Cafe Hayek

A Great Arrrgggument

One of my and Russ's impressive young colleagues, Pete Leeson, has his research discussed in today's edition of the Boston Globe.  (HT Pete Boettke)

Leeson makes clear that pirates on the high-seas evolved their own social order, one that makes good sense from the perspective of positive economics.  Here's a slice from the article:

The pirates who roamed the seas in the late 17th and early 18th centuries developed a floating civilization that, in terms of political philosophy, was well ahead of its time. The notion of checks and balances, in which each branch of government limits the other's power, emerged in England in the Glorious Revolution of 1688. But by the 1670s, and likely before, pirates were developing democratic charters, establishing balance of power on their ships, and developing a nascent form of worker's compensation: A lost limb entitled one to payment from the booty, more or less depending on whether it was a right arm, a left arm, or a leg.

The idea of enlightened piracy is strange swill to swallow for those steeped in a pop culture version of the pirate - chaos on the high seas, drinking and pillaging, damsels forced onto the plank. Sure, there's something about the independence of piracy that still speaks to people today. (Even the founders of International Talk Like a Pirate Day acknowledge that there is, in people who love to say "Aargh," a yearning for a certain kind of freedom.) But it turns out that pirate life was more than just greedy rebellion. It offers insights into the nature of democracy and the reasons it might emerge - as a natural state of being, or a rational response to a much less pleasant way of life.

To Leeson, pirate democracy was an institution born of necessity. In one successful cruise, a pirate could take home what a merchant sailor earned in 50 years. Yet a business enterprise made up of the violent and lawless was clearly problematic: piracy required common action and mutual trust. And pirates couldn't rely on a government to set the rules. Some think that "without government, where would we be?" Leeson says. "But what pirates really show is, no, it's just common sense. You have an incentive to try to create rules to make society get along. And that's just as important to pirates as it is to anybody else."

So just as Buchanan, Tullock, and Mancur Olson were pioneers in using economics to help us to better understand the behaviors and institutions of stationary bandits, Pete Leeson is using economics to help us to better understand the behaviors and institutions of floating bandits

Happy 109th, Fritz!

F.A. Hayek was born on this day in 1899.  To mark this occasion, I offer a brief passage from page 104 of Hayek's 1973 book Law, Legislation, and Liberty, Vol. 1: Rules and Order:

Maintaining the overall flow of results in a complex system of production requires great elasticity of the actions of the elements of the system, and it will only be through unforeseeable changes in the particulars that a high degree of predictability of the overall results can be achieved.

Interfering with trade and technological advances in order to protect certain producers from disappointment (and, hence, from the need to adjust to changes) not only makes the economy less productive over time, but also infuses it with greater uncertainty.

Optimal Population?

In his new book, Common Wealth, Jeffrey Sachs expresses his concern about population growth.  Worried by a U.N. prediction that global population will rise to 9.2 billion by the year 2050, from 6.6 billion today, Sachs says (on page 23 of his new book) the following about these additional 2.6 billion persons:

I will argue at some length that this is too many people to absorb safely, especially since most of the population increase is going to occur in today’s poorest countries.  We should be aiming….to stabilize the world’s population at 8 billion by midcentury.

(HT Karol Boudreaux)

Eight billion.  I'm not sure where Sachs got that number.  And, to be frank, I'm not curious about where he got it.  He could have dreamed it up in his sleep, or taken it from a multi-year study conducted by a lavishly funded committee made up of the world's most accomplished economists, demographers, environmentalists, statisticians, physicians, and other Very Smart Experts.  No matter where the number comes from, it's worthless.  There is simply no way to know how many persons the earth can "support" in the year 2050 (or any other year, for that matter).

First is the question: support at what standard of living?  Even if we grant the validity of the resources-are-very-tightly-limited supposition (upon which fear of population growth chiefly rests), there is no objective, scientifically determinable "optimal" number of people who can be alive at any one time.  According to the resources-are-very-tightly-limited supposition, the less that people consume, the greater are the amounts of resources that will be left for the future -- the greater is the earth's carrying capacity.  In this view, resources are simply 'out there,' waiting to be gathered, processed, and consumed by humans.  So more humans (or the same number of humans consuming more) will deplete resources faster than will fewer humans (or the same number of humans consuming less).

So on this resources-are-very-tightly-limited supposition, as people decrease their material standard of living, the earth can sustain a larger population.

How do we know today at what average standard of living persons alive in 2050 will seek to achieve?  We don't.  It's conceivable that the typical person alive in 2050 will have become so devoted to saving the earth that the prevalent culture and norms will dictate that most persons settle for material living standards lower than those that ordinary Americans enjoy today -- or, perhaps even lower than ordinary Americans enjoyed in 1950.  If so, then surely the "optimal" global population in the year 2050 will be lower than it would be if most persons alive in 2050 will seek to achieve living standards much higher than ordinary Americans now enjoy.

A much deeper problem with Sachs's eight-billion number is that, in calculating it, there is no way to predict how human creativity will alter the world during the next 42 years.  It's ludicrous to pretend that we can know now what, say, the average MPG will be for internal-combustion engines in 2050.  Hell, we don't even know if automobiles and lawnmowers and the like will still use such engines then.

Will another Norman Borlaug arise, between now and 2050, to spark another green revolution?  Will someone invent a way to efficiently power automobiles with air?  Will someone develop new and better techniques for defining and enforcing private property rights in ocean-going fish stocks so that the tragedy of the commons called "over-fishing" is eliminated?  Will an enterprising entrepreneur invent a means for ordinary households to power their homes with mulch or autumn leaves or small fragments of fingernail clippings?

Think back 42 years to 1966.  Who in that year imagined personal computers in nearly every home in America?  The Internet?  Digital cameras?  Cell phones?  Quality wines sold in screw-top bottles?  Buying music with literally the click of a button (and not having to burn fossil fuels in driving to the record store).  Aluminum cans that contain only a fraction of the metal that cans contained back then?  The Kindle (that will reduce the number of trees cut down to enable people to read books)?  Medical advances that make hip-replacements about as routine as getting cavities filled by the dentist?  Microfiber?

There is no way -- literally, no way -- to know how technology and social institutions will change between now and 2050.  Given this impossibility -- and given the fact that we can nevertheless predict with confidence that technology will advance and that social institutions will change -- to assert that "optimal" population in the year 2050 will be eight-billion persons is ludicrous in the extreme.  It's faux-science, and deserves only ridicule.

The Market, Not Nature, Is Bountiful

Robert Kennedy, Jr., recently wrote this letter to the editor of the New York Times expressing his opposition to building hydroelectric dams in Chile.  I sent my own letter in response to Mr. Kennedy's missive:

Robert Kennedy, Jr., might be correct that electricity is best provided in Chile by means other than hydroelectric dams (Letters, April 8). His presumption, however, about the source of prosperity casts doubt on the quality of his argument.

Mr. Kennedy opposes dams because he wants to protect "nature's bounty."  But nature is not bountiful. If it were, human history would be one of prosperity and long, healthy lives rather than one of oppressive poverty and short, miserable lives.  Nature is miserly.  The bounty that Mr. Kennedy presumes comes from nature is, in fact, the relatively recent product of human creativity and industry unleashed by free markets - and now threatened by the mindless worship of nature.

Sincerely,
Donald J. Boudreaux

My Mom

I pay my respects here -- far too inadequately, to be sure -- to my wonderful, late mother.

Mamet on government and markets

David Mamet has written an extraordinary confessional for the Village Voice (I've edited this link, ht: Drudge) where he describes his philosophical change of heart from being an anti-American, anti-market believer in man's perfectibility to something different. An excerpt:

What about the role of government? Well, in the abstract, coming from my time and background, I thought it was a rather good thing, but tallying up the ledger in those things which affect me and in those things I observe, I am hard-pressed to see an instance where the intervention of the government led to much beyond sorrow.

But if the government is not to intervene, how will we, mere human beings, work it all out?

I wondered and read, and it occurred to me that I knew the answer, and here it is: We just seem to. How do I know? From experience. I referred to my own—take away the director from the staged play and what do you get? Usually a diminution of strife, a shorter rehearsal period, and a better production.

And then Mamet shows an understanding of public choice theory applied to theater:

The director, generally, does not cause strife, but his or her presence impels the actors to direct (and manufacture) claims designed to appeal to Authority—that is, to set aside the original goal (staging a play for the audience) and indulge in politics, the purpose of which may be to gain status and influence outside the ostensible goal of the endeavor.

He goes on to say he's been reading Sowell and Friedman (and Paul Johnson and Shelby Steele). Sounds like he would like some Hayek if he hasn't tried him already.

Read the whole thing, although the site is slow right now from the raft of comments (190 and rising rapidly) and Drudge's link.

And if anyone out there knows Mr. Mamet or someone who knows him, I sure would like to invite him to be a guest on EconTalk.

Orders and Organizations

What's the single biggest way that collectivists misunderstand or misinterpret free-market liberals (such as Russ and myself)?  The answer, I bet, is the failure to understand that opposition by free-market liberals to government action does not mean that we free-market liberals oppose all of the goals of the well-meaning proponents of government action.

More generally, it seems difficult for some people to grasp the fact that society and government are not identical -- or, more precisely, to grasp the fact that civil society can and does often thrive outside of government influence and, indeed, very often (I would say most often) in spite of such influence.

A friend of mine who is a thoughtful and very intelligent man of the left asked me by e-mail -- in response to this post at the Cafe --

But don't libertarians, or at least some of them, see themselves as part of a movement?  I admit that I've always thought that was something of a paradox.  But maybe even libertarians can't free themselves from human nature, so much of which evolved, as you point out,  when humans, and our ancestors, hunted and gathered in packs.  But, for that matter, isn't much productive economic activity carried out collectively by corporate groups?

Good questions.  Here's my response:

There is a libertarian intellectual movement, of course.  And I admit that I feel deep gratification whenever I reflect that in some small way I work within a tradition enriched, and more or less consciously embraced, by people such as Adam Smith, Frederic Bastiat, Mencken, Hayek, Milton Friedman, Jim Buchanan, and Vernon [Smith].

There is also a libertarian political movement, but it is notoriously undisciplined.  (I've gone to a total of two Libertarian-party gatherings.  The first was in 1979 in New Orleans -- dull.  The second was in 1980 in NYC.  At this latter event, the Libertarians decided very ostentatiously to support the Man-Boy Love Association.  I thought this a bit much.)

I suppose that it is somewhat ironic that the classical-liberal and libertarian movement (perhaps a better word is "tradition") does prominently deny the myth that there's salvation in the political collective.  More specifically, this tradition denies three myths that many people still doggedly believe: (1) that useful social and economic orders only result from of a conscious plan and effort -- or can invariably be improved by such conscious planning and effort; (2) that the nation is economically and morally special - that each of us has a special connection (and should have a special connection) with each and every one of our fellow citizens that we don't have with citizens of other countries; and (3) that personal pursuit of material gain is suspect or, at least, contemptible -- that it's always better to aim for "higher" purposes -- to sacrifice ourselves for others or for some cause that is "larger" than the individual.

About your point regarding private firms: it's true that nearly all private, productive economic activity takes place in organizations consisting of some, often very many, people.  It's true also that people often feel loyalty to the organizations they work for or or are otherwise closely associated with.  But the motivating force of such organizations in a market economy isn't chiefly these small-scale collective purposes (any one of which is often at odds with the collective purpose of some other organization).  The motivating force is individual profit.  And, importantly, people are usually aware of this fact, and so they're not duped into sacrificing themselves for others.  Gains from trade, rather than commitment to a nebulous higher cause, is the chief motive.

One of the important influences on my thinking about this broad topic is a 1962 essay by Hayek called "Two Kinds of Order."  If you ever run across this essay, I do recommend it.

The People's Romance

The latest EconTalk is a conversation with my colleague Dan Klein on the economics of coordination—how markets connect people around the world doing various parts of a task that get combined into a finished product without any of the people contributing the task necessarily knowing that they're working together. Along the way, we talk about what Dan, calls The People's Romance, the idea that the highest human activity is a government project of some kind that "we" work on together. Dan argues that such an urge to is widespread and that it degrades our culture. I argue it's dangerous. Enjoy. Next week is William Easterly.

Bill Gates Was Creative at Microsoft

Bill Gates's call, in Davos, for "creative capitalism" is getting much press.  Here's a letter on this matter that I sent yesterday to the Wall Street Journal:

To the Editor:

I'm delighted that Bill Gates is reading the important work of the late Julian Simon ("Gates Calls for Kinder Capitalism," January 24).  When he digests Mr. Simon's central idea - that human beings in market economies are "the ultimate resource" - Mr. Gates might then recognize that there is no need to change capitalism so that it becomes "creative."  Capitalism has always been creative.  It is inherently creative.

Everything from apparently mundane pencils and stocked supermarket shelves to obviously complex skyscrapers and personal computers are astonishingly complex artifacts created by human ingenuity unleashed, as only capitalism can unleash it, to experiment, cooperate, and compete.  No philanthropist, no government body or commission, no Great Leader - no matter how "creative" or "kind" - has done one-trillionth as much to give dignity and comfort to ordinary people as has capitalism.  It doesn't need re-inventing or to be made kinder; it just needs to be spread more widely around the world.

Sincerely,
Donald J. Boudreaux

Update: John Tamny at RealClearMarkets has this wonderful reaction to Bill Gates's failure to grasp the reality of capitalism.  Here are some key paragraphs:

Far from kind, pre-capitalist living among the masses took the form of what [Gregory] Clark [in his new book A Farewell to Alms] terms “unrelenting drudgery,” with food in short supply, and early death a fact of life given the ravages of disease that capitalism hadn’t yet cured. Though humans today are capital themselves in the sense that a broad division of labor ensures greater work specialization and more plentiful output, death was a virtue in pre-capitalist societies thanks to the inability of its economic systems to produce much of anything for people very much in need.

Fast forward to the 19th century and industrialization, life for the average person changed substantially for the better. Whereas income had been flat for thousands of years, societies that welcomed the upheaval which industrialization brought saw their pay make near 180 degree turns upward.

And while capitalism surely created a class of wealthy owners, Clark notes that “industrialized economies saved their best gifts for the poorest.” To this day we see the truth in Clark’s words in that while the rich may have better houses, food and jobs than the average person, capitalism has done a better job than any other system of housing, feeding and employing those not at the top of the income pyramid.

Indeed so.

Unintended Consequences

Alex at Marginal Revolution has some interesting things to say on unintended consequences:

The law of unintended consequences is what happens when a simple system tries to regulate a complex system.   The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system.  When a simple system tries to regulate a complex system you often get unintended consequences.

Unintended consequences are not restricted to government regulation of society but can also happen when government tries to regulate other complex systems such as the ecosystem (e.g. fire prevention policy that reduces forest diversity and increases mass fires, dam building that destroys wet lands and makes floods more likely etc.)  Unintended consequences can even happen in the attempted regulation of complex physical systems (here is a classic example involving turbulence).

Read the whole thing.

Here is my attempt to get at the connection between complexity and unintended consequences.

Harold Berman: A Great Scholar

Probably no more than a half-dozen books have singly influenced my thinking as much as has Harold Berman's 1983 classic, Law and Revolution: The Formation of the Western Legal Tradition.  I was very sad to learn that Professor Berman died a few days ago.

In the early 1990s I spent several days with Prof. Berman and his charming wife at an Institute for Humane Studies seminar in Belmont, CA.  Organized by Leonard Liggio, the general subject of the seminar was the nature and origin of law.  Law and Revolution was the centerpiece of the readings.  And what a treat it was to have Harold Berman actively participating in all of the discussions!  I remember him as being deeply scholarly -- a man possessing as complete a command of his subject as is humanly possible and yet, simultaneously, unfailingly curious about different perspectives and open always to the possibility of changing his mind should he encounter sufficiently compelling facts or arguments.

Harold Berman was also genuinely kind, without a hint of pretentiousness.

The main lesson of Law and Revolution is that law can -- and certainly did in western Europe -- emerge unplanned from competition among different wannabe sovereign powers.  During the middle-ages and early modern era the Roman Catholic church sought absolute sovereignty.  So too, did various princes.  And these seekers of unalloyed sovereignty each had to compete for authority not only with each other, but also with the law-making processes that emerged in cities, on feudal manors, and -- importantly -- among merchants.

Sovereignty in the west, fortunately, was fractured.  The competition for absolute power -- the quests of the princes and of the church, of "caesar" and of "christ," each to wield absolute power prevented either of them from becoming absolute.  Competition is a grand thing.  And law is not so much the product of a sovereign, or of a law-giving genius, as it is the emergent outcome of countless instances of human interactions and struggles of each of us and of those who would rule us to carve out elbow room for ourselves and domains of authority.

I've yet to read the follow-up volume to Law and Revolution.  I'll do so soon.

Bob Higgs's fine tribute to Harold Berman is here.

Swarm

The ants go marching. The result is spontaneous order.

More on swarm.

More on ants.

A Curious Inconsistency

Warning: the following is something of an over-simplification, in the same way that it is an over-simplification to say that French cuisine is tastier than English cuisine, or to say that men are taller than women.

Modern American conservatives (at least those in the free-market camp) insist that physical and biological reality must be the product of conscious design and creation, but these conservatives also readily accept that productive social orders  -- such as markets -- can, and do, emerge undesigned and unplanned -- spontaneously.

Modern American "liberals" (at least those who aren't religious in the conventional sense) insist that productive social orders must be the product of conscious design and creation, but these "liberals" also readily accept that non-social orders -- such as the human mind and the flamingo's smile -- can, and do, emerge undesigned and unplanned -- spontaneously.

UPDATE: Steve Horwitz reminds me of his wonderful post of a few years back, Social Snowflakes.

Friedman Explains The Point

Here's a two-and-a-quarter-minute clip of Milton Friedman explaining why no one in the world knows, no one in the world has ever known, and no one in the world can ever possibly know, how to make an ordinary commercial-grade pencil.

Grasping the point of this explanation is as fundamental as anything you can ever learn about the nature of the economy and modern society.

Cape Cod Traffic

In a comment on a recent post of Don's about Cape Cod, Spencer asks about my prediction about Cape Cod traffic. He is referring to this article I wrote in the Boston Globe last November where I predicted that the $62 million project to eliminate congestion at the entrance to the Cape was likely to fail. Here is what I wrote:

Getting rid of the rotary can't solve the traffic problem because it doesn't change the underlying cause of the congestion: the relative scarcity of sand and surf next to magnificent dunes.

A lot of wonderful scarce things are expensive. Think box seats at Fenway on a perfect night in June, Van Gogh's paintings, or a condo overlooking Central Park.

But sitting on the beach at Cape Cod is wonderful and scarce and relatively cheap -- cheap measured by the out-of-pocket costs of a day trip. So more people want to enjoy the Cape than there is room for them on the Cape's roads and beaches. Removing a rotary makes that problem worse, not better. It removes one of the costs of enjoying those beaches. So other costs emerge in response, though no one wants it that way.

Next July or August, there will be a new bottleneck. I'm not sure where it will be, but I'm confident it will be there. The only question is how bad it will be.

The first test of the so-called Sagamore flyover came on Memorial Day. The Globe reported:

For thousands of visitors, going to  Cape Cod   over Memorial Day weekend was much easier and more pleasant than heading home.

The new $60 million flyover, which erased the hated rotary at the base of the Sagamore Bridge, smoothed Cape-bound travel on Friday and Saturday. But drivers returning from the Cape Monday found themselves in a worse-than-usual traffic nightmare, with backups that stretched as far  as 17 miles to Yarmouth at midafternoon.

To avoid a repeat this summer, state transportation officials said yesterday they plan to install electronic signs urging vacationers to stagger their departure from the Cape as well as their arrival. Officials said they will also look at possible changes to the roadways around Exit 1, where Route 6A merges into Route 6 at the base of the bridge.

Evidently, there are still problems as this article a week and a half ago from South Coast Today illustrates:

For Gov. Dukakis, a recent trip to the Cape reiterated the need for the rail line when he and his wife sat in heavy traffic before and after crossing the Sagamore Bridge.

Money that went into the $62 million flyover project would have been better spent on rail lines, he said.

When something valuable (experiencing Cape Cod) is underpriced, it will inevitably be overused and congestion will ration access. Something that appears to be an engineering problem (an inefficient traffic rotary) is really an economics problem.

Two reports don't prove a prediction. I'd love to see some real data on whether delays are more common or less. Anybody out there have any info? Diligent observers can go here on Fridays and Sundays and make their own estimates of whether traffic is free-flowing. Meanwhile, here's a story from December 2003 that called it a $35 million project. I guess it's hard to keep costs down in Massachusetts.

My Brand of Economics

How best to protect consumers from unreliable or even unsafe products?  Contrary to the dogma espoused by many people who fancy themselves "progressive," brand names are among consumers' best friends -- as explained in this excellent op-ed, appearing in yesterday's Chicago Tribune, by Edward Snyder, Dean of the University of Chicago Graduate School of Business.

Note that few Chinese producers yet have established brand names in the west.  That's a problem -- but it's a problem best solved, as Snyder argues, by letting the market deal with it.

Here are the final few paragraphs of Snyder's op-ed.

Those who advocate regulation by the West as the solution might be smoking unregulated substances. Aside from the obvious point that we have plenty of inspections and regulations of our own to worry about, the opportunity for Western manufacturers and anti-globalization interests to lobby against particular Chinese imports would be irresistible. They would use the new bureaucracy to reduce the general flow of Chinese goods. That would forward their objectives, but the results would be bad overall policy.

Waiting for the market to fix Chinese product quality -- doing nothing -- sounds like an unattractive solution. But the market is already reacting.

Consumers are thinking twice about buying no-name Chinese products with long lists of ingredients. U.S. distributors are checking their sources. Retailers, especially those who stock a lot of Chinese goods, are becoming a lot more concerned about their reputations. And Chinese firms and their partners are investing in brands.

How does all this happen? Firm by firm, case by case and step by step. You might recall the recent case of the 1.5million Thomas & Friends toy rail cars and accessories with lead paint. Fair or not, Thomas & Friends has lost quite a chunk of its brand-name capital, and its very survival is in question. No doubt Thomas & Friends has some new protocols.

How long will it take for the market to respond? Pretty much the same amount of time it takes other branded toy manufacturers to check and recheck for lead paint on their products.

Here's another Key Fact: Mattel, which produces Barbie dolls and characters from Sesame Street and Nickelodeon, this month stopped about 700,000 toys with lead paint from reaching U.S. consumers and recalled 300,000 additional toys sold through retailers such as Target, Toys "R" Us and Wal-Mart.

So how long will it take for the market to respond? Less time than it would  take for new regulations to take effect.

(HT John DeVries)

Abundant Social Change

I just started reading Brink Lindsey's new book, The Age of Abundance: How Prosperity Transformed America's Politics and Culture.  I'm just about 60 pages into it, and so far I'm enjoying it immensely.  I especially like this observation (that appears on page 3):

American capitalism is derided for its superficial banality, yet it has unleashed profound, convulsive social change.  Condemned as mindless materialism, it has burst loose a flood tide of spiritual yearning. The civil rights movement and the sexual revolution, environmentalism and feminism, the fitness and health-care boom and the opening of the gay closet, the withering of censorship and the rise of a "creative class" of "knowledge workers" -- all are the progeny of widespread prosperity.

Tolstoy on Hayek

David Brooks summarizes ($) President Bush's view of politics and history:

He’s convinced leaders have the power to change societies. Even in a place as chaotic as Iraq, good leadership makes all the difference.

When Bush is asked about military strategy, he talks about the leadership qualities of his top generals. Before, it was Generals Abizaid and Casey. Now, it’s Generals Petraeus and Odierno.

When Bush talks about world affairs more generally, he talks about national leaders. When he is asked to analyze Iraq, he talks about Maliki. With Russia, it’s Putin. With Europe, it’s Merkel, Sarkozy, Brown and the rest.

He is confident in his ability to read other leaders: Who has courage? Who has a chip on his shoulder? And he is confident that in reading the individual character of leaders, he is reading the tablet that really matters. History is driven by the club of those in power. When far-sighted leaders change laws and institutions, they have the power to transform people.

Then Brooks gives us Tolstoy's view. Very Hayekian and very nicely said:

Tolstoy had a very different theory of history. Tolstoy believed great leaders are puffed-up popinjays. They think their public decisions shape history, but really it is the everyday experiences of millions of people which organically and chaotically shape the destiny of nations — from the bottom up.

According to this view, societies are infinitely complex. They can’t be understood or directed by a group of politicians in the White House or the Green Zone. Societies move and breathe on their own, through the jostling of mentalities and habits. Politics is a thin crust on the surface of culture. Political leaders can only play a tiny role in transforming a people, especially when the integral fabric of society has dissolved.

If Bush’s theory of history is correct, the right security plan can lead to safety, the right political compromises to stability. But if Tolstoy is right, then the future of Iraq is beyond the reach of global summits, political benchmarks and the understanding of any chief executive.

How to Succeed in New Orleans

My friend and former NYU classmate Sandy Ikeda has this outstanding op-ed in the current issue of Forbes.  In it, Sandy argues that New Orleans would be rebuilt better if neighborhoods there secede from the City.  Here are some key paragraphs:

At first blush this idea [of secession] probably sounds radical, even absurd. But secession is the logical extension of the Unified New Orleans Plan, which, in an earlier incarnation, allowed each neighborhood to hire urban planners to coordinate post-Katrina reconstruction. If neighborhoods can be trusted with this vital task, why can't they manage their own security, garbage collection, noise ordinances and road maintenance? Devolving power in this way goes far beyond UNOP's proposed "citizen participation" and enables neighborhoods to more effectively mobilize their energy and know-how.

Consider this: Secession has been happening for decades. Almost a fifth of Americans now live in suburbs, private neighborhoods with deed restrictions and community-oriented governance. Why shouldn't urban dwellers have those options?

On Expectations and Flexibility

As Russ (and some of the commentors on Russ's post) pointed out, this claim by Harold Meyerson isn't supported by the facts:

Over the past 35 years, the massive changes in the U.S. economy have largely condemned American workers to lives of economic insecurity. No longer can the worker count on a steady job for a single employer who provides a paycheck and health and retirement benefits, too. Over the past three decades, workers' individual annual income fluctuations have consistently increased, while their aggregate income has stagnated. In the brave new economy of outsourced jobs and short-term gigs and on-again, off-again health coverage, American workers cannot rationally plan their economic futures.

Robert Samuelson, a couple of days earlier in the same newspaper (Washington Post), addressed the same issue, but with much more wisdom than Meyerson displayed.  Here are the key paragraphs from Samuelson's column:

For Americans, what's curious is that people seem to feel more economically insecure even though the economy has become more stable. Since 1982, there have been only two recessions, lasting 16 months. In the past 10 years, unemployment has averaged 4.9 percent; in the 1970s, the average was 6.2 percent. Yet in 2006, only about half of workers were satisfied with their job security, reports a poll from the Conference Board. In 1987, when unemployment was higher, about 60 percent were satisfied.

One explanation of the paradox is that the uncertainties and insecurities that assault workers, investors and firms actually foster overall economic stability. There are constant upsets -- business expansions and closures; greater competition from emerging technologies and foreign economies; shifting prices for stocks and bonds. These put people on edge. But many small adjustments may smooth out the business cycle. They may minimize deep recessions, stock crashes and panics [emphasis added].

One lesson here is that, rather paradoxically, allowing some expectations to be upset is a means of ensuring that a greater number of other expectations -- and, arguably, expectations over more important matters -- are more likely to be regularly fulfilled.

Another, related lesson is that a society that aims to prevent any and all expectations from being upset can, in the end, succeed in this quest only by impoverishing itself -- but reducing itself to such a level of simplicity that expectations finally can be nearly universally guaranteed to be fulfilled, but only because that society's division of labor has been dramatically reduced, and because all entrepreneurial dynamism and consumer sovereignty have been snuffed out.  The risk of "job loss" will replaced by a far greater risk of "life loss."

Adaptation, Prices, and Climate Change

Both the Atlantic (not yet online) and Sports Illustrated (HT: Michael Rizzo) feature cover stories on global warming. The Sports Illustrated piece is a bit of a stretch. They have a long tradition of trying to be about something more consequential than sports. Does global warming have anything to do with sports? Sure:

The next time a ball game gets rained out during the September stretch run, you can curse the momentary worthlessness of those tickets in your pocket. Or you can wonder why it got rained out -- and ask yourself why practice had to be called off last summer on a day when there wasn't a cloud in the sky; and why that Gulf Coast wharf where you used to reel in mackerel and flounder no longer exists; and why it's been more than one winter since you pulled those titanium skis out of the garage.

Global warming is not coming; it is here. Greenhouse gases -- most notably carbon dioxide produced by burning coal, oil and gas -- are trapping solar heat that once escaped from the Earth's atmosphere. As temperatures around the globe increase, oceans are warming, fields are drying up, snow is melting, more rain is falling, and sea levels are rising.

All of which is changing the way we play and the sports we watch.

  It's a bit of a stretch. A huge stretch. And of course it's a stretch in one direction only. It could have been written this way:

The next time you get to enjoy throwing a baseball in February or enjoying a December game at Chicago's Soldier Field instead of viewing it mostly as a rite of passage or a test of your toughness, thank global warming.

Oops. Not scary. The cover of the magazine is the way to go—a Florida Marlin (the baseball kind) in thigh-deep water in the outfield of the Marlins' stadium. I'm going to save the cover. It will be either the crow I eat in 25 years as a repentant ex-skeptic or the poster to share with friends who thought the experts were right all along.

Over at the Atlantic, recent EconTalk guest Gregg Easterbrook has the courage to stretch in both directions, looking at who might lose, yes, but also who might benefit from global warming. There's some good stuff in it. Lots of interesting speculation for example, on land values and how Buffalo might again become the place to be, while Arizona real estate plummets in value.

Toward the end, he offers this insight into coping with global warming:

The market has caused the greenhouse-gas problem, and the market is the best hope for solving it. Offering market-incentives for the development of greenhouse-gas controls—indeed encouraging profit making in greenhouse-gas controls—is the most promising path to avoiding the harm that could befall the dispossessed of developing nations as the global climate changes.

He then goes on to say that because global warming is already here, adaptation is also important.

Crops that grow in high temperatures, homes and buildings designed to stay cool during heat waves, vehicles that run on far less fuel, waterfront structures that can resist stronger storms‚the list of needed adaptations will be long, and all involve producing, buying, and selling. Environmentalists don't like talk of adaptation, as it implies making our peace with a warmer worlds. That peace though, must be made—and the sooner businesses, investors, and entrepreneurs get to work, the better.

Well said, but there is one more key point to make. Prevention, if it is indeed prudent, is likely to require collective action, government action, internationally imposed action. Action that is going to have all the rent-seeking and other mistakes that come from centralizing power. Adaptation comes from the market, as he calls it—from individual action. It is self-organizing. We don't need to exhort entrepreneurs to come up with cooler homes or better crops. Their own self-interest will push them to discover those innovations and at the right pace. And sooner isn't necessarily better with adaptation. Sooner comes at a cost of foregone other innovations and uses of time and energy and the sweat of the brow. Entrepreneurs have an incentive to take those costs into effect. Politicians don't. So don't worry. All the adaptations that you can make money from will come into being without any exhortation. Money talks. Loudly, but not too loudly.

One more thought on adaptation and the role of prices. If the worriers are right, if global warming really does threaten to make Miami uninhabitable, we'll see real estate prices in Miami start to fall as Easterbrook points out. The fact that they are not falling means that people do not believe the worriers. So someone is wrong. Either Al Gore or the guy who is paying the going rate for a lot in South Beach. My impulse is to choose Al Gore as mistaken simply because there is no consequence for him being wrong and the purchaser of the real estate has a much greater incentive to act on an inconvenient truth.

But maybe people are myopic. Maybe they inadequately perceive the risk of one-time events. Maybe it will take a while for all those Sports Illustrated covers to sink in. Even so, if sea levels really rise, eventually buyers and sellers of land will catch on. The demand for Florida real estate will go down and the prices will start to fall. The prices elsewhere will rise. Not uniformly. Some places will go up more than others. These changing prices will encourage some people to go to Buffalo and others to Omaha. Some people will leave Florida quickly while others will stay for a while as the waters rise.

The changes in the price of real estate will not happen overnight. They will happen gradually over time, giving people the signals about which places are relatively attractive and which places are less so. This adaptation will take place without any centralized direction.

When the price of land in Miami starts to fall relative to the rest of the country, then you'll know people are taking global warming seriously. That is one more piece of evidence you can use to figure out whether any political action will take place. Until that happens, bet on the status quo politically.

Traffic without traffic signals

In this earlier post, I wrote about the European trend toward removing traffic signals and relying instead on informal methods of communication. How would such a change actually work in practice? Some diligent readers (Romulo Lopez and Jose Andrade) found some extraordinary videos of traffic-signal-free traffic. The short answer is that it works surprisingly well, though it's not clear whether there are fewer accidents or more accidents and what the net impact is on travel time. What is clear from these videos is that a world of informal communication is dramatically LOUDER as the horn appears to play a crucial role in either communicating or catharsis or both.

Check these out. They have a ballet-like quality that is mesmerizing. In some of the sequences it works so well it almost looks staged. Whether it would work in American culture and with a different mix of cars and motorbikes is hard to say. But this is incredible:

Hanoi

Another Hanoi

Somewhere in Vietnam (at night!)

India

Markets process information

Sebastian Mallaby has much wisdom on how markets process information. My favorite part:

A long time ago, in a more aristocratic era, Henry David Thoreau lamented that "the mass never comes up to the standard of its best member." But in the age of the Internet, people are more inclined to believe that the decentralized efforts of large groups can be better than the work of experts. Wikipedia has edged out traditional encyclopedias; eBay can value your car better than a local used-car dealer. And politicians have a special reason to respect the wisdom of markets. Amateur traders on the University of Iowa's political futures market predict elections more accurately than professional pollsters.

Order emerges in unexpected places

European cities are cutting back on traffic signs in order to let order emerge. (HT: August from a comment here at the Cafe):

European traffic planners are dreaming of streets free of rules and directives. They want drivers and pedestrians to interact in a free and humane way, as brethren -- by means of friendly gestures, nods of the head and eye contact, without the harassment of prohibitions, restrictions and warning signs.

And later on in the article:

But one German borough is already daring to take the step into lawlessness. The town of Bohmte in Lower Saxony has 13,500 inhabitants. It's traversed by a country road and a main road. Cars approach speedily, delivery trucks stop to unload their cargo and pedestrians scurry by on elevated sidewalks.

The road will be re-furbished in early 2007, using EU funds. "The sidewalks are going to go, and the asphalt too. Everything will be covered in cobblestones," Klaus Goedejohann, the mayor, explains. "We're getting rid of the division between cars and pedestrians."

The plans derive inspiration and motivation from a large-scale experiment in the town of Drachten in the Netherlands, which has 45,000 inhabitants. There, cars have already been driving over red natural stone for years. Cyclists dutifully raise their arm when they want to make a turn, and drivers communicate by hand signs, nods and waving.

"More than half of our signs have already been scrapped," says traffic planner Koop Kerkstra. "Only two out of our original 18 traffic light crossings are left, and we've converted them to roundabouts." Now traffic is regulated by only two rules in Drachten: "Yield to the right" and "Get in someone's way and you'll be towed."

Strange as it may seem, the number of accidents has declined dramatically.

Sunstein on information

Cass Sunstein writes about Hayek and information in the Washington Post:

In the past year, Wikipedia, the online encyclopedia that "anyone can edit," has been cited four times as often as the Encyclopedia Britannica in judicial opinions, and the number is rapidly growing. In just two years, YouTube has become a household word and one of the world's most successful Web sites. Such astounding growth and success demonstrate society's unstoppable movement toward shared production of information, as diverse groups of people in multiple fields pool their knowledge and draw from each other's resources.

Developing one of the most important ideas of the 20th century, Nobel Prize-winning economist Friedrich Hayek attacked socialist planning on the grounds that no planner could possibly obtain the "dispersed bits" of information held by individual members of society. Hayek insisted that the knowledge of individuals, taken as a whole, is far greater than that of any commission or board, however diligent and expert. he magic of the system of prices and of economic markets is that they incorporate a great deal of diffuse knowledge.

The rest is here. (HT: J. Bradley Jansen)

Speed limits as an emergent phenomenon

After listening to this podcast with Don Boudreaux on Hayeks' distinction between law and legislation, John Hoehn responded with this fascinating example of how Michigan lets speed limits emerge on certain roads:

Hayekians may be interested to know that, in Michigan, traffic speed limits on state and county roads are "discovered".   Speed limits on the latter roads may be set initially based on engineering considerations and the general experience of county road commission personnel.  However, if a member of the general public thinks the initial limit is too fast or too slow, he or she can request a "traffic study" by the county road commission.  If the road commission hasn't recently conducted such a study, it usually responds positively to the request--it sets up equipment on the section of road to measure the actual speeds of vehicles traveling on the road.

The purpose of the traffic study is to estimate the speed at which the 85th percentile of traffic speeds.  If the 85th percentile matches the posted speed limit, the posted limit is affirmed.  If the 85th percentile is different from the limit, a new speed limit is established that is as close to the 85th percentile as possible (though rounded to the nearest multiple of 5, I believe).  That's how speed limits are discovered in Michigan.  The only caveat here is that the discovery approach only applies to speed limits under the statutory maximum of 55 mph to state and county roads.  The state has a brochure that details of the discovery approach:

http://www.michigan.gov/documents/Establishing_Realistic_Speedlimits_85625_7.pdf

Of course, there are other types of highways for which speed limits are set by legislative bodies.  Cities have the discretion to set statutory limits within their boundaries.  State legislation sets residential and school zone limits to 35 mph.  Freeway limits are also set by statute to 65 or 70 in most places.  It's all covered in the brochure on the state website.

The Blogosphere as Spontaneous Order

Nice piece from the American.

State, Society, and Unemployment Insurance

Perhaps the difference that most fundamentally separates true liberals and libertarians from others is that, to one degree or another, true liberals and libertarians are, unlike non-liberals and libertarians, dutiful sons and daughters of the Scottish Enlightenment.  And one of the great lessons of that remarkable intellectual movement is the refinement of the understanding that state and society are not the same thing.  Society is not created by the state, and the state's activities not only do not define those of society but often diminish society's activities.

I thought of the distinction between state and society when I read this passage in Paul Krugman's column from this past Friday's edition of the New York Times:

For the fact is that F.D.R. faced fierce opposition as he created the institutions — Social Security, unemployment insurance, more progressive taxation and beyond — that helped alleviate inequality.

Did Franklin Roosevelt "create" unemployment insurance?  His administration did champion legislation that created government-provided unemployment insurance.  But Mr. Roosevelt emphatically did not create such insurance.  Here's a letter that I sent to the Times in response:

Paul Krugman mistakenly credits Franklin Roosevelt with having "created" unemployment insurance ("On Being Partisan," Jan. 26).

Private unemployment insurance was offered long before the New Deal.  As Professor Michael Rappaport found, starting around 1910 companies began selling such insurance to railroad workers.  Alas, seeking to offer such coverage to other workers, private insurers were consistently blocked by state governments.  And when New York's legislature in 1931 finally approved the expansion of private unemployment insurance, the bill was vetoed by none other than Gov. Franklin Roosevelt.

Sincerely,
Donald J. Boudreaux

The Rappaport paper is "The Private Provision of Unemployment Insurance," Wisconsin Law Review, Vol. 61 (1992).   (I cannot find a non-gated version of this paper on line.)  A summary of some of the key points of the paper is found in this Regulation article by George Leef.

Private, voluntary actions supplied unemployment insurance in yet other ways.  My friend Steve Ziliak wrote, after I sent him a copy of my letter:

As I and David Beito have independently found, fraternities, sororities, lodges, and mutual aid societies had been offering private unemployment insurance in the United States throughout the second half of the 19th century and in the early years of the 20th.  Also: sickness insurance, death insurance, worker injury insurance, and temporary charitable aid.  Fred's and Barney's membership in the Royal Order of Water Buffalo Lodge "back in the Stone Ages" isn't much of a fiction.

Steve also offers these cites:

David T. Beito, From Mutual Aid to the Welfare State: Fraternal Societies and Social Services, 1890-1967

S. T. Ziliak (with Joan Hannon), "Public Assistance: from Colonial Times to the 1920s," Historical Statistics of the United States (Millennial Edition, Cambridge University Press, 2006). S. Carter, et al., eds.

S. T. Ziliak, "The End of Welfare and the Contradiction of Compassion," The Independent Review Vol. 1 (1996).

I suspect that unemployment insurance would today be much more efficiently supplied, with greater attention to the individual needs and circumstances of workers and their families, had the state not pre-empted and prevented society from creating this beneficial institution.

F.D.R. clearly did not create unemployment insurance.  It's closer to the truth to say that he helped to destroy it.

Private Creation of Private Property Rights (Or, Curing the Boston Commons)

Editorialists at the Boston Globe are skeptical of the plan -- for rather vague reasons of "fairness" -- but here's a neat way that private, innovative entrepreneurship might cause scarce parking spaces in Boston to be used more efficiently.

Although the details differ enormously, this idea reminds me of Fred McChesney's article on parking spaces in snow-bound Chicago.  In both cases, as a valuable commodity (parking spaces) becomes more scarce, private efforts and coordination develop ways of creating private property rights in goods that otherwise would remain free-access goods.

I, Phone

I, Phone.

With apologies to I, Pencil.

HT: Josh Hill

Prescott on Macro

Nobel Laureate Edward Prescott takes an Hayekian approach to macro in this commentary at the WSJ:

The sky is not falling. No need to panic and start playing around with all sorts of policy responses. Despite the impression created by some economic pundits, the U.S. economy is not a delicate little machine that needs to be fine-tuned with exact precision by benevolent policymakers to keep from breaking down. Rather, it is large and complex, with millions of people making billions of decisions every day to improve their lives, the lives of their families and the health of their businesses.

On the one hand, it's difficult to screw up all these well-intentioned people by crafting bad policy, but, on the other hand, it is of course entirely possible to do so. And once things are broken, they are much harder to fix. For example, all those doomsayers predicting a recession will get their wish if taxes are suddenly raised, new productivity-strangling regulations are enacted, the U.S. turns against free trade, or some combination thereof. Otherwise, we should expect 3% real growth, based on 2% increases in productivity and 1% population growth. This economy is fundamentally sound.

Read the whole thing.

We Do Cooperate

I'm pleased that The New York Review of Books published this letter of mine, as well as author Bill McKibben's response to my missive, in its Dec. 21 issue:

HOW CLOSE TO CATASTROPHE?

By Donald J. Boudreaux, Reply by Bill McKibben            

In response to How Close to Catastrophe? (November 16, 2006)

To the Editors:

I've read few passages in your pages that are as mistaken as Bill McKibben's assertion that "the technology we need most badly is the technology of community—the knowledge about how to cooperate to get things done.... We Americans haven't needed our neighbors for anything important..." ["How Close to Catastrophe?," NYR, November 16].

Each of us cooperates daily with countless others—neighbors, fellow citizens, foreigners—to ensure not only our prosperity but our very existence. My mind boggles at the number of people who cooperated to make available to me, for example, the shirt on my back. Cotton growers in Egypt; fashion designers in Italy; textile workers in Malaysia; merchant marines from around the globe; investment bankers in Manhattan; insurers in Hartford; truck drivers along the East Coast; department store executives in Seattle; security guards and retail clerks in Virginia—these people and millions of others cooperated so that I might wear an ordinary shirt. Ditto for my house, my food, my subscription to The New York Review of Books.

For McKibben to say that "cheap fossil fuel has allowed us all to become extremely individualized, even hyperindividualized" is to be blind to the amazing and vast system of cooperation that today spans the globe. Clearly, we have, in spades, "knowledge about how to cooperate to get things done."

Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Fairfax, Virginia

Bill McKibben replies:

Donald J. Boudreaux's response proves precisely the point I was trying to make—and it says something about the blinders that too many economists have strapped on. We do cooperate, unconsciously, to promote our individual self-interest; Chairman Boudreaux's slightly less elegant restatement of Adam Smith's remarks about the butcher and the baker are, as far as I can tell, not in serious dispute. What is in dispute is whether this cooperation carries over into more crucial matters—like keeping the planet from overheating in the next decade. Since my article came out, the British government has released a report estimating that the economic cost of global warming will exceed the combined impact of both world wars and the Great Depression of the 1930s. So far, there is precious little sign of our communities coming together to meet this challenge—politically, economically, culturally. Which doesn't prove Smith—or even Boudreaux—wrong. Just incomplete.

And I thank Tibor Machan for alerting me to my letter's appearance in TNYRB -- a fact that prompts me to share with you this wonderful recent op-ed by Tibor.