Conversation on Poverty

An old friend, James, who helped train me in Perl many years ago, recently came to me with a request: he wants to work on the problem of poverty, internationally and domestically, from a new perspective. His belief is that, rather than throwing money at the problem in the form of welfare or foreign aid, the development of personal micro-level capability is required. In the inner city, this means responsibility, inner peace in place of negative influence, and opportunity. Internationally, it means the tools of exchange and opportunity, and the ability to direct entrepreneurial drive into productive pursuits.

This is clearly the direction that programs are headed, though slowly. Welfare programs have been reformed toward these ends, and development economics has moved from supporting foreign aid in the form of blank checks, to building institutions; micro-loans and in-kind support for education have replaced cash that went directly to support dictators. But many of the new programs have been twisted to produce outcomes similar to the old programs, and poverty is still a major problem.

My friend came to me because I work at the Heritage Foundation, and he felt that the loudspeaker that Heritage possesses on the policy stage might serve this issue well. The idea is to build a bridge between the left-wing "peacemaking" groups, the right-wing responsibility advocates and the libertarian anti-state-programs people.

James says he hopes to understand the impact, if any, of wide-spread training in constructive conflict resolution and other proven-effective peace-building techniques. His hypothesis is that educating people to effectively cultivate peace in their lives and relationships will at worst make them more productive and save the rest of us a lot of money, and at best, result in a more secure world. He can advocate for policy in various left-wing peacemaking communities, while I can advocate among the "rightwing" such as Heritage, and the libertarian community and academia.

I pointed James to Pete Leeson's excellent lecture for FEE on development. He enjoyed it a lot and wrote the following email in reply. The email below, although it is just some rambling thoughts, brings up so many important questions and ideas that touch on so many of the issues that George Mason economists, in particular, are working on, that I was inspired to share it and invite thoughts from the best minds I know. Please share your reactions, questions, apprehensions, and references to relevant studies. Let's get a conversation going, and see what we can come up with. I've spoken to a couple of people at Heritage, and if we can come up with something, they may be on board.

I recommend listening to Pete's lecture if you aren't familiar with his take on development economics, as it is a great starting point for this conversation. This is what James is referring to in the email.

First, this is so interesting for me! I'm so pleased to be able to learn this stuff - thanks so much for sharing your knowledge! I have a ton of questions...

I was impressed with the talk, of course. There's a lot to learn there, and I'm sure that a lot or all of it holds water, but I keep thinking that it's all well and good, but it doesn't seem to take into account certain significant realities...

I whole-heartedly agree with the self-interested actor model here, just looking at it from a different perspective. The self-interest of the most powerful actors is likely the cause for the state of the world - or is that a tautology?

I'm under the impression that the US government, through covert means, has been intentionally undermining the well-being of poor, resource-rich countries for the last 50 years - whenever and wherever they can - in order to amass power and wealth for US corporations (link). I wonder if there's any discussion of that - or what is the understanding of that - within Heritage? Were those actions taken to shore up private property rights for the citizens of those countries, or so that we could own everything and they could remain in abject poverty? It's going to be a long wait indeed before the populations of these countries create good institutions if they're constantly being torn down by such well-funded and organized outside forces.

One form of aid that strikes me as the logical next step after hearing the talk is: we should send people in to teach all developing peoples about the benefits of private property rights... it couldn't result in any corruption and would cause the population to create their own enlightened institutions. What do you think?

One other thing I'm interested in is this: my understanding is that economists in general start with the idea that people are motivated by a need to be useful - so people want to produce more or something like that in order to be more useful. This belief - I understand - leads to measures such as GDP, which measure cash value but not other resource or human happiness. I'm more of the opinion that people are motivated by a desire to be happy, to have no problems. When people are not very good at taking care of themselves, they seek to enrich themselves but after people get good at taking care of themselves, which often includes having some stable means of self-support, they start to look to take care of other people (people are always surrounded by problems - first their own, and then others'). There are some economic thinkers who've come up with measures which try to take this kind of thinking into account - the Genuine Progress Indicator is one example. Do you know anything about this? I'd love to hear your reactions to these kinds of things.

When I look around, a lot of people are working awfully hard to cultivate happiness. Yet, given all the effort expended, there doesn't seem to be the abundance in terms of human happiness that I would have thought. We have so many technological marvels, so much infrastructure, we know so much about the universe and the world, and yet people don't seem to be much better off for it in terms of either individuals' own ease and inner peace, or peace between people either domestically or internationally. I know that significant progress can be made to achieving genuine long-term happiness if we apply ourselves, but it seems that not enough resources have been devoted to making this a reality. That's what I'm talking about, not aid. I'm talking about finding out what's the best way to cultivate peace for everyone, and teaching people so they can become engines of peace in their lives and communities.

Thanks again - this is fascinating for me. I'm sure that I'm asking a few stupid questions here. After all, I'm a pre-econ 101 person. I'll browse fee.org... I wonder if there's anywhere you might point me to get a basic education?

Those are just some thoughts and questions that James had, he will join us in the comments. Note that he brought up some very interesting, I think, theoretical questions, practical questions, and ideas. He is very open minded, I hope you will join him in this good spirit. Please make use of the open comments.

Update: On a related note, I may be working with the "Protecting American Sovereignty" group at Heritage on their initiative to prevent the movement toward One World Government, or toward world governance (international regulatory regimes), through advocating freer markets and freer trade instead, to combat global financial unease. Because security, as well as economic security, is of great concern to them, terrorism is a major issue for them. For this reason, development and combating poverty through institution-building and trade also fit into that program. Perhaps this could be one way of bringing this initiative to Heritage.

What Socialists Mean by Capitalism

I'm currently reading Le Grand and Estrin's book Market Socialism.

I have often complained that socialists misunderstand the market. Sometimes they do. Sometimes they understand it better than most conventional economists. Sometimes the most hard core Marxist will come so close to understanding the libertarian view - like Bukharin for instance.

Le Grand and Estrin did seem to understand markets in the introduction - at least as well as many "mainstream" economists.

Then an amazing passage occurred.

In this passage, these proponents of Market Socialism revealed that they distinguished "capitalism" from "liberalism" -- their use of "capitalism" was not synonymous with markets, but was distinguished from laissez-faire free market libertarianism. They still preferred market socialism to liberalism, but the complaints against capitalism are not complaints against free markets per se, but against a certain form of market system, which they call capitalism, but which arguably is really corporatism or crony capitalism.

Capitalism places the economic power in the hands of capital and its owners. Traditional socialism gives power exclusively to labour: the dictatorship of the proletariat, preferably exercised through a centralized authority. And the "New Right"--actually better characterized as traditional liberalism-- claims to locate power in the hands of the individual--particularly the individual citizen and consumer.

This is very interesting. Of course, I have argued this and heard whiff of this in socialist literature before, when they argue that the "ideal" of free markets is not possible, that concentration is delivering power into a few hands (a la Bukharin & Lenin, based on Marx), and so on, implying that it would be different if free markets did exist. Similarly, Lange's market socialist model was based on the use of state power to create a perfect market-- implying that if markets were less monopolized then they would be OK. But this is still a unique passage. Given this characterization,

In the following, replace "capitalism" with "corporatism" in your mind. It continues a bit below:

Full blooded capitalism is unattractive because it exploits labour through its monopoly of employment and because it exploits consumers through monopolizing goods markets. Traditional socialism expropriates capital and subordinates the interests of consumers to the interests of the workers. Indeed, with its penchant for centralization, it is far from clear that even the workers are properly taken care of. Liberalism puts people's livelihoods and their savings at the mercy of consumer taste and fashion; its emphasis on the narrow rights of individuals jeopardizes the collective activities of the community and hence the community itself.

What is needed is a model of society where power is more evenly distributed between these groups; where the interests of owners of capital, of workers, and of consumers are all taken into account with none taking automatic priority.

This struck me as fascinating. Now, I don't personally see how the group which liberalism represents - everyone - needs to be supplemented with the groups favored in corporatism and in socialism, which are partial. Nor that the interests of some "community" of individuals must be represented. In a free market (liberalism) such a group can form and defend itself, since all the individuals are protected by the system. But, the authors seem to believe that protection of each person, without protection of groups, leads to a loss of community-ness. Perhaps.

The fact that socialists have directed their main fight against corporatism this whole time and not against the free market is a critical point that we would do well to remember - and to make clear the distinction as often as possible. We have hardly tasted true liberalism, and socialists have tended not to start with models. In general, they, being people sympathetic to socialism and hence a softer sort of person, saw injustices in the world and began there. Seeing injustices, and seeing the market used by those with power and money, they blamed capitalists and they blamed the market. They did analyze different kinds of market societies, but they threaded them together in a dialectical historical account.

Market socialists are able to distinguish corporatism from liberalism. Starting there, the arguments are much easier to defeat. As above, sometimes it just boils down to "with liberalism, you lose the sense of community." There are some good books on how that isn't the case - that the opposite is true. When the state encroaches, as through welfare programs, it replaces community. In fact, the authors themselves cite "protection from the family" as a key feature of the welfare state (p. 21).

I'll post more on this book, maybe later today even.

update: I forgot to mention: Marxists describe the "crises" of centralizing capitalism, the movement from more to less competition, and consolidation into fewer hands. If capitalism is seen as rent-seeking driven corporatism, this makes sense. As rent-seeking drives policy, it necessarily does concentrate power into fewer hands, and also creates recurring crises (business cycles). As an example, consider how fixhousingfirst.com is calling for new increased low-income housing policies for its constituency, despite the fact that it was likely these policies which drove the housing bubble and caused the current crisis.

Update 2: I will also post more on this another time-- I would like to consider Marx and Bukharin's arguments in particular against "capitalism" as they may be estimated from a public choice perspective, as against corporatism (or mercantilism). It is possible that some Austrians have already done this - as it seems many Austrians see that Marx was really arguing against crony capitalism and not free markets - but probably not enough.

Then this can be tied together with the later market socialism literature and analysis. Marx was wrong with his labor theory of value, but perhaps right with his concentration, crises and ultimate end in planning (if he was studying the rent-seeking society); market socialists like Lange were wrong with their perfect competition models, but right in some of their understandings of the benefit of prices and competition. Very recent market socialists (like those above, and like Stiglitz) have greater understanding of many of the Austrian points than conventional economists. Perhaps bringing together all the good understandings of these various socialists could be useful in contributing to new, better models, and to a greater understanding of interventionism.

Stiglitz on Socialism

I'm flipping through Stiglitz's Whither Socialism, which I've not read before, and finding many interesting thoughts to chew on.

Many of these are of course old news by 1989 when he wrote this, (but not conceded by all economists!), and some are not correct but still interesting. He seems to be a thought provoking guy with some very insightful arguments and connections. He also packs a lot into a short space, and keeps it very readable.

1. Futures Markets: the perfect competition model, which Stiglitz admits is too flawed to inform the choice between markets and socialism, assumes a complete set of markets including the ability for markets to allocate investment efficiently.

But investment into the future requires futures markets, which many sectors don't have. "These futures markets are essential for making the correct investments allocations." He goes on to argue that they must extend infinitely -- of course this would only be in order to be as efficient as a planner with complete and perfect knowledge, so it seems to be a weak argument. p. 16

2. On Austrian methodology:

My concerns are two-fold: First, because Hayek (and his followers) failed to develop formal models of the market process, it is not possible to assess claims concerning the efficiency of that process, and second (and relatedly), in the absence of such modeling, it is not possible to address the central issue of concern here, the mix and design of public and private activities, including alternative forms of regulations (alternative "rules of the game" that the government might establish) and the advantages of alternative policies toward decentralization-centralization.

p. 25

3. Stiglitz does as well as Hayek showing the paradox of perfect competition assumptions, such as complete markets and perfect information (or "informed" markets), see e.g. p. 38

4. Stiglitz points to the incentive/calculation problem of using targets which specify output not according to profit, but according to a single measurement that so plagued socialist economies, calling it the problem of not fully specifying commodity prices. p. 85

He points to this later as a way in which planning failed in precisely the way that the neoclassical model failed, when he invokes the planners inability to specify commodities as creating "an incomplete set of markets" and concludes that it is "one of the reasons that the neoclassical model fails" and "Exactly the same set of factors are at work in explaining why socialism fails." p. 198-99

5. The theory of contests as a replacement for perfect competition-- isn't this very similar to the Austrian concept of competition as a driving force (Kirzner) or a market process (Mises)? Although he finds some areas in which he believes competition can be destructive, he indicates that the active role of the competitive driving force of competition is crucial to its ability to induce innovation, cost minimization, and improving quality. Hence he finds "not only that the ordinary usage of the term competition is not well reflected in the traditional economic paradigm of 'perfect competition' but that the traditional perfect competition model may give us only limited insights into the roles that competition plays." p. 115

And so much more!!

As a side note, he also speaks on such interesting topics as short term incentives when firm managers care about short run stock market valuation (p. 96); rent-seeking to get around patents (p. 129), and lots else not so directly related to comparative systems.

Austrians should look to Stiglitz for good insight, especially, I think, when he looks at socialism.

Mortgage Socialization

Cross-posted at Heritage.

Fannie Mae and Freddie Mac were created during the New Deal by the Roosevelt administration in order increase home ownership. With government backing and price controls, the supply of housing was artificially increased, with the funds coming from the taxpayer.

Even when Fannie and Freddie were made into government sponsored enterprises (GSEs) in the 1960s, they were still provided the financial support of the Federal Government. Because of their implicit government guarantees, these policy-based suppliers came to dominate the housing market.

As GSEs, Fannie and Freddie purchased 44% of subprime mortgage securities and were the biggest buyer of Countrywide loans. They became an industry duopoly, owning or guaranteeing about half the $12 trillion mortgage market. Risk was socialized, spread across all taxpayers through government guarantee, while profit was concentrated and private. This is a prototype case of government thriving on “concentrated benefits and dispersed costs.”

The ability to do this is what drives government expansion, taking from the masses and channeling the money to a minority – or special – interest. With these special interests, campaigns were launched, politicians entrenched and bureaucracy expanded. Hence Fannie and Freddie represent a massive rent seeking operation, to funnel money into the hands of officials at the expense of the taxpayer.

And yet none of this was sustainable, because it wasn’t profitable. Inevitably there would be collapse. Fannie and Freddie engaged in Enron-style accounting, and mafia-like corporatist tactics. It was their privileged status that led to the corruption, and that distorted the housing market and helped to inflate the housing bubble (also made possible by loose monetary policy).

The government takeover only makes all of these things worse. In the short run there is relief that a market collapse won’t occur imminently, but like the Soviet Union during perestroika, the fear of pain during reform can only lead to the delay of collapse and a more painful landing. Further concentration can only cause further waste, as competition, profit guidance and valuable price signals give way to bureaucracy, rent-seeking, inflation and misdirected investment.

As nationalized firms, Fannie and Freddie are government agencies, relying entirely on public funding. They have no reason to keep costs low, and every reason to allow short-term political objectives to guide their choices instead. Indeed, the Treasury has made it very clear that they will specifically move away from profit guidance. Treasury secretary Paulson said on Sunday that the entities “will no longer be managed with a strategy to maximize common shareholder returns.”

Paulson has promised that the fees they charge banks for loan securitization services will be examined “with an eye toward mortgage affordability,” even as they are neck deep in bankruptcy. This reminds me, again, of the logic of perestroika – instead of freeing prices up and allowing some market adjustment, so that the economy could finally get on track, a compromise was made. Prices would be “based on social costs,” companies were allowed to “take into consideration cost-effectiveness” but “speculative price increases aimed at excessive profit” were forbidden.

The logic of the expanding U.S. government is becoming just as warped. The socialization of risk caused the housing crisis, and the response is to nationalize. Risky lending driven by policy not profit caused the collapse and the “reforms” will reduce fees and shun profitability. If we keep moving in this direction, we’ll pass through our own reverse perestroika, and end up a socialist state.

Socialism Not Speculation to Blame for High Oil Prices

More than 75% of the world’s oil reserves are controlled by national oil companies. Of the world’s top 20 oil-producing firms, 14 are state-run. Those areas where private companies have been able to drill have recently been shrinking, and remaining private companies are facing hostile governments that may try to nationalize them.

Meanwhile, Congress, pandering to the least economically sound sentiments of the American public, recently tried to pass a bill to curb oil market speculation. This, lawmakers argued, was the way to get prices down. Speculation is just trading on the future price of a good. There have been many reasons to expect the price of oil to continue to rise. Along with rising demand, and subsidies to aid the rise in demand, there is a lot of risk. Risk causes volatility and drives prices up — at least in the short term.

There is risk because of the war in Iraq, because of the government in Iran, terrorism, and then there is additional risk because of the growing number of countries where the governments are trying to nationalize the oil supply.

This typically starts with the government harassing private oil companies. Clearly that makes owning stocks in those companies risky as owners will lose their investment. This can also fuel volatility in the futures markets as investors try to predict the likelihood of nationalization. If those companies get taken over or forced out, the total supply of oil may fall and so the future price will be higher.

This has been going on for a few years now. And the trend continues to worsen. Russia’s Vladimir Putin jailed the ex-chief of Yukos oil company so that it could be taken over by state-owned Rosneft in 2004. And today in Moscow, British Petrol is being hassled and taken to court.

In 2003 Hugo Chavez took the reigns of Petroleos de Venezuela in a “re-nationalization” move, and now Ecuador is taking Chevron to court. This little move by Ecuador could be the start of something bigger, as it looks like Ecuador might join forces with Chavez’s state-run venture, which might in turn join forces with Russia’s.

Bolivia also nationalized in 2006. Soon there will be nowhere left outside of Western Europe and the U.S. where private oil can safely drill.

Another reason that nationalization can drive prices up is that state-owned companies tend to under-produce private ones, creating additional risk that long-term output will be lower. Finally, consolidation of oil companies into just a few nationalized firms, especially when those countries form cartels rather than competing freely on the market, will also drive up prices. This trend in nationalization is simply an extension of the existing problems of OPEC. It should be obvious that this trend is contributing to the high oil prices.

But rather than see the reasons for the rise in prices — the real risks which face the oil market — Congress tries to strangle speculation, prevent new drilling, and it even flirts with idea of nationalizing our own supply. Reps. Maurice Hinchey (D-N.Y.) and Maxine Waters (D-Calif.) both recently suggested it, and a recent poll shows many Democrats(and even a few Republicans) think it’s a good idea. But nationalizing is the problem, not the answer.

cross-posted at Heritage.