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David Brooks echoes Hayek’s warnings on ‘Market Morals’ in an observant piece on our crumbling order

December 2nd, 2011 No comments

David Brooks has an excellent op-ed piece in the December 1 New York Times that speaks to the very worrisome and ongoing destruction of crucial social capital – what Hayek called “market morals“, and what Brooks calls the “spirit of enterprise”.

I excerpt liberally from the op-ed (emphasis added):

Why are nations like Germany and the U.S. rich? It’s not primarily because they possess natural resources — many nations have those. It’s primarily because of habits, values and social capital.

It’s because many people in these countries, as Arthur Brooks of the American Enterprise Institute has noted, believe in a simple moral formula: effort should lead to reward as often as possible.

People who work hard and play by the rules should have a fair shot at prosperity. Money should go to people on the basis of merit and enterprise. Self-control should be rewarded while laziness and self-indulgence should not. Community institutions should nurture responsibility and fairness.

This ethos is not an immutable genetic property, which can blithely be taken for granted. It’s a precious social construct, which can be undermined and degraded.

Right now, this ethos is being undermined from all directions. People see lobbyists diverting money on the basis of connections; they see traders making millions off of short-term manipulations; they see governments stealing money from future generations to reward current voters.

The result is a crisis of legitimacy. The game is rigged. Social trust shrivels. Effort is no longer worth it. The prosperity machine winds down.

Yet the assault on these values continues, especially in Europe.

Over the past few decades, several European nations, like Germany and the Netherlands, have played by the rules and practiced good governance. They have lived within their means, undertaken painful reforms, enhanced their competitiveness and reinforced good values. Now they are being brutally browbeaten for not wanting to bail out nations like Greece, Italy and Spain, which did not do these things, which instead borrowed huge amounts of money that they are choosing not to repay.

The estimated costs of these bailouts vary enormously and may end up being greater than the cost of German reparations after World War I. Germans are being browbeaten for not wanting to bail out Greece, where even today many people are still not willing to pay their taxes. They are being browbeaten for not wanting to bail out Italy, where future growth prospects are uncertain.

They are being asked to bail out nations with vast public sectors and horrible demographics. They are being asked to paper over fundamental economic problems with a mountain of currency.

It’s true that Germans benefited enormously from the euro zone and the southern European bubble, and that German and French banks are far from blameless. It’s true that the consequences for the world would be calamitous if the euro zone cracked up. It’s true that, in a crisis, you do things you wouldn’t otherwise do; you do things that violate your everyday values.

But our sympathy should be with the German people. They are not behaving selfishly by insisting on structural reforms in exchange for bailouts. They are not imprisoned by some rigid ideology. They are not besotted with some semi-senile Weimar superstition about rampant inflation. They are defending the values, habits and social contract upon which the entire prosperity of the West is based.

The scariest thing is that many of the people browbeating the Germans seem to have very little commitment to the effort-reward formula that undergirds capitalism. On the one hand, there are the technicians who are oblivious to values. For them anything that can’t be counted and modeled is a primitive irrelevancy. On the other hand, there are people who see the European crisis through the prism of some cosmic class war. What matters is not how people conduct themselves, but whether they are a have or a have-not. The burden of proof is against the haves. The benefit of the doubt is with the have-nots. Any resistance to redistribution is greeted with outrage.

The real lesson from financial crises is that, at the pit of the crisis, you do what you have to do. You bail out the banks. You bail out the weak European governments. But, at the same time, you lock in policies that reinforce the fundamental link between effort and reward. And, as soon as the crisis passes, you move to repair the legitimacy of the system.

That didn’t happen after the American financial crisis of 2008. The people who caused the crisis were never held responsible. There never was an exit strategy to unwind the gigantic debt buildup. The structural problems plaguing the economy remain unaddressed. As a result, the United States suffers from a horrible crisis of trust that is slowing growth, restricting government action and sending our politics off in strange directions.

Europe’s challenge is not only to avert a financial meltdown but to do it in a way that doesn’t poison the seedbed of prosperity. Which values will be rewarded and reinforced? Will it be effort, productivity and self-discipline? Or will it be bad governance, now and forever?

Brooks’ insights are incomplete; he fails to note how government-establish deposit insurance underwrote and capital standards (most government bonds enjoy a 0% risk-weighting under BIS standards) encouraged the irresponsibility of German and other EU banks in lending to Greek and other national governments in the first place.

Right now, the Japanese government only funds 40-45% of its budget from taxes, and so is quietly looting its citizens’ banking, pension and insurance assets for the shortfall. US citizens are more fortunate, because our dollar hegemony has meant that our government has largely been looting foreign bond purchasers and their customers instead.

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Clear-sighted myopia: prominent libertarians quoting Ayn Rand miss that industry itself undermines Hayek's "market morals"

May 11th, 2011 No comments

Rob Bradley has up a post at the fossil-fuel cheering “free-market” Master Resource energy blog on April 25 that shows Ayn Rand’s familiarity with the mis-regulation of the energy industry. The post itself is fairly apt, except that while it paints the energy producers as victims of erratic government regulations it ignores those whose health and property were damaged by the energy industry and gives little play to the role of major firms in pushing for and benefitting from regulation.

But the chief point I wish to make is that Bradley’s post ends with a quote from Rand that is intended to criticize government but actually resonates because of the statism and poor decision-making of the major industry players themselves: (emphasis added)

There is no “natural” or geological crisis; there is an enormous political one. It is in the nature of a mixed economy that its policies are rationally inexplicable, that there are no identifiable causes, no accountable initiators, no ascertainable villains — and that you are losing your jobs, giving up your automobiles, catching pneumonia in unheated bedrooms, not because some giant evildoers are plotting your destruction, but because some seedy hack wanted an unearned salary, and some crummy professor wanted an undeserved prestige, and some measly shyster wanted a chance to fish in muddy laws, and none of them cared to or could watch the state of the country’s economy, and the sum of such termite aspirations has eaten through the pillars of the structure so that one kick from a sheik was sufficient to make it crumble.

Hundreds of thousands of people’s livelihoods and thousands of businesses have been disrupted along the Gulf Coast and nearby TEPCO’s Fukushima nuclear power plants, and millions of power consumers in and around Tokyo have been and will be affected for several years, not because of “giant evildoers”, but because major energy firms –  protected by government from full liability and with weak shareholder classes – are themselves highly bureaucratized with no clear locus of responsibility, with executives who look out for their own  interests but have no personal responsibility or liability for the damages resulting from lightly considered but materialized risks.

As I noted in March, F.A. Hayek (in an essay that Jeffrey Tucker has since kindly tracked down and made available generally) noted that:

Where previously perhaps only the aristocracy and its servants were strangers to the rules of the market, the growth of large organisations in business, commerce, finance, and ultimately in government, increased the number of people who grew up without being taught the morals of the market which had been developed in the course of the preceding 2,000 years.  …

We are now in the extraordinary situation that, while we live in a world with a large and growing population which can be kept alive thanks only to the prevalence of the market system, the vast majority of people (I do not exaggerate) no longer believes in the market.

It is a crucial question for the future preservation of civilisation and one which must be faced before the arguments of socialism return us to a primitive morality. We must again suppress those innate feelings which have welled up in us once we ceased to learn the taut discipline of the market, before they destroy our capacity to feed the population through the co-ordinating system of the market.

People are losing faith in the market because large energy firms themselves are partially insulated from the market and as a consequence are not fully subject to its “taut discipline” – and, as a result, are making decisions that are highly damaging.

One can rightly protest that such firms are creatures of government and have been cosseted by government, so that government is responsible for skewed decision-making. But pointing this does not address the problem posed by institutionalized moral hazard.

Only reforms that restore responsibility and market discipline will do that. Such reforms should include not simply increasing competition and ending government ownership of resources and oversight of corporate risk-managment, but finding ways to ensure that there are real principals who are incentivized to hold corporate agents accountable. Otherwise, pervasive moral hazard and risk-shifting will persist.

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Are Hayek’s essential "market morals" breaking down? Hmm … Is peace breaking out, or are things getting ugly?

March 30th, 2011 No comments

[Apologies for the weird font sizes – guess I’m too old to figure out the html stuff that creeps in when I cut and paste!]

I wanted to post a few additional and somewhat scattered thoughts I have had relating to the 1986 essay of Hayek that I recently stumbled across, “The Moral Imperative of the Market”.

What morals do we end up with as “market morals” are eroded?  In larger communities, the morals of a cynical or self-deluded selfishness and self-justification, accompanied by growing tribalism, insularity, suspicion, hostility, avarice, prejudice, jingoism and intolerance.

As the market breaks down, so also do market dynamics of broad exchange and sophisticated institutions, and things become each man for himself, finding friend and families to hunker down with, a hardening towards and less concern for others – who indeed may be viewed as either a threat or as fair game.

IOW, it’s the same load of aggressive, selfish and narrowly tribal stuff that once was ESSENTIAL to bands of humans when when we lived in a state of Nature and life was brutish and short, and that I’ve been giving other members of this and other communities grief over ever since I was marooned on these fertile but once hostile shores:

Cooperation comes naturally to man – among those we feel we can trust – but within limits, as so too does suspicion come naturally as to “others” who look like they might pose a threat. In building extended markets, we are always struggling with our predilection to form “Bands of Brothers”. In doing this work, we are always making use of our sophisticated yet at times quite reflexive native endowment.

As I noted a couple years back (you know, in ancient times when Al Gore won the Nobel Peace Prize) in a comment to libertarian science correspondent Ron Bailey at Reason Online:

you forget what evolutionary psychology, Ostrom and Yandle have explained to us so well about how our innate moral sense drives and underpins mankind’s success as a species by enhancing our ability to cooperate and to overcome commons issues.
Ostrom: http://conservationcommons.org/media/document/docu-wyycyz.pdf
Yandle: http://www.fee.org/publications/the-freeman/article.asp?aid=4064

Our long history of developed rules and institutions (informal and formal now overlapping) are based on our moral sense and the effectiveness of these rules depends critically on our moral investment in accepting their legitimacy – witness our views on murder, theft, lying and “not playing by the rules” – and in voluntarily complying with them.

Our moral sense reinforces our judgments about when rules/institutions are not working and the need to develop new ones in response to changing circumstances and new problems.  When we see a problem that we think requires change, it is unavoidable that we respond to the status quo, the behavior of people within it and the need for change with a moral sense. 

This is simply a part of our evolutionary endowment.  (Of course, other parts of our endowment accentuate our suspicions of smooth talkers and help us catch free riders and looters and to guard against threats from outsiders.)

Let all of us here at LvMI (and any strangers!) please be aware of our predilections, while we continue with the hard work of building strong, vibrant and open free societies.

I know, comrades, that you’re all dying for links to some of my relevant posts, which I certainly won’t begrudge to you :

Snicker-snack! We hold these truths to be self-evident: That WE’re right, and THEY are stoopid, deluded, evil AND cunning, out to destroy all that is good and holy

Bill Gates, Roger Pielke, Avatar & the Climate (of distrust); or, Can we move from a tribal questioning of motives to win-win policies?

I Can’t Stand Cant, Or, LeBron James and our Collectivist Scorn of “Collectivists”

Nick Kristof on politics: why we conclude that I’m right, and you’re evil (with a handy-dandy listing of a number of earlier fun posts!)

And a clip of a comment I made to Stephan Kinsella a little while back:

Austrians seem to act as if the love of reason requires a surrender of it in favor of the comforting distraction of a self-satisfied echo chamber of a type that would warm the cockles of any like-minded religious “alarmist” cult.

Mind Games: Bret Stephens of The Wall Street Journal panders to “skeptics” by abjuring science and declaring himself an expert on “mass neurosis”

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Hayek on the grim threat posed by the erosion of “market morals”; Who, exactly, is leading us down the primrose Road to Serfdom?

March 27th, 2011 No comments

I recently ran across excerpts to what looks like an interesting essay by F.A. Hayek; I copy them below for the benefit of interested readers.  (I could not find a  complete or.pdf version.) [Update: At my request, Jeffrey Tucker kindly tracked down the rest of this essay and put it up here.][Links may be broken due to migration of blog.]

I ask readers to ponder the relevance of Hayek’s remarks in light of the huge expansion of government and of manipulations by the Fed, the growth of large and statist “public” corporations whose executives are free from shareholder control (because limited liability incorporation statutes free shareholders from personal concern about risks of injuring others), and of snowballing moral hazard (particularly obvious in connection with our heavily regulated banking sector).

It seems to me that one can as easily lay blame for our current problem as much at the feet of statist corporations and excesses of government – of the sharp elites who take advantage of both – as one can on “socialists” and “envirofascists” who either want to rein in corporations or are looking for what they see as their “fair share” from a now bankrupt government. http://bit.ly/9oBkC7  http://bit.ly/fDoROa

F. A. Hayek, “The Moral Imperative of the Market” (in Martin J. Anderson (ed.) The Unfinished. Agenda: Essays on the Political Economy of Government, 1986)

Emphasis added:

Until 130 or 150 years ago, everybody in what is now the industrialised part of the Western world grew up acquainted with the rules and necessities of what are called commercial or mercantile morals, because everyone worked in a small enterprise where he was equally concerned with, and exposed to, the conduct of others. Whether as master or servant or member of the family, everybody accepted the unavoidable necessity of having to adapt himself to changes in demand, supply and prices in the market-place. A change began to happen in the middle of the last century [1800s]. Where previously perhaps only the aristocracy and its servants were strangers to the rules of the market, the growth of large organisations in business, commerce, finance, and ultimately in government, increased the number of people who grew up without being taught the morals of the market which had been developed in the course of the preceding 2,000 years.

——–

For probably the first time since classical antiquity, an ever-increasing part of the population of the modern industrial state grew up without learning in childhood that it was indispensable to respond as both producer and consumer to all the unpleasant things which the changing market required.

This dichotomy explains the increasing opposition to the market system that has expanded far beyond the specifically socialist parties of the last century. In the course of history almost every step in the development of commercial morals had to be contested against the opposition of moral philosophers and religious teachers – a story well enough known in its outlines. We are now in the extraordinary situation that, while we live in a world with a large and growing population which can be kept alive thanks only to the prevalence of the market system, the vast majority of people (I do not exaggerate) no longer believes in the market.

It is a crucial question for the future preservation of civilisation and one which must be faced before the arguments of socialism return us to a primitive morality. We must again suppress those innate feelings which have welled up in us once we ceased to learn the taut discipline of the market, before they destroy our capacity to feed the population through the co-ordinating system of the market. Otherwise, the collapse of capitalism will ensure that a very large part of the world’s population will die because we cannot feed it.

We can nonetheless demonstrate that unless people are willing to submit to the discipline constituted by commercial morals, our capacity to support any further growth of population other than in the relatively prosperous West, or even to maintain it at its existing numbers, will be destroyed.

Grim words, that loom large these days.

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Why do the best lack passionate intensity, and disapprove of moral disapprobation? Horwitz on the Financial Crisis and Recession

October 28th, 2011 No comments

In a letter to the editor cross-posted to Cafe Hayek on October 23, Steven Horwitz, in responding to a reader who croticizes George Will’s recent column on Elizabeth Warren, challenges “a number of fallacies about the recession and financial crisis”.

In trying to distinguish ‘capitalism’ from the “government intervention and crony corporatism” that Horwitz sees as the cause of our current mess, Howitz seeks to lay blame off on government, while absolving from responsibility the firms that benefitted from the government inverventions:

If all the traffic lights in Watertown were stuck on green, we’d hardly blame the drivers for the ensuing accidents. When government distorts the signals and incentives facing producers and consumers, the blame for the resulting disaster should fall on government not the private sector.

Nonsense. Even if it was government that created signals that mucked up the works, government acted in response to pressure from people who stood to benefit, and we have every right – nay, we OUGHT – to be upset with them, as well as with others who acted to suit themselves, knowing that the downside would be borne by others.

Our outrage is our final line of defense against damaging behavior; we should tune and direct it, not dampen it. More on “Moral suasion” here.

I left the following comment (emphasis and link added; slight edits):

TokyoTom October 26, 2011 at 8:28 am

Let’s face it: our financial sectors is a massive, stinking mess, resulting proximately from rampant moral hazard encouraged by government laws and regulations – chiefly, the deposit insurance that substituted Government and .taxpayers’ pockets for oversight by depositors who no longer considered that they were putting their money at risk.

The central role of ‘government’ does NOT. however, eliminate the responsibility of men and women in various institutions that took advantage of incentives to maximize personal gain while shifting risks and losses to others.

In this, I have to disagree strongly with Steve, who seems to want to hold only ‘Government’ responsible. Emphatically No – to increase responsibility we must not simply restore risk, but also demand better behavior and call out those whose actions are shameful.

The relaxation of leverage standards much discussed above took place only because investment bankers who had gone public – and thus were playing largely with public investors’ capital and not their own – wanted to load up on risk, the better to reap massive profits during the bubble and downloading risks to shareholders (in addition to risks deliberately played off to insured banks, Franie and Freddie, and to other market participants giddied by the bubble).. They all played this game so well that they made billions in bonusses, even as they made their own institutions so opaque that they could no longer measure each other’s counterparty risk and brought each other crashing down. Lehman’s CEO Fuld, who made over $100 million annually in compensation and bonusses in each of his last few years, is just one example.

Those who sought, took advantage of and approved of this nonsense, and then sought and approved of bailouts ALL richly deserve and NEED our strongest condemnation.

None of this “We can’t blame drivers for ‘accidents’ that hurt others, because Government messed up the signals” for me.

 

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Dr. George Reisman and the Curious Case of the Missing Crony Capitalists, or, Moral Blindness Helps Me to See Clearly

October 28th, 2011 No comments

I refer to Dr. Reisman‘s October 21 post at Mises Daily, “In Praise of the Capitalist 1 Percent “. (The good Dr. and I go back a few years, as some of my readers may recall.)

In face of growing economic dislocation and discontent, Dr. Reisman serves up his usual, disappointing fare of portraying powerful (and provident) ‘capitalists’ as the victim of goverment and of the yammering mob. We all just KNOW it’s those with much less wealth who are corrupting government, socializing losses via the banking system and trying to raise barriers of entry that divide markets and limit competition, right?

Sure, the rabble may not well understand how capitalism is SUPPOSED to work, but they’re damned right that it isn’t , in large measure as a result of deliberate gaming and cynical socialization of risk by our so-called ‘capitalists’.

Rather serving up useful insights – or even appropriate outrage – Dr. Reisman is serving up smoke screens to protect those who bear the greatest blame for destroying laissez faire capitalism and Hayek’s essential “market morals”:

Hayek on the grim threat posed by the erosion of “market morals”; Who, exactly, is leading us down the primrose Road to Serfdom?

Those whom Reisman is actually defending are not pure capitalists, acting under laissez faire competition, but largely rapacious and irresponsible CEOs of large, listed companies, who, freed from any control of their erstwhile shareholder ‘owners,’ use government to crush competition, etc.

In effect, Dr. Reisman is defending the very people MOST RESPONSIBLE for DESTROYING laissez faire capitalism. For shame, George!

I left the following comment (edited lightly):

In his capable defense of our non-existent system of laissez faire capitalism, the good Dr. Reisman is curiously blind to the ways in which the ‘capitalists’ he defends are themselves BOTH the primary drivers and beneficiaries of the destruction of capitalism that he rightly lauds.

In Reisman Land, it’s always the powerful and corrupt ‘capitalists’ who are the victims of the relatively powerless hoi polloi.

Even Dr. Reisman’s throwaway references to ill-gotten gains shift focus and responsibility from powerful men ACTING to use government to the black box of government, which acts mysteriously and punishes as much as rewards firms: “government is permitted to depart from a policy of strict laissez-faire and thereby arbitrarily reward or punish firms”.

None is so blind as he who will NOT see. Dr. Reisman appears to be lacking a theory of Human Action, or rather, a theory in which men with money, in order to mitigate the rigors of laissez faire competition or to get easy money from selling goods and services to government, sometimes ACTIVELY coordinate their action with men more directly controlling the levers of government.

Instead, Dr. Reisman only sees the small man – laborers, officer workers, professionals and consumers – avariciously acting to use government to tie down and confiscate the wealth of the rich, noble, and heroic yet powerless capitalist.

Does the good Dr. not see that his capitalists, far from free and responsible men, act through GOVERNMENT-CREATED and licensed “limited liability” entities that are selected precisely because they shield the owners from personal responsibility for the harms their firms cause to others and the public and large? And that the intimate government role, the resulting harms and the lack of personal accountability are the very reasons why the victims then band together to petition government to “do something!”, rather than simply chasing the owners and their servants with pitchforks?

I agree with Dr. Reisman that ongoing events are a morality play writ large. But unfortunately Dr. Reisman (like many people now fed up with rampant crony capitalism who now blame ‘capitalism’ and the 1%) describes it to us in black and white.

Perhaps his mother took his Kodachrome away, but can’t we at least expect some shades of gray?

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The fundamental socialism of capitalism: Elinor Ostrom echoes Hayek in explaining that rules and institutions are a form of social capital

June 9th, 2011 No comments

I hope you’re not wondering just WHO Elinor Ostrom is, but I’ve blogged quite a bit about her.

For those of you who need a reminder, Peter Boettke said the following when this brilliant, hard-working political scientist deservedly won the Nobel Prize in Economics in 2009:

Lin Ostrom is firmly seated in the mainline tradition of economic scholarship from Adam Smith and David Hume to F. A. Hayek and James Buchanan ….. Instead,   she has been a major contributor to public choice economics, new institutional economics, and to our understanding of polycentricity and political economy.

And:

Her presidential address to the APSA summed up her theoretical agenda as “A Behavioral Approach to the Rational Choice Theory of Collective Action.”

She is most deserving of this Nobel, and she has made a unique contribution theoretically and empirically to the study of self-governance. But there is no need to pick a fight where one isn’t there. Her prize fits nicely in a stream of recognitions ANALYTICALLY by the committee to scholars such as Hayek (1974), Buchanan (1986), Coase (1991), North (1993), and V. Smith (2002). These are all scholars within the discipline of economics/political economy that recognize the cognitive limitations of man, and focus analytical effort on institutional analysis.

Lin Ostrom’s contributions come from an analytical framework that grounded in rational choice theory (as if the choosers are human) and builds to an institutional analysis (as if history mattered). The distinction between “rules in form” and “rules in use” means she studies in close detail the social norms that underlie self-governance in the management of resources and the management of social relationships.

It is amazing body of work.

Now for the pitch:

The Gund Institute for Ecological Economics has just posted on YouTube this thought-provoking 38-minute lecture that Ostrom gave in 2006:

 

The Challenge of Building Social Capital in a Sustainable & Desirable Future

 

[View:http://www.youtube.com/watch?v=Bo5Unn3AkVY&feature=youtube_gdata:550:0]

Hmm, you mean even the institutions of “private property” and corporations are forms of social capital, and dependent on shared institutions and even “trust”?

And that such “social capital” might include negative externalities?

Just what the heck IS “property“, then?

And corporations might have negative characteristics?

And indigenous “primitives” might have valuable, adaptive social capital?

And are large corporations as well as “government” responsible for the erosion of Hayek’s “market morals”?

So many questions, and so much distrust eating away at the social capital! …

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Rot at the core: When will Tom Woods and other "Free Market intellectuals" have second thoughts about the state grant of limited liability to shareholders?

March 4th, 2009 3 comments

Tom Woods, in his recent “Another “Free Market” Intellectual Has Second Thoughts” post at the Mises Economics Blog, notes with great disappointment that Richard Posner is about to publish a book that will apparently abandon the free market and call for greater government intervention.

While I share Mr. Wood’s disappointment that Posner and others are not more vigorously defending free markets, I suggested in comments on Mr. Wood’s post that perhaps free market intellectuals are not yet really pulling their own weight in examining and describing the flaws in the market system that contributed to the current financial crisis, or in explaining the types of reforms that would actually be appropriate.  In particular, it seems to me that the role played by the state grant of limited liability to corporate shareholders in facilitating flawed and irresponsible risk-taking by executives and traders, as well as in perversely fuelling a vicious cycle of rent-seeking and further counterproductive regulation, should be much more seriously examined. 

In short, I believe that, as argued by James Glassman and William Nolan in a recent Wall Street Journal op-ed, unless and until owners and executives have “more skin in the game”, we will continue to ride a tiger of selfish risk-shifting, moral hazard, and ever more disruptive government regulation.

I copy below my comments on Tom Wood’s post:

Tom, it’s hard to judge an unpublished book, but I suspect you’re
right to do so. Has Posner given any more solid clues as to where he’s
headed?

However, as it’s clear that things went wrong, I can’t help but
wonder when can we expect to hear more from you and others on what
government factors (besides the Fed, Freddie and Fannie) “fatally
deformed” the financial markets, and laying out a “new, genuinely
free-market paradigm for the economy”. Isn’t there a good book or two
in there from Austrians?

It seems to me that that James Glassman and William Nolan have a key
insight into the type of reforms needed in a WSJ piece that refers to
von Hayek. They argue that “an irresponsible attitude toward risk led
to terrible mistakes in judgment” and conclude that “bankers need more
skin in the game”
. How to move in that direction?  Glassman and Nolan
point to the success of the Brown Brothers Harriman partnership, which
lacks the limited liability feature of modern corporations, and specifically recommend that governments recognize (by less burdensome laws and regulations) that entities like partnerships where owners face unlimited personal liability are more responible risk managers.

As I have argued in a series of posts, starting with my review of
Huebert and Block‘s criticisms of Long
, the state grant of limited
liability to shareholders (in particular the grant vis-a-vis those
injured by corporate acts and involuntary creditors, which is a pure
grant from the state and cannot be contracted for) has led to a number
of perverse results, which can be fairly clearly seen in the financial
crisis:

TT

The sociopathy of not wanting to see the structural roots of “sociopathic” business behavior

April 19th, 2014 No comments

[cross-posted from comments at WBOS FB]

A colloquitor believes business successes are driven by “betrayal, and ruthless sociopathy. That is how it works, and that surprisingly is what seems to lead to dominance and success in markets – or is believed to lead to dominance and success in markets.”

I think the sociopathy you speak of is a very real problem, but it is one we see mainly where, thanks to the Govt interventions that have made shareholders powerless, there is no effective external check on management. Did you see my post on “drone corporations” (half of the Fortune 500)?

https://www.facebook.com/groups/webuildoursociety/permalink/510602852376936/?stream_ref=2

The progressive approach differs from mine/the real libertarian one largely in that progressives still naively believe that more centralization (more power to a few) is the best way to fight problems produced by centralization. Rather, we must fight the DYNAMIC of centralization — roll back Govt-enabled risk socialization (limited liability of shareholders, deposit insurance and “protection” of public shareholders) and make use creative destruction to bring down the dinosaurs/Frankensteins.

Yes, the NAME of “libertarianism” has been used to magnify and justify corporate power, and attack and disempower ordinary working people, but not real libertarianism itself, which fights against the dynamic of the growth and capture of a central state that both parties have fed.

“Arn’t you being a bit monotonic in your explanations here? Everything wrong with biz is an external factor that depends on the government and only on the government? Isn’t it possible there could be other sources of malfunction as well? If the government has done stuff surely it is in response to the encouragement of the sociopaths and the delinquence of the supposedly controlling shareholders? And you must be aware that appointing sociopathic upper executives has often increased the shareprice, suggesting that shareholders approve in general, or even demand sociopathy? just as they approve sacking ordinary workers or cutting their wages? Sociopathy could be a feature encouraged by capitalism and free markets – competition, wiping out the opposition, exploiting the workers, and profit are the key values – which could be easily embraced by sociopaths.”

I may seem monotonic because I am looking at core dynamics of#MoralHazard, risk socialization, govt “capture”, corruption and theft.

On share prices and sociopathy, can I get you to look at these posts on drone corporations’ negative behavior invited by unaccountability and government? [Did you know that cronyism in general means LOWER economic performance?]

https://www.facebook.com/tokyotomsr/posts/510602852376936
http://tokyotom.freecapitalists.org/?s=sociopath
http://tokyotom.freecapitalists.org/?s=frankenstein
http://tokyotom.freecapitalists.org/?s=hayek+moral+market

See Roderick Long here: http://c4ss.org/content/11146, and my earlier post on Robert Nisbethttp://reason.com/…/1984/10/01/cloaking-the-states-dagger.

Libertarianism/anarchism/mutualism/true conservatism would actually bring government and business both down to levels that could be managed by people in the communities that commons-guru #Ostrom spoke of:

http://www.theamericanconservative.com/art…/hometown-hero/
http://www.newrepublic.com/…/remembering-alienation…
http://www.kirkcenter.org/…/robert-nisbet-and-the-idea…/

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Fun exploration of limited liability corporations, and of anarchist community, with “principled libertarian” Stephan Kinsella

February 20th, 2014 No comments

I haven’t been in communication with anti-IP stalwart and occasional sparring partner Stephan Kinsella for some time (I lost my appetite for his hostility), but I saw him recently on Facebook, where he had reposted a review he had done of the movie “Avatar”; as I had liked his review, I stopped by to say hello. [Note: my various #Avatar-related posts, from my blogging/commenting days at the Mises Institute, are here: http://tokyotom.freecapitalists.org/?s=avatar.]

What follows are his Facebook post and our ongoing dialog to date (some other persons also appear; cross-links after the name); stay tuned!

1. Kinsella (Feb 12 at 10:54 pm)

I confess, I am not the a very good movie reviewer. When I occasionally do one, they start looking dated within months. Anyway, I remember this one from 2009. I got tons of grief for it from fellow libertarians, e.g., if I recall, Michael Barnett.

http://www.lewrockwell.com/lrc-blog/avatar-is-great-and-libertarian/

2. TokyoTom (Feb 13 at 2:52 pm)

I didn’t give you any grief about it, Stephan – in fact I praised you for it – but then I’m a good statist, like you:
http://tokyotom.freecapitalists.org/2009/12/22/envirofacist-avatar-comments-quot-avatar-quot-resources-property-rights-corporations-government-enabled-theft/

3. Andy Katherman (Feb 13 at 11:51 pm)

Great movie review Stephan. I wrote something very similar back in 2010 on my blog (http://www.libertyforlaymen.com/…/natural-law-take-on…). Mind you, I was in my anarcho-libertarian “infancy” and more of a minarchist/Constitutionalist back then.

It’s funny James Cameron is probably more of a pinko-commie-ish-enviornmentalist than a libertarian, but I had the same reaction in that he actually presented a brilliant case for the necessity of property rights and lockean homesteading than pretty much any other movie that comes to mind… all the while doing it with great visual effects and a pretty decent plot!

4. TokyoTom (Feb 14 at 8:32 am)

Andy, Cameron wasn’t presenting a brilliant case for the necessity of property rights and lockean homesteading, but an allegory for the reality of corporate resource development around much of the world where native title is ignored, and a fantasy of natives fighting back. Of course it’s a more tangled reality, with governments frequently involved, wanting royalties, and arrogating rights to balance interests. BP and the Gulf of Mexico and the Kochs, Albertan oil sands and Keystone, for example.

5. Kinsella (Feb 14 at 8:43 am)

why add the word “corporate” Tom? What does that add to anything. There is nothing inherent in corporations that makes them more likely to violate rights. It’s just a form of business organization.

6. Andy Katherman (Feb 14 at 3:30 pm)

Disagree “TokyoTom”. I concede Cameron is probably an eco-nut of the “watermelon” variety (green on the outside, commie red on the inside) and has disdain for commerce, free markets, and “Capitalism” (properly understood)… and may not even care about property rights. But, the movie really is a terrific demonstration why property rights are a vital normative concept to reduce conflict over scarce resources. And, it also provided a case why aggression is Bad and why self-defense of homesteaded land/property/resources (Home Tree) is good and JUST. Yes, it is an allegory and it gets a bit weird at times (mystical-ish) but so what. It’s a frickin’ movie not a revisionist documentary. I still hold it is a great work of fiction and a mostly libertarian one at that.

7. Kinsella (February 15 at 12:32am)
Tom has long been a gadfly type. He supports all manner of unlibertarian proposals, but wants to fly the libertarian radical flag, and of course people like him start to feel uncomfortable so they start attacking anyone wiht principles. They basically become useless nihilists.

8. TokyoTom (February 17 at 12:01pm)

Stephan, that last comment is a very impressive demonstration of confused, unprincipled, unconstructive blatheration. It’s the kind of reflexive, self-satisfied hostility I expect to see of statists, but am a bit embarrassed to see from self-ascribed ‘anarchists’/libertarians. Nice show.

9. Kinsella (February 17 at 12:03pm)

apparently the existence of principled libertarians drives the pragmatists and minarchists and middle-of-the-roaders nuts.

10. TokyoTom (February 17 at 12:04pm)

Andy, thanks for the comment. Dunno why you feel the need to bash Cameron as a “watermelon” “eco-nut”, when he has made it clear in other contexts that he is standing up for the rights of native peoples.

The struggle he addressed in Avatar is still very much underway; see this from recent news? “To get the gold, they will have to kill every one of us”

11. TokyoTom (February 17 at 12:08pm)

Stephan suggests that “There is nothing inherent in corporations that makes them more likely to violate rights. It’s just a form of business organization.”

I imagine Stephan can likewise not see the moral hazard trainwrecks that have also been set in motion by governments insuring deposits, protecting the shareholders of listed companies, owning and developing resources, or in regulating on the basis of pollutions or public health and safety, either.

12. Kinsella (February 17 at 12:12pm)

Governments violate rights when they insure deposits. You see, Tom, that is what libertarians are against–aggression, rights violations. People who privately organize their business arrangements in a certain way do not inherently or necessarily do this. See, so it’s irrelevant whether there is a “moral hazard” or not. Libertarians are not opposed to “moral hazards.” We are opposed to aggression.

13. Kinsella (February 17 at 12:16pm)

And the state does not “protect shareholders.” I have explained this in depth already. http://www.stephankinsella.com/…/kol100-the-role-of…/

and http://www.stephankinsella.com/…/kol115-mises-canada…/

14. TokyoTom (February 17 at 12:26pm)

Stephan suggests that I am a “gadfly” “unlibertarian” who “attack[s] anyone wiht principles” and who is a “useless nihilist” whom he has “principled libertarians” (AKA, himself) has “drive[n] nuts.”

I think that, unfortunately, what we have here is Stephan demonstrating the roots of property lie not in principles, but in the reflexive, bristling defense of what people (individuals and groups) regard as valuable enough to defend.

Calm down, Stephan.

15. TokyoTom (February 17 at 12:52pm)

Stephan is the kind of Bootlegger-Baptist critic who himself is a vociferous Baptist who is uncomfortable looking at how Govt sets up the Bootleggers who are gaming the system.

In free, voluntary markets, there is no Get-Out-of-Personal-Liability-for-Harms-Caused-to-Others-Free Card.

Limited liability for shareholders is a state-granted favor that is demonstrably at the bottom of the dynamic of people forever running to a gamed “democratic” government to make Govt make its creations behave more nicely (with the regulations then serving to protect the big, to limit competition, and to fuel corruption and further govt capture). As soon as governments began creating corporate monopolies and/or limited liability cos, then then judges followed suit by rejecting strict defense of property in favor of a pollution-/corporation-favoring “balance” of equities that Block noted.

16. Kinsella (February 17 at 2:28pm)

I explained in detail in the talks and blog post linked, why this is wrong. There is no reason to assume passive shareholders ought to be liable for torts committed by others. In a private law society, there is no reason to think shareholders would be liable in the first place.

17. TokyoTom

Stephan consistently attacks arguments I don’t make. It must be because he is more principled than I am:
http://tokyotom.freecapitalists.org/?s=limited+liability+kinsella

18. Kinsella (February 17 at 2:51pm)

Tom, you just stated your view that state limited liability for shareholders is some kind privilege. that implies it is giving someone a limitation on liability that they otherwise would have in a free market. It’s not a privilege unless it changes the situation.

19. TokyoTom (February 17 at 2:56pm)

Stephan: “In a private law society, there is no reason to think shareholders would be liable in the first place.”

In a private law society, one finds ALWAYS individuals and associations of individuals who may negotiate liability caps with voluntary counterparties, but remain potentially personally liable up to the remainder of their personal assets for harms that their activities (and those of their agents) caused to others.

While the persons who actually directly caused harms would of course be liable, their principals would try to limit their own potential exposure by either closely managing their agents or making sure that others were independent contractors.

Stephan defends a state-created order where it is now extremely difficult, if not impossible, for us (and tort victims) to determine WHO in fact acted and is responsible for vast harms, such as those produced by BP, WVa’s “Freedom Industries”, TVA, TEPCO and the like. Instead, Stephan grotesquely calls polluting companies “victims”.

20. Dan Cotter (February 17 at 3:17pm)

Does anybody else find it strange when people write their comments as if they are speaking to an audience rather than just directly speaking to the person they’re conversating with?

21. TokyoTom (February 17 at 3:44pm)

Dan, I’ve been talking with Stephan Kinsella for several years – putting me a ten-foot-pole distance has too often been one of his penchants, because his principles mean I stink. We’ve had a bit of a hiatus, so when I visited here, you can see that I addressed him directly; he shifted to the third person here: https://www.facebook.com/nskin…/posts/10151972701413181….

22. Kinsella (February 17 at 9:22pm)

haha, are you really criticizing me for using third person…? come on dude.

23. Kinsella (February 17 at 9:25pm)

“remain potentially personally liable up to the remainder of their personal assets for harms that their activities (and those of their agents) caused to others.”

This is almost right. You are liable for harms (some types anyway) caused by your *actions*. (“activities” is intentionally vague)

But shareholders do not act to cause the harm caused by employees of the company they have stock in.

“While the persons who actually directly caused harms would of course be liable, their principals would try to limit their own potential exposure by either closely managing their agents or making sure that others were independent contractors.”

Calling shareholders “principals” is question-begging. They are passive. I have explained this. So have other that I linked to–e.g. rothbard and pilon and hessen.

“Stephan defends a state-created order where it is now extremely difficult, if not impossible, for us (and tort victims) to determine WHO in fact acted and is responsible for vast harms, such as those produced by BP, WVa’s “Freedom Industries”, TVA, TEPCO and the like. Instead, Stephan grotesquely calls polluting companies “victims”.”

How is this supposed to be an argument that shareholders are causally responsible for torts of employees? Everyone seems to simply assume this respondeat superior type vicarious liability.

24. TokyoTom (Feb 19 at 4:52pm)

“‘activities’ is intentionally vague”

This is intentionally hair-splitting obfuscation; one “acts” – we call what people do both “activities” and “actions”.

– “shareholders do not act to cause the harm caused by employees of the company they have stock in.”

It is not my premise that they always/necessarily do — though of course, sometimes shareholders may be actively involved in torts tied to the business activities conducted by the corporation they own shares of. When judges “pierce the corporate veil”, they essentially treat shareholders as principals/partners/sole proprietors.

– “Calling shareholders “principals” is question-begging. They are passive. I have explained this.”

Suggesting I was calling shareholders principals is either stupidity or a deliberate misreading; I was clearly referring to private law orders/contractual arrangements outside of corporations, not state-made corporations: https://www.facebook.com/nskin…/posts/10151972701413181… (PS–I really don’t like this attack style, but perhaps tit-for-tat is the best approach with anarchists who prefer to set examples of disrespect.)

But yes, of course now, within the state-made corporate form — and especially within listed companies, shareholders MAY be (but are NOT necessarily) “passive”. But this is itself quite problematic, though not my chief point.

– “How is this supposed to be an argument that shareholders are causally responsible for torts of employees? Everyone seems to simply assume this respondeat superior type vicarious liability.”

You attack arguments that I do not make. This is your style is your wont, Stephan — I find it wanting. I have NEVER argued that “shareholders are/should be causally responsible for torts of employees” or just “assumed respondeat superior type vicarious liability”.

Partners and sole proprietors were/are not deemed automatically responsible for torts committed by their employees, yet the risk and expense of potential lawsuits has always served to have them pay attention to risks that their employees and agents might harm others. An artificial state-made liability cap freed shareholders from downside risks, and incentivized blind eyes to practices that were costly to others.

It is clear that respondeat superior doctrine was expanded judicially and by law as firms left the realm of private businesses and became favored creatures of the state.

I am glad you are paying some attention to questions of individual responsibility, though of course you have NOT done so consistently, when you persisted in calling “BP” a “victim” and ignoring the corporate problem of discerning who it is who acts:

“It is one of the salient features of corporations that they confuse themselves and everyone else as to WHO, precisely, is responsible for their actions and the harms they cause others, and it is time for Austrians to examine such features closely. – See more at: More about “the biggest victim”, BP, and how we can help it end its “victimization”

Poor statists! If we close our eyes tightly enough, we can see clearly that Corporations are innocent VICTIMS, of governments that foist on them meaningless grants like limited liability & IP, and of malevolent, grasping citizens

Thanks for playing, and for your decent Avatar post.

25. Kinsella (Feb 20 at 2:24 am)

“It is not my premise that they always/necessarily do — though of course, sometimes shareholders may be actively involved in torts tied to the business activities conducted by the corporation they own shares of. When judges “pierce the corporate veil”, they essentially treat shareholders as principals/partners/sole proprietors.”

I am at a loss to identify the coherent libertarian principle you are trying to invoke. Who cares about the modern positive state law of ‘piercing the corporate veil,’ for example–what possible relevance has this for justice?

“Suggesting I was calling shareholders principals is either stupidity or a deliberate misreading;”

oh, i assure you, I am merely stupid, not dishonest.

–Wait.

“I was clearly referring to private law orders/contractual arrangements outside of corporations, not state-made corporations: ”

Wasn’t clear to me, kemosabe, but then I don’t have your IQ or whatever.

“Partners and sole proprietors were/are not deemed automatically responsible for torts committed by their employees, yet the risk and expense of potential lawsuits has always served to have them pay attention to risks that their employees and agents might harm others. An artificial state-made liability cap freed shareholders from downside risks, and incentivized blind eyes to practices that were costly to others. ”

What does this frenetic screed of incoherent babble have to do with libertarian principles? Answer: not much.

“It is clear that respondeat superior doctrine was expanded judicially and by law as firms left the realm of private businesses and became favored creatures of the state. ”

So… you are in favor of respondeat superior. well Rothbard, Pilon, Hessen and I are not. Congratulations on your glomming onto the state schema.

26. TokyoTom (Feb 20 at 5:35 pm)

You disappoint by never failing to disappoint, Stephan.

1. “I am at a loss to identify the coherent libertarian principle you are trying to invoke. Who cares about the modern positive state law of ‘piercing the corporate veil,’ for example–what possible relevance has this for justice?”

You are at a loss to understand the libertarian principle that a man — even a shareholder — might be called to account for his own acts? I agreed that shareholders should not be liable qua shareholders, and simply indicated that they might be liable based on their own actions. Corporate “veil piercing” is justified if based on a fact-finding that a shareholder directed a tortious act.

2. “Wasn’t clear to me, kemosabe, but then I don’t have your IQ or whatever.”

Real gentlemen don’t find admissions of error so difficult, and sneering, gratuitous contempt and off-handed offensiveness so easy. Whatever.

3. Me: “Partners and sole proprietors were/are not deemed automatically responsible for torts committed by their employees, yet the risk and expense of potential lawsuits has always served to have them pay attention to risks that their employees and agents might harm others. An artificial state-made liability cap freed shareholders from downside risks, and incentivized blind eyes to practices that were costly to others. ”

You: “What does this frenetic screed of incoherent babble have to do with libertarian principles? Answer: not much.”

Kindly demonstrate that this is both babble, and babble not related to libertarian principles. Austrians are keenly attuned to moral hazard, and I was describing what I perceive as dynamics, not a principled position on liability rules (though LvMI has published pieces calling for a prohibition on corporations in the banking sector). But if I recall correctly, you too have indicated that you oppose the state structuring of/stamp of approval on corporations.

Your own frothing has nothing to do with libertarian principles, and in fact demeans them.

4. Me: “It is clear that respondeat superior doctrine was expanded judicially and by law as firms left the realm of private businesses and became favored creatures of the state. ”

You: “So… you are in favor of respondeat superior. well Rothbard, Pilon, Hessen and I are not. Congratulations on your glomming onto the state schema.”

Congrats on another false and unjustifiable conclusion. Par for your course. Austrians Mises, Hayek, Rothbard, Block, Cordato etc. all describe what they discern of the dynamics of human action within institutional structures; please congratulate them too for glomming onto the state schema.

Ad hom is a shameful game, Stephan. It discredits your good work that you that you thrill to it so much.

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