Category: Economics

Car insurers are charging more in minority neighborhoods as per Pro Publica investigation.

ProPublica has a major investigative analysis where they conclude that Minority Neighborhoods Pay Higher Car Insurance Premiums Than White Areas With the Same Risk

ProPublica bought data on average damage claims in white and non-white neighborhoods and compared them with the rates insurance companies are charging in these neighborhoods. They consistently find that auto insurers charge more in non-white neighborhoods even when average loss rates per vehicle are lower. To remove variations based on driving records, age etc. They focused on a mythical 30 year old woman with a good driving record and one four states, California, Illinois, Texas and Missouri.

The analysis is quite thorough, though they are working with industry wide data since insurance companies won’t release their own loss rates broken down by neighborhood. The report is quite damning. Insurance companies are bound by various state regulations that prohibit discrimination and require pricing to reflect risk.

OTIS NASH WORKS SIX DAYS A WEEK AT TWO JOBS, as a security guard and a pest control technician, but still struggles to make the $190.69 monthly Geico car insurance payment for his 2012 Honda Civic LX.

“I’m on the edge of homelessness,” said Nash, a 26-year-old Chicagoan who supports his wife and 7-year-old daughter. But “without a car, I can’t get to work, and then I can’t pay my rent.”

Across town, Ryan Hedges has a similar insurance policy with Geico. Both drivers receive a good driver discount from the company.

Yet Hedges, who is a 34-year-old advertising executive, pays only $54.67 a month to insure his 2015 Audi Q5 Quattro sports utility vehicle. Nash pays almost four times as much as Hedges even though his run-down neighborhood, East Garfield Park, with its vacant lots and high crime rate, is actually safer from an auto insurance perspective than Hedges’ fancier Lake View neighborhood near Wrigley Field.

— Pro Publica

Most insurance companies refused to respond to their requests. Some have responded with “we don’t discriminate based on race” boilerplate that does not address the specific issues around rating setting algorithms that the article raises. Some of the state insurance regulators and insurers pushed back on ProPublica’s methodology claiming ProPublica’s dataset is incomplete and doesn’t accurately reflect loss rates. Of course, insurers also refuse to release more complete data, or make it available for analysis, so there is no way to validate their claims.

They could release the data to independent researchers to exonerate themselves, but haven’t offered to do so as yet. The industry has a long history of covering up redlining practices. My own take is that Pro Publica’s methodology is reasonable, and they’ve identified a very strong pattern that requires further investigation.

ACTION: So what should you do if your concerned about this? There are three actions you can take.

  1. Call your insurance company, ask to speak with a supervisor and ask to provide ProPublica with a specific response to this article that provides details on their pricing algorithm. Tell them you will not be satisfied with boiler-plate, non-quantitative legalese that states “we don’t discriminate”.
  2. Call the state insurance commissioner. If you live in one of the states ProPublica investigated, their websites/numbers are below. All of them have consumer feedback hotlines and e-mails:
    1. California Department of Insurance: 1-800-927-4357 (@CDINews)
    2. Texas Department of Insurance: 1-800-252-3439 (@TexasTDI)
    3. Illinois Department of Insurance: 1-866-445-5364
    4. Missouri Department of Insurance: 1-573-751-4126 (@MissouriDIFP)
  3. Write to your representative in Congress and ask that they investigate this, especially if they are on the Housing and Insurance committee.

And please go read the entire article which also covers the history of redlining in the insurance industry, and the extensive efforts insurance companies and banks went through to cover up redlining and withhold data from investigators. ProPublica interviewed black insurance agents who related older practices that included denying coverage entirely in minority neighborhoods (redlining), to dissuading agents from working in black neighborhoods. They also descrieb the various excuses insurers have used to mask redlining practices. Thurgood Marshall was denied car insurance by Travellers because they said he lived in a “congested” area (Harlem). What are they odds they issued insurance at competitive rates on the Upper East Side, which is as “congested”? The NAACP and others advocated for the passage of anti-discrimination laws through the 40s and 50s:

most states passed laws stating “rates should not be inadequate, excessive or unfairly discriminatory.” The legislation defines discrimination as “price differentials” that “fail to reflect equitably the differences in expected losses and expenses.”

Of course, the laws didn’t immediately stop discrimination. In a thorough examination of MetLife’s history released in 2002, New York state insurance regulators catalogued all of the ways that the company discriminated against black applicants for life insurance — dating back to the 1880s when it refused to insure them at all, to the first half of the 20th century when it required minorities to submit to additional medical exams and sold them substandard plans.

In the 1960s, as insurers stopped asking applicants to declare their race, MetLife began dividing cities into areas. In minority areas, applicants were subject to more stringent criteria, according to the report. In 2002, MetLife agreed to pay as much as $160 million to compensate minorities who were sold substandard policies.

One plausible explanation for higher prices is “price optimization” algorithms which seek to maximize profits by predicting which consumers are less apt to shop around and quote them higher rates.

— @subirgrewal

China parades “Carrier Killer” missile, sends naval fleet to Alaska during Obama’s visit.

China held an enormous military parade today to mark the 70th anniversary of the end of the second World War. Hundreds of jets, ballistic missiles, tanks and thousands of troops participated.

Markets are closed in China today and tomorrow, while Hong Kong will be open on Friday. On Wednesday, Chinese markets were down more than 4%, but came back to close about flat. Many observers assumed this was because state entities had been told to buy ahead of the big military parade.

Putin and Ban-Ki Moon were in attendance at the parade, most other foreign heads of government declined to attend.

I’m sure the folks with military chops will have more to say about this, but here’s the FT:China unveils ‘Guam Express’ advanced anti-ship missile

Analysts who had been expecting to catch the first public glimpse of the DF-21D “carrier-killer” missile were not disappointed. The missile — for which there is no reliable defence — has been in development since 2011. Its unveiling on Thursday ended weeks of suspense among the global army of specialists who track Beijing’s defence technology breakthroughs.

“While an ASBM [Anti-Ship Ballistic Missile] version of the DF-26 was predictable, that it is already a deployed system is quite a shock,” said Rick Fisher, Senior Fellow at the International Assessment and Strategy Center in Washington.

The longer range of the DF-26 — the DF-21D can only reach 1,500km — means it is capable of reaching the so-called “second island chain” in the western Pacific Ocean, all the way to the US base on Guam.

The missiles are clearly intended to threaten aircraft carriers, making them less effective (cough, useless) as force projection tools. Presumably, someone in the US military knows this and is hard at work on massive submarine drone-carriers.

Internestingly, Xi also announced that China would be reducing it’s standing army from 2.3 million to 2 million.

A number of news agencies reported that a fleet of Chinese naval ships was spotted in international waters off the coast of Alaska during Obama’s visit.

Pentagon spokesman Captain Jeff Davis said it was the first time the United States had seen Chinese navy ships in the Bering Sea.

Academia responds to this year’s “econ nobel”

So it seems numerous Economists are scratching their heads about one of the winners of the “econ nobel”.  Some grad students are doing much worse (anonymously of course).  The Freakonomics blog sort of suggested this would happen, and there are a couple of good posts on Elinor Ostrom and Oliver Williamson, at Marginal Revolution, Austrian Economists, Charter Cities and Vernon Smith.  The Economist has a good overview, Glaeser wrote a good blog post in the NYT, and the WSJ has good coverage as well.

The work Ostrom and Williamson have done is really interesting, and far more so than simplistic attempts to apply math to small data-sets from markets (here’s a non-naive one).  My own take on the “Why Now” debate is that the selection committee chose to highlight work they thought would be relevant during the Copenhagen round of negotiations for a new climate change treaty.  Of course, it didn’t hurt that most of the mainstream economics establishment is in the dog-house after two or three market bubbles have burst.

Capitalism, Socialism and Democracy

Review of “Capitalism, Socialism and Democracy“, Joseph A. Schumpeter;
Harper Torchbooks, 1976; ISBN: 0061330086

The man of system… seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard.  He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.  If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful.  If they are opposite or different, the game will go on miserably and the society must be at all times in the highest degree of disorder.

Adam Smith: The Theory of Moral Sentiments, Part 6, Chapter 2.

Schumpeter is of course aware of this argument and acknowledges its validity, yet the kind of society he conceives in “Capitalism, Socialism and Democracy” will not, he predicts, have to content with any such difficulties.  This is of course easily demonstrated in Schumpeter’s taxis.  The socialist engine is clearly much more conducive to promoting authoritarian discipline, and this is, for Schumpeter, one of its great merits.  Yet the valuation of a command economy is one of the many claims Schumpeter makes that are questionable.

Schumpeter goes to great pains to demonstrate to us the great efficiency of the capitalist system.  He is entirely convinced that Capitalism is the sole explanation for us being where we are.  With his characteristic candidness he dismisses all arguments that fail to bestow laurels on Capitalism.  Yet beginning from this conviction, Schumpeter goes on to indulge in a socio/psychological analysis and finally tells us that

“… the ever-rising standards of life and particularly the leisure that modern capitalism provides for the fully employed workman… well, there is no need for me to finish the sentence or to elaborate one of the tritest, oldest and most stodgy of all arguments which  unfortunately is but too true.  Secular improvement that is taken for granted and coupled with individual insecurity that is acutely resented is of course the best recipe for breeding social unrest.”[pg. 145]

So, beginning with an acute analysis of Marx and a piercing critique of Marxist economics, Schumpeter finally declares the Marxist prophecy to be true.

It would be quite futile to argue against any such theory, and to an extent the rest of this tract is formulated by this pivotal statement. Schumpeter has reconciled himself with the inevitability of an increasing demand for Socialism, and as he himself notes this is because “Political criticism cannot be met effectively by rational argument.”[pg. 144]  As the book progresses however, Schumpeter modifies his stance somewhat and we find various defences of Socialism that come rather unexpectedly after the first two sections of the book.  This may be simply an attempt by an eternal optimist to see a half-full glass where there is nothing at all, but this is the portion of this tract that needs to be looked at most closely.

If there is one thing Schumpeter cannot be accused of, it is lack of thoroughness.  He has challenged almost all, and answered many, criticisms of the socialist schema in this rather wide ranging book.  Yet there are a few that he has shrugged off rather flippantly and it is here that we must focus our attention.  Along with all the other dismissals that Schumpeter hands out to economists and social scientists of all persuasions, he has answered the Hayekian critique in a few sentences [185], and Mises’s reservations concerning the socialist order with equal brevity [172-3].  Schumpeter’s responses do not do justice to the Austrian critique.

Unanswered questions

Schumpeter details an elaborate plan involving vouchers and price-fixing which a socialist state could adopt in order to make distribution a “distinct operation” that “in logic at least, is completely severed from production.” [173]  Schumpeter then goes on to claim that though this separation may become a determining factor as far as the society’s attitudes are concerned, it is completely arbitrary from the economic standpoint.  By separating distribution and production, however, Schumpeter’s hypothetical socialist state is forced to find a replacement for the price system that will convey information regarding the market to those making production decisions.  The tool that is readily available is of course an efficient bureaucracy infused with an adequate amount of espirit de corps.  Schumpeter fails to realize however that a bureaucracy cannot but be less responsive than the price system.  Renouncing the market price system entails giving up the most effective information dispersal mechanism we have chanced upon.  Despite his claims to the contrary [185], this bureaucracy will not function as efficiently or rationally as the market does.  Again contrary to Schumpeter’s expectations, such a bureaucracy will not require less intelligent managers than a modern capitalist enterprise; at worst it would require omnipotent beings, and at best those with very different thinking capacities.  Schumpeter fails to tackle the problem of gathering particular information for such a bureaucracy to process, and with rather irritating confidence declares that certain macro-economic variables, and other production data would suffice.  With surprising naiivete, Schumpeter assures us that it would be possible to set up a system of incentives to ensure that the bureaucracy makes the right decisions.  Of course this only makes us ask the question of a higher authority, and in the socialist schema there is always a higher authority.  So we finally have to put this question to those on the top. What are your criteria for making decisions?  The answer can only be that there are no criteria, that there are no laws, no rules, that all decisions are made arbitrarily as the “needs of the moment” dictate.  So much is implied in the Mises-Hayek doctrine.

Of course it is rather easy to see where Schumpeter has derived his vision of the “socialist engine” as a big enterprise from.  After all it with St. Simon that the imagery of the “one workshop” originated [F. A. Hayek, The Counter-Revolution of Science, pg. 121].  (Curiously, this is the one figure Schumpeter fails to denegrate, treats with positive veneration [307] and goes to the lengths of adopting an apologetic tone.)  Yet Schumpeter can hardly, at this juncture, defend this concept solely on the basis of its origins and he does not.  Not
surprisingly, Schumpeter has another surprise in store for us.  In perfect harmony with the refined Marxist prophecy Schumpeter declares that the capitalist system has itself created an environment where individuals are being trained to accept the all-encompassing bureaucracy.  Big business becomes for Schumpeter, the progenitor of the state economy. Ignoring all the problems such a claim presents, (the promiscuity of small businesses in new and emerging technologies, the phenomenon of consultants to provide small enterprises with the expertise they lack, the re-emergence of the self-employed entrepreneur in all fields…) it is rather amusing that Schumpeter informs us, countering Marx, of the white collar workers resistance to socialization.  The driving force behind this almost unanimous clamour for the “socialization of the economy” is Schumpeter’s (and in his view society’s) thirst for stability.  Writing in the post-depression moment, Schumpeter has perhaps been greatly shaken by, what appears to him to be, the naturally catastrophic undulations of the capitalist structure.  So Schumpeter opts for a system that places direct control in the hands of a few authorities, and by his thinking, consequently involves less arbitrariness, more “rationality”, less “creative destruction” and more stability.  The irony of it all is that Schumpeter is forced to acknowledge the need for regular changes, or repairs, to be undertaken on the socialist engine and (considering the bureaucratic aversion towards change in the absence of a direct threat to its own survival) this can only increase the uncertainty and friction he wants so much to avoid.

Even if we do accept that socialism might provide us with more stability, it becomes necessary to ask: At what cost?  Interestingly, Schumpeter has reversed Mises’ argument somewhat and in a rather fiery response to Keynesian economics and other “half-way” socialist measures, condemns them as mere platitudes that will only serve to delay the inevitable socialization of society and must be opposed by all true socialists.

But the question remains; at what cost?  Quite candidly, Schumpeter acknowledges that democracy becomes dispensable in a socialist environment.  This argument is preceded by a rather incisive analysis of what democracy is commonly understood to be and its own inherent limitations.  Yet, after concluding with this analysis Schumpeter does acknowledge that any form of democracy is quite incompatible with full-fledged socialism.  Once we are done with destroying this cherished myth, Schumpeter goes on to applaud the virtues of the socialist engine embodied in its ability to “impose hardships” [210], “eradicate the bourgeois separation of powers”, “empower social admonishment” [215], “insert the stock of the bourgeois extraction into its proper place within that machine” [207].  Sadly, Schumpeter seems to have rationalized the loss of individual freedom this would entail.  Paradoxically, he appears to be very concerned about rights abuses in Russia, yet even this concern is qualified by an elaboration on the uniqueness of the Russian situation, in that Russia was not a fully-evolved capitalist economy on the eve of the Bolshevik revolution.  None of this detracts however, from the fact that Schumpeter does not protest the subjection of the individual in the interests of “society”.  Rather, he would go as far as to suggest that such subjection of the individual is rational and desireable in that it enables society to harness the abilities of each individual more effectively.  The validity of that claim is highly questionable.

Despite all the reservations one may have about the thesis presented in the book, it is almost impossible to refuse to acknowledge Schumpeter’s thoroughness.  This book is a quite comprehensive discourse on Socialism, and one can hardly accuse Schumpeter of setting his sights too low.  It must also be said that the book is a delight to read, if only to taste Schumpeter’s irreverence.

The piece was written in Fall 1995 as an assignment in Prof. Kirzner’s
course on the “Foundations of Capitalism”.

Hayek’s The Road to Serfdom

The page numbers refer to the Fiftieth Anniversary Edition, University of Chicago Press; 1994; ISBN: 0226320618.

The Road to Serfdom

In the original introduction to “The Road to Serfdom“, Hayek describes this book as a “pamphlet”, which he wrote in his spare time. Yet as Hayek himself was aware much later, this book contained the gist of the argument to which he was to devote the rest of his life. “The Road to Serfdom” deals with so much material that it would be futile to attempt a review of the book in five pages, I can at most enumerate its most striking features and try to string them together in a semblance of order.

Order seems like a good place to begin. Many years after “The Road to Serfdom” was published, Hayek wrote the first volume of “Law, Legislation and Liberty” and gave it the title “Rules and Order”. The concept of the rule of law remains central to Hayek’s later work, and his emphasis on this institution is apparent in “The Road to Serfdom”. Hayek is convinced that the rules of the game cannot be arbitrary if individuals are to be able to function within a working market order. Though circumstances are constantly changing, the entities within any structure must be aware of limitations on other players if they are to be capable of forming plans. For Hayek these limitations are essentially restrictions on the powers of government to coerce specific individuals in order to achieve a particular outcome. Hayek contends that if we permit the state to invade the individual’s private sphere “in the interest of society”, the incentives to engage in market activity will largely disappear.

This argument that the rule of law serves as a means to facilitate the formation of plans which individuals can attempt to realize in the market, is supplemented by Hayek’s understanding of the nature of arbitrary power. Hayek does not fail to remind us of the dangers inherent in a structure that relies on the use of arbitrary power to achieve broadly defined objectives. Under a system where “society’s interests” are represented by the state, and where these interests take precedence over individual rights, we can be sure that these objectives will soon be perverted and the powers conferred on the state used to serve ends that they were not intended to serve. In Hayek’s own words, in a situation where the state is expected to plan out and solve the problems of the economic sphere, “As the coercive power of the state will alone decide who is to have what, the only power worth having will be a share in the exercise of the directing power” [pg. 92, F. A. Hayek, The Road to Serfdom, 1994]. Since it will often be necessary to exercise this power ruthlessly, Hayek believes that only those who are capable of using brute force shall be appointed to or attain positions of power, the gentler amongst the population would tend to drift away from posts where the use of force would be necessary. We can see how in replacing the dynamic of unaligned forces that constitute the market with a strict hierarchy it becomes necessary that the hierarchy have a ruler. Thus Hayek’s conclusion (and that of many socialists) that such a structure would of necessity turn into a totalitarian order.

Unlike the situation in a free market, a consistently planned order would force us to adhere to a common set of values. Whereas the market is capable of serving the needs and desires of numerous individuals by a process that achieves a relative ordering of these values with the aid of the price system, an enforced order would force us to choose “whether it shall be we who decide what is more, and what is less important for us, or whether this is to be decided by the planner” [pg. 100]. Thus the individual effectively abrogates all right to self-determination. If all actions are intended to serve one set of purposes, it is easy to see how the process of determining these ends constitutes the complete loss of individual liberty. Hayek is well aware that the degree of concurrence towards desirable ends that such a system requires simply does not exist. This is why we are warned of relying on the democratic procedure to guard against a deterioration to a totalitarian order. Once it has been demonstrated that such a system cannot function if it requires the approval of a large proportion of the population, the need for such approval will itself be questioned.

Since Hayek ascribes to the Mengerian notion that “civilization advances by extending the number of important operations we an perform without thinking about them” [pg 87, The Counter-revolution of Science, quote from A. N. Whitehead], a planned economy seems to him a step back as far as solving the “economic problem” is concerned. Since we would by opting for a planned economy, be refusing the services of the price system as a tool to convey pertinent information in a concise form, a planned economy would involve a degree of complexity that cannot perhaps be comprehended or abstracted by the human mind. In a mercurial environment –which the economic sphere is, if only because of our constantly shifting tastes and desires– it is essential that responses be quick and effective. Yet by making economic decisions on a large scale subject to conscious thought, indeed by giving such movements the character of a decision, destroying the only institutions capable of producing such responses. As Prof. Boettke notes in another essay on this book “rather than spontaneous adaptation” such an order ” requires conscious adaptation, and there are epistemological limits to this procedure”. As always Hayek remains aware of the sort of effect an imposed economic order will have on our understanding of our needs, how these are to be satisfied, and the very concept of justice itself. The market process Hayek believes is highly “impersonal”, yet an imposed order cannot but recognize the differences between individuals and treat them in different ways. In such circumstances it is highly likely that an individual’s dissatisfaction with her/his position will be channeled into attempts to improve that position by petitioning the state. If such attempts are unsuccessful however, it is easy to see how a violent conflict might arise between the individual and the authorities, or even among groups that have alienated themselves from one another. As Hayek himself stresses “Although competition and justice may have little else in common, it is as much a commendation of competition as it is of justice that it is no respecter of persons”.

“The Road to Serfdom” may appear to some as a prophetic text. Indeed Hayek’s convictions are portrayed with such strength that it is easy to believe Hayek is outlining a sequence of developments that is inevitable. Yet this book is not a prophecy, nor is it a theory of history and the nation-state. It is however an analysis of the sort of institutions that might develop in an environment where the individual is not free to choose. As such it demonstrates tendencies, not immutable consequences. After all, as Hayek himself said “if we can regain the belief in the power of ideas which was the mark of liberalism at its best, the battle is not lost” [The Intellectuals and Socialism].

This paper was written in Fall 1995 for Prof. Israel Kirzner’s class
“Foundations of Capitalism”. One grammatical error has been
corrected.

Ludwig von Mises, “SOCIALISM: An Economic and Sociological analysis”

Ludwig von Mises, “SOCIALISM: An Economic and Sociological analysis“; Yale University Press, New Haven; 1962; translated by J. Kahane; LCCN: 51009080; ISBN: 0913966620 (1981 edition)

 

Prices are the cornerstone of the market, they are the rule by which all agents measure value.  This is admittedly a presumption Mises has made before embarking on his analysis of “Socialism”.  Yet it is not an altogether preposterous assumption.  Mises claims that without the assistance of prices one is at sea in the market; it becomes impossible to effect any rational thought process because such processes presuppose the tools necessary for calculation.  Any rational economic process must have some method with which to rank the various means and ends at our disposal, without such an ordering a rational (i.e. one which permits agents to make informed, rational decisions) economic system is inconceivable.  In the price system Mises finds a highly evolved process which distills the various signals received from all agents in the market and determines the value society ascribes to a particular commodity.

With the assistance of the price system, all actors in the market can make decisions that promote the general good and assist in the satisfaction of the desires of individuals.  Guided by their own self-interest, producers and consumers can make decisions that reconcile their subjective values with those of all other individuals.  Prices provide us with an invaluable table of costs that accurately reflects the desires of all other individuals.  Without prices no agent has accurate and succinct data on which to base her decisions, consequently such a system cannot sustain rational behaviour.  Mises’ fundamental critique of Socialism is that with the abolition of private property it will, with the disappearance of the price system, become impossible to calculate.

Unless we are free to bid for products, based on the value we believe they have, the market is unable to arrive at a price for the product. An alternative system, short of one that has direct access to the minds and hearts of all individuals, will not provide us with information that accurately reflects the desires of society.  This is not of course a claim that goods will have different prices under Socialism, non-monetary costs will substitute to make up for under-priced commodities.  Yet a system that relies on long lines and overflowing warehouses as the only signals on which to revise production decisions is wholly inefficient.  Mises argues that Socialism is exactly such a system.

Since no one under a Socialist state will have access to prices it is entirely reasonable to suppose that inaccurate decisions will be made due to lack of appropriate measures of value.  This not only destroys the much vaunted “rationality” of Socialism, it also suggests that a Socialist economy may be unable to perform as well as a Capitalist market system. If we are aware that redistribution of the present wealth of society will not in itself be sufficient to ensure for each individual the standard of living the Socialists promise, it is difficult to see how an economy that is more prone to “persist in error” [Reuven Brenner, “Labyrinths of Prosperity”] can create enough wealth to enhance our individual positions so dramatically.  Mises assures us that the Socialist system is hardly an “improvement” on the Capitalist structure and as such will produce an inferior result.

Once “the fundamental question whether the socialist order of society promises a higher productivity than Capitalism” has been answered in this manner, little remains of the material rationale for socialism.  The Socialist is then forced to evoke other forms of reasoning to support his agenda.  One of these is an appeal to an acquisitive urge that is present among most of us, and which is sparked when we are presented with the opportunity to “take from the rich what is rightly ours”.  Proponents of such actions, quite apart from the fact that they lack any respect or understanding of rights, assume that they can redistribute in such a manner without affecting the total value of the economy’s product.  Such a position fails to comprehend the subtle relationship between production, distribution and consumption.  Yet this is not surprising when we realize that these claims are forwarded by authoritarians who presume to free us from all cares by replacing the capitalist’s “monopoly” over these three functions with their own.  It is clear that any tampering with either of these processes will radically change the end result of an economic process.

Yet any process that fails to acknowledge the nature of the human agent in the economic sphere and fails to create an incentive structure that forces us to weigh the benefits of consumption and saving can hardly be called economic [pg. 458].  After demonstrating the impotency of the socialist scheme in the economic sphere, Mises has to retaliate to the alleged “materialism” of the bourgeoisie.  At this point however, it is rather futile to argue about the merits of poverty and Mises rests his case after drawing various parallels between socialism and a particular interpretation of Christianity.

There are more problems in the discourse on Socialism than would otherwise be imagined.  One of the points Mises highlights, is the apparent ease with which Socialists (and particularly Marx) use words in different ways, imposing on them a variety of contexts and connotations, till the very logic of the argument has been lost in what Mises calls “word-play”.  This happens, Mises argues, in Marx’s writing where the terms rebellion and society are used at different times to mean different things.  It is not clear whether this is done intentionally, to obscure the argument or whether it is accidental.  In either case, it is clear that such verbal acrobatics simply make it even more difficult to conduct this discourse since one is never completely certain of the arguments advanced by others. These issues become crucial in Hayek, where the very word “Law” is imbibed with a halo that the legislature attempts to acquire by cloaking legislative decisions in an exterior of legality.  A similar conception of language is at work in Hayek’s “The mirage of Social Justice”, where he claims that the term “justice” is abused when employed in referring to an outcome that is not generated by an authority, but which is the outcome of an impersonal process.  Oddly, Mises does not seem to have stressed this mode of thought, and claims that “on this [the relative justice of the outcome produced by these two orders] point science can give no judgement” [pg. 273, also pg 436].  Yet, this has to be reconciled with Mises’ insight that “one is not permitted to ask whether a particular price is justified or not” [pg. 435].  The issue becomes a little clearer when we notice the value Mises has ascribed to the term “science”, and why he would wish to keep away from issues that could “only be evaluated subjectively” [pg. 436], or those that appear to require the application of a particular value structure.

Perhaps what comes out most clearly in this book, is that the structures described in Socialist literature cannot be accepted as they are.  As such these visions of Socialist societies are Utopias (ou + topos, no place), in the sense that they prophecy circumstances that Economic analysis tells us cannot be sustained with the institutions under consideration.  These visions are imaginary places because their structure fails to take into account the nature of the human animal and the way in which we make decisions.  We cannot reconcile Socialist Utopia with our Economic and Sociological knowledge of the nature of human action.

This paper was written for Prof. Kirzner’s class “The Foundations of Capitalism”, during Fall 1995.

Free Market Environmentalism

Free Market Environmentalism, Terry L. Anderson & Donald R. Leal;
Pacific Research Institute for Public Policy, 1991; ISBN: 0936488336

“The question is not whether the right solution has been achieved but whether the relevant trade-offs are being considered in the process.” [pg. 5]

Free Market Environmentalism is a book about how best to assure that decision makers take into account the costs and benefits of their decisions and actions.  The question is easily answered when we speak of private property, since the structure of private property is such that each individual has her own sphere of influence within which most costs and benefits are contained.  The owner can claim compensation for any damage done to her property by anyone else and reaps the rewards of good resource-management.  In the environmental sphere, this problem has been complicated by a mode of thought that holds environmental resources are only appropriately handled when responsibility for them is turned over to the state or its agencies.  Since it then becomes unclear as to who owns these resources, and how liabilities and benefits are to be assigned, a problem that is solved inherently by the system of private property we are now forced to find other solutions for.

With communal property comes the tragedy of the commons as each individual attempts to acquire as much of the resource as possible since others are out to do the same.  This inevitably leads to over-utilization of the particular resource and a disincentive to save for the future.  This scenario is applicable today to public fishing grounds and with subsidised water for farmers.  In both cases we see that rational agents decide to use/acquire as much of the resource as they can.  In the first case this is because the first person to harvest a fishing ground has a much lower marginal cost than those who come later.  In the case of water, we see farmers “over-utilizing” water because they do not face the real resource cost of doing so.  In both cases the solution is to attempt to ensure that all relevant costs are taken into consideration before any decision as to resource-utilization is arrived at.  Anderson and Leal suggest that in the case of common fishing grounds the appropriate solution would be to place the water-body in private hands so that both recreational and commercial fishermen have to pay the real costs of their decisions.  The present system (of common fishing rights) leads to an inefficient outcome since there is a tendency to over fish as the resource is publicly owned and no costs are imposed for using it.

The political process is not well adapted to resolve such issues.  Special interest groups are apt to pursue extreme ends and expend resources on lobbying political decision makers to choose one or the other option. Interest groups are generally not willing to consider median solutions which take into account the value of alternative ends for which a resource can be used (presuming such values can be calculated in the absence of a functioning market for them).  What ends up happening, as Anderson and Leal demonstrate, is that interest groups opposed to one another are locked in a zero-sum game.  The result of which must leave one player standing out in the rain.  This is an endemic feature of the political process where “political resource managers make trade-offs in terms of political currencies measured in terms of special interest support; at best this unit of account provides imprecise measures of the subjective values of citizens.” [pg. 16] Unlike the price system, a political resource management mechanism must rely on artificially generated abstractions to approximate the demand for various commodities and services.  The presence of externalities, transaction costs and dispersed, unorganized consumers makes the political market for environmental goods exceptionally imperfect. Anderson and Leal attempt to question the need for a system that is incapable of moving towards an efficient outcome when other alternatives present themselves.

An objection often raised against a market based environmental policy is that such markets do not exist.  The reason such markets do not exist is precisely because they have not been permitted to develop.  As the authors point out, when individuals face incentives to protect and realize the value of their property, tools to facilitate the demarcation and transfer of such property will evolve.  Since owners of private property find it in their self-interest to use means that help them establish control over their property, incentives are created for other agents to develop technology that would fulfill this demand.  Creative solutions are forthcoming when opportunities to market them profitably exist.

The authors are aware that the market solution still relies on the government to define and enforce property rights. [pg. 166] Nor do they claim that their proposals are a perfect solution.  “Property rights are costly to define and enforce, but these costs are a function of the value of the resource in question and the technology” [pg. 167] There is no reason to believe that a system of well-defined property rights will result in an “optimal” use of environmental resources by any or all standards.  That said, there is reason to believe that a structure which permits resource owners (not far-removed proxies) to make decisions based on their own values and market conditions would result in a more efficient use of resources than a system which does not have the benefit of the information conveyed by prices and knowledge of particular circumstances. It is by no means clear that politically appointed managers will be impartial or disinterested agents of society.  In fact, there is reason to believe that they would be very interested in promoting certain evaluations of the state of environmental resources, and the general concern for their future, if only to secure large, discretionary budgets for their departments.  At the other end of the spectrum, there is the concern that government appointed managers may be too disinterested, to the extent of being blind to theft of resources under their very noses.

Since we are dealing with issues that are still being debated in scientific circles, it is doubly difficult to judge, post-facto, whether the correct decision was made by an agent of the government or whether all relevant details were taken into consideration. Unless decision makers are faced with the consequences of their actions, i.e. only when they receive “negative feedback”, will they be prompted to take into consideration the effects of their actions.  Making sure that resource managers are also resource owners has been found to be the most effective way to promote the responsible use of all sorts of resources.  In the environmental sphere this can only be accomplished when specific resources are owned by individual entities.

That government agencies are not always the best executors of “society’s wishes” has been demonstrated a number of times, and is in part caused by the nature of the political process.  That individuals or organizations are in a better position to exercise their property rights over resources, and put them to their most valued uses is also quite clear.  What the authors have shown is that common objections to privatizing natural resources are often based on unsound reasoning and a willing ignorance of history.  The position advanced by Anderson and Leal deserves to be examined more closely, and it is clear that market solutions are being applied in a variety of environments with remarkable success.  Perhaps the most telling ratification of this stance is made by conservation groups that decide to put their lands to a variety of uses. Conservation groups are willing to evaluate the various trade-offs to be made between preserving environmental conditions in the region and the broader scope for conservation afforded by putting environmental resources to commercial use when they own the resource in question.  They are less amenable to compromise when the resource is publicly owned.  The same applies to commercial operators harnessing the recreational value of a particular natural resource.