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What Social Animals Owe to Each Other

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.

Friday, October 07, 2022

TGIF: How the State Violated Free Speech during the Pandemic

Is anyone shocked by this observation?

Public statements, emails, and recent publicly released documents establish that the President of the United States and other senior officials in the Biden Administration violated the First Amendment by directing social-media companies to censor viewpoints that conflict with the government’s messaging on Covid-19....

This insidious censorship was the direct result of the federal government’s ongoing campaign to silence those who voice perspectives that deviate from those of the Biden Administration. Government officials’ public threats to punish social media companies that did not do their bidding demonstrate this linkage, as do emails from the Centers for Disease Control and Prevention (CDC) and the Department of Homeland Security (DHS) to social media companies that only recently were made public.

So states the New Civil Liberties Alliance (NCLA) in announcing its lawsuit against President Joe Biden, former chief medical adviser Anthony Fauci, and other government public-health officials,  departments, and spokesmen. The case now before a federal district court in Louisiana is called State of Missouri ex rel. Schmitt, et al. v. Joseph R. Biden, Jr., et al. No social-media company was named as a defendant. Rather, the suit is about the government's illegal and unconstitutional conduct. (See the complaint for the eye-opening details.) In fact, the complaint states: "Notably ... prior to Defendants’ campaign of threats and pressure, social-media platforms generally declined to engage in the acts of censorship alleged herein." 

The plaintiffs are the states of Missouri and Louisiana and several health care experts, including Dr. Jay Bhattacharya of Stanford University (among other prestigious affiliations) and Dr. Martin Kuldorff of Harvard University, two of the three authors of the Great Barrington Declaration, published in October 2020 and signed by thousands of medical professionals. The Declaration challenged the government-led strategy of shutting down American society through a variety of mandates as though everyone -- young and old, healthy and ill -- were equally vulnerable to the dangers of COVID-19. The government's data on who was suffering serious, possibly lethal illness and requiring hospitalization contradicted that baseless premise early in the pandemic.

The Declaration, which today has signatures from more than 62,000 scientists and health care professionals (and 932,000 signatures overall) called instead for "focused protection" of the elderly and those with already-compromised immune systems. Otherwise, Americans should be left free to live normal lives. The shutdown of society, this view holds, would inflict untold harm in regard to health (because of deferred medical examinations/treatments), psychological well-being, children's education, and lost income. All of this and more have now been documented. "Focused protection," it must be emphasized, was not a radical position in 2020. Rather, it had been the mainstream approach to pandemics for the previous 100 years.

Unfortunately, the authors, who also included Dr. Sunetra Gupta of Oxford University, were smeared by government officials and spokesmen as fringe characters who could be safely ignored. At the same time, the national government pressured social media to suppress challenges to its message and policies. In other words, the government did everything it could short of direct censorship to keep the American people from knowing that eminently qualified doctors and other scientists disagreed with the party line.

Under the U.S. Constitution and case law, the government is not only barred from directly interfering with speech on the basis of content, but it is also prohibited from inducing or coercing private entities, such as social networks, to do so. The Supreme Court has spoken on this.

The plaintiffs contend that this is precisely what the defendants did during the pandemic through "express and implied threats" against the social networks, including the threat of antitrust action and the threat to withdraw the protection provided by Section 230 of the Communications Decency Act, which immunizes the platforms from liability for what participants post. 

NCLA says:

Government-induced censorship is achieved through a wide variety of mechanisms, ranging from complete bans, temporary bans, “shadow bans” (where often neither the user nor his audience is notified of the suppression of speech), deboosting, de-platforming, de-monetizing, restricting access to content, requiring users to take down content, and imposing warning labels that require click-through to access content, among others. These methods also include temporary and permanent suspensions of disfavored speakers.

This sort of censorship, which strikes at the heart of what the First Amendment to the U.S. Constitution was designed to protect—free speech, especially political speech—constitutes unlawful government action. The federal government is deciding whose voices and ideas may be heard, and whose voices and ideas must be silenced. Moreover, this state action deprives Americans of their right to hear the views of those who are being silenced, a First Amendment corollary of the right to free speech.

The lawsuit seeks no monetary damages, but it asks the court to declare that the plaintiffs acted illegally. It also asks the court to

Preliminarily and permanently enjoin Defendants, their officers, officials, agents, servants, employees, attorneys, and all persons acting in concert or participation with them, from taking any steps to demand, urge, pressure, or otherwise induce any social-media platform to censor, suppress, de-platform, suspend, shadow-ban, de-boost, restrict access to content, or take any other adverse action against any speaker, content or viewpoint expressed on social media.

Going further, we must demand an end to the government-university-science complex, which puts a heavy political thumb on the scale of scientific debate without which the truth cannot be ascertained. As the complaint states, "Yesterday’s 'misinformation' often becomes today’s viable theory and tomorrow’s established fact.... This prediction has proven true, again and again, when it comes to suppressing 'misinformation' and 'disinformation' on social media." (The complaint notes other examples of similar reversals despite official government efforts, including the Hunter Biden laptop story and the Wuhan lab-leak theory of the coronavirus's origins. These once-belittled accounts either have been confirmed, as with the laptop story, or have achieved reasonable credibility if not confirmation, as with the lab-leak theory.)

Government officials must not be permitted to suppress, directly or indirectly, public-health and other sorts of claims they disagree with. Officials of course can say what they believe are the facts, but they must not attempt to smear, marginalize, and silence dissenters. The very act of financing scientific research is prejudicial because of the stamp of exclusive legitimacy it implies. As the pandemic illustrates, a truly free marketplace of ideas is literally a matter of life and death.