Illegal Drugs - Ivry Man (IM) asks Dr. Know (DK) for Guidance

Ivry man finds himself in the park and, as expected, sees Dr. Know seated on his usual bench looking absent minded.

IM. Dr. Know, how are you? It’s been quite a while since we spoke.

DK. [Warm smile] Indeed it has my dear friend. The responsibility for this lies with the guy who writes this dialogue. Apparently he has been very busy with other things and could not find the time to bother with the likes of us. Who am I to argue with that?

IM. [Looking confused] I am not sure I understand.

DK. Never mind. The fact that we are here must mean that there is something bothering you. Did you want to speak to me about something?

IM. [Serious] Yes, indeed. I just read this morning about two Americans who were killed in this drug-war that is going on in Mexico. It doesn’t seem as if the Mexican government is doing enough to keep its citizens, and now ours, safe, and to stamp out this drug epidemic.

DK. [Looking thoughtful] Maybe we should look at this a little more carefully. What do you suppose this “war” is all about?

IM. Well, it’s obvious, isn’t it? These drugs are addictive, people are prepared to pay lots of money for them even though they shouldn’t have them, and so unscrupulous criminals have made a very big business out of it and are willing to go to war to defend that business. We have to do what it takes to put them out of business – step up to the plate!

DK. Well now let me get this straight. There are some people who want these drugs very badly and there are other people who want to sell to them. So what’s the problem exactly?

IM. [Exasperated]Are you deliberately being stupid? The problem is that we can’t simply allow people to sell and buy these very bad substances.

DK. And why is that?

IM. What is the matter with you? Don’t you think addictive drugs are terrible?

DK. Well yes, as a matter of fact I do. I think they are a curse. I can say nothing good about them. I am talking about hard drugs like heroine, crack, acid, etc. and various concoctions of over-the-counter stuff as well. I think cocaine is probably borderline and I think marijuana is pretty harmless.

IM.  How can you say that? Surely you know that marijuana is a gateway drug, a stepping stone to harder stuff. If you open the flood gates, what then? [Dr. Know grimaces at the mixed metaphors]

DK. As a matter of fact my dear Ivrey, I think that is completely false. I see no hard evidence that marijuana is itself addictive or leads to addiction of other substances. Nor do I see any credible evidence that it is unhealthy. Excess pot is surely less harmful than excess alcohol and alcohol can be dangerously addictive. And pot is certainly no more harmful than garden variety tobacco found in cigarettes, pipes and cigars. And we know that it has certain beneficial medicinal uses, for example in the treatment of pain and nausea. For the life of me I cannot even begin to understand why this stuff is illegal. We could save a lot of law enforcement dollars on this one.

IM. [Looking peeved] Well I can see I am not going to win this one. You do admit though that those other things are very bad?

DK. [Looking earnest] Indeed I do. Very bad.

IM. [Indignant] So, at least for the hard stuff, prohibit it?

DK.  No, my friend. This is an imperfect world. There are lots of dangerous temptations in it. Being a free person means having to make hard choices and bearing the consequences of one’s actions. We cannot, and do not try, to protect people from all that is bad in the world particularly when it is the result of their own bad choices. Who are we to decided for people what is good for them and what not? Should we prohibit the eating of red meat for everyone who has high cholesterol? We tried prohibiting the purchase and sale of alcohol and you know where that led. Isn’t this exactly the same as “Prohibition?”

         How long has this “drug-war” been going on? At least 30 years. Every successive administration, Republican or Democrat, pledges renewed efforts to control the sale and use of hard drugs; yet they are still with us, in the inner cities and in the affluent suburbs. The drug-war has not been won, cannot be won, and costs more and more in terms of dollars, corruption and human lives with each passing moment.

IM. [Incredulous] So what are you suggesting, that we just turn a blind eye to users and pushers?

DK. Think about it Ivrey. How could the harms and suffering of allowing free sale and use even begin to compare with the mounting costs of this war? I doubt we could accurately assess this cost. In addition to dollar expenditures and loss of life and limb (over twenty thousand people killed in Mexico alone since the war moved there from Colombia, many of them uninvolved innocents) we have to add the devastating loss of freedom and privacy as drug-enforcement thugs knock down doors and strip-search suspects, the costs of incarcerating hundreds of thousands of perpetrators, and the incredible degree of police corruption caused by the drug-enforcement situation.

IM. What do you mean?

DK  There is probably not a single urban police force in this country (and certainly not in Mexico) that is not seriously infiltrated by cops in the pay of drug-lords. How can local government (or even the federal government) compete with the kind of money the drug trade offers? And for what?

         Even more important, this is not something that should be a preoccupation of our secretary of state and an important aspect of our foreign policy as we lean very heavily on foreign governments to bear the brunt of this war. The demand for drugs in the U.S. and our attempt to stamp out the trade has resulted in major destruction to the economies of other countries, like Colombia and Afghanistan and now, to an even greater degree, Mexico. We, the U.S., have destroyed civil society and peaceful living in northern Mexico. We have made them pay dearly for our “problem.”

IM. [Red in the face] I just can’t believe you would allow people to be abused by these criminals without even trying to protect them.

DK. [Sad, concerned] If there were any likelihood of winning this war or even confining it to a low boil, one might make an argument for persisting; but after thirty years of war it is definitely time to declare defeat and choose the lesser evil – allow people to decide what to buy and ingest as long as they do it peacefully. And if you want to try and persuade them to make better choices, to “educate” them, that is your choice, with your dollar. Even if we used a fraction of the tax-payer dollars we now spend on enforcement for this educative effort, it would probably be more effective and sensible that this senseless “war.”

         Don’t you see Ivrey, if you criminalize something you attract people with a comparative advantage in being criminals. That is why there is so much horrifying violence. If it were decriminalized the violence would be unnecessary. The price would fall. Even low income addicts probably wouldn’t have to rob people to get their fix as often as now. The trade would be visible, like alcohol.

IM.  Don’t you think this will result in a huge increase in experimentation and addiction, especially among our vulnerable children?

DK. So dramatic. No I don’t actually. My best guess is that in the beginning there will be some spike in use and abuse, but in a short time this will smooth out. In the end we may actually have fewer users. But even if the number of users goes up this is no reason to persist with this craziness. And our children are already highly exposed to all manner of addictive substances, wherever they are.

IM. I should have known I was getting into trouble. So what is your specific proposal?

DK.  I propose officially decriminalizing the production and sale of all addictive substances and letting people make up their own minds. I suppose this is a non-starter. Then at least we can do this de-facto by putting drug-enforcement way behind the back-burner to where it is basically invisible.

IM. [looking thoughtful] It would take a lot of persuading to get to that point.

DK. Well that is why we are here you know (no pun intended). Our author decided to write this dialogue to do his little bit, just like he said he would when we last met (see here).

IM.  Well I hope to see you again soon. I see you looking at your watch. But I wonder if your argument about addictive drugs would not apply equally to prescription drugs (pharmaceuticals)?

DK.  As a matter of fact it would, and that will be the subject of our next discussion. Always a pleasure my good friend.

He rises and ambles off in the direction of … .

Immigration is an essential ingredient in American economic growth.

Within the space of 235 years (a blink of an eye in historical time) the United States of America has gone from an ex-colonial backwater to the greatest economic powerhouse in history. Its population has grown from about 3 million to over 300 million over this period. A sizable portion of this growth has come from immigration. The proportion of the foreign born (legal and illegal) has rarely been below 10% and has frequently been in the region of 20%. At any point in time a large proportion of working Americans were either born elsewhere, had parents who were born elsewhere, or had grandparents who were born elsewhere. This is an incredibly dynamic picture, a veritable demographic churning, with amazing cultural and economic implications.

Judging by my own experience and observations, there is a subtle inter-generational shift in cultural identity. Only by the third generation do people feel completely assimilated into the local culture. The immigrants never quite "make-it." I think of myself very much as an American. But I am frequently conscious that my accent and my experience causes me to stand out a bit - not in a bad way, but it is noticeable. Many of my fellow immigrants feel this to a greater extent. It makes for cultural tensions, but also for an exciting dynamism, an infusion of cultural DNA into to social gene pool. My children are American. But even they, as children of South African immigrants, carry an extra bit of background baggage. They feel just a little bit different, in possession of something unique (the tacit and conscious knowledge of another culture). You see this most clearly in the way they gravitate to other first generation Americans in their social circles. By the third generation the children are full Americans. Their grandparents might as well be from another planet.

This pattern is repeated over again in each generation of America's population. It has been a necessary part of the ongoing vitality of the American experience, including its entrepreneurial component. Without it American exceptionalism, and the rate of value-creation, of economic growth, will not be sustained.

Illegal immigration is not a problem. It is an opportunity.

We are America

President Obama told business leaders Monday, "I want to be clear: Even as we make America the best place on earth to do business, businesses also have a responsibility to America... As we work with you to make America a better place to do business, ask yourselves what you can do for America. Ask yourselves what you can do to hire American workers, to support the American economy, and to invest in this nation."

This is really annoying - he just doesn't get it. And the businessmen he was speaking do, don't either. They just want to make a deal that will let them run their businesses and make profits. In this speech to the US Chamber of Commerce Obama echoed John F. Kennedy's famous inaugural speech about not asking what your country can do for you but, rather, what you can do for your country.

This gets it exactly wrong!! A system that depends on individual duty and sacrifice to function properly, is likely to malfunction badly, and to be abused by the worst elements of society. This Adam Smith already knew, and this, Milton Friedman already made crystal clear in his 1962 classic Capitalism and Freedom. In the first sentences of the Introduction he writes as follows:

In a much quoted passage in his inaugural address, President Kennedy said, "Ask not what your country can do for you - ask what you can do for your country." Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your 'country" implies the government is the master or the deity, the citizen, the servant or the votary.

To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshiped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather "What can I and my compatriots do through government" to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect?

This should be required reading at the White House.

Walking the tightrope between left and right.

Today’s editorial in the WSJ by the president of the United States can be understood on at least two levels.

On one level it is an exercise in reasoned persuasion, on the basis of sound evidence and logic, to move the economic policy in a more sensible direction. If this is the intention, it must be judged an abysmal failure. As my annotations at the link below suggest, the reasoning is faulty, the assertions are vague and unsupported - the rhetoric reads like something out of Orwell's 1984 - "newspeak" - terms that mean the very opposite of what they say.

On a second level, this is a rhetorical play – a big one. I have said for a while that one of my biggest fears is that Obama will reinvent himself as a candidate of the “moderate middle” regain the support of the “moderates” and independents and win reelection in 2012. Is seems to me this editorial is all about that reelection. All form and no substance, it is an attempt to appeal to those who are worried about his commitment to a healthy economy. It is an attempt to allay these fears while not alienating the anti-business crowd too much. He is cleverly walking a tightrope, looking right and left and hoping not to fall.

Will it work?

You can find the editorial, together with my annotations, at the link below.
Click here.

You cannot replace God with Science - don't try.

Sam Harris is at it again. For those who don't know him, Harris is an American neuroscientist best known for his critical work on religion. In his books The End of Faith and Letter to a Christian Nation he provides devastating critiques of traditional religious beliefs. Though not new, his arguments are candid and compelling - at least to me. Reading his work (like the work of his fellow "New Atheists," Richard Dawkins, Christopher Hitchens and Daniel Dennett) leaves me wondering about two "mysteries" of life.

Mystery number 1 is how on earth reasonable people can believe the types of things claimed by the teachings of the traditional religions. I am talking factual things, not moral truths, like the stories of creation, revelation, miracles, etc. when the evidence and common sense is so compellingly against such things. I suppose I don't really expect to get a satisfying answer to this question. The explanation probably lies in the cognitive-emotional makeup of human beings. Which begs the question, why do some believe so fervently and others think that it is all nonsense and superstition? Leave that aside.

Mystery number 2 arises out of the realization that while the "answers" given by traditional religion may be patently unsatisfactory, or, actually, not really answers at all, no good answers to the "big" questions exist. There are many things in heaven and on earth that remain unknown, and perhaps unknowable. The ratio of what we know to what we don't know about what there is to know, might be pathetically low. This would not be surprising to me. And about the really "big" questions I imagine there can never be an answer. "How was the universe created?" or more accurately, "Why is there something rather than nothing?" or more mundanely, "From where does matter come?" are questions that tease us but whose coherence may be in doubt. They suggest some sort of transcendent infinite regress. I am content to say "I don't know, nobody knows, we will probably never know."

So much for the New Atheism. But Harris is not content to confine his argument to a penetrating critique of pretended knowledge. He also wants to attack the morality of religion. On some of this I find his arguments quite reasonable. Some religious teachings strike us "reasonable" folks as simply medieval. However, as I have explained before, here, what Harris fails to realize is that this kind of criticism, criticism of moral values, is of a whole different category from criticism of factual beliefs. Morals belong to the world of tastes and values informing us about how the world ought to be; factual beliefs belong to the world of facts informing us about how the world is. These are categorically different. As the British philosopher David Hume taught us, you cannot get an "ought" from an "is." You cannot decide how things ought to be simply by looking at how they are. Matters of value are different from matters of fact. "Harry is a thief" may be a fact. "Harry ought to be punished" is not. And the second sentence does not follow from the first without the insertion of some personal judgment.

Roughly the last third of The End of Faith is devoted to the futile exercise of trying to deduce morals from "scientific" facts. And now Harris has written a whole new book on this: The Moral Landscape: How Science Can Determine Human Values. Notice the subtitle. It is a straight-out denial of Hume's distinction between facts and values. How does he do it? With a very clumsy slight of hand, that is how.

He begins by equating morality to that which fosters "well-being" - since deep down everyone believes that we should be concerned about well-being. Hence if you find the scientific determinants of well-being you can find a scientific basis for morality! QED. One can use the objective filter of science to determine what is moral and what is not on the basis of the effect of various behaviors on well-being. Simply examine the states of people's brains under different conditions to find out what makes them "happy" and you can write the book on a scientific morality - as he perceives himself to have done.

It is clear from his references and sources, that in addition to work on neuroscience, Harris relies on work in what has been called Behavioral Economics. This includes recent work on so-called "happiness research" and the "new paternalism." Using laboratory methods (simulated realities with volunteers) these researchers claim to be able to discern enduring truths about human perception and decision-making. Maybe they can. Its what follows that is often problematic in the extreme. For example, from the observation that people often seem to make what the experimenter knows to be irrational decisions - because they are inconsistent (dependent on the way the decision problem is framed) or because they are clearly against the subjects' self interest, these behavioral economists would like to make paternalistic laws to guide people in their own interests to make "better" decisions. Science has become God and he wants to put Big Brother in charge. (see for example here.)

Harris's project is flawed before it gets started - it has two major flaws. 1. "well-being" is an amorphous, non-scientific concept. It is a futile attempt to objectify the subjective. We don't know and cannot know what it is that people "really want." To presume we do is to court extreme dangers of moral coercion; depriving people of moral autonomy. 2. Even if we could somehow determine what well-being is for each and every human being, we cannot assume that what enhances well-being is automatically moral. This is to illegitimately ignore the fact-value distinction. I mean one can make this assertion - that morality is simply the enhancement of well-being - but it is a lame assertion based simply on itself and nothing else but the belief that everyone would agree with it. I don't.

What supreme irony! To start a project aimed at dethroning dogmatic belief systems only to end up peddling another - one just as dangerous.

The essence of the matter

Have you wondered why economists seem so divided over on their interpretations of the current economic crisis? Here is my attempt to boil it down.

Keynesians and Classicals (of various kinds) agree on one key point; there is currently a serious lack of confidence in the economy that is inhibiting private business investment expenditures. What sharply divides them are views as to what caused this crisis of confidence and what needs to be done to fix it.

Keynesians think that the market failed because of lack of regulation in a dynamic innovative environment. Those with Classical inclinations believe that exactly the opposite is true; that it was ill-conceived regulatory initiatives like the concerted push to expand home ownership in America, underwritten by FANNIE MAE and FREDDIE MAC, and facilitated by easy money, that caused a housing bubble and runaway financial asset expansion. The latter was seriously aggravated by a cartel of rating agencies indirectly created by government licensing requirements and operating with serious conflicts of interest.

Keynesians think that more government-Fed-financed stimulus is needed, and that higher taxes don't matter. Those who believe in the market believe that permanent significant tax reductions (comprehensive tax reform) and a commitment to fiscal responsibility at the various levels of government is what is needed. This will entail credibly limiting the power of the Fed as well.

Look not to Israel, the Arab states or the U.S. for a solution - look to the United Nations!

See the pdf file at this link

click here

- an article from Commentary magazine, current issue, by Michael Bernstam.

I found this article amazing in its simplicity. It seems so obvious to me after reading it that I marvel that anyone carefully contemplating the Israel-Palestinian conflict could fail to consider the role of UNRWA. But you never hear a word about it.

If Bernstam is right, then UNRWA must stand as the most perniciously destructive and counterproductive of the agencies of the UN. The "achievements" of the UN in the world have been rightly criticized and even vilified. But this must be the worst of them. It is a case mostly of unintended harms, but that is no mitigation to those millions whose lives it has affected.

Those who rise to condemn Israel pointing to the injustice of the displacement in 1949 of the Arabs whose descendants became today's Palestinians, should read this article carefully and consider the balancing of evils over the years that have attended all of the many refugees from that awful period in history. Absent the dependency enabling (nay producing) role of UNRWA, the refugee status of the Palestinians would not have endured. In the meantime, UNRWA has evolved into a Palestinian controlled, terrorist sponsoring, paramilitary organization that is also an all-encompassing welfare state perpetuating refugeeism. Remember, this is an agency of the United Nations.! And, as such, it receives most of its financing from the taxpayers of the United States!

What this article tells me (and I do not discount the possibility that I am naïve about some of it) is that while we correctly report, analyze and condemn current injustices on both sides of the issue - being the predictable result of political opportunism and the racism of fundamentalists and ultra-nationalists - the foundationally pathological structure of the Palestinian situation is at the root of it. If this is not fixed the problem quite simply will never go away and will probably get steadily worse. Yet, if Bernstam is correct, the solution he offers, the abolition of UNRWA, is the obvious fix.

I highly recommend you read this article.

Income inequality is NOT a bad thing.

In light of the current debate in the Congress about extending tax cuts for the "rich," I feel compelled to revisit the question of economic inequality.

Perhaps the most stubbornly persistent idea embraced by American "liberals" (statists) is the idea that the rich ought to pay more tax (meaning a higher proportion of their income) because income inequality is a bad thing. This idea is widespread. It has achieved the status of a self-evident truth. And yet when one examines it carefully one sees that the belief is not only illogical, it is also unworthy.

At the most practical level it is just silly - though dangerously so. There is no reason to believe that target-taxing people who earn more than $250,000 a year will help anyone at all. The argument is that government needs that revenue to prevent the deficit from getting any worse. And, after all, the "rich" can afford it. This kind of reasoning comes from economic ignorance (notwithstanding the fact that many of the people who are making it should know better). It comes from focusing on the short-term-direct effects of any policy and ignores the longer-term-widespread effects. The deficit is the result of a shortfall of tax-revenue against expenditure. But taxes affect behavior. A lower tax rate may actually boost revenue if it encourages economic activity. This is not just a theoretical possibility; there are many historical examples of this. So, if its just the deficit that is the problem, it is by no means clear that soaking the rich will help and may likely hurt. There is nothing that helps cure government deficits more than vigorous private-sector economic activity which generates lots of tax revenue, and low levels of taxation are crucial for this in the long term.

Of course the best way to reduce the deficit is to cut government expenditure - but that is a subject for another blog.

If, alternatively, the liberals are concerned about jobs (especially for the poor and for minorities) they should understand that it is only the rich who create jobs. Government jobs depend parasitically on value created in the private sector; government does not create much value itself. Its role is to create conditions that allow for the creation of value by productive, entrepreneurial activity. Without the rich there are no jobs. Without the rich there is no economic growth. If you tax the rich you tax the desire to become rich and create jobs.

So, at a practical level, the policy is ill-advised. Liberals reading this will roll their eyes. "We have heard this before from the likes of Ronald Reagan - it is 'trickle down' economics and it is nonsense. The rich don't spend their money on creating jobs, they save it and the money does not trickle down to the poor." Again, economic illiteracy. Those making that argument could not possibly really believe what they are saying. If they did why would they stop short of advocating the complete elimination of all income inequality? Why not raise income taxes on the rich sufficient to erase all income gaps? Contemplating that, they will realize that this would be disastrous, that it would most probably destroy the economy by killing golden egg-laying goose. But somehow mild income leveling has no bad effects on the goose? Listen guys, we know that 'trickle down' must work. Even if the rich save their income, that money comes back into the economy through the capital market (at least it will when it starts working again!). Its not really 'trickle down.' Its 'spread it around.' Taxes shrink the pie, tax-cuts expand it. Its not a zero-sum game and its not rocket science. You can't simply take taxes from the rich and give them to the poor (which rarely actually happens anyway) without destroying economic value.

Yet, having said all this, I suspect that deep down the intelligent liberal knows it already. I suspect that this is not what its really about. We have had upwards of forty years of the war on poverty and there is apparently no victory in sight. If you add up all of the money extracted by taxes for so-called poverty programs, and divide it by the number of people classified as "poor," there should not be any poor people left. Contributions are more than adequate to ensure no poverty. Why are the poor not getting "their" money? Why indeed? Poverty in America is actually less of a condition than an industry employing millions of parasitical bureaucrats with a vested interest in its perpetuation. [Many of them are sincere - they know not what they do.]

No, I suspect the real reason behind the desire to sock it to the rich with a big tax stick, is the powerful visceral appeal of the act of reducing income inequality. Inequality has taken on a life of its own as a bogey man. Its not really poverty that is the problem in liberal eyes, it is inequality. Sans poverty, inequality would still be problem for them. If somehow the poorest person in America earned a million dollars annually and the richest earned a billion, this would still be a problem for them. If the rich billionaires were small in number yet owned a large proportion of the wealth, and the millionaires were large in number yet owned a proportion less than their numbers in the population, this would still be a problem for them. I think they will admit this. Inequality, in and of itself, is a problem for them.

Now, why should this be so? Oh, they have ready answers. But, though they may dress it up in all manner of respectable rhetoric like "the dangers of relative deprivation," in the end it comes down to just two basic and very base emotions - resentment and envy! That is what it is really about. The liberal mind hates all inequalities. It cannot abide "gaps." Its policy motivations are all about the eradication of gaps. There is a deep-seated resentment of the acquisition of riches. There is a barely acknowledged envy of the rich. How much is resentment and how much envy, who knows? I suspect the intellectuals are more resentful and the liberals who are poor are more envious, it doesn't matter much. Both are equally unworthy.

Think about it. What are the values we try to inculcate in our children? Generosity, sharing, joy for the good-fortune of others. And what values do we condemn in them? Resentment, envy, and the inability to rejoice in (or at least respect) the achievements of others. Yet when it comes to the fashioning of economic and social policy we somehow think its ok to reverse these values and extol the benefits of enforced equality, elevating resentment and envy to national virtues. Echoing Adam Smith, how can what are vices of private behavior become virtues when practiced by government?

Poverty is bad. Income inequality is not. It is a necessary outcome of a free society in which people make different lifestyle choices and encounter different odds. To be sure, all free people should be equal in the eyes of the law, they should be equally subject to the rule of law, but they should not be made to be equal in results when they violate no law.

After Keynes: Rediscovering Hayek.

About two years ago in my blog I predicted that sooner or later the pendulum would swing back against the Keynesian resurgence as disillusionment with its policy failures mounted up. This is now happening - in Europe and elsewhere. The one glaring exception is the Board of Governors of the Federal Reserve System of the United States (aka. Ben Bernanke).

See this interesting article in Newsweek.

A Return to Economist Friedrich Hayek's Ideas - Newsweek

PL.

Considerations on market stability and the world of finance

David Prychitko has written a very interesting article, just published in the latest issue of the Review of Austrian Economics. It is a timely consideration of the ideas of a prominent Keynesian, Hyman Minsky, on the question of the alleged inherent instability of the financial system (actually all capitalist financial systems).

Minsky was a devoted Keynesian, but an imaginative one. He extends and deepens Keynes’s ideas, making them more plausible and intuitive. His main instrument is a very useful taxonomy of types of finance. There are three types, hedge finance, speculative finance and Ponzi finance. They escalate in degree of risk. When the revenue stream from an investment is confidently expected to pay all expenditure streams at every moment in the future we have hedge finance. With speculative finance there are some holes; near-term expenditures may exceed revenues, the hope being that in the longer term, revenues and capital gains will redress the balance. Ponzi finance is a situation in which in which interest on the debt actually exceeds revenue flows. (In passing we could note that this is a nice framework not only for analyzing the behavior of individuals, but also, even more relevantly, of the state.)

Minsky’s story uses this taxonomy to explain how a cycle is composed of the progression of economic agents from hedge finance to Ponzi finance before an inevitable collapse. He claims that the take off from hedge to speculative finance is inevitable, the Minsky-moment at which the start of the boom occurs. Prychitko, while giving us an appreciation of Minsky’s work, criticizes him for not providing an explanation of the genesis of this progression from tranquil business as usual to escalating speculative positions. Of course the Austrian explanation is the credit cycle ignited by what is so charmingly referred to today as “quantitative easing” by the central bank. For the rest you need to read this wonderful article which provides Austrians with a welcome window into the other world.

I would like to add a note on one aspect of this fundamental debate with the Keynesians. Prychitko claims that Minsky has no explanation of the Minsky-moment and implies, I think, that without such an explanation we are at a loss to understand how any cycle would occur. Why would entrepreneurs ever abandon their commitment to hedge finance? What provokes them to take on more risk to the point of financial meltdown? I think this is basically correct. But I want to guard against the possible conclusion that what is being claimed is that, absent governmental monetary mismanagement, no cycles would ever occur.

Of course Keynes’s explanation (surely implicit in Minsky) is rooted in casual social psychology. Entrepreneurs display “animal spirits” and are susceptible to waves of optimism and pessimism. There is “herding.” Asset values, being inherently subjective, very sensitive to projected future revenues, are subject to large, unpredictable, connected swings. So the explanation of the Minsky-moment is that eventually financial tranquility is bound to be disturbed by a contagion of unrealistic optimistic expectations. And the rest is history.

My own take on this is as follows: I think there is an element of truth in what Keynes says. I think, even in the absence of monetary mismanagement, there would be cycles. In fact, cycles are part of the experimental, evolutionary nature of the market process. All action is based on expectations. The epistemological basis of some expectations is more solid than others. In the realm of business investment, particularly in an environment of innovation and rapid change, the knowledge-base is quite tenuous. Entrepreneurs pit their conflicting expectations against each other. Most of them (and maybe all of them) will be wrong. Hence, where the investment environment invites imaginative visions (for example the late 1800’s and early 1900’s, the 1990s) we are bound to get a clustering of errors. It is inherent in the market process.

There are a number of reasons why the “people should know better” argument doesn’t work against this. Firstly, even though it may be perfectly clear that asset values are unrealistically high, and must eventually be corrected, investors do not know when this correction will come and are anxious to ride the boom as long as they can. There is a kind of brinkmanship. That this occurs is, I think, undeniable. Second, one could argue that memory is fatally selective. We remember the more recent past better than the more distant, especially when the latter belongs to previous generations. So, for example, the discrediting of Keynesian ideas is not remembered as well by the current generation as by those who lived through the 1970’s and early 1980’s. Third, there is the “each episode is unique” syndrome (a kind of pop “historicist” anti-Mengerian approach); this is a “new economy” in which the old rules don’t apply. And there may be other, similar arguments. I think it not implausible to suggest that the “dark forces of time and ignorance” do make for a world of unavoidable turbulence.

So what? Well the power of the Austrian argument derives not from asserting that without government mismanagement cycles could be avoided; it comes rather from the anti-utopian argument that this world is not perfect. It is extremely complex, it churns, it surges, and it progresses. The trick is to allow it to play out and not think you can achieve smooth sailing by interfering with it. Striving for the impossible produces highly exaggerated cycles and messes up the ability of the process to filter information, to sift the viable projects from the others. Absent government mismanagement, the boom comes to a natural end because the waves of optimistic investment put an increasing strain on the supply of loanable funds and push up interest rates. The most insane thing you can do is attempt to prolong the boom by trying to keep down the cost of increasingly scarce credit.

But this is the view of someone who believes that the market process is inherently stable. Cycles will occur, but the financial markets, if unencumbered, can accommodate them. Cycles are mitigated by the homeostatic properties of the market, which work fast enough to correct any run-away waves of optimism and pessimism, to prevent social dysfunction or collapse.

The Keynesians quite simply do not believe this. They believe that the market system is inherently unstable, that herding behaviors, if not checked by enlightened leadership, could result in financial and social collapse, in disaster and catastrophe.

[At least that is the story. It’s hard to know how sincere this is and to what extent it is just a pretext for the desire to engage in large scale Robin-Hood-type income distribution. In addition, it totally ignores the unrealism of assuming that government leadership has the ability (knowledge) to, and can be trusted to, do the job. That is, it ignores the incentive and knowledge problems that economic policy must face. It asserts market failure but ignores government failure.]

As a theoretical matter, the stability of the market system cannot be proved. Stability (and convergence) rests (among other things) on the speed with which the undeniable homeostatic forces (like price flexibility) work relative to the speed of other changes. We have no robust theory of behavior in disequilibrium and without one we cannot prove the stability of a system of interconnected markets. The confident assertion that the market system is not inherently unstable (which I do firmly believe) derives from a particular understanding of how markets work plus a particular reading of history. Theoretically the world need not work the way it does. It could be closer to the one envisioned by Keynes, but it isn’t.

The absence of a knock-down argument (theoretical or empirical – history does not speak with one voice) is the reason I even have to write something like this; it is the reason discredited ideas get recycled. It makes our jobs much more difficult. But I guess there is an upside to that.