I first heard of Steven Johnson’s 2006 book The Ghost Map from a George Will piece called “Survival of the Sudsiest.” The book’s full title is The Ghost Map: The Story of London’s Most Terrifying Epidemic — and How It Changed Science, Cities, and the Modern World. Will describes it as "a great scientific detective story about how a horrific cholera outbreak was traced to a particular neighborhood pump for drinking water.”

In the "The Books of Summer" (Liberty, July 2007), Bruce Ramsey also recommends it:

It tells the tale of the deadly outbreak of cholera in London in 1854, and how two men, a doctor and a preacher, proved how it was spread.… In parallel to the detective story is a revolting description of London in the early industrial age. The industrial revolution made London the earth’s largest city with the earth’s largest waste problem. Libertarians will note that market mechanisms did arise to handle this, though they were, in the author’s estimation, not so good. They will note that the first solution imposed by government made matters worse — but that the second one was better. The book also shows how the provision of sewers and a clean water supply ended cholera epidemics by the last quarter of the 19th century.

I’m finally getting around to reading The Ghost Map, and while it is compelling and enjoyable from the first page, it is also an excellent example of why it helps to have some economic literacy to be able to read popular history critically.

Both Johnson’s masterly prose and his questionable economics are evident from the first. Here’s his opening:

IT IS AUGUST 1854, AND LONDON IS A CITY OF SCAVENGERS. Just the names alone read now like some kind of exotic zoological catalogue: bone-pickers, rag-gatherers, pure-finders, dredgermen, mud-larks, sewer-hunters, dustmen, night-soil men, bunters, toshers, shoremen. These were the London underclasses, at least a hundred thousand strong. So immense were their numbers that had the scavengers broken off and formed their own city, it would have been the fifth-largest in all of England. But the diversity and precision of their routines were more remarkable than their sheer number. Early risers strolling along the Thames would see the toshers wading through the muck of low tide, dressed almost comically in flowing velveteen coats, their oversized pockets filled with stray bits of copper recovered from the water’s edge. The toshers walked with a lantern strapped to their chest to help them see in the predawn gloom, and carried an eight-foot-long pole that they used to test the ground in front of them, and to pull themselves out when they stumbled into a quagmire. The pole and the eerie glow of the lantern through the robes gave them the look of ragged wizards, scouring the foul river’s edge for magic coins. Beside them fluttered the mud-larks, often children, dressed in tatters and content to scavenge all the waste that the toshers rejected as below their standards: lumps of coal, old wood, scraps of rope.

Above the river, in the streets of the city, the pure-finders eked out a living by collecting dog shit (colloquially called “pure”) while the bone-pickers foraged for carcasses of any stripe. Below ground, in the cramped but growing network of tunnels beneath London’s streets, the sewer-hunters slogged through the flowing waste of the metropolis. Every few months, an unusually dense pocket of methane gas would be ignited by one of their kerosene lamps and the hapless soul would be incinerated twenty feet below ground, in a river of raw sewage.

The scavengers, in other words, lived in a world of excrement and death.

And here’s his assessment of why we don’t see scavengers today:

The homeless continue to haunt today’s postindustrial cities, but they rarely display the professional clarity of the bone-picker’s impromptu trade, for two primary reasons. First, minimum wages and government assistance are now substantial enough that it no longer makes economic sense to eke out a living as a scavenger. (Where wages remain depressed, scavenging remains a vital occupation; witness the pependadores of Mexico City.)

His second reason is "because most modern cities possess elaborate systems for managing the waste generated by their inhabitants."

But notice what he implies in his first reason: minimum-wage laws have made the American working poor too well off to stoop to scavenging — in contrast to Mexico, where the laws presumably fail to do enough to raise the pependadores’ wages.

Anyone reading this blog already knows that the minimum wage is a price floor, and price floors can’t raise prices; they can only create a glut of the overpriced goods. Rather than increasing incomes, minimum-wage laws create a larger army of potential scavengers: the unemployed. The substantial government assistance that Johnson mentions may play a role in keeping the unemployed from turning to scavenging, as do today’s elaborate waste-management systems and the culture and legal mandates of recycling. But the most powerful cause — the one that has to come before all the others — gets no mention at all: greater wealth.

Mexico doesn’t have more scavengers because its laws are inadequately progressive. Mexico is poorer. And the reason it’s poorer is because of greater, not less, government interference. Historically, the United States has had more secure private-property rights and offered a more secure political and economic environment for investment. A more productive economy raises the wealth and well-being of even the poorest within the economy. Greater relative wealth means higher opportunity costs, which means that even the poorest Americans are less and less willing to do the most menial tasks even within the "legitimate" economy. This is why we so typically see people from less wealthy countries immigrating to the more wealthy countries to perform the most menial labor.

This influx of the foreign poor to do the jobs we won’t deign to do seems to many like a great social injustice. Rather than seeing it as the key to greater general well-being, the proponents of "social justice" see a violation of egalitarian ethics.

In a similar vein, Johnson writes,

We’re naturally inclined to consider these scavengers tragic figures, and to fulminate against a system that allowed so many thousands to eke out a living by foraging through human waste.

And "in many ways," he adds, "this is the correct response." I’ll return to this point.

But in addition to the "correct response" of fulmination, Johnson advocates "wonder and respect" for London’s 19th-century scavengers:

[W]ithout any central planner coordinating their actions, without any education at all, this itinerant underclass managed to conjure up an entire system for processing and sorting the waste generated by two million people.

(If his political reflexes weren’t already evident, he gives away his worldview in expressing wonder that spontaneously complex and efficient order can emerge among the scavengers "without any central planner coordinating their actions.")

But the respect Johnson feels for the people does not extend to the "system that allowed so many thousands to eke out a living by foraging through human waste."

Why not? Repulsion to scavenging is an understandable esthetic reflex, but is it a rational reaction to the dirtiest edges of the division of labor?

Harvard economist Edward Glaeser, who is far from libertarian, explains in The Triumph of the City that urban poverty — even and especially the shantytowns at the margins of cities and the unofficial jobs at the margins of the economy — can be a sign of the promise and success of a city: as poverty-reduction machines, market-rich cities attract more and more of the rural poor into the ranks of the urban poor. Over lifetimes and generations, the urban poor become the urban (and then often suburban) middle class.

In a free society with a healthy economy, we would see more scavengers, not fewer. As one generation raised itself from the refuse, and became less willing to take on the dirty work, another from elsewhere would step in to take its place. But they would not resemble the Dickensian muck-covered wretches of 19th-century London any more than modern laborers look like the factory workers of the Industrial Revolution. And we have the Industrial Revolution and those factory workers and owners and investors to thank for the greater prosperity that allows the developed world to look so different from the developing world. That was not achieved by labor unions or minimum-wage laws or a larger welfare state, by more regulations or social-justice campaigns. It was achieved despite these wealth-destroying developments.

I’m not saying that popular historians must embrace laissez-faire to make any contribution to our understanding of the past. But more often than not, they do not even show an awareness of the relevant issues or how the substantive arguments affect economic history.

The cause and effect they assume, and the social and political judgments that accompany them, are presented unquestioned. Even the most basic economic theory can give us the necessary tools to question them.

Yesterday, Mark DeWeaver did an interview with U.S. News & World Reports regarding his recently published book on China: Animal Spirits with Chinese Characteristics.

Below is the interview:

Also viewable at Google Hangout.

I previously interviewed Mark for TLS and reviewed Animal Spirits for TLS.

As many of my readers know, I often lecture and speak and give podcast or radio interviews on various libertarian topics and issues, such as intellectual property (IP), anarcho-libertarians, Austrian law and economic, contract theory, rights and punishment theory, and so on. I also blog and comment regularly on such matters in various blogs (primarily The Libertarian Standard, on general libertarian matters, and C4SIF, on IP-related matters), Facebook, and so on—often posting my take on a given issue in response to a question emailed to me or posted online.

This month I am launching a new podcast, Kinsella on Liberty. I expect to post episodes once or twice a week. The podcast will include new episodes covering  answers to questions emailed to me (feel free to ask me to address any issue of libertarian theory or application) as well as interviews or discussions I conduct with other libertarians. I’ll also include in the feed any new speeches or interviews of mine that appear on other podcasts or fora, as well as older speeches, interviews, and audio versions  of my articles, which  are collected for now on my media page). Audio and slides for several of my Mises Academy courses may also be found on my media page, and will also be included in the podcast feed later this year. Feel free to Subscribe in iTunes or Follow with RSS, and spread the word to your libertarian friends. I welcome questions for possible coverage in the podcast, as well as any criticism, suggestions for improvement, or other feedback. My general approach to libertarian matters is Austrian, anarchist, and propertarian, influenced heavily by the thought of Ludwig von Mises, Murray N. Rothbard, and Hans-Hermann Hoppe. My writing can be found in articles here and blog posts at The Libertarian Standard and C4SIF, such as:

• How I Became A Libertarian, December 18, 2002, LewRockwell.com (published as “Being a Libertarian” in I Chose Liberty: Autobiographies of Contemporary Libertarians (compiled by Walter Block; Mises Institute 2010))
• “What Libertarianism Is,” Mises Daily (August 21, 2009)
• What It Means To Be an Anarcho-Capitalist, January 20, 2004, LewRockwell.com
• How We Come To Own Ourselves, Mises Daily (Sep. 7, 2006)
• Causation and Aggression, The Quarterly Journal of Austrian Economics, vol. 7, no. 4 (Winter 2004)
• A Libertarian Theory of Contract: Title Transfer, Binding Promises, and Inalienability, Journal of Libertarian Studies 17, no. 2 (Spring 2003)
• Inalienability and Punishment: A Reply to George Smith, Winter 1998-99, Journal of Libertarian Studies
• Argumentation Ethics and Liberty: A Concise Guide, Mises Daily (May 27, 2011)
• New Rationalist Directions in Libertarian Rights Theory, 12:2 Journal of Libertarian Studies (Fall 1996)
• Punishment and Proportionality: The Estoppel Approach, 12:1 Journal of Libertarian Studies (Spring 1996).
• Defending Argumentation Ethics: Reply to Murphy & Callahan, Anti-state.com (Sept. 19, 2002)
• Montessori, Peace, and Libertarianism, LewRockwell.com (April 28, 2011)

On IP in particular, which I’ll also cover from time to time in the podcast, see:

• C4SIF Resources page;
• The Case Against IP: A Concise Guide
• Against Intellectual Property
• Selected Supplementary Material for Against Intellectual Property

[C4SIF; SK; PFS]

I was a guest on Jeff Berwick’s Anarchast (ep. 51, 36 min), released today. We discussed anarchy and how such a society might be reached; the basis and origin of law and property rights and its relationship to libertarian principles, and implications for legislation versus law and the legitimacy of intellectual property; also, utilitarianism, legal positivism, scientism, and logical positivism. Description from the Anarchist site below; MP3 download. For more background on IP, see the C4SIF Resources page; on legislation vs. private law, see The (State’s) Corruption of (Private) Law.

 

Anarchast Ep. 51 with Stephan Kinsella

Jeff Berwick in Acapulco, Mexico, talks with Stephan Kinsella in Houston, Texas

Topics include:

- Stephan explains how he became an anarchist and some of the books that pointed him in the right direction including
- The Fountainhead (http://amzn.to/VnZwSL)
- Stephan is a practicing attorney that applies his legal knowledge with his libertarian philosophy
- He believes a free law society will only come about if a majority of people agree in libertarian principles
- Law is defined as a concrete body of rules that permits a group of people that want to be able to cooperate to be able to do so
- Jeff asks if it is necessary for everyone to agree with libertarian philosophy in order to have a free society
- Stephan thinks that a majority of people already have libertarian principles but have not been educated correctly in constancy
- He is more optimistic that most because he sees more people not accepting central planning than in the past
- Jeff thinks that there could be a backlash against free market ideas during a financial collapse where the people believe capitalism is to blame
- Stephan hopes that people will slowly find the state to be irrelevant and this will bring about a free society
- Jeff thinks that there will be a financial collapse that will make this transition unpredictable
- Stephan is an expert in libertarian Intellectual Property theory
- He explains the principles of property law
- What most people think is law today is not what law would be based on in a libertarian society
- Stephan explains the problem with legal and economic positivism
- The proper libertarian view is to be opposed to making law through legislation
- The problem with intellectual property is that you are able to use the force of the government against someone who has not aggressed against you
- Stephan explains the problems with the utilitarian Intellectual property justification
- The intellectual property system forces everyone to participate even if they don’t agree with it

Stephan is doing astounding work in libertarian legal theory you can find more in formation on his sites

http://www.stephankinsella.com/

http://c4sif.org/

For more information on The Dollar Vigilante, go to http://dollarvigilante.com. For more information on Jeff Berwick’s anarchist enclave, Galt’s Gulch Chile, go to http://galtsgulchchile.com. And, for more on the anarchist enclave in Acapulco go to http://dollarvigilante.com/acacondos. Come on down and be a guest on Anarchast and live relatively free amongst other anarchists.

Source: http://financialsurvivalnetwork.com/2012/12/anarchast-ep-51-with-stephan-kinsella/?utm_source=rss&utm_medium=rss&utm_campaign=anarchast-ep-51-with-stephan-kinsella

 

 

[Cross-posted from C4SIF]

There are certain books in life that upon reading them you think to yourself “I feel not only smarter but this is exactly the book I would like to have written.”

And that is in summation what Animal Spirits with Chinese Characteristics embodies.  It is written by nine-year China veteran Mark DeWeaver, now the hedge fund manager of Quantrarian Capital Management in Washington DC.  In addition to having worked as a broker and financial analyst in Guangdong (the most populous province on the mainland) and Hong Kong, DeWeaver received his PhD in economics from the University of Hawaii.  The title alludes to the ‘animal spirits’ invoked seventy-five years ago by John Maynard Keynes to describe how emotions influence human behaviors.  The other part of the title comes from Deng Xiaoping’s “reform and opening up” (改革开放) liberalization process that began in 1978 – what Deng called “socialism with Chinese characteristics.”

One of the shortcomings of many China-related non-fiction books today is that they generally try to discuss something that is impossible to penetrate: how and why the Standing Committee makes decisions.  Volumes have been and will continue to be written about the purported inner workings of Zhongnanhai (中南海), the Party headquarters in Beijing, yet this amounts to little more than the modern-day equivalent of Kremlinology.  Or as the popular and fitting English expression germanely (sic) describes this seemingly futile divination activity: trying to read the tea leaves in China (tasseography).

Animal Spirits is nothing like these quickly outdated books and will arguably be timeless in part because of its methodological approach.  While he uses dozens of empirical examples to illustrate the boom-bust cycle within China, DeWeaver’s epistemology is unique in that it utilizes the deductive strength of the a priorism of the Austrian School.  The Austrian School is perhaps best known by one of its thought-leaders, Ludwig von Mises who wrote Economic Calculation in the Socialist Commonwealth nearly a century ago.  In it, Mises explains that central planners, within a closed economy cannot rationally calculate or allocate resources in an efficient manner; that without organic prices an economy will stall and even deindustrialize.  And since prices only arise from market interaction between participants (entrepreneurs, investors, suppliers) we as observers can a priori reject central planner claims to theoretical success without having to actually implement them to see if they could indeed work.  That is to say, central planning a priori cannot work because of the calculation problem.   Consequently, dozens of books have been written about how and why both the Eastern Bloc and Soviet Union collapsed largely due to this inability to rationally calculate, yet very little has ever been written about the Chinese experiment especially from the 1949-1979 time period.

The sole focus of the book is an analysis of both the economic and financial systems within mainland China since the founding of the PRC in 1949.  And despite the aforementioned Sino-centric tomes being published at a steady clip, surprisingly very little has been written about this financial area; and that is our loss.  In fact, the English-based scholarly corpus regarding the Chinese business cycle is almost non-existent.  The reason is simple: you need to be a trained economist, fluent in Chinese and capable of rigorous analysis.  Just as there were only a handful of potential scholars capable of writing The Last Knight of Liberalism (e.g., need to be German-speaking, trained economist, familiar with historical documents) so too are there few capable of pouring through both the modern Chinese financial press but also to look through the historical record.

And that is where Animal Spirits shines.

For example, one of the assumptions is that nationally developed central plans promoted in Beijing – Five Year Plans (中国五年计划) – are followed and executed in a classical top-down fashion.  That there is a monolithic entity capable of devising and controlling cogs and chess pieces down to the county level.  Yet, in Chapter 2 DeWeaver notes that “[i]n the Chinese case, central planning has not even been carried out consistently.”

Specifically,

In China the problems with central planning were exacerbated by the devolution of investment decision making authority to lower levels of government.  This made economic coordination even more difficult and produced powerful incentives for overinvestment.  Ironically, some of the very instabilities the revolution was supposed to eliminate became more extreme.  Transferring ownership of the means of production to the state resulted not in a new age of rational resource allocation, but rather in an exaggerated version of the capitalist cycle.

For instance, in areas like steel, cement, coal and other commodities, there are state-owned enterprises that are championed by local governments.  In the case of steel production, as part of the Great Leap Forward, each county and locality was encouraged to smelt ore and scrap ingots to produce metals based on mandated quotas at a variety of administrative levels.  The end result was denuded forests (for use as a smelting energy source) and what is now termed as ‘oversupply.’  Since all localities were smelting irrespective of profit or loss, enormous output took place and continues to take place – China currently produces and consumes about half of the world’s steel.

 And after decades of championing these local steel mills, despite decisions at a national level to consolidate or in some cases to allow market forces to bankrupt inefficient mills, local policy makers continue subsidizing them due largely to the perceived integral role the mill has in the community (e.g., jobs).  While allowing them to close and consolidate would bring volume efficiencies in terms of economies of scale, from a local policy maker point-of-view there are a number of consequences and side effects that they would rather not deal with.  As a result, provincialism is rampant across the country – there is no unified harmonized market like there is in most of Europe or North America, making it prohibitively costly and time consuming for both foreign and domestic businesses to expand operations across the country.

 Or as DeWeaver aptly notes:

 The emphasis on regional self sufficiency led inevitably to local protectionism.  Local governments came to be evaluated on the extent to which they could independently produce various categories of products or even generate surpluses for “export to other localities” (Donnithorne, 1972, 610).  Protecting markets for local light industry was also desirable because high retail prices were often necessary in order to subsidize inefficient small-scale heavy industry (616).  Thus, in 1970 the Changchun Number One Department Store “exclusively” sold “light industry products” made in Jilin Province (Changchun being the provincial capital).  Shanghai and Tianjin “claimed record shipments of their own products to other parts of the country” (611).  Hubei Province even had a program to grow all its own sugar (609).

Thus, China developed into a “customs union but not a common market,” with “a common barrier against the outside world” but without “free trade within its national boundaries” (618-619).  In the absence of either markets or effective central planning, the economy fragmented into “a myriad of small discrete units” (605) while the ideology of self-sufficiency became an excuse for local-level mercantilism.

And as noted above, some of much of this provincialism continues today in markets such as tobacco, Chinese wine (baijiu) and even in areas of skilled human labor.  For example, nearly every semester a number of my students will travel outside of the college or school to attend job fairs in neighboring regions.  There is always at least one or two that come back frustrated and focused because they have been told that the job fair is only open for people from that province.  In fact, one of my expat friends has a wife from Anhui who traveled to Nanjing to attend a fair and was told “no outsiders.”  And when I lived in Guangdong (Canton) a number of Chinese friends from other regions of the mainland explained that they faced various levels of discrimination due to being an “outsider” (e.g., speaking Putonghua instead of Cantonese).

Booms and busts

Another epistemological strength of the Austrian School is its inherent deductive capability to predict and asses the consequences of certain economic policies.  In particular the boom-bust cycle (or business cycle) describes the relative scarcity of credit in a financial system.  For example, if credit – which is typically managed by central banks and central planners – is loosened and made “cheaper” (e.g., subsidized), activities that were previously cost prohibitive now become relatively easier to finance.  Yet when the credit tap is proverbially tightened, many of these same unsustainable and unprofitable ventures go bankrupt as part of the market purge known as a “bust.”

And in China, economic laws are as immutable as in the rest of the world, as DeWeaver explains:

Central planning never worked as advertised in any of the countries where it was tried.  Even under ideal conditions it would never have been possible for central planners to identify optimal allocations of scarce resources.  It is unlikely that any such allocations could be realized in any case.  With decision makers’ incentives skewed by expansion drive and soft budget constraints, it is probably inevitable that socialist economic management is driven primarily by political considerations.  Investment booms and busts have been the result.

In the Chinese case, these problems were compounded during the command economy era by attempts to limit the role of central planning itself.  With Chairman Mao’s great principle of self reliance as the watchword, lower-level authorities enjoyed a degree of autonomy that made it practically impossible for the central government to coordinate economic development.  Even the Third Front, where many of the projects were national priorities, was not immune.  The result was a pattern of decentralized boom followed by centrally imposed bust.

In an inversion of Keynes’ assertion, the Chinese experience shows that “the duty of ordering the current volume of investment” cannot safely be left solely in public hands.  Government entities are, if anything, even more at risk of possession by animal spirits than private-sector companies.  They almost invariably tend to prioritize ideological or political considerations over cost-benefit calculations.

Yet as any China-watcher can attest, while these boom-bust cycles still continue, they have changed in nature.  Instead of having wild swings in agricultural productivity (due to credit to specific farms or agricultural segments), as China has developed over the past three decades, the booms occur in other areas.

For example, large portions of the manufacturing sector (e.g., textiles) that focus on exports receive perks and subsidies from nearly all levels of government, creating an unsurprising boom in production:

In each case, the booms were driven primarily by local governments while the busts, as had generally been the case ever since 1949, were brought about by central government policy.  At the same time, as product markets were introduced and the economy gradually became internationalized, inflation and trade deficits began to replace agricultural shortfalls as the primary constraints on investment.  These problems became less severe as high rates of accumulation along with productivity growth resulting from the economic reforms led to excess capacity.  This in turn generated both disinflation and a steady improvement in the balance of trade.

This is not to say that private companies are not guilty of waste, inefficiencies or miscalculation.  For example, in the US 56% of all start-ups fail within the first 4 years.  Each week the business press highlights both successes and poor investments made by entrepreneurs.  Three notable misallocation examples that come to mind are the Itanium project by Intel which was supposed to replace the x86 line of CPUs ten years ago, yet despite billions in investment it has gained negligible traction or marketshare.  In April 1999 Mark Cuban (now owner of the Dallas Mavericks) sold his internet company, Broadcast.com to Yahoo for $5.7 billion in stock.  The site fizzled and no longer exists.  And in November 2012 HP took a $8.8 billion write-down on the value of a company (Autonomy) that it had purchased in 2011 due to overstated revenue by Autonomy’s management team.

Yet as DeWeaver explains in Chapter 8, under a market-based economy one of the advantages is that ‘creative destruction’ (originally described by another Austrian, Joseph Schumpeter) the process of purging unproductive or misallocated assets can not only take place, but also take place at a faster pace than it would in a command economy of perpetual bailouts.  For example, at the turn of the 20^th century, the horse-and-buggy industry employed tens of thousands of laborers in the West.  In 1900, the US industry alone employed 109,000 carriage and harness makers.  And with the advent of the automobile these workers were effectively handed a collective pink slip, yet many of these laborers were reabsorbed back into the overall economy remaining a footnote in history books.  Yet in China, bankruptcy is warded off through the aid of patronage networks:

 This state of affairs is unlikely to be preferable to the “creative destruction” that takes place in a private enterprise economy.  Political competition in China is not normally rooted in economic issues.  While power struggles like the one that followed the Sixteenth Party Congress put many investors out of business, the threat of bankruptcy creates much stronger incentives to avoid overinvestment.  When the CCDI is the disciplining force, staying on the right side in factional struggles will be more important than optimizing resource use.  Investors with the strongest patrons will not necessarily be those with the best projects from a social welfare point of view.

Economic domination

Despite three decades of reform and privatization, an estimated 110-150,000 state-owned enterprises still exist in China contributing to roughly 62% of the GDP.  And at one point prior to Deng’s reforms that number was in the 90th percentile, in fact in 1995 there were 1.2 million SOEs.  Yet arguably a level of 100% never occurred even during the height of the Great Leap Forward as it would have meant every economic producing activity including human action itself would be owned by the state (e.g., slavery), something that has not legally occurred since just before the Qing dynasty collapsed (e.g., as Marx defined in Das Kapital, in a socialist system the means of production are in the hands of the state).  Consequently, these reforms illustrate the productive power of market forces and coordination, as the GDP of China increased from $10 billion in 1978 to over $7 trillion in 2012.

Yet because much of the economy is still dominated and controlled by the state, most decisions are left to local officials and policy makers (e.g., the vast majority of SOEs are owned and operated at the  local level).  However, any person in this artificial position – irrespective of culture, education or locality, will be left with little more knowledge to rationally calculate than the next.  The reason why is what DeWeaver weaves throughout the book, it is a case of the Hayekian “local knowledge problem.”  (Frederick Hayek was another Austrian economist and contemporary of Schumpeter and Mises.)  What this means is that because all information is currently distributed among individuals spread across any superficially defined region, there will always be some information and data missing from the datasets collected by central planners (Leonard Read illustrates this in “I, Pencil”).  The only conceivable solution to this knowledge problem and one that planners have been trying for a century to accomplish is to create an omniscient computer system capable of total awareness of all information at all times, simultaneously.

However even in the event of having this knowledge, assuming that such a machine could be built, planners still are left with the calculation problem: they may have every datum imaginable, yet they still do not know what actions are profitable or which activities may end in bankruptcy.  And thus any action they decide to make, while seemingly educated and ‘scientific’ is in fact arbitrary.  In contrast, the only planners per se of market-based economies are entrepreneurs who fundamentally only need to collect a single data point: prices (e.g., once a price is known and discovered rational economic coordination can take place).  In doing so they can rationally allocate resources and conduct business transactions or after doing market research decide simply not consume capital at all; preferring to forgo capital consumption today by investing in higher-order goods (e.g., factories) that require long-term periods of illiquidity (yet offer higher returns on investment).  This last point is called capital ‘roundaboutness’ (e.g., the time preference usage of capital) and originally comes from another Austrian economist, Eugene Böhm-Bawerk, the instructor of Mises and Schumpter (Hayek studied under Friedrich von Wieser the brother-in-law of Böhm-Bawerk).

DeWeaver also touches on a tangential issue, one that Mises and other 20^th century economists wryly explained: that central planners in command economies need to continuously collect reams upon reams of statistical data to accomplish an inherently futile task – productively and efficiently coordinate economic activity as noted above.   There is an old economic joke used during the Cold War noting that the Soviets would absorb and expand to cover the entire globe, except New Zealand.  New Zealand would be left alone so that market activities would create prices, prices which Soviet planners could then input into their models and equations.  A similar story comes from economist Gordon Tullock who visited Gosplan (the top planning administration in the Soviet Union) and discovered that planners were using an old Sears Roebuck catalogue to price their wares.  But the inherent problem with their approach (whether the story is true or not) is that all such prices reflect the local inputs that created them; thus the Sears prices are only relevant to the US and do not reflect the local conditions, the local inputs in the Soviet Union.  Or as Bruce Barton once quipped, “the easiest and most effective way to fight the Cold War would be simply to swamp the USSR in Sears catalogs.”

And Chinese planners, as educated and enlightened as they may be, are fundamentally faced with similar calculation constraints.  Compounding this issue is that local officials are motivated to maximize GDP growth irrespective of sustainability or profitability and also have ‘soft budget constraints.’  ‘Soft budget constraints’ is an economic term coined by János Kornai, a Hungarian economist that DeWeaver cites several times throughout.  Among his other academic contributions Kornai explained that the planners of command economies in the Eastern Bloc had created chronic ‘shortage economies’ through the pricing mechanism.  That in retrospect, the relatively low prices set by planners incentivized increased consumption by consumers and thus vast amounts products – both consumer and producer goods – were continuously in short supply.  In other words, when you intentionally or unintentionally subsidize an activity, demand may eventually outstrip the supply of it (e.g., lower prices send a signal to consume rather than save).  In the case of all the Eastern Bloc, the Soviets and even Chinese experiments with artificially price fixing the end results are long queues that are now immortalized in iconic black-and-white pictures.

Booms and busts

And because each county and each province is actually overinvesting (or malinvesting) in their SOEs, this gives rise to collective investment booms in a variety of market segments.  While the traditional boom-bust cycle scholarship investigates the causality of interest rates relative to monetary and credit expansion (there is also a corresponding component in China), what DeWeaver illustrates in each chapter is how central planners and policy makers at each administrative level spur unsustainable booms based on a plethora of plans including to meet GDP quotas or to fulfill a part of the overall Five Year plan.  For instance, these booms as noted above can take place in what Lenin termed the “Commanding Heights” (e.g., heavy industries) or in other areas such as infrastructure development like high speed railroads, highways, stadiums and airports.  For example, in Chapter 9 DeWeaver cites more than a handful of such projects including:

Consider the city of Fuyang in Northeastern Anhui Province, for example.  Located in a relatively remote location in one of China’s poorer interior provinces, the city originally had only a small landing field for flights to Hefei, the provincial capital.  In the 1990s, the local government decided to “raise the city’s profile” by building an international airport.  The original airport’s 400 meter runway was expanded to 2,400 meters (long enough for commercial flights to most Asian destinations) and a 7,200 square meter terminal and other amenities were built at a total cost of 320 million yuan (Wang, 2002).

In 2004, after being open only a year, the new facility had to be closed because there was not enough traffic to keep it operating.  While it was finally reopened in 2008, as of the beginning of 2011 its website showed only three flights a day.

When I taught in Anhui last year I asked several students from the area if they had ever used the airport.  They said it was more practical to use the large train station because the airport only had flights to just a couple of cities (Beijing and Shanghai) during the day.  While there is potential growth due to the population size (Fuyang itself is either the 1^st or 2^nd largest county in Anhui depending on which areas are included), this represents an unproductive asset that would probably not have been built in this location or time frame if left to market forces.

Is this an isolated incident and just a rare exception?  No.  According to the Financial Times, in 2010, three fourths of all airports in China lost money.  In 2011, of the 180 civil airports in operation, more than 70% lost money.  In fact, based on research from Li Xiaojin, an airport in China needs to handle 1 million passengers a year in order to turn a profit.  Yet according to his estimates, 80% of airports do not hit this mark.  And according to the Civil Aviation Administration of China (CAAC), these losses last year amounted to more than $314 million.

Reimposing economic rationality in China historically requires central government intervention because of the disconnected incentives at the local level (i.e., biting the hand that feeds you), which consequently leads to purges and busts.  Thus the Chinese investment cycle is entirely different from the cycles described in conventional business-cycle theory.  It is not driven by mistakes or miscalculations on the part of private-sector investors because their role is substantially diminutive (representing roughly 1/3 of GDP).  It also does not really have anything to do with money creation by the central bank although this can exacerbate the systemic issues as state mandated lending quotas are excised through state-owned banks.  It is instead essentially a continuation of the same investment cycle China had during the command economy period.

Conclusion

This is not to say that the Chinese growth story is over, that it will collapse and we will have to find a new labor source to make our athletic shoes and smartphones.  Rather if anything DeWeaver’s manuscript illustrates that despite what the market has ‘giveth’ central planning inadvertently (axiomatically) ’taketh’ away.  China will most assuredly endure either way, yet for perhaps the first time the English-speaking world now has a usable corpus to use and later stand on (e.g., nanos gigantum humeris insidentes) in expanding the financial and economic scholarship of the Middle Kingdom.

[Note: Animal Spirits is available starting December 24, 2012]

See also: TLS interview with Mark DeWeaver  and an excerpt from Chapter 1

The inimitable EconStories gang, which includes the great John Papola, has just released their newest creation just in time for Christmas: Deck the Halls with Macro Follies. It lampoons the idea getting consumer spending going is how to jumpstart an economy. Contra those ideas of Keynes and Malthus (and Bernanke!), the real way to build prosperity is to save and thereby increase production. But watch the video, it’s really fun.

The most evil and harmful state laws, institutions, and policies are, I believe:

• war;
• the Fed/central banking/fiat money;
• government schools;
• taxation;
• the drug war;
• intellectual property (patent and copyright).

How are we doing on these issues? I spoke with some radical libertarian friends—it’s fun musing as to which one you would abolish first, if you could—and here is the basic take:

• war: not great, but they are getting harder for modern debt-laden welfare-states to afford;
• the Fed/central banking/fiat money: not great, but bitcoin could pose a threat;
• government schools: not great, but at least, in the US, homeschooling and private schools are legal;
• taxation: not great, and getting worse, but there seems to be a limit to the level of taxes the state can get away with imposing on the economy;
• the drug war: still horrible, but significant inroads have been made in the last election, with marijuana being legalized on a state-law basis by Washington and Colorado; and
• intellectual property: getting more and more out of hand, but being seen as more and more ridiculous and unjust. Copyright is getting easier to evade with various technologies like encryption and bit torrent; and patents are being seen more and more as ridiculous and protectionist.

Overall, the biggest cause for hope is probably the recent progress made in the insane, evil war on drugs.

In a fascinating blogpost, Michael McConkey asks Is English Common Law Libertarian? Many libertarians tend to view the common law as being quasi- or proto-libertarian. McConkey argues, relying largely on Harold Berman’s classic Law and Revolution, II: The Impact of the Protestant Reformations on the Western Legal Tradition (v. 2), that,

in [Sir Edward] Coke’s time  [1552-1634] and far before, England was characterized by what modern libertarians would celebrate as legal polycentricism. There was a wide range of legal and judicial systems at work. In addition to the common law, there was ecclesiastical and canon, manorial, merchant, Roman, martial and Chancery law: not an exhaustive list! These all had their own laws and courts. Furthermore, this diversity of judicial options had exactly the benefits which pro-polycentricist libertarians would anticipate. Anyone who felt they were being abused in one court system could appeal to another for redress. Berman tells of cases where individuals were imprisoned by one court system, but managed to secure release by the authority of another court system.

McConkey argues that this kind of polycentrism is quasi-libertarian, but that Coke and other common-law proponents largely destroyed it by pushing the common law and its central place to the fore:

[polycentrism] is just this kind of mitigation of legal and judicial monopoly that libertarians (certainly voluntarists and libertarian anarchists) aspire to with their opposition to the state. Yet, make no mistake, Coke and his fellow common lawyers were not conspirators in this regard. On the contrary, their rooting of English common law in a mythical antiquity was precisely intended to give it the historical authority not only to triumph over monarchial sovereignty, but over all the other competing courts in England. Coke and crew’s battle with James I was not a battle against legal monopoly, but for it – just the promotion of a different claimant to the throne of legal monopoly.

Further, this was achieved precisely by means of the distinctly common law premise of finding historical sources upon which the common law could claim superior jurisdiction. Legal systems based upon positive or natural law, by definition, did not have the fundamental recourse to historical revisionism (temporal imperialism) that was at the core of the common law tradition. It was uniquely situated to win at this game. And, of course, this project of institutional imperialism has proven remarkably successful: today awareness of a once polycentric English legal order has all but vanished from popular knowledge.

I see two lessons here, one for advocates of common law as libertarian and a second for promoters of Hayekian spontaneous order as a kind of meta-reason that leads inexorably to freedom. From the perspective of libertarian values, not only does the common law tradition have blood on its hands (the blood of legal polycentricism), but it has logically built into its conceptual DNA a will to power. The temporal imperialism of its historical revisionism turns a blind eye to the subjectivity inherent in any interpretation of the past. Coke himself was prone to find “new” precedents when he changed his mind on a legal matter. History provides far too rich a buffet from which the jurist may pick and choose the precedents of preconceptual convenience — including common laws’ own legal supremacy.

Secondly, as valuable has been Hayek’s observation on the nature of the market  as a spontaneous order, emergent rather than planned, the tendency to apply this same lesson to other social domains overlooks the ubiquity of power. Whether or not it is possible in today’s world to have markets free of coercion and struggles for power, it seems unlikely in other domains of society. Certainly no existing order’s historical roots can ever be claimed to be free of such machinations. Common law, both its practice and its ascendance, is without doubt the result of spontaneous order. But neither the seeds nor the fruit of that result can be considered consistent with or beneficial to libertarian aspirations for freedom. The virtues of spontaneous orders for freedom, whether or not they’re always superior to planned ones, cannot be credibly assumed in any given instance.

None of this is to deny that there is some kind of potential for a market based customary law system to deal with the inevitable gray areas and space of subjective dispute that will arise even amid the most conscientious application of natural law. Its foundation though, unlike common law, should not be in subjective interpretation of history, but the aggregate application of subjective preferences, free from coercion. That may be a tall order, but it’s a picnic compared to getting consensus on the meanings of the past. And it is, indeed, the real lesson of value from Hayek on the virtues of spontaneous order.

See McConkey’s interesting post for elaboration. For related matters, see my posts/articles:

• Legislation and the Discovery of Law in a Free Society,” Journal of Libertarian Studies 11 (Summer 1995), p. 132;
• Legislation and Law in a Free Society,” Mises Daily (Feb. 25, 2010);
• The (State’s) Corruption of (Private) Law, 2012 Annual Meeting, Property and Freedom Society (Sep. 27 to Oct. 2, 2012);
• Property Title Records and Insurance in a Free Society.

Recommended podcasts:

• “Cuba’s New Now,” KERA Think (Nov. 8, 2012). Fascinating interview by the amazing KERA Think host, Krys Boyd: “What has changed in Cuba since Fidel Castro ostensibly stepped away from power and are the changes happening fast enough for the Cuban people? We’ll talk this hour with National Geographic Magazine contributor Cynthia Gorney, whose story “Cuba’s New Now” appears in the current issue of the magazine.”
• “Joshua Rauh on Public Pensions,” EconTalk. Chilling discussion of the looming public pension crisis, with host Russ Roberts: “Joshua Rauh, Professor of Finance at Stanford University’s Graduate School of Business and a senior fellow at Stanford University’s Hoover Institution, talks with EconTalk host Russ Roberts about the unfunded liabilities from state employee pensions. The publicly stated shortfall in revenue relative to promised pensions is about $1 trillion. Rauh estimates the number to be over $4 trillion. Rauh explains why that number is more realistic, how the problem grew in recent years, and how the fiscal situation might be fixed moving forward. He also discusses some of the political and legal choices that we are likely to face going forward as states face strained budgets from promises made in the past to retired workers.” My guess? States and localities will end up declaring bankruptcy to modify their pension obligations.
• “Chris Anderson on 3D Printing and the Maker Movement,” Surprisingly Free. “Chris Anderson, former Wired magazine editor-in-chief and author of Makers: The New Industrial Revolution, describes what he calls the maker movement. According to Anderson, modern technologies, such as 3D printing and open source design, are democratizing manufacturing. The same disruption that digital technologies brought to information goods like music, movies and publishing will soon make its way to the world of physical goods, he says.” A good discussion of IP implications of 3D printing begins around 14:00.
• My recent Libertopia talk, Intellectual Nonsense: Fallacious Arguments for IP.
• My interview, “Silver for the People Interview: Stephan Kinsella—Copyright Laws Cost the U.S. $Billions in Economic Growth” (at Libertopia, San Diego, Oct. 12, 2012).

Well, technically, Anarchy 100, a seminar at Lebanon Valley College. I was alerted by a friend to this interesting course by Michael Kitchens, an Assistant Professor of Psychology. The reading materials include many articles and books from Austro-anarchists such as Roderick Long, Bob Murphy, Hans-Hermann Hoppe, Walter Block, Anthony Gregory, Tom DiLorenzo, Lew Rockwell, Rothbard, and myself. This is cool. The reading list would make a good book. From the course page:

SELECT RESOURCES/INFORMATION

Books

• Bourbon for Breakfast by Jeffrey Tucker
• Economics in One Lesson by Henry Hazlitt
• Ethics of Liberty by Murray N. Rothbard
• For a New Liberty by Murray N. Rothbard
• The Left, The Right, & The State by Llewellyn H. Rockwell, Jr.
• No Treason by Lysander Spooner
• Defending the Undefendable by Walter block

Introductory Essays on Anarchy

• “What it Means to be an Anarcho-Capitalist” by N. Stephan Kinsella
• “What Libertarianism Is” by N. Stephan Kinsella
• “The Injustice of Social Justice” by Ben O’Neill
• “But Wouldn’t Warlords Take Over?” by Robert Murphy

The State & Anarchy 

• Anderson, T. L. & Hill, P. J. An American Experiment in Anarcho-Capitalism…
• Block, W. Libertarianism is Unique… Journal of Libertarian Studies 
• Dilorenzo, T. J. The Culture of Violence in the American West. The Independent Review 
• Rothbard, M. “Society Without a State” 
• Mises, L. Liberalism (book)
• Murphy, R. P. “What are You Calling Anarchy?”
• Murphy, R. P. “Anarchy in Somalia”
• Long, R. T. Toward a Libertarian Theory of Class  

Market Anarchy

• Hayek, F. A. The Use of Knowledge in Society The American Economic Review 
• Taylor, T. C. An Introduction to Austrian Economics (book)
• Tucker, J. “Does Favoring Free Enterprise Mean Favoring Business?”

Justice Anarchy

• Kinsella, N. S. “Introduction to Libertarian Legal Theory” 
  • (A series of resources are listed at the end of this article)
• Kinsella, N. S. “Legislation and Law in a Free Society” 
• Murphy, R. P. “The Possibility of Private Law”
• Murphy, R. P. “Law and Appeals in a Free Society”
• Murphy, R. P. “The Possibility of Private Law”
• Gregory, A. “Abolish the Police”

Defense  & Security

• Hoppe, H. H. The Myth of National Defense (book) 
• Murphy, R. P. “Policing for Profit”
• Murphy, R. P. Chaos Theory (book/monograph)
• Murphy, R. P. “Private Defense is No Laughing Matter”

Roads & Highways

• Block, W. “A Future of Private Roads and Highways”
• Block, W. The Privitization of Roads and Highways (book)

Civilization, Culture, & Life

• Kinsella, N. S. Against Intellectual Property (book/monograph)
• Kinsella, N. S. & Tucker, J. Goods, Scarce & NonScarce
• Kinsella, N. S. Intellectual Property and Libertarianism
• Tucker, J. How Blessed is the State that Thus Destroyeth the Car
• Tucker, J. McDonald’s as the Paradigm for Progress
• Tucker, J. Pushing Buttons Like the Jetsons