Wednesday, April 24, 2019

The Case Against Taxing Capital-gains


Taxing capital-gains is a bad idea, and taxing unrealized capital-gains is much worse.

Capital is not income. It is an estimate of future income. So taxing capital-gains is, in fact, triple taxation - income is taxed 3 times: when a company earns a profit, when it gives dividends, and when its stock price rises and is sold. And taxes, especially capital-gains taxes, discourage effort, innovation and value-creation. Now Oregon Senator Ron Wyden wants to rub salt on the wounds by taxing unrealized capital-gains – this in addition to raising the tax rate on capital-gains to the higher rate at which ordinary income is taxed. If his proposal ever became law the  destructive consequences would be extreme. 

The value of a business’s capital is  always based someone’s (perhaps an accountant’s) best estimate of the business’s future earnings (less all relevant expenses) over the remaining life of the business. This remains true for the value of a public company whose daily share price is a reflection of people’s expectations about the company’s future earnings. When a business or a share of stock on the stock market is sold for more than the buyer paid for it, this indicates that the buyer believes that the future earnings that the company justify the price that he paid. This is true whether the buyer intends to hold onto the purchased asset or not. If he intends to resell it after a short time he must believe that whoever buys it from him will pay him a higher price still and thus either intends to hold onto to it as the earnings materialize or will sell it again in the near future. Somewhere along the line the price paid for the asset will have to be justified by actual earnings, that is, income, or its value will fall and whoever holds it at that point will suffer a capital loss. Any capital-gains along the way will be offset by the capital loss. And although the gains are currently taxed, relief from tax for the losses is severely limited. This is yet another unjust aspect of the way capital-gains are taxed.

Income is the stream that flows from capital if capital is to maintain its value. So taxes based on income should apply only to income and not to gains in capital-value. In fact the capital value of an asset at any point of time already reflects the anticipated taxes that will be paid on the anticipated income.

Yet, Ron Wyden wants to go even further. He has a scheme to tax capital-gains even before they are realized, that is, before the asset is sold at a higher price than its purchase price. This is what is meant by unrealized capital-gains. He wants to tax the value of business assets according to their “market values” on an ongoing basis. Common sense reveals that the market value of any asset is a speculative matter. It is a guess about what price the asset could be sold for in the market. At any one time the estimated market valuation of all business assets taken together exceeds by a wide margin the actual prices at which all those assets could all be sold. This is because in a competitive market such valuations rest upon expectations that are mutually inconsistent. The dreams of some entrepreneurs conflict with those of others. The competitive process rewards the more accurate expectations and punishes the less accurate ones. Thus taxing all assets according to the gains they would hypothetically earn if they were to be sold would be taxing many values that will be proved in the event to have been based on incorrect expectations.

Senator Wyden has tried to anticipate such objections and to imagine a formidable set of rules and a bureaucracy to deal with them. Not least, the so-called “mark to market” exercise that would be necessary for his scheme, to provide an estimate of the momentary value of any asset were it to be sold, would create a nightmare for those trying to evaluate the real value of any business and having to estimate the ongoing capital-gains taxes that will accrue going forward.

Financial markets in which assets are routinely valued and revalued over time according to the estimates of real live buyers and sellers are absolutely indispensable for the creation of economic value in a dynamic, innovative growing economy. Senator Wyden’s scheme would severely compromise this spontaneous market process. Let us hope it suffers an early and permanent demise.

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Peter Lewin is a clinical professor of finance and managerial economics and Director of the Colloquium for the Advancement of Free-Enterprise Education at the University of Texas at Dallas.

Tuesday, March 19, 2019

A new look at the intellectuals and socialism

Some years ago I wrote a short article for FEE (The Foundation for Economic Education) entitled Recycling Discredited Ideas. I was referring then, in 2009, to the renewed embrace by economists and others of discredited Keynesian ideas for dealing with the recession. I had naively thought that the overwhelming evidence against the efficacy of these ideas was sufficient to establish their permanent demise. Not so. Clearly we are doomed by the re-embrace of failed ideas to repeat the mistakes of history. The Keynesians were reborn and are alive and well.

Even worse, however, is the resilience of the idea of socialism. If ever in the history of human affairs there was decisive evidence against something, it is the evidence against socialism, especially as compared with the history of capitalism. Yet, somehow, the faithful refuse to be deterred by the facts and remain undeterred by the mounting dismal failures of socialism and the absence of even one single example of success. Meantime  the benefits of competitive capitalism are spectacularly obvious for anyone who cares to see them. The resilience of the belief in the virtues of socialism is nothing short of miraculous, a testament to the capacity of human beings to create their own reality, a major refutation of the assumption that the scientific method will always win out in an argument involving intelligent, well-meaning individuals. It is not stupidity or meanness that is to blame. It is something much deeper and more insidious; it is the power of hard-wired human presumptions to endure in the face of massive evidence to the contrary.

The presumptions of socialism are intuitive and appealing. The logic of capitalism is counterintuitive and harsh (at least harsh-sounding). In the course of modern human history they bounce against each other and wax and wane. Just a little while ago very few politicians would have been prepared to adopt the label ‘socialist’. To call someone a socialist was widely regarded as an insult, an accusation of untenable extremism. Suddenly it is completely different. While self-proclaimed socialists have all the while continued their prominence in our academic institutions, hardly diminishing over the years, socialism’s cause has most recently been taken up by our youngest, most ignorant and inexperienced voters, with the result that young politicians and other demagogues, sniffing the opportunity, have risen to national prominence on the socialist banner. The young cannot remember the horrors of socialisms past, they were not alive. And they pay no attention to the lessons of history because studying history takes effort and we have told them it is unnecessary and all wrong anyway. So, in part, it is a failure of collective memory and the downgrading of knowledge about history that is to blame. These, indeed, it seems to me, are important explanations in the re-embrace of Keynesian doctrines as well. But, they cannot be all there is to it when it comes to socialism. Those intellectuals who cling to socialist dreams are neither short on memory nor ignorant of history. Quite the contrary, some of our most intelligent and well-informed intellectuals are among them.  

Now, every day, we get news reports on self-identifying socialist politicians proposing to collectivize aspects of our economy – from healthcare to the environment and in between. How then does one explain this disturbing development?

A new book from the Institute for Economic Affairs (in London) provides an illuminating explanation and I highly recommend reading it. It is Socialism: The Failed Idea That Never Dies, by Kristian Niemietz, which can be downloaded for free from here. An informative subtitle for this book may have been The Intellectuals and Socialism were this not associated with F. A. Hayek’s famous article by that name. “Over the past hundred years, there have been more than two dozen attempts to build a socialist society” (p. 21). Niemietz provides chapters on seven of them – the Soviet Union, Maoist China, Cuba, North Korea, West Germany (the GDR, perhaps the most informative chapter), Albania and Venezuela.  Each chapter provides a brief outline of the history, followed by detailed evidence of the predictable pattern of intellectual assessments that were published at the time. That pattern starts with praise and optimism about the new attempt to create a ‘true socialism’, followed by disillusionment at what actually transpires after the honeymoon period, for which various explanations and excuses are offered, usually suggesting that those in charge failed to follow through, and this in turn is followed, once failure is abundantly evident and abuses are impossible to deny, with condemnation and explanation that this particular historical case was clearly not one of ‘real socialism’, so socialism as such cannot be condemned by it. It was driven by the wrong people or by people who were not able and willing to stay the course. It could have and should have been different. Commonly they point to the absence of democracy that seems to characterize all these cases.

This pattern is repeated over again, with variations, in each case of actual socialist experimentation. First the euphoria, encouragement and praise that accompanied pilgrimages to the new promised land by the intellectuals, including some of the western world’s most prominent intellectuals, then the backtracking by degrees and the making of excuses, followed finally by disillusionment and disavowal – although this last phase is also characterized by a remnant of unrepentants who continue to defend the integrity and the achievements of the experiment, its blemishes notwithstanding. For example, Jeremy Corbyn, who features in just about every chapter, continues to defend the Soviet Union in spite of the extermination of around 20 million people and the brutalizing and abuse of many more, as a noble experiment that was largely successful. According to him nothing good would come from the collapse of the Soviet Union (p. 88).

These case studies are found in chapters 2 through 9 and make up the heart of the book, a valuable source for those seeking an overview of each of these historical experiments. Bracketing these chapters are chapters 1 and 10 which can be profitably read even if the reader reads nothing else in the book. Chapter 1 lays out the problem. Socialist ideas are pervasive. There is a strong knee jerk reaction toward fixing things by putting the government in charge, nationalizing it, especially in vital areas like education, healthcare, and the environment, but in other areas as well. Zero-sum thinking appears to be the default. By contrast, a general understanding of how competitive capitalism works is seriously lacking. The contrast between the miserable failures of tried socialism and the achievements of actual capitalism have somehow produced the opposite of what might be expected, namely, a dissatisfaction with the latter and a hankering after the promises of the former. This, in spite of the fact that, as explained, socialism has been tried over and over again and always ends in disappointment and often disaster.

Some people point to the Scandinavian countries as examples of successful socialism. This borders on the absurd. In fact, apart from the fact that these countries have high levels of taxation and high levels of government involvement in basic services they are very capitalist in nature. There is no widespread state ownership of property. Private property and the pursuit of profit is the norm. Sweden experimented briefly with socialist style tax and regulate policies but abandoned them when they failed. It is now one of the fastest growing economies in the world and one of the most capitalist judging by the rules of production.

Chapter 10 explains this curious situation by indulging in a bit of social psychology, borrowing ideas from the work of Jonathan Haidt and Bryan Caplan.  The common brain evidently sees in the aims of socialism – equality of outcomes, comradery, compassion, the absence of scarcity, financial security, …, - a ‘cure’ for all the ills plaguing our society. And this perception gets insulated against refutation by various (conscious and unconscious) stratagems. For example, the intellectual case for socialism never actually spells out in concrete terms the specific social institutions that will have to be put in place in order to achieve the socialist nirvana and exactly how this is to be done. The blueprints are confined to the articulation of highly abstract outcomes. And then, with the failure of every ‘new’ attempt to achieve these socialist ideals, the attempt is declared not to be what socialism really is. At bottom every socialist experiment is judged to be socialist or not by its outcomes not by its objectives. So, the fact that there has never been a successful attempt to establish the objectives of a satisfactory socialism is not seen as a shortcoming of socialism as a set of ideas or policies, but rather as evidence that the attempt cannot be labelled as real socialism. It is a perfect strategy for keeping the faith in the face of a challenging reality.

The final chapter (Epilogue) catalogues the pronouncements over the decades of the newspaper The Guardian on matters socialist and makes for fascinating reading as to just how wrong you can be and yet keep going.

There is much more, read the book.

Tuesday, January 29, 2019

UBI and Brexit some thoughts.

Morning musings.
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UBI - universal basic income, is the latest fresh new idea emanating from the new-new-left, the new-Progressives. Heavy irony here - this idea was first posited by none other than Milton Friedman and was called a negative income tax. Needless to say, he is not getting any acknowledgement for it. As it is being discussed, for example as a solution to poverty in India, there are two important elements being neglected.

1. It was never intended to be, and can never be, a policy for obtaining economic growth. It is not an instrument for growth. One proponent on the BBC suggested that with everyone having a basic income, increased spending would stimulate the economy and make it grow. Ugh. Rather ii is a scheme for alleviating poverty as a safety net. It is expensive and it will inhibit growth compared to no welfare policy. But

2. It was originally proposed by Friedman as a *replacement* for ALL of the welfare programs now in place at all levels of government. It implies a massive downsizing of bureaucracy, waist and inefficiency, and in that sense it would be cheaper and more conducive to growth. There seems to be a vague realization that it should replace current programs. But this implies that it should not carry any increase in taxation. The income subsidy should be limited to the amount that can be afforded under current conditions. This is not recognized and there is talk of dramatically increasing taxes (in India!!) to implement it. That would be a disaster.
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Not all no-deal Brexits are alike. There are good and bad ones in various degrees. The best, IMHO, would be one where the UK makes is very easy for those already in the country under EU laws to stay and continue what they are doing. A simple streamlined registration for example. Relatedly they should unilaterally extend to the EU the same conditions as are now in place for cross border workers in the future. An issue in the separation was immigration, so the UK could modify cross border rules to meet its concerns. This should not affect migrants with European job-market skills. Similar accommodations should be extended to investments and banking - this is very important. And border arrangements in Ireland should be establishment to be as close as possible to the current situation. A key element in the separation is the cost to the British taxpayer of subsidies to Europe and these would be abolished. The EU should be invited to match the UK's unilateral accommodations. I suspect eventually officially or unofficially they would. But maybe not. So be it.
My two cents. I suspect my advice will not be followed and we will get an unnecessary botch-up to some degree.

Sunday, January 6, 2019

The ‘cure’ for the trade deficit is in the budget deficit.



In light of current Trump trade policy, it is perhaps worthwhile to review some common sense principles about international trade.

The first, most basic and most important principle is that countries do not trade, only individuals trade. The U.S. does not trade with China. Such a statement is meaningless. Rather, some individuals residing in America buy valuable things (goods and services) from individuals residing in China. These are imports from China. At the same time other individuals resident in America sell valuable goods and services to other individuals resident in China. These are exports to China. (Often these individual actions are expressed through the legal fiction of companies, but the essential units of trade are individual people). There is absolutely no reason why the total dollar value of the first set of transactions (American imports from China) should exactly match the dollar value of the second set of transactions (American exports to China). Such a zero trade balance would be a very strange coincidence indeed, and not a very satisfactory one. In the normal course of trade we expect to import more from some places in the world (for example where manufactured goods are cheapest) than from others, and those places are likely not the places where the demand for our exports highest.

The matter is no different from what happens when people in Texas trade with people in New York. No one expects the balance of trade between Texas and New York to be zero. In fact, almost no one knows or cares what that balance is. Residents in Texas would not be surprised to learn that the trade balance between Texas and other US states varies considerably, some being negative and some being positive and probably none being zero. Negative trade balances are paid for by capital inflows – investments or trade credit. If people in New York as a whole sell more to people in Texas than people in Texas as a whole buy from people in New York, then it must be true that funds to pay for those sales must be flowing from New York and other places to Texas in the form of investments or extensions of credit. These financial transactions are private transactions that automatically ensure that payments always balance. Any aggregate negative (or positive) trade balance is equaled by an aggregate positive (or negative) capital account balance. It happens automatically through the market process. People work it out voluntarily in the routine actions of purchase and sale, investing and granting credit. Prices and quantities adjust to achieve the balance.

By the same token, the balance of trade with China should be of no concern. Logically it should be balanced by a favorable aggregate capital account balance with our trading partners including China. And, yes, it is. And that would be the end of the matter but for one important fact, namely, government involvement. In cases involving trade across national borders, often involving the conversion of currencies, governments are involved. One might say that governments have polluted the situation by insinuating themselves into what would otherwise be self-adjusting private trade in goods and finance. For this reason, trade balances have become intimately involved in domestic government spending. Government budget deficits are financed in large part by foreign capital inflows.

For example, when Chinese exporters receive dollars from American buyers the Chinese government takes those dollars in return for local yuan currency. For many years these accumulated dollars have been invested in U.S. treasuries. In other words, the U.S. has borrowed from the trade surplus earned by Chinese sellers, to finance its spending in the U.S. This is facilitated by the Chinese government in effect appropriating that surplus. Essentially the U.S. government has obligated its citizens to pay the extent of the debt owed to Chinese citizens who have been obligated by their government to lend money to the U.S. government. The same is true for our other large trading partners.

In October 2018, the Chinese government held $1.14 trillion of U.S. debt. It's the largest foreign holder of U.S. Treasury securities. The second largest holder is Japan at $1.023 trillion. The impetus for this policy has been a Chinese government fear that if it did not ‘neutralize’ the inflow of dollars by buying them, thus increasing the supply of domestic currency, the price of dollars (the exchange value in terms of yuan) would fall. This would mean Chinese exports to the U.S. would become more expensive and imports from the U.S. to China less expensive. In other words, the Chinese government has for many years been motivated by the same disastrous export-led, protectionist goals as the Trump administration now is. Each country wants to limit imports and boost exports by not only imposing tariffs, but also by countering natural flows of goods and finance with inhibiting monetary and fiscal policy. Despite the Chinese government's occasional threats to sell its holdings, it apparently continues to be happy to be America's biggest foreign banker.

At the same time, the U.S. government has become dependent on these foreign sources of finance. And as the debt keeps mounting up, the interest on the debt increases with it. With each passing day babies born in America inherit an increasing debt to our foreign bankers.

Is that a legitimate reason to be concerned about the large trade deficit with China (and other nations) that is fueling the current Trump protectionist trade strategy? No, not really. It is not the trade deficit that is the real problem. It is the U.S. government budget deficit that should receive our attention. Quite simply our government should not be borrowing so much money. The best way to fix this is to reduce government expenditure, not to increase taxes. The latter will hurt the economy and may not even result in a significant increase in revenue; in fact, it may reduce revenue. It is the overall size of the federal government that is the overarching problem of both foreign and domestic economic policy.

If the Treasury borrowed less, and/or if China decided to lend less (buy fewer U.S. bonds, or no bonds), what would happen? The dollar exchange rate would fall, imports would become more expensive, and exports would become cheaper and more attractive. Ironically that is what Trump says he wants. But it would happen automatically and it would mean downsizing the government, so don’t hold your breath.

A shorter version of this was published on January 2, 2018 in the Dallas Morning News.

Wednesday, September 12, 2018

Rosh Hashanah 2018

First day Rosh Hashanah. Rabbi Ari Sunshine’s sermon. I quite liked it and will try to share some parts of it, though, of course, I cannot and should not try to summarize all of it.
It was about our conception of ‘time’. The creation story was a product of its era. It is one of a few such creation stories from that region at that time. But there is at least one significant difference. It shifts the perspective from cyclical to linear time. The prevailing view was of a world sequentially and cyclical created, developed and destroyed, only to be recreated again. In the Hebrew bible God creates the world, almost destroys it, but then vows to Noah never to do so again. Time unfolds linearly, relentlessly. Each moment is unique, the past is gone forever, there are no do-overs, but there is also the opportunity to create something completely new in the future.
Rabbi Sunshine quotes the Psalmist who talks of how we fail to appreciate the gift of each day and, that most amazingly insightful of all biblical works, Kohelet (Ecclesiastes). There is a time for all things good and bad, a time to grieve and a time for joy – and if you do not grieve in the appropriate time you will not feel the joy.
Whereas our ancestors experienced an abundance of time, however, we with all our conveniences are always short of time. With the rapid explosion of technology, we now face a myriad of options with only so much time to experience them. And sometimes we lose track of the value of the important uses of time. We are so tethered to our cell phones that we forget to put them down during meals – a time to connect with friends and family. We rush from one experience to another with hardly any time for reflection.
In this wonderful but harried world we should deliberately slow down and turn to the sanctuary of Shabbat, once a week. He repeats Rabbi Joshua Heschel’s famous characterization of the Shabbat as “an island in time” and Sunshine embellishes and talks of 'islands of familiarity'.
I liked the way he connected aspects of the Jewish religious experience, at this time of Rosh Hashanah – Yom Kippur, when we are so emotionally conscious of the passage of time, to the truly exceptional conditions of our everyday world.
One little bit of humorous irony. This sermon about our experience of time, as apparently is true of all rabbinic sermons, was about one-third too long.

Sunday, September 2, 2018

Afrikaans is such an expressive language


If you grew up Jewish in South Africa, you had access to untranslatable words from both Yiddish and Afrikaans, delightful, expressive words that one simply cannot fully translate with all the nuance and emotion. Here are some from Afrikaans – sit down with your biltong and enjoy.
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AFRIKAANS is without a doubt the most expressive language ever
How do you explain the word "sommer" to someone who is not South African? It's not only a foreign word, it's a foreign concept. Perhaps the English never do anything "just sommer". There really is no equivalent.... "Why are you laughing? Just sommer."
"Bakkie" is another one, very useful around this house for all sizes and shapes of containers and dishes. Also used for what they call "utes" in OZ or "pickup" in England. I find it an indispensable word.
We all know "voetstoots" of course. It's been officially adopted into South African English. There's no concise, one-word equivalent in English. "As is" just doesn't hack it. And it's such a humorous word, conjuring up images of pushing that brand new car home...
There's no good English word for "dwaal". It doesn't mean dream, or daze. It's close to absent-mindedness, but that's not quite it. Being in one so often myself, I'm not likely to stop using it.
I think "gogga" is the most delightful word for insect I've ever heard. Children all over the world should use it. "Insect" just doesn't stand a chance.
And then there's "gatvol". OK, I know it's very rude. But it's so very expressive, ? "Fed up" doesn't have half the impact. "Gatvol" is a word used more frequently than ever in the workplace and the media these days, with increasing intensity.
While we're on the subject, another phrase which outstrips any English attempt is "Hy sal sy gat sien". "He'll get his come-uppance" definitely lacks the relish in comparison.
"Donder" is another very useful word, used as an all-purpose swearword, which again has no good English translation. Thunder does not even come a good second. Used as a verb, it can express any degree of roughing up. As a noun, it is a pejorative, as they politely say in dictionaries, to mean whatever you want it to mean. And there's no good translation for "skiet-en-donder" either.
It says something about the English that they have no word for "jol". Probably the dictionary compilers regard it as slang, but it's widely used for "Going out on the town, kicking up your heels, enjoying yourself.
Although curiously, the word "Yule" in Yuletide is related to "jol" and derived from Old English. So somewhere along the line, the English forgot how to "jol".
How do you explain the passion of "lekker!"? "Wow last night was a "lekker jol".
I've yet to meet a South African over the age of two who doesn't use the word "muti". Translation is impossible - "witches potion" is about the nearest I can get. It needs a long cultural historical explanation. Between "muti" and the pedantic "medication", there's simply no contest.  [Still use it today!]
And of course, my personal favourite "Kak en betaal" , which just says it all, doesn't it? A bland English translation would be "Cough and pay", or "Breathe and pay". But it just doesn't cut it, does it? Not by a long drop.
Other words that come to mind: "jou bliksem", "wag 'n bietjie", "nie so haastig nie", "just now", "sakkie-sakkie music", "ou swaer", "Ya, nee", and one of my personal favourites, "Poephol".
"Dudu". Telling your infant to "go to bed" is just not the same as, "Go dudu now, my baby!"
How about "bliksem"? "I'm going to bliksem you!". Wonderful Afrikaans expression with nothing to compare in the English language, at least nothing that gives the same satisfaction.
"Mielie pap" - there is no word like "pap", here. They have porridge, and when they say porridge, they mean oats. There's no Maltabela, no Tasty Wheat, No Creemy Meal... In other words, there's no "pap"!
"Mislik" - such a 'lekker' word. "Why are you so mislik, you little skelm?"
Which brings us to "skelm" - here you just get "baddies", but that doesn't have the same sneaky connotation of a proper skelm, does it?!
"Loskop" is another favourite. The English just don't understand when I say, "Sorry, I forgot - I'm such a loskop!"
And finally..... "moer". There simply isn't a word here that denotes the feeling of dread behind the phrase "If you don't clean your room, I'll moer you!"

Sunday, August 19, 2018

Ludwig Lachmann -"It need never have happened"


In 1967, at the impressionable age of 19, having decided, for reasons I can no longer remember, to study economics, I encountered Ludwig Lachmann. Lachmann was a Jewish émigré from Germany, having come to South Africa in 1950 to assume the position of chair of the department of economics and economic history at Wits (the University of the Witwatersrand). He came via London, after leaving Berlin with his wife in 1933, the year that Adolf Hitler came to power. Though attracted even then to the teachings of the Austrian School of Economics, this interest appears to have been greatly enhanced by many years of study with Friedrich Hayek at the LSE (London School of Economics). It was apparently during this time that his lifelong interest in capital theory was formed, though, at that time, it was mostly in connection with the energetic efforts of those many young scholars in the “Hayek circle” to understand the workings of the business cycle in order to come up with an explanation for the deepening crisis in which they found themselves in the 1930’s.

By the time he got to Wits the Great Depression was over and the protracted post-war period of economic growth was about to take off. In 1956 he published his most well-known book, Capital and its Structure, which cemented his reputation as an Austrian capital theorist and by the time I came to be in his class, in Economics II (as a second year undergraduate) he was devoting considerable attention to capital theory and growth theory in his lectures. It was through a lens shaped by this experience that I viewed him.

That year was the beginning of a lifetime association with Professor Lachmann, my most important economics teacher. Upon graduating my BA in 1968, I joined his honors seminar until I left for the Ph.D. program at the University of Chicago in 1972. (I returned briefly to South Africa 1976-1978, during which time I taught economics and resumed attending the honors seminar.) Little did I know that by the time I left Lachmann had completed and published his book The Legacy of Mac Weber. I was only dimly aware of who Weber was and oblivious as to why Lachmann might be interested in him. Looking back I realize how abysmally ignorant and conceptually immature I must have seemed, although less so than my peers. Lachmann must have struggled to find thinkers with whom he could truly converse. The opportunity to do so later, must have been very welcome, when he became a yearly visitor to New York University (and with some frequency to George Mason University), where he encountered Don Lavoie and other “mature” thinkers, some of whom would have been knowledgeable about the history of Germany and German social thought. I was aware of this from afar, when I returned to Austrian economics after Chicago, but my main interests lay elsewhere.

Now, in my 70th year, I find myself reading the third essay of his Legacy of Max Weber through a greatly expanded lens. It is an eerie experience. I hear him talking to me from beyond the grave, “Do you understand now what I was doing? Do you understand what I was trying to communicate, and why?”

In this connection I think of one particular episode from our early acquaintance. I was a junior lecturer at Wits, and a member of the Lachmann honors seminar, circa 1977 (Legacy had been published a few years earlier). I had a colleague that I introduced to the seminar, an Israeli living in South Africa. It so happened that he found himself one time alone with Lachmann in his office, perhaps arriving early for the seminar. Unlike me, who was extremely reticent in my demeanor toward my professors, he was very forthcoming and unrestrained in his curiosity, and, thus, asked a question I never would have. Knowing that Lachmann had left Germany in 1933, and knowing that he was Jewish, and strongly identified as Jewish, he asked him what he thought about the Holocaust! As I remember what my friend reported to me at the time, he replied that it was, indeed, a terrible tragedy, all the more so because it was something that “need not have happened”.

This has stuck with me over the years. I had no clue what he could have meant by this, what it implied to him, and even how anyone could say such a thing. Was he making excuses?

Now as I read his third essay on “Political Institutions”, and encounter a detour describing German history and the climate of opinion from German unification in 1871 until the rise of Hitler, I suddenly see what may be what he meant. My impression is strengthened by the fact that it is exactly what he was immersed around the time of the conversation in question.

My brief summary will not do justice to the subtleties of Lachmann’s account and is meant simply to indicate the nature of his preoccupations at the time he wrote this essay. He is referring to the fragility of the Weimar Republic. The unification in 1871 established the Great Compromise of the Rechstaat, the term by which it was known, which translates loosely as ‘the rule of law’. The power of the traditional Prussian agrarian elite, the Junkers, though diluted in the new institutional structure of the German Empire remained important. The Junker nobility was influential beyond its economic and political power across a wide range within the broader population. The new coalition of interests agreed, however, on the importance of institutional stability in the face of the rapid changes occurring as a result of industrialization. And this notion of institutional stability included the principle of freedom of contract and broadly laissez faire rules within a facilitating constitutional framework of “fundamental institutions”.

Industrialization brought with it a rapidly growing working class that did not seem to fit well within the new institutional order. From the 1880’s the Great Compromise was being challenged by the ascendancy of Marxist thinking, albeit subject to much revisionism, that saw history as an inevitable march toward the triumph of socialism. World War I shattered the institutional framework of the Great Compromise  and whatever influence the elite still had, and the coalition that constituted the Wiemar Republic formed in its wake, included a strong contingent of socialists ( for whom, as dedicated professionals, Lachmann interestingly expresses some admiration) who worked with the rest of the coalition to promote economic growth with the conviction that it was a necessary step along the path to socialism. And when in 1933 Hitler rose to power they viewed it in the same light, heralding an aspect of the impending collapse of capitalism. By this time, Lachmann suggests, quite simply the “fundamental institutions” of the Rechstaat had disappeared. There was no bedrock set of principles, or any strong political group who embraced them, to push back. Had these institutions and the principles they represented not been so eroded the Holocaust might never have happened (my interpretation).

To my knowledge, Lachmann never wrote about the Holocaust. But, I found his choice of words in this passage quite provocative.

“The mere fact that after the holocaust of Nazi rule and the Second World War the new German state was again erected on the same foundations as the Weimar Republic had been, because there were no others, seems to us to attest the inherent strength of the social forces underlying both.”

And he continues:

“Where, then, lay the weakness of the Weimar Republic? It so happens that the critical source of its weakness lay in … [that] its fundamental institutions rested on no firm basis. The compromise [between the parties of the coalition, notably by the socialists] was regarded by too many of the participants as a temporary rather than a permanent one, not as a Great Compromise [Rechstaat] but rather as a petit compromise”.


For Lachmann the Holocaust was a matter of personal experience. He was in a very real sense a ‘survivor’. I know nothing of the fate of his extended family, of friends and colleagues or of his personal feelings about those of his associates who rode the Nazi bandwagon, including his thesis supervisor Werner Sombart. I for one regret that he never addressed these matters publicly. After reading this essay I also wish he would have written a book on the history of modern Germany fleshing out the insights he presented so briefly in this essay. He refers the reader to the “brilliant” work of Joseph Schumpeter on this subject, but I can’t help feeling that Lachmann could have added much of value to that work, though, given my limited expertise, I make no judgment as to its standing relative to other different interpretations of that tumultuous history.

Sunday, July 8, 2018

My struggles with religious belief.

    One of topics I tend to obsess a bit about is the nature of religion and its role in society. My readers may react very differently depending on their presumptions. It is one of the those topics that is very difficult if not impossible to discuss with some people. I think I understand why this is. But I still have trouble emotionally interacting with these people. It is my problem not theirs I suppose. Let me try and explain.

    • It is astounding to me how resilient religious belief is. It almost seems as if we are hard wired to believe in some form of supernatural, and that while many of us are able to transcend this, many are not. 
    • In the modern secular world, many religious groups have adapted. Their belief systems are in various degrees adaptations of moral codes as filtered through the metaphors of scripture. They are not literal believers. If they have a belief in revelation it is a loose one - for example, that God reveals things in mysterious and often symbolic ways. And they are willing and able to disbelieve the factual claims of the scripture. With these people I have no, or very few, problems. 
    • For those who believe fundamentally - by which I mean, believe in the revealed word as recorded in the relevant (for them) scripture - for these people belief relates not only to morals, but also, crucially to facts. For example, there are factual claims about matters such as the age of the universe, the occurrence of events (including miracles), the development of language, etc. With these people I have great difficulty. 
    • There is no evidence that you could ever bring that would weigh with them against the claims of that scripture. Any such evidence, no matter how compelling, can be and is dismissed as mistaken or a puzzle sent by God. For example, the claim that the world is about 6,000 years old is reconciled by saying that appearances to the contrary were created by God. (Some respond by interpreting the claim liberally to be symbolic - so a 'year' could be much longer than a year. But many insist that the literal meaning of the words are the correct ones.)
    • This mindset is pretty scary. It is a mindset insulated from any prospect of refutation of core beliefs no matter how repugnant or incorrect factually they may appear to us.
    • This is why, while I recognize the many socially beneficial and aesthetically pleasing aspects of organized religion, I also fear its potential for incredible evil when it has the power to compel. This requires eternal vigilance. Theocracies once very common, still exist in many parts of the world and these are usually horrible places to live in.

    • As a Jew I also believe that, though Judaism, in many respects, avoids most of the worst cases that would operate in a world in which Jewish Law were the absolute authority, it is also true that in such a world there would be much to object to - especially regarding some of the more extreme varieties of interpretation of Jewish law. And I also think that, as oppressive as the dispersion was for Jews, the fact that Judaism became a rabbinic religion in a world of strangers, prevented some of the worst developments that might have occurred had it continued to be a temple religion based on the rule of the high priests. 

Tuesday, July 3, 2018

Feeling romantic and grateful

If I were Steve Horwitz I might write something like the following. But since I am not, and since it is much too soppy, I won't.
They are welcome to it; all that stuff
it’s never enough
All the parties and the clothes
for what purpose who knows?
Our own little heaven, just you and me
together, with our not so little family

The power of love.

Wednesday, June 13, 2018

Impressions on visiting South Africa - June 2018

South Africa today, almost three decades after the abolition of apartheid is a very confusing place. I suppose it could be somewhat simplistically described as a dual economy, a society caught in-between the first and the third worlds (as those terms are colloquially understood) with elements of both.

On the one hand there is a modern, industrialized technologically sophisticated economy, with beautiful highways, and vibrant businesses, large and small. The food is fantastic and cheap. And investment and expansion is all around, construction of residences and businesses everywhere. The urban populations are growing dramatically.

On the other hand there is the third world misery within this. Unemployment is rampant. Crime is very high. A large portion of the population is miserably poor. The wealthy live behind walls and barbed wire fences. There are chronic water shortages and electricity blackouts.

The government is typically third world - but with aspects of the rule of law remaining - for example in the judiciary and the electoral system. But people here tell me it is being eroded bit by bit. Corruption is rife, the police are useless, mobs and gangs are powerful and dangerous, especially in the townships and depressed areas. It is doubtful, that no matter how bad things get, the ruling ANC party will ever relinquish power. And the situation is ripe for the flowering of populist politics and economics.

The expenditure tax rate is high (15% VAT) and only 6% of the population of 50 million pay income tax. So the tax base is very small and is falling as the young among the wealthy and the educated leave in large numbers.  The country's human capital is being diminished by this. There is immigration that somewhat offsets this, from all over the world - people leaving bad situations coming to benefits from the manifest business and employment opportunities that do exist, but I don't know the resulting balance between these two trends.

So it is a really mixed bag, one whose future is really difficult to predict.

Monday, June 11, 2018

While visiting South Africa

Back in Joburg after a long six hour drive, some of it with traffic. A day of rest before tomorrow's early flight to Cape Town - till Sunday.
Our trip to the game park was indescribably wonderful. Non-locals might not appreciate the value of it. We saw an amazing variety of game up close in the African bush. Our guide was an elephant expert. We got close enough to a large male to touch his face - not that we did. Heart pounding. I am sure the kids have no idea how lucky they were. A female leopard with a kill in the tree. Lots of lion. All kinds of buck, some of them quite rare. Warthogs, zebras, wildebeest, wonderful birds, rhinos, giraffes, exotic squirrels, ... no cheetah (very rare) or wild dog (even more rare -only two packs in that area and they migrate out and in and were not there).
The park, Tintswalo (part of the greater Mayaleti reserve) is a concession dating from the end of Apartheid. During the Apartheid era it was an inferior blacks only game park. After Apartheid it was privatized (the ultimate fate is still in dispute) and is now a wonderful, luxurious, but not unreasonably priced, game resort. Great food (more than great), great accommodation (with a view of the waterhole to watch animals come down and drink). Dreamworld.

Tuesday, May 15, 2018

Impediments to effective interpersonal discussion/communication


Impediments to effective interpersonal discussion/communication. Not mutually exclusive.
  1. Lack of trust - the perception of bad motives by your discussion partner.
  2. Fear of being wrong - an ego commitment to a particular position that prevents the open consideration of alternatives. 
  3. Lack of clarity - a disjoint in the understanding of terms and concepts - sometimes the result of asymmetric prior education and conditioning.

Number 1 is devastating. 2. is formidable. 3. can be overcome with patience and determination.

Tuesday, May 1, 2018

Palestinian leader acknowledges the Holocaust in deeply anti-Semitic remarks.



I want to subject this incident to a bit of analysis. It is very interesting for a number of reasons.
1.     On the most superficial level his remarks are a window into what he and his collaborators in the PA and the PLO and related organizations really believe, or are prepared to say they believe in order to foster the basest resentment against Israel (=Israelis). The religious animus toward Jews runs deep in Islam and inevitably manifests in modern semi-secular pan-Arabism as well. It strikes a chord of resentment whenever desperate Arab politicians need to whip some up.
2.     Additionally, he wants to drive a wedge between Jews and the land of Israel by suggesting that Askenazim have no cultural ties to the land - one supposes in contrast to the Sephardim who have lived in the vicinity and in the Arab world forever. So, it is a an attempt to inject racism into the discussion - to make a distinction between Arab Jews and European (Caucasian) Jews. It is the European Jews who were persecuted and there are (good?) reasons for that.
If you are part of the common folk living in the middle east this could make sense to you. You see the social world primarily in tribal terms overlaid with race, religion and culture - us versus them. So identifying the Ashkenazim as alien Europeans may have some populist traction. (The attempt to deny any connection between Ashkenazi Jews and the land of Israel - a common feature of the Palestinian narrative, supported by the likes of UNESCO - is repeated in his remarks. Given the cultural components of 2,000 years of Jewish history the patent absurdity of this is obvious to people in the west, or familiar with that history. But it is totally lost on his intended audience, for whom it is just one more reason to hate.)
Ironically, there are internal contradictions in this narrative. It undermines the claim that the Ashenazi settlers (pre-1948) were instruments of European colonization. Were they both victims of the Europeans and their nefarious colonial allies? But this is a point for the western analysts and carries absolutely no weight in diluting the poison Abbas is hoping to brew. Populism is full of contradictory ideas.
3.     The remarks are interesting insofar as they seem to confirm the Holocaust. Absurdly this is used against the Jews in the sense that it can be explained by the resentment caused by their 'social functions' as greedy usurious bankers and financiers (talk about obnoxious stereotypes). So, it is not because of their religion that they were targeted, but because of their social function. Abbas apparently thinks, or wants other to think that he thinks, that this is a distinction with a moral difference. What an ingenious twist this is. The Holocaust is used as evidence of the obnoxiousness of the Jews who were responsible for colonizing Arab lands.
4.     Finally, what is left of the argument that it is possible to be anti-Zionist and pro-Palestinian without being anti-Jewish? Well, yes, of course it is, in theory. By which I mean, there is a logic that distinguishes criticism of the aims and actions of the Zionists (focusing on the effects it had on the local residents) that is not anti-Jewish in substance or intent. Close examination suggests, that while this is true, it is wrong, or contradictory. I say this because such arguments focus on the allegation that the pre-1948 Zionist settlers coercively displaced the rightful owners of their land where they settled, and this is simply just not true. There were instances of ambiguous ownership. But there was no concerted and coercive effort to displace the local Arab population, which in any case was sparsely settled and very small in numbers. In fact, large number of Arabs migrated into the area as a result of the Jewish settlements and the economic opportunities that they created. The East European Jewish settlers had no government behind them to carry out any kind of ethnic cleansing. In fact, it was the Arab Islamist/pan-Arab movements who had the support of the British, pandering for the sake of oil, who tried to keep out Jewish immigrants and drive settlers from the land. So, yes, it is possible to separate anti-Zionist from anti-Jewish, but one needs first to get the facts right, and then one needs to push the argument in universal terms and not apply double standards to the alleged Zionist colonists. The fact that, in practice, such arguments are both based on gross ignorance and employ double standards, invites the perception of bias of one sort or another.
But in the case of Abbas, there is no ambiguity. For him and his friends there is no difference between anti-Zionism and anti-Jewish. So much is clear from these recent remarks. One need only inquire of him whether Jews will be able to live in the Palestinian state that is the object of the two-state solution he claims to support.
In short, given the scrutiny they deserve, these remarks should put paid to any doubt about the chances of such a solution and where the obstacles to it really lie. That they will not be given such scrutiny in the western media or by the vocal leftist critics of Israel is clear. But some people may notice and begin to wonder.