Liberty Fund

The Rise of Formalism and the Decline of Chevron

Courts were too ready to find statutes ambiguous, which empowered federal agencies to read the law any way they wanted. That may be starting to change.

Discrimination and Harvard Discrimination

An article in the current issue of The Economist (“A Lawsuit Reveals How Peculiar Harvard’s Definition of Merit Is”) raises again the problem of discrimination. A private organization has sued Harvard University for discrimination against Asian-American applicants. The discovery process forced Harvard to reveal much information about its admission process, which confirmed what everybody suspected–that Harvard does discriminate, directly and indirectly, on the basis or race.

It is difficult not to accept that a private entity, including a private university like Harvard, should be able to discriminate as it wishes. One might reject the morality of some forms of discrimination. For example, discrimination against Jews in the Progressive Era, including at Harvard, was certainly objectionable. But some of us will have different views on different forms of discrimination. That private discrimination should not be banned (as many forms are now banned by federal law, including on the basis of race) is supported by good moral and economic reasons.

The moral basis of value judgments in public policy evaluation can perhaps be summarized in the principle proposed by Robert Nozick: the law should not forbid “capitalist acts between consenting adults” (Anarchy, State, and Utopia).

There also exist good economic reasons to favor the private liberty to discriminate. Economic reasons have to do with consequences in terms of individual income, opportunities, and social coordination. Only a private entity can know all its circumstances. For example, only Harvard can determine whether its practice of discriminating in favor of alumni’s children is desirable.

Moreover, competition forces discriminators to pay the cost of their discrimination, as famously demonstratedby Gary Becker. Consequently, one has an incentive not to indulge in discrimination too much, if at all. If Harvard discriminates on the basis of race, it will (with some probability) lose out to MIT or Caltech, two other private universities. (Incidentally, Lauren Landsburg has a fascinating EconLog article on Becker as a teacher.)

A general habit of judging individuals on the basis of the groups they belong to could have dire consequences in the long term. Could this consideration provide a libertarian basis for some antidiscrimination laws? Probably not. At any rate, government cannot help by mandating discrimination to fight discrimination, that is, with affirmative action. The case under consideration supports these doubts.

What is sure is that discrimination by public institutions and bodies should not be allowed. It is contrary to the rule of law, which treats all individuals equally. Public discrimination is unjust to the individuals who are forced to pay taxes like others but do not benefit from an equal treatment by the state. From a narrower economic viewpoint, public discrimination or a legal obligation to discriminate privately (as was long the case against Blacks in America or South Africa) limits exchange with the individuals discriminated against and thus reduces the general benefits of exchange.

I would argue that the subsidies that Harvard gets, which are, I suppose, open to all other universities and represent only a small portion of Harvard’s budget, are not sufficient to justify regulating it like a public university. Such subsidies show the danger of government subsidies to private organizations.

The Economist article reminds us how affirmative action is just discrimination in reverse. The federal government has imposed affirmative action for several decades, even if numerical quotas are now deemed illegal. Forced antidiscrimination preferences are disguised quotas. By mandating discrimination in favor of certain races or ethnic backgrounds, the federal government fuels discrimination, for it implies discriminating against individuals from the non-protected races, that is, Asians and Whites. One more non-Asian or non-White admitted at university because of his race or ethnic background means closing the door to one Asian or White.

As Friedrich Hayek wrote in The Constitution of Liberty,

What is privilege to some is, of course, always discrimination to the rest.

It is ironic that Harvard University is being sued for discriminating the way the government—and probably most of its politically correct faculty—wanted, that is, in favor of Hispanics and Blacks. A compounding irony is that Harvard is also being investigated by the Department of Justice for the same affirmative action. (It would not be surprising if the DOJ had some political motivation.)

One cannot obey legislation that mandates to both discriminate and not discriminate. This is what affirmative action is. Shouldn’t Harvard now claim a private right to discriminate? Will this bring the Harvard crowd to discover the benefits of liberty?

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The State (revised LF ed.) (Frédéric Bastiat)

The State. Revised LF edition by David M. Hart (Indianapolis: Liberty Fund, 2018).

Still Mine

I’ve been recovering from eye surgery since Thursday afternoon and so have spent more time than usual watching TV. (The World Cup soccer, by the way, has been really fun; I loved Germany’s last-minute win with a beautiful set-piece goal yesterday.)

Last night my wife and I watched “Still Mine,” a movie that I hadn’t heard about. It’s based on a true story. (Spoiler alert: if you read the link on the true story, some of the suspense might be ruined.)

It’s a very libertarian, pro-property rights, anti -absurd government regulation movie. It’s about a man who decides to build a one-story house on his own property in the province of New Brunswick in Canada, a house that will work better for him and his wife, who has dementia. The man has learned to build well and so doesn’t understand why a government agency needs to judge his building standards. But he’s not implacable. He tries to work with them, to show them that his standards are actually higher than those in the rules. But what matters to the government bureaucracy is, surprise, surprise, the rules, not what the rules are allegedly designed to accomplish.

Any movie that I rate a 7 or above out of 10 is one that I am glad I saw. I would give this one at least an 8.5.

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Bathtubs Over Broadway: When Trade Shows Sold the American Dream

Song and dance from the era of the industrial musical.

What causes recessions and “empressions”?

Before starting this post, let me highly recommend George Selgin’s recent post on NGDP targeting.

Nick Rowe has a post discussing a scenario where a lack of media of exchange disrupts trade, without affecting employment and output:

I would call that a “recession”, even though (by assumption) output, employment, and (aggregate) consumption are unchanged. People are worse off, because of a reduction in the volume of exchange, due to a reduction in the circular flow of money around the Wicksellian triangle.

Nick’s terminology is unconventional; recessions are usually defined more in terms of output and employment.  I’d prefer a third definition—a sharp rise in the unemployment rate, regardless of what happens to output.  But I don’t get to choose definitions, so rather than fight a losing battle I’ll invent a new word for the concept I’m interested in.  Let’s call an employment recession an “empression”.

To see the difference, imagine a primitive economy where all workers are peasant farmers.  There is zero unemployment, as all are self-employed.  A spell of bad weather would cause a recession (falling output), but not an empression.  However, it just so happens that in the US all recessions seem to also be empressions, and all empressions seem to be recessions.  In the following graph, the grey bars reflect recession periods.  You can see that sharply rising unemployment is a necessary and sufficient condition for a recession.  You can’t say that about inflation, stock prices, yield spreads, steel output, or numerous other variables.

Lots of things might cause a higher unemployment rate.  These include:

1.  Sharply higher minimum wage rates, or a surge in union organizing.

2.  A sharp rise in the share of GDP going to capital, meaning less money to pay wages.

3.  A sharp rise in hours worked per week, meaning fewer workers are needed to produce the same nominal output.

However, I don’t believe that any of those factors are important causes of the US business cycle, at least since WWII. Rather the problem is sticky nominal hourly wages and unstable NGDP.   Before looking at NGDP, lets examine the growth rate of total labor compensation:

Notice that nominal labor compensation growth slows sharply during recessions and empressions—every single time.  So the problem does not seem to be a surge in hourly wages, rather the labor market is being starved of funds to pay workers—my musical chairs “model” of unemployment.  (Or perhaps “metaphor”, as respectable economists wouldn’t think it rises to the level of being a model.)

So what causes nominal labor compensation growth to slow at various times?  Does the corporate sector suddenly grab a bigger share of national income, leaving less money to pay workers?  Or does growth in national income itself slow?  Not surprisingly (as labor compensation is a big share of national income) it’s the latter.  It turns out that falling NGDP growth (combined with sticky hourly wages) is the proximate cause of both recessions and empressions:

Recall that I said that wage spikes don’t seem to be the cause of recessions and empressions.  There is, however, one wage spike that made a recession/empression somewhat worse than one would have otherwise expected.  Notice that the slowdown in NGDP growth was pretty modest during the 1973-75 recession.  And yet that was one of the more severe postwar recessions/empressions.  Why?  It turns that that 1974 saw an unusual wage shock, something that generally does not occur during US recessions:

Why did wage growth spike during the 1974 recession?  I’d guess it was because Nixon phased out his wage controls during 1974, and workers demanded wage increases to compensate for the high inflation of 1973-74.  But while that sort of situation may be common in some unstable developing countries, it’s pretty unusual in the USA.  And even during 1974, slowing NGDP growth was still part of the story.  The 1974 recession was one part NGDP shock and one part wage shock.

So the cause of post-war US recessions is actually quite simple.  NGDP growth slows while nominal hourly wages are sticky, and thus employment falls while unemployment rises.

Why don’t workers offer wage flexibility to prevent high unemployment?  For the same reason that Wall Street financiers don’t offer indexed bonds to prevent falling NGDP from creating financial crises—it’s a collective action problem.  If any one worker agrees to flexible wages, it doesn’t help him preserve his job.  He shows up at the factory gate and finds his workplace is closed down.  Only if all workers have flexible wages can we avoid a recession/empression during periods of sharply slowing NGDP.

If all workers bargained collectively that might be possible. But a labor union that covered all 150,000,000 workers would create lots of microeconomic inefficiency, which might be even worse than the business cycle.  Better to use monetary policy to keep NGDP growing at a steady 4%/year, or something close to that figure.

To summarize, recessions/empressions are quite simple.  A combination of sticky nominal wages and unstable NGDP (i.e. unstable monetary policy) causes recessions.  At elite universities they have models that don’t even feature nominal wages and NGDP.  Rather they focus on price inflation, interest rates, output and other irrelevant variables.  Again, sticky wages and unstable NGDP are pretty close to a necessary and sufficient condition for US recessions/empressions—no need to look for microfoundations.  No need to make it complicated.

The policy implications are also simple.  Adjust monetary policy to keep market expectations of NGDP growing along a 4% trend line.  That will mostly solve the problem of empressions in the US, and any remaining movement in RGDP will be an efficient “real business cycle”, not be worth worrying about.

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Adam Ferguson observed that social structures of all kinds were "the result of human action, but not the execution of any human design" (1782)

Using Defamation Law to Restrain False Statements

The tide may be turning on the calumnies of the social justice warriors.

The Barber of Seville, or the Useless Precaution (Pierre-Augustin Caron de Beaumarchais)

The Barber of Seville, or the Useless Precaution; A Comedy in four Acts. With Songs (London: J. Chouquet, 1776).

John Trenchard on the real nature of political parties (1721)

The Polylingual Constitution

Any theory that develops under parochial circumstances (legal scholars only) will be ripe for debunking.

On The Universe We Think In

We often try to think our way out of the predicament of life, and Fr. James V. Schall offers us wisdom about our place in the universe.

The Thirteen Principal Upanishads (Misc (Upanishads))

The Thirteen Principal Upanishads, translated from the Sanskrit with an outline of the philosophy of the Upanishads and an annotated bibliography, by Robert Ernest Hume (Oxford University Press, 1921).

From Canuckistan with Love

Power, not justice, may well decide the fate of liberty in the new Canada.

Spinning the industrial revolution

JANE HUMPHRIES, BENJAMIN SCHNEIDER THE ECONOMIC HISTORY REVIEW Abstract: The prevailing explanation for why the industrial revolution occurred first in Britain during the last quarter of the eighteenth century is Allen’s ‘high wage economy’ view, which claims that the high cost of labour relative to capital and fuel incentivized innovation and the adoption of new techniques. […]

Plato believed that great souls and creative talents produce "offspring" which can be enjoyed by others: wisdom, virtue, poetry, art, temperance, justice, and the law (340s BC)

The Law (revised LF ed.) (Frédéric Bastiat)

The Law. Revised LF ed. by David M. Hart (Liberty Fund: Indianapolis, 2018).

Miracle Men: How Market Liberals Saved Germany from Economic Catastrophe

They triumphed over the interventionist and collectivist economic policies that had been endemic in Germany since before the First World War.

Should There Be Freedom of Dissociation?

DAVID S. ODERBERG ECONOMIC AFFAIRS, Volume 37, Issue 2 Abstract: Contemporary liberal societies are seeing increasing pressure on individuals to act against their consciences. Most of the pressure is directed at freedom of religion but it also affects ethical beliefs more generally, contrary to the recognition of freedom of religion and conscience as a basic human […]

Psychic and Physical Treatises; comprising the Second and Third Enneads (Plotinus)

Psychic and Physical Treatises; comprising the Second and Third Enneads, translated from Greek by Stephen Mackenna (Boston: Charles T. Branford, 1918).

The Basic Decency of Republican Self-Government

George Carey's In Defense of the Constitution offers a rich defense of republican self-government.

David Hume: Prophet of the Counter-revolution (Laurence L. Bongie)

Though usually Edmund Burke is identified as the first to articulate the principles of a modern conservative political tradition, arguably he was preceded by a Scotsman who is better known for espousing a brilliant concept of skepticism. As Laurence Bongie notes, “David Hume was undoubtedly the eighteenth-century British writer whose works were most widely known and acclaimed on the Continent during the later Enlightenment period. Hume’s impact [in France] was of undeniable importance, greater even for a time than the related influence of Burke, although it represents a contribution to French counter-revolutionary thought which, unlike that of Burke, has been almost totally ignored by historians to this day.” The bulk of Bongie’s work consists of the writings of French readers of Hume who were confronted, first, by the ideology of human perfection and, finally, by the actual terrors of the French Revolution. Offered in French in the original edition of David Hume published by Oxford University Press in 1965, these vitally important writings have been translated by the author into English for the Liberty Fund second edition. In his foreword, Donald Livingston observes that “If conservatism is taken to be an intellectual critique of the first attempt at modern total revolution, then the first such event was not the French but the Puritan revolution, and the first systematic critique of this sort of act was given by Hume.”

Germaine de Staël on the indestructible love of liberty (1818)

Alan Kahan, "Limited Government, Unlimited Liberalism. Or, How Benjamin Constant was a Kantian After All" [May, 2018]

In this month's discussion Alan S. Kahan, Professor of British Civilization at the Université de Versailles/St. Quentin, argues that Benjamin Constant, like Immanuel Kant, analyzed politics from a double perspective. Kant divided his Metaphysics of Morals into what he called the "Doctrine of Right," about how human behavior affects other people, which is the business of the state, and the "Doctrine of Virtue," which relates to human beings' internal obligations, their motives and duties, which are not the state's business. In Constant this double perspective takes the form of strictly limiting the sphere in which it is legitimate for the state to act, the equivalent of Kant's doctrine of right, and of close attention to human moral and religious development, the equivalent of Kant's doctrine of virtue. For both Kant and Constant the state's sphere of action must be strictly limited. But the limits they impose on the state do not limit the scope of their commentary on the relationship between politics and religion and morals. Indeed, for Constant at least, a limited state must rest on a broad religious/moral foundation to survive. Alan Kahan is joined in the discussion by Aurelian Craiutu, professor of political science at Indiana University, Bloomington; Bryan Garsten, professor of political science and humanities at Yale University; and Jacob T. Levy, Professor of Political Theory in the department of philosophy at McGill University.

See the Archive of "Liberty Matters".

Kim’s Grand Strategy

From the pages of rocket man’s diary.

The Virtues

Here we have a collection of images depicting the Seven Virtues of charity, faith, fortitude, hope, justice, prudence, and temperance.

Rational Voter, Meet Median Voter

“Tribalism” motivates a lot of partisan behavior, but there are many other factors—including policy preferences—involved.

A Source Book for Mediaeval History. Selected Documents (Oliver J. Thatcher)

A Source Book for Mediaeval History. Selected Documents Illustrating the History of Europe in the Middle Age, ed. Oliver J. Thatcher and Edgar Holmes McNeal (New York: Charles Scribner’s Sons, 1905).

Paul Sakmann’s and Albert Schatz’s Mandeville Studies: Their Link to Hayek’s ‘Spontaneous Order’ Theory

MARK CHARLES NOLAN Journal of the History of Economic Thought, Volume 38, Issue 4 Abstract: This paper agrees with Friedrich August Hayek’s assertion in his 1945 Dublin lecture that the importance of Dutch physician Bernard Mandeville’s role in the history of economics had been overlooked and with his 1966 London lecture’s assertion that Mandeville’s important contribution […]