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VIDEO: World-Leading Infectious Disease Expert Explains Why Government Lockdowns Should End

In 2010, The Atlantic said that Dr. John Ioannidis “may be one of the most influential scientists alive.”

The article, written by David H. Freedman, made it clear the Greek-American physician-scientist’s rising star stemmed in part from the fearlessness he demonstrated in challenging bad science in the medical research field.

“[Ioannidis is] what’s known as a meta-researcher, and he’s become one of the world’s foremost experts on the credibility of medical research,” Freedman wrote. “He and his team have shown, again and again, and in many different ways, that much of what biomedical researchers conclude in published studies—conclusions that doctors keep in mind when they prescribe antibiotics or blood-pressure medication, or when they advise us to consume more fiber or less meat, or when they recommend surgery for heart disease or back pain—is misleading, exaggerated, and often flat-out wrong.”

Today, Ioannidis is the C.F. Rehnborg Chair in Disease Prevention at Stanford University. He has authored some of the most cited medical journal articles in history.

Ten years after his glowing profile in The Atlantic, however, Ioannidis finds himself in the crosshairs of media and medical professionals for doing what he’s always done: challenging science he believes is flawed. This time, however, Ioannidis is challenging medical findings of a virus that isn’t just deadly, but deeply controversial.

Ioannidis has become perhaps the leading medical voice against COVID-19 alarmism and government lockdowns.

It began with a March 17 article in Stat that suggested governments around the world were taking sweeping and potentially harmful actions to limit the spread of COVID-19 without sufficient data. Then came a May 5 white paper he authored which suggested COVID-19 was not nearly as deadly as initially feared, a claim later supported by an NPR report that cited research from Johns Hopkins University showing a fatality risk as low as 0.5 percent. Ioannidis’s latest research on the COVID fatality rate pegs the median COVID-19 fatality risk at 0.25 percent, much lower than previous estimates but still about two and a half times higher than the seasonal flu.

Ioannidis’s credentials might be impeccable, but his findings have not been without controversy.

In an impressive piece of medical journalism published at Undark.org, investigative journalist Jeanne Lenzer and Shannon Brownlee of the Lown Institute detail the withering criticism Ioannidis has received from media and medical professionals alike.

Ioannidis appears unfazed by the attacks, which include (very thin) accusations that his study suffered from an undisclosed conflict of interest.

In the medical journal BMJ, Ioannidis recently explained why he believes government lockdowns should be lifted. (An opposing view is offered by Edward R. Melnick of the Yale Medical School.)

Even if covid-19 is far milder than feared, it can still devastate in specific settings. Massacres in overwhelmed hospitals with contaminated personnel and in nursing homes represent the lion’s share of deaths. Hospital preparedness, universal personnel screening, draconian infection control, and social distancing in these locations are indispensable.

However, blind lockdown of entire populations has questionable added benefits. Locking down healthy, no-risk people and transferring covid-19 patients to nursing homes was absurd. Proponents of “lockdown to flatten the curve” should acknowledge that this gains time for hospital preparedness but that most, if not all, covid-19 deaths will still happen when measures are relaxed—unless effective treatments and/or vaccines emerge. Moreover, the lockdown-to-flatten-the-curve rationale ignores seasonality and espouses 100 year old observational data from a 1918 pandemic with an infection fatality rate 100 times higher than covid-19.

Lockdowns have multiple components. Some, such as avoiding mass gatherings, may work; others may not. Some may even increase the number of covid-19 deaths—for instance, school closures may increase frail relatives’ exposure to children. But, regardless of the combination, lockdowns bring multifarious harms beyond those related to the SARS-CoV-2 virus, such as the consequences of health system dysfunction and extended harms eroding health, the economy, and society at large.

Lockdowns implemented during high infectious activity will force infective people to spend more time with frail relatives in cramped spaces. Low wage, essential workers adopt higher risks, and shelters for vulnerable homeless people become infection hotspots, while wealthy, healthy citizens get to stay at home. Stress may also affect our immune responses to respiratory infections. And, with the added horror spread by various media sources, lockdowns represent uniquely stressful experiences.

Under lockdown conditions many patients with acute, treatable conditions (such as coronary syndromes) avoid seeking care. This disruption may be seen in the excess deaths accruing so far in the covid-19 lockdown. Patients with cancer whose treatment is delayed have worse outcomes. And when patients avoid hospitals many health systems suffer financially, furlough personnel, and cut services. Covid-19 overwhelmed a few dozen hospitals, but covid-19 countermeasures have already jeopardized thousands of them.

Prolonged lockdowns fuel economic depression, creating mass unemployment. Jobless people may lose health insurance. Entire populations may witness decreased quality of life and mental health. Gun sales in the US have increased sharply since the lockdown began, with unpredictable consequences.

Underprivileged populations and those in need are hit harder by crises. People at risk of starvation worldwide have already exceeded one billion. We are risking increased suicides, domestic violence, and child abuse. Malaise and societal disintegration may also advance, with chaotic consequences such as riots and wars.

And how long a lockdown is enough? If we open now, will lockdown recur in autumn? Next year? Whenever authoritarianism so wishes? No dictatorship could imagine a better precedent for absolute control.

Lockdowns were desperate, defendable choices when we knew little about covid-19. But, now that we know more, we should avoid exaggeration. We should carefully and gradually remove lockdown measures, with data driven feedback on bed capacity and prevalence/incidence indicators. Otherwise, prolonged lockdowns may become mass suicide.

As Undark points out, Ioannidis’s opposition to lockdowns do not stem from libertarianism or a “Trumpian desire to benefit Wall Street,” but a longstanding skepticism of medical interventionism generally, which he says tends to be missed or downplayed by medical researchers.

Ioannidis may be no libertarian, but many of the lockdown themes he touches will sound familiar to FEE readers—deadly government policies that prohibited nursing homes from screening for COVID-19, soaring suicide, and widespread economic destruction resulting in millions of businesses wiped out and 40 million jobs lost.

While the costs of the lockdowns are apparent to all, less clear is how effective they have been in limiting the spread of the virus. A recent Bloomberg found “little correlation between the severity of a nation’s restrictions and whether it managed to curb excess fatalities.” Norway’s top health official recently stated the lockdowns probably were not necessary. Evidence from a recent JP Morgan report suggests most nations saw COVID infection rates fall after lockdowns were lifted.

These results make sense when one realizes, as studies have shown, that Americans were social distancing before lockdown orders were enforced. This fact brings to mind a quote from Nobel laureate economist F.A. Hayek.

“This is not a dispute about whether planning is to be done or not,” Hayek wrote in The Use of Knowledge in Society. “It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.”

Hayek’s point was that centralized planning tends to be irrational because central planners lack the knowledge to make rational decisions. We mustn’t forget that human beings by nature and self-interest will take reasonable steps to protect themselves from a deadly virus. Humans manage risk every single day, and each does so possessing and processing more local knowledge than any central planner can possess.

Government officials no doubt were acting in good faith when they ordered lockdowns, but by removing choices from individuals, businesses, and other organizations they committed what appears to be one of the most costly and ultimately lethal blunders in modern history.

It’s not too late to learn from the mistake. A first step toward that end would be to admit that John Ioannidis is right: The government lockdowns must end.

COLUMN BY

Jon Miltimore

Jonathan Miltimore is the Managing Editor of FEE.org. His writing/reporting has been the subject of articles in TIME magazine, The Wall Street Journal, CNN, Forbes, Fox News, and the Star Tribune.

Bylines: The Washington Times, MSN.com, The Washington Examiner, The Daily Caller, The Federalist, the Epoch Times.

He previously served in editorial roles at The History Channel magazine, Intellectual Takeout, and Scout. He is an alumni of the Institute for Humane Studies journalism program, a former reporter for the Panama City News Herald, and served as an intern in the speechwriting department of George W. Bush.

RELATED ARTICLES:

NPR: “Mounting Evidence” Suggests COVID Not As Deadly as Thought. Did the Experts Fail Again?

COVID-19 Lockdowns are Neither Necessary, nor Scientific, nor Helpful

Selective Social-Distancing Rules Are One of the Great Scams in American Life

Why Non-distanced Social and Commercial Interactions Have Resumed So Quickly

RELATED VIDEO: Multiple Scientists:  C0R0NAVlRUS Altered in Lab to Better Attach to Humans

EDITORS NOTE: This  FEE Daily column is republished with permission. ©All rights reserved.

VIDEO: Excuse Me, Professor! Correcting the slant on campus

excuse me professor book coverToo often, the message students get in college is that government is the answer to all social and economic problems. This happens in classes on history, sociology, politics, literature, and even in economics. You can graduate having heard only one narrative: the market has failed, so it must be replaced by all-controlling government bureaucracies.

FEE president Lawrence Reed is the editor of a wonderful collection of essays that address myth after myth. The book is Excuse Me, Professor (buy it from FEE). The essays deal with a huge range of issues that confront students every day. Unless young thinkers have an alternative paradigm in mind, the cause of human liberty will continue to lose the intellectual battle.

In this presentation at the Acton Institute, Reed discusses his new book and why it is an important contribution to setting the record straight. (Talk begins around 4:30 mark.)

Jeffrey A. TuckerJeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook.

Why Is Liberty So Important? by Lawrence W. Reed

At this time of the year, all of us at the Foundation for Economic Education take special note of our many friends, both new and old. Though our work is vitally important, we never want to be so absorbed in it that we neglect the people like you who make it possible.

So allow me this moment to express a collective thanks from all of us at FEE to all of you who partner with us as trustees, donors, seminar attendees and alumni, faculty network members, readers of the Freeman and FEE.org, and ambassadors for liberty.

If you’ve never financially supported FEE in the past, I invite you to do so today.

If you’re a past supporter of FEE, I thank you for your generosity and invite you to consider renewing your support.

When you invest in FEE, you invest in life-changing events and publications that will pay dividends for decades.

FEE is focused on cultivating an understanding of the principles of freedom in the minds of young “newcomers” to liberty — particularly those of high school and college age.

Every time I hear a student exclaim “I never heard this before FEE told me about it!” I know we’ve made a difference for the rest of that person’s life.

Why is liberty so important?

  • Liberty is precious, rare, never guaranteed, and always threatened. It can be lost in a single generation if it’s not advanced and defended.
  • Liberty follows from human nature: We are unique individuals, not a blob or an army of robots to be programmed by those with power.
  • To be fully human, all of us must be free to exercise our choices and govern our lives so long as we permit the same of others.
  • Liberty works. Over and over again, it produces a degree of interpersonal cooperation, innovation, and wealth creation that allows human beings to flourish — nothing else even comes close.
  • Liberty is the only social, political, or economic arrangement that requires that we live to high standards of conduct and character and rewards us when we do so. This is a crucial difference between liberty and the soul-crushing, paternalistic snares that are offered as alternatives.
  • Life without liberty is unthinkable. Who wants to live at the end of another’s leash, fearing at every turn what those armed with force and power might do to us, even if they have good intentions?

We wouldn’t expect, even if it were possible, that everyone who supports us will agree with everything they ever see or hear from FEE. We have our own core beliefs, of course, but to a considerable degree we are a forum for differing views among those who broadly share an affinity for liberty.

We don’t take for granted that we’ll earn your support every day, every month or every year. We know we have to earn it all the time. So we are engaged in a non-stop, self-improvement program. We experiment and innovate. Seminar themes, technology, content, and speakers change and improve. We expand and grow what works and drop what doesn’t. We do it all in an effort to be the best-known, most effective “first encounter” for young people with the economic, ethical, and legal principles of a free society.

I hope this cause in general — and our work at FEE, in particular — excites you as much as it does every member of the team we’ve assembled. We go to work every day with passion for what we do, and with appreciation for you who support us.

Thank you, too, for being an ambassador for liberty. Because of your sharing on social media and your own engagement with our content, FEE is reaching a wider audience than at any time in our 69-year history.

We are experiencing record levels of applications for our seminars. FEE voices are appearing in the international press. And FEE.org itself is being read by over 500,000 people per month (and rising fast!). This is a level of reach that would have delighted FEE’s founders, and the champions of freedom from time immemorial.

However, without the generosity of individuals like you, FEE would not be able to deliver life-changing moments for countless young people. We need your financial support to continue our work for liberty.

Whether you give a little or become a continuing benefactor in substantial amounts, we appreciate it deeply as a vote of confidence in FEE’s message, mission, and work.

Thank you for thinking of FEE in your year-end giving. And, thank you for all that you do to advance liberty in any way!

Best wishes to you and your families for this holiday season and for a blessed and prosperous New Year.

Lawrence W. ReedLawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Follow on Twitter and Like on Facebook.

Real Hero Cato the Younger: The Man Who Almost Stopped Julius Caesar by Lawrence W. Reed

In the estimations of many historians, two men hold the honor as the most notable defenders of the Roman Republic. Marcus Tullius Cicero was one. Marcus Porcius Cato, or “Cato the Younger,” was the other.

Since there was a “younger,” there must have been an “elder,” too. Cato the Elder was the great grandfather of the younger. Both men, separated by more than a century, were influential in public office. Think of the elder as the social conservative, concerned in his day with preserving the customs and traditions of Rome. The younger was one of history’s early libertarians, interested more in personal and political liberties because he believed that if they were lost, nothing else mattered. It is this second one to whom I refer in the balance of this essay as simply “Cato.”

By the time of Cato’s birth in 95 BC, the Roman Republic was long in the tooth. Founded four centuries earlier, it had risen from obscurity to political and economic dominance in the Mediterranean. Rome was easily the world’s wealthiest and most powerful society. It wasn’t a libertarian paradise — slavery was a part of its makeup, as it was even more brutal everywhere else — but Rome had taken liberty to a zenith the world had never seen before and wouldn’t see again for a long time after it finally fell. The constitution of the republic embodied term limits; separation of powers; checks and balances; due process; habeas corpus; the rule of law; individual rights; and elected, representative legislative bodies, including the famous Senate. All of this was hanging by a thread in the first century BC.

Cato was just five years of age when Rome went to war with its former allies in the Italian peninsula — the so-called “Social War.” Though the conflict lasted just two years, its deleterious effects were huge. The decades to follow would be marked by the rise of factions and conflict and local armies loyal to their commanders instead of the larger society. A “welfare-warfare” state was putting down deep roots as Cato grew up. The limited government, personal responsibility and extensive civil society so critical to the republic’s previous success were in an agonizing, century-long process of collapse. Even many of those who recognized the decay around them nonetheless drank the Kool-Aid, succumbing to the temptations of power or subsidies or both.

Before the age of 30, Cato had become a supremely disciplined individual, a devotee of Stoicism in every respect. He commanded a legion in Macedon and won immense loyalty and respect from the soldiers for the example he set, living and laboring no differently from day to day than he required of his men. He first won election to public office (to the post of quaestor, supervising financial and budgetary matters for the state) in 65 BC and quickly earned a reputation as scrupulously meticulous and uncompromisingly honest. He went out of his way to hold previous quaestors accountable for their dishonesty and misappropriation of funds, which he himself uncovered.

Later he served in the Roman Senate, where he never missed a session and criticized other senators who did. Through his superb oratory in public and deft maneuverings in private, he worked tirelessly to restore fealty to the ideals of the fading Republic.

Since the days of the Gracchus brothers (Gaius and Tiberius) in the previous century, more and more Romans were voting for a living to replace or supplement having to work for one. Politicians were buying elections with expensive promises to distribute free or subsidized grain. Cato saw the debilitating effect such cynical demagoguery was exacting from the public’s character and opposed it at first. The one time he compromised on this issue was when he supported an expansion of the dole as the only way to prevent a demagogue named Julius Caesar from coming to power. It was a tactic he hoped would be temporary, but it ultimately failed, becoming the only blot on an otherwise virtuous and principled public career.

It was Cato’s fierce and relentless opposition to Julius Caesar that made him most remarkable. He saw in the ambitious, power-hungry general a mortal threat to the republic and tried to block his every move. He filibustered for hours on end to prevent a vote on Caesar’s bid to attain Rome’s highest office, the consulship. Caesar eventually got the job, but while in office, Cato vexed him more than any other senator. Caesar even ordered Cato dragged from the Senate in the middle of one of his orations, whereupon another senator declared, according to historian Cassius Dio, that he “would rather be in jail with Cato than in the Senate with Caesar.”

In Rome’s Last Citizen: The Life and Legacy of Cato, Caesar’s Mortal Enemy, authors Rob Goodman and Jimmy Soni underscore Cato’s implacable resistance:

It had been an unprecedented year of obstruction and deadlock, all spearheaded by Cato. Never before had a senator brought forth such a range of legislation to the same dead halt in a matter of months. The tax contracts, the postwar plans for the East, the land reform, Caesar’s triumph (a costly public spectacle), Caesar’s bid for a strong consulship and a provincial command — Cato had not stood against them alone, but he was the common thread between each filibuster and each “no.”

Cato stood in the way of Caesar’s ambitious agenda but couldn’t prevent his postconsulship appointment as a provincial governor. In that post, Caesar mustered his forces for an assault on the very republic he had governed as a consul. In 49 BC, he famously crossed the Rubicon River and headed for Rome to seize power.

As a sign of strength and magnanimity, Caesar might have pardoned his old foe. Some contemporaries and present-day historians believe that was, in fact, Caesar’s intent and would have been a politically smart thing to do. Quoting again from Goodman and Soni:

But Cato would not give Caesar the gift of his silence; he had scripted his own scene. He would not recognize a tyrant’s legitimacy by accepting his power to save. As Cato saw it, Caesar broke the law even in offering pardons, because he offered them on no authority but his own. To accept forgiveness would be conceding Caesar’s right to forgive, and Cato would not concede that.

So in April 46 BC in Utica, using his own sword to do the deed, Cato committed suicide rather than live under the thumb of the man whose power lust was about to extinguish the old republic. While Cato lived, write Goodman and Soni, “every Roman who feared that the traditional virtues were guttering out, who saw the state’s crisis as a moral crisis — as the product of terrifyingly modern avarice or ambition — looked, in time, to Cato.”

With Cicero’s death three years later under the orders of Caesar’s successor, Marc Antony, the Republic died and the dictatorship of the empire commenced.

More than 17 centuries later, in April 1713, Joseph Addison’s play Cato: A Tragedy debuted in London. Depicting the ancient Roman as a hero of republican liberty, it resonated for decades thereafter in both Britain and America. George Washington ordered it performed for his bedraggled troops at Valley Forge during the awful winter of 1777–78. Congress had forbidden it, thinking its sad conclusion would dispirit the troops, but Washington knew that Cato’s resistance to tyranny would inspire them. And thankfully, it did.

“Few leaders have ever put ambition so squarely in the service of principle,” write Goodman and Soni. “These were the qualities that set Cato apart from his fellows — and that made posterity take notice.”

Putting ambition in the service of principle instead of one’s own glory or power or wealth: now that’s a virtue to which every man and woman in public office — in any walk of life, for that matter — should aspire today.

For further information, see:

The Fall of the Republic” by Lawrence W. Reed

Enemy of the State, Friend of Liberty” by Lawrence W. Reed

Are We Rome?” by Lawrence W. Reed, and other essays on Rome


Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

EDITORS NOTE: Each week, Mr. Reed will relate the stories of people whose choices and actions make them heroes. See the table of contents for previous installments.

Real Hero William Leggett: Imagine a Political Party That Really Supports Equal Rights by Lawrence W. Reed

Death from yellow fever complications claimed journalist William Leggett at the tender age of 38, days before he would have assumed his first political office. President Martin Van Buren had just named Leggett US ambassador to Guatemala. In the early 19th century, as temptations were rising to divert Americans’ constitutional framework toward bigger government, Leggett (to borrow a phrase from 20th-century journalist William F. Buckley) stood athwart history yelling, “Stop!”

Leggett’s fame is inextricably intertwined with the term Locofoco. Here’s the story.

Imagine a political movement that says it’s committed to “equal rights” — and means it. Not just equality in a few cherry-picked rights but all human rights, including the most maligned: property rights. Imagine a movement whose raison d’être is to oppose any and all special privileges from government for anybody.

When it comes to political parties, most of them in recent American history like to say they’re for equal rights. But surely the first lesson of politics is this: what the major parties say and do are two different things.

In American history, no such group has ever been as colorful and as thorough in its understanding of equal rights as one that flashed briefly across the political skies in the 1830s and ‘40s. They were called “Locofocos.” If I had been around back then, I would have proudly joined their illustrious ranks.

The Locofocos were a faction of the Democratic Party of President Andrew Jackson, concentrated mostly in the Northeast and New York in particular, but with notoriety and influence well beyond the region. Formally called the Equal Rights Party, they derived their better-known sobriquet from a peculiar event on October 29, 1835.

Democrats in New York City were scrapping over how far to extend Jackson’s war against the federally chartered national bank at a convention controlled by the city’s dominant political machine, Tammany Hall. (Jackson had killed the bank in 1832 by vetoing its renewal.) When the more conservative officialdom of the convention expelled the radical William Leggett, editor of the Evening Post, they faced a full-scale revolt by a sizable and boisterous rump. The conservatives walked out, plunging the meeting room into darkness as they left by turning off the gas lights. The radicals continued to meet by the light of candles they lit with matches called loco focos — Spanish for “crazy lights.”

With the Tammany conservatives gone and the room once again illuminated, the Locofocos passed a plethora of resolutions. They condemned the national bank as an unconstitutional tool of special interests and an engine of paper-money inflation. They assailed all monopolies, by which they meant firms that received some sort of privilege or immunity granted by state or federal governments. They endorsed a “strict construction” of the Constitution and demanded an end to all laws that “directly or indirectly infringe the free exercise of equal rights.” They saw themselves as the true heirs of Jefferson, unabashed advocates of laissez-faire and of minimal government confined to securing equal rights for all and dispensing special privileges for none.

The Locofocos saw themselves as the true heirs of Jefferson, unabashed advocates of laissez-faire and of minimal government.

Three months later, in January 1836, the Locofocos held a convention to devise a platform and to endorse candidates to run against the Tammany machine for city office in April. They still considered themselves Democrats: rather than bolt and form a distinct opposition party, they hoped to steer the party of Jefferson and Jackson to a radical reaffirmation of its principled roots.

“We utterly disclaim any intention or design of instituting any new party, but declare ourselves the original Democratic party,” they announced.

The “Declaration of Principles” the Locofocos passed at that January gathering is a stirring appeal to the bedrock concept of rights, as evidenced by these excerpts:

  • “The true foundation of Republican Government is the equal rights of every citizen, in his person and property, and in their management.”
  • “The rightful power of all legislation is to declare and enforce only our natural rights and duties, and to take none of them from us.”
  • “No man has a natural right to commit aggression on the equal rights of another; and this is all the law should enforce on him.”
  • “The idea is quite unfounded that on entering into society, we give up any natural right.”

The convention pronounced “hostility to any and all monopolies by legislation,” “unqualified and uncompromising hostility to paper money as a circulating medium, because gold and silver are the only safe and constitutional currency,” and “hostility to the dangerous and unconstitutional creation of vested rights by legislation.”

From affirmative action to business subsidies, today’s Congress and state legislatures routinely bestow advantages on this or that group at the expense of others. The Locofoco condemnation of such special privilege couldn’t be clearer:

We ask that our legislators will legislate for the whole people and not for favored portions of our fellow-citizens, thereby creating distinct aristocratic little communities within the great community. It is by such partial and unjust legislation that the productive classes of society are … not equally protected and respected as the other classes of mankind.

William Leggett, whose expulsion from the October gathering by the Tammany Democrats sparked the Locofocos into being, was the intellectual linchpin of the whole movement. After a short stint editing a literary magazine called theCritic, he was hired as assistant to famed poet and editor William Cullen Bryant at the New York Evening Post in 1829. Declaring “no taste” for politics at first, he quickly became enamored of Bryant’s philosophy of liberty.

He emerged as an eloquent agitator in the pages of the Post, especially in 1834 when he took full charge of its editorial pages while Bryant vacationed in Europe. Leggett struck a chord with the politically unconnected and with many working men and women hit hard by the inflation of the national bank.

In the state of New York at the time, profit-making businesses could not incorporate without special dispensation from the legislature. This meant, as historian Richard Hofstadter explained in a 1943 article, that “men whose capital or influence was too small to win charters from the lawmakers were barred from such profitable lines of corporate enterprise as bridges, railroads, turnpikes and ferries, as well as banks.”

Leggett railed against such privilege: “The bargaining and trucking away of chartered privileges is the whole business of our lawmakers.” His remedy was “a fair field and no favor,” free-market competition unfettered by favor-granting politicians. He and his Locofoco followers were not anti-wealth or anti-bank, but they were vociferously opposed to any unequal application of the law. To Leggett and the Locofocos, the goddess of justice really was blindfolded. His relentless rebukes of what we would call today “crony capitalism” are well represented in this excerpt from an 1834 editorial:

Governments have no right to interfere with the pursuits of individuals, as guaranteed by those general laws, by offering encouragements and granting privileges to any particular class of industry, or any select bodies of men, inasmuch as all classes of industry and all men are equally important to the general welfare, and equally entitled to protection.

The Locofocos won some local elections in the late 1830s and exerted enough influence to see many of their ideas embraced by no less than Martin Van Buren when he ran successfully for president in 1836. By the middle of Van Buren’s single term, the Locofoco notions of equal rights and an evenhanded policy of a small federal government were reestablished as core principles of the Democratic Party. There they would persist for more than half a century after Leggett’s death, through the last great Democratic president, Grover Cleveland, in the 1880s and 1890s. Sadly, those essentially libertarian roots have long since been abandoned by the party of Jefferson and Jackson.

Upon Leggett’s untimely death in 1839, poet William Cullen Bryant penned an eloquent obituary in which he wrote, in part, the following tribute:

As a political writer, Mr. Leggett attained, within a brief period, a high rank and an extensive and enviable reputation. He wrote with great fluency and extraordinary vigor; he saw the strong points of a question at a glance, and had the skill to place them before his readers with a force, clearness and amplitude of statement rarely to be found in the writings of any journalist that ever lived. When he became warmed with his subject, which was not unfrequently the case, his discussions had all the stirring power of extemporaneous eloquence.

His fine endowments he wielded for worthy purposes. He espoused the cause of the largest liberty and the most comprehensive equality of rights among the human race, and warred against those principles which inculcate distrust of the people, and those schemes of legislation which tend to create an artificial inequality in the conditions of men. He was wholly free — and, in this respect his example ought to be held up to journalists as a model to contemplate and copy — he was wholly free from the besetting sin of their profession, a mercenary and time-serving disposition. He was a sincere lover and follower of truth, and never allowed any of those specious reasons for inconsistency, which disguise themselves under the name of expediency, to seduce him for a moment from the support of the opinions which he deemed right, and the measures which he was convinced were just. What he would not yield to the dictates of interest he was still less disposed to yield to the suggestions of fear.

We sorrow that such a man, so clear-sighted, strong minded and magnanimous has passed away, and that his aid is no more to be given in the conflict which truth and liberty maintain with their numerous and powerful enemies.

If you’re unhappy that today’s political parties give lip service to equal rights as they busy themselves carving up what’s yours and passing out the pieces, don’t blame me. I’m a Locofoco and a fan of William Leggett.

For further information, see:


Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

EDITORS NOTE: Each week, Mr. Reed will relate the stories of people whose choices and actions make them heroes. See the table of contents for previous installments.

Capitalist Theory Is Better Than Socialist Reality by Sandy Ikeda

Tell someone on the left that crony capitalism is not the same as the free market and they’ll often respond that capitalism as it really exists is crony capitalism. They will say that there has never been an instance of capitalism in which government-sponsored or government-abetted cronyism didn’t play a substantial role — either through war, taxation, or slavery — in a market economy. As a result, the failings of crony capitalism — corruption, privilege, oppression, business cycles — are simply the failings of capitalism itself.

One correct response is to show that the less intervention there has been, the less corrupt, privileged, oppressive, and unstable the socioeconomic order also has been. Many would simply reiterate that, historically, laissez-faire capitalism has never existed, nor could it exist, without interventionism. They simply will not or cannot distinguish the free market from state capitalism, corporate capitalism, or other forms of the mixed economy.

Which is perhaps why some on the left have adopted the term “neoliberalism,” a perfectly good word that has come to represent an imbroglio of vaguely market-cum-corporativist views. They can’t imagine how markets could work without some form of state intervention holding it all together. And that’s probably because they reject what economist Peter Boettke calls “mainline economics,” or economics in the tradition of Adam Smith, Frédéric Bastiat, and Carl Menger, among others.

It’s frustrating, but there are two points I’d like to make. The first is that in our libertarian critiques of collectivism, we often make an argument that sounds similar to the one people on the left make. But, second, if libertarians are careful, they may be more justified in doing so.

What Is the Turnabout?

Most socialists today have abandoned their earlier claim that socialism generates greater material prosperity, but many on the left still insist that under a pure collectivist system, greater justice and equality would prevail. Socialism, in other words, is a far more humane socioeconomic order than capitalism.

How do libertarians respond to such a claim?

Sometimes we react with contempt or with disbelief that anyone could be so stupid or so evil or both as to argue such a thing. I hope no reader of theFreeman would react that way, although I’m afraid some do. Sometimes we react with slightly more civility by aiming our dismissive contempt not at the person but at the leftist ideas she holds. I will only say that we should take to heart what John Stuart Mill wrote in On Liberty about so-called bad ideas and opinions:

Every opinion which embodies somewhat of the portion of truth which the common opinion omits, ought to be considered precious, with whatever amount of error and confusion that truth may be blended.

There are other responses to the claim that socialism is more just and humane than capitalism, but I would like to focus on the one that I’ve often used: socialism in practice has always and everywhere tended to lead, to the degree that it is consistently applied, not to freedom and material well-being, but to tyranny and want. In other words, while socialism in theory may be all good things to all good people, the more government has practiced collectivism and central planning to achieve its goals of justice and equality, the farther it has fallen short of those goals. (And if you think countries such as Sweden are the exception, you might read my March 2013 Freeman article, “The New Swedish Model.”)

How is that different from the left’s position that legal privilege, oppression, and other problems are part and parcel of capitalism in practice? Each side seems to be arguing that the historical failings we’ve witnessed in each system are necessary to that system and not exceptions — features, not bugs.

A Possible Resolution

Clearly, the die-hard socialist and the die-hard libertarian argue from different fundamental principles. While there are many varieties of socialism, all are suspicious to a fairly high degree of private property, prices, and profit as the central ordering forces of society. Libertarians, too, are diverse, but I believe we all share strongly opposite views to those on the left on private property, prices, and profit as necessary (and for some libertarians, mistakenly I believe, sufficient) for a civil and prosperous society.

Socialists and indeed interventionists of all stripes also seem confident that the intentions of government authorities (especially those who have been elected) are virtuous enough and their knowledge reliable and complete enough to succeed in promoting the general welfare. In this, I think, it boils down to the underlying economics.

As a rule, libertarians use mainline economic theory to reach their conclusions about socialism and the perverse dynamics of interventionism. (There are, of course, ethical and philosophical approaches, as well.) And while interventionists and perhaps even some collectivists may believe that mainline economic theory does an okay job of framing some questions and of finding some answers to those questions, they also believe that mainline economics is far too limited to address a significant proportion of economic issues.

But the problem with such a view is that there’s no principled way to say in what circumstances mainline economics has failed. Sure, no theory of the economic system, mainline or otherwise, gets it right in every instance. We then have to look to historical evidence to clarify when, under what circumstances, and to what extent mainline economics holds up. And the historical evidence is indeed on the side of the libertarian interpretation of what collectivism and various degrees of central planning are, and of what laissez-faire capitalism is.

Indeed, the historical evidence overwhelmingly shows that social mobility, innovation, prosperity, per capita income, and per capita wealth are all tightly and positively correlated with economic freedom. And contrariwise, to the extent that economic freedom is lacking, social and economic stagnation, want, and shrinking civil rights have followed. (See, for example, the most recent publication of FreetheWorld.com.)

Someone might retort that correlation is not causation, and they would be right if there wasn’t a causal theory linking economic freedom with all those great things. But libertarians do have such a theory, and it’s called mainline economics.

Those on the left, however, don’t have a coherent theory of the mixed economy. Indeed, no such theory exists. There are several theories of so-called “market failure,” but they do not together constitute a coherent theory. What does exist is a critique of the mixed economy that is based on the realization that the ordering principle of the free market and the ordering principle of collectivist central planning are logically incompatible. One is based on open-ended entrepreneurial competition, the other on some form of constraining central planning. Interventionist approaches that attempt to combine them aren’t really systems at all. They are literally incoherent, and what makes them incoherent is the absence of a consistent ordering principle.

(My contribution to this volume [PDF] delves into this topic more deeply.)

Instead, what you’re left with, given the cognitive limits of the human mind and the spontaneous complexity of real-world systems, is expediency. Each problem is addressed not on the basis of principle, but in ad hoc fashion according to the prevailing interests of the moment. In the case of capitalism, while opportunism and cronyism do constantly pull in the direction of expediency, the force resisting that pull is entrepreneurial competition. That’s because cutting corners opens opportunities for one’s rivals to do a better job.  Moreover, that competition operates more effectively to resist and absorb all forms of intervention, crony or otherwise, the less interventionist the system is.

So while the form of the critiques of the left and of libertarians may sound similar, they are vastly different in substance.


Sandy Ikeda

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.

How Moms Both Challenge and Confirm Standard Economic Theory Or, the “Principles of Momonomics” by Sarah Skwire

Last winter, I was getting ready to put insulating plastic on all of my windows to keep the cold out. I quizzed my Facebook friends to see if they could use the economic way of thinking to predict which room’s windows I would insulate first. They had some good suggestions. Maybe the coldest room? Maybe the kitchen, because it gets the most use? Maybe the room with the largest windows?

They were all wrong, and they were wrong because I don’t really do economics. I do momonomics. Momonomics is the particular kind of economic thinking engaged in by parents. (All parents use momonomics, even dads. I just think momonomics sounds better than parentonomics.) If you practice momonomics, you know that the windows that get covered in plastic first are the ones in the kids’ rooms, because you can do that in the half an hour the kids are spending watching Phineas and Ferb and then get the rest done while they’re in bed and not in the way. Also, the children are tiny and cold, and you feel sorry for them.

The factor, in other words, that makes momonomics different from other economic ways of thinking is that children are the primary binding constraint. Here’s an example of what I mean.

Economics says that all goods have substitutes, but momonomics knows this is nonsense. Momonomics says that sometimes you’re going to have to turn the car around and drive two hours back to the hotel where you stayed last night in order to rescue one very special doll from the hotel laundry. (Thanks, btw, Mom and Dad. I still have her.) Economics says that ablanket may have a substitute, but momonomics says that the blanket does not. Sometimes demand curves are vertical, and price is infinite.

Economics takes preferences as given and explains why actors behave the way they do. Momonomics knows that preferences are mysterious and behavior cannot be explained, especially when the actor is under three feet tall. In fact, the job of the momonomist is often to restructure given preference sets and to alter behavior. We want you to eat your vegetables first, even if they don’t taste as good as tater tots.

Sometimes momonomics helps to reveal hidden economic secrets. We all know economics values efficiency. So some people might think that because the gas station is between the office and the day care, you should stop for gas on the way to pick the kids up. Momonomics knows this doesn’t make sense if the kids go out of their minds if they aren’t picked up at their usual time, and they really like to help put gas in the car. So momonomics schedules that trip in a way that makes momonomic sense and that, once the constraints are fully understood, makes better economic sense as well.

Economics thinks expressed preferences are important, but often mysterious. People want strawberry Pop-Tarts after natural disasters because they do. It’s not particularly important why. Momonomics can help unpack those preferences, reminding us that strawberry Pop-Tarts are a kid-friendly food that provide a burst of energy and a comforting familiarity; also, they don’t require any cooking, and they don’t make a mess.

Just as frequently as momonomics challenges economic theory, momonomics helps to confirm the practical applicability of economic thinking.

Economics reminds us that we live in an environment of scarcity. Momonomics agrees and says that because your sister finished the cinnamon Life cereal, you have to have peanut butter Cheerios for breakfast.

Economics reminds us that, just like every other resource, time is subject to scarcity constraints. Momonomics agrees, and wouldn’t sell you the hours between kid bedtime and grown-up bedtime for a gold nugget.

Economics knows that because time is a resource, sometimes the order in which you use other resources matters. Momonomics agrees. That’s why we’re having salad for dinner tonight, and frozen peas at the end of the week. And take a banana for a snack while you’re at it — they’re starting to get brown.

Economics knows that capital is heterogeneous. So does momonomics. That’s why if you don’t take the banana today, there will be banana bread tomorrow.

And when it comes time to slice up and share that banana bread, momonomics agrees with economics. You cut it up, but your brother gets to pick his slice first. (Momonomics comports to some degree with Rawlsian political philosophy). And don’t forget to wrap the leftovers in foil.

There’s a more serious point behind all this silliness. People who don’t know any technical economics use economic and momonomic ways of thinking every day to make decisions, both large and small. Lenore Skenazy is doing an excellent job of demonstrating the good things that can happen when moms start thinking about risk and uncertainty the way that economists do. And economists in classrooms everywhere are using momonomics examples to clarify arcane principles and connect economics to their students’ lives.

We would all make better decisions if moms thought more about economics and economists thought more about moms.


Sarah Skwire

Sarah Skwire is a senior fellow at Liberty Fund, Inc. She is a poet and author of the writing textbook Writing with a Thesis.

Progress and Poverty, Then and Now by JEFFREY A. TUCKER

Everyone seems to know about Thomas Piketty’s Capital in the Twenty-First Century. It’s all about unequal distribution of wealth and the government measures we need to fix it. But we’ve been here before.

Deja vu. The same focus drove the public debate more than a century ago.

It’s strange how a bestselling book from a century ago could so completely disappear from view. But that’s the case with Henry George’s Progress and Poverty, written in 1879. It became the single most influential book on economics during the highest period of economic growth ever recorded. This was true for decades after its publication.

I’ve seen it in used book stores for years but never bothered to pick it up. I recently had the chance to read George’s book through. The themes of the book were strangely familiar. In fact, in many ways, they are identical: the problem of massive poverty amidst plenty, the corrupt relationship between wealth and political power, the sense that the social order has vast potential that is being locked up by a ruling elite. It’s all here in George’s book.

“The present century has been marked by a prodigious increase in wealth-producing power,” reads the opening salvo. This was America in the Gilded Age, when double-digit growth was not unusual. The country was on a gold standard. New innovations and their disbursement through the population were dramatically changing the culture and challenging people’s thinking on economics. There were railroads, steel, internal combustion, flight, the telephone, electricity, and huge developments in medicine. Life spans increased, income boomed, and infant mortality receded.

It was the birth of the modern world, and George became its leading social and economic thinker. There was probably not an intellectual in the English-speaking world between the book’s appearance and the 1930s who did not read the book. Most everyone praised it, including Albert Einstein, Frank Chodorov, Leon Tolstoy, Philip Wicksteed, F.A. Hayek, John Dewey, and Bertrand Russell, among thousands of others. The praise extended far beyond politics, with free-market radicals and socialists all finding ways to credit his contributions as their primary influence.

The book eventually sold 6 million copies and was translated into 15 languages, becoming the second-best selling book next to the Bible (before Ayn Rand’s Atlas Shrugged displaced it for that title). This is notoriety is especially unusual given that George was never formally educated beyond the age of 14. He was a sometime businessman who grew up in poverty, eventually becoming a writer for newspapers. He had no academic standing at all.

What was the argument? On technical matters, George sought to address why it is that poverty persists despite the massive rise of wealth. How could so many create and possess such vast new wealth, while yet so many remain in a state of grueling poverty?

It was the inequality that struck him, and his casual observation seemed to suggest that the inequality grew even as wealth expanded. He noted that the poor in New York, where wealth was highest, were worse off than they were in California even though the West had far fewer barons of great wealth. How can we account for this? He was also struck by the cycles of boom and bust that caused so much suffering among so many, and speculated on their cause.

“So long as all the increased wealth which modern progress brings goes but to build up great fortunes, to increase luxury, and make sharper the contrast between the House of Have and the House of Want,” he wrote, “progress is not real, and cannot be permanent. The reaction must come. The tower leans from its foundations, and every new story but hastens the final catastrophe.”

His core theory was that the untaxed private ownership of land and resources was locking up wealth in a way that it could not be accessed by everyone but its owners. The value of land rose higher and higher, even though its owners were not themselves producing anything.

This was particularly true of the railroads, he noted. Wherever the tracks were laid, and the banks appeared, we saw large pockets of wealth appear, but it was channeled only to the few who were involved in land speculation.

He said that this was due to the fact that land is an example of a fixed resource. It doesn’t grow in supply. So when it becomes more valuable, the rent to the land flows only to its owner, who unjustly benefits while everyone else suffers.

His solution was a broad and sweeping tax on land, which he proposed as a replacement to all other existing taxes, including excise taxes of all sorts and also all tariffs (he was a radical proponent of free trade between nations). This tax, wrote George, would fund the whole of the government in all its operations and help discourage the monopolization of land in the hands of a few. This would create the conditions for a more widespread sharing of wealth.

What’s crucial here is that George was not in any way a socialist. In fact, he saw government as a tool of the ruling class that should not be empowered.

“The ideas that there is a necessary conflict between capital and labour,” he wrote, and “that machinery is an evil, that competition must be restrained and interest abolished, that wealth may be created by the issue of money, that it is the duty of Government to furnish capital or to furnish work, are rapidly making way among the great body of the people, who keenly feel a hurt, and are sharply conscious of a wrong. Such ideas, which bring great masses of men, the repositories of ultimate political power, under the leadership of charlatans and demagogues, are fraught with danger.”

Though he believed that poverty was traceable to private land, he nowhere proposed the end of private ownership of every sort. Indeed, he was a champion of all forms of private ownership, trade, innovation, and association.

“Laissez faire (in its full true meaning) opens the way to the realization of the noble dreams of socialism,” he wrote.

His one exception was land. He believed that a land tax would perfect the vision of Adam Smith and David Ricardo.

Why was this book so stunningly popular? There was in the world at that time a rising fear of socialist revolution. The socialists were gaining ground in Europe, and among academia generally, and a widespread fear of an all-out worker revolution was common.

George’s passion on the issue of poverty and equality, together with what seemed to be a common-sense solution, offered an alternative to revolutionary upheaval and the imposition of despotism. He seemed to provide a way to save economic freedom from being overthrown, at once protecting the rights of the wealthy while spreading the benefit of that wealth more broadly among the population. This solution had a huge appeal.

There is an additional factor here. Massive portions of this book are devoted to pushing the land tax idea as an explanation for poverty and cycles of business activity. He saw this solution as a way of lessening the overall tax burden on society.

“Nearly all of the manifold taxes by which the people of the United States are now burdened have been imposed rather with a view to private advantage than to the raising of revenue,” he wrote, “and the great obstacle to the simplification of taxation is these private interests, whose representatives cluster in the lobby whenever a reduction of taxation is proposed, to see that the taxes by which they profit are not reduced.”

His technical analysis here was deeply flawed. There is no theoretical case for singling out land as a unique form of property. Yes, it is limited, but so are all resources. The supply of and demand for valuable land is subject to all the usual economic laws. A tax on land is a tax on people, and this reduces overall prosperity.

And, in any case, this policy idea cannot account for the appeal of the book — the tax never happened nor was ever likely to.

To understand its draw, one has to move to the last chapters, which lay out a beautiful vision of a liberal economy, universal prosperity, and the moral urgency of freedom. He believed it belonged to all peoples in all times, and he was convinced that it could be had in the new century. In this sense, he defined the very essence of what became the highest aspirations of the best intellectuals of his age.

For, in the end, he was a lover of freedom and free markets. “We honour Liberty in name and in form. We set up her statues and sound her praises. But we have not fully trusted her.”

And he loathed power:

With the growth of the collective power as compared with the power of the individual, his power to reward and to punish increases, and so increase the inducements to natter and to fear him; until finally, if the process be not disturbed, a nation grovels at the foot of a throne, and a hundred thousand men toil for fifty years to prepare a tomb for one of their own mortal kind.

George’s perspective makes for a striking contrast to the views of other contemporaries, who expressed alarm at the radical demographic changes of the last quarter of the 19th century. Population exploded, infant mortality collapsed, and the middle class dawned and began to earn new levels of income.

These were the two warring factions at the time: those who aspired to global prosperity and those who wanted to use government to stop the progress of peoples and restore ruling class control of a static society. Intellectuals like T.S. Elliot and D.H. Lawrence, along with the Ivy League faculties of colleges and universities on the East Coast, were pushing for eugenic policies to curb the rise of a new middle class. They feared, even hated, the advance of commercial society.

Henry George, despite his confused economics and his advocacy of the land tax, was an eloquent and passionate advocate of the free society pushed toward progress through a laissez-faire economy. He rallied around the principle of association as the basis for the existence of society as we know it, and the lack of association or its forbidding is the condition that leads to its unraveling. He saw people as an asset that made society more prosperous, and thereby completely rejected the Malthusian idea that more people leads to more poverty.

His massive influence is sometimes credited with many of the reforms of the progressive era, but he is more correctly seen as a critical influence in the development of the 20th century libertarian tradition. In short, his concern for equality led him to seek conditions to raise everyone up, not merely build the state to tear down wealth.

“Liberty calls to us again,” he wrote. “We must follow her further; we must trust her fully. Either we must wholly accept her or she will not stay. It is not enough that men should vote; it is not enough that they should be theoretically equal before the law. They must have liberty to avail themselves of the opportunities and means of life.”

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.

The Chart that Could Undo the Healthcare System: Skyrocketing costs are being driven by bureaucracy

For a larger view click on the image.

This chart looks remarkably similar to a chart that tracks the growth of the administrative class in higher education. And that’s no accident. As the physician who shared the chart writes:

[The chart] outlines the growth of administrators in healthcare compared to physicians over the last forty years. And, it includes an overlay of America’s healthcare spending over that same time. Take a look at the yellow color. A picture is worth a thousand words, isn’t it?

You see, when you have that much administration, what you really have is a bunch of meetings. Lots of folks carrying their coffee from place to place. They are meeting about more policies, more protocols to satisfy government-created nonsense. But, this type of thing in healthcare isn’t fixing things. It’s not moving the needle.

What moves things is innovation.

Innovation, indeed. But it’s not easy to innovate in stagnant, hyper-regulated, captured sectors.

In Tyler Cowen’s 2011 book the Great Stagnation, he argued that the areas that were stagnating the most are education, healthcare, and government. Writing about Cowen’s book in his Wall Street Journal blog, Kelly Evans says:

A particular challenge we confront is that our progress as a society — chiefly, in extending and improving lives — is now at a point in which it appears to be undercutting our potential for further advancement. Part of this, Mr. Cowen observes, stems from well-meaning efforts to do more with education, government, and health care that instead seem to have backfired and left us with noncompetitive institutions closer to failing us than to serving us well.

With respect to healthcare, this chart gives us an indication of why these efforts are backfiring: The more an industry becomes like a regulated utility, the more administrators are required to enforce the regulations and administer the programs. And they, as well as the programs they administer, are expensive. All manner of distortions follow, and the costs of healthcare go up proportionally.

There also seems to be perverse incentives associated with subsidy: The more resources you dump in, the more expensive that industry becomes. You might shift the costs around on unsuspecting groups (like taxpayers), but in almost every case we see premium hikes and tuition increases in both of these industries, despite (or rather because of) the truckloads of federal largesse.

But they will have to stop at some point — one way or the other.

The US healthcare system has become something of a Frankenstein monster, with pieces stitched together ad hoc by regulators and special interests. The ACA seems to have ignored most of what really needed fixing and doubled down on the worst aspects of our system. Price transparency, affordability, innovation and competitive entrepreneurship have all gotten worse, not better. And the beast has grown to take over more than 17 percent of GDP.

(And if you think 17 percent is about right, consider that in Singapore healthcare takes up less than 3 percent of GDP.)

The trouble with any further healthcare reform is that a massive coalition of special interests in multiple sectors has formed as a husk around the entire industry — a care-tel, if you will — and they will be very difficult to dislodge.

Max Borders

Max Borders is the editor of the Freeman and director of content for FEE. He is also co-founder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.

Speaking Truth to Power Real Heroes: Jimmy Lai by LAWRENCE W. REED

For years, a bust of John James Cowperthwaite sat prominently in the foyer of Jimmy Lai’s Next Media office in Hong Kong, along with others of economists F.A. Hayek and Milton Friedman. If that’s all you ever knew about Jimmy Lai, you could at least surmise that he loves liberty and free markets.

Cowperthwaite had been the architect of Hong Kong’s free market miracle. He started with a destitute rock and turned it into one of the world’s freest and most prosperous economies. (Indeed, I’ve suggested that he deserves to be recognized annually and everywhere with a Cowperthwaite Day on the anniversary of his birth date, April 25.) Jimmy Lai is precisely the sort of individual that Cowperthwaite had in mind when he decided that entrepreneurs, not central planners, should drive an economy. Because of what Cowperthwaite had done, Jimmy Lai found a hero himself. And Lai, too, would go on to do great things.

Of the characteristics most often identified with successful entrepreneurship, Jimmy Lai possesses them all in abundance. He is a self-starter who takes initiative (and risk) with enthusiasm. He’s creative and intuitive. He’s passionate and tenacious. Where others see problems, he sees opportunity. He’s a visionary, both in business endeavors and for society at large. He doesn’t hesitate to defy conventional wisdom when it points to a dead end. Whatever he undertakes, he musters the courage to act. He puts his all — money, time, and energy — where his mouth is (and where his convictions are).

On paper, Lai’s early life would seem unlikely to produce a “real hero.” He was born in China the year before it fell under Mao Zedong’s dictatorial rule. Lai was smuggled out of the country and into Hong Kong at age 12. In the absence of child-labor laws, which would have ensured his deprivation there, too, Lai went to work in a garment factory for $8 a month. Fifteen years later, he bought his own garment factory and built it into the giant known as Giordano, now a leading international retailer. Lai’s boundless entrepreneurial zeal, free to operate within Hong Kong’s laissez-faire business environment, yielded jobs for thousands and consumer goods for millions.

But in 1989, Beijing’s infamous Tiananmen Square massacre set Jimmy Lai on a new course. With Hong Kong scheduled to be transferred from British to Chinese rule in just eight years, Lai knew that maintaining traditional freedoms under Beijing’s rule would be a challenge. So he ventured into media, creating what soon became the territory’s largest-circulation magazines,Sudden Weekly and Next. In spite of Beijing’s coercion of advertisers, Jimmy Lai’s tabloid-style newspaper, Apple Daily, is still the premier voice in Asia for the freedoms of speech, press, and enterprise.

Jimmy Lai does not shrink from controversy. The Communist Party of China, he wrote in a 1994 column, is “a monopoly that charges a premium for a lousy service.” He defended the student demonstrators when they went into the streets by the hundreds of thousands in late 2014 in defense of democracy. He routinely exposed corruption in both government and business, including the especially toxic brand of corruption that arises when the two get in bed together. He sold Giordano, the apparel firm he founded, to save it from Beijing’s intense pressure, but he refuses to this day to renounce his principles.

In December 2014, he revealed that he was stepping down as publisher of Apple Daily and chairman of Next Media to devote more time to family and personal interests. A month later, and for the second time, unknown assailants firebombed his home. He remains under intense scrutiny from Beijing, which regularly employs ugly rumors, threats of litigation, and other nefarious means to undermine his influence.

Earlier this year, Lai told the New York Times that he never planned to make his media empire into a family dynasty. His six children (ages 8 to 37) are not in line as heirs to that business or its leadership positions. “I don’t think I should ask my kids to inherit my business, because they can’t start where I did,” he said. “I was from the street. I’m a very different make of person. I’ve been a fighter all my life.”

Whatever the future holds for Jimmy Lai, friends of liberty everywhere can count him as one very brave man.

For additional information:

In the Freeman:

Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

EDITORS NOTE: 

The Foundation for Economic Education is pleased to present a weekly feature every Friday by our president, Lawrence W. Reed, commencing April 24, 2015. Real Heroes is expected to run for approximately one year. Each week, Mr. Reed will briefly relate the stories of people whose choices and actions make them heroes.

Mr. Reed has personally met many heroes himself. In a 2007 essay on one of them, Sir Nicholas Winton, he wrote, “The truest hero does not think of himself as one, never advertises himself as such, and does not perform the acts that make him a hero for either fame or fortune. He does not wait for government to act if he senses an opportunity to fix a problem himself.

The people Reed will write about will not be the well-known, usual suspects. Often, they will be men and women you’ve never heard of, from the distant past to the present day. In every case, they will be individuals who deserve notice and appreciation. They will exemplify one or more of the character traits Reed wrote about in his short book, Are We Good Enough for Liberty?— traits he regards as critical to the flourishing of a free society.

Each week, a new essay will be added to the table of contents. When the series runs its course, the collection will all be published in multiple digital-book formats.

Happy Capital Day? Why not? by Lawrence W. Reed

Any good economist will tell you that as complementary factors of production, labor and capital are not only indispensable but hugely dependent upon each other as well.

Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan.

Capital can refer to either the tools of production or the funds that finance them. There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture funding behind him. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

Harmony of Interest

This is not class warfare. I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business.

And yet, we have a “Labor Day” in America but not a “Capital Day.”

Perhaps subconsciously, Americans do understand to some extent that those who invest and deploy capital are important. After all, most people would surely have an easier time naming the “top ten capitalists” in our history than the “top ten workers.” We take pride in the kids in our neighborhoods when they put up a sidewalk lemonade stand. President Obama continues to be roundly excoriated for his demeaning remark, “You didn’t build that; somebody else made that happen.”

Bad Eggs

That’s not to say there aren’t bad eggs in the capitalist basket. Some use political connections to get special advantages from government. Others cut corners, cheat some customers or pollute a stream. But those are the exception, not the rule, in a society that values character. Workers are not all saints either—who among us doesn’t know of one who stole from his employer, called in sick when he wasn’t, or abused the disability or unemployment compensation rules? Those exceptions shouldn’t diminish the importance of work or the nobility of most workers.

Like most Americans, I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. Nothing at all wrong about that!

But this year on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. Indeed, what could possibly be wrong about having a “Capital Day” in odd numbered years and a “Labor Day” in the even-numbered ones?

Labor Day and Capital Day. I know of no good reason why we should have just one and not the other.

EDITORS NOTE: This article first ran on September 3, 2012.

larry reed new thumbABOUT LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

Sending Money Home: Technology or Bureaucracy? by Iain Murray

Remittances are helping poor people globally, but regulators loom.

Some of the world’s poorest people depend on the money they receive from relatives working in developed countries. In fact, this money dwarfs the world’s official foreign aid budget, and the gap is increasing.

In 2011, total private flows of aid totaled $680 billion—almost five times the $138 billion official figure. As I noted in 2005, “the future of aid to developing countries is private.”

This increase in private aid is great news for all concerned. Except, perhaps, for bureaucrats, who are loath to let good deeds go unpunished. World Bank and United Nations bean counters are denouncing remittance transfer fees as exploitative. The U.S. Consumer Financial Protection Bureau (CFPB) has issued a rule to crack down on supposed fraud and exploitation affecting the existing remittance-transfer infrastructure. Its most important provision is the right to cancel a money transfer within 30 minutes of its being initiated. Proposals to cap the fee charged by remittance firms have also been agreed to internationally.

Critics claim that high transfer fees are the result of a so-called market failure. Yet, markets in remittances are frequently overregulated. Many African governments have exclusive deals with money transfer companies, which operate as national monopolies, free from competitive discipline. And there are other regulatory pitfalls that drive up prices. A Western Union spokesman told The Guardian

Our pricing varies between countries depending on a number of factors, such as consumer protection costs, local remittance taxes, market distribution, regulatory structure, volume, currency volatility and other market efficiencies. These factors can impact the fees and foreign exchange rates offered by corridor and service type.

All this suggests the remittance market needs less regulation. Proper competition, lower taxes, less restrictive “consumer protection” measures (which quickly become outdated), and less red tape in general would all likely increase the flow of funds between individuals.

Such a solution would be inconceivable for global bureaucrats. Indeed, their house organ, The New York Times, last week recommended that the industry should be not only nationalized, but internationalized, with the World Bank taking on the role of remittance service provider, a role the Times actually described as “critical”:

The World Bank could pool deposits from banks and nonbank money transfer agents and parcel them to recipient banks, using its formidable certification protocols to verify that the money is coming from and going to legitimate parties. Such pooling could also reduce exchange fees, a big cost to migrants. Equally important, the World Bank could use its relationships with regulators around the world to enhance the remittance system’s integrity.

Technology is already solving many of the problems faced by the money transfer industry, making the industry obsolete in the process. For example, in the central Asian republic Kyrgyzstan, which relies heavily on remittances—accounting for 31 percent of its GDP, mostly from within the former Soviet Union—an Italian entrepreneur named Emanuele Costa is able to promote bitcoin as an alternative to the expensive, heavily regulated money transfer firms. 

Costa can do this because Kyrgyzstan is notably less oppressive and more free-market-oriented than its neighbors, and it has much less regulation than is typical in the area. He regularly hosts meetups to explain the currency to potential recipients and has installed a bitcoin ATM at a pizzeria (which, as Eurasianet notes, has been “bombarded with calls” since it publicized its existence).

In Kenya, meanwhile, a bitcoin startup called BitPesa offers money transfers “twice as fast and 75% cheaper” than traditional competitors. Kenya is an especially interesting place for this innovation to happen, as it was the scene of a “cell phone revolution” that allowed its telecommunications market to work around a serious case of government failure. As a result, most Kenyans now use a form of mobile wallet on their cell phones.

The potential for bitcoin to revolutionize the global remittance industry is hard to overstate. It largely cuts out the middleman, reducing the fees and charges some view as exploitative. Converting to local currency would be the most significant charge for most users. Bitcoin facilitates the establishment of trust through its “blockchain” public ledger, potentially reducing fraudulent transfers to near zero (although there is always the chance of someone stealing a wallet key). Taxes, at the moment, are minimal. 

For these reasons, bitcoin represents the best hope to ensure that all of the $680 billion in remittances goes to the people who need it. That might be why in America, bitcoin is most popular among Hispanics, who send more money abroad than any other group.

Yet, roadblocks remain. If Kyrgyzstan joins Moscow’s customs union as expected, bitcoin’s days may be numbered there, as Russian officials have taken a dim view of anonymous payment vehicles. Meanwhile, in the UK, where many Kenyan remittance senders live and work, banks are wary of taking bitcoin businesses on as clients. As BitPesa’s founder told The Guardian:

Most UK banks won’t let Bitcoin businesses open bank accounts. These businesses want to be licensed, but UK banks shy away, just like Barclays cut Somalia off the map. 

British banks are highly regulated and probably fearful of what regulators might do to them if they did business with companies that present “reputational risk”—as defined by regulators, of course.

In the United States, the CFPB rule mentioned above could threaten to make bitcoin illegal for remittance purposes. The average time for a Bitcoin transaction to go through is around eight minutes, and reversing a transaction is impossible unless an escrow service is used. It is possible that the rule may not apply to a decentralized network like bitcoin, but in its short existence, the CFPB has not become known for reading its powers narrowly.

Regulators could wind up killing off the solution to problems created by, well, regulators. If they are serious about reducing costs and decreasing the potential for fraud in remittances, they will stand aside and let bitcoin develop in this role. If the choice is between a distributed, autonomous cryptocurrency network approved by the people who need the remittances most, or a combination of policies approved by The New York Times, the World Bank, and international regulators, Public Choice economics suggests that the technological option faces a long struggle ahead.

ABOUT IAIN MURRAY

Iain Murray is vice president at the Competitive Enterprise Institute.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

What Gave Bitcoin Its Value? by Jeffrey A. Tucker

Those who use the work of Mises to challenge bitcoin should think again.

Many people who have never used bitcoin look at it with confusion. Why does this magic Internet money have any value at all? It’s just some computer thing that someone made up.

Consider the criticism of goldbugs, who have, for decades, pushed the idea that sound money must be backed by something real, hard, and independently valuable.

Bitcoin doesn’t qualify, right?

Maybe it does. Let’s take a closer look.

Bitcoin first emerged as a possible competitor to national, government-managed money nearly six years ago. Satoshi Nakamoto’s white paper was released October 31, 2008. The structure and language of this paper sent the message: this currency is for computer technicians, not economists nor political pundits. The paper’s circulation was limited; novices who read it were mystified.

But the lack of interest didn’t stop history from moving forward. Two months later, those who were paying attention saw the emergence of the “Genesis Block,” the first group of bitcoins generated through Nakamoto’s concept of a distributed ledger that lived on any computer node in the world that wanted to host it.

Here we are six years later and a single bitcoin trades at $500 and has been as high as $1,200 per coin.The currency is accepted by many thousands of institutions, both online and offline. Its payment system is very popular in poor countries without vast banking infrastructures but also in developed countries. And major institutions—including the Federal Reserve, the OECD, the World Bank, and major investment houses—are paying respectful attention.

Enthusiasts, who are found in every country, say that its exchange value will soar in the future because its supply is strictly limited and it provides a vastly superior system to government money. Bitcoin is transferred between individuals without a third party. It is nearly costless to exchange. It has a predictable supply. It is durable, fungible, and divisible: all crucial features of money. It creates a monetary system that doesn’t depend on trust and identity, much less on central banks and government. It is a new system for the digital age.

Hard lessons for hard money

To those educated in the “hard money” tradition, the whole idea has been a serious challenge. Speaking for myself, I had been reading about bitcoin for two years before I came anywhere close to understanding it. There was just something about the whole idea that bugged me. You can’t make money out of nothing, much less out of computer code. Why does it have value then? There must be something amiss. This is not how we expected money to be reformed.

There’s the problem: our expectations. We should have been paying closer attention to Ludwig von Mises’s theory of money’s origins—not to what we think he wrote, but to what he actually did write.

In 1912, Mises released The Theory of Money and Credit. It was a huge hit in Europe when it came out in German, and it was translated into English. While covering every aspect of money, his core contribution was in tracing the value and price of money—and not just money itself—to its origins. That is, he explained how money gets its price in terms of the goods and services it obtains. He later called this process the “regression theorem,” and as it turns out, bitcoin satisfies every condition of the theorem.

Mises’s teacher, Carl Menger, demonstrated that money itself originates from the market—not from the State and not from social contract. It emerges gradually as monetary entrepreneurs seek out an ideal form of commodity for indirect exchange. Instead of merely bartering with each other, people acquire a good not to consume, but to trade. That good becomes money, the most marketable commodity.

But Mises added that the value of money traces backward in time to its value as a bartered commodity. Mises said that this is the only way money can have value.

The theory of the value of money as such can trace back the objective exchange value of money only to that point where it ceases to be the value of money and becomes merely the value of a commodity…. If in this way we continually go farther and farther back we must eventually arrive at a point where we no longer find any component in the objective exchange value of money that arises from valuations based on the function of money as a common medium of exchange; where the value of money is nothing other than the value of an object that is useful in some other way than as money…. Before it was usual to acquire goods in the market, not for personal consumption, but simply in order to exchange them again for the goods that were really wanted, each individual commodity was only accredited with that value given by the subjective valuations based on its direct utility.

Mises’s explanation solved a major problem that had long mystified economists. It is a narrative of conjectural history, and yet it makes perfect sense. Would salt have become money had it otherwise been completely useless? Would beaver pelts have obtained monetary value had they not been useful for clothing? Would silver or gold have had money value if they had no value as commodities first? The answer in all cases of monetary history is clearly no. The initial value of money, before it becomes widely traded as money, originates in its direct utility. It’s an explanation that is demonstrated through historical reconstruction. That’s Mises’s regression theorem.

Bitcoin’s use value

At first glance, bitcoin would seem to be an exception. You can’t use a bitcoin for anything other than money. It can’t be worn as jewelry. You can’t make a machine out of it. You can’t wear it, eat it, or even decorate with it. Its value is only realized as a unit that facilitates indirect exchange. And yet, bitcoin already is money. It’s used every day. You can see the exchanges in real time. It’s not a myth. It’s the real deal.

It might seem like we have to choose. Is Mises wrong? Maybe we have to toss out his whole theory. Or maybe his point was purely historical and doesn’t apply in the future of a digital age. Or maybe his regression theorem is proof that bitcoin is just an empty mania with no staying power, because it can’t be reduced to its value as a useful commodity.

And yet, you don’t have to resort to complicated monetary theory in order to understand the sense of alarm surrounding bitcoin. Many people, as I did, just have a feeling of uneasiness about a money that has no basis in anything physical. Sure, you can print out a bitcoin on a piece of paper, but having a paper with a QR code or a public key is not enough to relieve that sense of unease.

How can we resolve this problem? In my own mind, I toyed with the issue for more than a year. It puzzled me. I wondered if Mises’s insight applied only in a predigital age. I followed the speculations online that the value of bitcoin would be zero but for the national currencies into which is converted. Perhaps the demand for bitcoin overcame the demands of Mises’s scenario because of a desperate need for something other than the dollar.

As time has passed—and I read the work of Konrad GrafPeter Surda, and Daniel Krawisz—finally the resolution came. I will cut to the chase and reveal it: Bitcoin is both a payment system and a money. The payment system is the source of value, while the accounting unit merely expresses that value in terms of price. The unity of money and payment is its most unusual feature, and the one that most commentators have had trouble wrapping their heads around.

We are all used to thinking of currency as separate from payment systems. This thinking is a reflection of the technological limitations of history. There is the dollar and there are credit cards. There is the euro and there is PayPal. There is the yen and there are wire services. In each case, money transfer relies on third-party service providers. In order to use them, you need to establish what is called a “trust relationship” with them, which is to say that the institution arranging the deal has to believe that you are going to pay.

This wedge between money and payment has always been with us, except for the case of physical proximity. If I give you a dollar for your pizza slice, there is no third party. But payment systems, third parties, and trust relationships become necessary once you leave geographic proximity. That’s when companies like Visa and institutions like banks become indispensable. They are the application that makes the monetary software do what you want it to do.

The hitch is that payment systems we have today are not available to just anyone. In fact, a vast majority of humanity does not have access to such tools, which is a major reason for poverty in the world. The financially disenfranchised are confined to only local trade and cannot extend their trading relationships with the world.

A major, if not a primary, purpose of developing Bitcoin was to solve this problem. The protocol set out to weave together the currency feature with a payment system. The two are utterly interlinked in the structure of the code itself. This connection is what makes bitcoin different from any existing national currency, and, really, any currency in history.

Let Nakomoto speak from the introductory abstract to his white paper. Observe how central the payment system is to the monetary system he created:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

What’s very striking about this paragraph is that there is not even one mention of the currency unit itself. There is only the mention of the problem of double-spending (which is to say, the problem of inflationary money creation). The innovation here, even according to the words of its inventor, is the payment network, not the coin. The coin or digital unit only expresses the value of the network. It is an accounting tool that absorbs and carries the value of the network through time and space.

This network is called the blockchain. It’s a ledger that lives in the digital cloud, a distributed network, and it can be observed in operation by anyone at any time. It is carefully monitored by all users. It allows the transference of secure and non-repeatable bits of information from one person to any other person anywhere in the world, and these information bits are secured by a digital form of property title. This is what Satoshi called “digital signatures.” His invention of the cloud-based ledger allows property rights to be verified without having to depend on some third-party trust agency.

The blockchain solved what has come to be known as the Byzantine generals’ problem. This is the problem of coordinating action over a large geographic range in the presence of potentially malicious actors. Because generals separated by space have to rely on messengers and this reliance takes time and trust, no general can be absolutely sure that the other general has received and confirmed the message, much less its accuracy.

Putting a ledger, to which everyone has access, on the Internet overcomes this problem. The ledger records the amounts, the times, and the public addresses of every transaction. The information is shared across the globe and always gets updated. The ledger guarantees the integrity of the system and allows the currency unit to become a digital form of property with a title.

Once you understand this, you can see that the value proposition of bitcoin is bound up with its attached payment network. Here is where you find the use value to which Mises refers. It is not embedded in the currency unit but rather in the brilliant and innovative payment system on which bitcoin lives. If it were possible for the blockchain to be somehow separated from bitcoin (and, really, this is not possible), the value of the currency would instantly fall to zero.

Proof of concept

Now, to further understand how Mises’s theory fits with bitcoin, you have to understand one other point concerning the history of the cryptocurrency. On the day of its release (January 9, 2009), the value of bitcoin was exactly zero. And so it remained for 10 months after its release. All the while, transactions were taking place, but it had no posted value above zero for this entire time.

The first posted price of bitcoin appeared on October 5, 2009. On this exchange, $1 equaled 1,309.03 Bitcoin (which many considered overpriced at the time). In other words, the first valuation of bitcoin was little more than one-tenth of a penny. Yes, if you had bought $100 worth of bitcoin in those days, and not sold them in some panic, you would be a half-billionaire today.

So here is the question: What happened between January 9 and October 5, 2009, to cause bitcoin to obtain a market value? The answer is that traders, enthusiasts, entrepreneurs, and others were trying out the blockchain. They wanted to know if it worked. Did it transfer the units without double-spending? Did a system that depended on voluntary CPU power actually suffice to verify and confirm transactions? Do the rewarded bitcoins land in the right spot as payment for verification services? Most of all, did this new system actually work to do the seemingly impossible—that is, to move secure bits of title-based information through geographic space, not by using on some third party but rather peer-to-peer?

It took 10 months to build confidence. It took another 18 months before bitcoin reached parity with the U.S. dollar. This history is essential to understand, especially if you are relying on a theory of money’s origins that speculates about the pre-history of money, as Mises’s regression theorem does. Bitcoin was not always a money with value. It was once a pure accounting unit attached to a ledger. This ledger is what obtained what Mises called “use value.” All conditions of the theorem are thereby satisfied.

Final accounting

To review, if anyone says that bitcoin is based on nothing but thin air, that it cannot be a money because it has no real history as a genuine commodity, and whether the person saying this is a novice or a highly trained economist, you need to bring up two central points. One, bitcoin is not a stand-alone currency but a unit of accounting attached to an innovative payment network. Two, this network and therefore bitcoin only obtained its market value through real-time testing in a market environment.

In other words, once you account for the razzle-dazzle technical features, bitcoin emerged exactly like every other currency, from salt to gold, did. People found the payment system useful, and the attached accounting was portable, divisible, fungible, durable, and scarce.

Money was born. This money has all the best features of money from history but adds a weightless and spaceless payment network that enables the entire world to trade without having to rely on third parties.

But notice something extremely important here. The blockchain is not only about money. It is about any information transfers that require security, confirmations, and total assurance of authenticity. This pertains to contracts and transactions of all sorts, all performed peer-to-peer. Think of a world without third parties, including the most dangerous third party ever conceived of by man: the State itself. Imagine that future and you begin to grasp the fullness of the implications of our future.

Mises would be amazed and surprised at bitcoin. But he might also feel a sense of pride that his monetary theory of more than 100 years ago has been confirmed and given new life in the 21st century.

20121129_JeffreyTuckeravatarABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. He speaks at FEE summer seminars and other events.

The Best Debt in the World by Emma Elliot Freire

Hard to believe, but Britain’s student loan problem is worse than the Yanks’.

In late 2010, tens of thousands of British students took to the streets of London. They protested government plans to cut direct funding of higher education and raise the cap on tuition from £3,290 ($5,500) to £9,000 ($15,000). Some of them occupied government buildings and clashed violently with police. Hundreds were arrested.

Maybe they shouldn’t have gotten so worked up. It’s now becoming clear that most of them won’t repay their loans in full. Some of them will even be getting their education for free.

The UK government’s student loan scheme is more generous than its American counterpart. Any British student who is accepted to a university is automatically entitled to a government loan for the entirety of their tuition. Most universities are charging £9,000 per year. British students can also get loans for their living costs, which range from £4,418 to £7,751 per year. The average student will graduate £44,000 ($74,000) in debt.

The core difference between the British and American systems lies in the terms of repayment. American students typically have to start repaying 6 months after they graduate. Opportunities for loan forgiveness are extremely limited, and loans cannot be discharged via bankruptcy. By contrast, British students don’t have to start repaying until they are earning £21,000 ($36,000) per year. They must then pay 9 percent of their gross income as long as they stay above the threshold. Their outstanding balance is automatically forgiven 30 years after it became eligible for repayment. Also, the loans do not appear on their credit report. 

“The thing people worry about with debt is that they won’t be able to pay it back. The way this is structured means that is not a worry ever, and it doesn’t follow you around until your old age,” says Sam Bowman, Research Director at the Adam Smith Institute, a free-market think tank. 

Bowman finds it helpful to understand loan repayment as a tax. “You can either think of it as a graduate tax or it’s the best debt in the world,” he says. “It makes sense to think of it as a graduate tax, a specific kind of tax on a specific action that is designed to offset the cost of that action.”

Uncharted waters for repayment

The first students to take on the new, larger type of loans have yet to graduate, so it is hard to estimate what repayment rates are likely to be. However, the Institute for Fiscal Studies (IFS), an independent research center, is already projecting that 73 percent of students will not repay their loans in full. They believe the average amount written off will be around £30,000 ($50,500).

report released in July by a committee of the British parliament reached similar conclusions. “By providing favourable terms and conditions on student loans, the Government loses around 45p [cents] on every £1 it loans out.” When the new policies were first announced in 2010, the government projected it would only lose 28p per £1 loaned out. The report notes that government loans to students are expected to total £330 billion by 2044. “We are concerned that Government is rapidly approaching a tipping point for the financial viability of the student loans system,” says the report.

By and large, students still think of themselves as having “real debt” for their education. “One valid criticism of the loan system is that students don’t realize how generous it is,” says Nick Hillman, director of the Higher Education Policy Institute. “Students think they’re paying for the entirety of their education when actually they’re not. Taxpayers are covering quite a lot of the cost.”

The IFS report notes that the lowest-earning 10 percent of graduates will only repay £3,879 (in 2014 prices). A survey earlier this year showed that 40 percent of graduates are still looking for a job 6 months after leaving university. If this trend continues, some graduates may never start earning £21,000.

A few savvy individuals are learning to work the system. British financial advisors encourage parents who could contribute to their child’s education to have their kid take out government loans instead. Martin Lewis, who runs the popular website moneysavingexpert.comwrites, “If a parent pays the £27,000 tuition fees upfront, and their child becomes a poet and never earns above £21,000, the whole £27,000 would have been wasted.”

The only people who can expect to repay their loans plus interest in full are the small group who take high-paying jobs soon after graduating and get regular pay increases for the next 30 years. These individuals are thinking hard about whether they need a degree. “The only income group that has gone to university less are the richest. That might be surprising, but what the debt does is it imposes some cost on people for going to university,” says Bowman. “So if they have other options, they take them. Maybe they could skip college and join their parent’s business or their parents can find them jobs.”

This is one immediate impact of the new loan scheme. There will undoubtedly be unintended consequences that may only become evident years or decades from now. For example, Britain may see an increase in the number of stay-at-home parents. Loan repayment is tied to an individual’s income. Spouse’s earnings are irrelevant. Child care is already very expensive. For some families, the extra 9 percent they would lose in loan repayments will be enough to push one parent out of paid employment.

Loans without borders

Loan repayments are collected by Her Majesty’s Revenue and Customs, the British equivalent of the IRS, via withholding from a person’s paycheck. This makes it fairly simple to collect money from anyone working for a British employer. Things become harder when a graduate leaves the country. 

“There is no way that the government can collect money from people who go abroad,” says Bowman. “There is a big incentive for them to stay away. Say you’re an English graduate and you go to America for a couple of years to work. If you have this debt waiting for you when you get home, there’s a big reason for you to stay abroad for as long as possible.”

The number of students who would actually permanently leave is probably very small. “It would be a much bigger problem than the student loan book if we were seeing Irish levels of emigration,” says Bowman. However, a determined few will be able to dodge repayment.

And then there’s the question of students who come to Britain from other European Union countries. Since 2006, EU law has required Britain to offer these students the same loan deals for tuition, though not for living costs. It is a tradition in British politics to blame problems that are largely homegrown on the widely-hated EU. As the issues with loan repayment have come to light, stories about EU students borrowing money and then “going to ground” have also been hitting the headlines.

This problem is still fairly small, since EU students have only been receiving loans since 2006. Hillman says that about half of EU students who study in Britain choose not to borrow or repay their loan in full before they leave the country. Many EU students enroll at British universities because they want to work in Britain later. Thus, they have a strong incentive to repay. However, data is now emerging that shows unpaid loans in the low millions. “The issue is less about what has happened to date but what might happen in the future because there aren’t many people yet who are liable to repay, but it’s growing all the time,” says Hillman. 

“If a French or Dutch person studies at a British university then goes home and gets a job, we can certainly chase them through the French or Dutch courts because they’ve signed a legal contract and they should repay,” Hillman says. “But the trouble is that it’s an incredibly expensive business. The person may owe £27,000, which is a lot of money, but chasing someone through the courts can easily cost that much.”

One way to address this problem would be an EU-wide agreement. “But there’s no real incentive for other European countries to do this because other European countries don’t use loans in the same way we do,” says Hillman. 

Relative improvement

Despite the problems, both Hillman and Bowman say the new system is an improvement over the way British higher education used to be funded. Tony Blair’s government only introduced tuition in 2004. “Before loans and fees came in, British taxpayers paid 100 percent of the cost of going to university. Now they don’t. But they still fund part of the loan cost,” says Hillman.

Bowman says it is important to remember the overall British context. “The alternative is not a kind of free market where you have everybody paying their own way and banks privately making loans to people. The alternative is going back to a situation where the government pays for everything, and that’s a disaster,” he says. “The political climate in the UK is very hostile to any kind of marketization of anything. That’s not going to change for a couple of years, at least until we’re growing rapidly, and we all feel rich and safe again.” 

Potential Solution

One interesting idea put forward by David Willetts, a Member of Parliament and former Minister of State for Universities, is to sell government student loans to universities, making them responsible for collecting repayment. This approach would address a problem that afflicts both American and British higher education: Universities collect tuition upfront and then have little incentive to ensure loans are repaid. 

Bowman supports the proposal. “Making universities responsible for whether people repay might make them more willing to turn people away if they’re not a great bet in terms of their future earning, and that might counteract some of the qualification inflation. Right now, you need a university degree for any job that isn’t blue collar manual labor.”

He believes Willetts’ idea is politically viable. “Britain has lots of middle-class people who think of themselves as being working-class. They feel like they’re fighting against the man when in reality they are the man. You could say to them that we don’t want people who haven’t gone to university picking up the bill in any way for people who have gone to university.” 

The only question is whether universities would go along with it. Right now, they have a very beneficial arrangement. 

Much will depend on how loan repayment rates develop in the next few years. Graduates will probably soon grasp that they have the best debt in the world. Maybe taxpayers will start to realize this debt isn’t such a good deal for them. 

ABOUT EMMA ELLIOTT FREIRE

Emma Elliott Freire is a freelance writer living in England. She has previously worked at the Mercatus Center, a multinational bank, and the European Parliament.

RELATED ARTICLE: Can You Pay Student Loans With a Credit Card?

EDITORS NOTE: This column with images is republished with permission. The featured image is courtesy of FEE and Shutterstock.

Unicorn Governance by MICHAEL MUNGER

Ever argued public policy with people whose State is in fantasy land?

Our problem is that we have to fight unicorns.

Unicorns, of course, are fabulous horse-like creatures with a large spiraling horn on their forehead. They eat rainbows, but can go without eating for years if necessary. They can carry enormous amounts of cargo without tiring. And their flatulence smells like pure, fresh strawberries, which makes riding behind them in a wagon a pleasure.

For all these reasons, unicorns are essentially the ideal pack animal, the key to improving human society and sharing prosperity.

Now, you want to object that there is a flaw in the above argument, because unicorns do not actually exist. This would clearly be a fatal flaw for the claim that unicorns are useful, if it were true. Is it?

Of course not. The existence of unicorns is easily proven. Close your eyes. Now envision a unicorn. The one I see is white, with an orange-colored horn. The unicorn is surrounded by rainbows (perhaps it’s time for lunch). Your vision may look slightly different, but there is no question that when I say “unicorn,” the picture in your mind corresponds fairly closely to the picture in my mind. So, unicorns do exist and we have a shared conception of what they are.

Problem: “the State” is a unicorn

When I am discussing the state with my colleagues at Duke, it’s not long before I realize that, for them, almost without exception, the State is a unicorn. I come from the Public Choice tradition, which tends to emphasize consequentialist arguments more than natural rights, and so the distinction is particularly important for me. My friends generally dislike politicians, find democracy messy and distasteful, and object to the brutality and coercive excesses of foreign wars, the war on drugs, and the spying of the NSA.

But their solution is, without exception, to expand the power of “the State.” That seems literally insane to me—a non sequitur of such monstrous proportions that I had trouble taking it seriously.

Then I realized that they want a kind of unicorn, a State that has the properties, motivations, knowledge, and abilities that they can imagine for it. When I finally realized that we were talking past each other, I felt kind of dumb. Because essentially this very realization—that people who favor expansion of government imagine a State different from the one possible in the physical world—has been a core part of the argument made by classical liberals for at least three hundred years.

Some examples help illustrate the point.

Edmund Burke  highlights the unicorn fallacy neatly. The problem is not bad people, or systems that need reform. Come the next election, we’ll have a Messiah! The next reform will lead to Utopia! No. No, we won’t, and no, it won’t.

In vain you tell me that [government] is good, but that I fall out only with the Abuse. The Thing! The Thing itself is the abuse! Observe, my Lord, I pray you, that grand Error upon which all artificial legislative Power is founded. It was observed, that Men had ungovernable Passions, which made it necessary to guard against the Violence they might offer to each other. They appointed Governors over them for this Reason; but a worse and more perplexing Difficulty arises, how to be defended against the Governors?

Adam Smith put it this way in The Wealth of Nations:

It is the system of government, the situation in which [people] are placed, that I mean to censure, not the character of those who have acted in it. They acted as their situation naturally directed, and they who have clamoured the loudest against them would probably not have acted better themselves.

Smith was talking about the employees of the East India Company in this passage. But the insight is a general one: the failure of a system of organization often arises from the incentives, the logic of action, or the inconsistencies, inherent in that system. The people who work in that system probably act in much the same way that other people would act if they found themselves in that system. So, while it’s true that one can imagine a State that works differently, there are no actual human beings who can work in that system and deliver what statists can imagine.

More recently, Ludwig von Mises and F. A. Hayek recognized the problem of unicorns rather deftly. In Epistemological Problems of Economics, Mises said:

Scarcely anyone interests himself in social problems without being led to do so by the desire to see reforms enacted. In almost all cases, before anyone begins to study the science, he has already decided on definite reforms that he wants to put through. Only a few have the strength to accept the knowledge that these reforms are impracticable and to draw all the inferences from it. Most men endure the sacrifice of the intellect more easily than the sacrifice of their daydreams. They cannot bear that their utopias should run aground on the unalterable necessities of human existence. What they yearn for is another reality different from the one given in this world … They wish to be free of a universe of whose order they do not approve.

Perhaps the most famous, and devastating, version of “skewer the unicorn” is Hayek’s, when he said in The Fatal Conceit that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The Munger test

In debates, I have found that it is useful to describe this problem as the “unicorn problem,” precisely because it exposes a fatal weakness in the argument for statism. If you want to advocate the use of unicorns as motors for public transit, it is important that unicorns actually exist, rather than only existing in your imagination. People immediately understand why relying on imaginary creatures would be a problem in practical mass transit.
But they may not immediately see why “the State” that they can imagine is a unicorn. So, to help them, I propose what I (immodestly) call “the Munger test.”

  1. Go ahead, make your argument for what you want the State to do, and what you want the State to be in charge of.
  2. Then, go back and look at your statement. Everywhere you said “the State” delete that phrase and replace it with “politicians I actually know, running in electoral systems with voters and interest groups that actually exist.”
  3. If you still believe your statement, then we have something to talk about.

This leads to loads of fun, believe me. When someone says, “The State should be in charge of hundreds of thousands of heavily armed troops, with the authority to use that coercive power,” ask them to take out the unicorn (“The State”) and replace it with George W. Bush. How do you like it now?

If someone says, “The State should be able to choose subsidies and taxes to change the incentives people face in deciding what energy sources to use,” ask them to remove “The State” and replace it with “senators from states that rely on coal, oil, or corn ethanol for income.” Still sound like a good idea?

How about, “The State should make rules for regulating sales of high performance electric cars.” Now, the switch: “Representatives from Michigan and other states that produce parts for internal combustion engines should be in charge of regulating Tesla Motors.”  Gosh, maybe not … In my experience, we spend too much time fighting with our opponents about their unicorns. That is, we claim that the unicorn/State itself is evil, and cannot be tamed in a way that’s consistent with liberty. The very mental existence of the unicorn is the target of our arguments.

The problem, of course, is that the unicorn they imagine is wise, benevolent, and omnipotent. To tell them that their imaginations are wrong is useless. So long as we insist that our opponents are mistaken about the properties of “the State”— which doesn’t exist in the first place, at least not in the way that statists imagine—then we will lose the attention of many sympathetic people who are primarily interested in consequences.

To paraphrase Hayek, then, the curious task of the liberty movement is to persuade citizens that our opponents are the idealistic ones, because they believe in unicorns. They understand very little about the State that they imagine they can design.

ABOUT MICHAEL MUNGER

Michael Munger is the director of the philosophy, politics, and economics program at Duke University. He is a past president of the Public Choice Society.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.