Russ Roberts

Capitalism, Government, and the Good Society

EconTalk Episode with Videos, Debates, Multiple Guests
Hosted by Russ Roberts
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On April 10, 2013, Liberty Fund and Butler University sponsored a symposium, "Capitalism, Government, and the Good Society." The evening began with solo presentations by the three participants--Michael Munger of Duke University, Robert Skidelsky of the University of Warwick, and Richard Epstein of New York University. (Travel complications forced the fourth invited participant, James Galbraith of the University of Texas, to cancel.) Each speaker gave his own interpretation of the appropriate role for government in the economy and in our lives. This was followed by a lively conversation on the topic moderated by Russ Roberts of Stanford University, host of the weekly podcast, EconTalk.

We are also pleased to include the video of the symposium, available on youtube at EconStories.

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Legend. The speakers, in order of appearance, are:
RR: Russ Roberts, host
CW: Chuck Williams, Dean of Butler University's College of Business
CT: Chris Talley, President and CEO of Liberty Fund
MM: Michael Munger, Duke University, guest speaker
RS: Robert Skidelsky, University of Warwick, guest speaker
RE: Richard Epstein, New York University, guest speaker
00:00:14 RR: It's a pleasure to be here on the campus of Butler University for this event: Capitalism, Government and the Good Society sponsored by Butler University and Liberty Fund. My name is Russ Roberts. I'm a research fellow at Stanford University's Hoover Institution and host of the weekly Podcast, EconTalk, which is part of the Library of Economics and Liberty which is sponsored by Liberty Fund. I want to begin our program by introducing Chuck Williams, Dean of the College of Business here at Butler University and Chris Talley, President of Liberty Fund. Please welcome them.
00:00:53 CW: Good afternoon. I'm Chuck Williams, Dean of Butler University's College of Business. It is indeed my pleasure to welcome you to Butler University's Clowes Hall for a panel discussion of Capitalism, Government and the Good Society. Today our esteemed panel of leading thinkers will address and debate the role capitalism plays in the good society. Whether policies should be more bottom-up or maybe top-down and whether the sphere of government activity should be larger or smaller. To anyone doubting the importance of these questions I direct you to the pages of the world's leading newspapers and magazines which over the last few days have furiously debated the legacy of British Prime Minister Margaret Thatcher who passed away earlier this week. Supporters praised Mrs. Thatcher, the Iron Lady, for saving Britain from economic ruin by taming labor unions, privatizing nationalized industries, strongly reducing taxes on income and capital and shrinking inflation which ran as high as 27 percent. In other words they favor the role of capitalism and the good society. Critics condemn Mrs. Thatcher as confrontational, dogmatic and abrasive. For policies that threw people out of work, that harmed the poor, that favored the rich, that divided the nation. In other words, they support the role of larger government in the good society. At Butler's College of Business our mission is experiential education, or what we call "Real life. Real Business". And one way in which we fulfill that mission is through extensive partnerships with the business and non-profit communities. Today's event is the result of one such partnership with Liberty Fund. And it's my honor to introduce Chris Talley, President and CEO of Liberty Fund. Please join me in thanking him and Liberty Fund for their support and sponsorship of today's event.
00:02:56 CT: Thank you Professor Williams. I'll take just a brief moment to explain a little bit about what Liberty Fund, about what kind of organization Liberty Fund is and join in the warm welcome for this evening's program. Liberty Fund is the legacy of an Indianapolis businessman. An Indianapolis based lawyer by the name of Pierre Goodrich. He was a very successful businessman, practiced law for a few years but more than that he was a very curious intellectual. He spent his life striving to understand what it is in man's nature that makes him want to be free. Mr. Goodrich founded Liberty Fund in 1960. Resulting from a long process of self-education, driven by that curiosity, along with in depth conversations with family, friends and business associates. He hoped that through educational activity liberty might be restored and be preserved. Mr. Goodrich believed that liberty in all of its dimensions: religious, economic, political and intellectual offers the greatest chance to release the fullest measure of the creative potential of the individual and therefore of society. Liberty Fund and the Pierre Enid Goodrich Foundation are delighted to have the opportunity to join with Butler University, in working with professor Williams, to provide this evenings educational program discussing the commanding heights of economic activity. Again I join with dean Williams in welcoming all of you to this program and the ensuing presentations and conversation. Thank you all for coming out. Professor Roberts.
00:04:50 RR: We're here to talk about government, capitalism and the good society. My view of capitalism has always been that under capitalism man oppresses man. And under socialism it's the other way around. It's not my line. I'm told it came from MAD Magazine. And to be honest it's not my view but it does capture the reality that all political and economic systems are imperfect. The ideal mix between free markets and government intervention was the central, political and economic issue of the 20th century. And it gives every indication of being the central question of the 21st century. We're still arguing about the appropriate role for government in stabilizing the business cycle, the appropriate levels of government intervention in health care, how we should regulate the financial sector, the role of the government in the distribution of income and plenty more. The big questions really haven't changed very much. What role does capitalism play in creating the good society? What's the appropriate role for government? Should economic activity emerge voluntarily from the bottom up? Should it be steered and imposed from the top down? What changes in the interaction between the marketplace and the government should be put in place in the aftermath of the 2008 financial crisis? Should government sphere be larger or smaller? Is market failure or government failure the right starting point for tackling these questions? What are the right rules of the game? The right policies that let the human creativity and self expression to flourish. We have a remarkable group of speakers here today. Each with their own philosophical and policy perspectives to help us think about these issues. Each speaker is going to talk for about 10 to 15 minutes and that will be followed by an informal hour long conversation that I'll moderate. So let's get started. Our first speaker is Michael Munger. Mike is a professor of political science at Duke University where he directs the Philosophy, Politics and Economics program. Trained as an economist, Mike is the author of numerous journal articles at the interface between economics and politics, as well as the author of Analyzing Policy Choices: Conflicts and Prices. He blogs at Euvoluntary Exchange and at Kids Prefer Cheese. He leads all guests in appearances on EconTalk with 22. Our last conversation was on John Locke and Hurricane Sandy. And he is also the best living economist to appear in the Keynes-Hayek rap videos. Please welcome: Mike Munger.
00:07:35 MM: Well thanks very much, how are ya'll doing? The other panelists really are very distinguished just as they said. I'm actually just the eye candy. The only person who actually laughs at that joke is my wife. Well those, those who favor...I can wait...Those who favor liberty and free enterprise are actually more often accused of being idealistic and naïve. And I think exactly the opposite is true. There are some real problems of information, collective incentives and externalities. But if we're realistic about the alternatives, which are equally bad, and in many ways worse, I think we can have a more useful discussion than the kind of dichotomy we usually get: we need more government, we need more markets. The truth is a little more complicated than that. Now I'm a professor at Duke, as Russ told you. In North Carolina at the state fair, we have what in effect are beauty contests for pigs. So you might imagine in one of the categories at the state fair there is a Big Pretty Pig contest. And there aren't many entrants because there's big pigs, and there's pretty pigs. But there's not many big pretty pigs. So there's just two. We have the two entrants. The first one comes out and the judge goes, "Oh, God, that's an ugly pig! Let's give the prize to the second one." Well, he hasn't seen the second pig. Now it's true that the first pig is ugly. But why would you have a decision based on the fact that there's problems with one system, the other one must be better? But that's precisely what people who want to reject market solutions in some ways are advocating. So the world is imperfect, our knowledge is limited, that particular pig of market solutions is in many ways pretty ugly. The world is hard. The problem is that advocates of state intervention often want to award the prize to the invisible pig: the state. But when you actually take a look under bright lights, government failures are just as ugly, just as prevalent, and in some ways harder to control than market failures. Now the kind of research that I do is called public choice. I'm interested in the consequences of policies, of the results of different combinations of rules and incentives, and I've reached the conclusion that limiting the role of government, not eliminating, but limiting the role of government in the lives of citizens in both markets and in society, has the best consequences for society, and for human flourishing. So I want to make two points in this regard. First, society and the state are different things. In fact, the state can sometimes crowd out society. But society's not the market either, it's something else. And then second, the real question is not between more regulation and less regulation. The real question should be what I call the "right kind of nothing." Well if I say that society and the state are different things and society and the market are also different things, government's a political collective organization that uses coercion. Markets are a set of shared institutions that reduce the transactions cost of impersonal exchange. Society is everything else, society is all the complicated relationships that you have with people around you that are neither coercive nor based on price and exchange. When you think about your lives, an awful lot of what you do is in that third category. Society is a really big pig, and in some ways it's prettier than either the state pig or the market pig. So if all we did is vote, if all we did do is discharge our obligations by going to the grocery store or pulling the lever in the voting booth, or buying a car, we would have a society that, as Alexis de Tocqueville said, would be enfeebled. If we rely exclusively on the state to carry out our moral obligations, or if we rely exclusively on the market to obtain the things that we want in our lives, society is enfeebled. Let me give an example. John Stuart Mill in his 1848 book, Principles of Political Economy said that no one would build light houses from motives of personal interest, because they wouldn't collect the fees that were necessary to cover costs. So Mill's conclusion was, it's the proper office of government to build and maintain light houses, since it is impossible that the ships at sea which are benefitted would be made to pay a toll. So his conclusion was, markets are a pretty ugly pig, let's just give the prize to the second, which is the state. But the fact is, as early as 1820 in England, which was the home of John Stuart Mill, more than three quarters of all lighthouses had been built and at that time were operated, the very time that he said this, were being operated by private individuals. Now how can that be? How can it be that it could be that light houses could be provided? How could it be that lighthouses, which were supposed to be public, could be provided privately? Well, there were sailor societies that had sprung up as part of society, not truly market nor truly state, that provided insurance, pensions, ways to provide for widows whose husbands had been killed at sea. A group of people got together and formed a voluntary, private organization. So it's true that government officials back a lot of the enforcements of those contracts. But how exactly did it work with light houses? Well if you put in to a port, the proprietors of the port, the people who operated the stores, would charge something extra and then that money would go to the private lighthouse. So lighthouses being provided privately by these societies didn't require state action. Now when I tell people this, sometimes they say "Well but that sounds like the government was acting." In a way it is, if you go into the Circle K and buy a Coke and try to steal it, the government enforces those contracts. So there's some mix, there's some proper mix of private voluntary action in groups and enforcement by the state. What I'm objecting to is the automatic awarding of the prize to the pig we haven't even seen which is the state must provide the lighthouses. That's not true. There are many ways that, that creative individuals can come up with voluntary organizations to provide those services. So the lighthouses of coastal England in 1840 weren't pure market entities, but a kind of hybrid. The point is there's no hope if we stick to these binaries. If we say more markets, more government, we have no hope of solving the problem. We have to do it on a case by case basis. Well, second. The right kind of nothing. I hope we can get away from that, the kind of dichotomy that I've talked about. And the objection that I often hear--I'm a kind of libertarian economist in terms of my own politics--people say: "Well you just want the government to do nothing." Well that's not right. What I want is for the government to do the right kind of nothing. And what would I mean by the right kind of nothing? In 2009 I taught for a semester in Germany in Friedrich Alexander University in Erlangen, Germany. And I don't speak any German, so at least twice a day I would end up saying: "Look, I'm sorry, I don't speak any German," and in some way I'd embarrass myself and something awful would happen and I would go home and hide in the bathtub. But, the problem was I would sometimes get hooked on what appeared to be cultural cognates. And I thought I knew how a grocery store worked. So I'd go to the grocery store, and in the US, if you're in a grocery store and you see an elderly woman pushing the shopping cart back towards the store you say: "I'll take that for you ma'am." You take the shopping cart in, she doesn't have to walk all the way in and you get the shopping cart. So I tried that. I'm in very large [?] an underground parking lot at a grocery store, and I see this elderly woman, kind of about five feet tall, in heels, "Uber Oma," a grandmother, walking along, pushing the shopping cart. And so I think, okay I know what to do, and I pantomimed to her "I'll take that" and her reaction surprised me. She dodged hard to the right. I had on more sensible shoes and I was younger. And so I dodged that way too and I was gonna intercept her. And she dodged pretty hard to the left, but I had the angle and I grabbed the shopping cart. It's surprising how loud an old lady's screams are in an enclosed area like that. Cause she started screaming. And then I saw a policeman running. In Germany you don't usually see policemen running, they're very placid individuals. If they want to talk to you they go... He was running and looking at me and I thought: this is bad! And I was practicing my speech: I don't speak German, I don't speak German. He gets to me and starts yelling and I said, "I don't speak German." And he says in perfect English, fortunately, "What are you doing?" Now many of you know, and usually people from Germany or Europe at this point are cringing because they know that in most of Europe, in order to put the shopping cart back, you re-chain it, you get back a Euro. So there's a deposit. So I was trying to steal a Euro from an old lady. I didn't think I was, but in the policeman's eyes I was, and in his defense, I was. It didn't just look that way, that's what was going on. So he demanded ID, and I wasn't carrying my passport, but I pulled out my wallet and he saw my Duke ID and he said "Oh my, my nephew went to the executive MBA program at Duke." And I go, "Thank God." By this time I could see the corners of his mouth starting to pull up and I said, look I've never seen a shopping cart, I had no idea, I'm sorry. And okay, this was going to be fine. But now he was smiling and he said, without turning around, "She's still looking isn't she?" And I looked, and she was peering out from behind a pillar, ready to see justice done. And so he said, "Ok," and he starts shouting, I'm not gonna shout loud cause I have a microphone on and poking me hard in the chest. "You have to understand! I don't think she speaks English! We're done here today!" That, I submit, is the right kind of nothing. Now you can understand that someone on the Left might say, "Well you libertarians you just want the cops to do nothing." As if they were going to sit in the car and smoke cigarettes and say, "Oh another grandma's getting robbed, where do you want to have lunch?" That's the wrong kind of nothing. If that's what you mean by deregulation, I don't want that either. But also, there was something he could have done. He could have said, "This guy is trying to steal a Euro from an old lady," because I was. In his defense, I was. He could have arrested me. Probably the charges would have been dropped, but as it was, the old lady was happy, and yes, I went home and hid in the bathtub. I admit, that, that part was bad. But his choice to do a particular kind of nothing, I thought, was an illustration of what I would hope we could think of as the proper role of government. The proper role of government is to serve as a referee. The proper role of government is to participate to the extent necessary to allow people to reach a full realization of their hopes, their dreams. Now as I said the two points, and to summarize, the two points that I wanted to make, of taken together, I think are more a program for conciliation. I've actually become convinced, myself, that a lot of the more extreme forms of deregulation are the wrong kind of nothing. So I hope we can talk more here today about the right kind of nothing. Thank you for listening.
00:21:03 RR: Our next speaker is Robert Skidelsky. He is an emeritus professor of political economy at Warwick University. His three volume biography of John Maynard Keynes won five prizes, and a single volume abridgment appeared in 2002. A revised edition of his book on the current crisis, Keynes: The Return of the Master, was published in September of 2010. He was made a member of the House of Lords in 1991 and was elected a fellow of the British Academy in 1994. His most recent book, How Much is Enough: The Love of Money and the Case for the Good Life, co-written with his son Edward was the subject of an EconTalk episode in October of 2012. Please welcome Robert Skidelsky.
00:22:01 RS: Ladies and gentlemen, I'm not going to talk about Margaret Thatcher. Though I will answer, make any comments you want on her, on the Iron Lady, afterwards. Certainly we've been overwhelmed by news of her, by her achievements, and also of course quite a few criticisms of her divisiveness. So I'll be very happy to talk to that, but rather, I'm going to talk about the conditions of liberty, which seems a good topic of conversation for a Liberty Fund event. Owing to the hazards of the weather, I find myself the sole representative of common sense, this, this afternoon. So the question really is, what policies and structures are best suited to maintain the system of liberty? And I want to consider that question through the prism of the two great rivals of 20th century economics, John Maynard Keynes and Friedrich Hayek. They were the colossi that bestrode the world of economics. Curiously enough, although they were near contemporaries they hardly ever engaged. They were near contemporaries, they lived in the same country, but they only had a couple of engagements over a long life. The first was in 1931 when they reviewed each other's books. Well, like most professors they reviewed each other's books badly. Hayek complained that Keynes' treatise on money lacked any principle of equilibrium. And Keynes was a bit more [?] in his review of Hayek's prices and production. He called it an example of how starting with a mistake a remorseless logician can go mad. Hayek never reviewed Keynes' big book which was his General Theory of Employment, Interest and Money. He said that by the time he had finished the review, Keynes would have changed his mind so it wasn't worth reviewing it in any case. But I do think that was a cop-out, he didn't know how to review it. However, I now come to their second and most fruitful encounter, which was in 1944. And in 1944 Hayek published his Road to Serfdom, his famous critique of central planning. He attacked the idea of democratic central planning because he said there would never be enough voluntary consent in a democracy for the goals of a central plan. Therefore, democratic central planning was an oxymoron. Partial planning, by which he meant a mixture of planning and markets, he also thought wouldn't work because, I quote: "Any attempt at such partial planning involved a progressive suppression of that economic freedom without which personal political freedom has never existed in the past." And fascism and communism, the two big rival ideologies in 1944, were totalitarian culminations of what had started as democratic planning. That was his thesis. Western democracies were fighting fascism without realizing they were on the same slippery slope to serfdom. The originality of Hayek's book was of course this argument that what he called serfdom need not be brought about by evil men like Hitler and Stalin. But by the actions of good men, the road to serfdom was paved with good intentions and was covered at a creep rather than at a gallop. Well, Keynes read this book. He was on the high seas traveling to the United States on the third of his wartime missions, treasury missions to America. And he wrote to Hayek in a letter dated 28th of June, 1944, which perhaps was rather surprising in view of their huge differences on economics. Keynes congratulated Hayek on having written a grand book: "Morally and philosophically I find myself in agreement with virtually the whole of it. And not only in agreement, but in deeply moved agreement. But..." There was a but. In fact, there were three buts. And I just want to go through the buts because I think they're very ,very apposite to what we're thinking about this evening. "First, you admit," Keynes wrote, "That it is a question of knowing where to draw the line between the state and the market. You agree that the line has to be drawn somewhere." This is Keynes, "But you give us no guidance whatever as to where to draw it. As soon as you admit that the extreme is not possible you are, on your own argument, done for. Since you're trying to persuade us that so soon as one moves an inch in the planning direction you are necessarily launched on the slippery path which will lead you in due course over the precipice." So that was his first but: Hayek doesn't give us any guidance as to where to draw the line between the markets and the state. And that's a good criticism. It's a cogent criticism. Libertarians have always regretted Hayek's concessions, in particular the concession he made that you have to have a limited welfare state. In fact, some of them have detected in Hayek a dangerous tendency towards socialism. The libertarian writer Ayn Rand denounced Hayek as a compromiser, and another famous libertarian philosopher argues that Hayek leaves the state's role ad hoc, open ended, and indeterminate. Now Hayek did try to draw the line in a number of ways. For example he tried to distinguish between general rules, which he thought were admissible, and rules designed to benefit particular groups, which he thought were wrong. But this doesn't do the work in defense of liberty he quite wants it to. Because general rules like conscription for example, can be highly coercive. And ... Nazi Germany and Soviet Russia were conscriptive societies. But everyone was conscripted, those rules weren't aimed at any particular groups. And Hayek also argues that a social safety net is okay, provided its aim isn't redistributive. But of course it's bound to be redistributive since in practice a social safety net involves a transfer from wealthy, who don't need a social safety net, to the poor who do. It is more accurately called forced charity. Well that was the first of Keynes' criticisms. Second: Keynes argued that an enlarged role for government was needed to prevent, I quote, "disillusion with the results of your philosophy." This was a sound conservative, even Whig-ish position. Because what Keynes was arguing, was that rejection of government policies to prevent slumps for example or to overcome extreme poverty, would likely produce a flight from liberty. In other words he was arguing for government intervention as an insurance policy. Because if you neglect that insurance you're likely to get far worse. Now this had just happened in four years in Germany. There was a flight from liberty, and Keynes said you need precautionary measures. You need government to intervene to prevent those situations from getting out of hand, which produce political extremism. And there were other criticism Keynes could have made. On the other hand, let me not leave the argument too strongly weighted in favor of Keynes at this point. Hayek was right to point out, but he only did so after Keynes' death, that by destroying belief in the balanced budget rule, Keynes had opened the door to unrestrained, expansive government spending. I mean, that I think is how you balance that particular argument. So this brings me to Keynes' final point, his last point. After emphasizing the need for planning, Keynes went on, "But the planning should take place in a community in which as many people as possible, both leaders and followers, share your own moral position." Remember he's writing to Hayek. "Moderate planning will be safe if those carrying it out are rightly oriented in their own minds and hearts to your moral position. Dangerous acts can be done safely in a community which thinks and feels rightly, which would be the road to hell if they were executed by anyone, those who think and feel wrongly." So that's Keynes' defense of dangerous acts. In communities with democratic traditions they don't lead to serfdom. In short, moderate planning was consistent with the preservation of liberty. And I think Keynes' view here was echoed by many of the American reviewers of Hayek's Road to Serfdom when it appeared. For example, Professor T. V. Smith of Chicago University noted that, "Preparation for an electrocution, and preparation for an electro-cardiograph were the same up to a point. What the outcome would be in either case depended on the traditions of the particular society. And," Smith wrote, "no country has yet wittingly or unwittingly slipped into serfdom whose presuppositions are democratic, whose customs, hopes and habits are full of sympathy for men and replete with respect for laws." So basically it depends on the society whether these acts, whether big government leads to serfdom or doesn't. However, Hayek has a good come-back on this, though he obviously, he didn't reply to Keynes' letter by the way. Keynes' argument was essentially static. What it ignored was the consideration, this is Keynes, "That right feelings and democratic customs can be depleted and eroded by continuous government intervention. That their continuation is not independent of the acts being done. A society in which Keynes' dangerous acts are frequent will lose its understanding of why they're dangerous. That is, it's sense of what it is to be free." And this has happened to some extent. Political liberty is, remains, we are free to vote, and to speak as we choose at least on occasions like this provided we're polite. But we now accept many more curbs on our personal liberty than we did in Keynes' day or Hayek's day, in the name of all kinds of desirable things to be sure. Like health and safety and security, all those sort of things we accept restrictions on our liberty which we never would have. And we don't associate them with curbs on our freedom because we've lost our sense of what that kind of freedom is. The war on terrorism offers leaders opportunities unrivaled opportunities for oppressive legislation, surveillance, and pre-emptive justice, which comes straight out of George Orwell's great dystopia, 1984. But most of us are completely unaware of how far down that slippery slope we've already slipped. The more that we do not escape, more statism of this kind may perhaps be the result of Hayek's salutary warning. Now this is the skeleton of the great debate which should have been, but never was. It never was because Keynes died less than two years after The Road to Serfdom appeared, and therefore never engaged properly with Hayek on this very important field of political economy. The question of course is, is a Keynesian state more or less likely to preserve political and individual liberty than a Hayekian state? And we'll talk, maybe discuss this perhaps more in our conversation, what I think the essential functions of a state are in the modern age: an economic stabilization, provision of public goods and I would argue, a redistribution of wealth and income. But my own view is that a state which does what Keynes wanted a state to do would be less vulnerable to political extremism and political authoritarianism than a state which followed Hayek's road. And in practice, underneath all the rhetoric we hear, post-war western states have been more Keynesian than Hayekian. And that is true of the United States too. And remarkably stable, I would argue, as a consequence, in their democracy. Let me put it this way, in conclusion, an economic system which tolerates periodic crashes in the name of freedom from financial regulation, which tolerates cuts in public spending in face of rising unemployment, which tolerates rising inequality in the name of sanctity of private, sanctity of contract, is more unlikely to suffer creeping authoritarianism, by way of political reaction to those things, than a state pursuing the middle way, commended by Keynes, which Hayek saw as the slippery road to serfdom. Thank you.
00:36:59 RR: Our next speaker is Richard Epstein. He is the Lawrence [?] professor of law at New York University School of Law, and the Peter and Kirsten Bedford Senior Fellow at Stanford University's Hoover Institution. His latest book is Designed for Liberty: Private Property, Public Administration, and the Rule of Law. His regular legal column "The Libertarian" can be found at Hoover.org. He's been a guest on EconTalk seven times and he will be appearing for the eighth time soon, to discuss constitutionalism. Please welcome Richard Epstein.
00:37:38 RE: On this particular occasion, what I want to express is that I actually started out life as a professional lawyer. And what lawyers do is something in many ways quite different from what economists do and political theorists do. What they do is they basically spend a lot of their time in the engine room trying to figure out how it is that you make these grand ships of states go. And we have basically two major functions that we try to discharge in these cases: one of them is to figure out how it is that we grease the wheels so that transactions can take place, whether they be done by private individuals or by government. And then secondly what we're trying to do is to put in a set of mechanisms whereby disputes can be resolved short of force by the introduction of the state, in neutral judiciary and some cases juries, and our opportunities to be heard, and so that in effect we can substitute adjudication for warfare in the operation of the overall system. What is the lawyer's role in this situation is, I think, important to know. Lawyers are remarkably uncreative people, I think it's important to say. We have never had a bright idea of how to organize a new industry, how to get people together with respective collective actions, we are essentially the keel on the boat, we are not the sail that propels it forward. But a boat needs a keel as well as a sail because what it has to do is to find a way to make sure that your enthusiasms do not exceed your capacity. So inside the engine room, our particular job is to do what the great economist and my personal friend Ronald Coase has said: figure out how it is that you've tried to organize a system so as to minimize frictions and transactions costs, where the transactions costs are to the social interactions what frictions are to the operations of physical systems. They never do you any good, and so to the lawyer the way in which you try to maximize the level of social welfare from the center is to figure out how it is that you drive those transactions costs down in order for creative activities to take place. And in order to do that, what we then have to do is to figure out what are the two kinds of things which by and large tend to frustrate the organization of a political system. And it turns out that they are as follows: One of them is good old fashioned aggression. It's a situation where you use force in all of its forms. You punch people over the head, you start to set traps of one kind or another so they fall in and die, you mislead them by fraud so that they fall to their death, things of that sort. And essentially what we can say is most people who engage in that kind of activity do so for some kind of private gain. But we're equally confident that the losses that come out on the other side of the transaction are far greater, so that it's not a situation in which the way in which you combat force is to have more aggression. What you have to do is to define some sort of collective institutions which can restrain that in the name of the self-preservation of the liberty of all persons in question. This is, I think, the fundamental condition of a society in introducing the rule of law, which essentially finds ways to curb that kind of aggression, is in fact the first and paramount task. But it's not the only task that you have to face when you're trying to organize a society. There are problems of coordination that also take place that sometimes cannot be achieved by voluntary means. Ideally if you could get everybody together by way of a contract that would be perfectly wonderful because you could be confident, if it were indeed a voluntary contract, everybody would come out the winner. But when it comes to organizing certain kinds of organizations it turns out that voluntary solutions are not possible, and we have to start thinking of collective type of arrangements. And in doing this I think it's important to remember from the very beginning of the legal system, it had never been devoted solely and exclusively to the protection and organization of private property. One of the subjects that I teach on a regular basis now over forty years is Roman law. And if you go back and you read the beginning texts on this particular subject the first thing they start to talk about is common property. And only after they've understood what makes property common work do they start to talk about private property. And if you want to get a sort of wholly biological analogy as to what this situation starts to look like what I recommend you do is to think about your own bodies for a second. And you realize that you have two kinds of organs inside of you. One of them are the long and skinny, you have a neural system which goes from one end to the other, and then you also have a blood supply which has exactly the same kinds of situation. If in fact you were to cut into the nerves on the one hand and the blood supply on the other the entire system would fall to pieces. When you're talking about a social system, you also have a long and skinny. Think of them as rivers and trails, streets and highways and so forth. And the key point to understand, it's only if these things are subject to various kinds of rules of open access can you have communication back and forth between individuals who occupy private parts of land. And to put the analogy again one step further, inside the body not only do we have the long and skinny, but we also have the short, square and squat. The various kinds of organs which are highly specialized in what they do, which are communicated or connected with each other through these other two systems. And in a social system the private property is in fact the factories, the farms, the houses that are beside the road, so that the ideal nature of the particular system in question requires that you have common and open access to a communication network of one kind of another, coupled with productive centers that start to take place with houses, farms, factories and so forth. And indeed this is not a peculiar feature of this or that society, no matter where you go and no matter what you do, that kind of dichotomy exists. And it's important to understand that because many of the critics of private property do not understand the way in which the more sophisticated defenders of private property argue for an optimal mix of those things which are collectively operated for the communication transportation and so forth, and those things which are privately controlled. Now, once you look at these two things you can see what the perils turn out to be. With respect to these highways and so forth, what you have to do is to make sure that they do not get divided, they do not get snipped. The famous Treaty of Westphalia in 1648 was designed to make sure that there weren't an endless series of tollgates along the Rhine river, which would in fact destroy communication. So what you needed was collective action to make sure that the rivers would not be privatized. On the other hand if you have land which is privately developed, privately owned, privately defended and you allow somebody else to take it, what happens is those who are not allowed to sow will not be willing to, will not be able to be reaped. Or to put it in another way, if you wish to get something at the back end, you have to give an incentive for people to put the front end investment in so that you now have the explanation as to how it is long, endurable private property lies with these farms and so forth can create the overall system in question. So the question is, what kind of legal system do we start to use in order to organize these kinds of complex objectives? And here what we do is we first have rules of acquisition, how it is somebody gets the property. I'm not going to defend the elaborate and novel proposition that each of us owns our own body, because the alternative is either the system of collective ownership which immobilizes us all, or a system of slavery which allows the few the exploit the many. But once you have those people, they cannot take something out of the common if it's a river or a trail, but they can take land, occupy, build and develop it so you get private property running in that way. Once you get these two institutions together, the next question that you have to ask is how do you maintain and defend? And here you get two other great bodies of law which help put the system in greater coherence. The first of these is what we call the law of tort. And what that means, in effect, is we now have a general rule which says that one person is not allowed to trespass against the person or the property of another individual. That's the way in which we want to control against aggression. Sometimes we say we're controlling against externalities, that later term is much too broad to be truly safe, you have to be much more careful in the way in which you use it. Why is that the case? Because many people get disappointed. If it turns out that a competitor comes along and offers a good for a lower price and a higher quality so that all their efforts to create wealth by their own labor is now smashed by that kind of opposition. But the key thing to start to remember is that if we start with the trespass situations, we're stopping these negative sum games where everybody is made worse off by the repeated application of force by one person against another, but if you now combine classical liberal theory in the legal side with modern economic theory, what you understand is that the competition which results in disappointed competitors necessarily results in a higher level of social output than any alternative system known to man, including that of state monopolies whereby the government decides who can produce what and how much can start to take place of various kinds of activities. If one wants to figure out what the great decline in the United Stated and in Europe has been with respect to social policy, it has been exactly the confusion I just mentioned between physical externalities, fraud externalities, and competitive externalities whereby what we do is we say in effect that certain people suffer from ruinous competition, when somebody else comes up with a better mousetrap or a cheaper good to sell, and so therefore the state has to intervene in order to prevent these things from taking place. And the great transformation that is associated with the move from classical liberal philosophy, which is not libertarianism in the sense that its collective action by the state is not appropriate to the modern progressive system which believes in lots of government management and so forth, is that the class for permissible externalities for government regulation is to the modern progressive and to some extent the modern Keynesian, various kinds of competitive distortions taken by innovation. And it is exactly that mistake which creates the biggest problem that we face, because it means that we turn an efficient economy which has a competitive industry into one that becomes much more monopolistic. And now, there was something which was said by Mr. Skidelsky which I think, in fact, is worthy of some kind of comment about our good friend Hayek. And indeed I have actually written an article called "Hayekian Socialism" which attacked Hayek for doing exactly the thing that he should not have done. Which was to understand that you have to understand the limitations of an ordinary libertarian theory involving force and fraud it means that what you have to do is to go into a huge set of [?] subsidies and the redistributive state. One of the things that lawyers have always known is that there are actually three states of the world that you have to take into account. One is pure competition, which is generally speaking an extremely good and benevolent type of situation, the other is naked aggression which you have to forestall, but the middle case has to do with the situation of monopolies. Now what is striking about the difference between lawyers on the one hand and political philosophers, like Keynes on the one hand and Hayek on the other, is that the philosophers tend to ignore this middle case, even though it explains huge portions of the economy that you are familiar with under the rubric of public utility regulation and railroad regulation, internet regulation, and so forth. It turns out that the creation of certain kinds of complex networks and services are not amendable to competitive solutions. Because unless everybody can cooperate nobody can in fact benefit from these operations. Think of how it would be if the telephone business were organized by competitive industries and competitive firms, none of which could connect to one another. So what the good ole lawyer starts to think about is how it is that you can create the gains from these networks without getting monopoly exploitation. And the mechanism that is introduced in order to control that, is in fact, a non-discrimination rule which says that people are entitled to fair and reasonable investment returns on a non-discriminative basis from their assets. And this in effect is a way of saying: well let the monopolist get as much money in order to operate his facilities, but we won't give it the [?] control over prices so that it can exploit everybody else. Now there's an instructive lesson that comes from this, because this model of essentially trying to limit what monopolists can do in the private market by these rules on just rates of return and nondiscrimination is in fact the template for the way in which the state when it exercises its monopoly of force should operate as well. And all the rules about forced exchange through taxation and condemnation are illustrations of how it is that you don't have to have a pure market so long as you understand that just compensation principle offsets the exercise and use of public force. This leaves only one issue left that one has to deal with, mainly the question of redistribution. And here I disagree I think with most [?]on this state, on this issue... The first thing on the list is always to expand the growth by controlling aggression and controlling monopolies and then if that starts to fail you figure out how private incentives can fill the gap. In most cases the tradition of laissez faire was notable for its willingness, indeed its insistence that voluntary charity was required of all those who had something to help those who did not. And that leads you back to the voluntary associations of friendly societies that my friend Mike Munger started to talk about. But understand that when you run this thing through, the redistribution function should not be allowed to wag the dog. And if you're trying to find why it is that the state today has failed in both Europe and the United States, its willingness to create monopolist institutions in competitive industries like labor and agriculture, and the moment you start in fact to use government power to create monopolies instead of to limit them, you're going to run a downward course. Thank you very much for your attention.
00:52:27 RR: We're now going to move to the second part of our event, our conversation, and as was mentioned earlier we lost a participant to weather. He's on his way. Maybe. If he doesn't make it, I find myself cast in a strange position of defending government intervention and making sure that poor Robert Skidelsky doesn't get ganged up on. So we'll see how that goes, but let's welcome our three speakers back to the stage. [Applause]
00:53:12 RR: So just to put names to faces again, we are very pleased to have with us in this conversation Michael Munger, Robert Skidelsky, and Richard Epstein. I want to start us off with a challenge of Twitter, and I'm going to ask each of our three participants, now I have to be fair to them, I didn't tell them much in advance about this opening question so I'm not going to hold them to it precisely, but I want them to tweet their appropriate role for government. So I'm going to give them a hundred and forty four characters. Since that's a little bit brutal, I'm going to give them a few more sentences, but I want them to start by telling us, briefly, what do they see as the appropriate role for government. And we'll go around the group here one by one and then we'll open up the conversation: Michael.
00:54:05 MM: Alright, I said, in a way, a very short kind of haiku answer is that government should be a referee. Government shouldn't be a participant, and government shouldn't be too active in actually making the rules on the fly. There should be a set of rules and then government should be in charge of enforcing them.
00:54:27 RR: Robert.
00:54:08 RS: Uh, three functions, I think, first of all economic stabilization. Market economies don't ensure continuous full use of resources. Secondly, public goods, that is goods which can't for various reasons be produced by markets. Richard talked a bit about that. And thirdly, enough redistribution to secure fair equality of opportunity for people to realize their potential.
00:54:54 RR: Richard.
00:54:55 RE: Well, I mean, I start off with the maxim: cooperation, yes, coercion, no. Qualified by saying: monopoly, maybe, because sometimes you need them [?]. And redistribution when the first three things fail. Added, in the following way, again as a lawyer, that you must have a very complicated and sensible system of administrative rules, which will tell you how you do civil procedure, criminal procedure, administrative procedure, that's the stuff in the engine room, it's probably the bulk of what I do as a day to day lawyer and no one should ignore it.
00:55:31 RR: So let's turn to the problems of capitalism. Mike, what do you see as the biggest challenges that capitalism faces, what are its weaknesses? Should we be worried about it?
00:55:42 MM: I think we should be very worried about capitalism and the reason paradoxically is that government is in some ways too cooperative with the wishes of capitalists. And I mean that in a, what we economists call, rent seeking. Suppose I own a large corporation, or I'm a manager of a large corporation, I have two choices. I can spend money trying to make better, cheaper, new products that people want to buy. I can create value. And the profits that I make from that actually redound to everyone's benefit. Yes, I make profits, but the big benefit is to consumers who are paying for something, they're paying less than its value to them. So that's the way capitalism is supposed to work. But the alternative, and it's identical from the perspective of the owners of the capital itself, is I lobby members of Congress for contracts which, if I were to make them privately, would violate the anti-trust laws. I want to have contracts in violation of restrictive trade laws. Now I can't do that because it would violate the Sherman Act [?] but I can if I get a cooperative member of the Senate that you can introduce legislation that's far more unassailable, far more difficult for my competitors to overcome, whether those competitors be in other countries or my competitors be new start-ups here in the United States. Now from the perspective of the owner, the stock holders, the people who I answer to as the manager of this corporation: "which one should I do?" They don't care. And in fact if I refuse to do the rent seeking, lobbying, use government to protect my profits route, I'll be fired. Or I'll suffer from an unfriendly take-over, because that capital has a higher value of use in rent seeking. So government must somehow armor itself against the blandishes of interest groups, so the problem that we have is precisely that government is too susceptible, and this, I sound like a Marxist at this point, but this is actually, I think Marx was the first public choice theorist.
00:57:48 RS: No you didn't.
00:57:51 RE: You don't sound like a Marxist to me.
00:57:53 MM: Marx is a different conclusion. Marx is: get rid of the corporations. I say, find a way to prevent government being bought and paid for by corporations.
00:58:02 RR: Richard? Did you also have any weaknesses that needed to be addressed?
00:58:03 RE: Yeah, I, well of course. On the Marxist point I don't think he thought that was the central issue; I think he thought exploitation of labor through contracts which were winning on one side and losing on the other, and I think he was wrong about that. I think the fundamental difference on that point is that most of us believe that voluntary contracts result in mutual gains between the parties, and the problem is whether or not, as with monopoly, the external effects are negative and override those gains. But I think in many ways the situation is even worse than Mike says it is because I'm going to go back into the engine room again. One of the great contributions of the American anti-trust law is the case for Parker and Brown in 1943. And what you did is you found that the states organized a raisin cartel where all the cost would be paid by people outside the state. And the Supreme Court was so enamored with the fact that there was government protection for this that it said it was legal against the Sherman Act, precisely because the state ratified it, whereas a good economist would say: "Oh my God, a state run cartel in fact is durable, it won't break down for cheating," so this is essentially the problem that you see is that you look at these societies and we are busy in the United States and in many other places, taking competitive industries using government resources to convert them into monopolies. When I wrote a book called Takings Now some twenty-eight years ago, the basic logic of this book was that every transaction that you have, either voluntary or coercive should result in positive sums for all the people who are involved. Monopoly always creates negative sums and positive cost so it's a double loser. And controlling that I think is the most important thing, and to the extent that monopolization and capitalization are equated, it does a great disservice to the capitalist institutions.
00:59:48 RR: Robert?
00:59:49 RS: Yeah, I'd like to disagree with both Michael and Richard, sorry, can I call you by your Christian names? I think that, sure, there's a bit too much collusion between the state and certain of interests. I mean, particularly financial interests. I mean, basically the state has deregulated the financial sector at the behest of the financial sector to the point at which a lot of its activities, quite simply, are waste. I mean a lot of finance is simply rent extraction and has no social justification, and people at the top of the profession get paid far too much for the value they actually render to society.
01:00:40 MM: Is this the part where you disagree?
01:00:42 RS: This is the part where, I am going to disagree in a second. This is the part where I think, you know, I agree. Now, and then to go to the part where I disagree with Richard, I don't think monopoly, I mean monopoly is bad, monopoly is a great source of misallocation, and all that. But even if you had a perfectly competitive market system, without any of these distortions, you would still need an economic growth of the state and stabilization, because you would not get a full utilization of resources under a freely competitive market system, because you have severe information problems. And if you take the argument for, saying that a market system would always achieve optimal equilibrium, you find it does depend on perfect information. Now we do not have perfect information. The future is very uncertain. And we have asymmetric information problems anyway.
01:01:42 RE: You know, I disagree with that and let me explain why. As I mentioned earlier on the central problem of every legal system is how to deal with friction. Imperfect information is one of those things. But it is a very dangerous leap to say that by virtue of the fact that there are gaps in the information markets that only government can stabilize them. One of the things that private markets do is they introduce all sorts of intermediates who have exactly that kind of role. These are people who are brokers in various kinds of exchange and entities and the theory is they have enough information they can basically organize both sides of...
01:02:16 RS: That's a theory.
01:02:17 RE: But it's, no, no, it's not a theory. It's a theory in which you look at the thousands upon thousands of people who filled exactly those kinds of roles, getting people paying on both sides of the market for their services, it's fine. One of the great achievements with respect to the financial markets apart from the disaster, is the creation of such institutions that...
01:02:36 RS: That's a huge qualification, Richard.
01:02:38 RE: No, no, no, no, no, let me explain what the system is. You know, look the financial markets will never be pure and competitive from the simple observation that it runs on back of the kinds of things which it's very difficult for private institutions to control against. And so you have to worry about that, and remember when I said you needed to regulate anti-trust laws, that' a concession of government roles in some kind of market values. But the ability essentially for a large number of people to participate in markets depends on the ability to create intermediates who in effect will take certain kinds of financial instruments which would be much too risky if concentrated in some hands, and to spread them out over a larger situation. And those markets, most of them have actually succeeded, some of them have failed. Where they have failed most notably has been in the real-estate market. But that's the area in which the intermediation has been covered with government guarantees and alterations of public money supply, so you can't treat it as purely a private failure. There' also some serious technical problems in that market, most of the people who are in fact engaged in the securitization thought they were diversifying against all risk, that turns out to be wrong, there are many risks which are systemic and for which securitization and partition of assets doesn't work. You need to point though, there are market failures in that case, but interestingly enough, none of the regulations of the SEC and so forth that were designed to counteract those things had any positive effect on the way these were organized.
01:04:01 RR: Okay, I'm going to let Robert respond and then Mike's going to jump in if he'd like to. Go ahead, Robert.
01:04:05 RS: Well the market failures here are colossal, or this particular market failure, because it actually has involved the economy of the world in the biggest slump we've had since the Great Depression. Now of course in the United States it's now coming out of it a bit better than Europe, but the loss of output income jobs over the last five years has been colossal. We're about ten percent poorer than we would have been growing at the old rate. Now, you talk about market failure, that is a huge market failure. What's more...much of the financial innovation which was the product of the last ten years or so, and particularly in the development of derivative instruments of one kind or another, were precisely designed to diversify risk so that something like this couldn't happen. Now it did happen. [?] so where do you go on from there? And I think you go on from there to say that, look, a lot of these risks cannot be guarded against except by state policy. I don't mean by state regulation of the banking system, I don't even mean by breaking up bigger banks, but state action to maintain a level of demand consistent with a reasonably full utilization of resources. So the market fluctuates, you let that happen, but the state continues a steady stream of investment. And that's what worked 1950s, 1960s, and on the whole I think that was a better period than the one we had in the last twenty years.
01:05:33 RR: Mike, do you want to respond to that?
01:05:35 MM: Of course!
01:05:36 RR: Please do.
01:05:37 MM: A parable: behold the unicorn. Now the unicorn is the ideal pack-animal. It can carry large amounts of cargo, it eats nothing but rainbows. And its flatulence smells of fresh strawberries. It's clearly the ideal pack-animal, save for one thing. It doesn't exist. The state is a unicorn. There's no such thing as the state. Now, Maggie Thatcher famously said there's no such thing as society. I clearly disagree with that, but I understand what she meant. There's no such thing as the collective, the uber mind that has all the information that markets are assumed to lack. So I would hope that before you say: "markets fail," that the first pig is ugly, and therefore I want the unseen pig, in this case a unicorn, to solve these problems for me, substitute in this. Next time you say: "I want the state to do X," say, "I want politicians I actually know, to be in charge of this. Because they are better informed, they have a longer time horizon." And I think you'll see that that's nonsense. Politicians are looking for the next election, if they lose they're done. Now it's perfectly true that people in markets, stock holders, managers, have very short time horizons. But so do politicians. We're in a situation where we have two pretty bad choices, and the idea that we're going to pick one over the other means that we're doomed to continue to make the mistakes that have gotten us to this point in the first place.
01:07:23 RE: Now I have a suggestion about what the intermediate solution would do [?]. And I disagree with professor Skidelsky when he says that this is all a market failure. I remember having the conversation with, I guess it was Senator Dodd Representative Dodd about the...
01:07:39 RR: Senator.
01:07:40 RE: Senator Dodd, I regress. And he said, I said, what about Fanny and Freddy? He said we didn't have time to get to that. And I said to myself, "What world does he live in?" And the reason is that when you start looking at the American financial consequence, crisis, and the things that produce, what you did is you have the government, government is a [?] last resort. Which is guaranteed to create irresponsible private behavior by banks, who look to the guarantee rather than the security. So that's a big government failure. Then on the other hand you have the guys running the Fed, churning out money like there's no tomorrow. And the only way people can get their hands on that particular money through low interest rates is to bid up the cost of the complementary asset, i.e. the real-estate. And so here you have a mixture of bad public incentives, and in effect these kinds of very bad private responses. Because one of the things that the good capitalist or market-defender believes is that all market firms are vulnerable to corruption. No matter what their politics, no matter what's going on, so the issue is how it is you reduce the discretion. And on this point, I would just like to mention, that one of Milton Friedman's great achievements was not his defense of markets, but the defense of the kind of monetarism which was designed to introduce this form of stability. Whereby you tried to keep the money supply, difficult to find to be sure, roughly proportionate to the level of goods so that the interest rates remain relatively constant, so that long term contracts could take place without that incredible uncertainty that takes place with currency risk fluctuation. And remember, every single private contract involved in pounds and dollars has a state component associated with its operation.
01:09:28 MM: But Richard, it sounds like you're just renaming, you're conceding Dr. Skidelsky's point, you're renaming it.
01:09:33 RE: No, no, I'm not conceding anything.
01:09:35 MM: I concede nothing!
01:09:36 RE: I'm not, I'm trying to say...
01:09:39 MM: You're just renaming it.
01:09:41 RE: No, no I'm not. I'm trying to say what the particular functions are, and what the particular mouth pieces, as well as I do think that you're wrong to the extent that you think that you can somehow run the monetary system by, say, turning to a gold standard or something, which would be independent of government control. Look, when I, you mentioned the title of my book, Designed for Liberty: Private Property, Public Administration, and the Rule of Law. That little piece is as much a part of the system as anything else. And when you run it very badly you get very bad results. To that extent I agree with Dr. Skideslky, but I disagree with him as to whether it's an all or nothing situation, and how you define what the particular risks were these cases. I also think that blockades on international trade of one kind or another, particularly in the Depression, really mattered. So what you need to do is to go back to the kind of Adam Smith broad taxes, open markets, distaste of monopoly, redistribution last, and you'll do a lot better than you'll do with these modern confections.
01:10:41 RS: Of course it's not an all or nothing thing. I mean, only extremists or quacks believe it's an all or nothing thing, and we haven't got any of those on this panel. So you've got to find out, what are the things markets do well, and where they should be encouraged and everything. And one of the things they don't do, which can only be filled in some other way, by regulation, or by actual state action. I had a correspondence with Milton Friedman about this and I showed him a manuscript of my biography of Keynes, whom he greatly admired by the way, and he said, "Well you know, the thing is, had Keynes been brought up in the United States, he wouldn't have had this idealistic view of government that he apparently has having been brought up in England. Because he would have realized that government is corrupt, rent seeking, and all this kind of thing, and he wouldn't have been willing to entrust it with such powers." And that was echoed in your statement: have you met a politician... you'd realize how inadequate they were. But the point is the state is not just politicians who get elected every two or three years. The state is an administration, and there are people there who work state department or treasury. That's their careers, and they do have long term goals, and they are not simply overturned by the whims of politicians coming and going. So I want you to always think of the administration and there is a long term element there. Second point, last point, is, you know, the trouble is Friedman was defeated on monetarism. Monetarism was defeated because they could not identify the correct money supply. I mean, the money supply proved to be a movable aggregate and they couldn't fix it. And that's why there are no pure monetarists in any central banks today. They tried for a long time. What they do in central banks is not to try and fix some monetary aggregate, but to try and fix something like, they fix inflation rates. And that is the target they've been aiming for. When you actually come to their attempts to use monetary policy in the present crisis, which should work if you're, if you believe in the quantity theory of money, you find the results have been very, very mediocre and rather unpredictable. Better in some countries than in others.
01:13:13 RR: Let me just make a strong statement to challenge the group with, related to this question. It's a fair criticism, I think, that Robert's just made. That monetary policy appears to have been quite disappointing. I would say the same thing about fiscal policy. We spent eight hundred and twenty billion dollars here in the United States on the promise that if we didn't do it unemployment would go to eight and a half percent. We did do it, it went to over ten. Now there are many reasons to explain that, but what I want to put forward to the group and get their reaction is: do you think we know enough about monetary and fiscal policy, that is the use of the money supply, the use of government spending and taxation, to have any control and fulfill the role that Robert Skidelsky is asking for. Now I'll let Robert go first, because I think he's going to defend that view. So I want him to defend it, and try not to gang up too much two on one. But I would argue as an economist that we are woefully inadequate to predict the path of the economy under various interventions, and I think we should be more honest about our inability to predict it, have a lot more humility and admit that a lot of what we do is simply story telling. After the fact.
01:14:30 RS: Yeah, I've always accepted economists should have a lot more humility. They pretend to an omniscience that they don't have, they're disciplinary imperialists without any real right to be. They pretend to sort of exact knowledge when all they have is rather imprecise knowledge and so, and I agree with all that.
01:14:48 RR: [??]
01:14:49 RS: I could go on, and I'd agree with that too.
01:14:50 RR: It's a long list.
01:14:51 RS: Yeah, and lots of them anyway work for private organizations and therefore aren't as disinterested as they claim. But, having said that, I think government fiscal and monetary policies can improve on the outcomes, especially in situations which such as we experienced since 2008, 2009. Just one point, if you compare what happened in the Great Depression when governments deliberately tried not to intervene and what happened in 2008, 2009, you have the same, exactly the same downward slope for five months in both cases and then in 2008, 2009 there was a flattening whereas in 1929 to 1932 it went on for another, for eight quarters. Sorry, I'm talking in quarters and not months. And I think that was due to government intervention. I think they improved on the outcome that would have resulted had there been no intervention.
01:15:47 RE: No, no, could I disagree with you?
01:15:48 RS: I know it's a counter factual, but I've got some data.
01:15:50 RE: I think that it's really complicated for another reason. If you start looking at the earlier period, what happens is we did have government intervention in the United States in the form of massive deflation, which essentially screwed up all long term contracts and resulted in massive, yes it resulted in the foreclosures on long term things in the bank world...
01:16:09 RR: Do you want to jump in first?
01:16:11 RS: Yes, yes it wasn't the government.
01:16:12 RE: Well deflation is created by the change in money supply...[?]...When Hoover did not and Roosevelt later did not re-inflate the currency, it turned out that the contracts which were denominated in fixed dollars essentially could not be paid by farmers.
01:16:29 RS: It was the Fed, not government.
01:16:31 RE: Well the Fed is the government. I mean, for these purposes I'm not going to try to distinguish which part of the government is responsible for it, the only point that I'm trying to make...
01:16:38 MM: In fact the Fed is the unelected experts you see in the vests.
01:16:40 RE: Yes, I mean, these guys are government figures. The intervention in the tariff markets was through [?] when that statute passed the market which was slowly beginning to recover in early 1930 again took another nose dive. Then Roosevelt comes in, far from being noninterventionist, the man was the cartel king of the western civilization, hundreds upon thousands of these things were set up, one more destructive and insane than the other. And in fact the only good thing he did since he didn't lower tax rates, was to try to prime the pump. Not because it's the first best solution but because it's the second best solution. If you kill private investment through a 62 percent tax rate under the revenue act of 1932, either you spend from the public side or you don't spend at all. But to say that this was a period in which there was no government intervention is an American fantasy.
01:17:31 RS: Look, you know as well as I do that a correlation isn't a cause, that the money supply did collapse between 1929, 1932, what caused it to collapse? Mistakes by the Fed as Friedman believed and Miyake followed, or was it the collapse of business and therefore the collapse of the demand for money? The jury's out on that, no one knows the answer, and I take the view that it was the collapse in the demand for money, the demand for investment, that caused the money supply to collapse. We're not going to agree on this this afternoon.
01:18:04 RR: Well I'm going to help you. Just for a novel experience.
01:18:08 RS: Really?
01:18:09 RR: Yes, let me join in, I think on this issue I'm on your side. I think it's extremely difficult to argue that it's government's fault that it didn't re-inflate. You have to go to a, sorry to disagree with you Richard, I think you have to go to a second level of argument that, and this is what I think Friedman said, he said the existing regulations that the Fed had imposed stopped and desisted from naturally re-inflating exacerbating, worsened the deflation. But I, we have to admit, I think, those of us who like capitalism here, the three of us, one of us trying to stay quiet, that's me, but...
01:18:46 RE: Not doing a very good job!
01:18:47 RR: Thank you. The three of us on this panel who like capitalism have to admit sometimes the money supply collapses that has nothing to do with the Fed. And I would say the financial crisis of 2008 would be another example where the shadow banking system through a set of, again we can debate how much of that collapse was due to government mistakes: encouraging moral hazard and bad investments, how much of it is due to natural forces within capitalism. But the contraction of the money supply that occurred in the aftermath of the financial crisis is part of the problem. Ok, so I don't, I raise a different problem though. Which is that Herbert Hoover spent a lot more money in 1932, 31 and 30 than he did in 29. He was an early Roosevelt practitioner. He would be a Keynesian in many senses in what he actually did, and so I think the jury's out on whether fiscal policy actually works.
01:19:38 RE: Can I make another observation?
01:19:40 RR: A short one though, because Robert needs to respond to me.
01:19:42 RE: Oh yeah, but, look, one of the things that I think follow from what Russ said is that it's very difficult to draw any inferences to whether deficit spending or [?] is going to give you a better result. And the result's simply very clouded on that. But the one unambiguous thing that has taken place, is the enormous increase of the unemployment rate both in Europe on the one hand and the United States on the other. And we know what the causes of those things are, and we know what the cure for that is. This is a situation in which the level of direct regulation on voluntary exchange has increased exponentially since earlier times. It's of course between family leave laws, sick leave laws, minimum wage laws, bad labor standards act, anti-discrimination laws, union protections and so forth, special gimmicks here, there and the other place. The unambiguous prescription is not to try and guess the monetary aggregates, I'm just going monetary, but to simply remove all of that stuff and get yourself back to a situation where labor markets are much freer. That will have some effect on the employment rates, and that will improve everything else. And the unwillingness of the macro-types to talk about those micro-issues, i.e. concerning a hundred and fifty million people, is I think a colossal mistake.
01:20:58 RR: Robert respond and then Mike.
01:20:59 RS: I mean, I just think you fail to distinguish between short and long term things. How can you attribute the massive increase in unemployment since 2008 to regulations that have been in force for ten, fifteen, twenty years? I mean, what minimum wage legislation...?
01:21:15 RE: No, it's what the minimum wage is. It's not the fact that there's a law. It goes up in 2005 to 2007 by thirty odd percent!
01:21:24 RS: Unemployment in Britain rose [?] doubled without any change in the minimum wage law. Look, any common sense view would be that the big increase in unemployment since 2008, 2009 is due to the collapse of the economy. Output has just collapsed. It collapsed terrifically in those two years. That cannot be the result of changes in regulation
01:21:53 RE: Yes it can.
01:21:54 RS: But it was the result of the fall in demand. I mean, any economist would tell you that, even if they believe that fiscal policy isn't necessarily the right answer.
01:22:04 RR: Mike
01:22:05 MM: What's interesting to think about Greenspan's famous cri du couer in Congressional testimony, where he said that the set of regulations, or actually in some ways de-regulations that have been put in place, he had thought would be okay because of the inherently self-correcting mechanisms that capitalism, and that financial capitalism in particular had. And it didn't. And so I think that's an important point in Robert's favor, that if you think that there is an inherent, corrective mechanisms that are so strong that reputation and the fact that you're going to lose enormous amounts of money are going to be sufficient to have the system be self correcting, that incidence seems to prove that it was mistaken. Now I would say that the reason that there were no self correcting mechanisms in capitalism, was that financial firms that were large enough knew that they were playing with house money. Either I would keep winning and I'd get to keep it, or if I would lose enough money I'd be bailed out. Now I don't think that's deregulation. I think that is an inability of government to commit not to reward extremely risky behavior. But I admit it's a pretty subtle point. Is the failure there the inability of government to commit, or the willingness of large financial firms to steal money from tax payers?
01:23:36 RR: I'm going to add a footnote to that, and let Robert respond. I think it's particularly repellent that Alan Greenspan made that [?] in front of Congress. Because Greenspan stood up and he said, 'All my life, I thought that markets were great and they could self regulate, and I have to readjust my position." This is a man who is famous for being a friend of Ayn Rand the, I wouldn't call her the patron saint of capitalism...
01:23:58 MM: At least a friend.
01:23:59 RR: ...the something of capitalism...what did you call him?
01:24:03 MM: He was at least a friend.
01:24:04 RR: At least a friend, exactly. They were very close. I don't read enough biographies to expand on that, unfortunately. So here is a man who is identified in the public eye as the capitalist, who grovels in front of a Congressional committee... makes this confession that he was wrong. And it sounds nice, except for one thing. As you point out there is an alternative explanation, which is we've taken away the loss side of the calculation. The reason it's repellent, the reason it's disgusting, is that Alan Greenspan was one of the driving forces behind that removal of those incentives. He is famous for what is called the Greenspan Put which means that he wouldn't let asset prices go down. He manipulated money supply to keep Wall Street happy. In 1995 he testified in front of Congress that we, you and me, had to guarantee loans to Mexico because they had to, it would be too horrible if they failed, even though it's not good policy he said. It's the worst of a bad alternative. [?] What we really did is we didn't bail out Mexico, we bailed out the banks that lent Mexico money. In 1998 he spearheaded the, the redemption, the saving of Long Term Capital Management, a hedge fund, which had really no systemic risk at all, because that's where, I believe, the Federal Reserve has bread its butter. In New York City by the people on their board. So, for him to say he's learned a lesson, he's become an interventionist, is a little bit obscene. Sorry, about that outburst. I want to let Robert respond and then Richard.
01:25:33 RS: [??] in many ways. And one of the supply side institutions that needs reforming is the banking system. There are lots of ways you can do it, I'm in favor of competition. I think that...I'm in favor of competition. I would do what I think they do in the UK now, what they've started to do, you can't abolish deposit insurance, whatever people say. It's not going to be abolished. But you can confine it to just banks that take deposits and then free up all the rest from any regulation, really. So that people put in their money and they can lose it and the government doesn't do anything about it. And that way you remove the problem of banks being too big to fail, so I would do that. Then I stop at this point but I would like to come back to fiscal policy, because it was mentioned and I have another word to say about it.
01:26:31 RR: Good.
01:26:33 RE: Well now, look, I'm wanting to agree with the last several comments, so a note of amenity. But I want to sort of take issue with the sort of question of why it is that things are so much worse now than they were before. And I think that the changes in the system of regulation and taxation at least in the United States have taken a very deep turn for the south, which helps explain some of these particular problems. I'm someone who works on the regulatory budget side of these things, because that's what I do for a living in many ways. This stuff has expanded. Let me give you one indication of what an alternative theory is. Uncertainty when it increases is like an implicit tax, and uncertainty is a tax on both supply and demand. If you look for example at the United States today and ask yourself what certainty you have with respect to the tax structure in this society , what has happened is there's not a single important tax rate that we have whose shape or duration is now known to anybody for a period of more than a year or two. We had an entire year where the estate tax just disappeared because these guys couldn't get their act together. Every one of these times we re-organize these things, you could have [?] progressivity, excise taxes, special capital gains taxes, they come and go, we will have the health care taxes coming on top of this. If you want to essentially have a government, you have to have long term stability in government rules just as you want long term stability in the way corporate shares and businesses run, and I think in effect that that major decline has created uncertainty which hurts both sides of the market, and the implication is the stimulus program will fail because it's targeted to shortness on the demand side where as an uncertainty theory will be much more accurate because it says it doesn't matter what you do on the demand side because the uncertainty's coming through on both sides. And when it comes through on both sides it collapses all markets, and until you reverse that and have government most constant in what it does, and get rid of the fiscal cliff which occurs every six months, you will not get a long term improvement in the health of the United States.
01:28:35 RR: Robert?
01:28:36 RS: You cannot explain collapses in output at five to ten percent all over the world, not just in the United States, in 2008-9 by increases in regulatory pressure or increased uncertainty about tax rates. You cannot do it.
01:28:56 RE: No, this is where I disagree. You can explain...
01:28:58 RS: I mean, that's what you think! Surely.
01:29:00 RE: No, I'm saying the recovery cannot take place in this environment. The thing is we will have, because of banking failures, given what Russ said, I agree with it, monetarism in a pure form fiscal policies aren't great. But if you don't get the micro stuff more or less correct, you will have exactly what has taken place: the most feeble recovery that we've had in time, precisely because we have not got these organizations under place. You talk to employers and say "Why don't you hire somebody anymore?" Because they say "The load that is put on that we don't know is very heavy," so you move to part time employment, inefficient production, everybody pulls back on both sides of the market. Let me put it to you this way, Robert, you may be right about some things about the macro stuff. Is there anything you could say, which would say, "You know what, I may be right about the five percent, but I think your proposals are bad nonetheless" when you concededly said they have some positive use, but if they don't have any positive use then we're on different planets.
01:29:56 RS: I already conceded they have positive use, I thought that you weren't conceding that fiscal policy has any positive...
01:30:02 RE: No, no, I did say, what I said is what Russ said, which I think is accurate. Which is that, when you look at this, I said, you don't know whether deficits or austerity are going to be better, precisely because of the weakness in the knowledge, but it's unambiguous that the removal of uncertainty and the restraints on labor markets, and the creation of monopolies, all of which are mid-size issues but there are so many of them that those things would help. And everything in this country has gone the opposite direction.
01:30:28 RS: You're claiming the bigger slice of the cake here. I'm willing to divide it between you.
01:30:33 RE: No, no, I'm just claiming, no, I'm not even trying to figure out what the size of the cake is. I'm trying to say, every single micro-policy that we have is anti-growth. I mean [?] take the Patent Act, which you may not know much about, what a disaster all these things are. And they accumulate. And so what I'm trying to say is, if we're uncertain on the macro, we should try and be together on the micro. If we can fix that, we might be able to change the slope.
01:30:59 RR: I'm going to defend Robert, and then I'm going to turn it over and let Mike comment. Of course I agree, Richard knows I agree with him on almost everything he said. The only problem I have is, you can't really prove it, right? I certainly accept that, and when I mean prove it, I don't mean prove it beyond the shadow of a doubt. I mean prove it, confirming it with any kind of evidence. As Robert said, we have lots of policies that do bad things, at least in theory, that slow down the labor market, that discourage employers from taking risk, that discourage innovators from taking risk. And yet there's, as Adam Smith said, there's a lot of ruin in a nation. And usually we seem to overcome that ruin. And why, because sometimes we can overcome it and sometimes we can't? In 1993, 87, 86, 62, 58, the economy was doing pretty well. We had a lot of bad policies. Now you could argue we reach a tipping point...
01:31:54 RE: My point.
01:31:55 RR: My basic argument is that we as economists don't have the ability to precisely measure the magnitude of these things. I certainly agree with the direction Richard, but I don't think we can measure the magnitude and therefore we are story-tellers. Mike.
01:32:07 MM: I want to tell a story.
01:32:08 RR: Good! Is it better than the unicorn, because that was fabulous! It's hard to top the unicorn, really.
01:32:13 RE: He's got a lot of them.
01:32:14 MM: Thank you, thank you very much.
01:32:15 RR: Is it an animal story?
01:32:16 MM: This, this is a story, in fact, come back with me to a world where we don't know very much about the germ theory of pathology. It's 1820. And one afternoon you pick up your daughter, and she's really hot and you think "oh she's got a fever, I better call the doctor." And so you call the famed Dr. Krugman. And Dr. Krugman, he's a professional, he's extremely dedicated, he comes to your house, and he says: "Your diagnosis is correct, she has a fever." He pulls out a small blade, this is 1820 after all, and he's forced to use the theories he has available to him. And he opens a small vein on her wrist and he takes half a pint of blood. He says, "call me if it doesn't get better." Two hours later her fever has not abated, in fact, if anything its gotten worse. He takes a half pint of blood. By midnight her fever is unbelievably high. He takes a half pint of blood. Four in the morning, she dies. He says, "My God, we didn't bleed her enough." Every single article Paul Krugman writes is basically that theme...There's still a recession, the stimulus must not have been big enough. The only conceivable interpretation is the stimulus isn't big enough, it can't be that the underlying theory is incorrect. And to be fair, instead of picking on Paul Krugman, I could have made it Dr. Friedman with pro-market prescriptions. We just don't know much about the macro economy. We should not think of the macro economy as a machine with levers to pull and dials to turn. We should think of it as an ecosystem. Ecosystems are enormous and complicated, and have relationships among species that we may not know much about. You lose one species, the entire ecosystem could collapse. We could get no growth in ways that are very complicated. We don't know enough to say we need a stimulus or we need more markets, it's an ecosystem it's not a machine.
01:34:36 RR: Robert?
01:34:37 RS: Yeah I think, I think, it's an extraordinary story, that, because it's exactly opposite of the prescriptions that actually Krugman [?], the austerity programs are bleeding programs. They bleed the patient, and that's in a very common sense, they're cutting down. They're cutting down demand, cutting down government spending, that's a sort of bleeding process. The Krugman prescription is actually a pumping blood in process, it's exactly the reverse. The macro economic theory is very simple to anyone who gives it a moment's thought. The private sector is increasing its saving that's a consequence of the slump, and it's overleveraging and so forth. If the government increases its saving at the same time the effect will be a downturn in economic demand and output. Because my spending is your income. If I decrease my spending, your income goes down, and so it goes on. That's a straight forward theory. Dr. Krugman is not advertising cutting, cutting, it's a very interesting analogy, cutting, because bleeding involved cutting. That is what governments in Europe and England, and to some extent in the United States, have been doing, and he's been opposing. It's just the wrong analogy.
01:35:59 RR: Mike, let Mike respond. His story, let Mike respond, it's his story.
01:36:00 MM: Well, the point is: there is a theory, it has an implication, and the conclusion from the empirical observation that we didn't succeed is we didn't do whatever it was the theory says was important, not that the theory itself is incorrect. I don't disagree with you about austerity. I said we don't know the other side either. So the point is I have a theory which I can't possibly test because I hold it as a theology. I'm a macro economist, I'm a theologian, not an actual person who studies markets
01:36:28 RS: Well what is the theory? You never told us what the theory is.
01:36:30RE: No, here's my theory. I mean there's no question...
01:36:33 RS: I've told you my theory.
01:36:34 RE: Well now I'll tell you my theory, because it's a very different theory. What happens is we increase the degree, you're certainly right to say that private and public savings together is a disaster, but there are two things you could do. What the Keynesian tries to do is to say, "Oh, there is this private stuff, well we'll do, spend stuff on the public side." Many times they spend it badly, when they spend it badly what they do is they decrease the capital base for the long term. So it's a [?] great invention. What they're doing in effect is instead of fixing the problem they're trying to create an offset. So this is equivalent to saying, well the minimum wage drops employment so we have to subsidize employers. My view is you don't want to do that. You don't want to have two mistakes cancel one another out, what you try to do is to get rid of the first mistake. And how do you try to do that? Well you try to remove the uncertainty which makes people on both sides of the market reluctant to do that. If in fact you do that, then in effect things will start to improve both ways, and what you then do when you start looking to the government and its expenditures is not to figure out how you stimulate an economy, but to figure out how it is that you managed to make sufficient expenditures on infrastructure where they're needed. One of the things that I've actually looked at is, you know, the Obama jobs bill from a couple years ago, and most of that has simply a corruption of public institutions for long term expenditures that will ruin the way that infrastructures work. And those things are much more important than the short term stimulus, so on the political point, to agree with Michael for a second, one of the things that happens in all of these cases, is that the effort to try and figure out how you control the short term disability, results in the institutionalization of long-term disasters. So the price fixing from the New Deal, which took place the same year as the stimulus programs of 1938. By the war stimulus programs were irrelevant and the Fair Labor Standards Act and the Agricultural Adjustment Act, and the Civil Aeronautics Board, lasted for somewhere between forty and sixty years. So that's the public source changer, and believe me, I don't accept skeptics. I'm a lawyer I don't expect [?] the economy. We do know monopolies unless they stimulate productions, and the patent system are bad, minimum wages don't do any good. You can't figure out how bad they are unless you know the relationship between the minimum wage and the market wage to give you some sense, and that's why in effect, this, you start boosting those things up the impacts will become much greater whereas the earlier on at a lower level they might have been negligible. I think we do know all of that stuff. And so de-regulate, flatten the tax structure, get rid of the political intrigue, and push on the levers you understand instead of having the theological debates on the things that these eminent economists don't understand, and frankly I don't understand either.
01:39:23 RS: I think economists understand a lot, and I think they understand that everything you said is right. I think we ought to press off on these things. The point is that in the short run, and I emphasize short run, they don't do anything to increase employment or output. Their effects will be to enlarge, say, the capital base for future years. And the short run lasts five or ten years, in which the economy is seriously depressed or under employed and in which the fiscal policies seem to be failing, is actually to risk a lot of political damage to your system. I think people's tolerance of going through the wringer for longer term advantages is actually quite limited, and I think we're starting to see this in Europe. You might say that Roosevelt's New Deal failed economically, although I don't accept that, I don't think it failed economically. The counter factual is that the United States would have recovered quicker if the New Deal hadn't happened and I think that's not provable. But I think he did a lot of political good, Roosevelt, I think the mood was very, very ugly in 1931, 1932, and I think the New Deal, I wouldn't say saved democracy for the United States, but it made it easier to preserve a Hayekian system as I, as I emphasized in my lecture, a Hayekian system of political liberty. So I think it did good political work. You can argue about the economics, and I feel that if you neglect the short route and concentrate just on the things Richard Epstein has been talking about, you run serious political risk.
01:41:14 RR: Now my, my only worry, and I think again I'm going to be the skeptic here, is that we don't understand the short run or the long run. And my worry is that when you go to give the blood transfusion to that little girl in her right arm, you're taking the blood from the left arm. That system is not going to work very well. That's essentially part of what we do, right? The resources have to come from somewhere, and you can argue that they are being, doing nothing in the private sector so that when we borrow the money to fund those government spending projects, that it somehow is a net positive. But I think it's very hard to sustain that when the project, when the money, when the money's poorly spent. I want to quote Robert Skidelsky though, because I think this is for me the bottom line of this conversation, this piece of the conversation then we're going to shift gears. When John Papola and I interviewed Robert for our econ stories Keynes Hayek rap video auxiliary material Robert said something quite profound. He said it without irony, I think, I think you stated it simply as a fact, you said, "Economics isn't a progressive science." And by that what you meant was, we don't learn a lot, it's not like physics, it's amazing how little we have learned about the workings of the macro economy since the Great Depression. You'd think by now, after seventy or eighty years, we would have mastered it. We're, I would argue, we're not close. But you're more optimistic. You want to close on that?
01:42:37 RS: Yeah, I'll close. I think that in all the areas Richard has been talking about, and you Michael, we know economics has made progress. Economics ought really to have been confined to micro economics, and I agree with Hayek on that. Unfortunately the micro economy left to itself is not stable. And there have got to be things that government has to do, therefore we have to have a theory of government economic policy. What should the state do in the economy? And on that theory, and on that the theory is not very precise.
01:43:12 RE: Can I, can I disagree on one point?
01:43:13 RR: Sure.
01:43:14 RE: Which is the question of how rapid people respond to short term incentives in respective markets? Now I'm going to give just a little illustration. A couple. One of them is just this nice piece ...by George Stigler and Milton Friedman together, trying to talk about the responses of markets. And what they do is they take first San Francisco where everything is blown up by an earthquake, and they ask how long does it take markets to equilibrate so their supply and demand are back to what they were before. And the answer is about a year. What happens is the high prices produce massive influx in capital and things start to slow down as the rates start to stabilize. You look at the energy markets, you open them up, the level of improvement is just enormous. Take rent control in New York City where we we're going to stabilize this stuff in the short run, for the long term benefit with three year statutes. The current stabilization scheme was introduced in 1969, it has to be renewed every three years, it's renewed if the vacancy rates remain below five percent because there's no stimulation. It turns out the market is a two tiered market and a disaster because every three years since 1969 to the present, nothing has changed by virtue of that system, it's in complete stasis. And so the real question is do we learn something about the rate of change? And with regulation what happens is the rate of change is zero. With the markets the equilibration takes place more in one year than under regulation in a place like New York has taken place in forty four years. What does it result in? Some people live in "prince-ier" accommodations at bargain prices, and everybody else scrubs around the edges for the marginal. You not only get regulation, you get Mao redistribution and two tiered systems. You deregulate, I can assure you this idea is going to take five to ten years to get thinks back. It's crazy. Deregulate these markets, within a week you will start to see businesses forming.
01:45:05 RS: Bad, bad, bad counsel. Bad counsel.
01:45:06 RE: Right counsel.
01:45:08 RS: You're assuming completely flexible wages and prices...
01:45:09 RE: No, no I'm not.
01:45:12 RS: Yes you are, yes you are.
01:45:13 RE: No. I'm not.
01:45:14 RR: Now, I'm going to defend Robert and say that, well the housing market works great when you leave it alone and I agree with that, but whether the whole macro economy works well on its own remains to be see. And we're going to debate that for a hundred years as whether the main source of business cycle fluctuations for the last hundred years is due to government mistakes or private errors.
01:45:32 RS: Only, only in the United States is it, is there a majority that believes it's due to government mistakes. Now that may be, may be...
01:45:41 RR: May be something to be proud of! Thank you!
01:45:44 RS: It may be something to be proud of, maybe there's a cultural difference, and, uh...
01:45:46 MM: We have a particularly bad government.
01:45:49 RS: Or, well it may be that you have a uniquely bad government. I don't believe the latter is true. I think there are differences of perception.
01:45:51 RE: No, I also think that you mention flexibility, one of the most striking features about the [?] economy is essentially the continuous adjustments of prices in market after market, given the improvements of technology. Labor markets are always a little bit more sticky, but there's a reason for that. It's not that they're sticky stupid, they're sticky smart. If you have a long term contract, essentially to keep a stable raise, and you have movements up and down it, they cancel out over periods. So you don't want to have the movement because it's a transaction cost without a gain. But if you look at day spot markets for labor, those things do fluctuate very rapidly. And so I think that the point here is that technology has undermined the Keynesians' assumptions that the rigidity is in some sectors of the market and not in others. And in fact if we just let this thing go a little bit more free, since there's more gains to information when you can actually fluctuate prices you will see a greater sophistication, through there intermediates, in making these markets work.
01:46:52 RS: Can I tell you a story on that very point? In 1981, and it goes back, I mentioned Margaret Thatcher at the beginning of my talk. In 1981 there was a big inflation rate in the UK. It had gone up, it was over 20%, and the government had a policy of eliminating inflation. How was it to be done? And they actually developed something called a Medium Term Financial Strategy, which is that year by year they would aim to reduce the rate of growth of the money supply. And they thought, expectations would adjust, five year program. And Hayek wrote an article in fact, he, this was his private advice to criticizing that gradualist strategy. He said it would never work because it would be derailed on the way. What you have to do, he said, is to cut the money supply to zero in one year. What would it mean, he said, that would be 50% unemployment, but it would only last a year. And after that you would resume in a much healthier way. Now governments didn't take his advice, and I think any politician that had attempted to do so would not have been fit for elective office. Which is, and the reasons they wouldn't, no one would take the political risk of having a year in a large country in which 50% of the work force was out of work. And there's a bit of stickiness there, which would account for it, what you call stickiness, a bit of stickiness in wages. And therefore, you have to be gradualist about this, and you have to see the world as it is, not the world that the Chicago Law School tells you it should be.
01:48:43 RE: Well NYU now, but no, that's not what, that's not what we're telling you. We're telling you...
01:48:48 RS: Sorry that was a cheap shot.
01:48:50 RE: I know it's a cheap shot, but you're forgiven. When you start doing this it's a question of what the optimal glide path is. And you know, one of the things that you say when you have to do it gradually, there's not a unique gradual solution. It could be one year, two years, three years and five years, and this is the trade off. The slower you do it, the nicer the adjustment's going to be. The longer you take, then in effect what happens, is the greater the political risk. So let me give you the counter example from New Zealand, where you're not talking about the money supply, but you're talking about tariff barriers and subsidies. The greatest achievement of that country was by Sir Roger Douglas in 1986 and I'll tell you how he described it afterwards. He said, "First I got rid of one of these darn subsidies and tariffs, and everybody said I'll never do it again. I said to hell with them, I'm doing it again, he said. I'm going after one after another because the moment I slow down, he said, the rats will seep jumping from the ship and we're trying to organize a counter-revolution." Now this is the difference. When you remove barriers to exports and imports, you don't have the 50% unemployment rate. These are unambiguously positive situations, so you can't take the prescription that you would apply to the macroeconomic stuff and apply it to the micro economic stuff, trade policy essentially, where in fact the opposite conclusion actually probably is more accurate.
01:50:08 RR: So, so to some extent...
01:50:10 RE: And you agree with that right?
01:50:11 RS: Yeah.
01:50:12 RR: So to some extent, our disagreements are micro and macro. But I, we've only got about five minutes left, and I want to ask one question of each of you. I want you to try to give a one and a half to two minute answer, I don't think we'll have time to debate it, but it's a key question we haven't touched on, which is: inequality and redistribution. A lot of people would say, they used to say, before we had the Great Recession: "Well capitalism's great, but it leads to inequality." I want to ask each of you: what is government's role, in your mind, in changing the natural results of inequality that will result from capitalism?
01:50:45 RE: Well I'm going first, and now, let me just state what the dilemma is. If in fact you have greater inequality from an initial position where both parties do a voluntary exchange for example, and made off, or made better off, or large numbers of people, all of whom improves, do you have a problem if you go from a society that starts with everybody at 10 and moves to one where one person has 11, 12, 13, 14 and all the way up. To an economist, or at least a classical economist, that's a Pareto improvement. But there are always troubles about the distributional side if it gets too extreme. And here is the way in which I start to think about it. First, worry about growth so that you can move the base up, at which point the need for support at the bottom diminishes because it's not a question of life or death anymore, it's a question of a black and white TV as against a color TV. And then what you do is to the extent that there are these things, you try to encourage the private sector, what Michael called civil society earlier on, to move that way, and in fact the great achievements of the 19th century on the laissez faire were the creation of these voluntary institutions, Stanford, John Hopkins, the Sloan Kettering Institute and so forth. And then after you've done all that, you try to figure out how you put a modest government program in place. And the danger with the third, is the first two are positive sum, the third one is negative sum, and the question to ask is can you confine it to modest levels? Unfortunately given the expansion that we've seen in Medicare, Medicaid, Social Security, unemployment benefits, and so forth, I'm coming around reluctantly to the belief that you can't seem to be able to control this stuff, and so politically I move to cut it back a little bit. Intellectually, I think it's probably a mistake if you start from an original position where in fact you don't have these programs already embedded.
01:52:28 RR: Mike? And then I'll give Robert the last word.
01:52:30 MM: I worry that our conception of social justice and the idea that inequality is somehow a problem, raise the sin of envy to the status of a social virtue. So if it makes me mad that you have more than I do, I presumably would need some basis for saying you don't deserve it, or that I do. And so the difficulty that we have is in not evaluating inequality and differences in income as a prima facie basis for state action, for having men with guns come to your house and take things that you have earned and giving them to someone else. On the other hand, it is certainly true that we act in a larger society than ourselves. Let me, let me pose this problem: suppose you and I engage in an exchange, we both are happier as a result. And I'm really good at this, and I can produce something where I can engage in this exchange with many people. The worrisome thing would be, it would seem that, people get rich in that setting, where they engage in many transactions that make a lot of people better off are going to be those who acquire more income. The problem is that when you look at the great wealth that's created by our financial sector, which is essentially a rent seeking circus, when you look at the disparity in incomes between people at places like Archer Daniels Midland that have managed to secure for themselves enormous monopolistic benefits at the expense of all the rest of us, I think that weakens my argument quite a bit. And so I'm concerned that once we take the step towards saying "it's not clear whether people deserve their incomes" and that's actually something that I concede, at what point do we say "and therefore the state is justified in redistributing it." I'm confused.
01:54:26 RR: Robert.
01:54:27 RS: Well, I don't think we're going to sort of disagree too much about this. I mean, one of, one of the arguments against redistribution is this: that if, if there's perfectly just allocation, if the market succeeds in doing that, that is if it succeeds in ensuring that every factor of production receives what it's worth, that is receives it's marginal product. What case, then, is there for the state to alter that? I mean [?] every fact of production gets what his, what his contribution to the economy is. So on what grounds should you seek to alter the allocation that the market generates? We're talking fairly perfect markets, but let's assume all that for the time being. I think on two grounds. One: that the people's, some people's marginal product, may not be enough to keep them alive. And therefore, you've got to, unless you're prepared or some of your population to die of starvation or other, other causes, you've got to support them. Now any support up to some basic standard of livelihood involves some redistribution. It must do, just arithmetically, it may not be your aim, but it must do. It's sort of, if you like, compulsory charity, which is done by the state because private charity doesn't do the job, enough of it. Secondly, you can through redistribution, increase people's marginal products just by making them more effective, participants in the labor party, and the whole of the economics...
01:56:18 RE: Wait wait, Labor Party or labor markets?
01:56:19 RR: I think he meant labor force.
01:56:20 RS: I meant labor force. Sorry, I don't actually support the Labor Party. I'm a cross-bencher, peculiar institution in the term the British upper has. You can improve people's marginal products because they depend, they depend on their educability, it depends on their home circumstances, on their social conditions, lots of things. And if you improve that, you actually give them a higher marginal product and make them more effective competitors. And that, I think, is an argument for distribution. The whole of the economics of human capital and human capital development, is based on this. And there you're not aiming, your aim isn't to redistribute, but your method has to involve some redistribution.
01:57:03 RR: I want to thank Butler University, Liberty Fund, you who came to help us create this afternoon, and I'd like you and all of us to thank our panelists: Michael Munger, Robert Skidelsky, and Richard Epstein. Thank you very much.

COMMENTS (40 to date)
Tommy writes:

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Greg G writes:

I enjoyed this very much. Especially the part where the bleeding analogy was shown to cut both ways. That one was well played on both sides. I guess one lesson is that analogies are no more reliable than economic predictions.

In my opinion this debate started off with a premise that is based on a false dichotomy. Chuck Williams framed public policy decisions as choices that should primarily be decided by the question of whether or not more or less government activity is desirable in general.

This precludes the possibility that we should decide such questions by looking at the specifics instead of relying on general principles. What if government should be a lot less active in agricultural policy but a lot more active in prosecuting financial fraud? What if government should be a lot less active in international military adventures but more active in maintaining roads and bridges? What if government should be less active in the prosecuting drug possession but more active in prosecuting violent crime?

The same people who insist that economics is all about the specifics of what happens at the micro level want to decide most public policy with one general rule about whether government action is good or bad in aggregate.

jonathan writes:

Only part-way through and I do intend to listen to the rest.

But Mike Munger put me off at the start with his big, pretty pig contest analogy. It is a complete straw man.

Who is rejecting capitalism without considering the alternative? It seems to me that the vast majority of economists (and others) are in favor of capitalism -- just not the crony capitalism we have and perhaps not the Ayn Rand type, either.

There are a few (perhaps including James Galbraith, it's a shame he couldn't make it) or Gar Alperovitz or Richard Wolff who do reject capitalism. But they do offer alternatives. Munger might not think they are practical (or attractive) but they are offering alternatives. He should criticize them, not dismiss them.

It is nice to hear Munger refer to capitalism as a big ugly pig, though.

Russ Roberts writes:

jonathan,

I understood Mike's metaphor to be more specific. People will often say there is market failure so we need to have government intervene. But will the actual government solution (and not the ideal proposed by an economist, say) actually be an improvement? Or will it be an even uglier pig?

I don't think he was talking about capitalism per se but whether we should use markets or government in a particular situation.

happyjuggler0 writes:

I'm going to channel my inner Scott Sumner (or at least try) and say that the alleged problem of "too much" saving is not a problem, at least properly understood, which is where the collective increase in savings is channeled into investment.

As Sumner would say, savings equals investment, and all the textbooks say that, so unless you think investment is bad, then saving isn't bad either. The US collectively radically under-saves (at least if you believe the government numbers), so we aren't suffering from too much saving, and thus it is a non-problem.

The mis-framed problem that Skidelsky (and at least one other person agreed with him, but there is no way I am going to go back and find out who) had with "too much saving" should instead be labeled as "too much hoarding". That is indeed a problem, at least when the central bank incompetently doesn't offset the fall in the velocity of money with a commensurate increase in the supply of money.

I also would like to add that while monetarism is dead, market monetarism is rising from its ashes like a phoenix. Don't target the money supply, or inflation, but instead engage in nominal gross domestic product level targeting (NGDPLT) of the market forecast of NGDP.

Alan Clift writes:

I found Chuck Williams comments very lopsided on the capitalist side. Starting with 'should be' bottom up, versus 'maybe' top down. Then for the capitalist side for Thatcher he use descriptors like 'Iron Lady', 'strongly' reducing..., and used 27 value for unemployment. Yet, he didn't called for 'more' capitalism. Then for 'larger' government, he gave no descriptors or supporting information, so it just sounded like unjustified whiners..

Shayne Cook writes:

At the 1:30:02 point in this, Mr. Epstein stated concisely the most profoundly important summary of the "problem" with the U.S., and U.S. economy:

"... you [economists] don't know whether deficits or austerity are going to be better, precisely because of the weakness in the [economists'] knowledge, but it's unambiguous that the removal of uncertainty and the restraints on labor markets, and the creation of monopolies, all of which are mid-size issues but there are so many of them that those things would help. And everything in this country has gone the opposite direction." Additions in brackets are mine. Also, I suspect Mr. Epstein meant to say the "removal" of monopolies, rather than the "creation" of monopolies in the transcript above, given his earlier comments.

It seems obvious right now that the U.S. Government is devoid of fiscal discipline. It has certainly been devoid of the ability to pass a Federal Budget for the past 5 years.

More than 3 years after the passage of the Dodd-Frank Bill, the U.S. Government is still devoid of a stable financial system regulatory framework - even a "bad" one.

Given the recent "delays" granted to businesses and insurance companies in implementing ObamaCare, the U.S. government is obviously devoid of the ability/willingness to enforce its own laws.

Given recent events in Egypt, and now in Syria, the U.S. Government is obviously devoid of anything that might be confused with a stable foreign policy.

Given the 2008 Bailout Bill (the worst abuse of Federal power I've seen in my lifetime), the U.S. Government demonstrated it is devoid of willingness or intent to enforce basic contracts law - or even worse, only selectively enforce it.

The list goes on ...

But the bottom line is, the U.S. and U.S economy has no shortage of U.S. Federal Government, but it has a critical shortage of U.S. Federal GOVERNANCE. A government, devoid of governance induces uncertainty.

Trevor C writes:

Great debate. I think that the scale of the role of government will remain a debate for the ages.

To quote CCR it seems like for those in power or trying to carry favor "when we ask how much should we spend the only answer 'more, more, more'".

The one thing that surprises me when talking recessions and depressions is that the depression directly after WW1 is rarely mentioned. From what I have read and listened to it had the potential to be severe but the government did the opposite of what we see today (they actually cut spending) and it was over quickly. I know one datapoint does not make a conclusion but it seems to warrant a second try.

Floccina writes:

I do not think that one can blame any of the effects of a monetary contraction on economic freedom as Skidelsky does because Government tool control of money long ago. IMO had we had free baking all along the monetary system would have evolved to a system based on bank notes backed not by gold but by all of the bank's assets. The money supply could then stretch to match changes in demand to hold the safest assets which would be cash.

David writes:

Overall, this was more of a fun than an informative conversation (I say that as a regular EconTalk listener, members of the less well informed hoi polloi may, however, find it exceptionally educative). My quick take was that Skidelski made good on his promise to be "the soul representative of common sense;" Epstein came across as someone attempting to shore up a weak argument with heaps of verbiage; and Munger just seemed off his game, not contributing much of substance. Russ showed that he is a gifted moderator by doing an excellent job of offering up support for the outnumbered Skidelsky and seeking a middle ground, when possible.

To me, Skidelsky's point, that some government intervention in the economy is required to maintain a Hayekian free society on the political side, is the crucial issue that libertarians must address. My belief is that the economically powerful have little to no interest in human liberty broadly defined. They are, however, very interested in expanding and maintaining their own liberty, especially the freedom to exploit the economically less powerful. Thus, they cash out their economic power as political power, in order to put the coercive power of the state in service of their own ends, to the expense of all others. The libertarian conundrum, then, is that to maximize human liberty broadly defined, we are required to limit the amount of economic power any one person can obtain.

[Many thanks for bringing to my attention the typo of "soul representative," which should have been "sole representative". It's been corrected now in the above Highlights.--Econlib Ed.]

Jack Abustar writes:

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Rufus writes:

I enjoyed this very much. Any time Richard Epstein is on, it is worth listening.

I did like the blood transfusion analogy, but with a few modifications. First, I liked the addition of taking blood from one arm and putting it in the other. There is only one body or economy, and the idea that shifting resources from the government arm to the private is bound to have consequences.

Also, I'd add that the govt money from the printing press is more like plasma. Yes, if we're in a traumatic accident, plasma is a very good thing, but it won't sustain life. The government's ongoing injection of plasma into the body eventually weakens it. The only way the patient is going to get healthy is if the natural process of producing blood cells restores itself. Ongoing intervention in the economy comes at a serious risk. And now, the doctors of the economy who've been pumping synthetic blood into the body are telling us that they need to turn it off. It's making the markets nervous, and perhaps it should. However, maybe they're finally realizing that we can't use a short-term fix to produce health in the long run. Would Keynes have supported 5 years of intervention?

Remember, until recent history, much of medicine was iatrogenic. And, as Russ pointed out, economics is worse than medicine as the knowledge does not appear to be cumulative.

Don Rudolph writes:

One thing that might be a point of agreement is that governments can theoretically and do in reality differ greatly. While none of them may be unicorns they may as different as draft horses are from cats in their ability to pull loads. While some governments do nothing right, others are made of reasonably intelligent and non corrupt people. The role of government should be debated with this in mind. Second, how do we structure government so the incentives lead to a more responsible government that can handle its role with some efficiency.

I liked the comment about the blood transfusion from the right arm to the left. That of course would not make sense. To go with the same metaphor, if the doctor knew a patient would occasionally loose large amounts of blood it might make sense to bank blood for some future need. Take it from the patient when they are healthy and give it back when they have experienced a dangerous blood loss.

I agreed with Mike Mungers point about envy to a point. I think in a functioning society envy must be overcome. I think if he believes it is not a reality however he is now the one who believes in unicorns. A society where inequality is too great is one on the edge of revolution. I would first try to get rid of rent seeking to make society more equal and then transfers that require effort on the part of the poorer party to be a benefit ( education subsidy). Let us agree that the value of economic equality is a personal taste. How much cost is worth how much benefit will vary between individuals. To argue what the right ratio is, is like arguing which is better pickles or ice cream.


Roman Lombardi writes:

When Sidelsky had said "Since you're trying to persuade us that so soon as one moves an inch in the planning direction you are necessarily launched on the slippery path which will lead you in due course over the precipice", it reminded me of another podcast

Don Boudreaux: One of the major--the major--and continuing misperception of Hayek is that Hayek--here's misperception: Oh, we can't take Hayek seriously because Hayek said the moment you have any untoward government intervention you are on a road to serfdom and you can never turn back.

Russ: A slippery slope that just slides into--and since that didn't happen or hasn't happened yet in America, obviously the book is wrong.


Boudreaux: All I can say is people who say that about Hayek have not read the book or have not read the book carefully. And they certainly have not read Hayek's many, many subsequent protestations

Don said it better than I could.

William B writes:

This is a very frustrating debate. The so-called proponents of capitalism have serious reservations about their own beliefs. Astonishingly, the 2008 financial crisis gets blamed on a lack of regulation and oversight, and the Federal Reserve barely gets mentioned! A good listen, but very disappointing.

William B writes:

It is odd to me that Keynesians will claim that the financial crisis was caused by "capitalism run wild" and an over-leveraging by the private sector, ignoring the incentive effects that low interest rates provided to fuel the boom that ultimately led to a bust, but when they prescribe policies for the recovery, they admit that low interest rates have a large effect on incentives to go out and spend, i.e. over-leverage!

SaveyourSelf writes:

Two Econtalk podcasts in one week—Bonanza! And this one two hours--what great fortune! This debate brought together an optimist, a skeptic, a mentat [see “Dune”], and a storyteller—what a great cast! Russ did a fine job setting up the framework for the discussion and keeping the panelists loosely within it.

I really liked that Skidelsky was from outside the USA and brought some of his experiences to the table.

Russ’s point about redistribution being like a transfusion from one arm to the other was great theater.

Munger’s anticipation of nearly every one of Skidelsky’s arguments with his prescient “give the award to the unseen pig,” was hilarious.

Skidelsky’s arguments were delivered beautifully but hid many flaws. Most of his arguments seemed built on the assumption that “capitalism is inherently unstable.” This is false. Capitalism is not a building. It can’t fall. It cannot sink in the ground. “Unstable” is an inappropriate and intentionally misleading analogy. Capitalism is an organic system, which Munger mentioned. Thus, Capitalism is more like a pool of water than a scaffold. It adjusts immediately to the most stable configuration possible the very instant a change occurs to the container around it. Now it is true that some markets have viscosity—which Epstein termed “stickiness”—but “viscosity” is not “instability”. What Skidelsky was actually saying—given his arguments that followed—is that Capitalism is inherently “unpredictable”! Which is a somewhat-true statement and one Russ makes constantly. Epstein intuited Skidelsky’s real meaning and countered with lists of the many features of economics that are predictable--notably the behavior of monopolies and the conditions which foster monopolies—which made for great sport.

Skidelsky went on to argue that because Free-markets were “unstable”, the government was necessary to intervene to make them stable. He gave an example where the government could create a constant demand for all markets so that the unreliable demand shifts in a market couldn’t cause damage. He is proposing, therefore, that the government act as a monopoly-purchaser in every market. That's straight up Communism and we already know what happens to Communist countries. [Spoiler: Very unstable outcome.]

That said, Epstein gave some ground to the monopoly argument when he said that Monopoly-solutions are reasonable in some limited circumstance. I was glad that he fleshed out his position more in this discussion than in his books but it still made me uncomfortable to hear it. I think he is wrong. Additionally, I suspect that he thinks he may be wrong given some of his admissions at the end of this debate and some of his self-reflections in his books. I think Munger was right to call him out on this point during this debate.

Separately, Richard Epstein's contributions on the length of time that short term economic adjustments take in the real world [1 year seemed to be the consensus] was really useful.

Two of Skidelsky’s other arguments were excellent and deserve further rebuttal. The first is that, in a society where everyone earns what they contribute, there are some who may not be able to earn enough to remain alive. He is correct and he thinks that is a solid argument for government intervention. I disagree. I think it is an argument for families, church groups, and private charity. His other good point was to note that there are radical differences in rational policy choices when economists’ focus on the long and medium term but “ignore” the short term. I suspect this is why he is not afraid of monopoly solutions. If you only consider the short term, Monopolies don’t have much in the way of negative impacts. It is in the medium and long term that they behave like cancer.

I enjoyed this discussion so much. Thank you for hosting it and posting it. Thank you for getting these great men together in one place.

Greg G writes:

Now Hold on there SaveyourSelf. You are defining away the problem rather than addressing it.

This debate was about the value of Keynesian policies in dealing with economic problems. For Keynes, the biggest economic problem was prolonged periods of high unemployment. For Keynes, the problem wasn't that these periods were unstable. It was that they WERE stable, but not in the good way. They were stable with periods of unemployment that were way too high for way too long. That in turn increased the danger of totalitarian responses that really could topple Capitalism.

During the 19th Century, the government made no attempt at all to manage aggregate demand. That century (whose economic policies you are so nostalgic for) was punctuated by quite a few harsh depressions with very high unemployment. And this was despite the fact that employment numbers were held up by multitudes of small farmers who were regarded as employed even as they were failing.

Now if you want to simply define Capitalism as an economic system that is always stable, that might work as a tautology (if you can convince everyone else to start using the language differently) but it won't do anything to address the unemployment issues being debated here.

The reliance on the "animal spirits" explanation by Keynes was a bit of hand waving. That was a description not an explanation.

It was Hyman MInsky who showed why Capitalism is unstable even without government screwing it up. It was Minsky who showed why stability itself is destabilizing in a Capitalist system because it rewards risky finance.

The longer a stable economic expansion continues, the more those who have indulged in the riskiest types of finance tend to prosper. Their methods tend to become regarded as the best methods. Of course, as overall leverage grows, the whole system becomes more and more vulnerable to a sudden crash. Note that no government action is required to make this happen. In fact to some extent, it requires the absence of government prohibitions on risky finance.

As Tyler Cowen noted in a recent MR post, there are some striking similarities to Austrian Business Cycle Theory here. Both want to emphasize the dangers of credit expansion.

I would love to hear an EconTalk podcast on Minsky sometime.

AJ Nock writes:

This was a very interesting discussion which I enjoyed listening to. However, there were two points that were blantantly missing in the discussion.

First with regards to the recovery and why it has been so slow: I don't believe anyone mentioned the large public and private debt that still overhangs the economy. There has not been any significant deleveraging to speak of. Most of what has occurred has been foreclosures and the Fed has shifted a large part of the risk sitting on banks balance sheet's to the Fed's balance sheet. Good luck to the next Fed chairman in unwinding the balance sheet! Very funny guys these central planners.

Second there was very little mention of the huge structural problems we have in our economy. Borrowing and spending is not a sustainable path: either for the government or for the consumer. The attack on austerity confuses cause and effect with a public policy choice. When you spend beyond your means there is belt tightening that has to occur afterwards. The funny money printing solution is nothing more than transferring the cost on those that can least afford it (thus the rise in income disparity). Thus Banksters' bonus are back at record levels while the little guy is getting squeezed. I did appreciate the unicorn story and Skidelsky being call out for placing too much faith in the politicians. I was curious why his defense (it's the army of public union bureaucrats with no incentive for efficiency and thrift and no punishment for failure) are the true unicorn was left without a response. Keynesian economics is like a zombie, it had a stake driven through its heart in the 1970s and yet it is still walking around causing disaster after disaster. Keynes was the master of hiding disproven economic theories in flowery, convoluted verbiage. Henry Hazlitt demolished "The General Theory.". Perhaps this explains the question of why the science of economics has not made significant progress in the last 80 years: because it has become politicized with vested interests hard at work pushing their brand of dogma.

SaveyourSelf writes:

@ Greg G

“For Keynes, the biggest economic problem was prolonged periods of high unemployment.”

Ok.

“The 19th’ Century…was punctuated by quite a few harsh depressions with very high unemployment.”

Ok.

“Now if you want to simply define Capitalism as an economic system that is always stable…”

I would phrase it: “Capitalism is an economic system that always seeks stability” or “Markets are perpetually changing and are—therefore--infinitely unstable if considered separate from the environment within which they operate but they are optimally-stable—by definition—when considered with the environment within which they operate.”

“It was Hyman MInsky who showed why Capitalism is unstable even without government screwing it up.”

I mean no offense, but I maintain that it is inappropriate to use the word “unstable” in your sentence. The fact that markets shift and change in response to new information is not a sign of instability. Those shifts and changes are REQUIRED to MAINTAIN STABILITY, which is perhaps the largest oversight in the understanding of Keynes, Sumner, Skidelsky, or any other advocate of monopoly central planning. The more they try and eliminate market adjustments, the more they interfere with the markets natural progress towards equilibrium—ie. employment. Keynes is his own worst enemy.

“The longer a stable economic expansion continues, the more those who have indulged in the riskiest types of finance tend to prosper. Their methods tend to become regarded as the best methods. Of course, as overall leverage grows, the whole system becomes more and more vulnerable to a sudden crash.”

Yes. You are right that leveraged bets on future outcomes carries risk. You’ll get no argument from me on that point. But I would add that finance-markets, left to their own devices, are self-stabilizing too. As debt burden increases-->the risk of default increases-->so lenders increase their interest-rates-->which slows down borrowing--no government required. It is true that sudden and unexpected adjustments will happen even under ideal conditions, but that is the nature of risk. And it is not possible to reduce risk to zero.

P.S. Thanks for pointing me towards Minsky. I have not heard that name before.

Greg G writes:

SaveyourSelf

We are each using the word "stability" in significantly different ways. I am using it in the way Minsky did. For him an unstable economy was one that might relatively suddenly go from expansion and full employment to a sustained period of high unemployment and production well below capacity as the result of a financial panic.

No one is arguing it is possible to reduce risks to zero. No one is arguing that markets don't continually change and adjust. The argument here is that those changes and adjustments can be, in some cases, too slow to avoid periods of prolonged high unemployment. We won't agree on what the best policies are or how the counterfactuals would play out but I'm pretty sure we can agree on what the arguments are.

Unless I am misunderstanding you, you are arguing that as overall leverage increases in a healthy economy, investors naturally become more cautious. This is the key spot where Minsky sees things differently.

He is saying that as leverage increases in a booming economy investors become LESS cautious. They see that the most successful people are those who have leveraged up and they increasingly want to mimic the success that they see. This increases overall leverage until the system becomes fragile.

As far as I know, every financial bubble in history has seen increasing leverage as it progressed. How could you have a bubble otherwise?

Of course the Austrians always come in afterwards and diagnose the problem as interest rates that were kept too low just as surely as every chiropractor finds a spinal subluxation. What they can't explain, as Tyler Cowen has pointed out, is why investors are so easily fooled by low interest rates.

Now you might ask then why they are so easily fooled as to the dangers of leverage. I think the key to understanding that is liquidity. Any asset that becomes the focus of a bubble becomes very liquid. Nothing makes lenders feel more comfortable than highly liquid collateral. When the financial panic comes everyone is shocked at how fast liquidity disappears.

I recommend Minsky's "Stabilizing An Unstable Economy." It is very readable and free of unnecessary jargon. I should warn you that Minsky does favor some interventionist policies you won't like but I don't think that they necessarily follow from the acceptance of his theory of the business cycle. You might choose to accept one and not the other.

erik writes:

this was an interesting podcast. it would be (quite) difficult to come to a conclusion on the topic given for this seminar, primarily because: the definition of a "good society" was never discussed nor adequately defined. i can think of why a market or government solution would be appropriate, but it would ultimately depend on what my definition of a good society was.

Ralph writes:

Fantastic ! Love the transfusion analogy Russ. I'm looking into Epstein's books to decide which to read first.

This was a wonderful discussion dense (in the good sense) with stimulating arguments and humor with a purpose !

Please have similar discussions in the future.

Taylor Davidson writes:

There's was a point about civil order/disorder that Robert Skidelsky raised repeatedly but was left relatively unaddressed by Drs Munger and Epstein. As someone who is an ardent admirer of the latter gentleman, this is still an area which I believe is under-recognized among conservative, liberty leaning and libertarian minded people. One notable story that was seemingly left in the table was that of Hayeks suggestion of 50% unemployment, but only for one year while the market corrected. I think it is hard to argue that this policy wouldn't have led to chaos and political violence.

My suggestion is that a discussion of the line between maintaining civil order and maximizing personal freedoms and market efficiencies would make a great episode for EconTalk.

As always, my thanks for great work and immeasurably valuable content!

- Taylor (@yipeedog)

SaveyourSelf writes:

@Greg G
"He [Minsky] is saying that as leverage increases in a booming economy, investors become LESS cautious."

  • I have an inkling of what Minsky may be suggesting. I have noted that there is a peculiar susceptibility in human beings to fall for Ponzi schemes. The pattern you described where lenders become less cautious even as overall leverage increases fits the Ponzi scheme pattern, as do its outcomes. This trend reeks of a Heuristic.

“Any asset that becomes the focus of a bubble becomes very liquid. Nothing makes lenders feel more comfortable than highly liquid collateral.”

  • I find no flaw in your idea here. In fact, I think it is brilliant.

"The argument here is that those changes and adjustments can be, in some cases, too slow to avoid periods of prolonged high unemployment."

  • Greg, the unemployment IS THE ADJUSTMENT. The labor was mis-allocated by the faulty price signals created by the credit bubble. People MUST be unemployed so that they can be Re-employed in some productive part of the economy. Unemployment, therefore, is not the problem, it is the solution to the problem. The only question is why that solution takes longer now than it did in the past. Dr. Epstein spoke directly to this point during this debate:
The one unambiguous thing that has taken place is the enormous increase of the unemployment rate both in Europe...and the United States. And we know what the causes of those things are, and we know what the cure for that is. This is a situation in which the level of direct regulation on voluntary exchange has increased exponentially since earlier times. It's of course between family leave laws, sick leave laws, minimum wage laws, bad labor standards act, anti-discrimination laws, union protections [unemployment insurance, FMLA] and so forth, special gimmicks here there and the other place. The unambiguous prescription is not to try and guess the monetary aggregates...but to simply remove all of that stuff and get yourself back to a situation where labor markets are much freer. That will have some effect on the employment rates, and that will improve everything else.

P.S. I bought the Minsky book. It is in the mail. Thank you for your recommendation.

@ erik Good point.
@ William B Excellent point.
@ Floccina I suspect you are right about the free banking system.

don rudolph writes:

Ideas for future discussions:

What kind of structure would give government officials the incentives to create good policies.

A discussion around societal values how many goals of government may appear to be self evident but are relly a matter of taste. Should government be in the business of social engineering? How liberals and conservatives are both (guilty) of social engineering.

Ralph writes:

Munger's "cutting" the patient was reversed to Skidelsky's "cutting" the physician(government).

Munger missed the opportunity to point out that Skidelsky's response to the "cutting" analogy assumed government was the only appropriate guarantor of economic stability.

Skidelsky also blatantly ignores the market for loanable funds that through a 'mystery of the transformation' turns savings into investments. That is why he fails to understand or accept Epstein's point about the origins of the financial crisis later.

That deliberate blind eye to the loanable funds market is possibly the cornerstone of the Keynesian idea: since Keynesians ignore the way the market turns savings into investment, they can't see that the 'blood' being transfused by the government into the right arm is just being taken from the left arm of the same patient. Thus, to Keynesians, government seems to be performing a miracle - creating value out of nothing, and magically envigorating the economy - except the patient doesn't actually get better and they are deliberately ignoring the reason why.

I loved Epstein's distinction of the redistributive function of government vs. the broad 'easing of friction', and the fact that that 'lubricating' the economic machinery increases efficiency and should be the primary goal. It's a very different thing from encouraging a sector (greasing palms) - and I wish I could find a better way to express it - not 'management' or just 'de-regulation'. And it's not just benign neglect; it hinges on what Epstein called "broad" policy - rules commonly applied and stability that allows predictability and planning.

More of this Russ. You could be the new Buckley Firing Line. The most intelligent discussions around, but not too snobby to provide accessible explanations for us non-economists.

Ralph writes:

Russ, for a guy who wrote a great book about the 'unseen' effects of bad policy (The Choice) you seem to have too little confidence in your own conclusions. Being correct is not hubris. Maybe you were just constrained by your referee function.

Seth writes:

Very enjoyable.

I'm curious if Skidelksy has a response to Russ's adaptation of Munger's 'drawing blood' analogy.

Also, Skidelsky mentioned several time how unstable markets can be with government to do something.

I believe Sowell has made some references to the length of recessions before government added 'managing the economy' to its charter and after, and I believe they were relatively shorter before. True?

Russ Wood writes:

Very interesting and entertaining.

As usual, Russ did an excellent job as mediator, even when he stepped out to advocate a position.

I thought that Lord Skidelsky did a better job than I expected, but he also was not as extreme as I expected. His turning Mike Munger's blood-letting analogy to his/Krugman's purpose was clever, although Mike had an excellent response.

The two best points of the day were made by Richard Epstein and Mike Munger (paraphrasing from memory):

Epstein: Russ is correct, economists really don't know much about the size (and sometimes the direction) of what will result from macro interventions, so let's focus on all the regulatory and other micro problems that we've imposed on our economy.

Munger: What politician do you trust to make decisions. I wish he'd added, in his last 2-minute answer, "Which of the politicians who created these monopolistic, rent-seeking distortions of income do you trust to reallocate income or wealth in our economy?"

Bogart writes:

I disagree with the three parts of interacting humanity: government, market and society. Society is the market as almost all human interaction deals with exchanges of scarce things of value regardless of the use of money.

I was expecting a better hammering of the point that the two mechanisms of Keynesian Economics amount to doing nothing but stealing directly through taxes and debts, or stealing through the devaluation of legally tendered money. Russ brought up the former issue strongly but was not backed sufficiently by those on his side. I did hear anyone as forceful as Russ on the critical topic that the artificial creation of legally tendered money is simply theft.

I was also expecting to hear the point that government can not be a forward thinking institution not just because of incentives. Government is not subject to the pricing system. Without the pricing system government can not get the knowledge necessary to make future plans and can not evaluate the use of scarce resources.

Greg G writes:

SaveyourSelf,

You are proposing to define all unemployment not caused by government as a necessary and ultimately beneficial market correction.

This fails as a definition because language is entirely conventional, and once you get off this site, very few people accept your definition.

It fails as an argument because, well, it is not an argument. It is a tautology. If you want to fashion it into an argument you will need to explain the prolonged periods of high unemployment in the 19th Century depressions when government did not attempt to manage aggregate demand or the money supply or the delivery of a social safety net.

SaveyourSelf writes:

Greg G,

I think you are calling the economic-model-of-labor-and-unemployment a “definition” and a “tautology.” I don’t think either is correct. It is just a model. I thought it was the standard economic model of the labor market. I wasn’t trying to cut any new ground. Regardless, it is very useful for understanding unemployment both in the present and in the past. You specifically took issue with it because you did not feel it explains, “the prolonged periods of high unemployment in the 19th Century depressions when government did not attempt to manage aggregate demand or the money supply or the delivery of a social safety net.”

Long Depression of 1873-1879 http://en.wikipedia.org/wiki/Long_Depression.

According to this Wiki, the Long Depression was produced by debt-financed speculation in railroads, a debt-financed civil war, and a contraction of the monetary base as the US tried to switch back to the gold standard from green-backs [civil war currency].

So, although there was no Government social-safety-net to slow recovery, moving from a gold standard to fiat money and back is certainly a central-government attempt at managing the money supply and, by extension, aggregate demand.
Additionally, the 19th century was not the 20th century. Economic comparison between those two centuries, especially in regards to labor, is like comparing tomatoes to plumbs. Both are fruit, but they are not similar. Consider that the first car was invented in 1886 and the telephone was first patented in 1876. So these technologies--which are integral to modern labor mobility--where absent during the period in question. Thus, any large shift in labors’ employment during the 19th century would necessarily creep at the pace of donkey’s, horse-drawn wagons, the postal system, word of mouth, and--occasionally--steam-powered trains.

Rajan C writes:

One of the best podcasts on Econtalk, well done to Russ Roberts. It is great to have people on both sides of the argument in order to appreciate the issues. I wish there were more like this.

I've been listening to all of Econtalk a third time starting from 2006 and I have come to really admire Russ. Unlike most of us, he is very open minded, a true intellectual. It is clear listening to his views change over the last seven years how he has adapted his views with changes in circumstances and facts (or at least this is my perception). I wish I could be more like him.

chitown_nick writes:

SaveyourSelf -

Sorry to butt in so late with your discussion with Greg G, but I think both your points are quite interesting. I also am struck by one point neither of you has mentioned thus far - where the impacts of the various stability / instability lie.

As you (SyS) have described it, unemployment is the necessary correction for an over-leveraged economy, and in the end, is a good thing. As Greg G has responded, sudden large-scale unemployment is a thing to be avoided as it risks society itself.

The friction may also be described in the following way: Viewing the economy as a whole, yes: unemployment is good to free up resources (labor) for more effective use elsewhere. However, as Russ points out many times in many podcasts including this one, there is no such thing as the economy, except in the abstract. What there is is a collection of individuals, connected via family, social, and economic relationships. The poor judgement of some of the most economically powerful of these individuals - investors, bankers, lords of finance - can result in an over-leveraged situation, and a market crash. This can result in a "correction" of massive unemployment - effects that go beyond the investor's losses and spread to the livelihood of many of the less economically powerful members of the labor force. Essentially, the big house at the top of the street just opened the septic tank and ruined the land value of his own house and all his neighbors' to boot. In this way, a leveraged system (capitalist or public-policy driven) is unstable from the point of view of the individual whose best asset is their ability to work. This asset's value drops precipitously based on the actions of someone else.

Finding a solution that minimizes government distortions (which encourage this ill-fated leverage), and provides a safety net for those worst affected by potential swings (some minimal re-allocation), and dis-incentivizes natural over-leveraging (bank capital requirements, or other suggestions) seems a reasonable path forward.

Daniel Barkalow writes:

I think Munger's analogy breaks down at the point where he has the patient die; we've got lots of examples of economies that have died (e.g. Zimbabwe recently, or the Weimar republic), and the US doesn't look at all like that. Likewise, the treatment (in the US, anyway) is obviously not something significantly short-term harmful, like bleeding. I'd suggest that the analogy should involve something like radium-water or willow bark (~=aspirin), where the treatment doesn't kill the patient immediately, doesn't address the real problem (which the doctor doesn't understand), may or may not improve the odds of survival (e.g., as a fever reducing agent), and may or may not cause other problems (e.g., cancer) eventually. The patient is bedridden for an extended period of time, and we're arguing as to whether she'd be up and about by now if she'd had more or less patent remedy. We didn't kill her, and (probably by chance) the infection didn't either. She may not grow up to be as healthy as if she'd been treated by a knowledgeable doctor, or even if she'd gotten no treatment at all. But it's disingenuous to talk as if we know the treatment is bad on account of the patient's death, when, in fact, the patient has not died and doesn't seem to be in critical condition currently.

SaveyourSelf writes:

@Chitown_nick

"I also am struck by one point neither of you has mentioned thus far - where the impacts of the various stability / instability lie."

  • My position is that stability/instability are misleading and inappropriate terms when discussing market corrections because the market corrections that are usually labeled "unstable" are, in fact, the adjustments necessary to keep the system in equilibrium--ie. stable.

"As Greg G has responded, sudden large-scale unemployment is a thing to be avoided as it risks society itself."

  • I don't think large-scale unemployment risks society itself, but it is unpleasant. I would like to find ways to avoid large scale unemployment if possible. Next weeks guest, Nassim Nicholas, argues in his book "Anti-Fragile" that the way to prevent such large scale events is to allow more randomness in the system. He explains that this approach is equivalent to embracing regular small earthquakes in order to prevent the buildup of energy that powers very large earthquakes. He points out that central planning [monopoly-government] solutions create just the opposite outcome--few small aberrations in exchange for occasional, catastrophic, large events. The way he proposes to achieve his desired outcome is through decentralization of decision making authority.

"Unemployment is the necessary correction for an over-leveraged economy."
  • Paying down debt is the necessary correction for an over-leveraged economy.
  • Unemployment, on the other hand, is the necessary correction for an economy which has a large portion of its resources devoted to losing endeavors. Leverage is not the problem. Leverage is one of the "tells" that misappropriation is possible and catastrophe may be coming.
  • The problem is not the leverage. The problem is people's misunderstanding of price signals and the absolute importance Prices play in determining individual rationing decisions.
  • Normally price reflects an enormous amount of data about supply and demand in a particular market AND the supply and demand in all other markets by way of the currency-market. Prices are expressed as simple numbers devoid of any labels. When a change occurs in the supply-demand relationships, the prices USUALLY change accordingly. People get used to the association between meaningful shifts in supply and demand showing up as shifts in prices. The trouble arises when something replaces prices with made-up-numbers or numbers that reflect something different than meaningful supply-demand relationships. When people don't realize that a substitution has occurred, they behave inappropriately by behaving the same as always.
  • Consider when the government prints money in secret or when large numbers of private citizens suddenly become eager to loan out their savings (following government increases to taxes on savings or government subsides on lending or government guarantees against default.) In all of these cases, the shifts in the money supply overwhelm any meaningful price information, leaving only useless numbers where prices had once been. Ignorant that the numbers no longer convey useful information, people in ALL markets react to an increase in the numbers as if they were actually increases in demand: they open new businesses; hire new employees; move their homes and families to new places; invest in new areas; and take on new debts. That last bit--taking on new debts--is important. Leverage increases naturally in response to inflation. People think they are investing money to meet the demand-signals. Except that they aren't demand signals. They are just changes in the amount of money in circulation. All those "investments" are guaranteed to fail because the demand they were intended to satisfy isn't there. It was an illusion of math.

"The poor judgment of some of the most economically powerful of these individuals - investors, bankers, lords of finance - can result in an over-leveraged situation, and a market crash."

  • I hope the model above makes it clear that the over-leveraged situation is not the result of the poor judgment of investors, bankers, and lords of finance. It is the result of the deliberate actions of the government using their monopoly powers to create changes in the currency for their own benefit. Those actions result is misappropriation and misallocation of resources in all markets by all market participants who do not recognize when prices are no longer tied to meaningful changes in supply and demand.

"Finding a solution that minimizes government distortions (which encourage this ill-fated leverage), and provides a safety net for those worst affected by potential swings (some minimal re-allocation), and dis-incentivizes natural over-leveraging (bank capital requirements, or other suggestions) seems a reasonable path forward."

  • Your first conclusion is dead on target. The second and third conclusions directly contradict your first by legitimizing government distortions.

Luke J. writes:

As one who ranks Richard Epstein near the top of EconTalk guests, and who disagrees with Robert Skidelsky's viewpoint, I was surprised to find myself nodding in agreement with Skidelsky at least twice while listening to this conversation.

Jim Feehely writes:

Hi Russ,

Thank you for making this discussion available - very interesting and stimulating.

It demonstrates one crucial point. Ideology and belief will never be the answer. Each participant proceeded from an identified ideological framework and then made relatively generous concessions to other opinions and ideologies. The 'good society' part of the topic ensured that the dogma of free market capitalism did not drive the participants into divisive ideological positions. It is that approach to political economy we must take, but we are fixated on the conflict of ideology.

If you compare the generous accommodation of other views exhibited by all participants in this discussion with the comments on Taleb's 'skin in the game' recent episode, you can see the stark difference between the intellectual flexibility of all participants in this debate with the refusal of many commenters on Taleb to concede Taleb's advocacy of 'sufficient skin in the game' at the point it challenged a certain rigid view of why the commenter inherently presupposes that all that is capitalist is good. The readiness of what seems like the majority of Americans to equate patriotism with free market ideology will continue to deny many in the US the 'good society'.

Regrettably, we here in Australia seem to be collectively determined to go the same way.

Regards,
Jim Feehely.

Jim Feehely writes:

Hi to all the correspondents in relation to Hyman Minsky,

I suggest that it was a bloke called Karl Marx who best identified the inherent instabilities of capitalism. And what Marx identified as the mechanisms of capitalism still hold true even if Marx caused the outbreak of neo-classical economics to explain away his observations and theories.

Labour is still exploited, even if you invent a theory of surplus value based exclusively on risk-taking.

Capital still seeks its own growth. Why else is conventional neo-classical market economics so obsessed with growth? I know the answer will be the 'trickle down effect' claimed to explain the increase in the standard of living. But that has not been the case in the last 30 years. Virtually all growth in the last 30 years has been achieved by credit and that has got Europe and the US to where they are today, carrying debt that is impossible to repay.

Society is still very much defined by its means of production and who owns those means.

Instead of dismissing Marx on the basis of his predictions, we should be re-examining his theories in the light of a truly distorted world. More capitalism will destroy the planet. And please don't give me any anti-socialism rhetoric in response to these points. I do not believe socialism is the answer to capitalism's problems.

Regards,
Jim Feehely.

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