Freedom and the Agency Problem

Sue-Ellen looks so upset
This isn't the first time
And it won't be the last
There's things going on behind her back
Oh, they'll give you a heart attack
--Flesh for Lulu

It is sometimes said that freedom isn't free. The underlying truism relates to axiomatic human behavior. Humans prefer leisure over work, and less work over more work. As such, humans are inclined to seek opportunities to satisfy their needs on the backs of others, a.k.a. seeking something-for-nothing.

Absent being objects of charity, seekers of something-for-nothing will be tempted to forcefully invade the person and property of others in order to achieve their interests. These invasions constitute acts of violence and include murder, slavery, and robbery among others.

The purpose of government in a free society is to help individuals protect themselves against violent assault from those seeking something-for-nothing. Government is authorized to use force in order to help people pursue their interests without unwanted intrusion by others.

Unfortunately, people in government are not immune to something-for-nothing temptation. Some government officials will be tempted to use the strong arm of government force to satisfy their own interests. The more productive the citizenry, the more likely the phenomenon.

It is therefore necessary that people who want to remain free cannot dedicate 100% of their energies toward pursuing their interests. Some fraction of time and attention must be allocated toward keeping an eye on government, so that those authorized with use of force do not turn that force on people in a manner that restricts their liberty.

Essentially, what we have here is a classic agency problem. Freedom loving principals have retained strong armed agents to assist in protection of person and property. Since the agents' goals may differ from the principals,' it is necessary for the principals to monitor agent behavior to ensure that the agents are acting in manners that support liberty. As some anti-federalists forecast long ago, government will be quick to exploit lapses in vigilance here.

But government behavior may be difficult to monitor--particularly as the distance between government and citizenry grows. As such, freedom loving principals must complement monitoring with incentives or disincentives that keep government agent mischief in check. These incentives/disincentives might include the power to re-elect at the ballot box, sanctions for violating the law while in office, social pressure (protests, etc), pulling more government to the local level, and, in extreme cases, throwing off government in violent fashion.

The costs of monitoring and incentivizing government agents are key reasons why freedom is not free.

Today's Slaves

Colonel Robert Gould Shaw: It stinks, I suppose.
Trip: Yeah, it stinks bad. And we all covered up in it too. Ain't nobody clean. Be nice to get clean, though.
--Glory

Slavery can be defined as being forced to work for the benefit of others. It is the antithesis of liberty, where people are free to pursue their own interests.

As such, slavery as practiced in the US, primarily in Southern states, for most of the first century of the country's existence was so glaringly wrong. How could a nation founded on the principle of liberty get it so wrong?

It's simple, really. A fundamental axiom of human behavior is aversion to labor. When presented with an opportunity to obtain economic resources produced by someone else--without commensurate exchange of one's own productive effort, then people are inclined to consider the prospect.

Stated diferently, people are constantly on the lookout for the chance to get something for nothing.

Slavery is one of those get-something-for-nothing propositions. Force someone else to work for you.

In fact, slavery is really a specific category of theft. Theft is the taking of someone else's property against his/her wishes. Property is broadly construed to include life and wherewithal to produce as well as one' personal possessions. As such, murder (expropriation of life), slavery (expropriation of wherewithal to produce), and robbery (expropriation of possessions) all constitute theft.

Textbooks tell us that, in the United States, slavery was abolished with the ratification of 13th Amendment in 1865. Yet, people's axiomatic desire to get-something-for-nothing persists. As such, it is more likely that one form of slavery has been replaced by other institutions with similar characteristics.

One of those institutions is the income tax. In the US, the income tax was institutionalized in 1913 by the 16th Amendment. The income tax gives someone else legal claim to a portion of an individual's productive effort. 'Legal claim' means that this situation is enacted under conditions of force.

Because this condition surely consitutes theft of wherewithal to produce and its economic outcomes, there is no fundamental difference between the taxation of income and blantant slavery as practiced in the Old South.

Currently, about half of all adults in the United States pay income taxes. These people are today's slaves. They are enslaved by those in the other half.

Why Can't We Cooperate? Pt II

Oh, that ain't working, that's the way you do it
Get your money for nothing, get your chicks for free
--Dire Straits

Previously we pondered our general unwillingness to work together on problems that have a national scope. Employing a market-based approach, we proposed that if the market for solving our nation's problems was truly unhampered, then lack of cooperation reflects absence of voluntary exchange between those with ideas about how to fix problems, and those that would need to execute potential solutions.

Simply put, buyers and sellers have yet to perceive mutual value when it comes to national problem solving, and a market has not yet been made that motivates voluntary cooperation in this regard.

This explanation is not entirely satisfactory, however, because the unhampered market assumption is questionable. Empirical evidence suggests that, contrary to the beliefs of many, large scale free markets generally don't exist in our country. And in the political domain, where many problems of national scope are positioned, it is absolutely certain that related markets operate under hampered conditions.

Political markets are hampered because property rights are not respected. Our current goverment structure permits politicians to confiscate resources from citizenry and redistribute them with discretion.

Rather than stimulating voluntary exchange, this situation creates a market for political favor where buyers, known as special interest groups (SIGs), seek to purchase resources from sellers, known as politicians. This constitutes a hampered market situation because resources for sale have been obtained by coercive means. Some of the exchanges are involuntary in nature.

Hampered markets for political favor are likely to crowd out unhampered markets for voluntary exchange with near certainty. This is because of the axiomatic Law of Parsimonny, which states that humans generally seek the greatest amount of satisfaction possible relative to the labor given up. In markets for political favor, it is possible for many individuals to acquire needs-satisfying resources by expending less effort than it would take to obtain those same resources thru productive labor and voluntary exchange.

Because markets for political favor offer the possibility of getting 'something for nothing,' human nature is likely to bid such markets up, while markets for voluntary exchange shrink from the scene.

The ramifications for broad cooperation should be apparent. Politicians broker involuntary exchange between parties who would not trade on similar terms if property rights were respected. SIGs form to increase bargaining power for confiscated resources. Other SIGs form to keep resources from being confiscated--particularly when democratic process provides an avenue for SIG operations.

Voluntary exchange diminishes as people seek to satisfy their needs via political channels. People are also busy trying to protect their property from confiscation.

Clearly this situation is not conducive to widespread voluntary cooperation.

This seems a reasonable answer to Jon Stewart's question. We can't work together as long as free markets are circumvented by markets for political favor.

Remove the power to confiscate resources from government's hands, and watch voluntary cooperation increase.

Getting More for Less

Come on, baby, dry your eyes
Wipe your tears
Never like to see you cry
--Human League

While at Target (TGT) last weekend, I mistakenly walked out of the store with a bag of fertilizer that I didn't pay for. I had put the bag on the bottom cart rack and forgot that it was down there when I was checking out. Neither the cashier nor I noticed it.

I was still oblivious while putting the items that I did pay for into my car. It wasn't until the cart was empty that the bag on the bottom rack was visible.

Rationalizing about keeping it was easy. It's heavy and would be a hassle to take back in. I'll more than make up for this freebie with future purchases. It's the cashier's responsibility to look out for items on the bottom of the cart. It's Target's problem, not mine. This makes up for the high price I paid on that other item.

So I started home with my bag of 'free' fertilizer. That little voice inside my head got louder with each mile I drove away from the store. My conscience was yelling at me. It is wrong to take someone else's property.

About half way home, I turned the car around, went back to the store, carted the bag inside, and paid for it.

The urge to get more for less, or in its extreme form the urge to get something for nothing, is strong. It comes from the axiomatic drive in each of us to economize. Resources are scarce. In our efforts to reduce scarcity, we want to be as productive as possible. Stated more plainly, each of us wants to get as much out of life as we can. What exactly each of us desires varies from person to person. Some desire lots of material goods. Others value good feelings or spiritual benefits.

Whatever the case, we jump at the chance to get more of what we want for less cost. It drives us to take the escalator rather than the stairs, to clip coupons and shop for discounts, to buy lottery tickets, to park closer rather than farther away from our destination, to seek more pay for the same (or even less) amount of work, to constantly seek faster ways to get to where we want to go.

The problem is that our drive to economize can cause us to blur the line betwen right and wrong. Taking home that bag of fertilizer is ok because it will more than even out in the long run. Taking property from others at gunpoint is ok because it levels out wealth and some of what is taken helps the poor.

We might be led to act on this temptation, doing wrong directly through our own behavior or indirectly through the behavior of institutional agents who act on our behalf.

The urge to get more for less fosters the aggression that opposes freedom.

no positions

A Letter to the Founders

Dear Founders,

Enclosed please find the Constitution of the United States that you developed for us over two hundred years ago. This document is being returned because, regrettably, we no longer find it relevant to our situation.

When first implemented, the ideals of individual liberty and limited government expressed by your design worked pretty well for us. In fact, during the first one hundred plus years of the Constitution's existence, our country became the most productive country on earth. Much wealth was created.

As you know, wealth attracts envy, along with scores of people (big business, social reformers, those with less, even government officials themselves) who wouldn't mind a slice of wealth pie to advance their own desires. Human nature, really. Government, of course, was the ideal agent for redistributing the wealth. However, your original intent and wording of the Constitution did not provide much wiggle room for doing what we wanted to do without breaking the law.

Beginning in the early 20th century, therefore, we embarked on a program to render the Constitution obsolete.

At first, we followed the processes that you had specified for changing the law. In 1913, for example, we passed the Sixteenth Amendment to give the Federal government legal power to appropriate property from the citizenry on a large scale. Evoking the name of Progress, you see, proved to be an effective rationalization for this and other 'reforms' made around this time. 

Going the formal route proved a risky proposition, however. Some people expressed concern that their rights were being violated. And occaisionally the Supreme Court would reject a legal measure as unconstitutional.

All of this slowed Progress.

So we began to subvert Constitutional procedure. It began with a  media campaign that questioned the validity of the Constitution in the modern world. Then, during times of economic or military distress, the government learned that it could greatly increase its scope of operations when people felt fearful or threatened. On such occaisions, of which there have been several over the past century, people were willing to exchange their freedom (which you presumed so highly valued) for security supplied by government (food, housing, health care, physical protection, etc).

Government size grew accordingly--along with people's dependence on State apparatus.

The coups de gras was figuring out how to bypass your clever check of judicial review. Actually, the solution turned out to be pretty straightforward. The executive and legislative branches learned that they could simply pack the court with judges willing to interpret the law in an interested manner. This scheme assured that virtually any law could pass muster if submitted to judicial review.

The upshot of this effort has been that, over the past few decades, we've been able to massively increase the size and scope of government without passing a single relevant Constitutional amendment. And because interest pervades the courts, we hardly bother to scrutinize new laws judicially.

Instead of law, we largely count on political influence to maintain Progress. This has spawned the nation's most lucrative industry, lobbying, which moves $ trillions annually between traders of favor and influence.

We couple that with a democractic voting process that helps the largest special interest groups exert their influence first.

As you can see, we have no practical use for the Constitution today. We realize, of course, that you had our best interests at heart when you wrote it. But you appear to have underestimated two powerful forces of human nature working against your framework from the get go. One, each of us possesses virtually unlimited desires. Two, we prefer to satisfy those desires while expending the least amount of labor possible.

These natural forces, you see, made it irresistable for us to recruit government as the agent for achieving our desires in a parsimonious, get-something-for-nothing fashion. Unfortunately your Constitution does not facilitate this process, so we need to move on.

We would, however, entertain any proposals you might have for managing the country's debt, which in the last few years has become nearly unmanageable.

Best regards,

We The People

Put Options, Insurance, and Moral Hazard

If I swallow anything evil
Put your finger down my throat
If I shiver, please give me a blanket
Keep me warm, let me wear your coat
--The Who

A put is an option contract that gives its owner the right, but not the obligation (that's why it's called an 'option'), to sell (or 'put') an asset to someone else at a given price (called the 'strike price').

It's not as complicated as it sounds, and odds are very good that you own one or more put options yourself. For example, insurance policies are put options. You buy a new put option every six months when you pay your auto insurance premium. When you drive accident free over the six month period, the put expires worthless. But in the unfortunate case that you have an accident, and the damage exceeds your deductible (which essentially serves as the strike price), then you will most likely exercise your right to 'put' the problem on you insurance company who is then obligated to cover excess damages.

Puts, therefore, can be viewed as a tool for managing downside risk. They are quite handy when problems arise, but the frustrating thing is that you often must shell out significant upfront money for an option that frequently expires worthless. Wouldn't it be great if you could get that put option for free?

In the public domain, people receive low or no cost put options all the time. Welfare programs such as food stamps, unemployment benefits, and healthcare benefits are often provided to people who have paid little or nothing in terms of upfront premium for such insurance coverage.

Such a situation creates a significant moral hazard problem. Moral hazard, a term that appears to have been coined by the British insurance industry in the 1800s, reflects the human tendency to take more risk when it is perceived that any costs related to the risky behavior will be shouldered by another entity (i.e., the insurer). Thus, people who are out of work may be less inclined to look for a job when they are receiving unemployment benefits. People might engage in poor dietary and exercise habits if they have access to low or no cost health care.

Moral hazard is grounded in basic axioms such as the Law of Parsimmony which, when stretched to its limit, suggests that people are inclined to exploit situations where they can get 'something for nothing.'

The moral hazard condition is in play whenever behavior has been insured. However, the upfront costs that one must pay for put options helps check excessive risk taking. When insurance premiums are lowered below the market price, however, moral hazard is likely to be amplified.

Currently, we may be witnessing moral hazard writ large in financial markets worldwide. We'll examine this in a subsequent post.

position in SH

Correlation and Causation

So true
Funny how it seems
Always in time
But never in line for dreams
--Spandau Ballet

Several times recently I have read statements claiming that correlation does not mean causation. Quite true. One morning a few months back I noted a small puddle of water on my basement floor near a corner wall. It had been raining heavily through the previous night. "Rain must be getting in somewhere," I thought.

Before donning the rain gear and heading outside, I decided to inspect the area above the leak, including various pipe runs in the vicinity. That's when I spied a drop of water hanging from copper tubing heading into the hot water heater. Upon closer examination, a slight leak had developed in a joint connecting two pieces of tubing, and the water drops were occasionally squeezing through the joint and dropping to the floor.

I had mistakenly presumed that the puddle on the floor was caused by the rain. Seemed reasonable--particularly because the rain was heavy and there hadn't been much rainfall in weeks. Because the puddle and rain showed up at the same time, their presence was correlated ('co-related'). But the cause of the floor puddle turned out to be something else, rendering the correlation between rain and puddle meaningless (what stats folks sometimes refer to as 'spurious').

Whenever one or more independent variables are regressed on an independent variable, the results bear the limitation that causality cannot be construed from the data alone. Even if a strong relationship between X and Y is detected, we don't know whether X caused Y or vice versa--or whether one or more unaccounted-for variables render the observed X/Y correlation spurious.

In empirical studies, analysts can try to reduce potential for false conclusions by 'controlling' for other variables that might influence relationships of interest. In most social settings, however, it is difficult to control for the myriad variables that might influence the findings.

Unfortunately, much social science research has been moving in the direction of empirical, multivariate studies. Because most of these studies explicitly or implicitly seek to determine/verify cause and effect relationships, the validity of the findings are usually severely limited. Lacking the careful controls of the lab bench, empirical studies are generally incapable of unearthing cause:effect findings that are highly convincing.

Moreover, it is also possible that simple linear models where X is thought to cause Y misspecify true relationships between variables. Senge's (1990) work demonstrated that feedback loops may reinforce or balance real-life systems that reduce directionality between variables.

Given the empirical difficulties, how can accurate conclusions about causality be reached? One way is to favor reasoning over statistics when conducting analysis. For example, the Austrian school of economics employs praexology, the study of human action grounded in a relatively small set of axioms about nature and human behavior, to deduce economic relationships.

For example, we can also deduce that, because people generally prefer leisure over work, and less work over more work, that people will be prone to act in ways that permit acquisition of more income (physical or psychic), with the least amount of effort. The prospect of getting something for nothing is the primary cause of most political behavior because people recognize that their situations can be made better on the backs of the productive effort of others.

We should also note that numerical data are not totally useless in studying causality. In fact, longitudinal series of proposed dependent variables that include known points where independent variables have been changed can be effective ways to investigate cause and effect.

For example, the 200+ year series of federal debt and deficits (two dependent variables) shown a few posts back includes labels of several possible independent variables thought to influence levels and trends of the proposed dependent variables. One of them is war. Because several wars take place over the horizon, and debt/deficits move in similar directions each time, there can be little doubt that war causes higher debt and spending. These patterns are consistent with deductive reasoning that suggests similar outcomes.

Longitudinal data are particularly useful when there is a lag between changes to independent variables and changes to the dependent variable. Back to the debt/deficit chart, note that the labels associated with the institution of the Fed (1913) and Nixon's closing of the gold window (1971) were followed by large increases in debt and deficits--after an initial lag. This lag could have been deduced ahead of time as time associated with establishing new institutional arrangements and routines. We should expect some lag between cause and effect here.

On the other hand, pinning the change in debt and deficits these two independent variables is not as convincing as the war variables that were 'turned on and off' multiple times. To gain more understanding of the effect of the Fed and removal of the gold standard, it would be nice to dismantle the Fed and go back on the gold standard, and then study changes to federal debt and deficits. We can only hope for such an opportunity!

Potentially, then, there is some causal information available from time series data. Studying US homicide rates in relationship to changes in gun control laws and gun ownership can yield some sense of cause and effect. When US homicide rates decline following weaker gun laws and increasing gun ownership, then that is consistent with theoretical predictions of causality.

Of course, studying additional periods of changing gun control laws and gun ownership would be more convincing. While hard to do with US data alone, it is possible to do so by looking at changes in gun control laws and gun ownership in other countries. I am pretty sure such research has been done, but I have only been privy to snippets here and there.

Thus far, the snippet data are consistent with the pattern observed in the US data. The lower the gun controls and the higher the gun ownership, the lower the violent crime. The more situations where such a pattern holds, the greater the evidence of causality.

References

Senge, P. 1990. The fifth discipline. New York: Doubleday.

Coping with Variation in the Human Condition

All for freedom and of pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

A fundamental axiom of nature is variation. In terms of the human condition, variation is expressed in the differing capabilities and interests among people. It is also expressed in the differing situations in which people are born--some environments being more favorable than others.

Why this occurs is unknown and perhaps unknowable. If you believe in God, then the answer rests in the mystery of the Creator. If you don't believe in God, then the answer rests in the mystery of secular humanity.

Two primary belief systems have evolved in modern times for coping with variation in the human condition. One belief system accepts this variation as part of life. People employ their resource endowments, whatever their nature, to advance their interests. Capacity and resource position can be enhanced thru self-development or thru voluntary exchange with others. Individuals are free to pursue their interests, which of course may include charity and outreach, as long as these pusuits do not forcefully intrude on the pursuits of others.

A second belief system views variation in the human condition as unacceptable. It is unjust that some have been endowed with less resources than others, and it is unfair for those with less to have to work harder to achieve what gifted people might accomplish with less effort. The equitable solution is to even up resources among people--to level the playing field in terms of resources and opportunities. Doing so requires forceful intrusion on the pursuits of others to obtain the resources deemed necessary to even things up.

It should be clear that the first belief system is grounded in the concept of personal liberty. People have a right to pursue their dreams unencumbered by forceful intervention by others. Each person's resource endowment, large or small, is but a starting point for growth based on free choice. This system is also grounded in the principle of non-violence. Individuals engage in peaceful, voluntary exchange with others when it is deemed mutually beneficial. Force is employed only to protect each person's life, liberty, and property from expropriation by others.

The second belief system is grounded in the concept of collective submission. Individual pursuit of happiness is subservient to the interests of others. Those endowed with less are viewed as unlikely to succeed unless they are provided resources. Voluntary dependence is a consequence. Because the resources given to the poor must be taken from the rich, a dominant principle of this belief system is violence--made legitimate thru government agency. Force is required to reduce variation inherent to the human condition. To keep people from pursuing their own interests, authoritarianism must rule.

It should be readily apparent which belief system is in harmony with nature.

But if the second belief system is so unnatural, then why does it predominate society? Perhaps it is because the drivers of freedom and peace conflict with another axiom the pervades human behavior: the urge to satisfy needs using the least amount of effort possible.

The spectre of getting something for nothing has been driving forceful conquest since the beginning of time.

Socialism and the Pathology of Resentment

Well a good man pays his debt
But you ain't paid yours yet
--Heart

There are two general ways of economic organizing. Capitalism (a.k.a. free or unhampered markets) puts ownership and control of production in private hands. Producers take signals from the market to determine the best approach for converting inputs into outputs.

The other way is socialism (also known as central planning or planned economy). In this system, ownership and control of production is in public hands (it is 'socialized'). A group of people, the 'central planners,' draw from their own resources (knowledge, experience, special interests, etc) to determine what should be produced, how much should be produced, and for whom.

When socialism began attracting serious attention in the mid-late 1800s, proponents claimed that this approach to economic organizing would elevate standard of living beyond the capacity of capitalism. Not only would resources be distributed more evenly (a.k.a. 'social justice' in today's parlance), but on average all would be better off.

During the next few decades, serious thinkers, particularly those of the Austrian economic school, tossed that theory onto the intellectual scrap head of history. A critical problem with socialism is that there are no price signals by which producers can effectively allocate resources. Moreover, bureaucratic planners are unlikely to match the speed with which capitalist systems, with its myriad actors each acting in their own self interest, correct for error and adapt to environmental change.

Socialism, concluded the thinkers, is more likely to result in squalor because economic resources would be grossly and persistently misallocated. Mises concluded that achieving the socialist ideal would not even be possible before the system dissolved into chaos. Empirical observations drawn from actual socialist systems (e.g., USSR, North Korea) provide confirmatory evidence in this direction.

Proponents of socialism have thus had to change their tune. Perhaps standard of living w.r.t. material goods will not be higher under socialism, they admit. But because those on the lower end of economic pyramid will be elevated and those at the higher end will be lowerd, then the system is justified. Besides, when people realize that they are no better off than their neighbors, then demand for economic goods will likely decline anyway.

Such claims, of course, do not square with basic axioms of human behavior.

Mises also suggested that proponents of the socialist argument may suffer from a pathological mental attitude of resentment. They resent, and perhaps envy, those who are better off. Socialism provides a mechanism for pathological resenters to obtain emotional satisfaction as they observe the rich suffer in an outsized fashion.

Mises may have a point. After all, it is easy to amass a mountain of 'journalistic' evidence that paints wealthier people as enjoying excessive or unfair advantage. I found these three examples (here, here, here) in about 30 seconds. The tone/one sidedness of the commentary is consistent with a resentful, envious tone.

As sagely observed by Mises, the reason why such resentment and envy may be pathological is that the socialist's prescribed solution for those who are less well off is to worsen the position of better situated people. A well reasoned person is more likely to conclude that the most effective way to deal with this situation is not to worsen the position of those better off, but to proactively improve one's own position.

On the other hand, because people are naturally attracted toward getting something for nothing, there may be no pathology in wanting to the soak the rich. Instead, it is perhaps a sensible approach for getting more wealth at the expense of less effort.

Of course, those who take this path are condoning the use of force to acquire the wealth of others. Justifying (rationalizing) such action once again suggests the possibility of a resentment-oriented pathology.

Two Purposes of Government

In violent times, you shouldn't have to sell your soul
In black and white, they really, really ought to know
--Tears for Fears

Government is legitimized force. Governments are formed because of the human tendency to obtain the most gains for the least amount of effort. This tendency will cause some people to try to further their interests on the backs of others. We might label this proclivity as seeking something for nothing (SFN).

One purpose for the legimitized force of government is to help indiividuals defend their person and property against invasion by those pursuing SFN schemes such as murder, slavery, robbery, etc. This is the argument for government under the auspices of natural law. Government is an enabler of liberty when it helps individuals to pursue their interests free of forceful intervention by others.

The other purpose for the legitimized force of government is allow individuals to obtain SFN. The strong arm of government can be employed by some to expropriate resources from others. Government becomes an agent of force for some to better their interests at the expense of others. Those getting SFN are either monarchs or special interest groups that trade votes for political favor.

All political philosophies are grounded in one of these two purposes.

Axioms 1.0

Too many shadows, whispering voices
Faces on posters, too many choices
If, when, why, what?
How much have you got?
--Pet Shop Boys

Let's see if we can stitch together a basic list of axioms from previous missives (here, here, here, here). These are basic, what Jefferson might refer to as 'self-evident,' truths, grounded in nature and human behavior, that any social system needs to cope with.

1.0 State of Nature

1.1 Diversity. Nature is grounded in diversity. Variation, in fact, is necessary to advance the evolutionary cycle. Humans are like the rest of nature. Simple observation shows that we differ physically, of course. It is just as apparent that we differ inwardly as well. We differ in skills and abilities, taste preferences, risk tolerance, emotional content, goals, drive for success, and cognitive abilities--among other things.

1.2 Scarcity. Although Earth abounds with resources, many of them are in a raw form not immediately useful for human consumption or use. Contrary to first impression, in its unalterated form, nature presents a state of scarcity for supporting the human condition.

2.0 Human Behavior

2.1 Self-interest. Humans behave in a self-interested manner. This does not necessarily mean that we behave 'selfishly' or 'materialistically' in the common sense of those words. Human behavior may be altruistic; the income gained from human action may be psychic, e.g., we feel better by helping others, or we get satisfaction from seeing the world configured according to our vision. Nonetheless, people behave in a manner that helps them fulfill their own desires.

2.2 Insatiable desires. Humans constantly seek a more abundant life. When lower level wants are satisfied, individuals will then seek satisfaction of higher level wants. Essentially, human desires are unbounded.

2.3 Ability to prioritize. Unlike others in the animal kingdom, humans can prioritize their wants. Humans generally possess a consciousness of comparable desires, and can make choices based on priorities.

2.4 Bounded rationality. Although the upper bound differs among individuals (1.1), people are limited in their cognitive abilities. The more complex the situation, the more difficult sensemaking and decision-making becomes.

2.5 Economizing. Because resources, including time, are scarce (1.2), humans behave in manners that conserve, or economize, these resources. 

3.0 Labor

3.1 Requirement for production, labor. Because the raw state of nature is one of scarcity (1.2), sustainable human life requires production. Production is the application of labor to raw materials in order to transform conditions of scarcity into abundance that can be applied toward the satisfaction of human desires (2.2).

3.2 Aversion to labor. When prioritizing (2.3), people prefer leisure over labor. Humans engage in work because they want to satisfy desires (2.2) and production is necessary to satisfy them (3.1).

3.3 Law of Parsimmony. Because production is necessary (3.1) despite general aversion to labor (3.2), humans economize (2.5) their labor, seeking the greatest amount of satisfaction relative to labor exerted. Taken to the extreme, the urge to get the most benefit for the least effort, or cost, stretches into a drive for 'getting something for nothing.'

4.0 Consumption

4.1 Now preference. When prioritizing (2.3), people prefer to satisfy desires (2.2) today rather than tomorrow.

4.2 Diminishing marginal utility. When satisfying a particular desire (2.2), greater consumption toward that end leads to less satisfaction per unit consumed.

Again, the idea here is to build a list of axiomatic 'truths' that any social system needs to navigate. We've surely omitted some things; this list will be revised as other axioms become apparent. But this should serve as a nice working list for future thought.

Philosophy of Freedom

"It's all for nothing if you don't have freedom."
--William Wallace (Braveheart)

Libertarianism (a.k.a. classical liberalism) is a philosophy grounded in natural rights, including the rights to one's life, wherewithal to produce, and possessions. As Jeffersom wrote, these rights are self-evident and inalienable. Depending on your view, these rights were either endowed by our Creator or are simply a function of our humanity.

The crux of libertarianism is that people are free to pursue their interests as long as they do not forcefully intrude on the pursuits of others. The role of government is to help individuals protect themselves against such forceful intrusion.

Libertarianism espouses peace, personal choice, and voluntary cooperation (a.k.a. trade).

It appears to be the only social and political philosophy to do so. All other frameworks legitimize violent intrusion to some degree. Government is typically the mechanism of such force. Principals seeking to satisfy their interests employ gpvernment as their strong armed agent to force their will on others.

Because people are attracted to schemes that promise something for nothing, it should not be surprising that libertarianism has been marginalized relative to philosophies that legitimize plunder.

Make no mistake, though. Not only are these legitimations morally bankrupt, but they are certain to produce economic disaster over time.

Defining Politics

So glad we've almost made it
So sad they had to fade it
Everybody wants to rule the world
--Tears for Fears

In the civic context, politics is commonly defined as (1) the science and practice of government, or as the activities associated with government.

The operative characteristic of government is force. Government either forces people to a) do things that they do not want to do, or b) restrain from doing things that they do want to do.

What separates the use of force by government from the use of force by other entities is that the use of force by government is sanctioned by some fraction of society. Government force can be sanctioned by a ruling fraction of people. That ruling fraction may be small in the case of a monarchy or oligarchy. Or the ruling fraction may be large in the case of a democracy.

Government force can also be sanctioned through the rule of law. In this case, procedures recognized by the community as binding specify the legitimate domain of government force. The sanctioning fraction of society needs to be very large, otherwise the law would not be viewed as binding or legitimate.

As such, we can redefine politics as (2) the science and practice of using force sanctioned by some fraction of society, either through discretionary rule or through the rule of law.

Politics has a relational meaning as well. We speak of 'office politics' or of people acting 'politically.' In such cases we are typically referring to a desire to obtain resources by power or influence rather than by toiling to produce those resources through personal labor.

Because a basic axiom of human behavior is preference for leisure over labor, politics becomes a means for obtaining resources and satisfying desires on the back of the effort of others. Politics provide an opportunity to 'get something for nothing.'

When the scope of govenment includes capacity for taking wealth from some and redistributing it to others, then people are likely to seek political means for obtaining wealth and satisfying their desires. In this context, politics can be seen as (3) the science and practice of using force sanctioned by some fraction of society so that some may obtain wealth produced by others.

Gold, Silver, and the Spectre of Systemic Collapse

Fate, it seems, is not without a sense of irony
--Morpheus (The Matrix)

Interesting take (part 1, part 2) on whether precious metals would really 'work' if we get a systemic collapse. The author is careful to state upfront that he is considering the worst case scenarios in the spectrum of chance.

He concludes those seeking power in a vacuum of collapse will likely demonize holders of gold, blaming them for 'causing' the collapse. Because most people will not have acquired precious metals for protection, the masses will likely jump on board this bandwagon in hopes that they will be able to get something for nothing.

He posits that metals markets will come under strict control with limited ability to convert metal into anything other than new script. Conversion rates may penalize metal holders, forcing them to give back much of the gains realized during the runup.

Silver, in his view, may have more utility than gold as a medium of exchange. It may be subject to less oversight, plus it is practically divisible into smaller units conducive to barter and routine trade. For this purpose, the author highlights the merits of US 90% silver coins minted 1964 or earlier.

The potential superiority of silver in this scenario is consistent with conclusions I've reached with my 'inner circle.' Gold is better viewed as a store of value to be passed along to future generations. Silver has more value as a medium for barter or exchange.

The other thing I found valuable in the author's work is his assertion that a powerful few, likely those with great influence in the current system, will try to reclaim control in the 'new' system. If that is the case, then the prudent question to ask is how will these people seek to preserve their weath across the transition? If there is a reasonable answer to this question, then perhaps individuals should allocate some resources in that direction as well.

I find it unpleasant to dream inside such a scenario. But prudent risk management requires exploring those scenarios far out in the tails of probability--where chances of occurence are small but the consequences of occurence are large.

Front Runners

The drinks flow
People forget
The big wheel spins, the hair thins
People forget
Forget they're hiding
--The Who

Members of the bicameral 'financial reform' committee are congratulating themselves for coming to agreement on what is being billed as the biggest financial system overhaul since the 1930s. The Depressionary reference should tell you something.

The wording of the bill should also tell you something. The current title is the Restoring Financial Stability Act of 2010. When bills are worded as gerunds you know you have trouble that will be hard to shake. Moreover, the bill is being abbreviated the Dodd Frank bill, after two of the most damaging bureaucrats w.r.t. finance that Washington has ever subsidized (and that's saying something).

Toddo offers that 'we needed to do something' as he discusses some of the bill's marquee provisions related to derivatives and prop trading. Not sure I agree bro when the actions lead us closer to the abyss. The bill contains nice slabs of requisite pork as well, including provisions that protect 'low income, minority, and underserved communities' affected by failing financial firms (can you say moral hazard and taxpayer burden?), and mandatory affirmative action hiring practices of regulatory agencies.

Revenge of the SIGs. It's all sadly comical.

Bank panics and failures always relate to one issue: excessive leverage. Leverage entials borrowing funds in order to increase potential returns. Of course, leverage also increases risk, or the potential for loss, as well.

When markets go down, lower prices reduce the value of assets held by excessively leveraged firms below the value of their, creating conditions of insolvency. We know leverage is the core issue because conditions of insolvency are difficult, if not impossible, to achieve with no borrowed funds.

In other words, take away the leverage, take away the insolvency. No politicians, or their sponsoring SIGs, want to do that, though.

So how do firms get levered? Two things are necessary. One is an entity or entities willing to supply ample quantities of credit. The other is willingness to borrow, or appetite for risk, among the debtors. Absent either of these conditions, leverage cannot occur.

In unhampered markets these two conditions are regulated by fear of loss. Lenders dial back on credit issuance if they feel borrowers will not be able to pay them back. Borrows dial back on borrowing if they feel less able to repay what they owe.

The probability of 'excessive' leverage building in systems regulated by purely by the natural fear of loss is low. Losses sting. And catastrophic losses, or outright failure, kills.

Yet we observe conditions of excessive leverage routinely. To anyone practicing reason, this should suggest that something must be muting the natural regulatory mechanisms of the market. I'll leave that for you to ponder. The questions you, or anyone truly interested in solving the problem of 'excessive leverage' in our financial systems should be asking, are twofold:

1) Where does the large supply of credit come from? What might reduce concerns among suppliers about the risk of extending too much credit?

2) What drives firms to borrow so much? What might reduce concerns among borrowers about the adverse consequences of excessive debt?

Hint: The Dodds Frank bill does nothing to address these fundamental issues. Indeed, it is more likely that the bill escalates the problem.

position in SPX

Original Welfare Queens

To keep her looking pretty
Buy her dresses that shine
While the rest of them dudes were making their bread
Buddy, beg your pardon, I was losing mine
--Mountain

Southern slaveholders were the original welfare queens of the United States. This group engaged in relentless pursuit of redistribution of wealth by force by instituting a 100% tax on the labor of slaves.

Southern artistocracy's pretentions of sophistication and refinement can be viewed as fronts for large quantities of leisure made possible because they didn't have to work--others were producing for them at the point of a gun. Slaveholders were using government force to advance their interests on the backs of others. They were using the strong arm of government to get more for less, or, in this particular case, to get something for nothing.

All welfare states require a fundamentally similar arrangement.

Political War and Markets II

"Goddammit, when is somebody going to go on the record in this story?"
--Ben Bradlee (All the President's Men)

Following up on last week's missive involving all-out political war and markets, Fleck had additional exchange with 'Mr Skin' about the issue. Mr Skin writes in big blocks of text, but I want to reprint the exchange once again as published in its entirety because I plan to reference some of it in future posts.

Mr Skin: I am not a special trump fan - (more of an extreme case of Hillary phobia) - but the witch hunt going on now is almost exactly the same "play book" they (media and Democrats) used against Nixon. Given that many of today's "pundits" or self-proclaimed "political analysts" plus biased media editors and reporters were in kindergarten or not even born when Nixon blew up, they have no context for pursuing this thing, regardless of substance. This "thing" will not go away. In fact, even without anything tangible to hang something on, "they" don't need anything. Just make something up, spin it well out of context, broadcast the "accusation", thus attempting to force a denial, that in turn will be spun, twisted, "inflamed-on-social-media" for all the idiots to absorb, leading to more "sponsorship" for the witch hunt. The progression of time, heading toward the off year elections, merely aggravates Trump's problem. The Grahams and McCains, plus several other "fearful" or outright leftie congressional Republicans (RINOs - Republicans in Name Only) render Trump's "New Reality" - "It-Ain't-Happening-Dude". When he was elected I figured he may have a few months of peace, probably not any sort of "honeymoon", but I never thought his political opponents would, in effect, deliberately try to sabotage his presidency from day one. The "Rachel Madow" media lunatics and the "Maxine Waters" political lunatics are understandable but it also seems that everyone has out the "long knives". When the Nixon "playbook" started, there were mostly mild suggestions that he might be vulnerable. It took a while for the momentum to build up to the point where everyone piled on. The media always had a "thing" about Nixon, from his days as Ike's VP back in 1956-60. He was perceived as "slick" or phony and had earned the title "Tricky Dick". BUT, their displeasure was nothing like the outright venom shown Trump. Nevertheless, "they" started after him right after he was inaugurated in 1973. The relentless barrage of negative "Nixon Stories", filled with innuendo and speculation, gained momentum into 1974. He resigned in late summer of 1974, whereupon a market already down more than 25%, simply went straight down into September. The big indices lost about 50% from day one of the "witch hunt" in early 1973 until the bottom in September 1974. Of course, there were economic problems along the way, such as an oil embargo, but the assault on the President was unprecedented in modern times and it scared the wits out of both domestic and foreign investors.

Great opportunities grew out of that bear market. And our little money management firm was lucky enough to be in the right place at the right time. Today's "players" have never seen values like those found in late 1974. For context, consider Polaroid - the greatest growth stock since RCA in the 1920s. It had a lock on instant photography (doomed by Texas Instrument's digital revolution a few years later). PRD traded at 149 at the top in early 1973. It bottomed at 13+ in late 1974. It had no debt, and the stock price was not only lower than its working capital per share but also lower than its NET CASH in the bank. In effect, you got paid to own it, and EPS was $1.50. The most absurd value was Boeing - whose market cap was LESS THAN the selling price of three 747 airliners. Of course, such "stone age" stories are forever irrelevant these days, given direct sponsorship of markets by CB bureaucrats, but if enough panic hits a market, similar stories will appear again.

Fleck: So, the bottom line is you think the die is cast, that now, this will be 4 years of hand to hand media/Trump combat nearly 24/7 and that will take its toll at some point? Do I have that right?

Mr Skin: Yep. I think the media will keep trying to outdo each other going after Trump and his enemies will never give up looking for a way to destroy his agenda. Reagan was wildly popular and "they" even tried to get him. When Woodward and Bernstein went after Nixon, and gained "fame" by running a President out of office, "journalism" became a career ambition for a whole generation of "giant killers". The big question is whether the underpinnings of the stock market can remain strong if the "witch hunt" theme keeps playing. Of course, we have grown a new crop of "players" over the last few years, including a Fed (Bullard, etc.) that seems to panic every time the market dips. In any case, I can't see any logical reason for investors to ignore the possible threat that "they" might actually do serious damage to the political process. The whole thing makes me want to puke.

List Serve

"Just another clue"
--Benjamin Franklin Gates (National Treasure)

I've been working on the collection of natural laws that any economic system would have to cope with. Chodorov (1959) has nicely framed a couple that I've noted before, and added a couple I hadn't thought of.

Insatiable desires. Individuals constantly seek a more abundant life. When 'basic' wants are satisfied, individuals will then seek satisfaction of higher level wants. Essentially, human desires are unbounded.

Necessity of labor. Living requires production, or the application of labor to raw materials that make things to satisfy human desires.

Aversion to labor. While some forms of labor may provide enjoyment or satisfaction, humans do not partake in labor for labor's sake alone.

Law of Parsimony. Humans seek the greatest amount of satisfaction related to the labor given up. Essentially follows from the three previous axioms. a.k.a. something-for-nothing tendency.

Valuation choices. Unlike others in the animal kingdom, humans can prioritize their wants vis a vis their costs. Human possess unique capacity for evaluating desires--a consciousness of comparable desires--and making choices based on them. Humans seek satisfaction where the most return is offered.

Unique wants. Each individual's taste preferences differ and cannot be accurately generalized.

Once past the period of discovery, we'll consolidate these list.

Reference

Chodorov, F. 1959. The rise and fall of society. New York: The Devin-Adair Company.

The Forgotten Man

I'm gonna teach you
How to sing it out
Come-a, come-a, come-a
Let me show you what it's all about
--Jackson Five

William Graham Sumner was a professor of sociology at Yale in the late 1800s. Unlike many of his contemporaries, Sumner refused to be sucked into socialistic fads coloring academic work emanating from European universities.

Instead, Sumner focused on social theory surrounding the nature of liberty and contemporary society. At first glance one might think that space to be crowded. Sadly, however, the vacuum created by the rush of many academics toward emerging theories of socialism left Sumner in a somewhat solitary theoretical position.

A gain for us, though, as it served to highlight Sumner's thought processes for all to consider.

In 1883, Sumner wrote a series of essays for Harper's Weekly on the subject of worker relations. He expanded two of his favorite essays from the series in an address given to audiences in New York and Connecticut that same year. The address as well as the essays are often famously referred to as "The Forgotten Man."

This is a remarkable essay for the time, and it rings true today.
One of the more thought provoking features is how Sumner introduces the Forgotten Man using some 'social justice algebra:'

"As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C should do for X or, in the better case, what A, B, and C should do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, but what I want to do is to look up C...I call him the Forgotten Man...He is the victim of the reformer, social speculator and philanthropist..."

The Forgotten Man wears scars from the truncheon swung by the Welfare State.

Fear of Freedom

"It's all for nothing if you don't have freedom."
--William Wallace (Braveheart)

I have been wondering for some time what drives some people to shun freedom and submit to forced existence under government control. And what causes these same people to want to force others into similar conditions of serfdom?

As such, I found the first two paragraphs of this missive particularly interesting. The author suggests that those who worship centralized authority are seeking to avoid risk at all costs. They live fearful of loss, and their fear drives them to seek control of their environment.

Government, being nothing more than legalized force, becomes an agent for mitigating fear by containing the world and sterilizing it of unpredictability. Because liberty is the embodiment of unpredictability, it is something to be suppressed--in both themselves and in others.

On this Easter Sunday, I am reminded that freedom paves the path to salvation. Pray for those souls who live in fear of freedom.