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The Vital Importance of Property in Land: Part 2 – An Analysis of the Georgist Land-Value Tax – Article by G. Stolyarov II

The Vital Importance of Property in Land: Part 2 – An Analysis of the Georgist Land-Value Tax – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
October 16, 2012
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In this second installment of my short series on land and property rights (see my first installment here), I begin to respond to “We Can Have It All: The Beauty of Value Capture” by Edward Miller. In particular, I focus on the idea of the single tax on the value of land, as originated by Henry George. Mr. Miller, a contemporary representative of the Georgist position, states that “We can eliminate taxes and debt, poverty and special privilege. Contrary to the dour pronouncements from the curators of the dismal science, we can have it all.” Mr. Miller advocates doing this by advocating the elimination of “no-strings-attached sovereignty” over land and replacing it with what he calls “Value Capture” and which many others would call a land-value tax. Mr. Miller states that this “is a tax only in the sense that Pigovian ‘Taxes’ are. It is not a tax on production, and thus there is nothing objectionable about it from the perspective of classical liberalism. Indeed, I’d argue that without it, classical liberalism is a cruel joke. Value capture is simply a reconceptualization of who owns the value of the access rights over the Earth.” In this installment, I will focus on the Pigovian/Georgist land-value tax idea in particular. In subsequent installments, I will address what I consider to be a more desirable approach to land in a free-market, classically liberal manner that seeks to facilitate economic growth and the continual improvement of living standards.

I am not a supporter of a land-value tax (however it may be termed) or of Pigovian taxation in general. The idea of a Pigovian tax (however called) seems to me rather contrived, in that it assumes a perfect knowledge on the part of the taxing authority of not just which activities create negative externalities, but also the precise extent to which a particular instance of such activities creates those externalities – and, correspondingly, the precise extent of taxation needed to take the “social cost” of these activities into account. The economic distortions of taxation, relative to a tax-free free-market situation, cannot be avoided in practice, no matter what form the tax takes – though, admittedly, it can be said that some types of taxes produce greater distortions or different kinds of distortions than others. Furthermore, the idea of a Pigovian tax is unworkable in practice, because political incentives and the influence of special-interest pressure groups would surely distort the incidence of the tax to benefit those with lobbying clout. In other words, even if the exact “social cost” of every activity could be calculated, the influence of lobbyists on elected officials would result in the incidence of the tax departing from a proper reflection of that “social cost.”

The elimination of all other possible taxes would be a definite advantage of the Georgist system, though – in practice – attempts to introduce a new type of tax have seldom supplanted existing taxes but have merely resulted in yet another kind of tax alongside all others. In fact, in the United States today, we might consider the current system of property taxation to be a partially Georgist system – but the property taxes are paid alongside income, sales, excise, gift, estate, fuel, and numerous other taxes – not to mention a myriad of fees to fund specific government services.

However, let us assume that it is politically feasible to enact a single land-value tax that supplants all other taxes. Perhaps an added advantage of this simplified approach would be the reduction in the overall cost of administering tax determination and collection – which the most benevolent conceivable government would entirely pass on to the people in the form of a lower tax rate. Even in this ideal situation, why might a land-value tax still be less favorable than other possible taxes?

Consider that certain kinds of taxes can be avoided by a property-owning individual entirely. He only needs to pay an income tax if he earns taxable income. He only needs to pay a sales tax if he purchases taxable goods. He can avoid gift taxes by not giving gifts (beyond the tax-exempt amounts). If he has enough money saved up to live on, grows/produces all of his own goods, and keeps his property largely to himself, he can avoid all such taxes in theory (even though, in practice, he would admittedly be part of a small minority of the population). The similarity among these taxes (no matter their other flaws, of which there are many) is that they do not reduce current wealth kept for personal use. Property taxes are different in that they are able to actually diminish a person’s stock of wealth without that person undertaking any positive action. As long as a person owns a house, or a commercial building, or even a stretch of land for recreational use, he cannot avoid the diminution of his wealth through taxation solely due to the passage of time. An income tax only reduces one’s potential earning opportunities. A sales tax only reduces one’s potential purchasing power if one chooses to make purchases. A property tax, however, reduces one’s existing stock of wealth, no matter what one chooses to do. Thus, with all other things (including the total tax collected) being equal, a property tax is more adverse to an individual because it compels him to engage in positive actions in order to maintain his present wealth, rather than merely discouraging the individual from undertaking certain additional activities that might be taxed to a greater extent than he might prefer.

A Georgist land-value tax is different from the current American property tax in that it taxes the land only and not the manmade improvements on that land. In this respect, the land-value tax is superior. It would probably encourage significant vertical building by landowners/occupants in order to increase the amount of improvements per unit of land. However, it would also probably result in large stretches of land being unoccupied and unused, because there would be a sub-optimal level of interest in developing that land, as the owners/occupants would be responsible for paying tax. This may make the unfortunate phenomenon of urban congestion common even in less populated areas.

Furthermore, one can conceive of a supremely sub-optimal outcome of the single land-value tax, which would be the result of a perverse incentive indeed. This is the scenario where most individuals decide that it is not worth the trouble to own land (or partially own it or “rent” it from the community – however this might be described legally). Instead, large landholding corporations would emerge and purchase most or all of the land. Their owners (probably a lot of dispersed shareholders beholden to an entrenched management and thereby subject to numerous principal-agent problems) would be willing to absorb the costs of the land-value tax in exchange for collecting rents from everyone else who lives and works on that land. Many ordinary people might think that they are getting a good deal by avoiding all legal incidence of taxation – but in reality, the amount of rent they would pay to the landholding corporations would be higher to reflect the taxes those corporations have to pay. In other words, the cost of the land-value tax would be at least partially passed on to the renters/majority of people in the community by the landholding corporations. Economically, this is identical to the scenario that the Georgist proposal seeks to avoid – the situation where (whether or not this is indeed the case) it is alleged that most of people are beholden to a minority of landowners or lienholders by means of payment of rent or repayment of expensive mortgages.

One significant downside of this scenario, relative to the status quo, is that the possibility of “free and clear” ownership of property would be more definitively off-limits to everybody – even in theory. Another even greater concern is that the landholding corporations would essentially behave like supercharged homeowners’ associations – with even more power to micromanage people’s lives and impose arbitrary restraints on the use of personal property and the improvement of land. They would be able to conduct this abuse with impunity, because there would be fewer of them in any given geographical area, compared to today’s homeowners’ associations. This would give the landholding corporations the oligopoly (and sometimes monopoly) power that enables many similar entities to disregard consumer preferences and extract large amounts of unearned money.

The reality is that the market always seeks to correct for economic distortions that are the result of confiscatory or redistributive policies. The correction is always imperfect, because real wealth is in fact appropriated through taxation. However, changing the tax structure cannot, by itself, solve the whole distortion – without addressing how much wealth is kept by private citizens and what they are legally able to do with that wealth. There may, however, be a valid argument for changing a tax structure if this inherently results in a lower total proportion of tax collected, relative to the wealth that exists among the general population. This, of course, depends on the real rates of tax selected for each alternative under consideration. For instance, I would wholeheartedly support (as an unambiguous directional improvement relative to the status quo) a single land-value tax whose entire collections would be a mere 0.5% of the Gross Domestic Product. Irrespective of any concerns about the incentive effects of the tax, those would be dwarfed by the sheer amount of wealth that individuals would be able to keep compared to today’s tax regime. In this situation, though, I would still strongly prefer that the legal concept of full ownership of land be retained and that the land-value tax be administered similarly to today’s property taxes – as opposed to treating the occupant of the land as a “tenant” who owes a “rent” to “the community.”

There may also be a valid argument for changing a tax structure if doing so results in more wealth-generating behavior and increased productivity. However, I cannot find a system that allows for the diminution of current wealth through taxation to be more encouraging of productivity than a system that merely takes a share of future active production or consumption. If one cannot be guaranteed the peaceful and total enjoyment of the wealth one has already earned, then earning more seems less attractive from a psychological (in addition to a purely economic) perspective. Productivity is simply not as enjoyable if one views it as a chore to be done in order to remain in one’s present situation and prevent a decline – rather than an ambitious endeavor of self-improvement and possible enrichment.

Next, I will address how land might properly be approached from a libertarian/classical liberal standpoint, with beneficial practical consequences to most and the avoidance of effects that might stifle economic growth or decrease individual opportunities.

The Vital Importance of Property in Land: Part 1 – Arguments for Land as Property – Article by G. Stolyarov II

The Vital Importance of Property in Land: Part 1 – Arguments for Land as Property – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
October 14, 2012
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In this small series on land and private property, I hope to counter the claims of Henry George and his contemporary followers, who generally support a libertarian view with respect to all property except land – which they do not consider to be legitimate property. I, on the contrary, see the ability to own property in land (based on a true Lockean understanding of “mixing one’s labor” with rightfully owned land, or legitimately acquiring it from those who did) as indispensable to the existence of other property rights – as well as, more generally, to the expression of human individuality and the improvement of the human condition.

Why is property in land essential for the exercise of all other property rights? In this first installment, I provide six arguments.

Argument 1: Use of Personal Property: If there is no property in land, one cannot be guaranteed the ability to set one’s personal property in any location for its use and enjoyment. This means, ultimately, the use and enjoyment of one’s personal property is always at the discretion – and with the permission – of whichever governing authority or collective decision-making would supplant the right of private property in land. This is not liberty; the best that it can be is a kind of benign neglect from the persons or committees who have the power to dispose of the land and what is on it.

Argument 2: Complete Ownership: If there is no property in land, then there is never an ability – even in theory – to enjoy the use of land “free and clear” – without paying some sort of rent or “usage fee” to someone. Ignoring property taxes (whose absence is wholly conceivable and would be tremendously beneficial – even if other types of taxes are kept in place), it is possible today for people to pay off any mortgages and liens on their property and to enjoy it outright, without fear of losing the property if they do not pay a continuous stream of money to a third party.  The greatest value of private property comes about precisely when the ownership of that property is absolute – not contingent upon future services or payments rendered to other people.

Argument 3: Opportunity to Choose Leisure or Work: If there is no property in land, and one must continuously and inescapably pay a stream of money to a third party in order to avoid losing the property, then this means that one must continuously earn a sizable income to support that stream of payments. The ability to lead a life of leisure (after having made adequate provision for one’s other needs) is forever closed off to most people (unless they are beneficiaries of trust funds or a fortuitous investment strategy). Whatever the relative merits of work versus leisure might be in any particular situation, a libertarian would hold that the choice to pursue either (or any combination of each) should be up to the individual. Restrictive institutions should not permanently foreclose individuals (in multiple senses of that word) from pursuing one of these alternatives or the other. My own ambition, for instance, is to pay off the mortgage on my house while I am still relatively young. I would continue to engage in paid employment (and hopefully earn decent money) for many decades thereafter, but a lot of the economic pressure would be removed by getting rid of the largest recurring expense, and the same amount of earnings could achieve a much higher standard of living in other respects.

 Argument 4: Incentives for Improvement: If there is no property in land, then there is little incentive (other than sheer benevolence) for the occupant to improve the land by the addition of permanent fixtures, for someone else (or “the community at large”) would capture the values of the improvements, while the occupant would spend his personal resources on the improvements. This is the classic case of a “positive externality” not being realized – or, alternatively, a “tragedy of the commons” situation arising from the community laying claim to a resource that becomes over-exploited and insufficiently maintained. If one wishes for private residential lots to begin to resemble the public roads of a large city in appearance, then doing away with land ownership is an excellent means to that dubious goal.

Argument 5: Individuality: Only through the exercise of the right of private property can a person truly actualize his individual aspirations and distinctive esthetic. True private property enables an individual to act within his own realm as he pleases, as long as he does not infringe on the identical prerogatives of all others with their property. Only private property in land can give an individual the unfettered ability to paint a house with the colors and patterns of one’s choice, to determine the surrounding landscaping, to select the appliances and amenities therein, and to decorate it (which is a right that should not be undervalued, lest we lose it in the age of draconian busybody “homeowners’ associations”). An individual who owns land can truly turn the land and the improvements on it into reflections of himself, rather than just another barren, drab, or cookie-cutter plot (though any of those are within his prerogative as well, if he wishes to be unimaginative). True innovators are always in the minority and always unconventional. If they do not have a sphere where they can act unfettered, then many of their creations may never come to be.

Argument 6: Owned Land versus Land in the State of Nature: While I do not support arbitrary claims of ownership to undeveloped land, I do hold to the Lockean view that a person comes to own land by mixing his labor with it as the first occupant – and only to the extent that he does so. Locke himself argued that a person’s legitimate claim to land extends only to whatever land this person (or others acting on his behalf, through the voluntary exchange or offering of their services) was able to transform with his labor and put to use. Any other (undeveloped) land remains in the state of nature, free for others to claim. This is why Locke opposed arbitrary claims of the King of England to all of the prime forests of that country as the King’s “hunting grounds”. Likewise, one might question whether a Lockean view of property rights would allow national governments today to lay claim to vast undeveloped territories and to preclude development thereon (or sell “development rights” or “resource rights” to those territories). A fully libertarian system of property law would recognize the right of the first occupant and user of a property to be its owner, but only with respect to the land which is truly inextricably involved with such occupancy or use – i.e., land that has been improved and transformed. This is a consistent and universalizable standard for legitimate ownership, and it is a standard that follows directly from the desire to use and transform objects in nature for the improvement of human well-being. Such improvement and transformation are precisely what differentiates owned land from land in the state of nature. Owned land is much more usable and often dedicated to specific purposes, whereas land in the state of nature remains to be adapted to human needs. In practice, the two would look quite different and would enable natural demarcations of private land holdings.

Organic Shmorganic – Article by Charles N. Steele

Organic Shmorganic – Article by Charles N. Steele

The New Renaissance Hat
Charles N. Steele
October 6, 2012
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A study by researchers from Stanford University of “organic” food was unable to find any health benefits, prompting a rant from NYT’s Roger Cohen against organic food.  Finally, finally, finally!  Cohen on track, rather than off the rails!Many years ago I heard Bruce Ames, a cancer researcher and head of College of Public Health at Stanford give a lecture in which he discredited the health claims of the “organic” movement and warned that it would raise costs without returning corresponding benefits.  His main fear was that this would lead people to eat fewer vegetables rather than more.  The second most important thing people can do to avoid cancer is eat more vegetables, he explained (stopping smoking is  number 1).  He based this in part on his own research with with carcinogenic properties of manmade pesticides and naturally occurring ones; the naturally occurring ones were every bit as bad and as prevalent in vegetables, and neither posed a meaningful risk in his research.  (Obviously misuse of pesticides could be a different matter.)  The new Stanford study was unable to find the superior health benefits attributed to “organic” foods, corroborating Ames’ argument.

I’ve also heard agriculture experts discuss the alleged environmental harmfulness of “non-organic” agriculture, something not covered in the Stanford study.  Again, the alleged environmental benefits of “organic” are mostly hype, and in some cases it can be worse.  Chemical fertilizers in particular deserve none of the slander that’s directed at them.  (Again, use them incorrectly and you can poison things… but that’s also true with “organic”.)

I’ve been putting “organic” in quotation marks, because the word itself always meant something different: it refers to carbon-based compounds.  That is, that’s what it meant until the word was grabbed by – let’s be honest – hippie food faddists.  “Organic” was changed to mean “simple, healthful, close to ‘nature,'” (another doubtful word), all utterly unsubstantiated claims.  Next yuppies and similar types jumped on the bandwagon, because it made them feel good about themselves “saving the planet and eating healthier and sidestepping ‘corporate agriculture,’ etc.”

This is a great example of the fundamental role of subjective utility in economic value.  Belief in “organic” is essentially religious faith, unfounded in evidence.  What makes “organic” more valuable is consumer demand, based on perceived, imagined characteristics, not some physical measurable properties.  That’s why big food corporations got into the act. They were slow to enter, and when they did, they were entirely responding to demand.  They would prefer not to produce this way, because it is costlier, but so long as consumers demand it, you give them what they want, or you lose market share.  There’s quite an irony here. Anti-capitalists frequently accuse “big business” of manufacturing consumer preferences in order to manipulate people and reap profits, yet the whole “organic” movement was manufactured by a motley collection of  anticapitalist  mystics from both left and right.

I heard NPR cover this story, and the  reporter concluded that the whole “organic” thing must have been a conspiracy by “big agriculture” (another dubious concept) to hoodwink us and get our money… a completely backwards argument, as most farmers, big or little, would prefer less costly, easier, more productive modern agricultural methods.  It’s quite common to be producing “organic” crops, meat, etc. and have some small step go wrong and have the “organic” label be lost – and even though the stuff is perfectly good, it now can’t be sold for enough to cover costs.  I’ve had farmers tell me about this, and have read of many more examples.

“Organic shmorganic” indeed!

Dr. Charles N. Steele is the Herman and Suzanne Dettwiler Chair in Economics and Associate Professor at Hillsdale College in Hillsdale, Michigan. His research interests include economics of transition and institutional change, economics of uncertainty, and health economics.  He received his Ph.D. from New York University in 1997, and has subsequently taught economics at the graduate and undergraduate levels in China, the Russian Federation, Ukraine, and the United States.  He has also worked as a private consultant in insurance design and review.

Dr. Steele also maintains a blog, Unforeseen Contingencies.

Are We Destroying the Earth? – Article by Sanford Ikeda

Are We Destroying the Earth? – Article by Sanford Ikeda

The New Renaissance Hat
Sanford Ikeda
October 3, 2012
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People often complain that mankind is destroying the earth: that insatiable consumption and relentless production have laid waste to irreplaceable swaths of our planet, and that these activities have to stop or someday it will all be gone.

Which raises the question: What does it means to “destroy” something?

When you burn a log, the log is destroyed but heat, light, smoke, and ashes remain.  It’s in that sense that physics tells us that matter is neither created nor destroyed.  Similarly, cutting down a forest destroys the forest but in its place are houses and furniture and suburbs.

The real question is: Is it worth it?

Value Can Be Both Created and Destroyed

What people usually mean when they say mankind is destroying the earth is that human action causes a change they don’t like.  It sounds odd to say that my wife, by eating a piece of toast for breakfast, is “destroying” the toast.  But if I wanted that toast for myself, I might well regard her action as destructive.  Same action, but the interpretation depends on purpose and context.

When a missile obliterates a building and kills the people in it, it may serve a political purpose even though the friends and family of those killed and the owners of the building are harmed.  The perpetrator’s gain is the victim’s loss.  In the political realm, one person’s gain is necessarily another person’s loss.  You rob Peter to pay Paul; you kill Jack to appease Jill.  It’s a “zero-sum game.”

In the economic realm, however, a thing is destroyed to the extent that it loses its usefulness to somebody for doing something.  Someone may want to bulldoze my lovely home just for fun.  If she pays me enough I may let her do it and be glad she did.  When not physically coerced, a trade won’t happen unless each side expects to gain.  If it does happen, and if the people who traded are right, then all do in fact gain.  Each is better off than before. The trade has created something–value.  If they are wrong they destroy value and suffer a loss, which gives them an incentive to avoid making mistakes.

Profits and Losses Help to Minimize the Destruction of Value

In free markets gains manifest themselves in profit, either monetary or psychic.  (In the short run, of course, you can sustain a monetary loss if you think there’s a worthwhile nonmonetary aspect to the trade that will preserve the profit.)  Now, the free market is not perfect, despite what some economics professors say about the benefits of so-called “perfect competition.”  People don’t have complete or perfect knowledge and so they make mistakes.  They trade when they shouldn’t, or they don’t trade when they should.  Fortunately, profits and losses serve as feedback to guide their decisions.

There’s another source of market imperfection.  People may be capable of making good decisions but they don’t trade, or trade too much, because the property rights to the things they would like to trade aren’t well-defined or aren’t effectively enforced.  In such cases their actions or inactions create costs they don’t bear or benefits they don’t receive.  The result is that their decisions end up destroying value.

If I free-ride off the oceans, if for example I don’t pay for dumping garbage into it, then the oceans will become more polluted than they should be.  If there is a cleaner, more efficient source of energy than fossil fuels, but no one can profitably use it because the national government prevents anyone from doing so (for example by prohibitions or excessive taxation), then again the value that would have been created will never appear.

Aesthetics or Economics?

Our esthetic sense of beauty is part of what makes us human.  If we wish to protect a lake or a valley from development because we think it beautiful, how do we do that?

To some extent it’s possible to do what the Nature Conservancy does, and purchase the land that we want to protect.  But that’s not always possible, especially when the land is controlled not by private persons but by the national government, which makes special deals with crony capitalists in so-called public-private developments.  In any case, even the free market is not perfect.  Economic development and material well-being mean that some beautiful landscapes and irreplaceable resources will be changed in ways not everyone will approve.

Remember, though, that economics teaches us that an action is always taken by someone for something.  There are no disembodied costs, benefits, and values.  In a world of scarcity, John believes saving rain forests is more important than saving the whales.  Mary believes the opposite.  If we are to get past disagreements on esthetics–essentially differences of opinion–that can turn into violent conflict, we need to find some way to settle our differences peacefully, some way to transform them into value-creating interactions.

Imperfect though it may be, the free market has so far been the most effective method we know of for doing that.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.

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

Ice and Economics – Article by David J. Hebert

Ice and Economics – Article by David J. Hebert

The New Renaissance Hat
David J. Hebert
July 21, 2012
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What can ice teach us about economics? We’ll see, but let’s begin with some fundamentals.

Prices, property rights, and profit (and loss) lead to information, incentives, and innovation. This simple statement contains nearly every lesson necessary for a free and prosperous society. But what do these words mean?

Prices convey information about relative scarcities and communicate to us the relative value of competing uses of a resource. They also economize on the acquisition of knowledge. When we see the price of a resource rise, market actors understand the need to use less of the resource. What they don’t know, however, is whether this rise is due to a disaster that destroyed some of the stock of that resource (an inward supply shift) or if a new, more valuable use for that resource has been discovered (an outward demand shift). These facts are irrelevant for a person who is currently using the resource, but from a societal level, her using less is necessary. If there is a disaster, we would want people to use less of it so that everyone else can still use some. If there is a new, more valuable use discovered, we would want the original users to use less so that more could be allocated towards this new use.

The Right to Exclude

Property rights refers not only to the right to use a resource, but also to the right to exclude others from its use. In this sense property rights provide the incentive to allocate the use of a resource efficiently across time, for example, to conserve it for later. With firmly established and enforced property rights, not only does the owner not have to worry about someone else taking his things but he also doesn’t have to rush out to gather the resources as quickly as he can. A situation where there are no property rights is susceptible to what is called the “tragedy of the commons,” where the resource gets depleted too quickly and never has a chance to replenish.

Profit (and loss) leads to innovation. Earning a profit is akin to being rewarded for doing something good. Suffering a loss is the opposite, a punishment for doing something wrong. In this case, the deed being done is the attempt to allocate scarce resources to where their will earn their highest return. People who successfully do this are rewarded with monetary gain, which we call “profit.” People who fail to do this experience what we call “loss.” In doing so, economic actors learn what works and what does not. Reducing the profitability of an activity through taxes or legislation or sheltering people from losses, therefore, acts to retard this learning process and stifles innovation.

This lesson is exemplified in early nineteenth-century Boston with the rise of the American natural ice trade. In 1806 Frederic Tudor sailed a ship full of ice from Boston to the Bahamas. Two years earlier Tudor had begun experimenting with insulation with the goal of bringing ice to the Bahamas.  When he was ready to set sail, he found that the ship captains refused to carry his cargo for fear of damaging their vessels. So he bought his own brig, the Favorite, and set sail February 10, 1806. He arrived in Martinique with a large quantity of ice still intact and began selling. The Bahamians loved the ice, which they had never seen before. Yet that first year Tudor lost a substantial sum of money, although he proved that ice could be shipped to the Bahamas. Now the objective became doing it at a profit.  Convinced his idea would be wildly successful, he continued his attempts to drive down costs and increase demand.

Higher Return

Meanwhile, as the price of the ice on the ponds rose, the people of Boston gained the information that the ice would bring a higher return in the Bahamas, thus they used less themselves and sold the ice to the Bahamians. In 1840 the ponds in the Boston area were explicitly divided, giving each person on the lake the right to exclude everyone else from harvesting any ice that wasn’t theirs. This allowed Tudor, for example, to invest in his ice and let it freeze longer so that it could better survive the long journey from Boston to India, which entailed crossing the equator twice and sailing around the tip of Africa. As Tudor earned profit from his venture, more people were attracted to the ice.

To continue to earn a profit, therefore, he had to find a way to outcompete everyone else. In 1825 Tudor enlisted the help of Nathaniel Wyeth, one of his suppliers. Tudor noticed that Wyeth’s ice was always significantly cheaper than everyone else’s and was cut in neater blocks which packed more easily. Wyeth had converted some old farm plows into ice-cutting plows and had fastened horseshoes with spikes to allow horses to pull these modified plows across the ice. By scoring the ice in such a fashion, Wyeth could break uniform sized blocks much quicker than his competitors, who were using hand saws that produced very rough and uneven edges.

These wouldn’t be the only contributions of Wyeth, as he went on to invent many other cost saving techniques. For example, Wyeth developed a conveyor-belt system that would haul the ice from the pond into the waiting icehouse.  He also invented bigger plows that could cut more blocks at once and poles that were used to guide the floating ice blocks onto the conveyor belt;  refined the above-ground icehouse, which allowed ice to be stored anywhere in the world for months on end without any external source of refrigeration.

New Insulation

Tudor and Wyeth also experimented with new means of insulating the ice from the heat, discovering that sawdust was not only a fantastic insulator but was also cheaply available from the sawmills around Boston. They also taught their customers new ways to use the ice, including making ice cream and storing the ice in iceboxes to preserve foods longer.

In short the three Ps lead to the three Is: Prices, property rights, and profit (and loss) lead to information, incentives, and innovation.  With these firmly in place, a free and prosperous society will follow.

David Hebert is a Ph.D. Fellow at the Mercatus Center at George Mason University.

This article was originally published by The Foundation for Economic Education.

Casino Banking – Article by Gerald P. O’Driscoll, Jr.

Casino Banking – Article by Gerald P. O’Driscoll, Jr.

The New Renaissance Hat
Gerald P. O’Driscoll, Jr.
July 15, 2012
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JPMorgan Chase & Co., one of the nation’s leading banks, revealed in May that a London trader racked up losses reportedly amounting to $2.3 billion over a 15-day period. The losses averaged over $150 million per day, sometimes hitting $200 million daily. The bank originally stated the trades were done to hedge possible losses on assets that might suffer due to Europe’s economic woes. There is now doubt whether it was a hedge or just a risky financial bet.

A hedge is a financial transaction designed to offset possible losses in an asset or good already owned. The classic hedge occurs when a farmer sells his crop in a futures market for delivery at a specified date after harvesting. He sells today what he will only produce tomorrow, and locks in the price. If the price at harvest time is lower than today’s price, he makes money on the forward contract, while losing a corresponding amount of money on the crops in the ground. In a perfect hedge the gains and losses should exactly offset each other.

How did JPMorgan suffer such large losses on its hedges, and what are the lessons?

It appears the London trader entered into financial transactions on the basis of observed relationships among various bond indices. The market relationships broke down. The indices moved differently from what historical patterns or financial models predicted. Such a breakdown has been at the heart of a number of spectacular financial collapses, notably that of Long-Term Capital Management (LTCM) in 1998 and a number of others during the financial meltdown of 2007–08.

LTCM invested the money of rich clients in financial bets based on the expected relationships among the prices of various assets. According to Nicole Gelinas in After the Fall: Saving Capitalism from Wall Street—and Washington, at the time of its collapse LTCM had $2.3 billion of client money. By borrowing, it leveraged that investment 53 to 1. Further, it employed derivatives to further magnify its bets so that its total obligations were a fantastic $1.25 trillion.

A derivative is any security whose price movements depend on (are derived from) movements in an underlying asset. “Puts” and “calls” on equity shares are relatively simple derivatives familiar to many. Asset prices, like various bonds, move in predictable ways with respect to each other, and values of derivatives linked to the assets similarly move in a predictable fashion with respect to the prices of the underlying assets—in normal times.

But the summer of 1998 was not a normal time. There was turmoil in Asian financial markets, then Russia threatened to default on its domestic debt. Global credit and liquidity dried up, and LTCM could not fund itself. It collapsed spectacularly.

A decade later there was turmoil in housing finance. The housing bubble was bursting. Mortgage lenders were under pressure, and some were failing. Many mortgages had been packed together in mortgage-backed securities, which were sold to or guaranteed by Fannie Mae and Freddie Mac. Fannie and Freddie, allegedly private entities but in reality guaranteed by the government, were failing. Lehman Brothers, an investment bank, was heavily involved in housing finance; it borrowed short-term, even overnight, to finance long-term holdings; it employed heavy leverage; and it made liberal use of derivatives contracts. It declared bankruptcy on September 15, 2008.

The specifics varied between 1998 and 2008, and between LTCM and Lehman. But the reliance on certain asset prices moving in predictable fashion was one shared element. So, too, was the heavy use of borrowed money (leverage) and the reliance on derivatives contracts. The volatility of complex derivatives contracts led legendary investor Warren Buffett to characterize them as “financial weapons of mass destruction.”

The Usual Suspects

In short there is nothing new in what happened to JPMorgan. It claimed it was not trying to make risky financial bets, but hedge risks already booked on its balance sheet. While details of the trades that led to losses are sketchy at this writing, they apparently employed both leverage and derivatives. As documented here, these are elements present in major financial blowups and collapses going back decades (and further). LTCM, Lehman, and Fannie and Freddie all thought they had at least some of their risks hedged. But hedges have a tendency to unravel just when needed most: in times of financial turmoil. Even so, financial institutions permit their traders to make the same kinds of dangerous bets over and over again. We used to have financial crises every decade or so. Now the cycle seems to be halved.

In the past I have dubbed today’s banking practice of placing dangerous financial bets “casino banking.” It differs little from the activities conducted at gaming tables in Las Vegas and has little or no reference to the fundamentally healthy activity of matching viable businesses with capital and credit.

In a Cato Policy Analysis, “Capital Inadequacies: The Dismal Failure of the Basel Regime of Bank Capital Regulation,” Kevin Dowd and three coauthors examined some of the technical problems with standard risk models used by large banks. It is an exhaustive analysis, and I commend it to those interested. The authors delve into many issues, but concentrate on the many flaws of the complex mathematical models used by banks to control risks.

In August 2007 Goldman Sachs Chief Financial Officer David Viniar puzzled over a series of “25-standard deviation moves” in financial markets affecting Goldman. (Returns deviated from their expected values by 25 standard deviations, a measure of volatility.) Such moves should occur once every 10-to-the-137th-power years if the assumptions of the risk model were correct (a Gaussian, or “normal,” distribution of returns). As Dowd and his coauthors put it, “Such an event is about as likely as Hell freezing over. The occurrence of even a single such event is therefore conclusive proof that financial returns are not Gaussian—or even remotely so.” And yet there were several in a matter of days. In Dowd & Co.’s telling, the models lie, the banks swear to it, and the regulators pretend to believe them. All of this goes to answer how the losses at Morgan might have happened. Traders rely on flawed models to execute their trades.

Now to the Lessons

Major financial institutions continue to take on large risks. Why? Assume the trades made by Morgan really were to hedge the bank’s exposure to events in Europe. That implies, of course, that risky investments had already been put in place (since they then needed to be hedged). Additionally, the risks were so complex that even a highly skilled staff (which Morgan certainly employs) could not successfully execute hedges on them.

Reports indicate that senior management and the board of directors were aware of the trades and exercising oversight. The fact that the losses were incurred anyway confirms what many of us have been arguing. Major financial institutions are at once very large and very complex. They are too large and too complex to manage. That is in part what beset Citigroup in the 2000s and now Morgan, which has until now been recognized as a well-managed institution.

If ordinary market forces were at work, these institutions would shrink to manageable sizes and levels of complexity. Ordinary market forces are not at work, however. Public policy rewards size (and the complexity that accompanies it). Major financial institutions know from experience that they will be bailed out when they incur losses that threaten their survival. Morgan’s losses do not appear to fall into that category, but they illustrate how bad incentives lead to bad outcomes.

Minding Our Business

Some commentators have argued that politicians and the public have no business in Morgan’s losses. Only Morgan’s stockholders, who saw its share price drop over 9 percent in one day, and senior management and traders who lost their jobs should have an interest. But in fact losses incurred at major financial institutions are the business of taxpayers because government policy has made them their business.

Large financial institutions will continue taking on excessive risks so long as they know they can offload the losses onto taxpayers if needed. That is the policy summarized as “too big to fail.” Let us not forget the Troubled Asset Relief Program (TARP), signed into law by President George W. Bush in October 2008. It was a $700 billion boondoggle to transfer taxpayer money to stockholders and creditors of major banks—and to their senior management; don’t forget the bonuses paid out of the funds.

Banks may be too big and complex to close immediately, but no institution is too big to fail. Failure means the stockholders and possibly the bondholders are wiped out. Until that discipline is reintroduced (having once existed), there will be more big financial bets going bad at these banks.

Changing the bailout policy will not be easy because of what is known as the time-inconsistency problem. Having bailed out so many companies so many times, the federal government cannot credibly commit in advance not to do so in the future. It can say no to future bailouts today, but people know that when financial collapse hits tomorrow, government will say yes once again. The promises made today will not match the government’s future actions. There is inconsistency between words and deeds across time.

What to do in the meantime? The Volcker Rule was a modest attempt to rein in risk-taking. Former Fed Chairman Paul Volcker wanted to stop banks from making risky trades on their own books (as opposed to executing trades for customers). Industry lobbying has hopelessly complicated the rule and delayed its issuance.

Morgan’s chief executive officer, James Dimon, asserted the London trades would not have violated the rule. If true, it suggests that an even stronger rule needs to be in place. Various suggestions have been made to address excessive risk-taking by financial firms backed by the taxpayers. It is time to take them more seriously.

Gerald O’Driscoll is a senior fellow at the Cato Institute. With Mario J. Rizzo, he coauthored The Economics of Time and Ignorance.

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

Federal Student Aid and the Law of Unintended Consequences – Article by Richard Vedder

Federal Student Aid and the Law of Unintended Consequences – Article by Richard Vedder

The New Renaissance Hat
Richard Vedder
July 8, 2012
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RICHARD VEDDER is the Edwin and Ruth Kennedy Distinguished Professor of Economics at Ohio University and director of the Center for College Affordability and Productivity. He received his B.A. from Northwestern University and his M.A. and Ph.D. in economics from the University of Illinois. He has written for the Wall Street Journal, National Review, and Investor’s Business Daily, and is the author of several books, including The American Economy in Historical Perspective and Going Broke by Degree: Why College Costs Too Much.

The following is adapted from a speech delivered on May 10, 2012, at Hillsdale College’s Allan P. Kirby, Jr. Center for Constitutional Studies and Citizenship in Washington, D.C.

Reprinted by permission from Imprimis, a publication of Hillsdale College.

FEDERAL STUDENT financial assistance programs are costly, inefficient, byzantine, and fail to serve their desired objectives. In a word, they are dysfunctional, among the worst of many bad federal programs.

These programs are commonly rationalized on three grounds: on the grounds that assuring more young people a higher education has positive spillover effects for the country; on the grounds that higher education promotes equal economic opportunity (or, as the politicians say, that it is “a ticket to achieving the American Dream”); or on the grounds that too few students would go to college in the absence of federal loan programs, since private markets for loans to college students are defective.

All three of these arguments are dubious at best. The alleged positive spillover effects of sending more and more Americans to college are very difficult to measure. And as the late Milton Friedman suggested to me shortly before his death, they may be more than offset by negative spillover effects. Consider, for instance, the relationship between spending by state governments on higher education and their rate of economic growth. Controlling for other factors important in growth determination, the relationship between education spending and economic growth is negative or, at best, non-existent.

What about higher education being a vehicle for equal economic opportunity or income equality? Over the last four decades, a period in which the proportion of adults with four-year college degrees tripled, income equality has declined. (As a side note, I do not know the socially optimal level of economic inequality, and the tacit assumption that more such equality is always desirable is suspect; my point here is simply that, in reality, higher education today does not promote income equality.)

Finally, in regards to the argument that capital markets for student loans are defective, if financial institutions can lend to college students on credit cards and make car loans to college students in large numbers—which they do—there is no reason why they can’t also make student educational loans.

Despite the fact that the rationales for federal student financial assistance programs are very weak, these programs are growing rapidly. The Pell Grant program did much more than double in size between 2007 and 2010. Although it was designed to help poor people, it is now becoming a middle class entitlement. Student loans have been growing eight to ten percent a year for at least two decades, and, as is well publicized, now aggregate to one trillion dollars of debt outstanding—roughly $25,000 on average for the 40,000,000 holders of the debt. Astoundingly, student loan debt now exceeds credit card debt.

Nor is it correct to assume that most of this debt is held by young people in their twenties and early thirties. The median age of those with loan obligations today is around 33, and approximately 40 percent of the debt is held by people 40 years of age or older. So when politicians talk about maintaining low interest loans to help kids in college, more often than not the help is going to middle-aged individuals long gone from the halls of academia.

With this as an introduction, let me outline eight problems with federal student grant and loan programs. The list is not exclusive.

(1) Student loan interest rates are not set by the forces of supply and demand, but by the political process. Normally, interest rates are a price used to allocate scarce resources; but when that price is manipulated by politicians, it leads to distortions in the use of resources. Since student loan interest rates are always set at below-market rates, too much money is borrowed for college. Currently those interest rates are extremely low, with a key rate of 3.4 percent—which, after adjusting for inflation, is approximately zero. Moreover, both the president and Governor Romney say they want to continue that low interest rate after July 1, when it is supposed to double. This aggravates an already bad situation, and provides a perfect example of the fundamental problem facing our nation today: politicians pushing programs whose benefits are visible and immediate (even if illusory, as suggested above), while their extraordinarily high costs are less visible and more distant in time.

(2) In the real world, interest rates vary with the prospects that the borrower will repay the loan. In the surreal world of student loans, the brilliant student completing an electrical engineering degree at M.I.T. pays the same interest rate as the student majoring in ethnic studies at a state university who has a GPA below 2.0. The former student will almost certainly graduate and get a job paying $50,000 a year or more, whereas the odds are high the latter student will fail to graduate and will be lucky to make $30,000 a year.

Related to this problem, colleges themselves have no “skin in the game.” They are responsible for allowing loan commitments to occur, but they face no penalties or negative consequences when defaults are extremely high, imposing costs on taxpayers.

(3) Perhaps most importantly, federal student grant and loan programs have contributed to the tuition price explosion. When third parties pay a large part of the bill, at least temporarily, the customer’s demand for the service rises and he is not as sensitive to price as he would be if he were paying himself. Colleges and universities take advantage of that and raise their prices to capture the funds that ostensibly are designed to help students. This is what happened previously in health care, and is what is currently happening in higher education.

(4) The federal government now has a monopoly in providing student loans. Until recently, at least it farmed out the servicing of loans to a variety of private financial service firms, adding an element of competition in terms of quality of service, if not price. But the Obama administration, with its strong hostility to private enterprise, moved to establish a complete monopoly. One would think the example of the U.S. Postal Service today, losing taxpayer money hand over fist and incapable of making even the most obviously needed reforms, would be enough proof against the prudence of such a move. And remember: because of highly irresponsible fiscal policies, the federal government borrows 30 or 40 percent of the money it currently spends, much of that from overseas. Thus we are incurring long-term obligations to foreigners to finance loans to largely middle class Americans to go to college. This is not an appropriate use of public funds at a time of dangerously high federal budget deficits.

(5) Those applying for student loans or Pell Grants are compelled to complete the FAFSA form, which is extremely complex, involves more than 100 questions, and is used by colleges to administer scholarships (or, more accurately, tuition discounts). Thus colleges are given all sorts of highly personal and private information on incomes, wealth, debts, child support, and so forth. A car dealer who demanded such information so that he could see how badly he could gouge you would either be out of business or in jail within days or weeks. But it is commonplace in higher education because of federal student financial assistance programs.

(6) As federal programs have increased the number of students who enroll in college, the number of new college graduates now far exceeds the number of new managerial, technical and professional jobs—positions that college graduates have traditionally taken. A survey by Northeastern University estimates that 54 percent of recent college graduates are underemployed or unemployed. Thus we currently have 107,000 janitors and 16,000 parking lot attendants with bachelor’s degrees, not to mention bartenders, hair dressers, mail carriers, and so on. And many of those in these limited-income occupations are struggling to pay off student loan obligations.

Connected to this is the fact that more and more kids are going to college who lack the cognitive skills, the discipline, the academic preparation, or the ambition to succeed academically. They simply cannot or do not master well much of the rather complex materials that college students are expected to learn. As a result, many students either do not graduate or fail to graduate on time. I have estimated that only 40 percent or less of Pell Grant recipients get degrees within six years—an extremely high dropout or failure rate. No one has seriously questioned that statistic—a number, by the way, that the federal government does not publish, no doubt because it is embarrassingly low.

Also related is the fact that, in an attempt to minimize this problem, colleges have lowered standards, expecting students to read and write less while giving higher grades for lesser amounts of work. Surveys show that students spend on average less than 30 hours per week on academic work—less than they spend on recreation.  As Richard Arum and Josipa Roksa show in their book Academically Adrift: Limited Learning on College Campuses, critical thinking skills among college seniors on average are little more than among freshmen.

(7) As suggested to me a couple of days ago by a North Carolina judge, based on a case in his courtroom, with so many funds so readily available there is a temptation and opportunity for persons to acquire low interest student loans with the intention of dropping out of school quickly to use the proceeds for other purposes. (In the North Carolina student loan fraud case, it was to start up a t-shirt business.)

(8) Lazy or mediocre students can get greater subsidies than hard-working and industrious ones. Take Pell Grants. A student who works extra hard and graduates with top grades after three years will receive only half as much money as a student who flunks several courses and takes six years to finish or doesn’t obtain a degree at all. In other words, for recipients of federal aid there are disincentives to excel.

* * *
If the Law of Unintended Consequences ever applied, it is in federal student financial assistance. Programs created with the noblest of intentions have failed to serve either their customers or the nation well. In the 1950s and 1960s, before these programs were large, American higher education enjoyed a Golden Age. Enrollments were rising, lower-income student access was growing, and American leadership in higher education was becoming well established. In other words, the system flourished without these programs. Subsequently, massive growth in federal spending and involvement in higher education has proved counterproductive.

With the ratio of debt to GDP rising nationally, and the federal government continuing to spend more and more taxpayer money on higher education at an unsustainable long-term pace, a re-thinking of federal student financial aid policies is a good place to start in meeting America’s economic crisis.

Seasteading’s Potential and Challenges: An Overview – Video by G. Stolyarov II

Seasteading’s Potential and Challenges: An Overview – Video by G. Stolyarov II


Seasteading has recently emerged as a promising alternative to political activism. Seasteads — a concept originated by Patri Friedman and Wayne Gramlich — are modular floating ocean platforms that can be combined and recombined to create autonomous cities on the oceans.

Mr. Stolyarov provides a general overview of the areas in which the concept of seasteading shows promise, as well as some of the significant challenges it will need to overcome.

Remember to LIKE, FAVORITE, and SHARE this video in order to spread rational discourse on this issue.

Resources:

– “Seasteading’s Potential and Challenges: An Overview” – Essay by G. Stolyarov II

The Seasteading Institute

– “2011 Tōhoku earthquake and tsunami” – Wikipedia

Seasteading’s Potential and Challenges: An Overview – Article by G. Stolyarov II

Seasteading’s Potential and Challenges: An Overview – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
June 30, 2012
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With many Western national governments, particularly in the English-speaking countries, increasingly approaching totalitarianism in their policies, the need for liberty-oriented reform has never been more urgent. This totalitarianism looms over us during a make-or-break time for human civilization. Depending on whether human beings will be allowed to innovate in peace, we can either achieve astonishing technological progress that will liberate us from age-old problems and bring about unprecedented prosperity – or we can descend into the barbaric abyss of interminable miseries that has characterized much of our species’ time on Earth.

Conventional political means are capable of rousing considerable passion – witness the Ron Paul movement in the United States. But, as the defection of Ron Paul’s son Rand to the Mitt Romney camp shows, such conventional means are vulnerable to the missteps of the liberty movements’ own leaders. Rand Paul’s endorsement of Romney fractured the Ron Paul movement and has created a widespread perception of mistrust among friends of liberty, many of whom will now go their own separate ways. Of course, it has historically been a considerable challenge to get libertarians to agree on a strategy for achieving beneficial change – and perhaps it is more reasonable not to expect agreement, but rather to develop an approach that would work in achieving greater liberty without the need for such agreement. It would also help if this approach did not need to be as cumbersome, top-down, and expensive as political activism.

Seasteading has recently emerged as a promising alternative to political activism. Seasteads – a concept originated by Patri Friedman and Wayne Gramlich – are modular floating ocean platforms that can be combined and recombined to create autonomous cities on the oceans. In 2008, Friedman founded The Seasteading Institute with the financial support of libertarian entrepreneur and investor Peter Thiel. The idea has attracted respectable financing from Thiel and others, as well as input from legal and engineering scholars, and proposals for seastead designs and businesses. The Seasteading Institute makes available a large collection of research papers, project ideas, and public discussions, and it is not my intent here to probe into or scrutinize every detail of its ambitions. Rather, I hope to provide a general overview of the areas in which the concept of seasteading shows promise, as well as some of the significant challenges it will need to overcome.

As a friend of liberty, I wish the seasteading movement all the best. It is vital to explore every peaceful approach that has even a possibility of reversing the galloping totalitarianism of Western national governments and creating an incentive structure for accelerating human technological innovation.

In today’s countries, the land and most homes are fixed. One cannot move with ease if one finds the government’s policies oppressive; one is reluctant to lose one’s home, land, larger articles of personal property, and other location-specific amenities. Some governments, such as that of the United States, will even try to impose an exit tax or lay claim to income earned abroad. The physical detachability of seasteads solves this problem by enabling a person and his property to move inseparably to a variety of communities, or to remain as an autonomous unit. Patri Friedman’s goal is to create laboratories for political experimentation on seasteads. Much faster implementation of innovative political structures would be possible on a seastead, as compared to a traditional country, since each seastead community would be small and modular. Quick decision-making in a small group would enable beneficial innovations to be deployed, while harmful policies could result in much easier secession from the community – simply by detaching one’s seastead and setting course for a different community.

Seasteading would not directly change existing political structures. However, it may achieve greater individual liberation in a twofold manner: (1) by liberating those individuals who choose to live on seasteads instead of in traditional nation-states, and (2) by creating a virtuous cycle of political competition that motivates traditional governments to enact reforms in order to keep up with the prosperity and innovation occurring on the seasteads. It is extremely difficult to convince a majority of citizens of a multimillion-person nation to adopt a radical new policy or to radically abolish existing policies, even if the change promises to improve life dramatically. But many people – including some politicians – who are reluctant to pioneer an improvement will be willing to accept it if it has been tried and shown to work elsewhere.

A major advantage of seasteading is that it can begin as a sufficiently low-profile movement to avoid crackdowns by existing centers of political power. The seasteading movement does not threaten the sovereignty of any country; it does not propose to take away any nation’s territory or to challenge its government’s jurisdiction over that territory. Indeed, the infant stages of seasteading may, out of practical necessity, entail the creation of seasteads that explicitly submit to the jurisdiction of the United States, Canada, or a country in Europe or East Asia. The purpose of those early seasteads would not be the direct exercise of political autonomy, but rather experimentation with seasteading technologies and modes of living. The early seasteads would yield useful insights about how to construct floating modular platforms to be durable, cost-efficient, spacious, and comfortable. At this stage, the seasteading movement does not require the support or even the notice of most people – or even all liberty-oriented people. The people who are interested can advance the viability of seasteading by their direct work on improving seastead design and creating viable seastead-based businesses.

Yet the initial stage of the seasteading movement remains its most vulnerable. Seasteads must be built somewhere under the jurisdiction of an existing government. It is possible for the various requirements pertaining to building standards, licenses, permits, and zoning to hobble the construction and deployment of seasteads. In most parts of the United States, it is difficult enough to obtain permission to build a new house or small office building! If federal agencies, such as the US Coast Guard or the Environmental Protection Agency, become involved, the difficulties would be further compounded. The seasteading movement would be greatly benefited by capable legal representatives who understand what current laws permit and would be ready to defend the construction of a seastead if it is challenged. Furthermore, it is essential to choose relatively lax and business-friendly jurisdictions for the construction and deployment of the initial seasteads. I recommend the approach of full compliance with all laws that actually exist, combined with a thorough knowledge of such laws – to give the seasteading movement the ability to refute arbitrary compliance requests that are not based in law – as well as a choice of jurisdictions where the laws in question are not as onerous. The seasteading movement must particularly be vigilant for attempts to quash the concept of seasteading itself, under the guise of achieving some formalistic compliance, but in reality motivated by an ideological opposition from the powers in a particular jurisdiction.

Once seasteads become sufficiently cost-effective and tested to be appealing to broader segments of the general public, the deployment of truly autonomous ocean communities can begin. Such communities could begin to arise once seasteads reach areas outside the territorial waters of any nation – but even there a risk exists of boarding, expropriation, and arrest by representatives of traditional nation-states. This risk is particularly high if a seastead is perceived to be engaged in activity that threatens the nation-state – such as trading in weapons or currently illegal drugs. Even though many advocates of seasteading, myself included, support drug legalization, it may be advisable to abstain from permitting certain substances on seasteads out of prudential considerations.

True political independence for seasteads will likely come about through an evolutionary process – much like the “benign neglect” of the American Colonies for decades by the government of Great Britain created a political culture that resisted restrictions on liberty when the British government began to impose them. Perhaps benign neglect from the United States and other Western powers will be the best that the early seasteaders can hope for. The first quasi-autonomous seastead communities might make a demonstration of complying with restrictions that Western governments would be particularly interested in enforcing extraterritorially. If a culture of such compliance is established, the seasteads might otherwise be left alone and free from the petty micromanagement that extends far beyond such matters as prohibiting trade in certain substances. But once there are enough seastead communities – each with already flourishing internal economies and many technological innovations to their credit – they may begin to have the resources and internal strength to resist impositions from traditional nation-states. Hopefully, this resistance will be accomplished by a peaceful assertion of sovereignty, a declaration of good will toward all other political jurisdictions, and simple acquiescence by the nation-states. Perhaps the economies of the seasteads and the traditional countries will have become so inextricably intertwined by that time, that violence will be deemed out of the question by all parties – and the populations of the traditional countries would strongly object to the notion of attacking another peaceful, prosperous, civilized community with many common cultural and even personal ties to these countries.

But inanimate nature can pose dangers to seasteads that are as great as the dangers posed by man. The oceans are not known to have the most clement conditions. Aside from severe storms, which can probably be withstood with sufficiently durable construction, the risks of earthquakes and accompanying tsunamis are immense – as Japan’s experience in 2011 has demonstrated. The 2011 Tohoku Earthquake and consequent meltdown of the Fukushima nuclear plant undermined confidence in nuclear power worldwide – despite the existence of more advanced nuclear technology that can avoid meltdowns. An earthquake and tsunami can wipe out even sturdy seastead communities. Furthermore, a large earthquake on the ocean during the early days of seasteading may greatly undermine interest in the movement. Therefore, it is particularly important to choose sites of low seismic activity to deploy at least some of the early seasteads. Deployment into more seismically active areas will be more viable once seasteading has reached such popularity that placing a seastead near an earthquake fault will be seen as no more unusual than building a house in California.

As a risk-averse person who prefers ample space, I would not be an early adopter of the seasteading lifestyle. However, I salute the pioneers who would be willing to live on the first seasteads, with their likely cramped conditions and limited amenities. They are paving (or, as the case may be, floating) the way for the rest of us. Ultimately, however, seasteads will need to be designed to accommodate the living standards to which people are accustomed on land. Persons with a strong desire to actualize a principle or with a particularly hardy disposition may be willing to accept some degree of privation; they would be a needed and much appreciated first wave of adopters. If the political situation on land becomes physically perilous to large numbers of people, a major exodus onto seasteads might be conceivable even before the seasteads become comfortable. In the absence of such an unfortunate development, however, I anticipate that seasteads would need to have the space and facilities typical of a small American house, or at least a large recreational vehicle (RV), before they become attractive to people without significant pioneering or ideological motivations.

The incremental evolution of seasteads toward viability, autonomy, and mass adoption seems the most likely practical course, but it is legitimate to ask whether it will be enough to stem the tide of encroachments on our freedoms today. Perhaps it will – combined with other forms of pro-liberty activity, including political activism in each country and continued technological and cultural innovation in areas where it remains possible. Seasteading may not be sufficiently mature to serve as a remedy to our current condition of servitude, but it may help us keep totalitarianism at bay in combination with other approaches. This is another avenue for friends of liberty to explore, and we need as many of those as we can get. Ultimately, the objective for libertarians and others who think similarly should be not to reach complete theoretical agreement on everything, but rather to enable each individual to arrive at a position where his or her direct efforts can effectively produce greater liberty, prosperity, and progress. Seasteading will hopefully serve to empower increasing numbers of people to make such lasting contributions.