrewdest man in the village and people did accept his judgment. The Sheik did not accept money for the service he provided. He said it was his responsibility as an elder of the village. If he was away or sick, one of the other elders served as the judge. The Sheik had first established his leadership as a businessman and entrepreneur. He was certainly the richest man in the village, but people did not respect him for his money. They respected his judgment and decision making skills, which had as a great benefit also made him wealthy. Although the Sheik’s eldest son was Captain of the police force, I never witnessed nor heard any rumor of the Sheik’s judgments needing to be enforced. People abided by his judgments out of respect. Note that it was respect for his wisdom, not power.

This was their basic government: The elders of the community acting as leaders and decision makers, the young providing the brute force of police and military action, and the senior elder acting as judge.

The system had many great benefits. There was no divide between police and the people because everyone either was or lived with a police officer. Since every household had a police officer, if a stranger came to town, someone always noticed and notified the patrol. Although surrounded by violence on all sides, in my seven months in Iraq that is the only town where I could walk the streets without body armor and enjoy relaxing dinners without fear of being attacked.

There was a strongman directly to the north of the village who dominated his area as a tyrant extorting money from businesses and households. He never once made a move against this village. If he had attempted to extort money from one house or shop, every able-bodied man would have emerged armed with an AK-47 ready to fight.

As a result of the system in place, there was not a single attack while I was there so I did not see first hand how they dealt with murderers. However, speaking to the Captain of the police I learned how they handled it in the past. I also had a friend serving a few hundred miles away in a very similar village who witnessed it first hand. Two insurgents planted an IED that resulted in the death of a local man. The police captured the two insurgents immediately. The elders of the town and older police officers gathered in the center of town. They held court, had a vote, and the two insurgents were executed.

I also questioned the Sheik and his eldest son on how judgments were enforced and what repercussions a young man would face if he refused to conduct security patrols of the village. In both cases the answers were the same. All individuals were part of the community and had a duty to that community. This meant protecting the village in time of danger and abiding by the judgments of the elders in case of personal disputes. Those who chose to ignore this were shamed. Other individuals and families would look down upon them, refuse to do business with them, and give no assistance in case of need. Then the individual had one of two choices: Become completely self-sustaining and live outside the community or do his part. They both said that police enforcement in either of those cases would be a waste of time and energy. The Sheik also emphasized that forcing an individual to be part of a community that they did not wish to be apart of would be against God’s Law.

The village also had public roads. However, there were no taxes imposed on people for the construction. As security improved in and around the village, the market slowly started to see more people showing up for trade. One evening the elders decided it was time for a good road in and out of the village. The building of the road was decided on because it would provide a path for trucks to move large amounts of fish and crops from the village to the cities. The Captain of the police, the man running the rock quarries, got his trucks together and organized the construction of the road. All the men that stood to benefit financially from the construction of the road, which as far as I could tell was almost everyone, donated personal resources and lent a hand in the construction. It was finished in a single day.

This was also the time of the Awakening in the al Anbar province. Meetings were being called in the larger cities and representatives from villages were being asked to attend. I was not surprised that the Sheik was selected as the village representative. When representatives gathered for these types of meetings, the talks and discussions were on the overall security of the province and how security might be improved along the highways between the villages. The types of things discussed were: What tactics was al Qaeda using throughout the province? What police actions had been most effective in dealing with the threat? If an individual from one village commits a crime in another, how will he be tried? How will the police from one village coordinate with the police of another so there are not unintentional fights? What procedures will be abided by to make coordination more efficient? At no time in any of the meetings that I attended, were there laws established on how cities or villages were to handle their internal affairs. The focus was on coordination.

Although no taxes were collected from the villagers, tax money did come into play. American military personnel provided the towns with standardized police uniforms, a couple of ford pick up trucks painted as police vehicles, training and training ammunition for the young men.

From war and chaos this village, and many others like it, was able to emerge as a free society with a free market and an increasing quality of life. They were able to accomplish this not by treating the use of force and violence as a normal service to be provided by the free market, but by community decision and action. Please do not mistake my obvious concentration on the positive aspects of this village as an implication that everything was perfect. There were many hardships and problems both in the village and in the coordination with other towns and organizations. However, as a whole, this village I served in had the safest and happiest people I met in my time in Iraq.

I am certainly not saying that we should look to adopt this style of village government in the United States, but there are some elements in this style of limited government that I believe to be important to any free society.

First: The use of force was not treated like any other service in a market economy. Justice and police/military action were collective actions taken by the communities as a whole. The power of this government was not focused with a single individual but spread across the community. The process was intentionally inefficient so that no one individual would take hasty/emotional action that would have negative and dangerous repercussions for the community.

Second: Government only used force for community defense. They drew a distinction between what police/military needed to protect with violence and what community needed to enforce with shame. A violent assault on a person’s life or property was collectively defended by the use of force. A “crime” or broken rule of the culture was dealt with through shame and exile from the community.

Third: Government power was decentralized. When the Sheik, as the representative from the village, met with other representatives from other cities and towns, it was to discuss how the towns and cities might work together to deal with shared hardships. They established rules and procedures so that the individuals from neighboring villages and cities might deal more effectively with one another. There were no laws passed dictating to villages or cities how they must run their internal affairs.

Fourth: Government was not a money making, for-profit organization. They were all entrepreneurs who supported themselves. Government was a duty each individual had to his community. The fact that they were all entrepreneurs who supported themselves lent to decisions that were pro free market.

I will not launch into my full theory of limited government here. However, I do believe that certain fundamentals in a just society apply to all societies from a small farming village to a modern day nation.

Edward M. Gonzalez is a graduate of New York University and served on active duty in the United States Marines Corps from January 2004 to August of 2008. He is currently a Captain in the reserves and works for a private school in San Jose, CA. The views expressed in this article are not necessarily endorsed by the United States Marine Corps.

21 Aug 2009

I Finally Understand Matt Yglesias

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Tyler Cowen brings to our attention this revealing passage from Yglesias:

At the same time, I’ve come to be increasingly baffled by the high degree cynicism and immorality displayed in big-time politics. For example, Senators who genuinely do believe that carbon dioxide emissions are contributing to a global climate crisis seem to think nothing of nevertheless taking actions that endanger the welfare of billions of people on the grounds that acting otherwise would be politically problematic in their state. In other words, they don’t want to do the right thing because their self-interest points them toward doing something bad. But it’s impossible to imagine these same Senators stabbing a homeless person in a dark DC alley to steal his shoes. And what’s more, the entire political class would be (rightly!) shocked and appalled by the specter of a Senator murdering someone for personal gain. Yet it’s actually taken for granted that “my selfish desires dictate that I do x” constitutes a legitimate reason to do the wrong thing on important legislation.

Making it all the odder, the level of self-interest at stake isn’t all that high. Selling the public good down the river to bolster your re-election chances isn’t like stealing a loaf of bread to feed your starving children. The welfare rolls are hardly stocked with the names of former members of congress. [Emphasis in original.--RPM]

Wow. Where to begin?

First of all, Mr. Yglesias, it would be incredibly reckless to kill someone with your own hands, in order to obtain a pair of shoes. If a senator got caught doing that, his peers would be amazed all right, but only because of the ridiculous risk/reward judgment involved. (And yes, they would all say their moral sensibilities were ruffled, but that would be for show–just like everything else they publicly say.)

Second of all, Mr. Yglesias, the reason retired senators (and Fed chiefs etc. etc.) are loaded when they lose office, is that they played along while in office. That’s how the game works. When you’re, say, a Pentagon general in charge of procurement, you make sure Defense Contractor X (not naming names here) gets the $3 billion project to breed sharks with laser beams attached to their heads. Then when the general retires, he becomes a “consultant” and gets paid millions to show up on Fox News and CNN and explain that yes indeed, it would be very useful to deploy sharks with laser beams attached to their heads in the Mediterranean.

Ironically, Friedrich Hayek explained “Why the Worst Get On Top” in perhaps the most famous chapter of his gigantic political classic, The Road to Serfdom. You would think that Yglesias surely read such a book–especially since in this blog post Yglesias says, “But I’ve been back-and-forth on the main issues long enough that I’m pretty sure I could switch this blog’s point of view and do a credible job of offering critiques-from-the-right of the progressive liberal health reform movement and the progressive liberal approach to domestic policy generally.”

And yet we can’t be certain Yglesias has bothered to read something as crucial as Hayek’s slender classic, since in another blog post our commentator referred to it as a “nutty alarmist book”.