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What Social Animals Owe to Each Other

Friday, December 02, 2022

TGIF: On Liberty and Security

"Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety." Benjamin Franklin's famous words are often quoted because, alas, they are always relevant.

Whether Franklin meant what libertarians take him to have meant has been challenged in recent years. See this disagreement between Benjamin Wittes and Leya Delray. In defense of her interpretation, Delray argues that Franklin shed light on his meaning when he quoted himself 20 years later.

Whoever is right, for Franklin the word liberty on these occasions meant not individual freedom but colonial "self-government" independent of the king of England and those to whom he had granted land in the New World. And for Franklin, the powers of such a government include the power to tax. Franklin thus was defending the collective "freedom" of Americans through their colonial legislatures (that is, majority rule) against undemocratic rule from afar. (Pennsylvania was a proprietary colony granted to the Penn family by the king of England. The family-appointed governor had repeatedly vetoed bills from the legislature that included provisions to tax the family's proprietary estate to pay for the defense of frontier settlements during the French and Indian War. The family objected but offered instead to pay a lump sum for that defense in return for a legislative renunciation of its power to tax the family land.)

In my view, Delray makes a better case than Wittes, but whatever Franklin had in mind, we as libertarians are free to apply Franklin's words to the individual rather than the collective. After all, we're methodological individualists, who realize that no group can possess rights not possessed by its members. So let's do so. (Another Benjamin -- the French-Swiss classical liberal Benjamin Constant -- had important insights about the critical difference between individual freedom and so-called collective freedom in his must-read 1819 essay "The Liberty of Ancients Compared with that of Moderns." Spoiler: Three cheers for modernity!)

Many points could be made about the trade-off allegedly required between liberty and safety, or security. For starters, can they really be traded off? The libertarian philosopher Roderick Long thinks not:

What we want is not to be attacked or coercively interfered with – by anyone, be they our own government, other nations’ governments, or private actors. Would you call that freedom? or would you call it security?

You can’t trade off freedom against security because they’re exactly the same thing.

Consider what's happening in China. In the name of delivering the impossible -- zero COVID-19 -- the people have been deprived of all liberty. Are they more secure for this deprivation? The virus is spreading apace anyway, and people are dying and suffering because whatever freedom they had previously has been curtailed. It is inspiring to see so many Chinese protesting their oppression in cities throughout the country. How sad that many other Chinese are willing brutally to police the people who are demanding freedom and justice.

Another way to look at the alleged trade-off between freedom and security is to realize that one doesn't gain actual security through state limits on freedom but rather a false sense of security. A false sense of security is worse than no sense of security at all.

When the state, even a democratic one, assumes the role as security provider, how do we know it will actually provide security rather than make us less safe? Because politicians and bureaucrats (think Anthony Fauci) say so? Because elected officials will accurately identify and appoint well-meaning and expert bureaucrats? A good deal of faith is expected on the part of the people who will be compelled to obey the resulting decrees. This model of governance also ignores the fact discovering what ought to be done in a given situation requires a decentralized competitive process in which competing hypotheses and theories are freely aired. Centralization in this realm suffers from the same fatal calculation and knowledge problems of central economic planning.

At any rate, what assurance does anyone have that the experts, who are human beings, will not err or act corruptly? We have no assurance at all. Even if a state official gets caught in a blunder or corrupt act, the likelihood that he will be held accountable is minuscule. Good luck suing that person. As for mounting an effort to defeat a politician at the polls, good luck with that too.

The doctrine that a democratic state (as opposed to a society of individual liberty and consensual social cooperation) can deliver security is actually rather peculiar. It's based on the curious principle that while we are too incompetent to manage our own lives through individual action and voluntary cooperation, we are perfectly competent to pick other people to manage our lives coercively. No one better exposed this contradiction than Frédéric Bastiat, the great 19th-century French classical liberal economist and legal philosopher. In The Law he wrote:

What is the attitude of the democrat when political rights are under discussion? How does he regard the people when a legislator is to be chosen? Ah, then it is claimed that the people have an instinctive wisdom; they are gifted with the finest perception; their will is always right; the general will cannot err; voting cannot be too universal.

When it is time to vote, apparently the voter is not to be asked for any guarantee of his wisdom. His will and capacity to choose wisely are taken for granted. Can the people be mistaken? Are we not living in an age of enlightenment? What! are the people always to be kept on leashes? Have they not won their rights by great effort and sacrifice? Have they not given ample proof of their intelligence and wisdom? Are they not adults? Are they not capable of judging for themselves? Do they not know what is best for themselves? Is there a class or a man who would be so bold as to set himself above the people, and judge and act for them? No, no, the people are and should be free. They desire to manage their own affairs, and they shall do so.

But when the legislator is finally elected — ah! then indeed does the tone of his speech undergo a radical change. The people are returned to passiveness, inertness, and unconsciousness; the legislator enters into omnipotence. Now it is for him to initiate, to direct, to propel, and to organize. Mankind has only to submit; the hour of despotism has struck. We now observe this fatal idea: The people who, during the election, were so wise, so moral, and so perfect, now have no tendencies whatever; or if they have any, they are tendencies that lead downward into degradation.

Any reasonably intelligent person ought to see that it is far easier for us to manage our own lives than to select "the right" social engineers, with their compulsory one-size-fits-all plans, to do it for us.

It is said that neither freedom nor security is free. I agree. But must we pay coercive monopoly prices for inferior services?

Friday, November 18, 2022

TGIF: Beware the Regulatory Storm over FTX

The bankruptcy of the cryptocurrency exchange FTX and the alleged fraud by co-founder Sam Bankman-Fried, which has cost customers millions, is tailor-made for anyone who already wants the power of government to expand, especially in the area of financial privacy. For that reason I think it would be useful to take a 30,000-foot view of the matter. I offer these considerations as someone with no more than a layman's knowledge of the cryptocurrency phenomenon. (I found this Reason video helpful.)

First, fraud is illegal. If a firm accepts money from clients and uses it in violation of the contractual terms, that is already against the law and the victims have legal recourse. So right off the bat we should be highly doubtful about calls for new laws and regulations or expanded regulatory oversight.

Second, regulation can create a moral hazard. That's what happens when a sense of security provided by insurance or government regulation unintendedly encourages the very bad thing that one sought to avoid. Think of the massive stock fraud perpetrated by Bernie Madoff. Madoff was a well-connected investment insider who defrauded highly sophisticated individuals and charities. He didn't prey on naive widows. Madoff had even worked with the Securities and Exchange Commission (SEC). Isn't it plausible that the existence of the regulatory regime worked to Madoff's advantage? Imagine if no such regime had existed and investors had not been led to rely on an SEC "watchdog," with all the classic bureaucratic deficiencies, to protect them. Would they have been such easy marks? I think not.

Fraud is always possible no matter the regulatory environment. Thus a false sense of security is worse than none at all.

Critics of markets denigrate the buyer beware principle, but when compared to the alternative -- trust state bureaucrats -- it looks pretty good. To the extent that regulators weaken buyer beware, they do a disservice to the public while posing as benefactors. Buyer beware is necessary in any legal environment. If you were you're looking for a new doctor, would you be content simply to throw a dart at a list of government-licensed physicians? Or would you ask around?

Third, the alleged criminality of FTX should not impugn cryptocurrency per se any more than Maddoff's criminality impugned the stock market per se. If, as appears to be the case, a bad actor harmed a lot of people, he should have to compensate his victims. (Of course, that may not come close to making them whole.) But Bankman-Fried's wrongdoing must not be used to demonize cryptocurrency as inherently suspect and illegitimate or to drive it out of existence. No reasonable person concluded that we should not have a stock market because Madoff used it to fleece lots of people.

Fourth, some powerful people are out to get cryptocurrency precisely because it can help regular people maintain some privacy. Those with a fetish for government power have pushed and often attained measures designed to abolish financial privacy. For example, through the government's "Know Your Customer" rules, banks are obliged to inform regulators about their depositors' behavior even if no evidence of criminality exists. Regulation of the government-cartelized banking industry is so extensive that bureaucrats can make virtually any demand and the unwitting depositors whose privacy is compromised have little or no recourse. In a competitive banking industry with market-based money, banks would perhaps offer different assurances about privacy and consumers would freely decide what level they valued at what price. That's how it should be.

If people believe that financial privacy matters only to those who have harmful activity to hide, they need to get over it. Financial privacy and privacy in general are simply implications of self-ownership and should matter to everyone. It is obviously important in authoritarian and totalitarian countries, where governments freely confiscate people's wealth, but it's also important here. We can't know exactly what the future holds. Remember what happened to protesting truckers' bank accounts in Canada? Let's also not forget PayPal's threat, since rescinded, to fine customers for spreading alleged misinformation. And the war on drug sellers and users can't be a good reason for denying financial privacy because the so-called drug war should be abolished.

No one who cares about individual freedom should stand by and let the FTX scandal become a pretext for expanded government power and the destruction or nationalization of cryptocurrency.

Friday, November 11, 2022

TGIF: Midterm Blues

As midterm elections go, for champions of individual liberty this one could have been worse. I see two bright spots. The likely slim majority of Republicans in the House could -- maybe -- produce a measure of gridlock on domestic spending and regulation, and the blame for the Republicans' substandard midterm performance might fall entirely on Donald Trump, driving him from the stage. When you consider all the possible outcomes from Tuesday, that's not bad.

In most midterm years the only outcome worth hoping for is gridlock. Gridlock, however, wouldn't be the best outcome under all conceivable circumstances. Libertarians want Congress to get many things undone, especially but not limited to out-of-control military and so-called entitlement spending. The latter, which is on autopilot, finances programs that are facing insolvency. When that happens, today's spending, taxing borrowing, and money creation will look trivial.

But hardly anyone in power even talks about these and similar problems, so gridlock for the next two years is hardly likely to stop anything good from happening. In other words, gridlock was worth rooting for. It won't be worse than continued Democratic domination.

So regardless of what happens in the Senate, if the House goes Republican, even by the small margin that appears likely, we might see it block the most egregious domestic spending and regulatory measures proposed by Joe Biden and the congressional Democrats. I'd keep an eye on any more energy bills intended to interfere with the use of fossil fuels. Not that Republicans are reliable when it comes to opposing domestic spending -- far from it -- but we can hope. On the other hand, don't look for a freeze, much less a reduction in military and related spending. Republicans have not lost their commitment to the warfare state. 

As noted, the other good news from Tuesday was the poor showing for Trump, some of whose favorite candidates lost. Not all of those he endorsed bit the dust, but some key ones did, such as in Pennsylvania and New Hampshire. He may yet be disappointed by still-undecided races in Arizona, Georgia, Colorado, and elsewhere.

I'm hoping that Republicans will blame Trump for their party's poor showing in the midterms. The out-party is supposed to make big gains in Congress, in governor's mansions, and in state houses, but the Republicans did not do it. This happened in a year when the voters' top concerns were inflation and crime, and with an unpopular Democrat in the White House. Who or what else could be responsible for the lackluster midterm performance if not Trump?

So if Tuesday's results play a role in convincing Trump to stay out of the 2024 presidential election, we can breathe a sign of relief. Liberty would be better off without his toxic presence. (This is not to say that Ron DeSantis, who would be the chief beneficiary, offers any hope.)

With another election behind us, it's worth remembering what a fraud electoral politics is. Campaigns are little more than performance art -- bad performance art. The skill that ignorant voters tend to reward is a candidate's mastery at delivering a particular tribe's or coalition's talking points. Much of what elected officials do is interfere with our peaceful productive endeavors, but how many voters know anything about economics? Without that knowledge, all that's left are cosmetics and rhetoric that reassures.

The candidates typically don't know anything either, but they and their handlers do know that the voters are ignorant and thus are suckers for comforting soundbites. It's just a matter of which candidate gets more of his or her tribe to the polls.

If you can see in this any resemblance to selecting office holders according to their actual knowledge, judgment, competence, and integrity, let me know.

I'm not implying that politics could be better than this. The problems are inherent because government is a top-down way of attempting to organize society that cannot help but violate individual liberty. What I'm saying is that at best politics is show-biz by other means. 

So as usual, the election gave us both good news and bad news. The good news is that the losers lost. The bad news is that the winners won. 

Friday, November 04, 2022

TGIF: Election Day 2022

Another election day is upon us. We're told that we have a duty to vote because so many Americans gave their lives for that right. But perhaps it ought to be spelled R-I-T-E, as in a religious ritual.

Is it a duty or a right? Let's make up our minds. In 21 countries voting is mandatory -- although the law is not always enforced -- but that absurd idea has never had traction here. There is something weird about an alleged right that one is compelled to exercise. It certainly would be unique.

And did Americans really fight wars for the vote? Many who were killed in wars that the government tricked them into fighting might have thought they were risking their lives for freedom, but the freedom to vote probably didn't rank high on the list. Americans certainly died in the domestic struggle for full citizenship -- civil rights-- which includes the vote, and I don't mean to disparage that struggle.

I'm saying that the freedom to govern one's own life is more important than the vote, and deep down people know it. In our private lives individual action really counts: we tend to reap the lion's share of the benefits and pay the price of our actions. When I go to the supermarket to buy eggs, I am confident that I'll bring home eggs. Virtually all the costs, both in time and money,  and the benefits are mine; thinking about them is how I decide if going to the supermarket is worthwhile in the first place.

Voting is different. Individual action is almost always indecisive -- each person has only one vote, and the costs and benefits of each person's decision are widely and thinly dispersed throughout society. That disconnect breeds irresponsibility.

Imagine if we shopped for groceries the way we pick rulers. On Shopping Day you would walk into the supermarket and see before you two (maybe three or four) sealed pre-filled shopping carts. Each cart has a different selection of products. Your task is to vote for a cart from among the candidates. That may not be easy. Undoubtedly, you would like some of each cart's contents and dislike others. You would have to decide which one has more of what you want and less of what you don't want. And no, you would not be to able exchange items with other people.

So you would mark your ballot and then return home to watch the election returns. The cart that you get to bring home is the one that wins 50 percent plus 1 of the votes or perhaps a plurality. Of course, it may not be the one you voted for. Oh well. (To make this even more like politics, the cart you bring home isn't exactly like the one you saw in the supermarket. Campaign promises are notoriously ephemeral.)

I submit that that would be a stupid way to shop for groceries. But that's the system we use to pick the people who are empowered to meddle in our lives, embroil us in war, and do other foolish things that no one has any business doing. I acknowledge that voting is preferable to violence for selecting rulers, but when Churchill said democracy beat any alternative, he overlooked a contender: consistent liberalism (libertarianism), which does not allow majorities to negate individual rights.

Mathematically, one vote is rarely decisive and that's only in the smallest jurisdictions. As the late public-choice economist Gordon Tullock pointed out (watch the video "Voting Schmoting"): "It’s more likely that you’ll get killed driving to the polling booth than it is that your vote will change the outcome of the election."

No election in my adult lifetime would have turned out differently had I done something other than I did on election day. Not one. While the smaller the vote pool, the greater the chance of a tie, greater is not the same as great. In most places that chance is insignificant. People still talk about how close the 2000 Bush-Gore vote for president was in Florida. But the margin there was 537 out of nearly six million votes. As far as I've been able to determine, no individual Floridian cast or declined to cast 537 votes that day.

So when the good-government types tell you to get to the polls because "every vote counts," you know not true. It is certainly true that the winner by definition must have more votes than the loser. (Presidential elections are more complicated, of course.) But each person has only one vote, and it will make no difference. The only action you can control will not decide the outcome.

Someone might object that although your chance of casting the decisive vote is typically only the tiniest bit above zero, you won't know for certain how things will turn out until the votes are counted -- so you'd better vote. But if that were the right way to look at it, playing the lottery would be a good financial strategy because your chance of winning, no matter how small, is greater than zero. But it's not a good strategy. Except in truly desperate circumstances, we don't usually undertake a course of action unless we see a reasonable chance of success. That's how we avoid wasting scarce time, energy, and resources. Instead of voting, perhaps your time would be better spent doing something that has a reasonable chance of making a difference in some way that matters to you. Every action -- including voting -- has opportunity costs.

Tullock wasn't telling people to stay home on election day. He pointed out that many people vote because they like to vote, and he meant no criticism of them. Voters can have many reasons for liking that activity, such as feeling part of a like-minded group of people. Tullock simply thought that aiming to determine the outcome of an election is a bad reason to vote.

People can also have good reasons to dislike voting. They may not want to participate in a civic religious-style rite, which apologists for the government power will invoke in order to blame the voters and excuse the politicians and bureaucrats for bureaucratic incompetence and misconduct. If "we are the government," as we are often told, then the fault must lie in ourselves. But are we the government? Or is popular sovereignty the secular equivalent of the divine right of kings -- a fiction to rationalize an elite's power over us? (See the section titled "The Fiction of Representative Government" in my article "The Misrepresentation of Health Care Reform.")

One last thing: we are also told that if we don't vote we have no grounds to complain. That fallacy was put to rest in 1851 when the classical liberal Herbert Spencer pointed out that, apparently, voters have no grounds to complain either because those who voted for the winner got what they wanted and those who voted for the loser accepted the rules of the game. So everyone must shut up and obey. How convenient.

Friday, October 28, 2022

TGIF: Free Markets and Greed

"Greed, for lack of a better word, is good."

Ever since corporate raider Gordon Gekko, the lead character in Oliver Stone's Wall Street (1987), made that declaration, left-wing opponents of the market economy have regarded that one-liner as the only rebuttal required to silence their libertarian adversaries. (Right-wingers like the national conservatives probably find Gekko's line useful too.)

But Gekko's scriptwriters, Stone and Stanley Weiser, neglected to have their creature define the word. How interesting, then, that Gekko says, "for lack of a better word." Is there no better word or phrase than greed for what he might have had in mind? "The peaceful pursuit of one's interest" or "the pursuit of happiness" works for me.

The lack of a definition, of course, has never stopped anyone from quoting Gekko. It's as though a real person had finally blown the whistle on the market economy. It's about greed, and we all know that greed is the worst thing! What more do we need to know?

Bear in mind that the economy that Gekko operated in was not free, especially in banking and corporate finance. The politicians' and bureaucrats' hands were and still are all over it.

The video clip of Gekko praising the morality and efficacy of greed is still a staple of the left. So advocates of the market ought to be prepared for the charge. Milton Friedman can help.

Friedman, the late Nobel-Prize-winning economist, market advocate, and classical liberal was second to none when it came to handling questions from critics, and fortunately we can watch him in action as he answers the charge that greed is a moral stain on the marketplace. (YouTube has many videos showing Friedman answering market critics. Each is a superb lesson in how to respond with patience, civility, and clarity. Everyone would benefit from studying those videos.)

In 1979, eight years before Wall Street, Friedman appeared on Phil Donahue's popular television program. In this short segment of the interview, Donahue asked Friedman, "When you see the greed and the concentration of power, did you ever have a moment of doubt about capitalism and whether greed's a good idea to run on?" (Like greed, the ink-blot word capitalism means different things to different people, which it makes it a bad name for a social system. Hence it is often modified with such conflicting adjectives as free-marketcronylaissez-fairepolitical, and state. That's only one reason I have for rejecting the word.)

Friedman replied:

Well, first of all, tell me, is there some society you know that doesn't run on greed? Do you think Russia doesn't run on greed? Do you think China doesn't run on greed?

What is greed? Of course, none of us are greedy. It's only the other fellow who's greedy.

The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn't construct his theory under order from a bureaucrat. Henry Ford didn't revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you're talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it's exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear: that there is no alternative way, so far discovered, of improving the lot of ordinary people that can hold a candle to the productive activities that are unleashed by a free-enterprise system.

Donahue isn't finished, however. "But it seems to reward not virtue as much as the ability to manipulate the system."

Then Friedman:

And what does reward virtue? You think the communist commissar rewards virtue? You think a Hitler rewards virtue? You think -- excuse me, if you'll pardon me -- you think American presidents reward virtue? Do they choose their appointees on the basis of the virtue of the people appointed or on the basis of their political clout?

Is it really true that political self-interest is nobler somehow than economic self-interest? You know, I think you're taking a lot of things for granted. Just tell me where in the world you find these angels who are going to organize society for us. I don't even trust you to do that. [Smiling.]

Without my intending any criticism, Friedman might have asked Donahue what system he thinks some business people try to manipulate in today's mixed economy. Isn't it the interventionist political system that free-market advocates object to? Friedman also might have asked what's unvirtuous about a system that leaves individuals free to peacefully pursue their happiness through production and trade that necessarily makes many other individuals better off too. State-run or state-guided alternatives are all zero-sum, if not negative-sum, systems. One person's gain is another's loss. Only the market economy is positive-sum -- win-win. John Stossel likes to underscore that buyers and sellers typically thank each other when they complete their transactions. That should tell the Phil Donahues of the world something.

By the way, if you want an actual good movie on the economics of corporate takeovers, check out Other People's Money (1991), based on the play by Jerry Sterner, screenplay by Alvin Sargent, directed by Norman Jewison, and starring Danny DeVito and Gregory Peck.

Friday, October 21, 2022

TGIF: Are Bosses like Rulers?

What does the libertarian philosophy have to say about business management as an institution? Is it analogous to the state or something entirely different? Since we libertarians generally dislike seeing people being bossed around, whether by the state or anyone else, we may be tempted, as I've certainly been, to think that a free and just society would spontaneously dispense with the traditional employer-employee relationship. After all, libertarians have good reasons to at least be suspicious of all hierarchies and subordination, right?

So freedom would achieve its glorious pinnacle through flat bossless worker-owned co-ops, small partnerships, single-proprietorships, and peer-to-peer arrangements that lack even Uber's central ownership.

But maybe not.

The prediction that managerial specialists are due for extinction, however, looks more like wishful thinking in light of solid economic theory and empirical evidence, write economists Peter G. Klein and Nicolai J. Foss in their new book, Why Managers Matter: The Perils of the Bossless Economy. (This is not intended as a formal book review. Listen to Klein's conversation with Keith Knight of Don't Tread on Anyone.)

Klein and Foss's thesis grabbed my attention because, as I've experienced firsthand, drawing an analogy between the state and the traditional firm is seductive. On the other hand, I've known and respected Klein, an economist of the Austrian school who teaches at Baylor University's Hankamer School of Business, for many years. I take him seriously. (Foss teaches at the Copenhagen Business Schools in Denmark.)

The case against the traditional firm has this touch of plausibility: because government interventions in mixed economies can make quitting a job artificially costly, people might feel trapped in bad work situations. To the extent that the government deliberately or inadvertently creates obstacles to starting businesses or relocating (through licensing,  zoning, and more), or through a tax system that ties medical insurance to one's job -- to that extent, the government can in effect block employees from leaving bad workplaces or reduce their bargaining power. Such interventions provide a politically derived advantage to employers over actual and prospective employees that could not be achieved in the market.

But employers can create these impediments. Politicians and bureaucrats can and do.

For libertarians, the obvious remedy for politically bestowed advantages on employers is freedom, specifically, the freedom to compete, to start businesses, to move where the terms are better, etc. Ready options increase employee bargaining power. (Adam Smith in The Wealth of Nations decried the English laws that barred workers from moving to other areas in search of better pay.) Competition is the universal solvent.

The case against government policies that favor employers (again, not necessarily by design) should not facilely be extended to managerial hierarchy or traditional employment per se. Socialists haven't been the only ones to equate employment with servitude. Even the great classical liberal philosopher Herbert Spencer compared it to slavery. (Ironically, the pre-Civil War South's most eloquent defenders of chattel slavery denounced the wage slavery of the free labor market.) However, in a free market and even in a mixed economy like ours, the problem isn't distinct ownership and management. It's politicians and bureaucrats.

This is a big subject, and I'm certainly no expert, so I can only scratch the surface here. But Klein and Foss specialize in the economics of industrial organization and are an important reality check on those who think managerial hierarchy is morally objectionable and economically superfluous or worse.

Morally, of course, as long as neither side of a transaction, including the employer-employee relationship, uses force against the other, the transaction passes muster. It is irrelevant that one side can be said to have a "greater need" than the other for that relationship at that time. It is no employer's fault that people need to earn a living. One might even praise the employer for providing the means to do so. But let's remember that no firm is founded to provide jobs. Firms exist to make money for their owners by producing something of value for others. To do that they will typically hire people. Like other market transactions, all these exchanges produce mutual gains.

People start businesses with plans to produce something specific. Until they decide that a new objective is needed, the owner (or owners) will want to motivate and guide the staff to carry out the mission. Exactly who decides how the mission is carried out is a management's judgment call that depends on many factors. That's what management is about, and managing is real work, as the early classical liberals understood. The owner of an Indian restaurant is unlikely to hire chefs who insist on the autonomy to add other kinds of dishes to the menu. It would be wrong to think that those chefs are oppressed or stripped of their dignity.

Owners or their managerial agents, then, select the company's ends. However, the authors say, in the new information economy, it makes more sense than ever to leave the means to frontline employees. "We agree that the new environment suggests the need for a redefinition of the traditional managerial role." But they add: "Despite all the changes that have occurred, there is a strong need for someone to define the framework. In the knowledge economy, the main task for top management is to define and implement the rules of the game." Managers are also important for coordinating different divisions of a company that depend on each other.

Nuance, then, is the order of the day. Klein and Foss clearly are not dogmatically pro-hierarchy: "Indeed, some companies have excessive corporate fat: layers could often be cut, and empowering employees might increase productivity."

But the authors note that although the new technologies have revolutionized business, "the laws of economics are still the laws of economics, human nature hasn't changed, and the basic problem of business -- how to assemble, organize, and motivate people and resources to produce the goods and services consumers want  -- is the same as it ever was."

Any firm or noncommercial organization, for that matter, requires a focus on both the forest and the trees, the long and short term. Why would we be surprised that different people have different skills and different preferences in this regard? Skills, of course, are not evenly distributed throughout a population. A division of labor, knowledge, and inclinations is to be expected. Many will want to concentrate on a specific job, without having to think about management, long-term planning, and such. Lots of people dislike sitting through meetings.

Moreover, people differ in their preferences for risk-taking. Some prefer a regular paycheck in return for less overall responsibility.

The upshot is that human diversity makes noncoercive hierarchies perfectly understandable, inevitable, and beneficent as long as the market is free. That in no way means that bosses can't be stupid, obnoxious, or abusive. Of course they can and are. But if they have to compete without government privilege, abuse and stupidity won't survive because profits will go to the better-run firms, which will attract the best employees. 

In interviews (as in his and Foss's book), Klein emphasizes that one size surely does not fit all companies. As a Hayekian, he understands that nonmanagement workers possess local and tacit knowledge that managers don't -- and that good managers will want their employees to capitalize on that knowledge and reward them for doing so. "[T]here are many benefits to decentralization, as well as costs, and these vary widely with context and circumstance," Klein and Foss write.

Klein and Foss intend their book to correct the impression given by many current writers on management philosophy that hypes the spread of nonhierarchical companies and predicts a future marked by this new way of doing business. It's not true, Klein and Foss respond: "... echoing Mark Twain ... the death of hierarchy has been greatly exaggerated and ... its bad reputation is largely undeserved."

Their point is not simply that some degree hierarchy is more efficient than none at all, but that bosslessness poses perils to businesses, such as discoordination and -- perhaps counterintuitively -- lack of flexibility.

As you can tell, this is a rich thesis. I'll close with a couple more quotes:

Writers [who favor bossless firms] ... are fiercely critical of traditional hierarchy, but we think they exaggerate its problems and neglect many benefits.... The near-bossless companies -- and there aren't many of them -- with their self-managing teams, empowered knowledge workers, and ultra-flat organizations are not generally or demonstrably better than traditionally organized ones. Bosses matter not just as figureheads but as designers, organizers, encouragers, and enforcers....

[I]f you look more closely at ... ostensibly bossless companies, you see that they do have formal [or informal] bosses.... Right away, this suggests that perhaps the whole bossless company narrative is a bit of a head-fake -- a way to draw attention to the charismatic, influential leaders who create and promote flat structures..... Contrary to popular opinion, the world is not becoming dominated by flatter, even bossless, network organizations.

The market is an efficient decentralized information-generating process. Through private property, voluntary exchange, free enterprise, and the price system, we learn things that we can't learn in other ways. This is as true for the best management methods as it is for the many other things we look to the market for. Government should never impede worker-owned enterprises, but it shouldn't help them either. Freedom is for all. 

Related reading: "Free Men for Better Job Performance" by C. L. Dickenson, published by the Institute for Humane Studies in 1966. It is posted here and here.

Friday, October 14, 2022

TGIF: Governments Create Problems; Markets Fix Them

My article "Complete Liberalism" prompted an unexpected challenge. An interlocutor, who says he owns a business and thus is not antibusiness, claimed that my article suggested that, unlike government regulators, businesses never get things wrong. Yet business failures outnumber successes 10,000 to one, this person said, for all kinds of reasons, both innocent and malign, including a desire to pull the wool over consumers' eyes for as long as possible.

The problem with the comment is that my article never claimed that business people always get it right or are always virtuous. I've pointed out repeatedly that the best economists -- especially the Austrian economists -- never ignore the inherent existence of error in describing how markets work. And libertarian writers have never suggested that business owners cannot have bad intentions, which are magnified by access to state power. Quite the contrary! What these thinkers have emphasized are the systematic incentives and disincentives produced by free competition that reward pro-consumer performance and penalize incompetence and malevolence. Think of all the libertarian criticism of the malignant relationship between business and government. Now think of Ayn Rand's businessmen-villains in Atlas Shrugged.

One need only read the accessible writings of Ludwig von Mises ("Profit and Loss," Bureaucracy), F. A. Hayek ("The Use of Knowledge in Society," "Competition as a Discovery Process"), or Israel Kirzner ("Economics and Error") to see that the plague of uncertainty, error, and incomplete and dispersed knowledge figures heavily in good economic analysis. The question they sought to answer is: how can people coordinate their productive social cooperation in the face of such ignorance? Individual freedom produces the only answer for a great society: prices.

In fact, if it weren't for imperfect knowledge, free markets would be unnecessary and profit and loss would disappear. Mises wrote:

If all people were to anticipate correctly the future state of the market, the entrepreneurs would neither earn any profits nor suffer any losses.... What makes profit emerge is the fact that the entrepreneur who judges the future prices of the products more correctly than other people do buys some or all of the factors of production at prices which, seen from the point of view of the future state of the market, are too low....

On the other hand, the entrepreneur who misjudges the future prices of the products allows for the factors of production prices which, seen from the point of view of the future state of the market, are too high. His total costs of production exceed the prices at which he can sell the product. This difference is entrepreneurial loss.

It's hard to believe that an economist who writes about entrepreneurs with correct or incorrect judgments about the future could have thought that business owners were infallible. Economic analysis, after all, is supposed to be about real human beings who, whether they are acting as producers or consumers, are fallible.

The free-market position is that free and competitive markets are not perfect but better than government bureaucracies at detecting and correcting errors about what consumers will want and what they will be willing to pay. That's what counts, isn't it? Since omniscience is not an option, we want the best method available. That's all we can hope for, and it turns out not to be too bad. We must always ask about any touted solution to a problem: compared to what? Thomas Sowell's Law -- "There are no solutions, There are only tradeoffs" -- is relevant here.

David D. Friedman is another important scholar who has shed on the relative merits of bureaucracies and markets in his important article "Do We Need a Government?" (I recommend his video lecture.) Friedman addresses a different matter than the one I'm concerned with, namely, the collective-action problem, one manifestation of which is called "market failure." But much of what he writes applies. Here's the key, which is about systematic incentives:

In private markets, most of the time, an individual who makes a decision bears most, although not all, of the resulting costs, and receives most of the resulting benefits. In political markets that is rarely true. So we should expect that the market failure that results from A taking an action most of whose costs or benefits are born by B, C, and D should be the exception in the private market, the rule in the political market. It follows that shifting control over human activities from the private market to the political market is likely to increase the problems associated with market failure, not decrease them.

This shouldn't be controversial. We experience this as shoppers when we spend our own money on the very goods we then bring home and use, and as voters, where the disconnect among choices, costs, and benefits is stark. This has critical implications for both business owners and bureaucrats. A fundamental contribution of public-choice theory is that the normal principles of human action apply to government employees. Bureaucracies are filled with ambitious people too, so this is only fair. They don't become sainted creatures with perfect knowledge and perfect virtue merely because they step across the threshold and take government jobs. 

Incentives matter, as we all know first-hand. The same human being operating in two different institutional environments should be expected to behave differently. And indeed they do.

In a competitive -- that is, free -- market a business owner's mistake or bad conduct is someone else's chance to make a profit. Because entrepreneurs know this, they are on the lookout for errors. "Hence in a market society," Friedman writes, "there is an incentive for private parties to find ways around the inefficiencies due to market failure."

Nothing is more powerful than the profit motive, something that even opponents of the market readily concede.

The same incentive is not to be found in bureaucracies, which are not profit-and-loss organizations. Most important, bureaucrats don't have the price information that entrepreneurs have. Their revenue is obtained by force -- taxation -- and their "products" are not offered on markets where prospective buyers can pass them by for competing offerings. That's an entirely different ballgame from market activity.

Notice that bureaucratic failures are routinely portrayed as market failures (most people's economic ignorance leaves them gullible) and are used to justify even more government: larger budgets, bigger staff, and wider powers. If (alleged) market failures require more government, as some people believe, how can government failures require, not more markets, but more government?

We should want the incentives for spotting and fixing errors to be as undiluted as possible. The way to achieve that is to keep the government from interfering with people's peaceful activities.