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State's role in providing access to electricity?

I’ve been watching a documentary on the history of the British power grid. You can see the first 15 min here.

Synopsis: Reeling from the rise of the Communists in Russia in 1913, the British of the 1920s were deeply suspicious of centralized state authority. Lenin had remarked that Communism was just the power of the people “plus electricity”; this prompted even deeper suspicion about expanding the role of the state into the world of electricity.

Thus England largely refrained from regulating electricity. As a consequence, in 1920 most of the nation remained without. And where electricity was available, rival providers would string competing lines down the streets, providing service at a variety of voltages. Thus, if you moved across the street, you might find that none of your electrical appliances would work. Also, the failure of any one supplier would result in blackouts for customers; there was no interconnection to provide back-up service.

One final consequence: The centralized governments of Germany and France had directed the rapid deployment of electricity throughout their nations. Due to economies of scale, electricity in those countries proved to be cheaper than in England. This gave a competitive advantage to firms operating in those countries.

Confronted with these facts – and the fact that expanding the electric grid would be politically popular -- England’s otherwise laissez faire Conservative government created the Central Electricity Board in the 1920s and launched into a process of centralized planning and construction of the electric grid -- the greatest program of government expenditures in the nation’s history to that time.

The project was opposed by many -- including luminaries such as John Maynard Keynes, Rudyard Kipling, and John Galsworthy -- on grounds that it would be ugly and required the condemnation of private property.

The project was completed on budget, ahead of schedule, and succeeded in expanding the availability of electricity and reducing its price. Among other results, this expansion would prove to be vital during WWII -- to power production, to enable production in rural areas, and also to provide reliability; the German Blitz would destroy England’s power plants, yet electricity would continue to flow in from Scotland and Wales.

England’s choice to establish the CEB and accelerate the expansion of the power grid: good, bad or indifferent? You make the call.


More monetary omens?

One of the stalwart stocks of the past couple of years is Dollar Tree.

An argument can be made that DLTR is an inflation "canary in the coal mine". If most things get more expensive, and everything at the Dollar Tree stores stays the same price, it's more attractive to consumers. Is DLTR's price action warning of inflation?

Similarly, Coinstar's stock has been on fire lately. The argument for it being an inflation canary is much weaker. More money sloshing around means more loose change, and more worthless change?

Thoughts?

My current thoughts about the endgame of our financial woes is hyperinflation in terms of dollars, but I'm expecting it well into the future (3-5 years).


Monetary Omens

Inflation protected treasury bonds (TIPS) sold today at negative yields for the first time ever. While this is good blog fodder for writers who tend to the apocalyptic, a sober man weighing the probability of immanent monetary apocalypse should note that yields on normal treasury bonds are also quite low (about 1.2% on the 5-year) so modest inflation expectations, say 2%, would be enough to push yields negative.

Still it is strange to see investors paying the Treasury for the privilege of taking their money. For this to happen expected returns on other asset classes have to be quite low, which is a bad sign for any economy.

Via Marginal Revolution


Libertarian Europe

In American political discourse “European” is used as shorthand for socialism, a pervasive anti-market mentality, and an extensive welfare state. Like most simplifications this stereotype is only part true, as the European policy reaction to the Great Recession has a striking libertarian flavor.

The Economist magazine remarked that there are two competing explanations for the continuing economic malaise:

  1. Aggregate demand was weakened with the collapse of housing prices and has not yet returned to normal levels
  2. Overinvestment in housing caused permanent damage to the economy that has no easy fix. Time is needed for resources to be channeled to other uses before economic growth will continue and unemployment will fall

Between these two competing explanations, the second one is clearly more libertarian. The first explanation suggests that government can return the economy to normal by boosting aggregate demand through large increases in spending. This is the policy path that American officials favor while pundits on the left like Paul Krugman berate them for not taking it far enough.

In contrast the second explanation suggests that aggressive government action will be ineffective at restoring growth and employment to normal. At best government spending projects can treat the symptoms of the recession by offering temporary work and assistance. In addition to offering the more laissez faire policy prescriptions, the second explanation recommends itself to libertarians by tracing its genesis to the traditionally libertarian Austrian school of economics.

European policy makers are firmly lined up behind the second explanation. Not only do they eschew large stimulus bills, they are perfectly willing to cut public programs to cover up budget holes caused by lavish spending in boom times and anemic tax receipts.

America has the reputation of the hardcore market fundamentalist of the world. But it is nominally socialist Europe that is trusting the market to heal itself while the American government eagerly takes on ever more debt for emergency programs. In a few years it is not hard to imagine Europe roaring out of the recession with a firm financial footing while the American recovery is dragged down by its own debt crisis.


Miscellany

One mystery solved; one not:

Mystery 1. Why so many blog posts from me at this time? I'm under deadline; this is how I procrastinate. I told Brandon Berg that I shouldn't start blogging here because this is EXACTLY what I'd do when under deadline. And I was right. Oh, well; too late now....

Mystery 2. How do we get so many comments on three-year-old threads?


On free ridership, and the State as superhero

Who needs a coercive state? People who are concerned about externalities and free riders, that's who! I create externalities when I make decisions and you have to bear the consequences. I become a free rider when you expend resources to create a benefit and I derive the benefit without contributing.

Both phenomena arise from the fact that the ideal of “private property” often fails to adequately describe our world: we affect each other more than we might like to admit. This market failure demonstrates the absurdity of thinking that people can live together without coercion.

Or does it? Still working on the externality issue. But evidence suggests that free ridership is not the deal-breaker I had thought. Pretty much all institutions operate in the face of them. I can’t really recall any endeavor in which I would honestly say that all participants received benefits in proportion to the burdens they bore.

Lo and behold, a new study focuses on the financing mechanisms of two forms of voluntary association: synagogues and churches. Synagogues typically charge an annual membership fee; churches typically request voluntary donations. As you might expect, there’s a larger disparity in levels of giving in churches than in synagogues. But as you might not expect, all else being equal, these two systems generate roughly equal amounts of revenue. In other words, begging is a perfectly viable business model, notwithstanding the fact that plenty of people will decline to contribute.
_________

Honestly, I’m having a problem accepting this. Free riders PISS ME OFF. They offend my sense of justice. I want to believe that we need a state to coerce these people into paying their fair share because I WANT TO COERCE THESE PEOPLE INTO PAYING THEIR FAIR SHARE. It’s not about the outcomes; it’s about the fairness.

I'm gradually coming to the view that I just need to get over it. But it’s hard. And that’s given me a new insight.

If I place less reliance of the coercive power of the state, I will experience injustice without hope of remedy. If I place greater reliance on the coercive power of the state, I will still experience injustice. I may even experience greater injustice. But at least I am able to cling to the abstract notion that there exists a coercive power in the universe – God, Superman, the state – that could and might remedy injustice.

And perhaps it is this hope – even if delusional – that dooms libertarianism. In this sense libertarianism becomes akin to atheism and existentialism: Embracing this view requires letting go of some comforting delusions. It’s a pretty bitter pill to swallow. I appreciate anew how difficult it may be to persuade any large number of people to swallow it.


Benefitting from FEWER options?

Conversations during first dates are insipid; each party is so obsessed with image management that nothing interesting gets said. Dan Ariely, author of Predictably Irrational and The Upside of Irrationality, quotes the film Best in Show regarding the results of these conversations:

“We have so much in common. We both love soup. And snow peas. We love the outdoors. And talking. And not talking. We could not talk or talk forever and still find things to not talk about.”

So Ariely conducted an experiment on an on-line dating site. He required the first message sent from any person to any other person to be one from a finite set of probing, slightly-beyond-the-bounds-of-propriety questions: How many romantic partners did you have? When was your last breakup? Do you have any STDs? Have you ever broken someone’s heart? How do you feel about abortion?

And later he asked the parties how they liked this arrangement. They liked it; they even preferred it. How can it be that constraining people’s choices makes them better off?

I see two dynamics as play here. The first is pretty mundane: Ariely’s system constrained people’s choices in the same way that contracts constrain people’s choices. That is, people bind themselves (limiting their choices) in order to secure a reciprocal concession from someone else. A member of a couple was willing to surrender her defenses in return for the other member of the couple surrendering his. No conceptual mystery here.

The second dynamic is more interesting: Sometimes people may feel constrained from doing what they’d like out of concern for reputation. People then look for opportunities to act without bearing responsibility for their actions.

 “OMG, I was so embarrassed to ask you that. But what could I say? The other questions were even worse!”

 “Ok, sure, I came onto your girlfriend last night. What can I say? I was drunk!”

 “Mom? Hey, I’m not going to be able to be home by curfew. What can I say? The car won’t start.”

 “Look, guys, I’m not any happier than you are to have to serve those Negros at my lunch counter. But what can I say? It’s the law.”

 “Yes, you know and I know that crumbling crackers into your soup is a lowbrow thing to do. But President Truman did it right on national television! You don’t want us to make the president look like a boor, do you?”

 “No, rabbi, I didn’t want to eat that hot dog, honest! But what can I say? That’s what they were serving. You say I should treat others as I would want to be treated, and if I were a host I wouldn’t want to have to cater to an ungrateful guest…. ”

 “I admit I slaughtered those Tutis. But what can I say? But if I hadn’t, my fellow soldiers would have killed me!”

This dynamic is NOT reciprocal. The actor really wants to act in a certain way that violates some people’s values. The fact that many might also join in the action is merely a useful cover; the actor would look for opportunities to act according to his preferences even if no one else were allowed to do so.

As such, this dynamic suggests a kind of opportunity to achieve a social benefit. To the extent that an authority figure can break through a social norm that people would like to abandon anyway, the majority may find themselves better off. (Conversely, to the extent that an authority figure can normalize the practice of shirking a duty owed to others, the majority may find itself benefiting by transferring wealth from those owed a duty to those having the duty. Whether that results in a net social benefit is doubtful.)


Show me the money!

A rare entertaining yet informative article from Sports Illustrated about how far sports agents are willing to go to recruit clients:

"Hey, Kanavis, my name is Josh Luchs. I'm a sports agent, and I flew here from Los Angeles specifically for you," I said. "You're a great player and I came a long way, and I'd really appreciate it if you would sit down and talk to me for a few minutes."

Kanavis said, "Sure, man. Come on in."

We sat on his couch, and I gave him my spiel. I told him about myself and asked him questions, trying to connect with him. After about half an hour, Kanavis said to me, "Josh, you seem like a pretty good guy, can I share something with you?"

"Sure."

"I need some help. My mom lost her job and she's sick and she hasn't been able to make her rent. If I don't come up with $2,500, she is going to get evicted from her apartment."

"I don't know," I said. "Let me think about it. I'll come by tomorrow and let you know."

That night I sat in my hotel room making a list of pros and cons in my head. Sure, it was breaking NCAA rules, but I would be helping Kanavis out. How would I feel if my mom was sick and I didn't have money to help her? I went through this for hours and finally decided to do it. The next morning I went to the bank, pulled out some of my bar mitzvah money, $2,500 in cash, showed up at Kanavis's door and told him, "Kanavis, I gave this a lot of thought, and I want to help you out. I know how I would feel if it was my mom."

"Thank you so much," he said. "You're my boy, man. You're really coming through for me."

I went back to my hotel and for a little while I felt good, but then the phone rang. It was a teammate of Kanavis's calling.

"Hey, man, Kanavis told me you're a pretty good dude," he said. "I got this problem, and I need some help. My father is really sick and he is losing his apartment and I need $2,500. Do you think you can help me out the way you helped Kanavis?"


Unintended consequences of regulation – specifically, Prohibition

Organized crime, disrespect for law, yeah, yeah.

But David Okrent’s book Last Call suggests other, less familiar consequences of Prohibition: The growth of Walgreens. Budweiser Clydesdales. Expansion the amount of ocean that the US claims as part of its national sovereignty. The growth of home entertaining and mixed drinks. The growth of Coca Cola. Wholesale changes in California agriculture. NASCAR. Even an early version of seasteading.

Yet Prohibition had one large intended consequence: Contrary to libertarian lore, Prohibition actually succeeded in dramatically – and permanently – reducing per capita alcohol consumption.


Government as Public Corporation

With democracy, the people eventually vote themselves largesse from the public treasury. Deficits ensue. Constitution writers can dream up limits: balanced budget amendments, enumerated powers, checks and balances, and so forth. It doesn’t work. The people find a work around. As voters they own a government; eventually they want the profits.

Perhaps we should borrow a page from the modern monarchists and simply formalize the arrangement. Government is a sovereign corporation. Democratic government is a sovereign corporation in which each citizen owns one share – a consumer cooperative, as it were. Maybe that corporation should pay a dividend, instead of having shareholders constantly thinking up sneaky ways to get their hands in the public till. Ditch the welfare state and give every citizen an equal amount of free money from the government.

The result would not be libertopia. Self-interested citizens would want to maximize tax revenue in order to maximize their dividend check. But our theoretically limited government often goes beyond the Laffer maximum in order to use the tax code to indirectly redistribute the wealth. Worse yet, we have hundreds of programs and hundreds of thousands of bureaucrats and social workers to figure out which category of largesse you deserve. Naked aggression/people power/might makes right would be simpler and fairer. All those smart people currently bonded to the government teat would be banished to the private sector, receiving no more from the government than the bums on the other side of the tracks. Who knows what sorts of interesting businesses and foundations they would set up if so released into the wild?

Would this fix the deficit problem? Or would the people vote themselves a dividend beyond the ability of government to pay? Or worse, would they vote for a dividend and a welfare state to boot?

We cannot say without doing the experiment. But the private sector provides some clues. Corporations pay big money to top management in order to keep management’s interests aligned with the shareholders. Pay someone a mere $100K to run General Motors and the CEO can make far more money in kickbacks from suppliers than from serving GM. This doesn’t always work, of course. Sometimes greedy or overly ambitious CEOs milk the businesses they run anyway.

But the people are the shareholders, not the CEO. So this payment principle is a bit of a stretch. For democratic government we have finely dispersed ownership. A somewhat closer analog would be the mutual insurance company. Hmmmm, if we could get government to behave as conservatively as a mutual insurance company, we’d be doing rather well…