Detailed Abstractions » Free Market Principles

Freddie de Boer to Public: My Ideas Aren’t Liked

Michael S. Langston — Wed, 19 Jan 2011 20:21:39 +0000

Up until a couple days ago, I didn’t know who Freddie de Boer was/is. Apparently, he’s a semi-retired provocative and well known leftist blogger. What brought him to my attention is a puzzling headline from the Atlantic, Does The Blogosphere Permit Left Wing Ideas?

Puzzling in that I’m not sure what the argument would be, when the blogosphere is the definition of an open forum. So I read further to find out that Freddie began the argument:

There are many myths within the political blogosphere, but none is so deeply troubling or so highly treasured by mainstream political bloggers than this: that the political blogosphere contains within it the whole range of respectable political opinion, and that once an issue has been thoroughly debated therein, it has had a full and fair hearing.

Um… okay. I don’t know that I’ve ever heard anyone assert this “myth” before, don’t know anyone who believes it, and certainly don’t know anyone advocating it strongly.

I have heard several arguments along the lines of, the increase in the blogosphere has increased the number of views overall, but nothing like “media reports, blogosphere decide”. In fact, many of those arguing that the blogosphere has increased the number of voices don’t agree that this has been a good thing, nor that it’s in any way equal in presentation of all ideas. Just that it can help and has increased the total number of ideas available.

But I digress… the more puzzling part is this:

The truth is that almost anything resembling an actual left wing has been systematically written out of the conversation within the political blogosphere, both intentionally and not, while those writing within it congratulate themselves for having answered all left-wing criticism.

Puzzling because the one thing the blogosphere is above all else: a free market. Yes, it’s not completely free as costs do exist, but costs for bloggers have been decreasing dramatically over time and are close to being zero from a casual level.

Now to maintain a consistent blog of course takes time and additional money, but thanks to aggregating sites, search engines, social networking channels, and a number of other technologies, getting a blog post in front of 1000 people isn’t all that hard (getting 100 to read on the other hand….) and the costs for doing so can be minimized to only include the cost of the internet connection itself. All these other products can be used for free.

Of course larger operations can afford advertising, preferential search engine listings, possibly advertising revenue to the point of having a staff, as well as other advantages, but in the marketplace of ideas – the NY Times’ or Freddie’s or my opinion on say, health care reform (assuming they are all different), all stand on equal ground.

Note that this doesn’t mean that I believe every idea which rises to the top is correct. Human biases can lead to aggregate societal wisdom being wrong for a number of reasons. & without any proof, I will say that I believe while group wisdom can and does fail, that given enough freedom of information to enough people, the chance of that knowledge being wrong diminishes a great deal.

True, the NY Times’ opinion on health care reform will likely be given an air of credibility, that potentially isn’t given to the standard blogger, but the basic message rises and falls on the ideas presented. This truly is a marketplace of ideas, where the wisdom of crowds can show itself.

& I’ve made a point before of this meme about the increased number of views and whether the average person is really taking advantage (here):

In a world with the internet with all it’s free content, differing view points, ability to look at multiple sources instantly (thanks to search engines), and really, the ability for people to truly become informed, it appears that most of us, like Bill [Maher], only seek out people who agree with us and help us prove our own presumptions….

But none of this seems to be Freddie’s point. His view as stated is:

That the blogosphere is a flagrantly anti-leftist space should be clear to anyone who has paid a remote amount of attention.

Which amounts to little more than a having temper tantrum, while repetitively screaming, “You’re not paying attention to me! You’re not paying attention to me!”

Healthcare & Government Threats

Michael S. Langston — Mon, 13 Sep 2010 21:36:50 +0000

As most know, late last week, smaller health insurance companies sent out press releases detailing a simple fact – when mandates increase, so will premiums (via WSJ here):

…Aetna Inc., some BlueCross BlueShield plans and other smaller carriers have asked for premium increases of between 1% and 9% to pay for extra benefits required under the law, according to filings with state regulators….

To most, this might seem an obvious consequence of the legislation. The economics and logic of these required rate increases are undeniable. If someone, in this case the government through force of law, tells a private business that they must increase their spending, under force of law, some, if not all, of those new expenditures will be passed on to consumers (WSJ continues):

…Weeks before the election, insurance companies began telling state regulators it is those very provisions that are forcing them to increase their rates….

…Aetna, one of the nation’s largest health insurers, said the extra benefits forced it to seek rate increases for new individual plans of 5.4% to 7.4% in California and 5.5% to 6.8% in Nevada…

…Regence BlueCross BlueShield of Oregon said the cost of providing additional benefits under the health law will account on average for 3.4 percentage points of a 17.1% premium rise for a small-employer health plan…

…In Wisconsin and North Carolina, Celtic Insurance Co. says half of the 18% increase it is seeking comes from complying with health-law mandates….

Not only should this seem obvious, but in a free country, any company should be able to set their rates for their services.

This of course assumes you don’t work for the government – then the news is shocking (WSJ continues):

…The White House says insurers are using the law as an excuse to raise rates and predicts that state regulators will block some of the large increases.

“I would have real deep concerns that the kinds of rate increases that you’re quoting… are justified,” said Nancy-Ann DeParle, the White House’s top health official. She said that for insurers, raising rates was “already their modus operandi before the bill” passed. “We believe consumers will see through this,” she said….

Not only shocking – but so wrong that even more force is needed.

Enter the Department of Health and Human Services threatening private business, for making private decisions, solely because those decisions disagree with the government’s predictions (via HHS website – bold added):

It has come to my attention that several health insurer carriers are sending letters to their enrollees falsely blaming premium increases for 2011 on the patient protections in the Affordable Care Act. I urge you to inform your members that there will be zero tolerance for this type of misinformation and unjustified rate increases….

…We estimate that that the effect will be no more than one to two percent….

…Given the importance of the new protections and the facts about their impact on costs, I ask for your help in stopping misinformation and scare tactics about the Affordable Care Act. Moreover, I want AHIP’s members to be put on notice: the Administration, in partnership with states, will not tolerate unjustified rate hikes in the name of consumer protections….

Think carefully about some of these words/phrases used by government officials against private businesses in a free country: zero tolerance, misinformation, not tolerate, unjustified….all for raising theirs rates at a greater rate than the government assumed.

Maybe it’s just me, but when the government threatens people for fishy emails, then moves forward to threaten private business for deciding what to charge for their services…. well, it certainly doesn’t appear to be a free society.

As Thomas Jefferson stated so many years ago:

When the people fear their government, there is tyranny; when the government fears the people, there is liberty.

Should the US Government own Government Motors…. I mean GM?

Michael S. Langston — Thu, 26 Aug 2010 21:30:42 +0000

Well currently, the question is moot as the US government does own 61% of GM stock. So they are the controlling shareholder, but it seems once again, pundits, journalists, and the rest are acting as if it’s a good thing only because it’s not as bad is it could be.

Via the Economist (here subtitled: An apology is due to Barack Obama: his takeover of GM could have gone horribly wrong, but it has not):

AMERICANS expect much from their president, but they do not think he should run car companies. Fortunately, Barack Obama agrees. This week the American government moved closer to getting rid of its stake in General Motors (GM) when the recently ex-bankrupt firm filed to offer its shares once more to the public…

Which sounds nice in theory, but in reality, the US Treasury through pressure by the Obama administration spent $50 billion dollars to own 61% of the shares. With roughly 500 million shares available, this means the US government current owns 305 million shares. At the current stock price today of .375 dollars, their 50 billion dollar investment is worth roughly 115 million dollars.

So even if a theoretical IPO that generates excitement were to happen, in order for the government to recoup $50 billion dollars the stock price will have to increase to $163 dollars a share or by more than 400 times it’s current price.

But of course when it’s not your money you lost, but taxpayers money, I guess that changes the calculus….

The Economist continues:

…Many people thought this bail-out (and a smaller one involving Chrysler, an even sicker firm) unwise. Governments have historically been lousy stewards of industry. Lovers of free markets (including The Economist) feared that Mr Obama might use GM as a political tool: perhaps favouring the unions who donate to Democrats or forcing the firm to build smaller, greener cars than consumers want to buy….

& here’s where it gets more confusing. After stating the obvious concerns one would normally have when any business starts making decisions based upon politics instead of what’s best for the company (& also what they are legally bound to do, their fiduciary responsibility), they tell us those fears are wrong:

…Mr Obama has been tough from the start. GM had to promise to slim down dramatically—cutting jobs, shuttering factories and shedding brands—to win its lifeline. The firm was forced to declare bankruptcy. Shareholders were wiped out. Top managers were swept aside….

While simultaneously explaining to us how they did in fact make tons of political decisions:

Unions did win some special favours: when Chrysler was divided among its creditors, for example, a union health fund did far better than secured bondholders whose claims should have been senior….

DA posted about how the Obama administration used their leverage and power to bend the law to help the Unions over other creditors who should’ve legally be first in line for any monies (here).

But of course, that wasn’t the only political meddling in GM (the Economist):

Congress has put pressure on GM to build new models in America rather than Asia, and to keep open dealerships in certain electoral districts. But by and large Mr Obama has not used his stakes in GM and Chrysler for political ends….

Then why does the Economist think it’s a good idea?

[President Obama] his goal has been to restore both firms to health and then get out as quickly as possible. GM is now profitable again and Chrysler, managed by Fiat, is making progress. Taxpayers might even turn a profit when GM is sold….

& there we have it. So long as there wasn’t a huge amount of political intervention and there’s a possibility that the government might recoup all their money…. Thing are good for The Economist.

Of course “good” is being defined by potential future results. The truth is, the US government buying up private businesses creates far more implications that whether the stock prices rise enough to recoup the money they were given.

Enter Harvard Law School on Corporate Governance and Financial Regulation. Instead of asserting some win based upon theoretical future value, they asked the more important question (here):

In our paper When the Government Is the Controlling Shareholder, recently made publicly available on SSRN, we analyze the ways in which existing corporate law structures of accountability change when the government is the controlling shareholder, and the extent to which federal “public law” structures substitute for displaced state “private law” norms.

& the implications are vast. In their full research paper (here), they ask a much more serious and long term question. Which is, what rights do other shareholders have when the government owns a controlling interest and is forcing companies to make decisions that will not benefit shareholders in the long term?

Normally, shareholders have legal rights at the state level where officers of any company are held legally liable to their fiduciary responsibility:

In the handling of money and when one acts as a corporate or individual trustee, there is a fiduciary responsibility owed to the principal party. It is defined as a relationship imposed by law where someone has voluntarily agreed to act in the capacity of a “caretaker” of another’s rights, assets and/or well being. The fiduciary owes an obligation to carry out the responsibilities with the utmost degree of “good faith, honesty, integrity, loyalty and undivided service of the beneficiaries interest.” The good faith has been interpreted to impose an obligation to act reasonably in order to avoid negligent handling of the beneficiary’s interests as well the duty not to favor ANYONE ELSE’S INTEREST (INCLUDING THE TRUSTEES OWN INTEREST) over that of the beneficiary. Further, if the agent should find him/herself in a position of conflicting interests, the agent must disclose the dual agency (acting for two parties at the same time) or risk being accused of constructive fraud in regards to both or either principals….

What this is for, is so shareholders can be protected. If a company you own shares in decides to willfully make decisions which are counter to this responsibility, shareholders can sue for compensatory damages.

But what if the main decision maker is the federal government? Even though the Economist seems to be ok with this, though recent history shows this is an incredibly naive position to take (from the full report):

Even though government investment started less than three years ago, there are already troubling anecdotes….

For instance, after the government purchased 71% of AIG and AIG gave 165 million dollars in bonuses which were contractually guaranteed, the “owners” responded with threats. Senators and Congressmembers bemoaned this. Told us it was unethical for AIG to follow their contractual obligations because the government owns them. Even President Obama:

….urged Congress to draft legislation that sends “a strong signal to the executives who run these firms that such compensation will not be tolerated.”

As if Senators, Congressmen, and the President have any idea what pay should be in the first place… (DA post here), but they went further (from the full report):

Barney Frank, chairman of the House Financial Services Committee pushed the idea of suing AIG….

Since they have majority ownership:

[Barney Frank] “I still believe that we have a right legally to recover this, because we can assert our ownership rights and say, yes, you may have a contractual right to a bonus but your rotten performance means you should forfeit it”…

Additionally:

…”senior Treasury officials have been meeting several times a week all spring to review, one by one, the payments to the company’s executives. But the time-consuming discussions have never been resolved whether any of the executives should get paid.” Now, even routine bonuses are pre-cleared with Kenneth Feinberg, the “compensation czar.”

& what of the bank bailouts?

…bailout recipients faced mounting pressure from the President and Congress to increase lending. President Obama said he would “hold banks ‘fully accountable’ for the assistance they recieved and that they ‘will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer’”…

What about foreclosures, from people who can’t pay their mortgages?

Rep. Barney Frank “acknowledged that struggling homeowners [weren't] getting help as fast as many in Congress had hoped”, and urged bank executives to put in place a foreclosure moratorium until the government could implement mitigation programs.

These same people who also went after GM & Chrysler for closing too many dealerships. And then there’s Citigroup, Bank of America, etc, etc, etc. (DA post here).

But this is Harvard, so they talk about ways other countries have handled this. For instance, the UK started another government agency. Theoretically it’s independent of politics, with a sole goal to find businesses which need to be saved and to save them.

Which of course is an entire other conversation…. why anyone believes the government can make the bad decision of buying a failing private company and solve the conflict of interest by simply building another government agency is…. well, it’s stupid.

It would be like having an entire corrupt police force arguing that the solution to the corruption is to merely hire more cops.

& therein lies the true problem. When the press, politicians, and us normal voters, refuse to look into the future to see the true implications of such actions, we end up with answers like “since our [government's] original plan didn’t work, it must only be because we didn’t go far enough.”

I would submit to those willing to critically contemplate, that the decision itself was wrong & all these implications were obvious, known, and serve as further proof that politics and business don’t mix.

More importantly however, they fail in their analysis on a fundamental level. True critical thinking can never rely on results as proof of anything. Because it’s always possible to make a bad decision, and have positive results in spite of it. It’s also completely possible that you make the most perfect decision ever, but it still fails.

So no – the question isn’t really whether the government made a good investment, whether taxpayers will actually recoup the $50 billion spent, or whether GM ultimately succeeds in the long run.

The question should be- should we have done it regardless of the answer to any of those questions?

& I would proffer the answer is easy: no. The long range implications of such dangerous behavior isn’t worth saving one single car company.

Of course, that’s just my two synapses firing…. they could always be misfiring

Thought Experiment – Do we gravitate towards centralized control?

Michael S. Langston — Fri, 20 Aug 2010 14:01:34 +0000

Over at HBR Amar Bhidé has written an article discussing the housing market and subsequent crash (very interesting – entire thing here) and proposes that among the causes of the crash, a sort of self restriction had taken the market from a vibrant one to one controlled by centralized authority:

The modern economy creates and spreads unprecedented prosperity by drawing on the resourcefulness and enterprise of the many, not by blindly following the dictates of a few. Individuals today make and act on their own judgments to a degree that would have been unimaginable to our forebears….

In recent times, though, a new form of centralized control has taken root—one that is the work not of old-fashioned autocrats, committees, or rule books but of statistical models and algorithms. These mechanistic decision-making technologies have value under certain circumstances, but when misused or overused they can be every bit as dysfunctional as a Muscovite politburo….

His argument is one we’ve heard from the military and other agencies as well – what they needed was more human intelligence on the ground, not more technical complexity from high.

He continues:

…Consider what has just happened in the financial sector: A host of lending officers used to make boots-on-the-ground, case-by-case examinations of borrowers’ creditworthiness. Unfortunately, those individuals were replaced by a small number of very similar statistical models created by financial wizards and disseminated by Wall Street firms, rating agencies, and government-sponsored mortgage lenders. This centralization and robotization of credit flourished as banks were freed from many regulatory limits on their activities and regulators embraced top-down, mechanistic capital requirements. The result was an epic financial crisis and the near-collapse of the global economy. Finance suffered from a judgment deficit, and all of us are paying the price….

Even going so far as to invoke Hayek to make the case:

The great twentieth-century thinker Friedrich Hayek made the classic argument for decentralized choice in his essay “The Use of Knowledge in Society.” The stability of the economy depends on constant adjustments to small changes, he believed—“B stepping in at once when A fails to deliver.” No single individual has the knowledge to make those adjustments; rather, it is widely dispersed across many individuals. But information about “the circumstances of the fleeting moment” cannot be quickly and accurately communicated to a central planner. Therefore, individuals who have on-the-spot knowledge must be allowed to figure out what to do….

Adaptation to changes—the focus of Hayek’s article—is only part of the story. The success of the modern economy also depends on innovation. As it happens, decentralization beats central planning here, too. Innovations are unprecedented, one-of-a-kind developments. Even incremental ones require imagination. An innovator cannot simply rely on historical patterns in placing bets on future opportunities. Knowing what has worked before and what hasn’t is but a starting point. Innovation also requires considerable trial and error. Unforeseen technical problems—or customers not doing what they had told market researchers they would—demand recalibrations that combine on-the-spot observations and historical knowledge with leaps of imagination….

Of course like most writers who seem to espouse the virtues of decentralization, he still thinks some things need centralized control which don’t:

Technologically advanced societies couldn’t function without some centralized control, of course. Governments need to regulate how businesses drill for oil, develop genetically modified crops, and pick the paints they use in toys, for instance….

Either way, he goes on to argue that the financial industry, using mathematical formulas and statistical models, embraced a sort of top-down control giving rise to “Mechanistic Decision Making” & “Robotic Finance”.

This basic line of reasoning isn’t exactly new. Wired had an article in February of 2009 (here) about the risk formula which killed Wall Street. The formula worked well for 5 years as investors used it as a way to measure pooled risk in MBSs (mortgage backed securities), but the formula:

…still hadn’t solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there’s a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there’s a higher probability they will default, too….

Now while both articles point to specific issues which helped the collapse, like most they conveniently left out all discussion in reference to the government’s role in perverting the incentives, but together I think they present an interesting challenge to those of us who believe in decentralization as a good (DA post on decentralization here).

& that is – can there be mechanisms put into place which actually help foster decentralized control since our history, both long term and recent, seems to indicate humans have a tendency towards centralized control at certain levels of complexity.

We see this through various disciplines such as anthropology, archeology, and history, that over the past 10,000 years or so, humans made a mass migration from the nomadic lifestyle which was practiced for nearly 200,0000 years, to villages, towns, and cities.

Using agricultural knowledge to help spur this transition, humans also started growing in population. As more land became developed and could support more people, villages and towns grew into large cities & states.

With the advent of these new societal structures, came new power structures. In nomadic communities, authority is handled from a tribal point of view.

This means that people don’t really have positions of authority which is spelled out by any specific power structure. Their authority comes from their ability to influence. So elders with specific knowledge are sought after for wisdom and help, without a formal power structure of say a judicial system.

With the growth of society, came the growth of power structures as they became necessary to handle the population explosion. Things such as basic sanitation and clean water were large public work projects which required the control of enough resources (labor mostly) which heretofore had been impossible.

These beginning power structures, would eventually evolve into the world in which most of us find ourselves today: a world in which more of our daily lives are coming under scrutiny from centralized power structures.

& we’ve seen what these power structures are capable of doing, both good and bad. While it allowed for greater sharing of knowledge through vibrant cities which pooled resources in denser areas, it also allowed for the pooling of resources for war.

Either way, in this case the centralized authority we can normally blame was there in multiple areas, but for this specific factor it was self imposed.

Indeed in looking at human history, it seems given some level of complexity we seek out centralized forms of control. It might seem today as if humans would never pick governments and politicians as idiotic and with as much power as they have today, but these were gradual changes over generations.

Taken with the most recent example of self selected centralization, it may be we need to consider the possibility that humans tend towards this direction with or without institutions directly promoting centralized control.

More thoughts on complexity here

Moral Markets

Michael S. Langston — Thu, 29 Jul 2010 18:36:51 +0000

Over @ Concuring Opinions, Nate Oman has an interesting post about the defenses of a free market (whole thing here):

Broadly speaking, I think that there are three families of arguments that can be made in defense of markets. Most commonly within the legal academy markets are defended on the basis of efficiency….

The second defense of markets is libertarian. This looks a lot of like the efficiency argument but is actually quite different, notwithstanding the fact that libertarians frequently confuse the two. In the libertarian argument what matters is not welfare but freedom. Freedom is taken as a good in and of itself, even if choices might result in reductions of welfare for the chooser….

The third argument is a defense of markets as markets.

Both the efficiency and the libertarian defenses of markets are reductionist in the sense that they see the good of markets in a unitary way. Markets are good because — properly constructed — they move resources around to maximize welfare….

Markets are good because they provide cooperation in the face of disagreement over the definition of the good and “social stability.”…

It’s a very decent article, though as a non-card carrying libertarian, I need to disagree with some of his minor points. Namely, that libertarians are by group interested in freedom alone. In fact, libertarians, just like other demographic groups get to the same answers through different paths and all three paths are prevalent in the current party.

For some libertarians, it is an…. intellectual/efficiency argument alone. They believe markets aren’t necessarily moral or perfect at rationing, but they firmly believe that a free market leads to the best possible solution for the most people.

For me, I take the freedom approach. To maximize individual welfare means one must maximize individual choices. This might seem as too moralistic or philosophical for some as to be practical or useful, but it seems logical that reducing one mans’ freedom is antithetical to maximizing welfare.

& to be thoroughish, lots of libertarians are just tired of all the other parties and joined that cool one with that goofy, “Who is Ron Paul” stuff. In reality, like most organizations, libertarians are not absolutists either way using a combination of thoughts to form their basis for their beliefs, but I digress.

The author continues about the third way:

On this view, traders are not cowardly, greedy, souless parasites (see, e.g., Shylock) constantly tempting the virtuous away from the path of justice with filthy lucre. Rather, commerce encourages courage, honesty, and fidelity. It encourages cooperation rather than predation. It allows people with widely disparate views of the ultimate ends and purposes of life to peacefully cooperate with one another. Commerce rewards the frugal and the farsighted, while punishing the wastrel and the spendthrift…..

But he tells us….

The third, pluralist view of the good of markets gets scant attention…

While this maybe a true statement, but the reality is that all three defenses coexist to form both a cohesive political and philosophical framework (though I do have issues with libertarians on foreign policy).

If we can start with the idea that maximizing welfare includes maximizing freedom, efficiency, freedom, & moral markets work together.

When starting with the paramount of freedom in economics, one also gets into the land of (un)intended consequences and perverted incentives. Hayek talked about this a great deal – the fact that due to the shear size and complexity of the market, any attempted centralized interference will change incentives and unlikely for the better. Unlikely, because the “status quo” we all question exists through millions and millions of individual transactions.

For lack of a better term, a collective wisdom emerges, order out of chaos. An answer, that we might not like, but something for which a centralized system is (highly) unlikely to do better than free individuals. The result is the most efficient use of resources we can hope to achieve while maintaining the most individual freedoms we can.

What about the morals? Well….it’s not as if we don’t have recent examples to help us out. Leaving out the current mess of a tax code, take the recent financial crisis.

Predatory lenders? Sure. Fraudulent and speculative borrowers? Sure. The reason why it worked so well? Government incentives pushed quasi-government agencies to purchase loans without much oversight.

Why no oversight? No skin in the game. They couldn’t fail. The market believed it & they believed it. & in the end, the government proved them right. Do the wrong thing, over and over and over and over again until it finally collapses and someone else ends up paying the bill….

So while the author is probably correct that we don’t use a moral market argument much, especially in an atmosphere of language such as “fat-cats”, he’s incorrect that this moral option is a “third” argument. It is indeed part and parcel of the framework that markets are more efficient, better at maximizing freedom, and yes, even better at incenting moral behavior as well.