Social Pressure

Duke of Norfolk: Why can't you do as I did and come with us, for fellowship?
Sir Thomas More: And when we die, and you are sent to heaven for doing your conscience, and I am sent to hell for not doing mine, will you come with me, for fellowship?
--A Man for All Seasons

Unlike the pressure felt when benchpressing barbells in the weightroom, social pressure is not physical force. It is not force at all. Social pressure does not even come from external sources.

Social pressure is a construct. It reflects a state of mind. We tell ourselves that we need to act or think a certain way because others want us to.

We make a choice to 'feel' social pressure. No outside influence is effective unless we admit it into our person.

We can also choose to not let others dictate our existence.

Whether we live our lives on our terms or on someone else's terms, in the end each of us alone will be accountable for the choices we make. We cannot lay off accountability on someone else.

Negative Forces

"A king may move a man. A father may claim a son. But even if the men who move you be kings or men of great power, your soul is in your keeping alone. When you stand before God you cannot say, 'But I was told to do thus,' or that 'Virtue was not convenient at the time.' That will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

Two negative forces work against seeking truth and doing the right thing. One stems from the axiomatic need to economize. Resources that advance standard of living are scarce. Material things are scarce, but so are intangible resources such as time an energy.

In order to get the most standard of living at the lowest cost of scarce resources, people are tempted to use aggression to satisfy their need to economize. Aggression enables people to take production from others, which allows the aggressors to economize their time and energies on other endeavors. Individuals might do the taking directly, or they might employ strong armed agents to do their bidding for them. Either way they are principals of violence and forcibly acting on others in order to get more for less.

The other force is bowing to social pressure. Because people accrue self esteem from group affiliation, they will bend their behavior to comply with group norms. Individuals are tempted to engage in activities for 'the greater good' or similar rationale. Social pressure to compromise one's morals and beliefs is often intense and difficult to sidestep.

Economizing via aggression and bowing to social pressure. Much evil in the world is driven by these negative two forces.

Militant Left

We'll be fighting in the streets
With our children at our feet
And the morals that they worship will be gone
--The Who

Some people are voicing surprise at the recent escalation in the militant nature of the left. But it should be no surprise. Leftists are statists. When they sense that their statist institutions are being threatened, leftists will do what they can to neutralize the threat.

In pretense that the state does not act aggressively, however, leftists will rarely begin with overt force. Instead, they will follow a familiar progression that unfolds as follows:

Social pressure. Public ridicule, belittlement, etc. aimed at embarrassing or shaming the target into 'voluntarily' removing the threat.

Legal action. Laws, law suits, arrests, impeachment meant to keep the threat at bay.

Physical violence. When the previous two measures don't work, then overt physical force is employed against the threat.

Because leftists are collectivists, they mistakenly believe that ridicule and shaming work against members of out-groups just as effectively as against members of their in-group. They fail to realize that out-group members are often less influenced by rhetoric than leftists are. As such, no matter how loud the left shouts--and they have been shouting--little social pressure is actually exerted on out-groups. Consequently, this tactic has been largely ineffective in quelling recent threats to the state.

Until recently, running to the courts to obtain legal recourse against state threats has been an effective fallback tactic. However, since President Trump took office, he has been nominating judges for benches from the Supreme Court on down that promise to tilt the balance of judiciary power away from leftist agendas.

Because legal channels are also failing them, leftists are increasing turning to overt violence as a preferred measure for preserving the state. This explains rising militant tendencies of the left.

Guildthink

Dean Yeager: Dr...Venkman. The purpose of science is to serve mankind. You seem to regard science as some kind of dodge, or hustle. Your theories of the worst kind of popular tripe, your methods are sloppy, and your conclusions are highly questionable. You are a poor scientist, Dr Venkman.
Dr Peter Venkman: I see.
Dean Yeager. And you have no place in this department, or this university.
--Ghostbusters

In a WSJ article, Amity Shlaes suggests that the economics profession is guilty of 'guildthink.' Economists shut out innovative ideas in favor of status quo concepts. Such a notion, of course, is not new. Narrow, status quo thinking has influenced scientific progress for centuries.

Indeed, when viewed through the lens of institution theory, guildthink is a predictable phenomenon. Social pressure builds inside the economics field to promote such normative isomorphism.

Over time, growing uniformity of isomorphic behavior reduces the variation necessary for successful adaptation. Pressure to adapt overcomes pressure to conform, which topples guildthink status quo in favor of ideas with more validity.

Central Banks and Social Instability

There's a room where the light won't find you
Holding hands while the walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Minsky-esque hypothesis that efforts by central banks to stabilize economies and financial markets will create social instability as the wealth chasm grows between people at the top and bottom of the social pyramids. That social instability, in turn, could exert significant political pressure on the system to remove interventionary monetary policy.

Of course, such social instability could also spawn riots in the streets.

War on Dissent

Trim life shadows flicker and fall
But you still can't turn away
Get up and run before you stall
Before the edges fray
--Ric Ocasek

Glenn Greenwald nicely frames the growing war on dissent. Dissent is disagreement with collective norms, particularly as they apply to politics. 

In any social environment, there will be institutional pressure to conform to norms, resulting in movement toward sameness in behavior (a.k.a. 'isomorphism'). Pressure to conform can be peaceful, taking the form of public opinion/persuasion or threat of exclusion from group activities.

However, pressure to conform can be coercive and involve force. For example, dissenters who gather in protest could be assaulted or arrested.

Greenwald suggests that government action against dissent, which is by definition forcible, has been increasing in western societies. Western societies are grounded in political frameworks that, at least on paper, tolerate dissent. In the US, for example, the Constitution guarantees that no law will prohibit or abridge freedom of speech.

Government-sponsored coercion against dissent is easy to spot in other countries. Thus, when Russia moves to freeze bank accounts of political dissenters, headlines in western countries howl in uproar.

However, when western countries do the same thing, as is currently happening, among other places, in Canada, the response is much more muted.

What Greenwald fails to mention is that this inconsistency is explainable by social identity theory. Simply stated, bad behavior by outsiders is punished or berated, while similar behavior by insiders is condoned or rationalized. 

As such, dissenting speech by insiders is legitimate protest to be respected, while dissenting speech by outsiders is disinformation or sedition to be silenced.

Greenwald's main point, however, is that war against dissent in western societies is increasing. He posits that  heads of western governments are stepping away from rule of law in favor of discretionary rule. By definition, discretionary rule is prone to inconsistency and hypocrisy, and requires violence to keep behavior in check.

Fortunately, citizens (read: voters) wake up politically when their freedoms are being trampled. Consequently, as western governments wage war on dissent, the dissenters appear to be organizing their own campaign aimed at ballot boxes.

Freedom of Choice

"A king may move a man. A father may claim a son. But remember that, even when those who move you be kings or men of great power, your soul is in your keeping alone. When you stand before God you cannot say 'but I was told by others to do thus' or that 'virtue was not convenient at the time.' This will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

One characteristic that separates us from the rest of the animal kingdom is freedom of choice. Unlike Pavlov's dog, we can decide how to respond to a stimulus. We can override limbic reflex and choose differently.

This means that no matter how bad or high pressure things get, we control our response. Others cannot move us unless we let them. When we stand accountable before the Creator we will not be able to claim temporary insanity, or that social pressure was too much, or that orders were merely being followed, or that we were ignorant, or that good ends justified evil means.

But I gave you capacity for reason and choice, He will say, to choose between right and wrong, between peace and aggression. Why did you not use it?

Imitation Gone Awry

"Hey, check out the Dukes over there. They must know something. Let's get in on it."
--Floor trader (Trading Places)

Although institutions are commonly viewed as people (the president of the United States), places ('institutes of higher learning'), and even dates (holidays), institutions are better seen as laws, customs, and other norms produced, practiced, or symbolized by those 'things.' A primary, but certainly not singular, purpose of institutions is to provide a stable social backdrop for human interaction.

Institutions operate by exerting 'isomorphic' pressure for sameness in behavior. Per their seminal work, DiMaggio and Powell (1983) elaborated three types of isomorphic pressure: coercive ("Do this or go to jail"), normative ("This is how we do things around here"), and mimetic ("Follow the leader"). Although these categories are often useful for analytical purposes, they are often blended in practice.

A common hypothesis in institutional theory is that, when uncertainty rises in the environment, mimetic pressure often dominates the landscape. Simply stated, when people don't know what to do, they copy the behavior of others who they think might 'know' something.

There is certainly some validity to this premise. It is hard to dismiss that much of the behavior during the CV19 pandemic seems to be driven by mimetic isomorphic pressure. For example, once an influential organization decides to mandate vaccines, other organizations quickly do the same. People see others wearing masks, so they put masks on too.

Mimetic isomorphism can lead to obvious dysfunctionalities. Imitating others is the basis for herd behavior. The 'blind may be leading the blind'...perhaps over the cliff.

It seems plausible that mimetic isomorphism can only 'work' for so long. If copying the behavior of others doesn't produce positive results within a reasonable amount of time, then people will being to discard this strategy in favor of something else. Probably not all at once, but gradually as people slowly conclude that their imitation strategies are not producing desired results. 

People more prone to think for themselves are likely to be early dissenters and strike out in search of alternatives. Those alternatives may take the form of non-isomorphic behavior entirely. Entrepreneurship, innovation, et al. This is sometimes called 'active agency'--i.e., pursuing interests that do not align with prevailing institutions (Oliver, 1991).

Perhaps much of the pushback to the new round of CV19 mandates that we're currently witnessing results from active agency driven by imitation gone awry.

Reference

DiMaggio, P.S. & Powell, W.W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48: 147-160.

Oliver, C. (1991). Strategic responses to institutional processes. Academy of Management Review, 16: 145-179.

Neutralizing Threats to the State

Hey!
Think the time is right for palace revolution
'Cause where I live the game to play
Is compromise solution
--The Rolling Stones

The state grows larger only by expropriating ever more resources from some for the benefit of others. Those beneficiaries constitute principals contracting with strong armed government agents for their mutual welfare. A larger state means more benefits for the principals and their agents.

Naturally, the principals and agents of the state will be reluctant to surrender their spoils. That reluctance will grow with the size of their take. Because the state has now grown to mammoth proportions, the resolve with which state beneficiaries seek to hold onto their spoils is also very strong.

Anyone who challenges this institutional arrangement or, pray tell, seeks to reduce or eliminate it, will face stiff resistance. Indeed, principals and agents of the state will do everything in their power to neutralize the threat.

All stops are unlikely to be pulled right away, however. Instead, a progression is likely where force is hidden (in pretense that the state does not act aggressively) and becomes more overt only if necessary to neutralize the threat. The progression of force generally unfolds as follows:

Social force. The first phase is to apply social pressure to back off the threat. Public ridicule, belittlement, revelations of personal secrets, etc. The media, which is often a large beneficiary of state power, serves as a primary instrument in this phase. The idea is to create a situation where the target feels so much embarrassment, shame, etc so as to give up and 'voluntarily' walk away.

Legal force. If that doesn't work then the next step is to use the legal system to force the target to stop acting in manners that threaten the state's institutional arrangement. Laws, law suits, arrest, impeachment, et al. are meant to keep the threat at bay.

Physical force. If the legal system is unable to deter the threat, either because the laws cannot be bent enough to ensnare the individual or because the subject refuses to comply, then overt physical force is necessary. If the threat has made it this far, then it is unlikely that low to moderate levels of force will be effective. Principals and agents of the state will probably need to use lethal measures to neutralize the threat.

Because history suggests that running this gauntlet takes what might be viewed as divine commitment, the state's approach to neutralizing threats has been quite successful.

Rhetorical Refuse

Guy de Lusignan: "Give me a war."
Reynald: "That is what I do."
--Kingdom of Heaven

The sad Arizona shootings find opponents of freedom once again seeking to exploit a tragedy for political gain. Over the past few days, the logic has unfolded on a predictably twisted path. First came proposals that the shooter had Tea Party ties, since such a linkage conveniently fits Leftist claims that those associated with the Tea Party have violent underpinnings.

But subsequent media frenzy to uncover 'the truth' revealed no direct Tea Party ties. So the thesis drifted toward the supposedly 'harsh rhetoric' of Republican politicians that must have indirectly motivated a sympathetic gunman into action.

Then information surfaced that the alleged shooter had a long record of unstable behavior, including the issuance of death threats to various officials, and appeared to favor books by Marx and Hitler. So the party line shifted once more, this time suggesting that harsh political rhetoric, primarily spewed by Republicans, helped compel an unstable individiual into irrational action.

An all-too-predictable conclusion is that, because of the 'obvious' connection between inflammatory rhetoric presumably present in the environment and the perp's actions, that the environment needs to be more carefully controlled--perhaps even w/ government 'assistance.' By doing so, we can avoid offending those with 'delicate sensibilities' who are capable of unleashing a string of irrational violence at the drop of a hat.

That tortured thought process barely registers on the scale of reason. Precisely what constitutes 'inflammatory rhetoric' is an obvious issue. What is perceived as violent or inflammatory by one person may be altogether non-combustable to another. For example, gun imagery might motivate threatening feelings for some while sparking feelings of safety for others.

It would then need to be shown that the perpetrator was exposed to the rhetoric and interpreted it in a manner consistent with potential for violent response.

Finally, even if there was agreement on what constitutes inflammatory rhetoric and that the perpetrator was exposed to it and interpreted it in violent context, proponents of this theory would have to establish a decisive connection to action. In the Arizona case, no empirical evidence of such a linkage has been produced. Nor will it--because there can be no such evidence. Social or suggestive pressures emanating from the environment do not directly affect human behavior. Between environmental pressures and human action is personal choice. Even in situations where an environment may be 'loud' with suggestive pressure, an individual must choose whether to bend to that pressure.

Which brings us to an important, perhaps the most important, way that we differ from the rest of the animal kingdom. Creatures lower in the food chain instinctively react to environmental stimuli. Stimulus->thoughtless response. Humans, on the other hand, possess capacity for self-awareness. We can interpret a situation, exercise judgment, and choose our response. Potential stimulus->judgment->thoughtful reponse (which may include no response at all).

Stated another way, social pressures can not move our behavior unless we allow them to do so.

From a spiritual standpoint, many believe that the human qualities of self-awareness and judgment are central to how our Creator will hold us accountable for our behavior here on Earth.

Meanwhile, Progressives are trotting out proposals that resemble those offered in past situations with tragic or crisis character. These proposals aim at restricting freedom--in this case primarily First and, of course, Second Amendment freedoms--in the name of security. We have noted it before: security is not a right. Whereas speech and self-defense are rights with which we are born--and rights that the Constitution was designed to protect.

Indeed, for those who value freedom highly, calls for more government power and control constitute perhaps the ultimate expression of violent, inflammatory rhetoric.

Be Different

"Go on, lean in. Listen...you hear it? Carpe...hear it? Carpe...carpe diem. Sieze the day, boys. Make your lives extraordinary."
--John Keating (Dead Poet's Society)

Social pressure pulls behavior like a magnet to the status quo. Be like us. Don't be different.

Why is this so? Being different takes effort. Not just blind imitation of others.

It also requires risk. If the difference results in a mistake, then the herd feels self-righteous. "You were foolish to break from the pack," chastises the status quo.

If the difference results in something good, then the herd looks wrong. "You're making us look bad," warns the status quo.

Being different is a can't win situation, it seems.

Until one realizes that we are not accountable to the status quo. Christ's birth tells us that each of us was put on this earth to make a difference. By definition, improvement and innovation requires breaking from the status quo.

Take a deep breath and be different.

Institutionalized Compliance

"These walls are funny. First you hate 'em. Then you get used to 'em. Enough time passes, you get so you depend on them. That's institutionalized."
--Ellis Boyd 'Red' Redding (The Shawshank Redemption)

Although many of the draconian measures imposed to counter COVID-19 appear unconstitutional, the vast majority of US citizens are complying. One would think that, at the very least, gross infringements on personal liberty such as 'stay at home' orders and forced shutdowns of 'non-essential' businesses would spark public protests and perhaps outright rebellion.

By and large, however, Americans are not only complying with COVID countermeasures, but they have become zealots in promoting them. In fact, some locales have established tattletale systems for reporting non-compliance to authorities.

Why are Americans so willing to accept infringements on their liberty that they famously fought so hard for in the past?

One explanation is fear. As these pages have noted, conditions of threat drive reactive, fast thinking processes less capable of reason. When we are afraid of what a novel virus strain might do to us, we find it difficult to 'think straight,' making us more likely to bow to central authorities that promise safety.

Another, perhaps more comprehensive explanation can be found in institutional theory. Institutions are cognitive, normative, and regulative structures and activities that provide stability and meaning to social behavior (Scott, 1995). Although we often refer to them as people, places, or dates (e.g., President of the United States, courts, prisons, markets, holidays, 'institutes of higher learning'), institutions are better thought of as the laws, customs, and other norms produced, practiced, or symbolized by those agencies.

When viewed in this manner, institutions constitute an approach for managing environmental uncertainty. Because uncertainty threatens to upset resource flows necessary for survival, people create 'negotiated environments' laden with governance mechanisms to regulate transactions in the name of stability (Oliver, 1991; Pfeffer & Salancik, 1978).

Institutions support the stability motive by specifying 'rules of the game' in social settings; their primary role in society is to reduce uncertainty by establishing stable structure for human interaction (North, 1990).

Individuals and organizations can seen as operating in 'fields' that exert institutional pressures for sameness (a.k.a. 'isomorphism') through various mechanisms (DiMaggio & Powell, 1983). These mechanisms can be coercive ("Do this or you'll go to jail"), normative ("This is the proper thing to do"), or mimetic ("Let's copy what they're doing"). Individuals and organizations that adopt the rules are rewarded with resources and legitimacy that enable survival and prosperity. Those who do not adopt are sanctioned.

The general proposition is this: The greater the environmental uncertainty, the greater the institutional pressure exerted by the field to stabilize the situation.

The COVID-19 pandemic has caused perceptions of environmental uncertainty to shoot through the roof. Witness, for example, the spike higher in the measure of economic policy uncertainty pictured above.

We should expect, therefore, greater imposition of institutional rules aimed at quelling the threat to resource stability posed by the COVID-19 situation. Indeed, we've seen the complete range of institutional mechanisms at work: coercive (mandatory business shutdowns), normative (social distancing standards), mimetic (NBA shutdown quickly cascades to all active professional and amateur sports).

Sanctions for noncompliance are currently so strong that few are tempted to break the rules.

However, if people begin to perceive less acute uncertainty (e.g., "the virus threat has passed" or "the virus threat is less than we originally thought") or if they perceive that newly imposed institutional rules create uncertainty in other areas (e.g., "COVID countermeasures might tank the economy"), then isomorphic pressures exerted by the field must be revised. Ineffective rules must be rescinded or replaced. Otherwise, extant institutions will be seen as creating more instability than they suppress, and rebellion to topple those rules will intensify.

We may be entering such a situation now.

References

DiMaggio, P.S. & Powell, W.W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48: 147-160.

North, D.C. (1990). Institutions, institutional change and economic performance. Cambridge, UK: Cambridge University Press.

Oliver, C. (1991). Strategic responses to institutional processes. Academy of Management Review, 16: 145-179.

Pfeffer, J. & Salancik, G.R. (1978). The external control of organizations: A resource dependence perspective. New York: Harper & Row.

Scott, W.R. (1995). Institutions and organizations. Thousand Oaks, CA: Sage Publications.

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.

Individuals Act

"A king may move a man. A father may claim a son. But even if the men who move you be kings or men of great power, your soul is in your keeping alone. When you stand before God you cannot say, 'But I was told to do thus,' or that 'Virtue was not convenient at the time.' That will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

Axiomatically, only individuals act. Groups, races, classes, nations etc exist but they can only act through individuals.

For example, Japan attacked Pearl Harbor on December 7, 1941, but only because certain individuals flew airplanes and dropped bombs on US ships. The US declared war on Japan on December 8, 1941, but only because certain individuals in Congress voted to declare war.

Yes, social pressure can persuade action. And herding tendencies can drive like-minded behavior.

But this does not alter the truth that when analyzing human action, the core unit of analysis is the individual.

Debt Ceiling Drama

I'm traveling down the road
And I'm flirting with disaster
I've got the pedal to the floor
And my life is running faster
--Molly Hatchet

Two years ago I still held some hope that politicians would come to their senses and pull the system back from the brink. It didn't happen. The debt ceiling was raised as it had been every time the issue had previously come before Congress. My hope pretty much vaporized at that point.

There is little chance that it will be different this time. The media is merely elevating the drama factor. The drivel spewed last time is just louder.

Even those politicians who know that we are headed for disaster are feeling social pressure to cave. They don't want to be the ones that the addicts point to and say, "Curse him! He took our drugs away."

That drug is debt, the great enabler of spending beyond one's means.

As valiant as the efforts of some Tea Party types have been, the task before them is herculean. Our addiction is so strong that it seems unlikely that we can be coaxed to voluntarily kick the habit.

Instead, as we have noted many times on these pages, it is more likely that the outcome will not be grounded in voluntary choice. Either creditors no longer lend, or residual resources are simply consumed and there is nothing left to 'borrow.'

We will have then reached the chaos endpoint of socialism.

We Control Our Response

"Knights, the gift of freedom is your by right. But the home we seek resides not in som foreign land. It's in us, and in our actions on this day! If this be our destiny, then so be it. But let history remember that, as free men, we chose to make it so!"
--Arthur Castus (King Arthur)

Many situations are out of our control. How we respond to those situations is in our control. Another person's words, social pressure, even dangerous situations influence our behavior only to the extent that we let them.

Stress, guilt, anxiety, anger, outrage, et al are self-imposed responses to external stimuli. We can choose differently.

Don't take it personally, and live free.

Externalities

Inside, outside
Leave me alone
Inside, outside
Nowhere is home
--The Who

Externalities (a.k.a. external economies or external costs) involve situations where the outcomes of A's activities impact B. These impacts on B, sometimes termed 'spillovers,' are usually regarded as indirect, perhaps even unintentional, outcomes of A's actions.

Spillovers that are beneficial to B are called positive externalities. For example, innovation that creates new products and industries can generate large positive externalities.

Spillovers that are costly to B are called negative externalities. For example, air pollution spewing from a factory smokestack can generate negative externalities for those living in nearby communities.

A complaint often levied against free market designs is that they ignore the problem of negative externalities. Polluting producers, it is posited, are motivated to think narrowly and act myopically in their own self-interest. While their situation improves, those producers harm others.

Early interventions to address this perceived market deficiency involved taxes and regulation intended to penalize or reduce the negative externalities. However, monitoring costs (read: bureaucracy) of these approaches are high, and may even offset the benefits incurred from reduced externalities. Moreover, these interventions bypass the voice of consumers, who in free markets demonstrate thru their buying actions what they truly value. Absent free trade where buyers and sellers can express their preferences thru voluntary exchange, estimating the costs of externalities by fiat is merely guesswork and subject to significant error (Rothbard, 1956).

Coase (1960) theorized that as long as property rights are clearly defined and transaction costs are low, then A and B can privately negotiate a solution that 'internalizes' the externality. Thus, if people living in nearby communities have a property right to 'clean air,' then the factory will have to negotiate with them in order to rightfully discharge waste thru the people's property.

There seems a compelling argument to be made that, rather than a failure of free market designs, cases of negative externalities can be seen as failure of government, whose purpose in a free market system is to enforce individual property rights against subtle forms of invasion. In the case of smoke control, the proper free market remedy is not the creation of a State bureau to prescribe smoke control regs. Rather, the appropriate remedy is judicial action to punish pollution damage to the person and property of others (Rothbard, 1962).

An additional advantage to the 'property rights' solution to negative externalities is that both A and B are motivated to determine ways to reduce the costs, which benefits social welfare over time.

Of course, market pressure alone may limit externalities. Those seeking organic foods, for example, vote with their wallets for produce that does not encourage negative externalities associated with chemical additives. Producers who do not follow the market's signal are penalized with declining trade.

References

Coase, R.H. 1960. The problem of social cost. Journal of Law and Economics, 3: 1-44.

Rothbard, M.N. 1956. Toward a reconstruction of utility and welfare economics. In M. Sennholz (ed.), On freedom and free enterprise: Essays in honor of Ludwig von Mises. Princeton, N.J.: D. Van Nostrand.

Rothbard, M.N. 1962. Man, economy, & state. Princeton, NJ: D. Van Nostrand.

Theories of Viral Response

"I hate losses, sport. Nothing ruins my day more than losses."
--Gordon Gekko (Wall Street)

As strange as the past few months have been, there are actually theories that help explain the unusual behavior of people and policymakers. These pages have been documented a few. Let's review some of them here.

Social identity theory. Behavior of out-group members is criticized while behavior of in-group members is largely given a pass. Because leftists tend to be, by definition, more collectivist, we should expect in-group/out-group norms to be more prevalent among those on the political left. Helps explain division of CV19 discourse and policies along political lines.

Institution theory. Institutions are rules and norms that exert pressure for sameness and compliance. Pressure for 'isomorphism' can be classified in one of three types: coercive (laws, regulations), normative (customs, common practices), mimetic (imitating behavior of others). Mimetic isomorphism is particularly prevalent in uncertain times--which helps explain quick spreading policies such as lockdown and mask wearing.

Agency theory. Agents are supposed to work on behalf of their principals, but often pursue their own interests at the principals' expense--particularly when principals are unable to monitor/assess agent work. Helps explain behavior of public health officials as well as efforts to manipulate data to hide error.

Resource dependence theory. Entities are rarely self-sufficient. Instead, they must trade with others to obtain resources necessary for survival and growth. Larger resource providers exert more power over smaller dependents. Helps explain why sectors highly dependent on government funding, such as health care, are likely to fall in line with CV19 policy mandates.

Threat rigidity theory. Facing conditions of threat, individuals, groups, and organizations tend to do two things. One, they restrict information processing channels to reduce information overload and to economize attention on lessons learned from dealing with past threats. Two, they tighten control processes by centralizing decision making authority. These actions combine to rigidify response to threat. Creative solutions are shunned in favor of customary responses that worked well to quell previous threats. When the nature of the threat differs radically from previous episodes, then failing to consider novel responses results in a reinforcing loop of maladaptive behavior. This theory, coupled with the next one, says much about collective response to a new virus.

Fast and slow thinking. People posses two decision making processes. System 1 is emotional and reactive. Instead of deliberately processing information which takes time and effort, this 'fast thinking' processes makes snap decisions. The vast majority of decisions are made using fast thinking processes. System 2 is rational and data driven. It collects evidence and deliberates before deciding. This slow thinking process--the truly rational one--is rarely used. It is easy to surmise that most people have been engaging their fast thinking system 1 brains when making sense of the CV19 pandemic and associated policy responses.

Transaction cost economics. Econ 101 assumes that exchange is cost-free. In reality, 'transaction costs' accompany trade. Search, contracting, arbitration, translation, regulation. The higher the transaction costs, the less likely people trade on the market (outsource) with other specialists. Instead, they will pull more activities in-house (insource) and diversify. Higher transaction costs associated with CV19, particularly those imposed by regulation (mask wearing, hand washing, sanitizing, spacing), are keeping people from trading with each other.

Prospect theory and escalation of commitment. You plan out what seems like a great strategy. You begin implementing it. But it doesn't work. What to do? Rather than cut your losses and change course, you will be prone to keep going and perhaps even escalate your commitment. A key reason: loss aversion. People hate losses more than they like gains. This theory says much about why officials are unlikely to reverse failing CV19 policies.

My sense is that these threads could be woven into an interesting theory of viral response.

How Weak Currency Initiatives Could Hammer Gold

There's a room where the light won't find you
Holding hands while
The walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Fil Zucchi shares an interesting thesis that actions by central banks to weaken currencies could put downward pressure on the price of gold. This is counterintuitive because interventions to weaken a currency are typically viewed as bullish for gold.

Because there is building political pressure against weakening a currency via money printing, Fil posits that central banks might sell some of their gold reserves, and use the proceeds to buy foreign currencies (forex). Price of forex would rise, and domestic currency would weaken as per the objective.

I hadn't given this scenario much thought but I do think Fil has an interesting angle. Domestically, the Tea Party movement and other social awakenings seem to be sensitizing the public about the dangers of money printing by the Fed and other central banks. By selling gold to weaken the currency, central banks can achieve their goal in a politically expedient manner--i.e., they cannot be accused of pure money printing to manipulate currency cross rates.

Should such actions occur, it would almost certainly drive the price of gold lower. How much lower and for how long would be anybody's guess. What we do know is that central banks could not engage in this operation indefinitely as they would run out of gold to sell at some point.

Fil notes that, while the selling of gold by central banks would be bearish for gold price in the near term, it would likely set up a very bullish scenario for gold at some point. Once central banks deplete their gold, then the only way to continue currency debasement (which is the heart and soul of central banking) would be to crank up the printing presses full force. At that point, 'big inflation' would be en force; gold would be situated for a moonshot increase.

It would also constitute poetic justice of sorts, since gold will have left government hands and landed in the hands of the people--where it naturally belongs.

Like Fil, I'm currently out of 'paper' gold and silver, having sold the last of my trading position in SLV last week before ensuing price weakness (better lucky than smart). I do maintain exposure via my physical metals position--a position that I do not plan to sell.

Meanwhile, I'm going to watch gold price from the sidelines for a while, and look for evidence that Fil's thesis may be playing out.

position in gold, silver, USD

Eighties Envy

You must be my Lucky Star
'Cause you make the darkness seem so far
And when I'm lost you'll be my guide
I just turn around and you're by my side
--Madonna

Peter Atwater pens what is one of the more concise explanations as to why this recession may wind up being unlike any over the past 30 yrs.

In a word: debt. We have way more of it this time than before, and we've only added to it during the last 18 months of 'crisis mgt.'

Moreover, social attitudes toward debt appear to be shifting. People want less of it, not more. If true, then reflating an economy via additional credit creation won't work this time.

He cautions that the recent uptick in stocks, economic indicators may be a mirage. No V this time; we're merely relieving oversold pressure before downtrend resumes.

Couldn't agree w/ Peter more.

position in S&P