Monthly Archives: February 2016

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No, Mr. Trump, Victims of Eminent Domain Do Not “Get a Fortune” – Article by George C. Leef

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Categories: Economics, Justice, Tags: , , , , , , , , , ,

The New Renaissance HatGeorge C. Leef
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Trump’s huge mistake about eminent domain

During the debate among Republican presidential candidates last month, Jeb Bush hammered Donald Trump on his abuse of eminent domain. But Trump apparently sees nothing wrong in having government officials force people to sell their property.

Trump replied,

Eminent domain is an absolute necessity for a country, for our country. Without it, you wouldn’t have roads, you wouldn’t have hospitals, you wouldn’t have anything. You would have schools, you wouldn’t have bridges.

And what a lot of people don’t know because they were all saying, oh, you’re going to take their property. When somebody — when eminent domain is used on somebody’s property, that person gets a fortune. They at least get fair market value, and if they’re smart, they’ll get two or three times the value of their property.

This last assertion led George Mason law professor Ilya Somin (an expert on eminent domain) to quip at the Volokh Conspiracy, “If eminent domain really were a good way to make a fortune, the Donald Trumps of the world would be lobbying the government to condemn their property. But that rarely, if ever, happens.”

Put aside Trump’s hyperbole about the supposed impossibility of schools, hospitals, and bridges without eminent domain. What I want to focus on is his claim that eminent domain is not objectionable because people who have their property taken make out just fine financially.

That claim is simply indefensible. The truth is that people who lose their property to eminent domain proceedings are almost never made whole.

Legal scholars have for many years been writing about the injustice that usually befalls people who have to settle for what the government deems “just compensation” under the Fifth Amendment. I wouldn’t expect Mr. Trump to know about that because he is too busy making deals. But the kind of deals businessmen usually make involve two parties who can say “no,” unless and until they think the deal will improve their positions.

With eminent domain takings, however, the property owner can’t say “no,” and usually must settle for much less than he or she would have bargained for in a voluntary setting.

Professor Gideon Kanner has written extensively about the problem of inadequate compensation for people who’ve been forced to sell under eminent domain. In his article “[Un]Equal Justice under Law: The Invidiously Disparate Treatment of American Property Owners in Taking Cases,” he writes:

The true standard of compensation is not indemnity, but rather fair market value so artfully defined as to exclude factors that sellers and buyers in voluntary transactions would consider, and that the government need only pay for what it acquires, not for what the owner has lost.

Those losses include business goodwill, relocation expenses, and the emotional damage of having to leave a community where one may have strong ties. In the government’s calculus, people are expected to suffer such losses as part of the price of living in America.

As the Supreme Court stated in the 1949 takings case Kimball Laundry v. U.S., “Loss to the owner of non-transferable values … is properly treated as part of the burden of common citizenship.” That “tough luck, property owner” mindset still prevails.

Knowing that they hold the high cards (and ultimately the guns) when they deal with property owners, government officials take full advantage. As Kanner observes, “Condemning agencies regularly reap unjustified windfalls from the fact that the majority of their offers (including the many low-ball ones) are accepted without litigation or even involvement by a private appraiser or lawyer.”

Therefore, eminent domain causes many property owners to suffer uncompensated losses.

Far from “getting a fortune” or “two or three times” the market value of their property, most owners are left substantially worse off for their unwanted encounter with condemning government agencies. Few if any of them shrug off the losses as their part of the “burden of common citizenship.”

Although the eminent domain issue came up during a debate among presidential candidates, there is hardly anything that the president can do to rectify the problem of under-compensation for property owners. He (or she) cannot issue an executive order mandating that property owners be made whole.

If there is to be a solution, it must come from the judiciary.

Judges, and especially the justices of the Supreme Court, will have to stop ruling that merely because an individual is paid an amount deemed “fair market value,” the Fifth Amendment’s requirement of “just compensation” has been satisfied.

It would also help property owners if the Supreme Court would overturn Kelo v. New London and establish that property can only be taken for actual “public use,” as the Fifth Amendment requires, and not for private use that local politicians think might have some “public benefit.”

Since we are going to have confirmation hearings for a new member of the Court eventually, it would be important to find out precisely what the nominee thinks “just compensation” and “public use” actually mean.

George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

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Homeschooled Weirdoes and the Culture of Conformity – Article by B.K. Marcus

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Categories: Education, Self-Improvement, Tags: , , , , , , , ,

The New Renaissance HatB.K. Marcus
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“Not seeming weird” carries its own cost

Remember that weird kid in school? I don’t mean the really scary one. I mean the borderline oddball. The one you had to talk to a bit to spot the weirdness. The boy who never knew what TV show everyone was talking about. The girl who, when you asked her what her favorite music group was, answered some long name that ended in “quartet.” The kid who thought you meant soccer when you said football.

How did you treat that kid? (Or were you that kid?)

In “Homeschooling, Socialization, and the New Groupthink,” I suggested that the most useful definition of socialization is “ensuring that a child becomes sociable, that he or she develops the intelligence and social reflexes that promote peaceful and pleasurable interactions.” I also suggested that some of homeschooling’s critics might mean something more sinister: indoctrination into a particular vision of society.

But after reading my article, third-grade schoolteacher Heather Lakemacher, commenting on Facebook, pointed out yet a different meaning of socialization: not seeming weird.

This is the real reason, she said, “why this stereotype of the poorly socialized homeschooler exists.” Whereas I had only addressed adult perceptions of homeschooled children, the true culprit, she said, is other kids:

Many of us who were educated in a traditional school have vivid memories of meeting other kids our age who were homeschooled and thinking, “Oh my god! This kid is so WEIRD!” It’s entirely possible that the child in question grew up to be a happy, well-adjusted, productive member of society. …

However, I think the stereotype exists because of the power of those childhood interactions with a peer who just didn’t behave in the way we were expecting them to behave. That’s not an argument against homeschooling, but data will always have a hard time dispelling emotionally charged memories.

She’s right. Odd kids can make a lasting impression.

Grownups regularly note how polite my homeschooled son is, or how he’ll talk to them at all when so many other kids clam up and fail to make eye contact. Adults find his lack of awkwardness with them charming. But what do schooled kids see?

Diane Flynn Keith, a veteran homeschooling mom and author of the book Carschooling, writes that homeschooled kids are, in fact, “not well-socialized in the traditional school sense.”

I hate to be the one to break it to you, but there’s nothing “normal” about our kids. Your homeschooled child is odd compared to the schooled population because they have not experienced ongoing school-based socialization and standardization. …

They haven’t been indoctrinated in the same way. They have not been steeped in the popular consumer culture to the degree that most schooled kids have been. They are not adult-phobic and peer-dependent. (“Yes, My Grown Homeschooled Children Are Odd — And Yours Will Be Too!“)

And most of the time, homeschooling parents love that about our kids — and about homeschooling in general. We don’t want them to be standard. Whether we admit it or not, we tend to think they’re better than the standard. But it’s true that our socially flexible and resilient children can be puzzling to their traditionally schooled peers, and vice versa.

So why does the assessment of weirdness flow only in one direction? Why don’t homeschooled kids think the mainstream schoolchildren are weird?

One answer is that our kids know the mainstream experience through television, movies, and books. They may not always track the finer distinctions between Degrassi High and Hogwarts, but they certainly know a lot more about schools and schooling than mainstream kids know about education outside a classroom.

But I think that even without the pop-cultural lens on the schooling experience, homeschooled kids are just less likely to see anyone as weird. It’s just not a part of their semantic reflexes. Instead they think, “I don’t get him,” or “I’m not into the same stuff she is.”

As a result, homeschooled kids aren’t just more tolerant of diversity; they’re probably also more diverse. And that’s a lot of what gets labeled weird by those who are better assimilated into the mainstream culture.

What’s probably obvious to anyone familiar with homeschooling is that it’s good for the emotional health of kids who don’t easily fit in. What is less obvious is the damage that a culture of conformity does not just to the oddballs in that culture but also to the kids who conform with ease — and to the liberty of the larger society.

For over half a century, studies have shown that the need for social acceptance not only changes our behavior but can even make us perceive the world differently — and incorrectly.

In the early 1950s, psychologist Solomon Asch conducted a series of experiments on the dangers of group influence. When presented with simple problems that 95 percent of individuals could answer correctly when free of group influence, 75 percent of Asch’s test subjects would get the answer wrong when it meant concurring with the group.

In 2005, neuroscientist Gregory Berns conducted an updated version of Asch’s experiments, complete with brain scans to determine if the wrong answers were a conscious acquiescence to social pressure or if, instead, test subjects believed that their group-influenced wrong answers were in fact correct. Not only did the subjects report that they thought their wrong answers were right; the brain scans seemed to confirm it: they showed greater activity in the problem-solving regions of the brain than in those areas associated with conscious decision-making. And the nonconformists who went against the group and gave correct answers showed heightened activity in the part of the brain associated with fear and anxiety.

Commenting on the implications of these experiments, author Susan Cain writes,

Many of our most important civic institutions, from elections to jury trials to the very idea of majority rule, depend on dissenting voices. But when the group is literally capable of changing our perceptions, and when to stand alone is to activate primitive, powerful, and unconscious feelings of rejection, then the health of these institutions seems far more vulnerable than we think. (Quiet: The Power of Introverts in a World That Can’t Stop Talking)

Groupthink, in other words, is dangerous to a free society. And we don’t always realize when we’re not thinking for ourselves.

This kind of cognitive conformity, however, isn’t fixed or universal. Not only does it vary, for example, between East and West; it has also declined in the West since the 1950s, according to a 1996 review of 133 Asch-type studies from 17 countries. That review assessed the cultures in which the studies took place to see if their results “related cross-culturally to individualism [versus] collectivism.” Unsurprisingly, test subjects were least susceptible to the reality-distorting effects of the group in the more individualistic national cultures.

We should expect the same to be true of more and less individualistic subcultures. I bet homeschoolers, for example, are less likely to show the Asch effect. I suspect the same thing of the oddballs at school.

That doesn’t mean everyone should homeschool, or that only weirdoes can be independent thinkers, but it does suggest that the more a culture values independence and diversity, the less vulnerable it will be to the distortions of conformity. And if socialization means helping kids fit in more easily with the culture of their peers, then parents of homeschoolers and schooled kids alike may want to reconsider the value of socializing our children.

B.K. Marcus is editor of The Freeman.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

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How Networks Topple Scientific Dogmas – Article by Max Borders

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Categories: Culture, Science, Tags: , , , , , , , , , ,

The New Renaissance HatMax Borders
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The Peer-to-Peer Republic of Science

Science is undergoing a wrenching evolutionary change.

In fact, most of what we consider to be carried out in the name of science is dubious at best, flat wrong at worst. It appears we’re putting too much faith in science — particularly the kind of science that relies on reproducibility.

In a University of Virginia meta-study, half of 100 psychology study results could not be reproduced.

Experts making social science prognostications turned out to be mostly wrong, according to political science writer Philip Tetlock’s decades-long review of expert forecasts.

But there is perhaps no more egregious example of bad expert advice than in the area of health and nutrition. As I wrote last year for Voice & Exit:

For most of our lives, we’ve been taught some variation on the food pyramid. The advice? Eat mostly breads and cereals, then fruits and vegetables, and very little fat and protein. Do so and you’ll be thinner and healthier. Animal fat and butter were considered unhealthy. Certain carbohydrate-rich foods were good for you as long as they were whole grain. Most of us anchored our understanding about food to that idea.

“Measures used to lower the plasma lipids in patients with hyperlipidemia will lead to reductions in new events of coronary heart disease,” said the National Institutes of Health (NIH) in 1971. (“How Networks Bring Down Experts (The Paleo Example),” March 12, 2015)

The so-called “lipid theory” had the support of the US surgeon general. Doctors everywhere fell in line behind the advice. Saturated fats like butter and bacon became public enemy number one. People flocked to the supermarket to buy up “heart healthy” margarines. And yet, Americans were getting fatter.

But early in the 21st century something interesting happened: people began to go against the grain (no pun) and they started talking about their small experiments eating saturated fat. By 2010, the lipid hypothesis — not to mention the USDA food pyramid — was dead. Forty years of nutrition orthodoxy had been upended. Now the experts are joining the chorus from the rear.

The Problem Goes Deeper

But the problem doesn’t just affect the soft sciences, according to science writer Ron Bailey:

The Stanford statistician John Ioannidis sounded the alarm about our science crisis 10 years ago. “Most published research findings are false,” Ioannidis boldly declared in a seminal 2005 PLOS Medicine article. What’s worse, he found that in most fields of research, including biomedicine, genetics, and epidemiology, the research community has been terrible at weeding out the shoddy work largely due to perfunctory peer review and a paucity of attempts at experimental replication.

Richard Horton of the Lancet writes, “The case against science is straightforward: much of the scientific literature, perhaps half, may simply be untrue.” And according Julia Belluz and Steven Hoffman, writing in Vox,

Another review found that researchers at Amgen were unable to reproduce 89 percent of landmark cancer research findings for potential drug targets. (The problem even inspired a satirical publication called the Journal of Irreproducible Results.)

Contrast the progress of science in these areas with that of applied sciences such as computer science and engineering, where more market feedback mechanisms are in place. It’s the difference between Moore’s Law and Murphy’s Law.

So what’s happening?

Science’s Evolution

Three major catalysts are responsible for the current upheaval in the sciences. First, a few intrepid experts have started looking around to see whether studies in their respective fields are holding up. Second, competition among scientists to grab headlines is becoming more intense. Third, informal networks of checkers — “amateurs” — have started questioning expert opinion and talking to each other. And the real action is in this third catalyst, creating as it does a kind of evolutionary fitness landscape for scientific claims.

In other words, for the first time, the cost of checking science is going down as the price of being wrong is going up.

Now, let’s be clear. Experts don’t like having their expertise checked and rechecked, because their dogmas get called into question. When dogmas are challenged, fame, funding, and cushy jobs are at stake. Most will fight tooth and nail to stay on the gravy train, which can translate into coming under the sway of certain biases. It could mean they’re more likely to cherry-pick their data, exaggerate their results, or ignore counterexamples. Far more rarely, it can mean they’re motivated to engage in outright fraud.

Method and Madness

Not all of the fault for scientific error lies with scientists, per se. Some of it lies with methodologies and assumptions most of us have taken for granted for years. Social and research scientists have far too much faith in data aggregation, a process that can drop the important circumstances of time and place. Many researchers make inappropriate inferences and predictions based on a narrow band of observed data points that are plucked from wider phenomena in a complex system. And, of course, scientists are notoriously good at getting statistics to paint a picture that looks like their pet theories.

Some sciences even have their own holy scriptures, like psychology’s Diagnostic and Statistical Manual. These guidelines, when married with government funding, lobbyist influence, or insurance payouts, can protect incomes but corrupt practice.

But perhaps the most significant methodological problem with science is overreliance on the peer-review process. Peer review can perpetuate groupthink, the cartelization of knowledge, and the compounding of biases.

The Problem with Expert Opinion

The problem with expert opinion is that it is often cloistered and restrictive. When science starts to seem like a walled system built around a small group of elites (many of whom are only sharing ideas with each other) — hubris can take hold. No amount of training or smarts can keep up with an expansive network of people who have a bigger stake in finding the truth than in shoring up the walls of a guild or cartel.

It’s true that to some degree, we have to rely on experts and scientists. It’s a perfectly natural part of specialization and division of labor that some people will know more about some things than you, and that you are likely to need their help at some point. (I try to stay away from accounting, and I am probably not very good at brain surgery, either.) But that doesn’t mean that we shouldn’t question authority, even when the authority knows more about their field than we do.

The Power of Networks

But when you get an army of networked people — sometimes amateurs — thinking, talking, tinkering, and toying with ideas — you can hasten a proverbial paradigm shift. And this is exactly what we are seeing.

It’s becoming harder for experts to count on the vagaries and denseness of their disciplines to keep their power. But it’s in cross-disciplinary pollination of the network that so many different good ideas can sprout and be tested.

The best thing that can happen to science is that it opens itself up to everyone, even people who are not credentialed experts. Then, let the checkers start to talk to each other. Leaders, influencers, and force-multipliers will emerge. You might think of them as communications hubs or bigger nodes in a network. Some will be cranks and hacks. But the best will emerge, and the cranks will be worked out of the system in time.

The network might include a million amateurs willing to give a pair of eyes or a different perspective. Most in this army of experimenters get results and share their experiences with others in the network. What follows is a wisdom-of-crowds phenomenon. Millions of people not only share results, but challenge the orthodoxy.

How Networks Contribute to the Republic of Science

In his legendary 1962 essay, “The Republic of Science,” scientist and philosopher Michael Polanyi wrote the following passage. It beautifully illustrates the problems of science and of society, and it explains how they will be solved in the peer-to-peer age:

Imagine that we are given the pieces of a very large jigsaw puzzle, and suppose that for some reason it is important that our giant puzzle be put together in the shortest possible time. We would naturally try to speed this up by engaging a number of helpers; the question is in what manner these could be best employed.

Polanyi says you could progress through multiple parallel-but-individual processes. But the way to cooperate more effectively

is to let them work on putting the puzzle together in sight of the others so that every time a piece of it is fitted in by one helper, all the others will immediately watch out for the next step that becomes possible in consequence. Under this system, each helper will act on his own initiative, by responding to the latest achievements of the others, and the completion of their joint task will be greatly accelerated. We have here in a nutshell the way in which a series of independent initiatives are organized to a joint achievement by mutually adjusting themselves at every successive stage to the situation created by all the others who are acting likewise.

Just imagine if Polanyi had lived to see the Internet.

This is the Republic of Science. This is how smart people with different interests and skill sets can help put together life’s great puzzles.

In the Republic of Science, there is certainly room for experts. But they are hubs among nodes. And in this network, leadership is earned not by sitting atop an institutional hierarchy with the plumage of a postdoc, but by contributing, experimenting, communicating, and learning with the rest of a larger hive mind. This is science in the peer-to-peer age.

Max Borders is Director of Idea Accounts and Creative Development for Emergent Order. He was previously the editor of the Freeman and director of content for FEE. He is also cofounder of the event experience Voice & Exit.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

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A Date That Should Live in Infamy – Article by Sanford Ikeda

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Categories: Culture, History, Politics, Tags: , , , , , , , , , , ,

The New Renaissance HatSanford Ikeda
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Never forget Executive Order 9066

On February 19, 1942 — seventy-four years ago — Franklin Delano Roosevelt signed Executive Order 9066. With the stroke of his pen, the man who had earlier snubbed Jesse Owens after the Berlin Olympics used his executive powers to order the imprisonment of over 100,000 persons of Japanese ancestry (as well as thousands of German and Italian ancestry) for the duration of World War II.

internment-2Most of the internees were natural-born American citizens, whose “crime” was having a parent or merely a grandparent with Japanese blood. It was an act of naked, aggressive racism that damaged people and families, including my own, for generations.

internmentIt happened here. With the NDAA as the law of the land, and with war-mongering and xenophobia, it could happen here again. We must oppose such collectivism and stand for freedom for all.

On a related note, if you think Apple’s current battle with the FBI over iPhone security is based on empty fears of civil-liberties violations, think again. After decades of denials, the US Census Bureau recently admitted that it provided the Treasury Department with the names and addresses of Japanese-Americans who were later tracked down and herded into concentration camps.

Sanford (Sandy) Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

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Central Banks Should Stop Paying Interest on Reserves – Article by Brendan Brown

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Categories: Economics, Tags: , , , , , , , , , , , ,

The New Renaissance Hat
Brendan Brown
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In 2008, the Federal Reserve began paying interest on reserve balances held on deposit at the Fed. It took more than seven decades from the US leaving the gold standard — in 1933 — for the fiat regime to do this and thus revoke a cardinal element of the old gold-based monetary system: the non-payment of any interest on base money.

The academic catalyst to this change came from Milton Friedman’s essay “The Optimum Quantity of Money” where he argued that the opportunity cost of paper money (any foregoing of interest compared to on alternative money-like instruments such as savings deposits) should be equal to its virtually-zero marginal cost of production. Opportunity cost could indeed be brought down to zero if base money (bank reserves, currency) in large part paid interest at the market rate. Under the gold standard, the opportunity cost of holding base money largely in metallic form (gold coin) was indeed typically significant. All forms of base money paid no interest. And the stream of interest income foregone in terms of present value was equal in principle to the marginal cost of gold production (this was equal to the gold price).

Interest on Reserves are Important to Controlling Markets and Imposing Negative Rates
Friedman, however, did not identify the catch-22 of his proposal. If the officials of the fiat money regime indeed take steps to close the gap between the marginal production cost and opportunity cost of base money, with both at zero, then there can be no market mechanism free of official intervention and manipulation for determining interest rates.

That is what we are now finding out in the few years since central banks in the US, Europe, and Japan started paying interest on reserves. (The ECB was authorized to do this since its launch in 1999, while the Fed and BoJ began following the 2008 financial crisis.) Central banks can now bind the invisible hand operating in the interest rate market to an extent almost unprecedented in peacetime. In some cases, central banks have even deployed a negative interest rate “tool” which would have been impossible under the prior status quo where base money paid no interest.

How We Got Here
The signing into law of the Financial Services Regulatory Relief Act in 2006 authorized the Federal Reserve to begin paying interest on reserves held by depository institutions beginning October 1, 2011. On the insistence of then Fed Chief Bernanke, that date was brought forward to October 1, 2008 by the Emergency Economic Stabilization Act. He was in the process of dispensing huge loans to troubled financial institutions but wanted nonetheless to keep interest rates at a positive level (one purpose here was to protect the money market fund industry).

Accordingly, the Federal Reserve Board amended its regulation D so that the interest rate paid on required reserves and on excess reserves would be at levels tied (according to distinct formulas at the start) to market rates. An official communiqué explained that the new procedure would eliminate the opportunity cost of holding required reserves (and thereby “deregulate”) and help to establish a lower limit for the Federal Funds rate, becoming thereby a useful tool of monetary policy.

This was useful indeed from the viewpoint of rate manipulators: by setting the rate on excess reserves the Fed could now determine the path of short-term interest rates and strongly influence longer term rates regardless of how the supply of monetary base was growing relative to trend demand. By contrast, under the gold standard and the subsequent first seven decades of the fiat money regime, interest rates in the money market were determined by forces which brought demand for base money into balance with the path of supply as set by gold mining conditions or by central bank policy decision respectively. A rise in rates meant that the public and the banks would economize on their direct or indirect holdings of base money and conversely.

Back Before the Fed Paid Interest on Reserves
Yes, under the fiat money system the central bank could effectively peg a short-term rate and supply whatever amount of base money was needed to underwrite that — but the consequential growth of supply in base money was a variable which got wide attention and remained an ostensible policy concern. Right up until the Greenspan era, the FOMC implemented policy decisions by directing the New York Fed money desk to increase or reduce the pace of reserve growth and changes in the Fed funds rate occurred ostensibly to accomplish that purpose. This old method of determining money market interest rates under a fiat regime — in which banks’ need for reserves was minute given deposit insurance, a generous lender of last resort, and too-big-to-fail — depended on the banking industry enduring what was essentially a tax on its deposit business, which was then magnified by fairly high legal reserve requirements. Thus, it is not surprising that the original impetus to paying interest on reserves, whether in the US or Europe, came from the banking lobby. There was no such burden under the gold standard even though the yellow metal earned no interest. Banks in honoring their pledge to deposit clients that their funds were convertible into gold had to visibly hold large amounts of the metal in their vaults or at hand in a reserve center. Actual and potential demand for monetary base by the public is more limited under a fiat money regime than under the gold standard as bank notes are hardly such a distinct asset as gold coin from other financial instruments.

More Problems with Friedmanite “Solutions”
Friedman, when he advocated eliminating the opportunity cost of base money under a fiat regime, hypothesized that this could occur under a long-run declining trend of prices rather than by the payment of interest. The real rate of return on base money could then be in line with the equilibrium real interest rate. This proposal for perpetually declining prices would also have been problematic, though. The interest rate would fluctuate, and in boom times be well above the rate of price decline. In any case, the rate of price decline would surely vary (sometimes into positive territory) in a well-functioning economy even when the long-run trend was constant (downward). The equilibrium real interest rate would be below the rate of price decline sometimes (for example, during business downturns), meaning that market rates even at zero would be too high. That situation did not occur often under the gold standard where prices were expected to be on a flat trend from a very long-run perspective and move pro-cyclically (falling to a low-point in the recession from which they were expected to rise in the subsequent business expansion, meaning that real interest rates would then be negative).

What Can Be Done?
So what is to be done to escape the curse? A starting point in the US would be for Congress to ban the payment of interest on bank reserves. And the US should use its financial power with respect to the IMF to argue that Japan and Europe act similarly within a spirit of G-7 coordination such as to combat monetary instability. We have seen in recent years how rate manipulation and negative rates are made possible by the payment of interest on reserves, and are potent weapons of currency warfare. Yes, the ban in the immediate would force the Federal Reserve to slim down its balance sheet so that supply and demand for base money would balance at a low positive level of interest rates. The Fed might have to swap its holdings of long-maturity debt for T-bills at the Treasury window so as to avoid any dislocation of the long-term interest rate market in consequence. That, not the Yellen-Fischer “rate lift off day and beyond,” is the road back to monetary normalcy.

Brendan Brown is an associated scholar of the Mises Institute and is author of Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations and The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution. See Brendan Brown’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

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Why Free-Market Advocates Are Not Obligated to Defend the Economic Status Quo – Video by G. Stolyarov II

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Categories: Economics, Philosophy, Tags: , , , , , , , , , , , , , , , , , ,

The New Renaissance Hat
G. Stolyarov II
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Many on the political left today equate advocacy of free-market capitalism with an “anything goes” support for the economic status quo. Many on the political right give credence to this perception by, indeed, seeking to defend the status quo just because it happens to be so. Yet this is neither an obligatory nor an advisable approach for characterizing a genuinely well-considered free-market outlook.

Suppose that you are a free-market advocate and also an engineer, well-versed in the principles and methods for constructing durable, safe structures. Suppose you also identify severe deficiencies in a bridge proposed to be constructed by a completely private enterprise. Mr. Stolyarov explores the implications of this dilemma and the appropriate responses in a free society.

Reference

– “Why Free-Market Advocates Are Not Obligated to Defend the Economic Status Quo” – Article by G. Stolyarov II

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UN “Green Climate” Program Is a Slush Fund for Dictators – Article by Marian L. Tupy

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The New Renaissance HatMarian L. Tupy
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The fund is planned to be $450 billion by 2020

Wherever you stand on the subject of global warming, pay close attention to one under-reported aspect of the 2015 United Nations Climate Change Conference or Paris Agreement. I am referring to the Green Climate Fund (GCF), which is a financial mechanism intended “to assist developing countries in adaptation and mitigation practices to counter climate change.”

According to the current estimates, developed countries will be obliged to contribute up to $450 billion a year by 2020 to the GCF, which will then “redistribute” the money to developing countries allegedly suffering from the effects of global warming.

Lo and behold, Zimbabwe’s government-run daily “newspaper” The Herald reported that “Southern Africa is already counting the costs of climate change-linked catastrophes… In Zimbabwe, which has seen a succession of droughts since 2012, a fifth of the population is facing hunger… Feeding them will cost $1.5 billion or 11 percent of … the Gross Domestic Product.”

No doubt Robert Mugabe, the 91-year-old dictator who has ruled Zimbabwe since 1980, is salivating at the prospect of some global warming cash. Beginning in 2000, Mugabe started to expropriate privately-held agricultural land. The result of what is euphemistically called “land reform” was a monumental fall in productivity and the second highest bout of hyperinflation in recorded history.

slush1Some three million of Zimbabwe’s smartest people, including tens of thousands of doctors and lawyers, have left the country. Most of those who have remained behind are subsistence farmers with very little wealth. There is, in other words, very little loot left for the government to steal.

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Thankfully for the Zimbabwean dictator, there are plenty of gullible Westerners willing to believe that the frighteningly vile, comically incompetent government isn’t at the root of Zimbabwe’s food shortages, but that global warming is to blame.

Of course, this is pure nonsense. Botswana and Zimbabwe share a border and their climate and natural resources are exceptionally similar. Yet, since 2004, food production has increased by 29 percent in Botswana, while declining by 9 percent in Zimbabwe. It is not drought but government policies that make nations starve!

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As befits a dictatorship, Zimbabwe is one of the most corrupt places on earth. The notion that GCF funds will be will used for environmental “adaptation and mitigation” is a dangerous fantasy.

Like much foreign aid before it, most of the “green aid” money will likely end up in the pockets of some of the cruelest and most corrupt people on earth. Congress must stand firm and refuse to appropriate any money for the fund.

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This post first appeared at Human Progress.

Marian L. Tupy is the editor of HumanProgress.org and a senior policy analyst at the Center for Global Liberty and Prosperity. 

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

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Why Negative Interest Rates Will Fail – Article by Frank Hollenbeck

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Categories: Economics, Tags: , , , , , , , , ,

The New Renaissance HatFrank Hollenbeck
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It is now just a matter of time before the US central bank follows the central banks of Japan, the EU, Denmark, Sweden and Switzerland in setting negative rates on reserve deposits.

The goal of such rates is to force banks to lend their excess reserves. The assumption is that such lending will boost aggregate demand and help struggling economies recover. Using the same central bank logic as in 2008, the solution to a debt problem is to add on more debt. Yet, there is an old adage: you can bring a horse to water but you cannot make him drink! With the world economy sinking into recession, few banks have credit-worthy customers and many banks are having difficulties collecting on existing loans.

Italy’s non-performing loans have gone from about 5 percent in 2010 to over 15 percent today. The shale oil bust has left many US banks with over a trillion dollars of highly risky energy loans on their books. The very low interest rate environment in Japan and the EU has done little to spur demand in an environment full of malinvestments and growing government constraints.

Central bank policies have also driven government bond yields into negative territory. Nearly $7 trillion of government bonds are currently trading at negative rates.

But, economic theory presupposes that negative rates are an impossibility. After all, why would you buy a one-year treasury bill for $1,005 that will get you $1,000 in a year, when you can stuff your mattress with the $1,005 and still have $1,005 in a year? Some would say that storing money is costly and risky, but that is also true for most assets.

The reason is actually quite simple and shows how distortive monetary policy has become worldwide: It makes sense to purchase a bill for $1,005 if you intend to sell it before it matures to the central bank for more than $1,005. In today’s world, the central bank is often ultimately expected to purchase the bill and lose money on it. It’s just another type of debt monetization.

(And it is, by the way, something the Germans emphatically wanted to avoid when the ECB was initially created.)

We Just Need to Print More Money!
The real problem is the way monetary policy is taught in almost every undergraduate and graduate program in the world. Pick up any macroeconomics textbook and it will explain how interest rates are determined by the demand and supply of liquidity. The economy is treated as a car, and interest rates are viewed as the gas petal. When reality does not match up with the model, today’s economist, instead of questioning the model and theory, assumes that more of the same will ultimately force reality into the model.

The problem arises from a fundamental misunderstanding about the role of interest rates. Mises in 1912 had this to say about our current enlightened view on money:

[This view of money] regards interest as a compensation of the temporary relinquishing of money in the broader sense — a view, indeed, of unsurpassable naiveté. Scientific critics have been perfectly justified in treating it with contempt; it is scarcely worth even cursory mention. But it is impossible to refrain from pointing out that these very views on the nature of interest holds an important place in popular opinion, and that they are continually being propounded afresh and recommended as a basis for measures of banking policy.

In fact, interest rates reflect the ratio of the value assigned to current consumption relative to the value assigned to future consumption. That is, money isn’t just some commodity that can solve our problems if we just create more of it. Money serves a key function of coordinating output with demand across time.

So, the more you interfere with interest rates, the more you create a misalignment between demand and supply across time, and the greater will be the adjustment to realign output with demand to return the economy to sustainable economic growth with rising standards of living (see here and here). Negative rates will only ensure an ever greater misalignment between output and demand.

As with Japan, Western economies that pursue a long-term policy of low or negative interest rates can expect decades of low growth unless these “unorthodox” monetary policies are rapidly abandoned. Recessions are not a problem of insufficient demand. They are a problem of supply being misaligned with demand.

The War on Cash
Meanwhile, a goal of some of the attendees at Davos and others has been to push the world toward a cashless society since an increase in cash holdings would limit the effectiveness of negative rates. They know that if they eliminate cash, central banks will have greater control over the money supply and the ability to guide the economy toward their macroeconomic goals.

As long as there is physical cash, people will hold cash in times of uncertainty. It is a wise alternative when all other options seem unproductive or irrational — and keeping cash in a bank at a time of negative rates is, all things being equal, irrational. Central banks, not surprisingly, would therefore like to take away the ability to hold cash outside the banking system. Worst of all, people who hold cash outside the system might be saving it instead of spending it. Naturally, from the Keynesian perspective, this must be stopped.

This is just the latest frontier in the radical monetary policy we’ve been increasingly witnessing since the 2008 financial crisis. The best monetary policy, however, is no monetary policy at all, and central bankers should take an extended holiday so that the world economy can finally heal itself.

Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

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What Markets Are Telling Us – Article by Ron Paul

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Categories: Economics, History, Tags: , , , , , , , , , , , ,

The New Renaissance HatRon Paul
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Last week US stock markets tumbled yet again, leaving the Dow Jones index down almost 1500 points for the year. In fact, most major world markets are in negative territory this year. There are many Wall Street cheerleaders who are trying to say that this is just a technical correction, that the bottom is near, and that everything will be getting better soon. They are ignoring the real message the markets are trying to send: you cannot print your way to prosperity.

People throughout history have always sought to acquire wealth. Most of them understand that it takes hard work, sacrifice, savings, and investment. But many are always looking for that “get rich quick” scheme. Monetary cranks throughout history have thought that just printing more money would result in greater wealth and prosperity. Every time this was tried it resulted in failure. Huge economic booms would be followed by even larger busts. But no matter how many times the cranks were debunked both in theory and practice, the same failed ideas kept coming back.

The intellectual descendants of those monetary cranks are now leading the world’s central banks, which is why the last decade has seen an explosion of money creation. And what do the central bankers have to show for it? Lackluster employment numbers that have not kept up with population growth, increasing economic inequality, a rising cost of living, and constant fear and uncertainty about what the future holds.

The past decade has been a lot like the 1920s, when prices would have dropped without intervention, but the Federal Reserve kept the price level steady through injections of easy money into the economy. The result in the 1920s was the Great Depression. But in the 1920s prices were dropping because of increased production. More goods being produced meant lower prices, which the Fed then tried to prop up by printing money. Unlike the “Roaring 20s” however, the economy isn’t quite as strong today. It’s more of a gasp than a roar.

Production today is barely above 2007 levels, while heavily-indebted households already hurt during the financial crisis don’t want to keep spending. The bad debts and mal-investments from the last Federal Reserve-induced boom were never liquidated, they were merely papered over with more easy money. The underlying economic fundamentals remain weak but the monetary cranks who run the Fed keep trying to pump more and more money into the system. They fail to realize that easy money is the cause, not the cure, of recessions and depressions. They didn’t realize that prices needed to drop in order to clear all the bad debt and mal-investments out of the system. Because they don’t realize that, we are on the verge of yet another financial crisis.

Don’t be confused by any stock market rallies over the next few months and think that the worst is over. Remember that after Black Tuesday in 1929 the Dow Jones rallied over the next year before it began slowly and steadily to sink again. The central bankers will do everything they can to delay the inevitable. If they had allowed housing prices to fall in 2008 and hadn’t bailed out the big Wall Street banks, the economy would have corrected itself. Yes, it would have been a severe correction, but it would have been nothing compared to the inevitable correction that will present itself when the Fed runs out of easy money options. The Fed may try to cut interest rates again, maybe even going negative, or it will do more quantitative easing, but that won’t work. Creating more money does not lead to economic growth and well-being. The more money the Federal Reserve creates, the more ordinary Americans will end up suffering.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

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Why Free-Market Advocates Are Not Obligated to Defend the Economic Status Quo – Article by G. Stolyarov II

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Categories: Economics, Philosophy, Tags: , , , , , , , , , , , , , , , , ,

The New Renaissance Hat
G. Stolyarov II
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Many on the political left today equate advocacy of free-market capitalism with an “anything goes” support for the economic status quo. Many on the political right give credence to this perception by, indeed, seeking to defend the status quo just because it happens to be so. Yet this is neither an obligatory nor an advisable approach for characterizing a genuinely well-considered free-market outlook.

Suppose that you are a free-market advocate and also an engineer, well-versed in the principles and methods for constructing durable, safe structures. You hold that individuals and businesses should have the freedom to be able to build structures which would improve human well-being, in exchange for the opportunity to earn a profit (or not, if they wish to build structures for a charitable purpose). Now suppose that you are tasked with evaluating the integrity of a particular structure constructed by a private business – perhaps a bridge. This particular bridge happens to be fully privately funded – no subsidies, no exclusive rights, no barriers to competitors’ entry. The business undertaking the construction intends for the bridge to be used as part of a major new toll road that is intended to carry massive amounts of traffic.

Unfortunately, upon deploying your technical skillset and studying the bridge design carefully, you find that the bridge, while it is represented as being able to withstand one thousand cars at a time, would in fact collapse under the weight of only five hundred cars. You also find that, in your basic repertoire of engineering techniques, you have knowledge of construction techniques and superior materials which would rectify these design flaws and enable the bridge to be as safe and as durable as originally represented. The trouble is that the business owners want to hear none of it. They are attached to their original design partly out of cost considerations, but mostly because they simply cannot understand your findings or appreciate their significance, no matter how many different ways you have attempted to communicate them. The business owners have almost no engineering knowledge themselves and are generally contemptuous of overtly mathematical, “nerdy” types (like you). They are skilled salespeople who have capital from a previous venture and are eager to make additional money on a high-profile project such as this bridge. Suppose that you know that you have all of the technical knowledge of your discipline firmly on your side, but it is the owners’ money on the line, so, unconvinced by your arguments, they build the bridge according to their original specifications. They still advertise it as highly durable, but in a sufficiently nebulous way that the advertisements do not truly make any specific promises or technical claims. (This business is short on technically knowledgeable professionals, but spares no expense in hiring attorneys to litigation-proof its marketing materials.) The driving public’s impression from the marketing campaign is expected to be, “It is an incredibly sturdy, state-of-the-art, daring new bridge that you will enjoy driving on in safety and style.” The business owners contend that there is no problem. After all, were this a truly free market, the public could choose to pay to use their bridge or to find some alternative in getting from point A to point B. And competitors could build their own bridges, too, if they could buy the land, purchase the tools and materials, and hire the labor to do it.

Of course, on most days, this bridge would not collapse, since it is rare for five hundred cars to be on it simultaneously. The owners could well be reaping profits from their bridge for years and convince the lay public to drive on it with no visible ill consequences during that time. The bridge is, however, vulnerable to high winds, earthquakes, freezing damage, and gradual deterioration over time (exacerbated by substandard construction). As time passes, the risks of collapse increase. No bridge is invulnerable, but this particular bridge is about 30 years farther along the path to decay than other bridges that you know could easily have been built in its place, had the owners only listened to you. As a free-market advocate, you have some sympathies with the owners’ view that the construction of the bridge should not be forcibly prevented, as they are using their own property for their own chosen purposes, and they are not forcing anyone to use it. However, as an engineer who knows better when it comes to quality of bridge design and construction, what do you do?

This dilemma illustrates a question at the core of how free-market advocates approach the world in which they find themselves – a world, of course, which is far from free in an economic sense, but where many people still use their own property for their own purposes. There are some who will assert that the very fact of private, voluntary use of property renders such use inherently above criticism, provided it is a manifestation of free choice. (We can overlook, for the sake of this argument, the fact that, in the real world, many incentives and constraints upon human action are routinely distorted by the effects of political influences in favor of one group or set of outcomes and/or in opposition to others.) In this argument’s more typical instantiation in today’s world, some would assert that any outcome of “private enterprise” in today’s world must be acceptable for free-market advocates, since it was (ostensibly) somebody’s use of private property for a private purpose. For example, mass corporate layoffs (virtually unheard of until the 1970s), raising the price of a life-saving, long-generic drug by 5,556 percent (as pharmaceutical executive Martin Shkreli did with Daraprim in 2015), listening to or creating brutal “gangsta rap” (virtually unheard of until the 1990s), teaching of creationism in private schools (common throughout history, but increasingly untenable in the face of over 150 years of mounting evidence), and many other behaviors of questionable rationality and/or taste are defended as being the decisions of private entities – so what could be wrong about them?

The problem with reflexively defending any and every behavior, just because a private entity undertakes it, even in the absence of market distortions, is that it misses an essential point. The market is nothing more than the sum of the choices and actions of its participants. A market outcome is not a Panglossian “best of all possible worlds” scenario. Even in the absence of compulsion or restraint, some people will be mistaken, irrational, overconfident, immoral, confused, or all of the above. Ex ante, they may expect that the transactions and behaviors they engage in will benefit them – much like a tribal shaman might believe that his rain dance would bring forth water for the tribe’s crops – but, ex post, they may well find themselves regretting their behavior, or even if not, they may have still become materially, intellectually, or emotionally worse off from it compared to the alternatives. In addition to choice, there is also truth – which comes in the form of scientific, mathematical, historical, and philosophical principles and facts. Truth is an outcome of combining induction from the empirical facts of reality with deduction from the application of logical reasoning to known facts and incontrovertible first principles. It is entirely possible for a person – including a wealthy, powerful, influential person whose decisions affect thousands or millions of others – to completely miss what the truth is, or even to be ignorant of the correct methods of arriving at the truth. In other words, if the external reality is objective and governed by comprehensible natural laws – and if morality is also objective in the sense that some outcomes are incontrovertibly more beneficial to human well-being than others – then it must be the case that somebody who is thinking in a rational, well-informed manner can truly “know better” than a particular decision-maker who is not.

Does that mean that the market could be replaced by some “superior” system of decision-making? Ultimately, no. We have no guarantee that any substitution of decision-making for that of private actors could lead to a necessarily preferable result from those decision makers’ free choices. If Person A is irrational and mistaken, we have no guarantee that leaving Person B in charge of A’s life would not lead to even more irrational and mistaken choices, compounded by the knowledge problem that B will necessarily have in relation to A’s situation. The possibility that B could be not simply misguided but nefarious, and seek to sacrifice A’s genuine interests in favor of B’s own, is a further argument against this kind of command-and-control approach. More devastating, however, would be an outcome in which a different person, C, really is doing his best to act in a truthful, rational, and just manner, but the controller B does not see it. Or perhaps B does see it and thinks it is all well and good, but B needs to set uniform standards that would keep the lowest common denominator in check, and C’s scrupulous, innovative, and principled way of living could never be generalized to a society-wide system of controls.

But getting back to you, the engineer: How to address the dilemma that you are in? Has the “market” not “decided” that the bridge of substandard technical quality is just fine? Not so fast. We must never forget that we are the market, and that the market does not only consist of the first decisions and inclinations of some small group of wealthy, powerful, or connected individuals. Quite the contrary: We are what a truly free market consists of. A truly free market consists not only of our affirmative choices, but also of our negations and criticisms of certain other choices. It consists of our knowledge, including those situations where we truly “know better” than certain others. You, the free-market engineer, could not force the bridge owners to change their design. However, you could fully publicize its flaws in a fully free society, one characterized by robust protections of free speech and lack of a climate of frivolous litigation with regard to libel laws. If today such professional criticism is difficult, it is because many larger, politically connected enterprises will hire legions of attorneys to squelch sufficiently specific assertions in meritless litigation that is too costly for ordinary people to counter. But a truly free society would lack this obstacle and would include a legal system that is designed with speed, simplicity, affordability, and protections for peaceful natural persons in mind. A corporation would not be able to sue you for publicizing detailed criticisms of its products; the judge would be empowered to simply throw out such a lawsuit at first glance. A truly free market of goods and ideas is not an indiscriminate stew of anyone’s and everyone’s plans. Any such plans also would get tested, scrutinized, refined, and ultimately accepted or rejected by the other market participants. To the extent that one owns property that could sustain the perpetuation of a plan, one might counter even strongly held prevailing opinions – but only temporarily and only if one has other means of replenishing that property if the plan causes it to be depleted.

Moreover, in a truly free market, barriers to entry exist only on the basis of the constraints of the physical world, not on politics and special behind-the-scenes influence. Thus, competitors can always arise with a superior business model. Perhaps if you, the engineer, criticize the existing bridge sufficiently, another business enterprise will learn of its defects, purchase another piece of land, and construct a parallel, sturdier bridge that takes your suggestions into account. The misguided owners of the first bridge might eventually find themselves out of business because travelers will discover that safer, more convenient routes are available. And if the bridge ever does fail, a free-market system of civil liability will penalize those businesses who, through negligence, failed to take reasonable precautions to protect the health and safety of their customers. If the bridge ever becomes an imminent danger to travelers, it would be proper for public warnings to be issued and for the law-enforcement entity (be it a minarchist government or a private dispute-resolution agency) to order that traffic to the bridge be discontinued until the immediate danger is averted (perhaps through structural improvements at that time). A free market does not permit the reckless endangerment of unwitting, non-consenting others.

But always, in a hypothetical free-market society or in our own, a free-market-oriented engineer – or any professional, really – should have no compunction about expressing the truth about the soundness and validity of any party’s decisions or proposals, be they private or governmental. Just as a private party may well propose building a substandard bridge, so might a government today actually develop a decent bridge, especially if the incentives of a given political system are conducive to that particular outcome. The free-market engineer should not hesitate to praise the technical design of a good bridge, no matter what its source – because truth is true, and a bridge that could support two thousand cars at a time would, indeed, support those cars no matter who constructed it (provided the methods and materials used are identical in each case). A free-market perspective is a political and economic position which is compatible with completely rigorous, objective views of matters of science, technology, mathematics, history, metaphysics, epistemology, ethics, psychology, and any other conceivable discipline. Free-market advocates should respect people’s right to make choices, even when those choices are mistaken, but can maintain their own right to criticize those mistakes using as high a set of standards as they consider justified. If your values include striving for truth and justice, then those values are a part of the market as well, and you can improve market outcomes by working to instantiate those values in reality.

This essay may be freely reproduced using the Creative Commons Attribution Share-Alike International 4.0 License, which requires that credit be given to the author, G. Stolyarov II. Find out about Mr. Stolyarov here.

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