Elected officials, in general, have two fundamental incentives; the first is to get elected or re-elected; and the second is to do some good. The first is very straightforward and easily understandable. The second…well, the second creates a question…do some good…for whom? Generally, this question can be answered by saying that “for whom?” refers to people that will elect the officials…or will re-elect them.
Elected officials are often asked to behave in ways that reflect the common good…that ignore total self-interest. But, the very cynical argue that you can count on one hand the number of times that an elected official acted in ways that were solely for the good of all and did not reflect just self-interest. Others would argue that the number is larger than that…but to understand the elected official you must not ignore the fact that his or her position depends upon them acting in their own self-interest.
If a subset of the electorate elects an official, they do so on the expectation that the official will represent them and support their interests. If the official does not represent the subset’s interest to the degree that they expect the official to…then they have incentive to support another candidate. So, elected officials really only have one incentive in running for office…to get elected or to get re-elected.
The point here is that elected officials may have incentives that are different from the incentives that exist within the economic system. For example, if economic growth is slowing down…elected officials or those appointed by elected officials may have an incentive to stimulate the economy and increase employment if an election is near at hand. If elected officials or those appointed by elected officials express concern that the stock market may collapse, they may try and keep interest rates extremely low in order to avoid a stock market correction or a readjustment to a more realistic level. If elected officials or those appointed by elected officials believe that every American…or almost every American…should own a home, they will create and support programs that encourage such a result.
Every one of these efforts…and many more like them…can be traced back to efforts to get elected officials re-elected…and they are all aimed at a “good” thing…or a “good” cause. No one can disagree with the basic attempt by the elected officials or those appointed people.
Each of these efforts, however, is what the economist would call a “shock” to the economic system. Each of these efforts represents a response to a different set of incentives than those that exist within the functioning of markets and relationships in the economic system, itself. Economic models attempt to separate out the different factors that are at work within an economic system. Factors that do not respond to the regular incentives that exist within the economic system are called “exogenous” variables and changes in these variables are introduced independently of the system. Other variables that respond to the incentives that exist within the system, both those created by other non-exogenous variables as well as to the incentives created by the exogenous variables are called “endogenous” variables.
The importance of this distinction is that many of the “shocks” that an economic system receives is of the “exogenous” variety and are introduced into the economy for reasons other than allowing the economic system to work out all the incentives and dis-incentives that currently exist. In effect, these “exogenous” shocks are often aimed at preventing the economic system to work itself out in the direction it is going. And, as stated above, many of these interventions are for the “good” of the economy or for the “good” of, at least, some of the people in the economy.
The fact of the matter is that we don’t really have good theory to examine how these “exogenous” shocks come about. If we did, obviously, then they could be incorporated into the economic model and would become “endogenous” variables. Therefore, these “exogenous” shocks…government decisions…must stay exogenous and be introduced as they happen or are expected to happen.
Economics is a study of human behavior. Therefore, the predictions that come from economic models are going to be highly imprecise. Economic models are all incomplete and fallible. We just can’t do better than that when dealing with human behavior. Some situations lend themselves to more consistent behavior that allow for the making of better predictions…but other situations…like government decision making…are not systematic and so are almost impossible to model. And, we are finding out through the research in areas such as behavioral economics and behavioral finance that some situations that were, in the past, assumed to be fairly regular, are not that regular and need to be modeled with much less confidence about the accuracy of their predictions.
The name of John Maynard Keynes has surfaced a lot these days…and I am going to refer back to something that he wrote that, I believe, pertains to this very issue. In his commentary of the great economist Alfred Marshall after the great man died, Keynes discusses what makes an exceptional economist. In terms of Marshall, Keynes remarked that he was very learned in history. And then Keynes followed up on this by saying that anyone that wanted to be a top level economist needed to incorporate history into his or her explanation of how things worked. And, Keynes did not mean by history, incorporating a huge amount of statistical data into the model building process. Keynes was referring to the need to understand specific individuals and how those individuals made decision…how they were affected by their time…and how they were affected by their own experience and upbringing. He concluded that good economics required a good knowledge of history and biography…not something that is often taught in Ph. D. programs in economics or finance.
The point of this post is that in the policy making issues that government has to deal with we cannot just rely on assumptions of completely self-correcting free market economic systems where the incentives generated within the system are sufficient to work themselves out in a deterministic fashion. These systems will be continuously impacted by “exogenous” shocks that will bump the system one way or another, preventing the system from working itself out into a “new equilibrium” where everything is OK. These systems…for better or for worse…will be buffeted by these “exogenous” shocks and this will mean that we, in order to understand what is happening or what has happened, will need to introduce history and biography into the analysis we are going through. That is…economics cannot stand alone and provide all the answers.
This leads us into the position that we can…and must…look for bumps and shifts in the economy that are caused by governmental interference…usually with good intentions…and see how the government changes incentives…and how these changed incentives can divert the economy from one path onto another.
A good example of this comes in situations that create what economists call “moral hazard”…actions that lead people to do perverse things that they would not do under other circumstances. For example, people have to take risks in what they do…starting a business, buying a home, investing in securities, and so on. If a situation arises in which the people that have done one or more of these things get into dire straights…that is, they may face foreclosure or bankruptcy…elected officials can decide…for good reason…to protect them in some way. This presents a situation of “moral hazard” because those people that get protected may, in the future, decide to take on even higher levels of risk and make the economic or financial system more fragile. One can applaud of condemn actions that create “moral hazard” but it is a judgment decision. The elected officials must make a decision relating to the trade off between avoiding a bad situation now…protecting the people who have gotten in trouble…versus not protecting the people now and facing a economic or financial catastrophe. Where you set the tradeoff is a personal decision.
Showing posts with label Libertarian. Show all posts
Showing posts with label Libertarian. Show all posts
Saturday, February 7, 2009
Friday, January 30, 2009
Big Government
So much discussion is going on today about “Big Government.” The urgency of the talk is, of course, a result of the Obama stimulus plan…and TARP…and a possible “bad bank”…and possibly even more spending and tax cuts coming down the line. There is even a new book out called “The Case for Big Government,” by Jeff Madrick.
Has anyone been to Washington, D. C. lately?
Tell me what someone means when they say…”small government”?
It’s all relative…right?
To me the talk about “Big Government” or “small government” is so much wasted energy. The United States government IS big! It is going to STAY big! There is no way that I can see it becoming smaller. And, this doesn’t even take into account that we are faced, throughout the world, with dealing with other BIG governments.
The question to me is not about the size of the government. I would even argue that the size and complexity of other organizations within the country and the problems that must be dealt with require that the government be big. To me the question is about how this government goes about its business…that is how the public sector interacts with the private sector.
Last February, I put up a post on this site titled “More on Hamiltonian Government” (2/27/2008). In this post I argued that government faces three problems that put a limit on its power. These problems relate to the creation of incentives, the lack of sufficient information, and the speed at which events are taking place in the modern world. These limits, as I saw the situation, restricts what a government can achieve and directs us to those things a government can do that are actually helpful. The conclusion is that a government can have a positive effect on the private sector if it focuses on process rather than outcomes. If it focuses on outcomes, a government may create more problems than it solves.
Let’s just looking at the first of these problems today, the problem of incentives: the basic incentive for government is to “improve” something…make something better…or less bad. (On January 10, 2009, I wrote a post called “Improvers” to discuss the topic a little more deeply.) The government doesn’t have a lot of specific incentives…except in cases like the military…win wars…keep the peace…and so forth. So the primary goal is to “improve” things.
The problem with this is that in trying to “improve” things, the government can often create other incentives that have undesirable results or results that are the exact opposite of what they would like to achieve. (To see some specific cases please refer to the popular book…and blog…called “Freakonomics” developed by Steven D. Levitt and Stephen J. Dubner.) The difficulty occurs when people attempt to focus outcomes and state their objectives in specific goals. Setting the specific goals can then create other incentives that can harm or destroy the purpose of the whole effort the government has undertaken to “improve” things.
This often happens in situations involving the government’s monetary and fiscal policies. For example, the goal to avoid recessions can create government policies that send out messages to the private sector that can totally destroy the initial goal of the government. When Alan Greenspan, chairman of the Board of Governors of the Federal Reserve System became so concerned about the possibilities of an extended recession following the bursting of the stock market bubble in the early 2000s that he kept the target interest rate of the Fed excessively low for an extended period of time, lower than the rate of inflation the economy was experiencing.
The result…excessive borrowing took place because the real rate of interest was negative…it paid people to borrow…a bubble in asset prices occurred in housing markets…this was passed into the capital markets through securitization…and this funneled into other areas of the capital market, especially more and more exotic derivative instruments…and as people continued to create credit at an exponential rate and as people continued to leverage up their balance sheets…the financial markets…and the whole economy…became more and more fragile.
Why did people…even sensible people…do these things?
The incentives created in the credit expansion distorted things. If, for example, I run a hedge fund and I want to earn a slightly better return on my portfolio than you I can, say, try one of two things. For one I can increase the riskiness of the assets I hold…maybe purchase securities backed by subprime loans rather than corporate bonds. Or, I can increase the leverage on my balance sheet to stimulate higher net returns on my portfolio. In either case I am increasing the riskiness of my portfolio in order to gain an advantage over you.
And, how can I get away with this. Well, I know that Alan Greenspan is so worried about avoiding a recession that he will continue to support the credit expansion even in the face of riskier asset portfolios or greater use of leverage in the system. And if this continues on for two or three years, the competitive pressure to do well and outperform my competitors will grow and grow. I will continue to increase the risk of my portfolios and to increase how much leverage I introduce to my balance sheet.
And, if I don’t do it? Suppose I am a relatively conservative portfolio manager and I don’t believe that I should either increase the riskiness of my asset portfolio or raise the amount of leverage on my balance sheet…what happens? Over time, as my competitors earn, even a few more basis points on the return on their portfolio…my clients will start withdrawing money from my funds and placing it with my competitor. If this environment is sustained by the government, I will either have to close my fund or capitulate and change my beliefs and become more aggressive. And, if I don’t have that choice and work for someone else…I will be replaced with someone that is more aggressive.
Is this outright greed that is driving this scenario? Are these people “bad” or “excessively crass” in their behavior?
These people want to perform well…that is true…but, I don’t believe that they are addicted to avarice any more or less than most people. The incentives changed on them and they just responded to the competitive pressures that were present in the market place. In my estimation…these incentives were set up by the government in following the incentive they placed high on their priority list…government officials wanted to improve things…they wanted to keep a recession from happening.
Government is going to have its incentives; and the private sector is going to have its incentives. The problem is not one of whether or not the government is big. The problem is related to how the government is going to implement its actions to achieve the goals it sets for itself. Often, as in the example I have given, the “good intentions” of the government can be translated into actions that create the “wrong” incentives for the private sector. If the private sector responds to these “wrong” incentives…and they will…the ultimate result may be totally the opposite of what the government was trying to achieve in the first place.
The problem is that the ultimate results occur at such a distance from the cause that the two are not tied together. Do people tie Greenspan’s attempt to avoid recession early in this decade with the current financial collapse?
Has anyone been to Washington, D. C. lately?
Tell me what someone means when they say…”small government”?
It’s all relative…right?
To me the talk about “Big Government” or “small government” is so much wasted energy. The United States government IS big! It is going to STAY big! There is no way that I can see it becoming smaller. And, this doesn’t even take into account that we are faced, throughout the world, with dealing with other BIG governments.
The question to me is not about the size of the government. I would even argue that the size and complexity of other organizations within the country and the problems that must be dealt with require that the government be big. To me the question is about how this government goes about its business…that is how the public sector interacts with the private sector.
Last February, I put up a post on this site titled “More on Hamiltonian Government” (2/27/2008). In this post I argued that government faces three problems that put a limit on its power. These problems relate to the creation of incentives, the lack of sufficient information, and the speed at which events are taking place in the modern world. These limits, as I saw the situation, restricts what a government can achieve and directs us to those things a government can do that are actually helpful. The conclusion is that a government can have a positive effect on the private sector if it focuses on process rather than outcomes. If it focuses on outcomes, a government may create more problems than it solves.
Let’s just looking at the first of these problems today, the problem of incentives: the basic incentive for government is to “improve” something…make something better…or less bad. (On January 10, 2009, I wrote a post called “Improvers” to discuss the topic a little more deeply.) The government doesn’t have a lot of specific incentives…except in cases like the military…win wars…keep the peace…and so forth. So the primary goal is to “improve” things.
The problem with this is that in trying to “improve” things, the government can often create other incentives that have undesirable results or results that are the exact opposite of what they would like to achieve. (To see some specific cases please refer to the popular book…and blog…called “Freakonomics” developed by Steven D. Levitt and Stephen J. Dubner.) The difficulty occurs when people attempt to focus outcomes and state their objectives in specific goals. Setting the specific goals can then create other incentives that can harm or destroy the purpose of the whole effort the government has undertaken to “improve” things.
This often happens in situations involving the government’s monetary and fiscal policies. For example, the goal to avoid recessions can create government policies that send out messages to the private sector that can totally destroy the initial goal of the government. When Alan Greenspan, chairman of the Board of Governors of the Federal Reserve System became so concerned about the possibilities of an extended recession following the bursting of the stock market bubble in the early 2000s that he kept the target interest rate of the Fed excessively low for an extended period of time, lower than the rate of inflation the economy was experiencing.
The result…excessive borrowing took place because the real rate of interest was negative…it paid people to borrow…a bubble in asset prices occurred in housing markets…this was passed into the capital markets through securitization…and this funneled into other areas of the capital market, especially more and more exotic derivative instruments…and as people continued to create credit at an exponential rate and as people continued to leverage up their balance sheets…the financial markets…and the whole economy…became more and more fragile.
Why did people…even sensible people…do these things?
The incentives created in the credit expansion distorted things. If, for example, I run a hedge fund and I want to earn a slightly better return on my portfolio than you I can, say, try one of two things. For one I can increase the riskiness of the assets I hold…maybe purchase securities backed by subprime loans rather than corporate bonds. Or, I can increase the leverage on my balance sheet to stimulate higher net returns on my portfolio. In either case I am increasing the riskiness of my portfolio in order to gain an advantage over you.
And, how can I get away with this. Well, I know that Alan Greenspan is so worried about avoiding a recession that he will continue to support the credit expansion even in the face of riskier asset portfolios or greater use of leverage in the system. And if this continues on for two or three years, the competitive pressure to do well and outperform my competitors will grow and grow. I will continue to increase the risk of my portfolios and to increase how much leverage I introduce to my balance sheet.
And, if I don’t do it? Suppose I am a relatively conservative portfolio manager and I don’t believe that I should either increase the riskiness of my asset portfolio or raise the amount of leverage on my balance sheet…what happens? Over time, as my competitors earn, even a few more basis points on the return on their portfolio…my clients will start withdrawing money from my funds and placing it with my competitor. If this environment is sustained by the government, I will either have to close my fund or capitulate and change my beliefs and become more aggressive. And, if I don’t have that choice and work for someone else…I will be replaced with someone that is more aggressive.
Is this outright greed that is driving this scenario? Are these people “bad” or “excessively crass” in their behavior?
These people want to perform well…that is true…but, I don’t believe that they are addicted to avarice any more or less than most people. The incentives changed on them and they just responded to the competitive pressures that were present in the market place. In my estimation…these incentives were set up by the government in following the incentive they placed high on their priority list…government officials wanted to improve things…they wanted to keep a recession from happening.
Government is going to have its incentives; and the private sector is going to have its incentives. The problem is not one of whether or not the government is big. The problem is related to how the government is going to implement its actions to achieve the goals it sets for itself. Often, as in the example I have given, the “good intentions” of the government can be translated into actions that create the “wrong” incentives for the private sector. If the private sector responds to these “wrong” incentives…and they will…the ultimate result may be totally the opposite of what the government was trying to achieve in the first place.
The problem is that the ultimate results occur at such a distance from the cause that the two are not tied together. Do people tie Greenspan’s attempt to avoid recession early in this decade with the current financial collapse?
Tuesday, January 27, 2009
A Modern Liberal and Free-Market Capitalism
Milton Friedman always claimed that he was a liberal…but, that he was a “classical” liberal. By that he meant that in terms of economics and liberty he was more like a liberal in the 18th century and the early 19th century. Liberalism shifted on him…or as Ronald Reagan said about the Democratic Party…he didn’t leave the Democratic Party…the Democratic Party left him. Friedman felt the say way about the policies and programs proposed by 20th century…and early 21st century liberals.
I am in this dilemma as well. I tried to lay out my position in my last essay, posted o January 24. In that post I claimed that I was an Information Libertarian. This meant that on the side of the cultural wars and civil rights I tend to come down with the modern Liberal…I am for openness, transparency, and liberty. However, on the side of capitalism and the role of government in the economy, I tend to come down on the side of free-market capitalism and minimal government intrusion into economic affairs. My liberalism…as it were…is split…right down the middle.
Liberalism, as Friedman argued, used to include free-market capitalism as one of its components. What happened? Why did free-market capitalism move from support on the left of the political spectrum and land on the right? Good questions.
Currently, I am reading the book titled “The Ascent of Money” by Niall Ferguson. In the Introduction to his book Ferguson makes several observations about how the world looks at finance and financiers that carry some relevance for the questions asked in the previous paragraph.
Ferguson writes: “Throughout the history of Western civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the ‘real’ economic activities of agriculture and manufacturing.” He cites three causes of these attitudes:
• Debtors have tended to outnumber creditors and the form have seldom felt very well disposed towards the latter;
• Financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather that stability;
• For centuries, financial services in countries all over the world were disproportionately provided by member of ethnic or religious minorities, who had been excluded from land ownership or public office.
Furthermore, in terms of business, in general, there have been wide disparities in income distribution and this can be highlighted by the earnings of corporate executives in recent history and the increases they kept receiving over the years, far exceed what individual workers receive, the including small increases that they have received in recent years.
Ferguson goes on to say that one of the real paradoxes of the ‘liberal’ or ‘radical’ prescription for the elimination of the use of money is that one of the major constraints on economic development and growth is the LACK of financial institutions, the absence of banks…not the presence of them. And, this not only applies to nations, or regions, but also to neighborhoods and areas within cities. That is, for economic development to take place there must be some kind financial services present or development is not going to happen or be constricted.
However, Ferguson also says that “If the financial system has a defect, it is that it reflects and magnifies what we human beings are like.” For example, behavioral finance has shown that “money amplifies our tendency to overreact.” Also, the financially knowledgeable can use their talents and skills to multiply opportunity whereas those that are not can be severely hurt. Financial presence can accelerate mobility…both upward and downward. “The rewards for ‘getting it’ have never been so immense. And, the penalties for financial ignorance have never been so stiff.”
What Ferguson seems to be saying is that the presence of free-market capitalism and modern financial institutions and markets are like financial leverage…they can magnify both positive results and negative results. The way this seems to work is that ‘the few’ get very great benefits from capitalism whereas the ‘many’ end up with only meager results. That is the distribution of benefits is very skewed with smaller numbers at the top with a substantial number at the bottom.
The thing that doesn’t get mentioned as much is that, on average, countries that are democratic, capitalistic, with a great amount of liberty have much higher living standards than do countries that don’t offer these things to their citizens. The income distributions may be very skewed and unequal in the former countries but even those that are nearer the bottom are much better off than many of the citizens in these other countries. This doesn’t make the skewed income distribution right…but the fact that there are higher living standards relative to those in other countries is relevant.
The point is free-market capitalism can create wealth, it can create inequalities in income distribution, and since the inequalities can be quite substantial and magnified. Given these results, people can focus on the issue of fairness, not only of relative results at one particular time but also over time in terms of economic fluctuations. Thus, criticism can be leveled at financial capitalism because of these outcomes and because the people further down the pyramid outnumber the people at the top, discussions and debates about the validity of capitalism can be dominated or, at least, forcefully engaged in.
I would like to make three points in response to this. First, there does need to be oversight and regulation existing side-by-side in a capitalistic system…it cannot just be an open, do-as-you-will environment. This would include greater openness and transparency within the business and financial system. The capitalistic system can run better. Second, there does have to be safety nets, insurance programs, education, financial institutions to serve poor areas and other forms of help to reduce some of the risks and extreme results that can come about in free-market capitalism.
Finally, the government must not be too active in attempting to fine-tune the economy. The government can set up incentive systems that drive people and businesses to take excessive risks and make unwise decisions. The most recent eight years is a case-in-point. Through its monetary and fiscal policies the Bush43 administration created an environment that incented executives to take on more and more risk, to assume higher and higher leverage, and to bring new and untested innovations into the market place. The financial…and economic…system became more and more fragile. The collapse came. And, who got the majority of the blame…the executives running these institutions…those running the government escaped without the fingers being pointed at them at all…or, very little.
What I would like to emphasize is that small, entrepreneurial businesses provide most of the dynamism of a free-market capitalistic system, most of the new jobs created, large amounts of wealth that is relatively well distributed, and it adds substantially to the upward mobility in a country. This system thrives on information, trying new things, gathering more new information, innovating, learning, and growing. This part of the system…even the modern liberals like. It is the big, set-in-their-ways organizations, who create much of the unhappiness and the inequality.
I, of course, like this breed of entrepreneurs that exists below the horizon covered by the large, clumsy behemoth. It is also consistent with my support of liberty in the culture wars and civil rights. It is also consistent with support of the “new” in art and literature and music and life style. It is consistent with what being an Information Libertarian is all about…at least, I believe it is.
I am in this dilemma as well. I tried to lay out my position in my last essay, posted o January 24. In that post I claimed that I was an Information Libertarian. This meant that on the side of the cultural wars and civil rights I tend to come down with the modern Liberal…I am for openness, transparency, and liberty. However, on the side of capitalism and the role of government in the economy, I tend to come down on the side of free-market capitalism and minimal government intrusion into economic affairs. My liberalism…as it were…is split…right down the middle.
Liberalism, as Friedman argued, used to include free-market capitalism as one of its components. What happened? Why did free-market capitalism move from support on the left of the political spectrum and land on the right? Good questions.
Currently, I am reading the book titled “The Ascent of Money” by Niall Ferguson. In the Introduction to his book Ferguson makes several observations about how the world looks at finance and financiers that carry some relevance for the questions asked in the previous paragraph.
Ferguson writes: “Throughout the history of Western civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the ‘real’ economic activities of agriculture and manufacturing.” He cites three causes of these attitudes:
• Debtors have tended to outnumber creditors and the form have seldom felt very well disposed towards the latter;
• Financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather that stability;
• For centuries, financial services in countries all over the world were disproportionately provided by member of ethnic or religious minorities, who had been excluded from land ownership or public office.
Furthermore, in terms of business, in general, there have been wide disparities in income distribution and this can be highlighted by the earnings of corporate executives in recent history and the increases they kept receiving over the years, far exceed what individual workers receive, the including small increases that they have received in recent years.
Ferguson goes on to say that one of the real paradoxes of the ‘liberal’ or ‘radical’ prescription for the elimination of the use of money is that one of the major constraints on economic development and growth is the LACK of financial institutions, the absence of banks…not the presence of them. And, this not only applies to nations, or regions, but also to neighborhoods and areas within cities. That is, for economic development to take place there must be some kind financial services present or development is not going to happen or be constricted.
However, Ferguson also says that “If the financial system has a defect, it is that it reflects and magnifies what we human beings are like.” For example, behavioral finance has shown that “money amplifies our tendency to overreact.” Also, the financially knowledgeable can use their talents and skills to multiply opportunity whereas those that are not can be severely hurt. Financial presence can accelerate mobility…both upward and downward. “The rewards for ‘getting it’ have never been so immense. And, the penalties for financial ignorance have never been so stiff.”
What Ferguson seems to be saying is that the presence of free-market capitalism and modern financial institutions and markets are like financial leverage…they can magnify both positive results and negative results. The way this seems to work is that ‘the few’ get very great benefits from capitalism whereas the ‘many’ end up with only meager results. That is the distribution of benefits is very skewed with smaller numbers at the top with a substantial number at the bottom.
The thing that doesn’t get mentioned as much is that, on average, countries that are democratic, capitalistic, with a great amount of liberty have much higher living standards than do countries that don’t offer these things to their citizens. The income distributions may be very skewed and unequal in the former countries but even those that are nearer the bottom are much better off than many of the citizens in these other countries. This doesn’t make the skewed income distribution right…but the fact that there are higher living standards relative to those in other countries is relevant.
The point is free-market capitalism can create wealth, it can create inequalities in income distribution, and since the inequalities can be quite substantial and magnified. Given these results, people can focus on the issue of fairness, not only of relative results at one particular time but also over time in terms of economic fluctuations. Thus, criticism can be leveled at financial capitalism because of these outcomes and because the people further down the pyramid outnumber the people at the top, discussions and debates about the validity of capitalism can be dominated or, at least, forcefully engaged in.
I would like to make three points in response to this. First, there does need to be oversight and regulation existing side-by-side in a capitalistic system…it cannot just be an open, do-as-you-will environment. This would include greater openness and transparency within the business and financial system. The capitalistic system can run better. Second, there does have to be safety nets, insurance programs, education, financial institutions to serve poor areas and other forms of help to reduce some of the risks and extreme results that can come about in free-market capitalism.
Finally, the government must not be too active in attempting to fine-tune the economy. The government can set up incentive systems that drive people and businesses to take excessive risks and make unwise decisions. The most recent eight years is a case-in-point. Through its monetary and fiscal policies the Bush43 administration created an environment that incented executives to take on more and more risk, to assume higher and higher leverage, and to bring new and untested innovations into the market place. The financial…and economic…system became more and more fragile. The collapse came. And, who got the majority of the blame…the executives running these institutions…those running the government escaped without the fingers being pointed at them at all…or, very little.
What I would like to emphasize is that small, entrepreneurial businesses provide most of the dynamism of a free-market capitalistic system, most of the new jobs created, large amounts of wealth that is relatively well distributed, and it adds substantially to the upward mobility in a country. This system thrives on information, trying new things, gathering more new information, innovating, learning, and growing. This part of the system…even the modern liberals like. It is the big, set-in-their-ways organizations, who create much of the unhappiness and the inequality.
I, of course, like this breed of entrepreneurs that exists below the horizon covered by the large, clumsy behemoth. It is also consistent with my support of liberty in the culture wars and civil rights. It is also consistent with support of the “new” in art and literature and music and life style. It is consistent with what being an Information Libertarian is all about…at least, I believe it is.
Saturday, January 24, 2009
Being an Information Libertarian and Its Conflicts
I have claimed over the past several years that I am an Information Libertarian. I have defined an Information Libertarian as one who believes in the free flow of information, complete access to information, and the eventual triumph of information over all those that attempt to hide, control, or in anyway manipulate the use and access to information…for whatever purpose. I believe in openness and transparency in all activities.
I put this last sentence into the paragraph because it is hard to say that there are cases where perhaps some secrecy is necessary and still call oneself an Information Libertarian. Yet, I will admit, there are some situation where, perhaps, some information should be controlled…like in situations of national security…or, in the case of the hurt or harm that might be imposed on someone, say, who is dying.
But, this then gets back into the argument for balance…something that I dealt with in my post of January 19, 2009. Because we work in a world of incomplete information we can only say that there may be some situations that we have to deal with in which the “best” (whatever that means) decision we make is to keep some information “under wraps”…keep it secret. Still, to me, to argue that one is an Information Libertarian means that one should, in reaching a balance, always err on the side of openness and transparency. One should always lean to the side that argues for the release and spread of information…whatever that information is about.
It is difficult to be an Information Libertarian in the political world that exists today. On the one side, an Information Libertarian tends to side with what would be considered to be the left, or the progressive, side of the political spectrum. In other issues, an Information Libertarian would tend to side with what would be considered the right, or the free-market capitalistic, side.
This conflict puts the Information Libertarian in a conundrum because, taking one’s beliefs seriously, one feels constantly ill-at-ease with the wide chasm that seems to exist between these two extreme positions. Wouldn’t it be much nicer if one could one could find one location on the political spectrum where all that an Information Libertarian supports would be located?
On the left side of the spectrum, the Information Libertarian supports a free press, no censorship, freedom to publish anything, freedom to produce anything in the theater, movies, and so on, freedom to compose anything, paint anything, sculpt anything, and basically freedom to create, compose, write, or perform any kind of information one feels compelled to. Obviously, this refers to political as well as cultural efforts.
It also refers to individual thinking, individual decision making and so forth. These, of course, are all generally associated with those ideas, laws, and rules that are looked on as “liberal” as the way of thinking. Of course, all of these must be incorporated within the legal and social structure of groups, organizations, governments, and other cultural arrangements so that people can live and work and thrive together. One thinks of the idea of a “civil” society…one in which people can get along with each other and not harm one another. The fundamental concept here is the idea that a person cannot be allowed to yell “fire” in a movie theater filled with people. Where one can, one leans to the side of as much freedom of expression as is reasonable.
On the left side of the spectrum, the Information Libertarian supports free-market capitalism. Of course, as with the other side, a societal balance must be achieved between unfettered markets and regulation or oversight. One can argue, and I do, that the freedom of markets enhances the living standards and effectiveness of a society through the greatest encouragement of information exchange, innovation and progress. This kind of a society encourages the mobility and fluidity of people, the breakdown of exclusiveness and discrimination, and the spread of wealth, and, consequently, power throughout the society so a truly democratic form of government can exist.
It refers to investigation, exploration, discovery, debate, dialogue, collaboration, and scientific advancement in all forms. It produces an environment where ideas can go from just thought to creation to application to consumption. The world of free-market capitalism, because of the fact that it supports meritocracy rather than aristocracy, should provide the environment for all that produces openness and transparency within the whole society. Therefore, a society that supports free-market capitalism should support the spread of information, the enhancement of education, and the existence of the public forum where anything and everything can be discussed. But, again, I add the caveat that there are limits or boundaries that people or groups cannot go beyond except to the detriment of the society. Yet, one still needs to err on the side of liberty and freedom in contemplating the constraints that might be imposed on the society.
This last side of the argument may draw some skepticism from many readers at this particular time in history. With the collapse of the financial markets throughout the world and with many economies in recession or expecting something worse, a lot of analysts have pointed to the failure of free-market capitalism to operate without sufficient oversight and regulation.
I have two responses to these charges. First, with a greater flow of information in the business world…more openness and transparency…there would be much less for today’s more progressive thinker to be concerned about. If businesses had to reveal what they were doing in all areas of their operations, then people, groups, and markets would be able to respond to the information and the “bad” conditions, etc., for which the progressive thinkers condemn free-market capitalism. I argue that greater information availability and dissemination would lessen discrimination and bias, create greater mobility in markets, which I believe would reduce inequities and inequalities, reduce risk taking and other things that people contend create crises.
The second point has to do with how effective government or oversight or regulation is in overcoming the problems of free-market capitalism. It is my belief that government, or oversight organizations or regulatory bodies often create an environment in a free-market economy that can lead to the subsequent behavior that come to be criticized in the future as the “problems” with free-market capitalism. To me the current financial crisis is a perfect example of this type of situation.
I don’t have time to go into this in this post but my belief is that government actions can lead to the creation of incentives for business people and organizations to act in a self-destructive way. On top of this the government counters the consequences of their initial actions thereby creating moral hazard with respect to banks, investment banks, financial companies, business manufacturers, retail organizations and so on, who then enter into competitive behavior that makes themselves riskier and riskier finally leading to a point where the system becomes so fragile that it collapses of its own weight.
I would put the theory that the “government is the cause of the problem” up in opposition to the theory that “the problem with the world is the behavior of greedy business people and speculative financiers.” If anyone needs a quick bit of evidence that government activity, in this case “Conservative” government activity, can be harmful to the economy and the society, I submit the example of the eight years of the Bush 43 administration.
The apparent contradictions in policy prescriptions in today’s world that come from claiming to be an Information Libertarian can present a real hornet’s nest of problems. In today’s post my effort is to begin to get these problems out into the air in order to start a discussion of how these contradictions might be resolved.
I put this last sentence into the paragraph because it is hard to say that there are cases where perhaps some secrecy is necessary and still call oneself an Information Libertarian. Yet, I will admit, there are some situation where, perhaps, some information should be controlled…like in situations of national security…or, in the case of the hurt or harm that might be imposed on someone, say, who is dying.
But, this then gets back into the argument for balance…something that I dealt with in my post of January 19, 2009. Because we work in a world of incomplete information we can only say that there may be some situations that we have to deal with in which the “best” (whatever that means) decision we make is to keep some information “under wraps”…keep it secret. Still, to me, to argue that one is an Information Libertarian means that one should, in reaching a balance, always err on the side of openness and transparency. One should always lean to the side that argues for the release and spread of information…whatever that information is about.
It is difficult to be an Information Libertarian in the political world that exists today. On the one side, an Information Libertarian tends to side with what would be considered to be the left, or the progressive, side of the political spectrum. In other issues, an Information Libertarian would tend to side with what would be considered the right, or the free-market capitalistic, side.
This conflict puts the Information Libertarian in a conundrum because, taking one’s beliefs seriously, one feels constantly ill-at-ease with the wide chasm that seems to exist between these two extreme positions. Wouldn’t it be much nicer if one could one could find one location on the political spectrum where all that an Information Libertarian supports would be located?
On the left side of the spectrum, the Information Libertarian supports a free press, no censorship, freedom to publish anything, freedom to produce anything in the theater, movies, and so on, freedom to compose anything, paint anything, sculpt anything, and basically freedom to create, compose, write, or perform any kind of information one feels compelled to. Obviously, this refers to political as well as cultural efforts.
It also refers to individual thinking, individual decision making and so forth. These, of course, are all generally associated with those ideas, laws, and rules that are looked on as “liberal” as the way of thinking. Of course, all of these must be incorporated within the legal and social structure of groups, organizations, governments, and other cultural arrangements so that people can live and work and thrive together. One thinks of the idea of a “civil” society…one in which people can get along with each other and not harm one another. The fundamental concept here is the idea that a person cannot be allowed to yell “fire” in a movie theater filled with people. Where one can, one leans to the side of as much freedom of expression as is reasonable.
On the left side of the spectrum, the Information Libertarian supports free-market capitalism. Of course, as with the other side, a societal balance must be achieved between unfettered markets and regulation or oversight. One can argue, and I do, that the freedom of markets enhances the living standards and effectiveness of a society through the greatest encouragement of information exchange, innovation and progress. This kind of a society encourages the mobility and fluidity of people, the breakdown of exclusiveness and discrimination, and the spread of wealth, and, consequently, power throughout the society so a truly democratic form of government can exist.
It refers to investigation, exploration, discovery, debate, dialogue, collaboration, and scientific advancement in all forms. It produces an environment where ideas can go from just thought to creation to application to consumption. The world of free-market capitalism, because of the fact that it supports meritocracy rather than aristocracy, should provide the environment for all that produces openness and transparency within the whole society. Therefore, a society that supports free-market capitalism should support the spread of information, the enhancement of education, and the existence of the public forum where anything and everything can be discussed. But, again, I add the caveat that there are limits or boundaries that people or groups cannot go beyond except to the detriment of the society. Yet, one still needs to err on the side of liberty and freedom in contemplating the constraints that might be imposed on the society.
This last side of the argument may draw some skepticism from many readers at this particular time in history. With the collapse of the financial markets throughout the world and with many economies in recession or expecting something worse, a lot of analysts have pointed to the failure of free-market capitalism to operate without sufficient oversight and regulation.
I have two responses to these charges. First, with a greater flow of information in the business world…more openness and transparency…there would be much less for today’s more progressive thinker to be concerned about. If businesses had to reveal what they were doing in all areas of their operations, then people, groups, and markets would be able to respond to the information and the “bad” conditions, etc., for which the progressive thinkers condemn free-market capitalism. I argue that greater information availability and dissemination would lessen discrimination and bias, create greater mobility in markets, which I believe would reduce inequities and inequalities, reduce risk taking and other things that people contend create crises.
The second point has to do with how effective government or oversight or regulation is in overcoming the problems of free-market capitalism. It is my belief that government, or oversight organizations or regulatory bodies often create an environment in a free-market economy that can lead to the subsequent behavior that come to be criticized in the future as the “problems” with free-market capitalism. To me the current financial crisis is a perfect example of this type of situation.
I don’t have time to go into this in this post but my belief is that government actions can lead to the creation of incentives for business people and organizations to act in a self-destructive way. On top of this the government counters the consequences of their initial actions thereby creating moral hazard with respect to banks, investment banks, financial companies, business manufacturers, retail organizations and so on, who then enter into competitive behavior that makes themselves riskier and riskier finally leading to a point where the system becomes so fragile that it collapses of its own weight.
I would put the theory that the “government is the cause of the problem” up in opposition to the theory that “the problem with the world is the behavior of greedy business people and speculative financiers.” If anyone needs a quick bit of evidence that government activity, in this case “Conservative” government activity, can be harmful to the economy and the society, I submit the example of the eight years of the Bush 43 administration.
The apparent contradictions in policy prescriptions in today’s world that come from claiming to be an Information Libertarian can present a real hornet’s nest of problems. In today’s post my effort is to begin to get these problems out into the air in order to start a discussion of how these contradictions might be resolved.
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