Archive for the ‘Political Economy’ Category

Review of Zelmanovitz on money’s truth and money’s health

Wednesday, December 7th, 2016


At the Library of Law and Liberty’s site — Stephen Hicks discusses Leonidas Zelmanovitz’s ambitious work in the philosophy of money:

Review of The Ontology and Function of Money: The Philosophical Fundamentals of Monetary Institutions 

Dr. William Kline on David Hume — video interview transcript

Monday, December 5th, 2016

Interview conducted at Rockford University by Stephen Hicks and sponsored by the Center for Ethics and Entrepreneurship.

Part I

Hicks: I’m Stephen Hicks, executive director of CEE, and our guest today is Dr. William Kline, an expert on David Hume, the 18th-century Scottish Enlightenment philosopher. He spoke today at Rockford University in the Ethical Theory class on Hume’s contribution to the foundations of moral and political thought. Why, in the 21st century, should Hume matter to us?

Kline: There are at least a couple of reasons. One is Hume is very concerned with the origin of property rights and how and when they apply, which I think is is perennially important. I also think, two, there are certain questions that arise about the extent to which free and self-directed human interaction should be allowed to the extent that it’s beneficial for us all — basic questions of liberty — and I think Hume painted a picture that deserves to be examined.

Hicks: If we paint that picture in broad strokes, certainly Hume’s conclusion is a conception of a society that is just. For him, justice is a fairly expansive concept. What are the major constituent elements of the just society that he would like us to work toward?

Kline: Well, his theory of justice is actually going to be constrained to basically property, trade, and contract, which is consonant with writers that have come before him, whether Hobbes or Locke. So, those who want look at a more expansive view of social justice aren’t going to find all of those elements there. But with that said, Hume focuses on this because he thinks that they are central to any society, that they are necessary, and that they have to be stable. And that point you do find even reflected in people saying, like John Rawls in A Theory of Justice, the basic rules of justice have to be stable. And so, in that sense, his project is the same. Another reason to read Hume for today.

Hicks: So part of the just society is going to be a set of stable principles. But in terms of content, respect for property, respect for trade, respect for contract is going to be essential, firm principles that we have to realize. Now if we go back to the beginnings or foundations of Hume’s philosophy and his moral thinking, he has a reputation — how deserved or not is subject to interpretation, though — for being a radical subjectivist in his moral theory. So, there is obviously a big gap that has to be bridged if you are starting from radically, subjectivist foundations to ending up a fair, relatively firm, socially-wide conception of a just society. How deserved is Hume’s reputation for being a subjectivist in his moral theory?

Kline: Well, he is a subjectivist in the fact that moral approbation will be in the eyes of the beholder. The disconnect happens when people don’t realize is that the subjectivity is going to be some sort of intersubjectivity, it is not going to be, it’s not a solipsistic argument, that somehow moral judgments are just generated by me, by my passions, by my sentiments, not in reference to anybody else. That’s not going to be his argument. In fact, the whole reason you want society is you can’t even live like that. So, whatever subjectivity we are going to talk about is going to be in an intersubjectivity of human beings that have a certain nature and have certain needs to be met and have to figure out how exactly to do that.

Hicks: So, if we then start the process where Hume says certain principles will emerge, even we do start off more atomistically or more individualistically each with our own subjective evaluations, how does some sort of coordination, right, emerge or some principles emerge with? Can you sketch that process?

Kline: And I think it’s good the way you said it too: Hume began and definitely it ends with a sort of methodological, subjectivist, individualist in almost like an economist would begin. And you find this approach reflected in modern game theory. You’ll find people like Axelrod, Brian Skyrms, Robert Sugden, asking ‘Here are individuals with their own subjective preferences interacting with other such individuals, what kind of solutions to different problems can they find?’ In Hume’s case, he is going to talk about property. And the upshot of it is that the strategy people find is that if I leave you alone, and you leave me alone, we are both better off. And I will leave you alone if you leave me alone. And there is a lot of traction to be gained from that. Hobbes doesn’t see this as a possibility. Hobbes thinks we are just going to attack each other and we need Leviathan to stop us. Hume doesn’t. Hume says we can actually learn from our mistakes and we can actually learn to conditionally structure our activities, much as Axelrod tells us today, that if I cooperate with you, and you cooperate with me, I will keep cooperating with you.

Part II

Hicks: So this is in keeping them with the rest of Hume’s empirical philosophy, where it’s a matter of learning through trial and error, as opposed to a priori principles being dropped upon us to which were supposed to conform. So the idea then is that individuals can’t start out with their own subjective preferences, but through the process of trial and error learn that through cooperation and respect for each other’s stuff they will be better off?

Kline: Yes.

Hicks: So at least we’ve gotten past the bootstrapping, right, the initial moment, we’ve got some principles here. But, as you mentioned in your talk, at this point, it’s still based on self-interest in a narrow sense and there is no reason why people won’t defect, say, or just see the mutual backscratching and mutual respect as something that is short-term and not necessarily to be extended to all of the members of society, and so on. So, how do we get from these initially emergent agreements among individuals to where Hume wants to end up, which is to say, with social-wide or all-of-society agreed-upon principles that are firm and binding? What do we need to add?

Kline: Yeah, and this is a problem too, historically. It occurs in Plato, and we find it in Hobbes as well, where you start out with this methodological individualism, it’s run by self-interest, self-interest is all I recognize, it is on self-interest to leave you alone, you recognize this in yourself interest leaving me alone, and everything is all alone and good until you say ‘Wait a second, what about these cases where you realize it’s not in your self-interest anymore’? Maybe I am way more powerful than you, maybe you’ve turned your back and I can get something and you don’t know it. If all it is is self-interest, it would seem that, well, then, that’s what you should do, take the ring, go kill the king and make the queen your wife. You would be a fool to do otherwise and there’s certainly no moral rules stopping you.

The point is that Hume’s takes methodological individualism up to convention, but then after that, conventions are really what is running the game. I think that Hume does think, just as Aristotle, that we are social creatures. We are not these solipsistic creatures, right? We are social creatures and these conventions, once they are running — once we are respecting each other’s property, once we are trading, once we’re recognizing that these mutual strategies are beneficial, we are interacting as the social creatures we are meant to be — this has an effect on our psychic makeup, just like cause and effect does, where the repetitive, constant conjunction of continuous objects, whether they are pool balls or whatever, in principle upon our minds, that, well, that’s going to be happen again. We develop the same expectations, but it’s not a rational calculation, we develop the same expectations with regards to other people. And also we begin to put this into language. And once we start having concepts of mine and thine, if you will, and language that says those certain actions — and this is actually his terminology in the Enquiry — ‘certain actions are odious’. These then now apply in a general fashion, it goes beyond me. Odious means to anybody and that’s what we are really then go beyond. It’s now no longer about whether it’s in my self-interest or not, it’s whether the activities is odious.

And if I can add one more thing here, it’s a very interesting article by John Rawls, called ‘Two Concepts of Rules’, and really what Hume, I think, is arguing is how summary rules, which are conventions, they are rules of thumb, that have a general utility become practice rules, and a practice rule is something that actually defines the practice. That one is not free to violate based solely on self-interest. So, the rules of baseball has certain rules that are practice rules, I don’t care how much is it in my self-interest, I am now allowed to go to first base unless I do certain things to earn getting to first base.

Hicks: So, you mentioned, historically, a connection from David Hume in the 18th century to the 20th century figures such John Rawls, Axelrod, both of them you mentioned. Are there other important figures in the transition from Hume’s generation to ours, who are carrying on the Humean legacy, Humean approach?

Kline: Well, Smith, definitely. Adam Smith takes, I think, Hume’s analysis of how conventions are formed and then applies it to economics. Smith says things work once you have property, trade and contract in place. And Smith’s natural liberty as allowing people to pursue their self-interest for their own ends within those constraints, mirrors agents pursuing their own ends and making a property. Of course, that’s not recent, that’s 1776. More recently, Robert Sugden, Brian Skyrms. Hayek draws on Hume, greatly draws on him. And those are the ones that I can think of right now that have a huge influence in Hume.

Hicks: All right, so Hume’s influence is alive and well in the late 20th through the early 21st century.

Kline: It is, and I think it is getting better, but there was a time, and it stems from Rawls, Rawls is very Kantian and admittedly so, and you look at a lot of Rawls’s students that graduate from him, they get key positions at key universities, so, if you really look at the decades from the mid-80s up and through pretty much even now, academia, I mean, there is an emphasis — Kant has it right, Hume opened Kant’s eyes, but Kant is the one that had it right, Hume didn’t. I think that is changing slightly. There certainly have been big names that have championed Hume, but you would be hard-pressed to go to the literature and find a Humean theory of justice. Find Kantian, Rawlsian, utilitarian, Hobbesian, all defended as correct systems of justice, but it’s really hard to find one that defends a Humean theory.

Hicks: Thank you for your lecture today.

Kline: Thank you, I had fun.

[The video interview with Dr. William Kline follows.]

Martín Krause’s Index of Institutional Quality

Monday, May 16th, 2016

Martin_KrauseMartín Krause is Professor of Economics and the University of Buenos Aires and a specialist in law and economics and institutional economics.

With Professor Krause’s permission, here is the 2015 edition of
“INSTITUTIONAL QUALITY 2015” [pdf], which ranks 193 countries in three categories: Institutional Quality, Political Institutions, Market Institutions.

For those interested in the nations of North and South Krause-image America, those continents’ nations are also separated for focused analysis and comparison. (See also Stephen Hicks’s related article, “Comparing North and Latin American Economic Performance” in English, Spanish, or Portuguese.)

Related indices are Index of Economic Freedom, Economic Freedom of the World, and

David Henderson on Seven Myths of Free Markets — Transcript

Tuesday, December 1st, 2015

Interview conducted at Rockford University by Stephen Hicks and sponsored by the Center for Ethics and Entrepreneurship.

Hicks: I am Stephen Hicks, here at the Center for Ethics and Entrepreneurship with Dr. David R. Henderson, an economist visiting from the Naval Postgraduate School in Monterey, California.david-henderson

Dr. Henderson is the author of many books and articles, notably The Joy of Freedom, a semi-biographical exploration of economic themes and his career. Also The Concise Encyclopedia of Economics, a widely-used textbook in economics available both online and in print. Dr. Henderson was here today to speak on the seven myths of free markets. Actually, on seven myths of free markets, leaving open that there might be more.

You mentioned that economics has the moniker, the dismal science, but people don’t often know the actual origin of that. What is the story there?

Henderson: Yes, and the origin is fascinating. The way most people or most economists who think of themselves as informed think is that it came from Thomas Robert Malthus because he was dismal. He thought, two-hundred years ago in his essay on population, that agricultural output could grow only arithmetically and that population would expand exponentially, and, therefore, we would have mass starvation. That turns out not to be the reason at all. The term was coined by Thomas Carlyle, a British anti-capitalist author in the early 19th century. And his objection to economics — you have to remember, economics was dominated by very free-market economists at the time, two-hundred years ago — that those free-market economists who dominated economics strongly opposed slavery. So Carlyle is saying economics is dismal because economists oppose slavery.

Hicks: You then proceeded to the topic about the seven myths with respect to the free market, how people think and evaluate free markets. This is important because it leads to lots of policy issues here. We can run through the seven. The first one ties into Carlyle’s anecdote that free markets, in some sense, promote racism. What do you think about that one?

Henderson: Yes, that’s the myth. And, in fact, free markets undercut racism. This is the typical case people think of when they think about markets and racism. Think of a white employer who is faced with the chance of hiring a black employee who is productive, but because this employer is racist, he says, ‘No’. Free markets make him bear a cost for that action because if he gives up the chance to hire a productive black employee he gives up the potentially profitable opportunity. It doesn’t mean he won’t do it, but it does mean that it will make him bear a cost, and, therefore, the employers who come to get bigger market share are the ones who are the least racist because they are making out best financially. And that, then, gives an incentive even to racist employers not to care as much.

Hicks: Okay, so the less racist employer will hire the black employee, get the productive worker, and then will have a competitive advantage against the less tolerant employer.

Henderson: Exactly. And, in fact, governments were the ones that promoted racism. And the example I mentioned in my talk was street car companies, which one-hundred years ago in the South, were required by law to segregate by race. They had been segregating, but they had segregated smokers from non-smokers. And they were required, instead, to segregate by race, and they fought those regulations tooth to nail until the government got harder and harder on them and they finally gave up.

Hicks: What you call the second myth is the standard slogan, “The rich get richer under free markets and the poor get poorer under free markets.”John_D._Rockefeller_1885

Henderson: Right, and it’s half-truth. The rich get richer, the poor get richer, and in between get richer. And what I would point out is that, if you look at what Rockefeller, the richest man in the world one-hundred years ago, he had stuff that all but our very poorest people have. College students with very little money have cellphones, but he didn’t have that. He couldn’t fly very many places for most of his life. He couldn’t telephone people from most of his life. And then, even more important, if he got sick he couldn’t use penicillin or any other drugs because almost no other drugs existed. And that was key.

Hicks: So, the rich get richer and the poor get richer as well under free markets. Other standard criticism is the dynamic of free market capitalism is to lead to monopolies, and monopolies have various economic pathologies. What about that one?

Henderson: Yeah. Actually, free markets break down monopolies, and the reason is that, when there is a monopoly, the monopoly is making money. Those high profits attract new entrants into the industry the way honey attracts ants. And so, monopolies under free markets tend to be temporary until some better competitors or better product comes along. And an example is the Blackberry, which now is being displaced by the iPhone. What’s interesting is that the Federal Trade Commission was suing Apple for a while on the grounds that they were dominating and whoever gets there first dominates. Well, that’s absurd, because the people who get their first were Blackberry.

Hicks: Okay, fair enough. Capitalism or free markets are bad for the environment. Another myth?

Henderson: Another myth because, in fact, what’s bad for the environment is socialism, because no one has an incentive to care for the environment under socialism. Property is not privately owned, so no one has an incentive to care for it. I have a chapter in my book, The Joy of Freedom, entitled “The Environment Owned and Saved”, and the idea is that if you own something you tend to take good care of it. And, imagine we can get in time travel and travel around the world, what we will find is that in 1990, before the former Soviet countries had a chance to develop out of socialism, you saw pollution. You saw lakes that were destroyed. The Soviet Navy had dropped nuclear waste in the ocean on purpose. If you go to Africa in this time travel, you find that the countries that have the strictest poaching laws are losing the most elephants. But the ones that have poaching laws and also allow the local villagers to share in the benefits from the tourism that elephants give rise to, those villagers have an incentive to then watch out for poachers, and those elephant populations are growing.

Hicks: So, the time travel argument is kind of an historical argument. If you look at the nations that are more socialistic, the environmental record is terrible. In the more free-market countries that have property rights, the environmental problems are either solved or less severe.

Henderson: Yes, solved or less severe is completely accurate.

Hicks: Okay. Free markets lead to war. Another standard one?

Henderson: Yeah, in fact, trade promotes peace because part of free markets is free trade across borders. And if two countries have a lot of trade they have an incentive not to make war. It was interesting that when there was the big conflict between the United States and China in the first couple of months of the Bush Administration, when the Chinese forced a U.S. Navy plane down, and they were held prisoners for about a week to two weeks, the multinational corporations went to Bush and said, “however you resolve this, don’t do it by making war, because China is a great trading partner and we want to keep that going.” And it was resolved. And, in fact, these two economists found that the larger the interaction or the larger the amount of trade between two countries, the lower the probability of conflict is.Henderson-Joy-of-Freedom

Hicks: Interesting. Another myth you call the “Stinginess myth.” Capitalism and free markets are all about money, about getting money, hoarding money, being like Scrooge, and so, those nations are stingy compared to more benevolent modes of organizations.

Henderson: There are two reasons why that’s a myth. The first is that the more economic freedom we have over time, the wealthier we become. The wealthier we are, all other things equal, the more generous we are. The other part is that when governments come in and try to be generous with other people’s money — which, by the way, is really a contradiction — they crowd out private individuals’ actions in that area. So, one reason that Europeans aren’t nearly as generous as we are — and it isn’t mainly wealth because the wealth differences isn’t that huge — is that the government does so many things for people that it never occurs those people to do it for others. So when we have any kind of a natural disaster or whatever, there is this huge outpouring of help, in money, in goods, in food, clothing, time spent, and so on. The economists which looks their nose down at American audiences even admit that we’re the most generous nation in the world. We give on average one weekly paycheck a year to charity, 2% of our income. The average person that volunteers, and the majority of us do volunteer, spend at least four hours a week in voluntary activities. That’s unheard of in most of Europe.

Hicks: The seventh myth on your list had to do with employer/employee relations, with the dynamic being kind of zero-sum. The employers have the upper hand and bargaining power, so free markets allow employers to dominate and not treat their employees properly.

Henderson: Right. That is a myth, and the reason is worker mobility. Within a certain community workers have choices of jobs, and even more important, they have a choice of moving to another community. Railroads, when they came along in the 19th century, made that much easier. And so, what really gives rise to worker power is mobility. Now, it is true that unions can bargain for a higher wage — and they were successful in doing so — but that doesn’t help workers in general. That gives higher wages to the employees who were lucky enough to keep their jobs, but at the higher wage, employers employ fewer people. Those people put out of work because of the unions’ high negotiated wage go elsewhere. They drive the wage down slightly elsewhere by being in that non-union sector. So the main effect unions have on workers is a wash, and it’s essentially a distribution of wealth from the non-union workers to the union-workers.

Hicks: Let me ask one question in conclusion. Why do we think these myths are so widespread, if indeed they are myths? You did present a lot of historical data, a certain amount of economic analysis that seems relatively straightforward. What’s the power that these myths have still?

Henderson: First of all, I think they are still taught in school. I think most schoolteachers don’t know they are myths. Second, there are now groups with strong incentives to push these myths because they want their particular, special deal. They want to have this restriction on capitalism, or they want that monopoly power. And so they push the idea that a free market is dog-eat-dog and all that kind of stuff. So, it’s a combination of bad education and incentives of people to propagate the myths.

Hicks: All right, thanks for being with us today.

Henderson: Thank you.

[The original video interview with Dr. Henderson follows.]

Tragedy of the Commons — Stephen Hicks transcript of video lecture

Thursday, September 4th, 2014

tragedy-iconBelow is the transcript. Or here in PDF. Professor Hicks’s lecture is part of the Business Ethics Cases series. Thanks to Matheus Pacini for his work on making the transcription.

The Tragedy of the Commons (transcript)

Video lecture by Stephen Hicks, Ph.D.
Transcription by Matheus Pacini

Part 1: What the Tragedy Is [Video clip 1]

The Tragedy of the Commons is a foundational case study in business ethics, generating a large amount of discussion among business ethicists, economists, and public policy experts.

The title comes from an article published by Garrett Hardin. Hardin refers to a satellite shot over a portion of North Africa where there was a large expense of green area—a fertile area—but what struck him in the satellite photo was a huge, neighboring brown area. Upon closer investigation, the brown area was unsuitable for agriculture purposes, though it had been used for grazing by a number of herdsmen and for various reasons had become unusable. Hence the title: the resource in question, the brown pasture land, was held as a commons, and Hardin´s analysis led him to think that land held as a commons and used by resource users, herdsmen in this case, would necessarily result in tragedy. The tragedy is that the commons becomes unusable as a resource, and people will either starve or have to abandon the use of that resource.

I’ll put on the whiteboard Hardin´s initial analysis of the situation.

Initially, what we have is a commons. We need to define our terms. A commons is a resource—that is to say, it is something that has economic value to human beings; it has intrinsic properties that, in relationship to human needs and human understandings of the resource have value. But a commons is a resource that is unowned. As unowned, no one can claim exclusive use to the resource. No one can stop anyone from using the resource if they so choose; that´s the unowned part of it.

Hardin then says that if we have an unowned resource, then a bunch of stuff will occur, and the end result is a tragedy—which is that the resource loses all of its economic value. So I´ll put this on the whiteboard: the resource becomes depleted, unusable, worn-out, no longer possessing any value to the users.

Now, the question is, Why? Hardin argued that there is a necessary economic logic at work here—that if we start with a resource that has this commons status, then necessarily, by an internal logic, we´ll end up with the tragic result.

The argument proceeds as follows. Obviously, we have the resource, but we need to add another element to the scenario. The resource is just sitting there. No problem yet. But we add people who want to use the resource. And so here [on the whiteboard] what we need to do is add people. And these are people who are self-interested—that is to say, they want to use the resource for their purposes. In Hardin’s working example, we have herdsmen who have cattle, and they want to put their cattle out on the commons to have the cattle graze, grow fat, produce meat, milk, and so forth. So, we have resource users who are seeking profit by using this particular common resource.

Now, if we add these two together, Hardin says, under that scenario a number of things will happen. I will draw a larger box in the middle for this. One of those things is that the resource users will then have an incentive to overuse the resource.

Why will they have an incentive to overuse the resource? Because they will be thinking: If I put a cow out, there is no cost to me to using the resource for doing so, but all of the benefits to using that resource accrue to me. So I will put out another cow. Again that´s costless to me and again I will accrue all of the profits from the use.

You, of course, if you are another resource user, will make the same calculations and have the same incentives.

Next, I will notice that you are putting more cows out, so I will say to myself, I´d better put more of my own cows before your cows use it up. So we´ll have a mutually-reinforcing incentive to overuse the resource.

At the same time, we have an incentive not to do any maintenance. If I’m a cattle farmer, I normally would have an incentive to look after the pasture resource so that my cows can continue to graze. If I do not engage in maintenance, then the resources will become depleted more quickly.

Now, though, we have to ask: In a commons, why do I not have an incentive to engage in maintenance? Well, suppose the maintenance that we´re considering is weeding. There´s the huge commons, a pastureland with some weeds. So I might say: Well, I can go out and weed this huge pasture. And if I weed the pastureland, then there will be benefits that will accrue to me, namely, that more grass will grow, which will be better for my cows. But, at the same time, I recognize that if I do all the weeding myself, your cows also will gain the benefit of my weeding; so, I will then incur the cost of doing the weeding and I will get some of benefits—but much of the benefits will go to other people who are using the resources as well. So when I do my personal cost-benefit analysis, the numbers don´t add up, and I have less of an incentive to do so. You will make the same calculation, and so maintenance is less likely to get done by either of us.

Also, I don´t have much incentive to make improvements. For example, maybe the pastureland gets drier late summer, so I think: Maybe I should dig a well so that my cows have water available to them in the dry season. Well, if I put the well in the commons, then, of course, my cows will get the benefit of that, but also your cows will get the benefit of the well, as I won´t be able to stop you from using the well in the commons. I will incur the costs of digging the well, and the benefits of the well will be dispersed among any number of people who are using it.

Let’s put some numbers to it. Suppose that the pastureland is 10,000 acres and 50 herdsmen using it. If I think about doing the maintenance for 10,000 acres, that´s a big cost to me; but the benefit is going to be spread among 50 people, which means I am going to get only one-fiftieth of the benefit. That is, I will bear 100% of the cost and get 2% of the benefit. The same thing holds for any improvements. Maybe I consider planting some shade trees to protect my cows from the summer heat. I would bear the costs, but the benefits would be dispersed.

So the first point is that, under this commons scenario, people have an incentive to overuse the resource and incentives not to engage in maintenance or improvement.

These are only incentives along a spectrum, depending on the particulars of the resource in question, the number of people who are using it, and the costs involved in doing these things. The incentives may be more or less, but nonetheless there is a general principle about the incentives and disincentives in place.

Now, consider a second iteration of this cycle. Suppose that in the first year we put our cows out. Nobody engages in maintenance and nobody makes improvements. What will happen in the second year—if we continue to do the same sorts of things—is that things will get worse. Since we´ve overused the resource and not engaged in maintenance, then, at the beginning of the next grazing season the grass grows less thickly, less fully, less in quantity overall. There are more weeds and so forth. And we´re still putting our cows out.

But we notice partway through the season that our cows are underweight. My cows are supposed to be, say, 1,000 pounds, but they are only 800 pounds. My cows are skinnier.

What does this then give me an incentive to do? Well, if my profit margins or the gains that I need depend on my cows being over 1,000 pounds, but my cows are underweight, then, say, I need to put my cows out to pasture earlier. My practice might have been to take my cows out at 7 o´clock in the morning and leave them out until 4 o’clock in the afternoon and then bring them in for the evening. Well, if my cows are underweight, then I need to get them out at 6 o’clock in the morning and leave them out until 5 o’clock in the evening. That´s an incentive to overuse the resource.

Of course, the same thing is happening to you and the other 49 herdsmen. All of us, then, have an increased incentive to overuse the resource. We certainly are not going to engage in maintenance or improvement in that circumstance. We are poorer because our skinnier cows or the lesser amount of milk is not bringing in the income.

Also, when we see the resource declining, that forces more short-term thinking upon us. Maintenance and improvements are for the longer term, so we have less of an incentive to do so. So the relative amount of overuse increases.

Also, the relationship between the herdsmen themselves starts to go downward in a vicious cycle direction. If I put my cows at 6 o’clock in the morning, and you notice that I am putting my cows out earlier, then you´ll start to say, Oh, maybe I need to get my cows out at 5:30 in the morning and leave them out even longer.

And then tit-for-tat types of competition come along. If I see you putting your cows out earlier or even putting more cows out there, then I might start to see you as an enemy—your cows are using up resources that are important to my cows. Maybe I will start doing things like sneaking into your barn at midnight and killing a couple of your cows. Oh, sorry, look what happened, that´s so sad that you lost some cows last night. But, really, your having fewer cows is to my benefit, so what we then have is explicitly zero-sum competition. You will likely have your suspicions about who killed your cows—or it might not matter to you who killed your cows—you will have an incentive to do the same thing to other people´s cows.

This starts a vicious cycle: the incentives get worse and worse in a downward spiral, until finally we end up with a depleted resource—the grass is all weedy, it´s not growing plentifully, our cows are skinny or dying, which means that we farmers are becoming skinny or dying—so what we must do is abandon the resource altogether.

Part 2: The Free-Market Solution [Video clip 2]

We have reached a tragedy, and it´s a bad thing. So the next question is: What is the solution to the problem? How do we avoid the tragedy resulting from resource depletion? We have to break this vicious cycle somehow. That means we need to change the incentive structure, and that points us back to the initial two cells in the flowchart. We have (1) the common resource, and we have (2) people who want to use the resource.

Now, everything is business ethics and political economy is controversial. While most people will agree with Hardin that he has identified something correctly—there is an iron-clad logic to what has been presented here so far—but what it is disagreed upon very fundamentally is what the proper solution to the problem is. And the proper solution to the problem depends on a proper analysis of what gives rise to the problem in the first place.

So: what we have are two initial factors at work. And the problem is that jointly they send us down a certain developmental or lack-of-developmental path. And the difference is going to be whether we say this factor [the commons] is the problematic factor or that factor [the resource users] is the problematic factor.

Solution 1: One side of the debate says that the problem is that we have a resource held in common. So what we need to do is change the incentive structure, that is, the bad incentive structure that is built into resources being held in common. So we need to abandon the commons, so to speak.

So, Solution One is going to say that the problem is the commons. It´s fine that people are self-interested: people are farmers, and naturally and healthily they want to put cows out to use the resource, because they want to feed themselves, feed their families, become prosperous, and so forth. That´s fine, but the commons is the thing that needs to be changed. The solution, then, is going to be to privatize the resource. We need to institute property rights in the resource.

Now, what will then mean in our working example? We imagined 10,000 acres of pastureland, and we´ve got 50 people who are resource users. So to do the math crudely: take the 10,000 acres and divide equally among the 50 resource users, the 50 farmers. Each person gets 200 acres. That becomes their private property. We have then instituted private property.

How does privatization change the incentives? Under a commons, I can´t stop you from doing what you want with the resource and you can´t stop me from doing what I wish with the resource. But under a private property regime, my property becomes mine: I can do what I want with it and I can also prevent you. There are legal protections in place stopping you from using my resource. And the same holds for you. You can use your resource how you wish and you can prevent other people from using or abusing your resource.

So, how will self-interested people act under the institution of private property? The argument on this side is to say that this changes the incentives quite dramatically. This is now my 200 acres and I can then look at it in terms of the problems. Do I have an incentive to overuse the resource? Will I just put as many cows out there as I possibly can to maximize my short-term gain?

No: I have then an incentive to respect the capacity of the land. I have my 200 acres and I know that each cow needs, say, two acres of pastureland to support it during the course of the year. I can then do the math and see that I can at most have 100 cattle in this particular place. If I don´t respect that limit, then I am just setting myself up for long-term failure. So I then have a respect for the limits of the resource.

I might then also think about improvements. Is there a way that I can increase the carrying capacity of the land or increase the value of my resource in this particular place? I have an incentive to do so if the cost-benefit calculation works out.

For example, will I dig a well on my land? Well, I´ll do my research to figure out that it will cost me some amount of money to put the well in. Since it´s on my private property, I will bear 100% of that cost. But at the same time, I am going to get 100% of the benefits, because only my cows can use that well. I do my cost-benefit calculation and, if it works out—if I am going to be profitable in doing so—I am more likely to do so.

Or, I might also say: If I put a well in and the well produces a great amount of water, then I´ve got more than enough for my cows to use. I can, in turn, sell some of that water to my neighbors and therefore make more profit. So my incentive to make improvements increases.

The same thing holds with respect to maintenance. If we go back to the example of weeding: I´ve got my 200 acres—should I do the weeding? I could say Yes, because if I do the weeding then there´s going to be more grass for my cows. Weeding costs a certain amount, costs time or, if I use herbicides, it costs certain amount to purchase the herbicides. I will bear all of those costs, but I will also get all of the benefits. So I do the cost-benefit analysis, and my incentive to do maintenance increases.

Also, since this is private property, I have an incentive to do all of these things over the long term. Long-term improvements and long-term maintenance mean the long-term value of the resource goes up. For example, maybe I am a younger farmer right now, but at some point, I want to retire and get out of the farming business. When I retire, though, I want to sell my farm and make sure that I´ve got enough money saved up in order to be able to support myself in my old age. So, I think ahead, what is going to put me in a position to sell my farm for the most amount of money? Well, what will put me in that position is if I´ve looked after the resource, done proper maintenance, and made improvements. The more that I do those things, the more in the long term my farm will have higher property values, so I can sell it for more money. So my self-interest will lead me to pay attention to the long-term value of the resource.

Another self-interested consideration: Maybe when I retire I will want to turn the farm over to my kids. As a parent, I love my children and want them to have the best possible advantages in life. That will mean, if I am going to turn the farmer over to them, that I want the farm to be in as good as possible condition for my children—this is something about their long-term futures. So I have an incentive to look after things as well.

Now, under privatization, the long-term value is going to be maximized for me, but this is also going to be socially win-win. Over here [in the initial tragedy scenario], we had zero-sum competition. The privatization argument also says that this property-rights regime increases the win-win nature of competition.

For example, a maintenance issue might arise. Suppose you are my neighbor, and I want to put a fence up to stop my cows from wandering off or to stop your cows from wandering onto my property. Under a commons scenario, I can´t put a fence up unless I get other people´s permission. Or maybe I can put the fence up but then I can’t stop them from tearing the fence down or otherwise ignoring the fence’s being there. But under a circumstance of private property, we have an incentive to work together with respect to the fence issue. I might then say: I think it´s a good idea to have a fence, and I do my cost calculations—but it would make sense for me to go to you, my neighbor, and say, We share this joint boundary, and it will be to your advantage if there is a fence there. It´s also to my advantage if there´s a fence there. So, why don´t we cooperate and split the cost of the fence? We´re then more likely to work with each other to engage in a particular improvement in that case. Socially, that´s an increase in win-win relationships.

Also, if I improve and maintain my property, that increases the long-term value of my property, but there are also network effects. If you are the neighbor of someone who has well-maintained, attractive farm, then that increases the property value of your farm. That´s the network effect with respect to real estate prices. Also, it gives you an incentive, perhaps, in a keeping-up-with-the-Joneses social dynamic. Or maybe you see that I did something on my farm and you say: Ah, that´s really cool. I never thought of that. You learn from me, and you go ahead and do the same improvement on your farm. Or maybe there´s something that you do on your farm that I think is a good idea. I learn from you and do that on my farm as well. Once again, we have socially win-win benefits.

Now, to summarize, the argument here is, if we start putting labels to it, that the best way to solve the problem of the commons is to institute free-market capitalism. The features of free-market capitalism that are being tapped into here are: (1) self-interested profit-seeking, which is seen a healthy, positive, motivational force; and (2) the institution of privatization and so private-property protections for various kinds of resources. The argument then is that private property combined with self-interest leads people to (3) maximize in a healthy, long-term respect the economic value of resources. And that free-market capitalism is (4) social dynamic is socially win-win. This is what we will call the free-market capitalist solution, and that´s the first of two proposed solutions to the problem.

Part 3: The Socialist Solution [Video clip 3]

Solution 2: The other side of the debate differs with the free-market capitalist solution by arguing that the problem is not the commons. In fact, this side of the argument is going to argue that it´s important that we have commonly held resources—that important resources be available to all people. That we should all share collectively in the bounty of the Earth, and so forth.

The problem from this perspective is this motivation of the resource-users. The problem is that most people as individuals are self-interested profit-seekers, and that´s what leads to the dysfunctional tragedy of the commons scenario. So, to put the cells in place, this side is going to say that the problem is self-interest. The way it´s sometimes put is to say that people are greedy or they are profit-seeking in a pejorative sense.

So, I will highlight this cell [on the whiteboard] here. And what that motivation leads them to do is to think about their own personal advantages and not the effect of their actions on other people. Or to maximize their short-term benefits to themselves and to ignore the longer term effects of that on the community as a whole. So, self-interest is a bad thing or least the dysfunctional element in the scenario. And this side is in favor of commonly held, shared, mutually accessible resources—it is more likely to think that private property is not a fundamentally valuable institution, socially speaking.

So, what we then need to do is not privatize the resource—but the solution rather will be to limit or override the effects of private self-seeking behavior. Override the profit motive. Override the self-interest. Stop the tendency of greedy behavior from manifesting itself in socially-destructive results. What we then need is, rather than instituting private property that is then protected by the government, the proper solution is going to be government management of the resource.

So we say that the resource is a public property, is a community property, it´s a socially-valuable resource. The government is the institution that makes decisions on behalf of the community or society as a whole. And so, if we have an important, valuable resource that we want to be held in common, it makes sense that the government as our agent or representative assumes the management of that resource.

What the government then will do is put in place a variety of policies that will change people´s incentives with respect to how they use the resource. Rather than just leaving it up to individuals freely to decide for themselves how many cows they´re going to put out, how long they´re going to leave them out, and so forth, we will have the government say: Here is how much of the resource we have, say, here is how much land we have, here is how many people we have, and we´ll decide in a central fashion how many cows you may put out, for how much time you can put them out, and so forth. That is rationing.

In order to engage in maintenance and improvement, we´re saying that in the initial tragic scenario people were not voluntarily putting up the resources that were necessary. And so, since these things do need to be done—but people are not voluntarily willing to do so—we need to tax people. So we the government will send people a tax bill: here is how much we need for improvements, here is how much we need to engage in maintenance, and so forth. And it´s for the good of the community, so we have the rationale for imposing taxation.

We might next say: In addition, out of a sense of community spirit, since this is something that we are all doing, if there´s a certain amount of maintenance that´s necessary for the good of the resource, we need people to do weeding, we need people to dig wells, we need people to put out fences, plant trees, and so forth. Under the initial tragedy-of-the-commons scenario, people were not voluntarily doing that labor. So what we might say is—we the government can mandate that people engage in that behavior, so we´ll draft or conscript people, or what is now conscription. It´s not a draft necessarily for military purposes, but for broader social purposes. And so, people are assigned to tasks: You have to do two hours of weeding, or three hours of fence-building, and so forth.

Of course, the government can pass all of these pieces of legislation and regulation, but we need to make sure the people are doing what they´re supposing to be doing. That people aren´t sneaking extra cows out when they´re not allowed to. That they´re in fact playing their tax bill. That they´re showing up for their public duty when they´re assigned to do so. So we´re going to need a significant amount of policing in order to so. And this policing must have some teeth in it. There have to be various penalties in place: if you don´t pay your taxes or if you violate the rationing orders, then you´re subject to various sanctions.

All right, so what we then have is array of regulations that the government can put in place. The argument on this side of the debate is that with the right, judicious mix of rationing, taxation, conscription, policing, and penalties, in place, the government will then will maximize the long-term value of the resource.

We´ll end up with a socially win-win result. The resource is managed appropriately in a way that preserves its common value. The self-interested motivation and its socially-destructive results are contained, thereby leading to this result as well.

What we then have obviously not a free-market capitalist solution, if we again start putting labels on here. In its strongest form, if we assume and we generalize this point at all the significant resources of a society belong to the community as a whole and that it is the job of the government to manage them, then the best label for that is a kind of socialism.

Part 4: Comparing the Two Solutions [Video clip 4]

Now to summarize and point out some fundamental contrasts between these two analyses of the situation.

Both sides will agree that the central part, here in black [on the whiteboard], is good economic logic. These two initial institutional factors [commons plus self-interest] do jointly lead to this negative result [depleted resource]. And then we have two competing solutions with different analysis of the root of the problem, which lead to different solutions.

I next want to point up what are the fundamental differences that are driving the different analyses of the problem and the corresponding solutions.

One has to do with the status of self-interest. One thing that typically happens prior to getting to economic management, political economy, or public policy issues is that people bring to the table a pre-set commitment to an ethical position. One side is more likely to say that self-interest is a healthy, moral phenomenon, that people are competent and capable of figuring out what their self-interest is and that they are able to think long-term. They are able to work out in a voluntary fashion, mutually beneficial, self-interested behaviors and so forth.

The other side is more likely to bring to the table an analysis of self-interest that sees it as zero-sum, as potentially predatory, as irrational, and as not only in the long term destructive to my own interest but also to the interest of others.

So, do we see self-interest as a good, moral, healthy phenomenon or do we see self-interest as a bad self-socially destructive phenomenon? We see that right off the bat when we look at the scenario here. One side is immediately focusing on self-interest as the problem and playing up the negative results of self-interest. The other side over here sees self-interest as fine and as having positive energies that can be channeled in a healthy direction with the right institutional framework.

The second thing that is contrasting in these two positions is the status of private property as an institution. One side argues that private property is healthy, normal, and moral, and that as much as possible we should respect what is yours and you, in turn, should respect what is mine or ours, and so forth. And so, we see here that private property and individual control of private property as a good phenomenon.

The other side is more likely to see private property as something that alienates people from the community, or, positively, to have a vision of a moral community as one in which we share, we hold things in common, and we do things for the good of the community as our primary focus. And so, naturally, that side wants to preserve or increase the stock of things that are commonly done.

So this side [privatization] is more likely to say that the commons is a problem and to be very comfortable and to moves smoothly to the idea of Let´s privatize the commons as much as we possibly can. This side over here [government-management] resists that move: it wants to keep things in the commons as much as possible. So the logic of its position then leads it to try to develop institutions that will preserve and protect things in the commons.

A third point of difference than has to do with the scope of government. One side will bring to the table the idea that there is properly a fairly limited function for government. The government´s job might be initially to institute private property rights—e.g., to take the 10,000 acres and divide it up among the 50 people—to assign title and then to develop the legal mechanisms that will protect people´s property from thieves, from contract disputes and so forth. The idea is that government has a fairly limited role: the way the economy is going to work, and the way that most of human life is going to work, is going to be a matter of people managing for themselves.

The other side, by contrast, is going to call for an expansive role of the government in most areas of human life. In this case, in the economy as well.

So: do we see the government as limited in its focus or very broad? That abstract political-philosophy point is broad to bear.

Fourth point of difference: This side [privatization] is more likely to see free markets as socially win-win. So, if we look at free markets on the flowchart here, what happens in a free market is that people use their property to their advantage and that has network effects that benefit other people.

But free markets also have socially win-win mechanisms in place to deal with people who abuse their property. So, for example, if we do this initial institution private property, everybody gets their farm, so we now have 50 farmers, each of whom has 200 acres. The majority of us are going to do this [good farming practices] here. But some of us are not going to be very good farmers.

Take me, for example. Maybe I am really lazy and when I am supposed to be working on my farm, too often I just stay home and watch baseball on TV and drink beer. Or, I make really bad decisions, and so forth. And so I just run my farm into the ground.

Now, of course, my neighbors are upset with me because my farm looks terrible and that reflects badly on them. Maybe there are pests and diseases that are starting to infect my cows, and there is the danger that they will spread over to other people’s farms.

But the point here is: If I am one of those individuals who is not maximizing the long-term value of my farm, what is going to happen to me in a free market? Well, what’s going to happen is that my farm will no longer be able to support me. My cows will get skinny, they will get disease-ridden, and pretty soon I won´t be able to make a living from my farm and I will be out of business. What that then means is that if I am going to stay alive, I am going to have to sell my farm. That farm has some latent economic value, so I will have to sell the farm, take the funds from that, and do something else.

To whom will I sell the farm? Who is going to be in a position to be able to purchase the farm? Well, it has to be one of the other 49 farmers, one who did a good job with his or her farm, who was very profitable and has saved up a certain amount of money, so that he or she is in a position to buy my farm.

What that means is that in the medium-to-long term, if I am a bad farmer, I am not going to be able to retain control of my resource. Instead, the control over that resource is going to shift to somebody who does maximize the long-term value of that resource. And so, in the longer term, we´ll weed out to people who are abusers or misusers of resources, and the control of those resources will go to those who do well by that.

What happens to me in that scenario? Well, chances are good that I will have to work for you. If you are the person who purchased the farm from me, you now have, say, 400 acres, and that´s a lot for one person to manage. So you´ll hire me. But at least I will be working now for someone who is a good farmer. My working for someone who is a good farmer—who knows what he or she is doing with the resources—that is better for me than being a dysfunctional farmer on my own. That´s the argument that free markets typically are win-win.

The other side [on this fourth point of difference] is more likely to say that free markets are going to be win-lose. What they will say is that the problem is that we had a kind of free market: [In the initial tragedy scenario] we had these resources and we left people free to do whatever they want with those resources. But free market led to a kind of anarchy, a negative anarchy in which nobody can trust anybody. The resource was misused, and so forth. And we know that caused a negative effect, the tragedy. So the argument here is that free markets are inherently negative—they set people against each other in competitive ways, and that is a problem.

Another, fifth, element of difference is over the status of the various kinds of incentives that the two solutions put in place. This point is a combination of the role of government-versus-free-markets, because these two institutions incentivize people in very different ways.

You notice that common incentivizing point here on this [government-management] side of the debate is to say that we need to have rationing, we need to have taxation, we need to have conscription, we need to have policing, and we need to have penalties. All of those involve compulsion. We´re saying: If you don´t follow these regulations, then bad things will happen to you. The police will come after you. They will make you pay your taxes. They will make show up for work when you´re supposed to. They will physically remove your cows from the resource if they´re inappropriate. And so this side is arguing that we need a great deal of compulsion in order to get people to do the right sorts of things.

This side [privatization], by contrast, is saying that we really don´t need very much compulsion at all. Instead, if we have people in a free market, if they own their own resources, then their self-interest will motivate them voluntarily to do things that are good for them, good for the resource, and so forth. For example I don´t want to be sued and you don´t want to be sued, so we will voluntarily respect the boundary limits between our property here. I want to make a lot of money, so I will voluntarily engage in improvements that are going to make me money, and the same thing holds with respect to maintenance. So this side then is more likely to argue that voluntary mechanisms are best to get the proper kinds of results.

Okay, in conclusion, these are five points of contrast: (1) the status of self-interest as good or bad, (2) the institution of private property or commons, (3) the narrow or broad scope of government, (4) whether we are friendly or unfriendly toward free markets, and (5) what we see as the proper incentivizing structure in order to achieve good results.


* Garrett Hardin, “The Tragedy of the Commons”, The Concise Encyclopedia of Economics.
* Transcript of the above video lecture online [html] [pdf].
* Summary flowchart of the arguments [jpg] or [pdf].
* Elinor Ostrom, “Ending the Tragedy of the Commons.” The Nobel-Prize-winning economist explains how, with proper governance, humans are capable of finding peaceful solutions to the problem of resource scarcity.
* The Business Ethics Cases series. Full playlists at YouTube.

* * *

Only in Argentina?

Saturday, July 12th, 2014

map-argentinaA fun and informative post about 20 things that only happen in Argentina.


* Two of our Kaizen interviews on entrepreneurship and ethics:
Enrique Duhau and Eduardo Marty.

* Business in Argentina — interview with Federico Fernández and Martin Sarano.

* A comparison of how resource-poor Hong Kong’s relatively laissez-faire free market has taken it from poverty to riches while resource-rich Argentina’s experiments in statism have taken it from prosperity to decline and semi-functionality.

* Stephen Hicks’s keynote lecture at the 2010 Austrian Economics conference in Rosario, Argentina, sponsored by the Bases Foundation, the Faculty of Economics of the Pontifical Catholic University of Argentina, and the Instituto Hayek.

Hicks and Zientkowski on Nietzsche’s politics of genius

Friday, February 21st, 2014

ruch-filo-polandPrzemysław Zientkowski (Nicholas Copernicus University, Poland) and Stephen Hicks (Rockford University, USA) have a co-authored article (in English) now out in the Polish journal, Ruch Filozoficzny.

The full title of the article is “Friedrich Nietzsche’s Politics of Genius and Its Challenge for Liberal-Democratic Europe.”

Zientkowski recently (2013) published a book on the critique of human rights in Friedrich Nietzsche’s philosophy and Hicks is the author of Nietzsche and the Nazis (2010) and “Egoism in Nietzsche and Rand” (2009).

Paul Theroux on ending aid to Africa

Monday, December 9th, 2013

150 years of aid to Africa has not helped much — and may have hurt more than it helped — argues writer Paul Theroux in Barron’s. (1) If goods are provided free by foreigners, local small businesses cannot compete, and they go out of business. A cycle of dependency is thus created. (2) Corrupt government is the other major problem — bribery, oppressive regulations, extortion, and theft on a grand scale are endemic.

So Theroux calls for fresh thinking about how economic development occurs: “the self-sufficiency of ordinary people” must be enabled, by getting the politicians off their backs and ask the well-meaning to stop creating dependency.

See also Magatte Wade on entrepreneurship as the fundamental route out of poverty for everyone, not only Africans.

Silicon Africa on the African diaspora

Monday, October 28th, 2013

“I want to start a business back home, but everything is political in Africa. If you don’t have connections, your business could be crushed and closed at any time by officials.”

In “The Top 10 Fears of African Diaspora About Africa,” Mawuna Remarque Koutonin explains why most of the 30 million Africans who have left Africa are worried about returning home. “70% of African graduates in the diaspora are willing to return to build Africa,” she writes, but realistic fears prevent them from doing so.

See also our Kaizen interview with Senegalese-American entrepreneur Magatte Wade about her own journey and Africa’s challenges.

Robert Lawson to speak at Rockford University

Tuesday, October 22nd, 2013

lawsonrobertDr. Robert Lawson is co-author of the widely-used Economic Freedom of the World, which “uses 42 distinct pieces of data to measure economic freedom in 141 nations.” He will speak at Rockford University on October 23.

Professor Lawson teaches at Southern Methodist University in Texas, where he is the Jerome M. Fullinwider Endowed Centennial Chair in Economic Freedom. Previously, he earned his B.S. in economics from the Honors Tutorial College at Ohio University and his M.S. and Ph.D. in economics from Florida State University.

Professor Lawson’s talk is sponsored by the Center for Ethics and Entrepreneurship. More about Dr. Lawson here.