Category Archive: Economics

  1. The many faces of means-testing

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    Isn’t a Universal Basic Income just another name for a negative income tax, such as Tax = -$10,000 + .3*Income?  If so, isn’t a Universal Basic Income means-tested by definition?

    The answer to the first question is Yes.  UBI is just Milton Friedman’s negative income tax in new packaging.

    The answer to the second question, however, is more equivocal.  The UBI is means-tested in the weak sense that your net payment falls with income.  But the UBI dispenses with many other traditional forms of means-testing.  Most notably:

    1. Means-testing by age.  Most welfare states prioritize children and the elderly.  The implicit theory is that, unlike prime-age adults, the very young and the very old are unable to provide for themselves.
    2. Means-testing by dependents and marital status.  Most welfare states prioritize single moms with minor children.  The implicit theory is that single moms have reduced opportunities to work due to their family responsibilities.
    3. Means-testing by health.  Most welfare states prioritize the disabled.  The implicit theory is that they’re not healthy enough to work.
    4. Means-testing by job history.  Most welfare states prioritize people who recently lost their jobs over people who have never worked, or lost their jobs a long time ago.  The implicit theory is that the short-term unemployed are unlucky, while the long-term unemployed are lazy.

    If your UBI proposal includes factors like these in its formula, it’s very hard to see what makes it a UBI.

    If your UBI proposal dispenses with most or all these factors, then it is a distinctive reform indeed.  But “distinctive” is a far cry from “good.”

    Advocates correctly note that dropping multi-faceted means-testing reduces moral hazard: If your monthly payment doesn’t depend on your health, you have no reason to fake bad health.

    But there is also an gargantuan disadvantage: Dropping multi-faceted means-testing greatly increases the number of eligible recipients.  If perfectly able-bodied, childless adults are eligible for free money, plenty will take it – and many won’t work at all.  Taxes on remaining workers have to rise to pay for them.  This probably won’t create a “UBI death spiral,” but a milder sloth spiral definitely kicks in, especially over the longer run as stigma against idleness erodes.  And the burden of supporting able-bodied non-workers is also very likely to cut into funding for the more deserving poor.

    Frankly, given the bleak long-run fiscal forecast for the U.S., I’m baffled that anyone with libertarian sympathies takes the UBI seriously.  The welfare state is already unsustainable, largely because our means-testing by age and health isn’t stringent enough.  The elderly may have trouble working now, but since they had a lifetime to save for their own retirements, few of the indigent elderly are victims of circumstance.  And given the huge long-run rise in the share of U.S. adults on disability despite rising health and less strenuous jobs, its clearly far too easy to plead disability.

    What’s especially strange is that the bleak long-run fiscal forecast makes old-school libertarian austerity more relevant than ever.  Why are so many libertarians running away from our core ideas when conditions are nearly ripe for mainstream America to finally listen to us?

    This piece was originally published at Econlog.

  2. The bell curve of anti-slavery

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    For years, I’ve read essays in which students seem to think that on the eve of the American Civil War all people were either abolitionists or slaveholders. But abolitionists and slave-holders were actually at the far ends of the bell curve of the United States’ population.

    Most Americans occupied an ambiguous middle, between pro-slave and anti-slave views, but not necessarily owning slaves or calling for outright abolition. In fact, during the 1850s, the real debate was about curtailing the expansion of slavery, not ending it in the near term.

    Abolitionism is one of the complex historical topics that is always over-simplified in textbook accounts of history. The conventional story is that William Garrison was the avant-garde of an abolitionist movement radiating out of New England in the 1830s. By the 1860s, much of the northern population had come over to his side. From this view, the liberal victory over slavery came from the relentless social pressure of the abolitionists.

    In reality, though, there were a variety of anti-slavery positions in antebellum America.  Let’s focus on just four of them. We know that William Garrison argued for immediate abolition, and justified it on moral and social grounds. But the North Carolinian Hinton Helper opposed slavery for its supposed economic inefficiencies and called for gradual abolition, partly through initiatives that would settle emancipated slaves abroad. Abraham Lincoln’s political opponent, Stephen A. Douglas, took the most moderate view on slavery with his belief that if each state could determine its own laws on slavery, the institution would slowly die out. Finally, we can add the libertarian Lysander Spooner, who argued that slavery was antagonistic to natural rights and the Constitution. Spooner called for vigilantes to punish slaveholders.

    This matrix helps us to explore and argue a variety of anti-slavery positions. In classroom debates on this topic, a surprising number of students gravitate towards non-Garrisonian positions. They might find the economic arguments against slavery more convincing, or a radical approach more compelling. Through this process, and in their own struggles to choose a position in the matrix, students learn something about the difficult decisions that faced the anti-slavery contingent alone.

    They also learn about the value of liberal debate. Conventional wisdom is that the force of the radical abolitionists won America over and ended slavery. But in my view, the decades of debate about slavery were necessary to push society towards accepting slavery’s demise. The most famous example of moderate and somewhat more radical positions engaging in civil debate is the Lincoln-Douglass debates of 1858. But a very active source of debate was on the east coast, where immediatists, gradualists, and colonizationists argued over the proper form of abolitionism. Although many Americans became stronger defenders of slavery when faced with calls for its abolition, in the long run, the anti-slavery movement grew because we had a liberal enough society to allow for debate. Gradual, moderate anti-slavery views were a stepping-stone towards abolition.

    Liberty develops in fits and starts, and there is no guarantee that it will succeed. When studying history closely we learn that seldom is there one force or idea that is wholly good or wholly bad. But by recognizing the varieties of antebellum anti-slavery ideas, we see that the general thrust of the period was towards increasing freedom.

  3. Trade restrictions imperil our standard of living

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    A recent trip to Cincinnati afforded me the opportunity to check out the well-known Jungle Jim’s International Market just north of the city. As a lover of all kinds of food, I was promised that here I could find everything under the sun in one location. And that promise was largely fulfilled, as Jungle Jim’s is indeed an amazing place.

    From its fantastic wine selection to its charcuterie to its tanks of live fish to its exotic and obscure international produce to its international dry goods area with sections containing food from countries across the globe, including some of the smallest in Europe and Central America, Jungle Jim’s is a food lover’s paradise. It is a cornucopia. It is a giant global buffet table. The more time I spent there, however, the more I began to think about the physical space of that market as a metaphor for the globalized economy.

    In Human Action, Ludwig von Mises wrote that “The market is not a place, a thing, a collective entity. The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor.” That process of cooperation, of course, knows no national boundaries. The market, in Mises’s sense, extends across the globe, as exchange by comparative advantage creates a very fine division of labor, which in turn facilitates increased cooperation and prosperity.

    Jungle Jim’s is a physical manifestation of that process. The shelves are lined with goods that come from all over the world, and the shoppers are made up of people from all walks of life and from all kinds of geographical locations. We were two hours from home there, and since telling friends I was there, a number have told me that they’ve made it a point to stop there while driving through the Cincinnati area. I’m quite sure that market was economically and geographically diverse.

    It was also ethnically diverse. The selection of international foods and fresh meat and seafood attracts a wide range of customers who know they could only find what they wanted at Jungle Jim’s. For example, the seafood section was full of older Asian women who were clearly picking out the fresh items they needed for that night, and being very precise with how they wanted those fish filleted.

    Other customers were also clearly immigrants or descendants of immigrants looking for the food from their native lands. The ability to access ingredients or prepared food imported from all over the world makes their lives here in the United States that much better, whether they are newly arrived immigrants or long-standing citizens of any of dozens of ethnicities or nationalities.

    Jungle Jim’s is also a model of peaceful, tolerant interaction among diverse humans. Exchange doesn’t just make us better off, it makes us better people.

    In addition to the direct consumers who benefit from something like Jungle Jim’s, so do other producers. Although I cannot know for sure, I suspect that a number of the customers there that morning were chefs from local restaurants and catering businesses who know that they can buy the exotic ingredients they need, whether it’s sauces or spices or fresh produce. As consumers, of course, we enjoy our Chinese or Thai or Greek food, or American dishes influenced by those cuisines, but doing so is dependent on the ability of owners of those restaurants, regardless of their ethnicity, nationality, or citizenship status, to acquire those ingredients. For American chefs, the availability of imported ingredients at reasonable prices is crucial to pleasing their American consumers and making their businesses successful.

    Too often, we talk about international trade as being about the direct benefits to consumers. Those benefits are real. It’s true and important that Walmart can import goods from China and sell them to US consumers at low prices. It makes us, especially the least well-off among us, better off than we would be otherwise.

    But what that conversation forgets is that over half of US imports are actually inputs into the production of US-based firms. That’s about 8 percent of US Gross Domestic Product. Plus, many of those importers are also exporters. The firms who buy imported inputs use them to produce final goods here in the US then export some of them to the rest of the world.

    When we start to place limits on global trade through tariffs on imports, we are not just harming the producers of those goods in other countries. We are harming US manufacturers who rely on those imports for their production here (and the jobs that go with it). Raising tariffs on imported dry goods or produce makes food produced by American chefs at restaurants that employ Americans more expensive, thereby threatening the viability of those businesses and those jobs.

    If we raise the price of imported steel, we don’t just hurt foreign manufacturers, we hurt American firms who rely on that input for their production, including their exports.

    Standing in the crossroads of commerce that is Jungle Jim’s, I could not help think about these issues. Under one roof in the Cincinnati suburbs was a microcosm of the global economy: people with a variety of different wants and desires finding ways to mutually satisfy them through exchange. The building is the physical manifestation of the coordinating role of the market process. When we go to Jungle Jim’s, we see it. But when we move beyond a building, it becomes part of Bastiat’s unseen.

    The institutional framework of laws, rights, and finance that make exchange possible is the analogue in the market process to how the physical structure of the building makes possible the exchanges at Jungle Jim’s. The institutional framework is harder to see but is, in many ways, far more important. And because it’s harder to see, we don’t always understand how weakening it can destroy global exchange just as weakening a pillar or a beam at Jungle Jim’s could destroy the exchanges there.

    In fact, the invisible network of trade-facilitating institutions is what makes it possible for there to be a visible building in which trades take place. They are deeply intertwined.

    Every person who goes to Jungle Jim’s and enjoys its bounty should be considering the invisible structures that make the visible structure possible. The global market process, and the institutions such as the admittedly imperfect treaties like NAFTA and organizations like the WTO that facilitate it, are what make the local marketplaces possible.

    While you enjoy your French cheese, your Chilean wine, or your Bulgarian pickled mushrooms, consider the invisible network of institutions that make it possible for you to do so, and for your local chef to get them as well. Then consider how that invisible network does the same thing for the imported cars you buy and the imported components US car companies buy to make their cars.

    Because the market process of global trade is not a place or thing, it’s easy to forget and to take for granted. But like the marketplace of Jungle Jim’s, it cannot stand without its foundations. When we weaken those institutions and when we place limits on trade, we threaten the livelihoods and well-being of us all.

    This piece was originally published at the Foundation for Economic Education.

  4. How processing payments with Bitcoin is different than cash, banks

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    Arguably, the most interesting feature of the Bitcoin system is the way in which Bitcoin payments are processed. To make it clear why payments must be processed at all and how Bitcoin processes payments differently, I’ll look at processing payments with cash and banks before turning to bitcoin.

    Think about a cash transaction. Cash transactions have some desirable properties. If I were to pay you in cash, you’d be able to observe that I have a balance of dollars, and you would know when I’ve transferred the balance to you because you would see the dollars leave my hand and into yours. Moreover, transferring the cash to you prevents me from spending that balance again, because I no longer have the cash to hand over to some future seller. Physical cash limits users to spending balances they actually possess and prevents them from spending that balance more than once.

    Electronic payments are somewhat different because, without an appropriate protocol, digital balances can be duplicated. I can send you a file without relinquishing my possession of the file. You have the file. I have the file. We both have the file. There’s no way to ensure that I’m in exclusive possession of a particular balance of digital money. So, with electronic payments, we must find some protocol to prevent double spending.

    Processing a block of transactions requires a solution to a complicated cryptography problem. Since the problem is sufficiently difficult, everyone trying to solve the problem essentially has a random chance of being first, equal to his or her share of total computing power. That’s important because some black hat user could make and confirm fraudulent transactions if she controlled a majority of the computing power. In fact, no one has control over a majority of the computing power on the Bitcoin system, so the system provides a sufficient check on double spending.

    Processing transactions is costly. Solving the cryptography problem requires sophisticated computing hardware known as a mining rig and energy to run it. Why would someone incur these cost of processing transactions for the Bitcoin community?

    The Bitcoin protocol includes an incentive to process transactions. The first person to confirm a batch of transactions is rewarded a prize of new Bitcoin and all of the transaction fees users offer up when making their transaction requests. The Bitcoin prize awarded for processing of a block of transactions is halved roughly every four years, so many suspect that transaction fees will become more important as the prize approaches zero Bitcoin.

    Hopefully now you have a better sense of (1) why transactions must be processed and (2) how Bitcoin, a distributed system, processes transactions differently from decentralized physical cash and centralized clearinghouse systems.

    Want to learn more about Bitcoin? Click here for an article on the basics of Bitcoin and here for a piece on cryptocurrency.

  5. What is a cryptocurrency?

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    Cryptocurrencies are hot right now. Whether you tune into your local news, read The Economist, or scroll through tech sites like Ars Technica, odds are good that you’ve come across a story about Bitcoin, Litecoin, Dogecoin, Ripple, or a host of other cryptocurrencies. So what is a cryptocurrency exactly?

    The term “cryptocurrency” is a portmanteau, combining the words crypto and currency. Let’s start with currency. A currency, or money, is a commonly accepted medium of exchange. As a medium of exchange, it’s an item that you accept and exchange, even though you don’t want to consume it, because you believe – and this is important – that you’ll be able to trade that item for some good or service that you would like to consume at some point in the future. That is, a currency acts as a medium through which you can exchange what you have for what you want.

    A lot of items might function as a medium of exchange. For example, when I purchased my house, there was an old washer and dryer in the basement. I already had a washer and dryer, so I had no intention of consuming the services provided by the old washer and dryer that came with the place. Still, I accepted these items. Why? Because I was confident I could exchange them at some point in the future for some goods or services that I actually wanted to consume. In this case, I first traded the washer and dryer for dollars and then traded the dollars for a delicious dinner at my favorite restaurant. The washer and dryer, and then the dollars, functioned as a medium of exchange. They were items I had no intention of consuming but that I accepted because they would allow me to acquire goods and services I would like to consume.

    A currency is a medium of exchange, but it’s not just a medium of exchange. It must also be commonly accepted, which raises an interesting question: How common is common? What fraction of the population must accept an item before we agree it’s a currency? 50%? 75%? 100%? The whole country? The world? We can probably agree that the old washer and dryer I mentioned are not commonly accepted. And we can probably agree that dollars are commonly accepted — certainly in the United States. It isn’t so clear where we should draw the line, and reasonable people might disagree. For our purposes, it is enough to understand that, when economists refer to money or currency, they are talking about a commonly accepted medium of exchange.

    Next, let’s consider the crypto part of cryptocurrency. Crypto is short for cryptography, the practice of securing communication in the presence of third parties. In the case of cryptocurrencies, the term “crypto” denotes that the currencies are digital and rely on encryption for secure transactions. Since they’re digital, they might also be programmed to have a host of other features, like a slow and predictable rate of growth, for example.

    So, putting the pieces together, what is a cryptocurrency? It’s an item intended for use as a commonly accepted medium of exchange that exists in the digital world and relies on encryption to make transactions secure.

    Want to learn more about cryptocurrency? Click here for an article on Bitcoin and here for a piece on how Bitcoin payments are processed.

  6. Demystifying Bitcoin

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    Whether you’re a paranoid libertarian who fears the coming monetary apocalypse or just a regular Joe looking to diversify your portfolio, you may have some interest in learning about Bitcoin. Like something straight out of a Neal Stephenson novel, Bitcoin has cyberpunk sex appeal. It foreshadows a radical change in the social and economic order and is shrouded with a mystique and aura that can be difficult to penetrate. But that’s why I’m here – to demystify Bitcoin for you. You’re welcome.

    The Bitcoin protocol was first described in a 2008 paper by Satoshi Nakamoto. “Satoshi Nakamoto” is probably a pseudonym, so it’s not clear whether the protocol was developed by an individual or a group of individuals, and attempts to identify the developer or development team have been unsuccessful. What we do know is how the protocol works. That is, what Bitcoin is.

    At the core of the Bitcoin system is the blockchain, a ledger that records the rightful owner of every balance of Bitcoin in existence. When you make a Bitcoin transaction, you effectively announce to the system that you would like to transfer a balance of Bitcoin on the ledger from one owner to another. These transactions are grouped into a block and members on the system then compete to be the first person to confirm that the transactions in the block are legitimate. Once a block is confirmed, the ledger, or blockchain, is updated to reflect the most recent transactions.

    Bitcoin owners are not identified by their name or location, but by a string of characters known as a digital address. In other words, bitcoin owners are pseudonymous. You can transfer a balance of Bitcoin from one address to another without revealing your actual identity in the physical world. You only verify that you own the address from which the Bitcoin is being sent.

    How do you prove ownership without revealing your identity? To accomplish that, the system relies on public key cryptography. All of that can be a bit confusing, so let’s work through a simple example. Suppose Leah wants to transfer five Bitcoin to Nick. Leah requests that the balance of Bitcoin held at her address on the ledger be reduced by five Bitcoin and that an address owned by Nick be increased by five Bitcoin. Leah doesn’t have to know Nick. She just needs to know his address. On the Bitcoin system, addresses function as public keys – everyone can see them. Leah confirms that she owns her address by generating a digital signature with her private key, which she keeps secret. Anyone else on the system can then use this digital signature to verify that she owns the address, even though they don’t know her private key. That’s the beauty of public key cryptography.

    Once the transaction request is made, it’s grouped with other transactions to be processed. Once processed, the public ledger, or blockchain, now reflects that Leah’s address has five fewer Bitcoin and Nick’s address has five more Bitcoin. If Nick then would like to transfer the newly acquired Bitcoin to some other address, he’ll have to generate a new transaction request and use his private key to create a digital signature. That, in a nut shell, is how the Bitcoin system works.

    In brief, the Bitcoin system is a public ledger. It denotes who owns each unit of Bitcoin available. Transactions amount to debiting one address and crediting another. And public key cryptography ensures transactions are secure.

    Want to learn more about Bitcoin? Click here for an article on cryptocurrency and here for a piece on how Bitcoin payments are processed.

  7. Better market-oriented proposals that reduce income inequality

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    I was initially excited to see that progressive Dean Baker has written a piece on “Eight Market-Oriented Proposals That Reduce Income Inequality” for AEI. It begins promisingly by criticizing overly strict occupational licensing for high-skilled workers.  But it then studiously avoids the really big wins.  Namely:

    1. Immigration.  High-skilled immigration reduces conventionally measured inequality by making high-skilled workers more abundant relative to low-skilled workers.  And low-skilled immigration drastically reduces properly measured inequality by moving the absolutely poor to First World prosperity.  Estimates of the size of this effect are vast.

    2. Housing deregulation.  Letting developers build more housing in expensive areas of the country directly reduces inequality by making housing more affordable.  And it indirectly reduces inequality by making it more affordable to live in high-wage areas of the country.  Estimates of the size of this effect are also vast.

    To be fair, Baker does discuss occupational licensing as a barrier to high-skilled immigration.  But that’s only the tip of the immigration iceberg.  And his only “market-oriented proposal” for real estate, bizarrely, is a surtax on vacancy!  On the surface, he’s got a decent case:

    A vacant property tax can have a similar effect on the real estate market to that of reducing unemployment benefits and other supports on wages.

    But this misses the bigger picture: A vacancy tax also reduces the incentive to build housing in the first place, so it’s a lot more like a tax on firing workers than a reduction in unemployment benefits.  In the short-run, such a tax saves jobs, but in the long-run, it makes employers nervous about hiring.  A vacancy tax, similarly, keeps rental units on the market during bad times, but reduces the long-run payoff for construction.  Baker is flatly wrong to say, “Unlike most taxes, all the side effects of this tax are positive.”

    Governments around the world willfully create poverty and inequality.  I’m glad to see Baker calling attention to these ugly facts.  But focusing on relatively minor and not-so-market-oriented examples spreads the false impression that government-sponsored poverty and inequality is but a marginal issue.  Alas!

    This piece was originally posted at Econlog.

  8. This Valentine’s Day, the chocolate supply is in turmoil.

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    By all means, get your date a box of chocolates for Valentine’s Day. In my opinion, dark chocolate is far superior to other traditional Valentine’s Day trinkets. What good is a stuffed bear (unless it’s holding a box of truffles)?

    To really leave an impression, however, you want to give them something new and exciting, such as current insights into the rollercoaster chocolate market.

    “Did you know that a series of cocoa bean export contract defaults could seriously disrupt the economy in Ivory Coast?”

    “No, but I could talk to you all night!”

    See how easy that is? Keep reading to learn how to drop the word “déblocage” into your romantic evening.

    Chocolate is made from cocoa beans, and the West African nation of Ivory Coast produces over a third of the world’s cocoa. During the colonial period, governments tightly controlled the cocoa economy, and the markets are still regulated today.

    Like any economy that exports a commodity, Ivory Coast is affected when world cocoa prices drop. To try to insulate farmers from fluctuating world prices, a marketing board called the Coffee and Cocoa Council (CCC) made this rule in 2012:

    Farmers get paid a minimum price for their cocoa crops. Exporters agree to price contracts with the CCC months before they can ship the cocoa out of Ivory Coast.

    The CCC auctions contracts for export permits called déblocage. This policy, even when it was working, likely resulted in lower prices paid to farmers. Today, it is a disaster.

    Many exporters wrongly predicted that cocoa prices in February 2017 would be high. In fact, the price just hit a 3-year low!

    Purchasers in Europe will not pay high prices for cocoa right now. So, the exporters do not want to go through with the deals they had made with the CCC to pay the farmers a high price. The ports are literally filling up with boats loaded with raw cocoa, but no one wants to ship it out. Instead of getting a guaranteed minimum price, some farmers are getting no sales at all. The CCC will likely need to break their rules and allow people to buy the beans at lower prices that reflect current world market demand.

    After Reuters published a story on the crisis, the CCC said the claims were false! Is that as dramatic as The Bachelor or what? Rumors were circulating in the fall, but the CCC tried to deny any problems until recently.

    Cocoa beans are a “commodity” cash crop and commodity-based economies are negatively affected by unexpected global price swings. However, attempts to regulate the variability away invariably cause new problems. In the end, the market price determines how much money flows into these economies.

    The effect of the fall in cocoa prices can be compared in some ways to the fall in US home prices in 2008. Americans had made promises based on the assumption that home prices could only go up. Predicting how prices will change in the future is difficult because prices move as a result of the separate actions of billions of individuals. When real estate price suddenly fell, those promises were broken. The cocoa exporters say they can no longer buy and export beans because they would have to buy them for a higher (regulated) price than they are able to earn on the world market.

    Speaking of promises, will your date promise to call you again? Would that promise be broken if prices unexpectedly change? To make sure he or she wants to see you again, you could also show them some more interesting economics of Valentine’s Day here.

  9. William Graham Sumner Part 4 – Charity, Liberty, and Social Justice

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    William Graham Sumner, I have argued, was not a social Darwinist. He was a laissez-faire liberal who was a fierce opponent of militarism, protectionism, and plutocracy. Far from being a champion of the strong against the weak, he was a champion of the “Forgotten Man” against both the socialists who would exploit his labor for the benefit of the masses, and the plutocrats who would exploit him for the benefit of the privileged few.

    At times, however, Sumner seems to go farther than this. On the issue of poverty relief, for instance, Sumner does not confine himself to the standard classical liberal critique of coercive redistribution. At times, he seems to caution against even charity of the purely voluntary sort. After all, he notes, such charitable giving might divert resources away from productive channels where they would do more good.

    The next time that you are tempted to subscribe a dollar to a charity, I do not tell you not to do it, because after you have fairly considered the matter, you may think it right to do it, but I do ask you to stop and remember the Forgotten Man and understand that if you put your dollar in the savings bank it will go to swell the capital of the country which is available for division amongst those who, while they earn it, will reproduce it with increase.

    So one problem with charitable giving is that it, like every activity, has an opportunity cost. But this is not all. In some passages, Sumner seems to suggest that the problem with charity is not merely that it relieves suffering at the expense of productive capital investment, but simply that it relieves suffering at all!

    Vice is its own curse. If we let nature alone, she cures vice by the most frightful penalties. It may shock you to hear me say it, but when you get over the shock, it will do you good to think of it: a drunkard in the gutter is just where he ought to be. Nature is working away at him to get him out of the way, just as she sets up her processes of dissolution to remove whatever is a failure in its line. Gambling and less mentionable vices all cure themselves by the ruin and dissolution of their victims. Nine-tenths of our measures for preventing vice are really protective towards it, because they ward off the penalty.

    Finally, in one of the most damning and controversial passages he ever wrote, Sumner warns of the ultimate consequences for society of listening to the “socialists and sentimentalists” who seek to “regulate in any way the struggle of interests under liberty.”

    If we do not like the survival of the fittest, we have only one alternative and that is the survival of the unfittest. If A, the unfittest to survive, is about to perish and somebody interferes to make B, the fittest, carry and preserve A, it is plain that the unfittest is made to survive and that he is maintained at the expense of B, who is curtailed and restrained by just so much. This process, therefore, is a lowering of social development and is working backwards, not forwards.

    This last passage is especially problematic, not only for its troubling moral implications, but for its apparent incompatibility with the way Sumner explicitly defined the idea of “the survival of the fittest” elsewhere in his writings. As I noted in an earlier essay, Sumner generally emphasized that the phrase “survival of the fittest” does not mean survival of the best. “Fitness,” in an evolutionary context, simply means “adaptation to environment,” and what is well-suited to one environment might be ill-suited to another. But if this is what Sumner means by the “survival of the fittest,” then how can he consistently claim that socialism would produce the survival of the unfittest? Wouldn’t it be more consistent to say that what counts as “fitness” under socialism is simply different from what counts as “fitness” in a free market? The claim that socialism promotes the survival of the “unfittest” seems to impute an evaluative meaning to “fitness” of precisely the sort Sumner elsewhere properly took pains to deny.

    Sumner himself seems to have eventually recognized that the phrase was, at the very least, more trouble than it was worth. After a short period of controversy that went as far as the editorial page of the New York Times, Sumner apparently dropped all talk of “survival of the fittest” and the “unfittest” from his speeches and writings. Neither phrase appears anywhere in his What Social Classes Owe to Each Other, and his use of the especially problematic “survival of the unfittest” phrase seems to be confined to a relatively small number of mostly unpublished pieces between 1879 and 1884.

    But more can be said on Sumner’s behalf than this. The passages above are blunt (it was not for nothing that Sumner was known as “Bluff Billy”). But the ideas they express are, extracted from Sumner’s feisty rhetoric and dispassionately examined, relatively uncontroversial. And when they are understood in the broader context of Sumner’s thought on issues of poverty, responsibility, and the state, they form a doctrine that is not without significant attraction.

    First, consider Sumner’s remark about the “drunk in the gutter.” The most striking claim in that passage, of course, is that such a person is “just where he ought to be.” And it would be easy to infer from this claim that Sumner is indifferent to the suffering of the drunk, or perhaps that he even approves of it.

    But nothing could be further from the truth. Sumner abhors vice, and the suffering it produces for its bearer and for society as a whole. But he is sensitive to the problem of moral hazard. The more we do to relieve the suffering that naturally accompanies vice, the more we chip away at one of the strongest natural disincentives to vicious behavior. The lower the costs of vice, the more vicious people we get, and the more vicious people we get, the more suffering there is (since the suffering vice creates cannot be eliminated altogether, but only transferred from the vicious onto some other innocent person). A concern to avoid moral hazard is thus entirely compatible with a concern to reduce the suffering of others.

    Second, Sumner’s writings reflect what he saw to be an important moral difference between suffering that is due to chance and suffering that is due to choice. Sumner’s discussions of poverty are often infused with moralistic language such as “negligent,” “imprudent,” and “incompetent.” And, again, it would be easy—especially for one reading only quotes taken out of context—to come away from such passages thinking that Sumner is attributing these vices to the poor as a class.

    But this, again, would be a mistake. Language such as this is easy to come across in Sumner’s arguments against redistribution, not because he identifies poverty with vice, but because he is limiting his argument to that poverty which is the result of vice. Sumner doesn’t think that those who are poor because of their own laziness, imprudence, or incompetence have any claim of justice to the assistance of those who were more cautious and successful. And it is for precisely this reason that he finds it less than helpful to talk about “the poor” as a class.

    Under the names of the poor and the weak, the negligent, shiftless, inefficient, silly, and imprudent are fastened upon the industrious and prudent as a responsibility and a duty. On the one side, the terms are extended to cover the idle, intemperate, and vicious, who, by the combination, gain credit which they do not deserve, and which they could not get if they stood alone. On the other hand, the terms are extended to include wage-receivers of the humblest rank, who are degraded by the combination.

    Thus, the problem isn’t that all poor people are negligent and imprudent. The problem is that some of them are, and lumping together “the poor and the weak” as a class obscures the important moral differences between them and those who are poor despite their industriousness and prudence.

    When our fellow men do the best they can and nevertheless suffer because of bad luck, Sumner thinks, we have a moral (if limited and not legally enforceable) obligation to come to their aid. Indeed, in the final chapter of What Social Classes Owe to Each Other, titled, “Wherefore We Should Love One Another,” Sumner goes even further and claims—surprisingly!—that this obligation sometimes extends even to individuals who suffer because of their own bad choices.

    We may philosophize as coolly and correctly as we choose about our duties and about the laws of right living; no one of us lives up to what he knows. The man struck by the falling tree has, perhaps, been careless. We are all careless. Environed as we are by risks and perils, which befall us as misfortunes, no man of us is in a position to say, “I know all the laws, and am sure to obey them all; therefore I shall never need aid and sympathy.” At the very best, one of us fails in one way and another in another, if we do not fail altogether. Therefore the man under the tree is the one of us who for the moment is smitten. It may be you tomorrow, and I next day. It is the common frailty in the midst of a common peril which gives us a kind of solidarity of interest to rescue the one for whom the chances of life have turned out badly just now. Probably the victim is to blame. He almost always is so. A lecture to that effect in the crisis of his peril would be out of place, because it would not fit the need of the moment; but it would be very much in place at another time, when the need was to avert the repetition of such an accident to somebody else. Men, therefore, owe to men, in the chances and perils of this life, aid and sympathy, on account of the common participation in human frailty and folly.

    Sumner goes on to say that this obligation is based in a “law of sympathy” that cannot be made the basis of any “mechanical and impersonal schemes,” thus relegating it to the realm of private virtue rather than public law.

    But a handout is not really what the poor need from the state anyway, on Sumner’s view. What the poor need—especially the prudent and industrious poor—is for the state to get its foot off their necks. What the poor need is liberty. And those of us who are in a position to demand it on their behalf have an obligation to do so. Taxes, regulations, and restrictions upon the poor, in Sumner’s words,

    represent the bitterest and basest social injustice. Every honest citizen of a free state owes it to himself, to the community, and especially to those who are at once weak and wronged, to go to their assistance and to help redress their wrongs. Whenever a law or social arrangement acts so as to injure any one, and that one the humblest, then there is a duty on those who are stronger, or who know better, to demand and fight for redress and correction. When generalized this means that it is the duty of All-of-us (that is, the State) to establish justice for all, from the least to the greatest, and in all matters.

    This is a vision of social justice—or, at least, the minimum requirements of social justice—on which all of us should be able to agree.

  10. William Graham Sumner Part 3 – The Forgotten Man

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    Libertarians have long been hostile to the idea of “social justice.” Personally, I think that some of their more common objections are misguided. But even a Bleeding Heart Libertarian like me can (happily) admit that there’s a lot to be learned from what libertarians have had to say about this issue. Whatever case can be made for social justice (if any), will have to be one that takes the best libertarian critiques of social justice seriously. And William Graham Sumner’s is certainly one of the best.

    Sumner, of course, never used the phrase “social justice,” which didn’t become popular until after his death. But throughout his writings he was severely critical of the idea that society has any general obligation to help “the poor.” One of his most trenchant critiques of this idea is to be found in his memorable and important essay, “The Forgotten Man.”

    Quite apart from its content, the essay is memorable for its style and rhetorical effectiveness. Even by the high standards Sumner’s other writings set, it is simply a great pleasure to read. But there is a substance beneath the style. Sumner’s essay puts forth a general analysis of what we might call “social legislation”—government programs designed to “fix” some kind of “social problem,” whether that problem be that some persons live in poverty, that other people are drinking too much, or that laborers stand in a disadvantageous economic position relative to their employers.

    Every such program, Sumner wrote, begins with some person A observing some problem from which another person X appears to be suffering.

    A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X.

    And who is C?

    I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.

    The Forgotten Man is forgotten because he is, in a word, boring. “He is the simple, honest laborer, ready to earn his living by productive work.” He is “the clean, quiet, virtuous, domestic citizen, who pays his debts and his taxes and is never heard of out of his little circle.” The Forgotten Man spends his time “in patient industry, supporting his family, paying his taxes, casting his vote, supporting the church and the school, reading his newspaper” and generally minding his own business. And this, in the end, is precisely why he is forgotten. “We pass him by because he is independent, self-supporting, and asks no favors. He does not appeal to the emotions or excite the sentiments. He only wants to make a contract and fulfill it, with respect on both sides and favor on neither side.”

    It is quite another case with “the poor and the weak,” who, Sumner argues, are constantly put forth by social reformers “as objects of public interest and public obligation.” Their suffering is obvious to us, and moves us to want to do something to help. It is What is Seen. But what is not seen is the effect our proposed program of relief for X will have on C – the Forgotten Man.

    The notion is accepted as if it were not open to any question that if you help the inefficient and vicious you may gain something for society or you may not, but that you lose nothing. This is a complete mistake. Whatever capital you divert to the support of a shiftless and good-for-nothing person is so much diverted from some other employment, and that means from somebody else … Capital is force. If it goes one way it cannot go another…

    “Society” can only devote resources to the relief of X by taking them away from C. Similarly, the law cannot eliminate altogether harmful consequences of X’s imprudent behavior; it can only shift those consequences, out of sight, onto somebody else’s back.

    The whole system of social regulation by boards, commissioners, and inspectors consists in relieving negligent people of the consequences of their negligence and so leaving them to continue negligent without correction…Now, if you relieve negligent people of the consequences of their negligence, you can only throw those consequences on the people who have not been negligent.

    Sumner devotes much of his essay to criticizing programs aimed at helping the poor. But it is important to recognize that Sumner did not regard such programs as the only threat to the Forgotten Man, or even the most dangerous one. As I noted in my last essay, Sumner actually saw the most serious social threat as emanating from programs designed to help the rich. And this is why Sumner was as fierce a critic of plutocracy as he was of socialism.

    The Forgotten Man was threatened not only by programs of social relief, but by what Sumner referred to as “jobbery.” Jobbery, or as we would now call it, “rent-seeking,” Sumner defined as “the constantly apparent effort to win wealth, not by honest and independent production, but by some sort of a scheme for extorting other people’s product from them.” As examples of jobbery, Sumner condemned various programs of public works, subsidies to miners and farmers, and most especially the protective tariff, a device that he memorably described as “delivering every man over to be plundered by his neighbor and […] teaching him to believe that it is a good thing for him and his country because he may take his turn at plundering the rest.”

    Now, it would be easy to come away from these passages thinking that Sumner is making a rather obvious consequentialist point – that government programs designed to do good will often, through corruption or ignorance, produce unintended negative effects. And that is, to be sure, an important part of Sumner’s argument. Sumner, like Herbert Spencer, made frequent appeals in his political writings to the idea of society as a spontaneous order, and often pointed out that attempts to replace this order with a theoretically more desirable but artificially constructed one would likely yield unintended and unwanted consequences.

    But this consequentialist argument not the most interesting, the most original, or even the most important part of Sumner’s case against redistribution and regulation. What sets Sumner’s argument apart and, I suspect, makes it resonate so clearly with such a wide audience, is his appeal to justice. After all, it is “the Forgotten Man and the Forgotten Woman [who] are the very life and substance of society.” They are the ones who work to support themselves and their families, who pay their taxes, and who engage in the productive labor on which the maintenance and growth of society depend. Why, Sumner asks, should people such as this, who already faithfully bear the burdens for which they are properly responsible, be further burdened “with the cost of public beneficence, with the support of all the loafers, with the loss of all the economic quackery” and with the cost of pervasive jobbery?

    We are addressed all the time as if those who are respectable were to blame because some are not so, and as if there were an obligation on the part of those who have done their duty towards those who have not done their duty. Every man is bound to take care of himself and his family and to do his share in the work of society. It is totally false that one who has done so is bound to bear the care and charge of those who are wretched because they have not done so. The silly popular notion is that the beggars live at the expense of the rich, but the truth is that those who eat and produce not, live at the expense of those who labor and produce.

    If it is the Forgotten Man and Woman on whom the health and future of our society depends, then should not society help, rather than hinder them, in their productive efforts? If X is capable of supporting himself but chooses not to, is it not unfair—indeed, exploitative—to use the coercive power of law to allow X to live at C’s expense?

    There is a powerful argument here. But how far does it go? Sumner is clearly opposed to coercive redistribution by law. But what do his arguments imply about voluntary charity? Does Sumner’s heart bleed at all for the poor, the weak, and the downtrodden? And what lessons can libertarians learn from all this? It is to these questions that I will turn in my next essay.