The Ironic Origins of Libertarianism

From I Chose Liberty: Autobiographies of Contemporary Libertarians

“some liberty-loving soul had donated a copy of John Hospers’s Libertarianism: A Political Philosophy for Tomorrow (1971) to my local public library. While I doubt I would find Hospers’s book impressive today, at the time it was a thrilling read. I had never heard the “standard libertarian arguments” before. (Bryan Caplan)

 “When I was about thirteen, I decided I wanted to read all of the good books in the public library. …. At the public library I found Ayn Rand; my grandmother also recommended her to me. Capitalism: The Unknown Ideal had a big influence on me, as did Atlas Shrugged. Hayek and Rothbard followed shortly thereafter.” (Tyler Cowen)

“I had some unusual early influences. In the eighth grade I borrowed an H.L. Mencken book from the city library. I couldn’t understand why everybody didn’t think and write like he did. Also, I became enamored of the Barry Goldwater legend.” (Karen De Coster) 

“That experience led me to the public library and a host of books on economics, one of which was a book whose table of contents I could not understand and which had never before even been checked out: Mises’s Human Action.” (Robert Formaini) 

capitalism, institutions, and history

Related to yesterday’s post, here are a couple of reviews of Geoff Hodgson’s Conceptualizing Capitalism by Christian Barrere and Mehmet Kerem Coban.

Speaking of Geoff Hodgson (editor of the Journal of Institutional Economics), I just got an email from Cambridge University Press letting me know that BRADLEY A. HANSEN and MARY ESCHELBACH HANSEN (2016). The historian's craft and economics. Journal of Institutional Economics, 12, pp 349-370 was just published.

Is capitalism a useful concept?

Thanks to Tom Cutterham at the Junto for blogging about the Capitalism and Slavery session at the meeting of the Organization of American Historians.

I have been very critical of the “New History of Capitalism” NHC, which is the label that has been applied to much of the recent work in this area. Mostly, I have criticized it because it is bad history. The worst problems are that they tend to provide misleading historiography and simply make things up. The description of Beckert’s talk doesn’t do anything to alleviate these concerns.

It is particularly ironic that Beckert should point to “an active act of forgetting” since that is largely what he has been promoting. Rather than developing a truly novel argument, Beckert has simply tried to wipe out the work of earlier historians. The role of force has been prominent in the work of numerous scholars from Carlo Cippola’s Guns, Sails and Empire, to O’Rourke and Findlay’s Power and Plenty, and even Jared Diamond’s Guns, Germs and Steel. The use of force to maximize profits is the essence of Fogel’s analysis of slavery, which he repeatedly referred to as a dynamic capitalist system.  It is not just traditional economic historians that actively forgotten, John Clegg and  Peter James Hudson show how Beckert and Baptist also disregard the work of radical scholars.

The work of Edward Baptist is built on an even more misleading myth, the myth that he is telling the half that has never been told. Rather than responding to criticisms of his argument and evidence claims that people who disagree with him refuse to accept the legitimacy of slave testimony. Ed Baptist speaks for the enslaved, like the Lorax speaks for the trees. If you disagree with him you are denying the voice of enslaved people. The fundamental problem with Baptist’s claim is that the story has been told. Unlike the trees, enslaved people spoke for themselves. Charles Ball and Solomon Northrup don’t need to be filtered through Baptist. The half has been told. If you haven’t heard it, it’s because you chose not to listen until a professor at a prestigious university said it. Moreover, the economic historians that disagree with Baptist have not at any point rejected the statements of former slaves about the brutality of slaveholders. Their arguments are premised on the belief that enslaved people were brutally beaten to force them to work at maximum effort. Instead they argue that these accounts by former slaves to not provide evidence that increases in productivity were the result of improvements in torture that led to improvements in picking techniques over time.     

Even if the most prominent authors in this field were not doing really bad history, one can question the extent to which capitalism is a useful construct for analysis. In this regard, Caitlin Rosenthal’s attempt to define capitalism is an interesting development among new historians of capitalism and I am curious to see how it plays out. It is new development because to the extent that other historians follow her, I think it will force people to confront the more fundamental question: Is capitalism a useful concept for the analysis of societies?

Up to this point NHC have acted as if it is, but it is not clear to me that the work supports this conclusion. Beckert provides a good illustration of the problem. Beckert asserts that capitalism is not necessarily characterized by the things people normally associate with it:  wage labor, markets and contracts, property rights, and the rule of law. Sometimes it is associated with these things, but sometimes it is not. There are different capitalisms with different characteristics. But what makes a system capitalist as opposed to something else?  When discussing the expansion of cotton production in the Soviet Union, he explains that “Such recourse to the state in postcolonial and postcapitalist societies was not a return to the war capitalism of the eighteenth and early nineteenth centuries, but a sharpening of the tools and an enhancing of the methods of industrial capitalism.” (page 436) If the Soviet Union provides an illustration of industrial capitalism I’m left wondering if there is anything that is not capitalism. And if everything is capitalism what does the concept add to our understanding? Rather than using it as a tool, Beckert seems to toss the word capitalism in every once and a while, occasionally changing the adjective in front of it, to add a little flavor to the dish.  I think it is this sort of use of capitalism that prompted Lou Galambos to suggest that the NHC was primarily a clever marketing ploy.

Personally, I am skeptical of the extent to which capitalism can be a useful analytical concept. Economists, economic historians, and business historians do not seem to me to have had much success with it as a tool for analysis. Economics departments used to frequently have courses on Comparative Economic Systems, which were largely about comparing capitalism and socialism. Even before the fall of the Soviet Union and China’s turn toward markets these courses seemed to be running into a dead end. The differences among the capitalist and socialist countries often seemed more relevant the similarities. Economists generally turned to the analysis of specific institutions, rather than trying to classify entire systems.  It seems to me that much of the recent work in economic history has tended to undermine simple notions about capitalism. Things like individualism and private property seem to predate what had been thought of as the emergence of capitalism in England, and a lot of work since Pomeranz Great Divergence has challenged conventional notions about the significant differences between the West and the Rest.

I am not suggesting that historians abandon the study of capitalism. Historians can’t really avoid studying capitalism. “Capitalism” is a term that people have used for a long time to express their beliefs about certain kinds of economic systems since the early 19^th century (according to my very old copy of Raymond Williams Keywords). To the extent that ideas about “capitalism” have played an important role in shaping people’s thoughts and actions historians must study “capitalism.” But, at least for the most part, this hasn’t been what the “new historians of capitalism” have been doing. The NHC treat capitalism as an analytic concept. They write as if there is an objective thing called capitalism that by means of historical analysis they can make concrete statements about. 

Behavioral Whatever

I’m going to start a new discipline called behavioral physics. Unlike traditional physics, which assumes that objects just fly apart from each other, behavioral physicists recognize that a phenomenon they call “gravity,” prevents this from happening.  Or maybe I will create behavioral evolutionary biology based upon the concept of natural selection, rather than the assumption that everything just stays the same, which traditional evolutionary biologists rely on. The way a physicist or biologist would feel reading those sentences is the way that I feel most of the times I read about behavioral economics.

The latest irritation is an article from the New York Times about getting doctors to stop over-prescribing antibiotics. Getting doctors to stop over-prescribing antibiotics is a good thing. Personally, I worry more about the negative consequences of overuse of antibiotics than I do about the negative consequences of the overuse of painkillers. On the other hand, their suggestion that they are able to solve this problem because behavioral economics has remedied the flaws of traditional economics is nonsense.

They describe how various attempts to get doctors to stop prescribing unnecessary antibiotics have failed because they “are all based on the assumption that physicians are rational agents who will do the right thing if provided proper information and incentives. But,” they ask, “what if doctors are a little irrational, like the rest of us? They may over-prescribe antibiotics out of an unrealistic fear that the patient could eventually develop complications and need them, or because it is easier than arguing with a patient who insists on getting them.” The situation they just described is practically a definition of a rational choice. Prescribing the antibiotic has a benefit for the doctor (the patient is happy) and no cost to the doctor. 

Nevertheless, they go on to explain that “Over the last few years, our research team has developed several new approaches to reducing unnecessary antibiotic prescribing, drawing on insights from behavioral economics and social psychology. These disciplines acknowledge that people do not always behave rationally and are strongly motivated by social incentives to seek approval from others and compare favorably to their peers.” I have no idea what they mean by rational.  There is nothing irrational about being motivated by social incentives or wanting to compare favorably with peers. One of the characteristics of traditional economics is that economists don’t care what your preferences are, or where they came from.The only thing that is really required for rational behavior is that you respond in predictable ways to changes in the costs and benefits of a choice, which brings us to the interventions they introduced.

In one of their interventions “whenever doctors prescribed an antibiotic that was not clearly called for by the diagnosis, the electronic health record system asked them to provide a short “antibiotic justification note.”” Wait a minute, did they just say that they increased the cost to the doctor of prescribing an unnecessary antibiotic, and doctors chose to write less unnecessary prescriptions. Let me see if I’ve got this straight. As the cost of doing something increases, other things equal, people will do it less. Thank God for behavioral economics. If only someone had thought of this before, they could have given it a name like “the law of demand” and taught it in every principles of economics course.

Next week, I think I’ll invent behavioral history, which, unlike traditional history, relies on critical analysis of primary sources. You can play along too. It’s easy. Take any discipline, x. Identify one of the primary features of that discipline, y. Assert, contrary to all evidence, that x does not do y. Claim that the new discipline “behavioral x” does y. Repackage some standard results from x as startling new results of “behavioral x.”

Stories about economic historians

Here is an article in the Chronicle of Higher Education about Deirdre McCloskey. I have to say that I feel the same way about Deirdre’s recent work that Jim Holt does: "She has read the library, and won’t let you forget it." I am afraid many people no longer enjoy listening to her, even when she might be right. The problem is less the move away from cliometrics and toward culture than it is the voice that she chooses to use. Here, for instance is Noah Smith’s reaction to McCloskey’s review of Piketty.

This is a long but fascinating story about the economic historian Nathaniel Leff.

New York City Trust Companies

I am working on a paper about trust company failures in New York State between 1875 and 1925, which I will be presenting at the meeting of the Economic and Business History Society in Montreal. I ran across a bunch of illustrations stored on my computer that I had collected while working on the Panic of 1907. Since they did not make it in to the paper in Business History Review  (here is an earlier ungated version) I decided to post some of them here.

Here are two maps showing the location of trust companies in Manhattan in 1907. They were created by Karen Hogan, who was a Geography major here at the University of Mary Washington. They illustrate the geographic difference between the traditional downtown trust companies and the uptown trust companies that experienced most of the runs.

These two are pictures of runs on the Trust Company of America and the Lincoln Trust Company from the New York Tribune on October 24 and 25, 1907.

Here are two pictures of the main office of the Knickerbocker Trust Company. One shows how it looked in 1893; the other shows how the main branch looked in 1907. They illustrate the rapid growth of the first of the uptown trust companies.

This is an advertisement from the Van Norden Trust Company, the furthest uptown of the uptown trust companies. It illustrates how much their strategy differed from the focus of traditional trust companies on business clients.

Recent Essays on Slavery and the "New" History of Capitalism

Robert Wright asked Does Enslaving Others Help the Economy or Not? at a Historians Against Slavery Symposium. He argues that the claim that slavery was the driving force behind economic growth is both wrong and potentially dangerous:

“These good folks are trying to lay the grounds for reparations but at the same time putting living people at increased risk of enslavement by providing developing world officials with yet another reason not to clamp down on human trafficking, debt peonage, child soldiering, and so forth. If slavery made the U.S. wealthy, as Baptist and his buddies claim, such officials reason, then aren’tantislavery efforts just another imperialist attempt to keep their nations impoverished? Perhaps slavery should even be encouraged. Maybe slavery is immoral, they reason, but the ends justify the means.”

I have previously addressed the argument that slave produced cotton as a driving force in American economic development. I would also say that it is not clear to me why the benefits to slaveholders, or non-slaveholders who benefited, are relevant to the issue of reparations. My understanding of the law (at least in countries with a common law tradition) is that compensation should be based on the damage done to the party that was harmed not on the benefit gained by the person that caused the harm. If your negligence causes an accident in which I am injured I seek compensation for the damage done to me: my medical expenses, lost wages, pain and suffering, etc. It is no defense on your part to claim that you gained only minor benefit from your negligence.

The Racist Dawn of Capitalism by Peter James Hudson reviews books by Beckert, Baptist, Johnson, and Draper. On Baptist he writes

“This “half” has, in fact, been told—multiple times and more often than not by black writers, some of whom are fleetingly mentioned in Baptist’s footnotes. But the claim that African Americans built the world is simply wrong. Baptist’s book is marked by such rhetorical excesses, which lend themselves to a blinkered and narcissistic American exceptionalism. The result is an oversimplified view of capitalism and slavery that ignores the historical contributions to modernity of Africans in the Caribbean and in Africa itself.”

The Eviction Economy

Matthew Desmond wrote an interesting piece in the New York Times, drawing on his new book on eviction, but I’m not sure that the economics implicit in his analysis and the economics implicit in his remedy are consistent.

The analysis seems to be that landlords and lenders are not just earning a profit from dealing with the poor they are earning extraordinary profits from the poor:

“Landlords like Tobin aren’t making money in trailer parks or ghettos in spite of their poverty but because of it. Depressed property values offer lower mortgage payments and tax bills. In poor areas of the cities, rents are lower, too — but not by much. In 2010, the average monthly rent in Milwaukee’s poorest neighborhoods was only $50 less than the citywide median.

Landlords renting to poor families can charge slightly reduced rents but, owing to far lower expenses, still command handsome profits. As a landlord with 114 inner-city units once told me, speaking of an affluent suburb near Milwaukee: “In Brookfield, I lost money. But if you do low-income, you get a steady monthly income.”

He also points out that

“Exploitation is not confined to the housing sector alone. It thrives when it comes to other essentials, like food. Inner-city bodegas take advantage of families’ lack of transportation to increase grocery prices, effectively reducing the value of food stamps. The payday lending industry exploits poor people’s lack of access to credit by offering high-interest loans and collecting over $7 billion a year in fees.”

I say that I am not sure that his remedy, housing vouchers, is consistent with his analysis because while housing vouchers will increase the demand for housing on the part of low income households, it will only increase the supply if the increase in profits attracts more investment. If, however, landlords are already making higher than normal profits and the supply is not increasing, why should we expect the housing vouchers will be able to induce more affordable housing rather than simply going to even higher profits?

I agree there is a problem. But we need to understand the causes of the problem. There are essentially two reasons for high prices (rents or interest rates): either the cost of production is high or there are barriers to competition that enable sellers to earn monopoly profits. If renters are being exploited, in the sense that landlords are getting a greater rate of return than other people who take similar risks, then we need to find out what is preventing others from entering the market. Removal of these barriers to entry should drive down prices and profits. If on the other hand, there are actually high costs associated with lending or renting in low income neighborhoods we need to think about what might be done to reduce those costs. Desmond’s analysis seems to point toward monopoly but his prescription seems to point toward high costs of production.   

One other alternative is that the prices are not actually that high, but many people are still unable to afford them. If that is the case, then the issue is fundamentally one of redistribution. But then the story is not really about exploitation.