Robert E. Wright's Blog, page 4

Nasty "Nannies"!

NB: most of my hot takes and searing rakes can still be found on the AIER website aqui: https://www.aier.org/staff/robert-e-wright/.

Nasty "Nannies": A Cautionary Tale

Once upon a time, not so long ago, in a land not so far away, a very large family faced a conundrum about what to do after noticing that their nannies had multiplied in number and grown quite nasty. The solution to the family’s problem, which is ongoing and even growing, is by no means clear but surely something must be done. Maybe you can help?

The first big difficulty is that the family inherited the nannies, most of whom are quite old and/or childless. The head nannies are the oldest and have become scolds. When family members object to their many rules, the nannies retort by asserting that they are following the terms of their ancient employment contract, a determination generally seconded by a small group of the head nannies claimed to be sufficiently independent from the others to render an objective opinion on the matter.

When pressed, the nannies also point out that family members possess the right to choose which faction of nannies is in charge. The nannies who lose leadership roles remain employed but defer, more or less, to the winning nannies until the next selection is made in two, four, or six years, depending on the exact nannyship role in question. 

Traditionally, the nanny leadership selection procedure appeased most family members. Recently, however, the legitimacy of the selection method has been questioned due to rule changes, some of which appear to have violated the ancient employment contract. Also, the selection justification strikes some family members as odd given that today the vast majority of the nannies, including many very powerful ones, are not subject to direct selection.

The nanny leaders hire many subalterns to perform various tasks, few of which seem necessary or even beneficial once the costs are properly accounted for, an exercise that the nannies refuse to undertake in a serious way. Mostly the nannies just make and enforce rules that make a few family members happy or rich while making the rest poor or miserable. 

All told, the nannies take about one in every three dollars earned by family members but they give some of it back in various ways, some of which are very popular and some not so much. The entire complicated exercise appears designed to prevent family members from knowing precisely how much they contribute to the nannies on net. The richest family members of course contribute more but all sorts of claims to the contrary are made to keep the family divided.

Understandably, some family members are not happy with the arrangement and wish to change the terms of the ancient employment contract but other family members fear that even worse arrangements will take their place. Some joke that everything is fine because their nannies are the worst in the world, except for all the others. 

A few family members whisper that maybe the family doesn’t need any nannies at all. Others think they need just a few, like when the family first hired them, and the nannies were more like sentinels. Many family members, though, cannot imagine life without nannies and would gladly give half or two-thirds of other family members’ incomes to have nannies tell them what to do with their lives.

The family members might be able to work this all out themselves but the nannies interfere constantly, in ways large and small. The nannies scold or mock those who question their authority or who have the audacity to claim that they are not following the terms of the employment contract, as amended over the years.

The nannies also claim to have a monopoly on science, a claim that some family members find absurd but others accept because they were educated by the nannies, who fight all attempts to allow non-nannies to educate family members. The nannies are so set on educating all the family members that they donate large sums to private universities in order to better control what the bastions of higher education tell family members about the nannies. One common distortion is to blame the nannies’ bad behaviors on family members.

Most of the nannies think that family members should not have firearms because it is the nannies’ job to safeguard the family. Although the nannies did successfully coordinate the family members’ efforts to thwart outside attacks several times in the past, the nannies also sometimes sent family members off to distant swamps and deserts to die for reasons that some family members thought dubious.

Moreover, some family members wonder where the nannies are when family members kill each other, as too often happens, especially when the nannies coerce them into living in close proximity to each other. The nannies seem to use everything as an excuse to take the family members’ firearms instead of looking into the root causes of murders, many of which are committed using bombs, knives, and blunt objects.

Meanwhile, instead of combatting real ills, some nannies trick family members into joining sundry ludicrous plots against the nannies simply to aggrandize themselves and make it seem as if family members cannot be trusted with their privacy let alone with guns. They also claim that some family members are better than other family members due to the way family members look, or what their ancestors did, or did not, do. Many family members find such claims upsetting and even contrary to the ancient terms of employment but they still let the nannies tell their children such things.

The nannies also routinely interfere with family members’ social media posts, especially regarding the selection process and their own health. They claim that they do not want family members spreading misinformation about the virus, vaccines, therapies, masks and other forms of social distancing, and such. Very few of the nannies have medical training and most family members see non-nanny doctors, however, so it was not clear that the nannies had superior knowledge, information, or understanding of the virus or ways to treat it or to mitigate its transmission. But apparently nannies have to nanny.

It is the utter arrogance of the nannies that troubles many family members the most. Instead of admitting that they cannot control everything and simply providing the best available advice, the nannies pretend to know everything and get defensive and even censorious when family members expose their ignorance, which is legion. ‘Tis feared the nannies might think it possible to run every aspect of the household economy, though ample precedents suggest that the attempt will lead only to poverty, despair, and death, the very things the nannies are supposed to help to prevent.

What is this family to do? Fire most of the nannies? Jettison or reform the ancient employment contract? Split into one or more new households? Or maybe the family members should lower their standards and laud nannies simply for not making things worse? Maybe pay the nannies not to nanny?

No path will prove an easy one but clearly something must change soon if the family is to survive the onslaught of their nasty nannies.

Is Britney Spears Enslaved?

 Is Britney Spears Enslaved?

One would think that in this Woke World more people would be asking if Britney Spears is a slave.
Although her income and net worth are enviable, it is no secret that the 39-year-old-American has been
under the thumb of a court-appointed guardian for 13 years. Recently, her plight regained media

attention after she gave an impassioned plea in court asking for her Constitutional rights to be restored.In light of the Paternalist Authoritarian Turn of 2020, I herein approach the question of her enslavement

as rigorously as I can, which means my response is nuanced, detailed, and based on my study of

10,000 years of human slavery across the globe.

    In 2017, Palgrave published my book The Poverty of Slavery, one key aspect of which was not to “define” slavery but rather to measure it. In Chapter 2, “Various Degrees of Liberty,” I developed a twenty point “Freedom Scale” based on official definitions and historical characteristics of enslavement. For context, most modern CEOs score a 20 on the scale, chattel field hands worked in the gang system in the antebellum cotton belt of the U.S. South score a 0, and an everyday working American today scores about a 15. So far as I can ascertain, Ms. Spears scores a 4 on my scale, which is just 1 above the score of chattel slaves workinged on the task system in the rice plantations of antebellum South Carolina.

    Here is my Freedom Scale as published and, in bold typeface, my estimation of how it relates to the situation of Ms. Spears based on media reports. Her score, a 0 or 1, is provided at the end of each criterion, in bold and italic typeface. Note that because this is a Freedom Scale rather than a Slavery Scale, some of the wording may be confusing. Just remember, freedom = good = 1 and unfreedom = bad = 0.

Direct Methods of Control:

1.  Is the laborer paid primarily in cash or other liquid assets (e.g., company stock)? (Payment

entirely in kind or in company scrip can be used to limit worker mobility or otherwise ensure his/her

dependence on the employer.) 1 She is paid a weekly cash allowance of $2,000.00.

2.  Can the laborer own property on the same terms as his or her employer? (Preventing laborers from

owning property serves the same purpose as paying him or her entirely in kind as it prevents the worker

from selling assets when s/he wishes to move to a new employer.) 0 The assets accumulated by virtue of her work, estimated at $60 million, are controlled by her guardian.

3.  Is the laborer free from physical restraints? (Punishment should be termination of employment,

not being beaten.) 1 The restraints, so far as I have ascertained, are entirely paper ones.

4.  Is the laborer free from psychological constraints? (‘Invisible’ or psychological chains can be as

potent as iron ones.) 0 She is clearly emotionally manipulated by her guardian, who is also her father.

5.  Is the laborer not legally required to work? (Vagrancy or compulsory labor laws contain, as a

newspaper put it in 1922, “the essence of slavery” because they reduce each worker’s option to remove

him or herself from the labor force, thereby reducing the attractiveness of strikes, subsistence lifestyles,

or self-employment.) 0 She claims she has been forced to work and of course we have to believe her, not due to some Woke baloney but because we know

that people respond to incentives, and her incentive under conservatorship is not to work.

6.  Is the laborer inalienable (unsalable or otherwise nontransferable to another employer without his

or her consent)? (Sale of labor services is also another characteristic of slavery, though of course not the

only one.) 0 This is a trickier one but my take, given that I am not a lawyer but can still see a clear legal path

for the sale, is that her guardian has complete control over her and if desired could sell her/the

right to benefit from her labor, to another guardian. 

7.  Is the laborer incapable of owing his/her employer significant sums or of being listed as collateral

security for an advance or other loan payable to his/her employer? (When an employer is also a major

creditor to his/her/its workers, the employer possesses too much economic power over them, which

can lead to debt bondage.) 0 She could borrow from her father or anyone whom he might sell her guardianship to.

8.  Has the worker not been subjected to ‘seasoning’ designed to break his/her will to find other

employment? (This is another standard sign of enslavement.) 0 I cannot find anyone who has used that term of art, but her recent court statement strongly

suggests that she was seasoned, though ineffectively.

9.  Does the laborer have freedom of movement in order to search for other employment? (Employers

that prevent laborer movement can effectively stop laborers from moving to employers willing to

offer better terms of employment.) 0 Clearly not.

10.  Can the laborer quit without monetary or other loss? (This question appears key to many.) 0 clearly not. She could presumably buy her freedom from her guardian, per the response to number 6 above,

but likely at the loss of most or all of the assets her labor since age 17 has accumulated.

Working Conditions:

11.  Can the laborer control his/her work schedule? (If not, s/he can be prevented from having a

personal cultural, economic, political, or social life outside of the workplace.) 0 The guardian controls such decisions.

12.  Can the laborer control the total hours s/he works? (Ditto.) 0 The guardian controls such decisions.

13.  Can the laborer control the tempo of his or her work? (If not, s/he can be driven to work at a pace

that injures his/her well-being, as well as his or her ability to have a personal life outside of work.) 0 The guardian controls such decisions.

Personal Life:

14.  Is the laborer not legally dead, socially dead, or otherwise alienated from the formal or dominant

social order? (If dead to society, the laborer has no basis for a personal life outside of work.) 0 Her social life has been curtailed, ostensibly to keep her away from illicit drugs.

15.  Does the laborer not belong to a group that has been dishonored? (Ditto.) 1 Pop music stars are more idolized than dishonored.

16.  Can the laborer determine his/her own name? (If not, his or her identity is controlled by another.) 0 Britney Spears was born Britney Jean Spears but unlike other she could not change her name without her guardian’s approval.

17.  Can the laborer determine what to consume and where to buy consumption goods? (Employers

can lower wages into negative territory by selling laborers goods at monopoly rates and can prevent

laborers from purchasing goods that might aid in their resistance.) 1 She shops around with her allowance.

18.  Can the laborer choose his/her place of residence? (If not, a major component of the laborer’s

personal life is outside of his/her control.) 0 She was forced into a long residency in Las Vegas.

19.  Is the laborer able to marry on the same terms as his or her employer? (Ditto.) 0 No, she needs

permission from her guardian.

20. Does the laborer control his or her own children on the same terms as his or her employer? (Ditto.) 0 No, her guardian insists on an IUD and the conservatorship has apparently negatively affected her custody rights negotiations with their father, a fella named Kevin Federline.

    It is important to note that slavery is NOT illegal in the United States, it is simply highly regulated. Specifically, the 13th Amendment of the U.S. Constitution (rat. 1865) commands “Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States.” Millions of Americans have been enslaved since 1865. (For details, see the resources provided by the nonprofit Historians Against Slavery, of which I am currently treasurer.)

    A court that presumably followed due process placed Ms. Spears under conservatorship but did NOT convict her of a crime. That means that any among us could be treated similarly, whether called a slave or not. In fact, many elderly persons have already fallen victim to the guardianship system, as detailed by HBO funnyman John Oliver in 2018 and as portrayed in the 2021 comedy thriller I Care a Lot. Both show that the current system creates incentives to bilk the wealthy elderly on paternalistic grounds ultimately rooted in greed. The movie, in fact, should be entitled I Care a Lot (Not!).

    The best solution I can think of would be to turn the guardianship of duly ascertained incompetents over to nonprofit charities that receive no direct remuneration from their wards, or some other private ordering solution a la Ed Stringham’s Private Governance.

Alexander Hamilton and the Poverty of Slavery

Alexander Hamilton and the Poverty
of SlaveryBy Robert E. Wright for the Alexander Hamilton Awareness Society 
at the Hamilton Grange in Manhattan, 22 February 2020, 1 p.m. ETA spectre haunts the world, the spectre of the widespread return of slavery. 
A thorough dose of Hamiltonian economics, however, could save the world from this blight.If suggesting that slavery could again haunt the world sounds alarmist to you, consider the following:Slavery is one of the few constants in world history. Although only a relatively few places became slave societies dependent on unfree labor, almost every society has countenanced slavery in some form or another and ample evidence suggests that slavery even existed in prehistory. Slavery has been so ubiquitous there is probably not a person alive today who is not descended from at least one slave and at least one slaveholder.Throughout the world today, tens of millions of people are enslaved. Slavery is illegal so estimates vary but the trend is upward and 40 million is a widely accepted round number. That likely is more individuals than in any previous epoch. Because of the 20th century population explosion, those 40 million enslaved souls represent perhaps the lowest percentage of people enslaved in human history but that simply means there is ample room for growth.And, indeed, the supply of potential slaves increases daily. Modern slavery is not explicitly racialized; enslavers feed upon the economically vulnerable regardless of their creed, color, or gender. The trafficking of females for sex has received the most attention but sex slavery is only part of much broader systems of forced labor practiced over broad swathes of the globe.Demand for slaves is also growing as producers without access to financial or high tech physical capital attempt to compete with AI-enabled robotics by driving down labor costs to their bare physical minimum, at which almost nobody willingly works.Most modern slaves are not chattels enslaved for generations but instead are what Kevin Bales calls quote unquote disposable people, whose slavery ends in a few years due to death or disability. Those few who escape find freedom fraught as former sex slaves are often stigmatized and former debt peons and other types of forced laborers rarely receive reparations or even help with repatriation. They re-enter society scarred emotionally, and often physically as well, often with little support unless they are fortunate enough to come to the attention of a rehabilitation NGO. While slavery seems to be widely abhorred today, both major barriers to its widespread legalization or its de facto re-imposition have eroded in recent years.What are those barriers? For over a century, most people agreed that slavery was immoral and detrimental to economic growth and development and hence not to be countenanced for any reason. Enslavers, almost everyone agreed, were nothing more than greedy brutes rightfully subdued by any means necessary. All people are created equal so all adults of sound mind are fully capable of making their own decisions about their own work lives.Recently, however, experimental economists have shown that paternalism remains potent. In other words, despite the lip service paid to basic human rights and equality, many people believe that they know what is best for other human beings and are willing to act on that belief. The experiments are ingenious but for obvious reasons do not test the willingness to enslave directly. People who are willing to stop others from eating edible insects or accepting a little cash now instead of more cash later, however, may cross the line into employment issues without a second thought. Consider, for example, minimum wage laws, which are essentially paternalistic efforts to lawfully prevent people from working for less money than some majority deems adequate. Oddly when you think about it from a Hamiltonian perspective, most jurisdictions with minimum wage laws allow people to volunteer, which is just another way of saying to work for free, but make it illegal for those same people to work for a dollar a day or a penny an hour. Hamilton and almost everyone of his generation believed that people, so-called free people anyway, ought to be able to decide for themselves whether to accept a proffered wage or not, or whether to go into business for themselves or not. They saved paternalism for children, and slaves.Paternalism was, of course, a major factor in America’s long history of chattel slavery. Many enslavers truly believed that they knew what was best for the enslaved, who they considered mere children or savages in need of their guidance and protection. Work was presumably good for slaves because idle hands are the devil’s workshop and all that. It was all some enslavers could do to keep their chattels busy and out of trouble. That was a sarcastic remark by the way.One might think that paternalism would be on the wane due to the emergence of woke culture and social justice warrior movements but, in fact, the aforementioned experiments, which stem from the work of Nobel prize winner Al Roth on repugnant markets, show that many people on both sides of the political spectrum remain eager to impose their own values on others. Meanwhile, public intellectuals regularly accuse John Stuart Mill, James Buchanan, and others who championed individual liberty of being misanthropes or taking up space on the so-called autism spectrum.The strength of paternalism -- the urge to force other people to do what you want, not what they want -- obviously does not bode well for those of us concerned with the revivication of slavery because paternalists easily turn immoral behavior, like forcing others to work against their will, into moral behavior by insisting that the will of others is infantile and hence not equal or fully human. For paternalists, questions like “how can you justify enslaving others?” can quickly become “how can you forgo enslaving others” who so clearly need our parental help and guidance?Even more frighteningly, morality too often takes a backseat to economic growth and development. People who do not buy into the paternalistic notion that enslavement is good for the enslaved, for example, may acquiesce to slavery on the grounds that the suffering of the few is the necessary cost of economic progress.That is why perhaps the single most disturbing intellectual trend of the last decade or so is the repeated claim by several Ivy League historians, who annointed themselves the New Historians of Capitalism, and more recently the New York Times, that slavery made America and Britain wealthy. Such claims are not just wildly historically inaccurate, they threaten to justify the enslavement of tens or even hundreds of millions more people today.One of the great misfortunes of American history is that Alexander Hamilton died in 1804, well before he had the time to carefully lay out his views on many economic matters. To this day, many scholars misunderstand Hamilton’s views on bailouts, corporations and their governance, tariffs, and slavery because he never wrote the economic treatise he likely would have completed if he had lived until 1836, as his assassin did. Sorry, couldn’t resist that swipe at Burr, a sitting Vice President who for some reason was not impeached for shooting the leader of a rival political party.In any event, Hamilton did not live to see the great natural experiment that took place in antebellum America, where people who shared the same culture, language, laws, and religion split on their choice of labor system, with some embracing, some tolerating, and others eschewing chattel slavery. By the 1820s, the results of the experiment were already becoming evident and by 1860 were palpable to all who dared to look.In short, the Great Labor Experiment showed that slavery, while profitable to the enslaver, hurt economic growth and development pretty much in proportion to its proliferation. The Black Belt was akin to today’s Saudi Arabia, a kingdom of cotton instead of oil where a few rich princes owned almost everything, including the local and state governments. There, corporations of any type were few, transportation infrastructure primitive, civil society stunted, and innovation almost absent. More upland and northern areas, where slaves were fewer, showed more signs of development, especially in border states where free whites were not forced to capitulate to slaveholders’ interests. But only in the family and wage labor North did economic freedom reign, and banks, corporations, financial markets, inventions, and transportation infrastructure truly thrive, as I described in many of my early books, like Hamilton Unbound; The Wealth of Nations Rediscovered; Financial Founding Fathers; The First Wall Street; One Nation Under Debt; and Corporation Nation.The so-called New Historians of Capitalism, in other words, have gotten the story backwards. Slave-grown cotton did not cause the industrialization of the North or England, the economic development of those places created demand for cotton and, to a lesser extent, other agricultural staples that many, but not all producers in the South chose to supply with slave labor, not because it drove development, which it palpably did not, but because it proved profitable.Hamilton well understood the difference between private profit and economic growth. The former occurred whenever a proprietor was able to sell his or her goods for more than the total private cost of their production. Profits are relatively easy to come by when a proprietor can force laborers to engage in simple, repetitive tasks in the most efficient ways known and receive public subsidies that help the enslaver to control his or her enslaved laborers. Economic growth, by contrast, occurs when output per person increases. Economic development occurs when potential output per person increases due to the creation of institutions and infrastructure that reduce transaction, transportation, and other costs, like patents, roads, and schools. Private profits do not sum to total output because they measure different things. Most importantly, private profits do not account for public benefits or public costs, or positive and negative externalities in the parlance of economists, or spillovers and pollution in regular person-speak.Hamilton clearly understood the concept of externalities, both positive and negative. In his report on manufactures, he noted that manufacturing created positive economic spillovers, specifically an increase in quote unquote ingenuity. Hamilton also noted that alcohol consumption created negative externalities, like decreased productivity, which is why he preferred strong coffee over arduous spirits and was happy to tax the latter via tariffs and excise taxes. In his report on the Bank of the United States, Hamilton argued that by printing too much fiat paper money governments could create negative externalities in the form of an inflationary bubble quote incompatible with the regular and prosperous course of the political economy unquote.Others less economically astute than Hamilton realized that slavery’s total social costs far exceeded the private profits of enslavers. In the sixteenth century, French philosopher Jean Bodin argued that the fear induced by slavery in both slaves and the general population more than offset the profits slaves created for their masters. Slave societies were quote always in daunger of trouble and ruine, by the conspiracie of slaves combining themselves together: All Histories being full of servile rebellions and warres unquote.Like Bodin, Hamilton well understood that wars were expensive and did not cause economic growth or development. War destroys human and physical capital and the opportunity costs of many men engaged in non-productive pursuits and consuming war material is high. Although as a young man Hamilton pined for war, as a statesman he did everything he could to avoid it, and to establish for America Adam Smith’s wealth-producing formula of quote peace, easy taxes, and a tolerable administration of justice unquote.An eighteenth century German scholar named Johann Gottfried Herder also realized that slavery created negative externalities. The spread of syphilis due to sex slavery, which devastated three continents, constituted a prime example of social costs not borne by enslavers, Herder argued.In Philadelphia in 1805, Thomas Branagan compared slavery quote to a large tree planted in the south, whose spreading branches extends to the North; the poisonous fruit of that tree when ripe falls upon these states, to the annoyance of the inhabitants, and contamination of the land which is sacred to liberty unquote. Founding Father George Mason had also likened slavery to a quote unquote slow Poison, a negative externality if there ever was one!In 1832, soon after Turner’s rebellion, Henry Berry of Virginia argued that slavery was akin to raising tigers, something the state certainly had an interest in arresting, even if it was quote a very lucrative business unquote. Virginians would not be allowed to raise the Upas tree or Tree of Death, Berry argued, even if it grew entirely on their own private land. Another Virginian, Charles James Faulkner, also noted that quote Slaves are injurious to the interests and threaten the subversion and ruin of this Commonwealth unquote.Joseph Conder, a British abolitionist, argued in 1833 that free laborers cost society less than slaves did because slavery encouraged quote a wasteful and deteriorating husbandry unquote due to its reliance on monoculture and primitive tools as well as quote contingent social evils, which demand a precautionary provision unquote. Slavery survived only by state subsidy, specifically quote the state expenditure which it renders necessary in order to provide against the dangers inseparable from the existence of a servile class unquote. Such public expenditures also included public whipping posts and an extensive separate legal code for slaves.Nobody has quantified all the negative externalities spawned by slavery but they were undoubtedly large. It was all I could do to describe them over 90 pages and two chapters in The Poverty of Slavery. The biggest single cost was protection from vengeful slaves, which took the form of nightly patrols by poor whites in peaceful times and deployment of the military following insurrections. Following Turner’s rebellion, for example, militia from 3 Virginia counties joined regular army forces to sweep The Dismal Swamp, which was thought to hold 2,000 to 3,000 maroons, or escaped slaves. But many smaller events, including court cases involving runaway slaves in states like Massachusetts, necessitated calling out the militia to maintain order. All those men had to be paid and of course were not at home working while they were trudging about swamps or providing courtroom security.A couple of haters tried to take me to task for not bean counting the costs of all the many negative externalities that I found but in the case of the antebellum United States we really do not need to carefully quantify the externalities, which is a wicked business by all accounts and explains why governments rarely tax pollution directly despite the compelling theoretical justification for doing so. Quantification is unnecessary because the results of the Great Labor Experiment came so quickly and clearly.By the 1810s, not long after Hamilton’s early demise, foreign and domestic travelers began to comment on the vastly different appearance of the free and slave states. One wrote how quote the smiling villages, and happy population of the Eastern and Central States, give place to the splendid equipages of a few planters, and a wretched Negro population, crawling among filthy hovels -- for villages (after crossing the Susquehanna) there are scarcely any unquote.By the 1820s, still well within Hamilton’s natural life expectancy, observers began to systematically compare the economies of free and slave states and invariably found the latter lacking. Despite Virginia’s natural advantages over New York, Cassius Clay of Kentucky noted, the latter exceeded the former in quote the elements of National prosperity and glory; wealth, numbers in new countries, literature, industry, the mechanic arts, scientific agriculture, &c. unquote. Slavery, Clay concluded, caused Virginia’s relative economic retardation. Quote the twelve hundred millions of capital invested in slaves is a dead loss to the South, unquote he declared, predicting, accurately, that the free North would defeat the slave South if civil war ever erupted.In 1823, another observer claimed quote in Virginia, land of the same natural soil and local advantages, will not sell for one-third as high a price as the same description of land will command in Pennsylvania unquote. A British author that same year argued that slavery quote could not exist for a single year, but for the aid of the public purse; which, to the extent of two or three millions, is, at this moment, annually expended in bolstering up this fabric of inquity unquote. Bolstered by such such sentiments, the British abolished chattel slavery in the 1830s and spent those millions instead trying to end the African slave trade.In America, by contrast, it took several more decades for Hinton Helper to make a compelling case that the North had won the Great Labor Experiment, much as free market West Germany and South Korea later won their natural experiments with communist East Germany and North Korea. But Hamilton was often ahead of his time and less racist than most Southerners and so less blinded by the racial rhetoric that for a time obscured the North’s clear victory.Note that I don’t claim that Hamilton was not prejudiced against African-Americans, just that he was much less so than most of his contemporaries, especially those from the South. In The Farmer Refuted, Hamilton made clear that he was convinced that quote the whole human race … [was] intitled [to] civil liberty, … [which I considered] in a genuine unadulterated sense … [to be] the greatest of terrestrial blessings unquote. If he intended a Jeffersonian asterisk on the whole human race, I haven’t seen any sign of it. During the Revolution, for example, Hamilton told John Jay that he believed that African-Americans would quote make very excellent soldiers, with proper management … [because] their natural faculties are probably as good as ours unquote. Whites, Hamilton lamented, were quote taught … contempt … for the blacks [which made them] fancy many things [about dark-skinned people] that are founded neither in reason nor experience unquote.Like myself and several other scholars, Hamilton saw chattel slavery as the extreme end of a continuum of freedom and unfreedom that included institutions like serfdom, which still existed in parts of Europe in the early nineteenth century. Hamilton deprecated serfdom in no uncertain terms. Quote Certain foedal rights which once oppressed all Europe and still oppress too great a part of it made absolute slaves of a part of the community and rendered the condition of the greatest proportion of the remainder not much more eligible unquote. Those feudal rights, he continued, tellingly, were quote contrary to the Social order and to the permanent welfare of Society unquote and hence were quote justifiably abolished unquote.Hamilton’s views on chattel slavery and abolition remain hotly debated but if he ever owned slaves they were few and probably acquired for the convenience of his wife, who bore 8 children, mostly domestically useless boys, between 1782 and 1802. If my model of firm labor choices in the “Uncle Tom’s Cabin” chapter of my book Fubarnomics is correct, Hamilton had little choice in the matter as the continued existence of slavery in New York, especially as domestics in urban areas, decreased the availability of free domestic laborers.If you are interested in deep legal and philosophical arguments that point towards Hamilton’s disdain for slavery, read Michael Chan’s 2004 article “Alexander Hamilton on Slavery” in the Review of Politics. Suffice it to say here, Hamilton clearly frowned on the institution, which is why he helped to establish the New York Society for Promoting the Manumission of Slaves in 1785. But up until his death he was too busy trying to keep his fragile Union together to push for even gradual emancipation in other states.Moreover, although Hamilton wanted to beef up the national government, he still advocated for a federal system in which the individual states retained considerable power, especially over local economic issues, including labor regulation. He would not have wanted the national government to end slavery by force but rather would have tried to reason with the leaders of slave states by arguing that slavery was profitable but immoral and clearly not a boon to growth or development.Once the result of the Great Labor Experiment was clear, Hamilton certainly would have tried to minimize federal subsidies for slavery like the fugitive slave act of 1793. In fact, Hamilton’s reasoning on the issue of slaves that escaped to the British during the Revolution suggests that he believed in something like Stadluft macht frei [mock fry] which is my bad German pronunciation of the doctrine that free air makes you free, that enslaved people who made it to free soil without their owners’ consent won their freedom, a custom diametrically opposed to the fugitive slave clause and act.Had Hamilton lived to clearly see the results of the Great Labor Experiment, he might have even urged the federal government to end its tolerance for the interstate slave trade, which by all accounts kept the peculiar institution profitable in older states like Virginia and North Carolina.And Hamilton would have certainly pushed, as Edward Atkinson eventually did, for free labor demonstration projects to show that cotton, sugar, tobacco, and other crops could be grown profitably by family and free laborers. This was the same man, after all, who claimed that quote the sacred rights of mankind are not to be rummaged for among old parchments or musty records. They are written, as with a sunbeam, in the whole volume of human nature, by the hand of divinity itself, and can never be erased or obscured by mortal power unquote. In other words, truth inscribed itself on reality if given the chance, which is why Hamilton pushed for the creation of the Society for the Establishment of Useful Manufactures across the river from here in Patterson, New Jersey to demonstrate that Americans could, in fact, produce textiles. The corporation and demonstration did succeed, though only after Hamilton’s untimely death.Those approaches to ending chattel slavery would have worked better than mere legal abolition. We know that because another victim of assassination freed the slaves de jure before he could take deeper measures to free them de facto. That man, Abraham Lincoln, who counted Benjamin Franklin, Gouvernor Morris, and Hamilton as the three greatest enemies of slavery in the Founding generation, knew, as did Hamilton, that to end slavery in fact one must reduce the supply of, and demand for, slaves, and that requires more than laws. In the absence of economic abolition, slavery reappears in sundry forms, just as it did in the postbellum South and just as it did throughout the British Empire in the nineteenth century and much of the globe in the twentieth century.In sum, if Hamilton were here today, he would try to reduce the supply of slaves by removing barriers to human flourishing, from onerous drug laws to occupational licensing to technological transfer and immigration barriers.He would also try to reduce demand for slaves by raising the cost of enslaving others. In many parts of the world today, slavery is technically illegal but tolerated to the point that it is essentially decriminalized. To end its profitability, enslavers must be imprisoned and their ill-gotten gains stripped from them and allocated to survivors.Finally, Hamilton would duel Ed Baptist and the other leaders of the New History of Capitalism crowd. Or, at least, having learned his lesson in 1801 and 1804, he would enjoin them to read my book The Poverty of Slavery: How Unfree Labor Pollutes the Economy, which shows how enslaving others cannot possibly help the overall economy. I understand the New Historians of Capitalism want to make a compelling case for reparations, but it is the wrong one factually for the reasons just adduced, and it is the wrong one morally because it is being used to justify the enslavement of human beings today.Thank you for your attention! Questions?

Liberty Lost: Antebellum America’s Independent Sector

Liberty Lost: Antebellum America’s Independent SectorBy Robert E. Wright, Nef Family Chair of Political Economy, Augustana University, Sioux Falls, SD, for the Dartmouth College Decision Bicentennial Conference, University of Oklahoma Law School, Norman, OK, 14-16 November 2019
Historian Peter Dobkin Hall once claimed that “historians have tended to ignore the nonprofit sector.” This paper, by contrast, centersnon-profits in early America’s business, economic, and political history. First, it argues, on the basis of ongoing data collection, that non-profit corporations were at least as numerous as for-profit corporations formed by special act of incorporation in the U.S. between Independence and the Civil War and sketches the numerous socioeconomic problems addressed by the Third, Independent, or Nonprofit Sector in the antebellum period. Second, it shows that voluntary association, not the right to vote in political elections, grounded early Americans’ conception of democracy and good governance. Third, it argues that the right to voluntarily associate drove US economic growth and development. De Tocqueville was right to consider antebellum America a nation of joiners. As I showed in Corporation Nation and the accompanying database, “US Corporate Development, 1790-1860,” available online at the Magazine of Early American Datasets (2015), between the Revolution and the Civil War, several hundred thousand Americans joined together to charter over 22,000 for-profit corporations by act of special incorporation, plus thousands more by means of general incorporation. Over a million different Americans owned at least one share of corporate stock over that period.Notes

How Alexander Hamilton Turned This Marxist into a Classical Liberal

How Alexander Hamilton Turned This Marxist into a Classical LiberalBy Robert E. Wright, Nef Family Chair of Political Economy, Augustana University, American Institute for Economic Research, Museum of American Finance, Historians Against Slavery, &c.For ConSource’s Constitution Day Fundraiser at the Pierre Hotel, Manhattan, New York, 17 September 2019
In high school and as a Social Studies education major at Buffalo State College, I was a flaming Marxist. Proof, from my high school yearbook, is on the screen [SLIDE 2]. If Cassie calling me Karl with a K in addition to my real nickname of Moose and threatening to warn my college of the arrival of my spectre, a reference to the first line of Marx’s Communist Manifesto, is insufficient proof, the slide now on the screen [SLIDE 3] is brutally direct. Sorry to say, though, that unlike some people I can’t produce my annotated calendars, but if I could, they would reveal the exact dates that I attended Communist Party gatherings. Either I threw them out or never made them in the first place. You be the judge.Today, I don’t recall who either of these people were but the second one was right. Not about me dying a commie pinko but about the vacuity of Marxism. Ten years after graduating from high school, I was an emerging classical liberal. By then, I held a Ph.D., a wife, and a toddler -- no need to get into details about the order. An old joke posits that anyone who is 20 and is not a Marxist has no heart, but anyone who is 30 and is still a Marxist has no brain. I like to think I possess a bit of both organs but to some extent I was mugged by the reality of the fall of the Wall and all.Mostly, though, it was Alexander Hamilton who saved me from a life of Leftist lunacy. Some of you may still think of Hamilton as a would-be autocrat who espoused high tariffs and a big government and oversized national debt. Actually, though, he was a classical liberal, or, in today’s parlance, more Libertarian than Republican, and certainly no Trumpian. In fact, I fear that if Hamilton were alive today he would charge the Oval Office, bayonets fixed, and seize it as he did Redoubt Number Ten at Yorktown.I am not pulling your leg about Hamilton saving me from communism and sundry other lame isms. I named my first-born son Alexander Hamilton Was … my last name, which is Wright. Again, proof is on the screen [SLIDE 4]. And just in case you think I forged his Social Security card, which isn’t difficult to do these days, here is more proof, from the Wall Street Journal, which, of course, is always right about everything [SLIDE 5].Upon learning about my son’s name, and the names of my other two kids -- I kid you not Madison and TJ -- people often ask me, what was Hamilton right about? Just about everything, as it turns out, but that W leading off my name was not just a way of making sure that I was among the last called for everything, along with a handful of Yangs, Youngs, and Ziebachs. Double U R I G H T actually means a maker of things, as in cartwright or wheelwright. So Hamilton was correct about most things but more importantly he was a maker, specifically of this still great country of ours. Great as in Great War or Great Depression anyway.As you can imagine, the only thing more thrilling for me than learning that the musical Hamilton was a huge hit was being invited to New York to watch it, and comped a ticket for one of Lin’s last shows after the big Tony award wins. In return, all I had to do was to write a review of the musical for The Independent Review. So I went for broke and reviewed it in verse and even included an extra scene, “What Bondholders Want.” Again, evidence is on the screen [SLIDE 6].I composed a new scene because it was the only way that I could prove the thesis of my review, which was that Lin could have written an engaging musical that actually explained what specifically made Hamilton so important. I will perform it for you here tonight, for the first time in public, but with a few caveats [SLIDE 7]. First, I am not a rapper by trade or even by hobby, though I sometimes listen to some NWA, Biggie, or Eminem when in the mood. Second, the scene contains three different singers but there is currently only one of me, so I will use different voices for Hamilton, the Company, and Burr. For the Company, which refers to the entire cast, not a business entity, I will try to sound like the Spice Girls, for reasons that will soon become apparent to anyone who recalls the 1990s. For Burr, I will try to sound like Humpty Hump, the persona of rapper Gregory Jacobs and developer of the Humpty dance, which debuted in December 1989. As you can see from the album cover, now pictured on the screen [SLIDE 8], Humpty was something of a clownish figure, much like Burr. Finally, and most importantly, following the lead of The Spinners and other musical performers, not only do I give you permission to record my performance and put it up on social media, I beg of you to do so. I’ll put Lin up on screen [SLIDE 9] during this so you don’t have to look at Humpty the whole time and so you can imagine how good this would sound with him performing it.**What Bondholders Want**HAMILTON: Our humiliation was the government of the new nationAnd its inability to pay our farmers, soldiers, or sailorsthe proper remuneration, due to its distressed monetary situation,a situation called bankruptcy that led mere individuals straight to the jailers.
When Continentals and other forms of fiat money lost all their worth,because the rebel governments printed them in too much girth,All that was left to do, was for officers and quartermasters to pay on cue,using a written device that in common vernacular is called an IOU,
an evidence of a debt that could be kept or traded, for pennies on the dollar.When the government didn’t pay the interest on time, bondholders began to holler.
COMPANY: What do they want, what do they want, what do bondholders really, really want?
HAMILTON: What bondholders want, what they really, really want is:security negotiability liquidity punctualityand banality.
COMPANY: Bondholders want security, negotiability, liquidity, punctuality, and banality.
HAMILTON: They want security, negotiability, liquidity, punctuality, and banality.
BURR: They got their brain on their bonds, and their bonds on their brain.
It seems what they want is for it to rain, rain, rain, and never with any pain.
But how are you going to give the bondholders what they want?
COMPANY: One shot is all you’ve got, one shot is all you’ve got.
HAMILTON: One shot is all I’ve got, so on these policies I will bank: tariffs, discrimination, funding and assumption, and a bank.
I’m going to give bondholders security, negotiability, liquidity, punctuality, and banality in the form of tariffs, discrimination, funding and assumption, and a bank.
COMPANY: One shot is all you’ve got, one shot is all you’ve got.
HAMILTON: One shot is all I’ve got.
COMPANY: Bondholders want security.
HAMILTON: Bondholders have no recourse to the sheriff.To give them security we must tie payment to my tariff.
COMPANY: Bondholders want security.
HAMILTON: A tariff is just a tax on stuff imported from abroad.A tax so easy to administer, taxpayers will not find it sinister.When people see it in action, all they can do is applaud.
COMPANY: Bondholders want security.
HAMILTON: The key is to maximize revenue, so there’ll be some residue,after the government has paid bondholders just their just due.
COMPANY: Bondholders want security.
HAMILTON: Paying bondholders as promised is the key to it all.
COMPANY: Bondholders want security.
HAMILTON: Anything less and the government will take a nasty fall.
BURR: Bondholders got their gains on their brains, and their brains on their gains.
HAMILTON: Bondholders also want negotiability.
COMPANY: Bondholders want negotiability.
HAMILTON: Discrimination, paying only the present holders of bonds owed by the nation,supports negotiability, the ability to sell bonds and not worry about proration.
COMPANY: Bondholders want negotiability.
HAMILTON: The common law on this point is clear, People who sell debt instruments for any reason, including poverty or fear,Are not entitled to takebacks, even those who sold low after buying dear.
ALL: Caveat venditor!
BURR: On this point there can be no negotiation, bondholders want negotiability.
HAMILTON: Bondholders also want liquidity.
COMPANY: Bondholders want liquidity.
HAMILTON: Liquidity, liquidity, to buy or sell quickly is that ability.
COMPANY: Bondholders want liquidity.
HAMILTON: So as part of my funding plan, I took a cacophonyOf scores of different notes, I told bondholders to give them to meIn exchange for three new bonds called Deferred, Six, and Three
COMPANY: Bondholders want liquidity.
HAMILTON: We all know that when we assume, we make an ass of you and me.But when the debts of the several states I assume, I make yet more liquidity.
BURR: Make the markets rain liquidity.
HAMILTON: Bondholders also want punctuality.
COMPANY: Bondholders want punctuality.
HAMILTON: That means making payments quarterly, right on the dot.But sometimes tariff revenues do not quite hit the spot.
COMPANY: Bondholders want punctuality.
HAMILTON: That is why the Bank of the United States I did make.To ensure the government never missed a bond payment for goodness sake.
COMPANY: Not by a single day, no matter what.
BURR: Pay them everything they are due, and always right on cue!
HAMILTON: Bondholders also want banality.
COMPANY: Bondholders want banality.
HAMILTON: That means that they like things slow and steady.No revolutions, usurpations, armed forces at the ready.
Or anything that could cause panic, as in 1792, when into the mawI stepped with a piece of new policy now called Hamilton’s Law:Lend freely at a penalty rate to all with good collateral until the credit markets thaw.
BURR: They won’t cabal because they want it banal.
Cuz they got their brains on the rain, the precious, specious rain.
HAMILTON: Before I close, two myths I must dispose.
I discussed, but never said I wanted, a tariff of protection.That lie was set forth decades later by a German named List, who was a damned liar, or very British-style pissed.I wanted industrialization, but sought it from another direction,
Paterson, New Jersey, and the Society for the Establishment of Useful Manufactures, y’all!
Finally, I am not some big debt freak.What I said was quite unique.
A bigger debt, if not excessive, will be to us a blessing.
COMPANY: If not excessive, if not excessive.
BURR: Liquidity was the lettuce but cementing the union was the dressing.
HAMILTON: Every child, woman, and man who owns a federal bond,Will protect the new government and never abscond.**End Scene**Thank you(!)? Had I received any encouragement, I could have written many such scenes. It’s not easy, especially when you have no talent and little experience, but it could be done. I’m going to spare you that pain tonight, though, by simply narrating the Founding, and Hamilton’s germinal role in it. Germinal, by the way, is the gender-neutral version of seminal.To fully grasp the scene, the first thing you need to know is that the American Revolution was not at its root about taxation without representation, it was about a sudden switch of monetary and trade policy. Taxes were simply the straw that broke the colonists’ back. The University of Virginia’s Ron Michener and I realized that way back when I became his colleague in 1999, well before subprime mortgages or trade wars were major news. We were not reading the present into the past but rather were deep in a variety of primary sources all pointing in the same direction.Critics found our mounds of evidence circumstantial but then one day in 2008 I found the smoking gun, not only miscatalogued by the New Jersey Historical Society in Newark but interleaved with another document penned twenty years later! Ever since, the executive director over there has blocked the smoking gun’s publication for reasons he never made clear to me. Fair use, however, allows me to share some of a transcript of it with you tonight [SLIDE 10]. The document verifies what Michener and I already knew, that the colonists were ticked off at the Mother Country because she drastically reduced the money supply following the French and Indian War by greatly reducing the stock of paper money, called bills of credit, and blocking colonists’ access to foreign trade and hence gold and silver coins. The rapid decrease in the money supply raised interest rates and depressed land prices, leading to a refinancing crisis in an economy where most mortgages ran only a year or two and ended with balloon payments. Here is some of what the anonymous author of the smoking gun letter, written in mid-1768 in response to some unnamed Brits’ query about what was up the colonists’ keister, replied:I must observe that it is not the Stamp Act or New Duty Act alone that had put the Colonies so much out of humour tho the principal Clamour has been on that Head but their distressed Situation had prepared them so generally to lay hold of these Occasions, and how they came to be so I must trace back to commencement of the late War. There was then little paper Money in the Colonies, but all Ranks lived frugally within what they got and there transactions and Dealings did not exceed the Currency among them, there Trade to England was small and they made Remittances by their West India Trade for the Country People in general were contented with their own Produce and Manufactures, the Price of Land was so low that they could soon pay for it out of what they raised … but mark the great Change a short Time produced.  … Extraordinary Levies, laid the Colonies under a Necessity of issuing Notes or Paper Bills of Credit payable in future Periods by Taxes, for to raise the Sum wanted within the year, or by Loan as in England, was equally impossible, but being secured by the Legislature to be sunk by future Taxes they never depreciated, but on the contrary when the largest Sum was current Viz in the year 1760 Exchange was 25 P cent lower than at present, or it took £25 less of our Paper to buy a Bill of £100 Stergon London than at present. … This money being plenty, both in Specie and Bills of Credit and Labour high, and Land high, the Price of every thing encreased People were not afraid of entering into deep Engagements equivalent to our Circulation, which being since called in by Taxes or remitted for Goods occasioned a sudden Stagnation, and by calling upon and suing one another brought many to ruin. … The Men of War are also expensive especially when so many are kept up. They are of no Manner of Use, but often cramp Trade by stoping and detaining Merchants ships and pressing their Men. … Another capital Greivance and Inconvenience to these middle Colonies is being restrained from issuing Notes or Bills of Credit … to recount our Distress for want of this Medium were Endless or by what unaccountable Policy G. Britain acts in the Restriction. … It must not be forgot that our Trade to the Spanish and French West Indies was laid under the severest Restrictions, and the Spanish Ships were even prevented laying out their Money in our Ports. O wise Grenville! To this miserable and discontented Situation were we reduced about the year 1765 and in November the ever odious and memorable Stamp Act was to take Place, which we look’d upon as equally inexpedient and illegal and which never could have been carried into Execution. … We are unfortunate that our Situation is not sufficiently known or properly represented to the Ministers at Home; it is true we have agents there but few of them are acquainted with our Circumstances, and when called upon seldom speak the Sentiments of their Constituents, and often insinuate rather what is agreeable than real. … the Colonies in general are composed of Emigrates from England who little dream’d they forfeited their Liberties while they extended the British Dominions.What made the real estate boom and bust a big deal was that back then only creditors could discharge bankrupts and most were loathe to do so because creditors invariably owed yet others. Credit was very much a web, rather than a pyramid, and a voracious Black Widow spider sat its center because creditors could put bankrupts into debtors’ prisons where they had to somehow pay their board while they quote languished, or, worse, wallowed in idleness and profligacy unquote. Many died, the victim of a system designed to get debtors to cough up hidden assets and completely unprepared for a monetary and trade policy-induced real estate crash.Banks did not step up to the rescue because the British did not allow the colonists to form joint-stock commercial banks. Devoid of effective intermediaries, without the power to issue government fiat money, and with trade routes that could have led to the importation of gold and silver coins blocked, the colonists could only limp by on trade credit, commodity barter, and innovative instruments like the squirrel scalp bounties that circulated in Bucks County north of Philadelphia in the latter half of the 1760s.By the time the young Hamilton, now pictured on screen [SLIDE 11], arrived on the mainland in 1772, the dispute between the colonists and their Imperial overlords had further intensified. Hamilton soon proved himself a prolific writer by entering the evolving debate with a series of pro-Patriot essays steeped in classical liberal ideas, including limited government.Hamilton of course played a major role in the war, both on the battlefield and as one of General Washington’s closest advisors. Even in the throes of the long conflict, Hamilton strategized about future policies and governance structures. With peace came continued national bankruptcy, domestic insurrection, and economic recession. With a little help from his friends, he swept that all aside and established the nation’s modern economic growth trend, now pictured on screen [SLIDE 12]. The per capita economic output data, stated in real or inflation-adjusted terms, is rendered on a log scale so that the rate of growth can be discerned by the eye. The greatness of the Great Depression and World War II are readily discernible, but most recessions appear as mere blips in the overall story of America’s economic growth, the red trend line. Even the Depression eventually succumbed as the economy returned to its long-term trend. Several economic historians have shown, in different ways, that the return to trend would have occurred even without World War II, but that is a story for another evening. Note that after Hamilton’s time, the economy performed under trend for a long time. That was due to suboptimal policies, including slavery and protective tariffs, of which more a bit later.I shudder to think that my 20-year-old quote unquote commie Pinko self was prepared to walk into middle and high school classrooms and tell students that the Revolution was about taxation without representation, Washington was the hero of the Revolution, Madison was key to the Constitution, and Jefferson and his Revolution of 1800 saved the early Republic from the little, evil monster Hamilton.Thankfully, I stank at teaching yutes and my master mentor teacher suggested that in lieu of finishing student teaching I get a degree in History and go to graduate school for the same. Once there, I started reading primary sources for myself and enjoyed epiphany after epiphany. Hamilton, it turned out, was no elitist. He was a poor immigrant, a point – spoiler alert -- that Lin’s musical does make amply clear. Like any classical liberal worthy of the name, Hamilton did not seek special privileges for favored groups but sought instead to lay out the fundamental principles of liberty for all.Unlike the Lord of Monticello, Hamilton opposed slavery, an institution that classical liberals came to find appalling. Hamilton’s record as an abolitionist was imperfect, but better than most of his contemporaries. Had Hamilton died of old age, I am convinced that he would have elucidated the thesis that I set forth in the book now pictured on screen [SLIDE 13], to wit that enslaving others creates negative externalities akin to pollution. Slavery, in other words, is profitable for the enslaver but an impediment to overall growth and development. It therefore essentially impoverishes everyone to some degree, except the enslavers who manage to reduce the costs of controlling slaves with sundry public subsidies like slave patrols, public whipping posts, and fugitive slave acts. With the distinction between private profit and overall economic growth and development clearly in place in the early nineteenth century instead of the 1850s, the Civil War may not have occurred at all, or it may have erupted in 1820 instead of the Missouri Compromise, or in 1833 in response to the Nullification Crisis. When Hamilton called for a president-for-life, he was thinking carefully about incentives. A president-for-life would be concerned with implementing long-term policies, not winning the next election. The Founders applied Hamilton’s reasoning to members of the Supreme Court, who serve life terms. Later, policymakers mandated single, long-term appointments for certain key positions, like Federal Reserve governors. President-for-life sounds appalling today only because the presidency has grown so powerful. Had we gone Hamilton’s route, you best believe that POTUS would be checked much more heavily than today. A president-for-life would almost certainly not have tariff authority, for example.Contrary to myth, Hamilton did not believe in a BIG national government. Time and again he made clear that he wanted an ENERGETIC government, one that could fulfill its limited mandate completely at the least possible cost. He wanted efficiency, not size. On screen now is the cover of a book that firmly establishes this point [SLIDE 14].Hamilton also did not believe in the perpetuation of a huge national debt. Those who quote him as saying that a national debt would be a blessing leave out a crucial qualifying clause: quote if it is not excessive unquote. He specified in detail what an excessive national debt would look like and, brothers and sisters, I am chagrined to report that we have one today because we gave up on Hamilton’s unwritten fiscal constitution during the Nixon administration. It is now completely moribund, as the book now pictured on screen details [SLIDE 15]. The main gist of the Fiscal Constitution was that during times of peace and prosperity, the national debt was to be paid down in nominal and real terms. During recessions, federal government budget deficits were to be kept below the average rate of economic growth. Large deficits were allowable only to fight wars or obtain territory but when peace returned surpluses were to be applied to the debt, not to concocting new areas of spending. These rules were easier to follow, Hamilton showed, when each new bond issue was tied to a specific tax sufficient to service and eventually extinguish the debt.Unlike most of his contemporaries, Hamilton was a debt realist, a point clearly established by the book now pictured on your screen [SLIDE 16]. Some believed the national debt, at least that part owned domestically, was not a problem because it was money that Americans quote unquote owed to themselves, which didn’t make a whole lot of sense to people paying taxes to service bonds owned by others. Some believed that all government debt was morally wrong, an imposition on future generations, so the national debt should be paid off as quickly as possible. Hamilton reasoned that a debt incurred to win a just war or to acquire new lands was no imposition but to spark a recession by ramping up taxes merely to repay the debt quickly certainly was. So his debt repayment plan called for slow and steady.Moreover, Hamilton realized that federal bondholders cemented the Union by rendering them loyal to their debtor, a point carefully proven in the book now on your screen [SLIDE 17]. The looney who wrote it actually tracked down the residences of many of the nation’s early bondholders, which he was able to do because the bonds were registered and not bearer instruments. He also tracked down the occupations of over a hundred federal bondholders who lived in Jefferson’s Virginia. The foreign debt likewise served to align the interests of foreign nations with America, a point that all those who decried our debt to Britain then, and Japan and China more recently, too oft forget.Most interestingly of all, perhaps, I learned that Hamilton did not implement, or even espouse, protective tariffs, a point forcefully made by the three books now pictured on screen [SLIDE 18]. Hamilton’s tariffs were all about the revenue. In other words, they were designed to fund the government, and especially to service the national debt, not to encourage manufacturing. Following Adam Smith’s notion that all that was requisite to spark economic growth was peace, easy taxes, and a tolerable administration of justice, Hamilton opted for the easiest taxes to collect, those on imported goods. His tariffs exempted many foreign goods used as inputs in domestically-produced goods and imposed progressively higher levies on imports according to their elasticity of demand, or the degree of their luxuriousness in the parlance of the day. Foreign-made carriages and fancy liquors, for example, bore higher tariffs than common fabrics.Hamilton imposed excise taxes on domestic whiskey production in order to discourage its production given the relatively high tariffs placed on the foreign stuff. His Report on Manufactures makes this clear. It also makes clear that, unlike his previous reports on public credit and the national bank, the report was more of a primer, a lesson in the economics of international trade. It makes no sweeping recommendations for legislation but rather discusses the tradeoffs involved in interfering with international trade and correctly identifies production bounties as the least costly method of encouraging domestic manufacturers, and argues that they should be implemented if, and only if, that was something that Congress wanted to do. But tariffs, subsidies, and other distortions of trade, Hamilton makes clear in the report, are merited only in a second-best world, one, in other words, in which other countries impose high tariffs first.Contrast Hamilton’s Report on Manufactures with his Report on a National Bank and you will see exactly what I mean. In the latter, Hamilton laid out very specific reasons for establishing a central bank, detailed its structure, and specified its goals, which included providing a backstop in the event that federal revenues ever fell short of the sums needed to service the national debt. You will sometimes see scholars describe the Bank of the United States as a quasi-central bank because it did not have the same degree of monetary policy discretion that central banks do today. That is true because Hamilton put the U.S. on a bimetallic standard. Indeed his Report on the Establishment of the Mint led directly to the Mint Act, which defined the dollar as specific weights and fineness of gold and silver. Although the Bank of the United States could signal its desired monetary policy stance to state banks, which had grown rapidly in number and importance since the end of the Revolution, by the speed with which it redeemed their notes for gold and silver, it allowed international market conditions to determine the domestic money supply and interest rate. Of course, at the time the Bank of England and the world’s few other central banks did likewise. So, I don’t consider the Bank of the United States a quasi-central bank, I consider it what it was, an eighteenth-century central bank, and that was no mean thing. In addition to servicing the national debt when revenue tariffs fell short and acting as the federal government’s main depository and paying agent, the Bank of the United States also acted as a lender of last resort during financial panics, like those experienced in 1791 and especially 1792. What is commonly called Bagehot’s Rule should be called Hamilton’s Rule because Hamilton was the first to stymie a panic by having the central bank lend freely at a penalty rate to all who could provide ample collateral. Unfortunately, he never wrote a book about it.I like to stress Hamilton’s Rule because some of those rational enough to accede to the points all these books shown on screen make still like to retreat to the claim that all Hamilton did was to copy British precedent. In fact, Hamilton did not adopt British financial precedents, he adapted them. Adoption of foreign institutions rarely works well. Just ask the newly-formed Latin American republics that adopted the U.S. Constitution or the Indian tribal governments induced to adopt American municipal forms in the early twentieth century. Hamilton’s intelligent adaptation of foreign financial practices and institutions, however, saved the early U.S. republic from many embarrassments that could have led to its dissolution.Hamilton also astutely adapted British legal practices to America’s legal scene, a point well made in the book now pictured on screen [SLIDE 19]. What that otherwise wonderful book misses, though, is Hamilton’s contribution to corporation formation and governance. He showed that if need be businesses could voluntarily associate instead of formally incorporate and still enjoy the two main benefits of formal incorporation, limited liability and perpetual succession, by contract instead of by law. Facing such competition, legislators in most cases were not unduly stingy with special acts of incorporation. In fact, the book now pictured on screen [SLIDE 20] shows that over 22,000 businesses received formal special charters in the U.S. before the Civil War. Incorporation became so easy, in fact, that general acts of incorporation were already becoming the norm in the antebellum era and of course are the standard today for both for- and non-profit organizations.My forthcoming book, Liberty Lost, will detail the importance of non-profits to America’s democracy and provide the first count of all those that received special acts of incorporation before the Civil War. It appears that specially-incorporated non-profits actually outnumbered for-profits. DeTocqueville was right, without the capital W.Ease of incorporation also plays a germinal role in my most recent book, now pictured on screen [SLIDE 21]. Thanks to the ease of incorporation made possible by Hamilton’s adaptation of British common law to American realities, groups excluded from financial institutions and markets could, and often did, simply form their own. Artisans, blacks, farmers, Hispanics, Jews, immigrants, Indians, mountain folk, women, and other excluded groups all eventually entered the financial services market and failed, survived, or thrived on the merits of their respective business plans and their execution, all thanks to seeds planted by a so-called elitist monarchist economic nationalist! The abolitionist immigrant Hamilton was really a champion of the common person, competitive markets and institutions, and effective government.By drafting several early important charters and by-laws, including those of the Bank of New York, the Bank of the United States, and the Merchants Bank, Hamilton also helped to establish rules of corporate governance that U.S. corporations used to great effect for over a century. Early U.S. corporations were basically mini-republics replete with checks and balances designed to ensure that major stockholders and managers could not expropriate the resources of minority stockholders, many of whom were minors, women, or busy businessmen. Mistakes were made, even with Hamilton’s own Society for the Establishment of Useful Manufactures, but they were relatively few and minor. Confidence ran so high, in fact, that investors purchased shares in mere startups in unintermediated direct public offerings. Well, technically, again thanks in part to Hamilton, they purchased call options on shares, which they paid for in instalments as the newly-formed corporations geared up operations and achieved identifiable milestones.I say thanks to Hamilton in part because there were, as the book now on the screen makes clear [SLIDE 22], numerous financial founding fathers, including Thomas Willing, the first president of the Bank of North America and the first president of the Bank of the United States, and his partner Robert Morris, the so-called Financier of the Revolution. Their stories are also interesting and complex. Maybe one day I will compose a musical starring them, or Albert Gallatin or Stephen Girard, or maybe the entire ensemble of financial founders. That story would be set in Philadelphia, America’s first financial center and the subject of the book now pictured on the screen [SLIDE 23]. Or maybe not, as I am currently hot on the trail of Wilma Soss, a postwar feminist, corporate gadfly, radio journalist, economic pundit, and financial literacy advocate whose life is worthy of more than the biography I am currently writing with Bucknell’s Jan Traflet. Saucy Soss is now pictured on the screen [SLIDE 24], as is an advertisement for the movie made about her in the early 1950s called The Solid Gold Cadillac. In any event, I promise not to appear personally in anything requiring singing.Thanks so much for your time and attention. These remarks and slides will be posted on my blog, Finance: History and Policy at http://financehistoryandpolicy.blogspot.com/ which is now pictured on the screen[SLIDE 25].I’ll now entertain your questions with what I hope will be entertaining responses. 

Introducing Corporate Malfeasance Bonds

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This is still the spot to go for more in-depth analyses and social innovations, like this:

Introducing Corporate Malfeasance Bonds
By Robert E. Wright, Nef Family Chair of Political Economy, Augustana UniversityAbstract“Introducing Corporate Malfeasance Bonds” describes a corporate governance problem, the difficulties corporations face making credible commitments to behave in ethical or lawful ways, that can have severe negative consequences for long-term equity holders. It then proposes a solution, termed corporate malfeasance bonds, drawn analogically from an existing financial instrument with a long and successful history, the fidelity performance bond. The goal is to protect shareholders from the stock price volatility associated with episodes of corporate fraud and scandal by reducing corporate incentives to engage in malfeasance.ProposalI propose adapting fidelity performance bonds as a private ordering solution (Stringham 2015) to the endemic problem of corporate wrongdoing (Porter 2012). Under my proposal, corporations would post, or issue, “corporate malfeasance bonds” to credibly commit to not breaking their promises by pledging assets to pay whistleblowers, NGOs, regulators, third party certifiers, and victims of corporate malfeasance should obligors/issuers engage in behaviors prohibited by their bonds. Corporations will have incentives to post or issue such bonds to win back skeptical stakeholders (consumers, employees, investors, regulators) and/or to bind their own future behaviors by raising the cost of their malfeasance. Long-term investors will benefit from reduced risk of equity price declines associated with corporate scandals.To the extent that corporations behave rationally, they engage in malfeasance when the expected total benefits of breaking laws, ethical boundaries, or promises, which are often nontrivial, exceed the expected total costs of such lapses, which are often minimal. Corporations per secannot be imprisoned and jurists and ethicists remain divided on who exactly should be held responsible for corporate wrongdoing (Fischel and Sykes 1996; Lee 2011), rendering corporate leaders de facto immune from most criminal prosecution (Admati 2017). In addition, governments are often reluctant to impose large fines on corporations for fear of inducing their bankruptcy, hurting their presumably innocent shareholders and creditors, or even possibly fomenting financial panic or industry contagion. Moreover, many of the largest fines publicly levied upon corporations are only ever partially uncollected (Ross and Pritikin 2011). Fear of being publicly shamed may dissuade some corporate malfeasance, but obviously is not strong enough to prevent all of it (Skeel 2001; Porterfield 2018), as evidenced by the existence of a “corporate settlement treadmill” (Remus and Zimmerman 2015).In response to their malfeasance, or suspicions of the possibility thereof, corporations create narratives that present themselves to stakeholders in the best light possible (Patelli and Pedrini 2014). Some lie, others honestly overestimate their capabilities, and yet others, like BP, engage in complex rhetorical strategies designed to convince stakeholders of the authenticity of their brand images (Matejek and Gossling 2014). Corporations also capture regulators (Dal Bo 2006) or, where that is too costly, engage in regulatory arbitrage, essentially choosing to be regulated by the least effective nations or agencies (Admati 2017: 141-44), even if that requires what Partnoy (2009) calls corporate “shapeshifting.”Cognizant of those facts, stakeholders are often skeptical of corporate self-declarations (Waddock 2004). Third-party certification exists, in part, to add credibility to corporate claims about a variety of corporate behaviors important to various stakeholders. Certification, however, is far from a foolproof solution due to the large information asymmetries that exist between corporations, stakeholders, and certifiers (Dranove and Jin 2010). To the extent that achieving and maintaining certification is costly, corporations have incentives to attempt to dupe certifiers. Moreover, certifying bodies often have incentives to conspire with those they certify so that fees and information continue to flow. As Manasakis, Mitrokostas, and Petrakis (2013) document, the level of “certification standards depends crucially on the certifying institution” (285). Certification of certifiers has sometimes developed in response, but that approach immediately raises the specter of a reductio ad absurdum and in any event does little to alleviate the agency and asymmetric information costs at the root of the certification problem (Dranove and Jin 2010). Long-term investors therefore face two major risks associated with corporate malfeasance, scandal-induced volatility and certification risk, the probability that a third party certification system could unexpectedly fail. To the extent that specific certified corporate behaviors are capitalized in prices, as they appear to be in many instances (Manasakis, Mitrokostas, and Petrakis 2013), a sudden change in perceptions regarding the quality of a certification regime could induce sizable equity price swings, like those experienced after the failure of Penn Central and the “questionable payments” scandals of the 1970s exposed the weaknesses of management-dominated boards (Gordon 2007), and the losses suffered after the Enron bankruptcy and corporate accounting scandals exposed the weakness of the auditing regime in place in the early Third Millennium AD (Clark and Demirag 2002). Less than a decade later, a loss of confidence in bond rating agencies had negative repercussions for both bondholders and stockholders across a range of industries (Dranove and Jin 2010). Several other crises show that even corporations not directly affiliated with a troubled certification regime are sometimes negatively affected by certification regime shocks (Bonini and Boraschi 2010; Giannetti and Yang 2016). A better way to induce corporations to reduce malfeasance is to adapt the performance bond, whereby party A agrees to perform some activity B before some time C on penalty of $D. For example, construction companies and a variety of other entities in a position to expropriate resources from counterparties often post performance bonds (Gallagher and McCallum 2010). The obligor or surety in such cases is a third party or parties that promise to pay $D in the event of A’s default on B before C. For centuries before the development of modern D&O insurance, corporate employees with access to company funds (and certain government officials with access to government monies) had to post a specific type of performance bond called a fidelity bond, whereby one or more sureties agreed to indemnify the employer $D if the bonded employee engaged in malfeasance. Sureties had obvious incentives to monitor the employee, but if the employee managed to expropriate corporate resources, the employer received $D in recompense (Anderson 2004). If the potential employee or officer had a poor reputation or was otherwise unworthy, he or she (quite a few NGOs by the early 19th century employed female treasurers [Bloch and Lamoreaux 2017]) should have found it costly, or even impossible, to obtain adequate fidelity bonds from a sufficient number of quality sureties to obtain a position of trust (Anon. 1936).Corporate malfeasance bonds would fulfill a similar function by compensating stakeholders in the event a corporation breaks its promise to not engage in certain specific illegal, unethical, or untoward behaviors. A corporation that wanted stakeholders to believe, for example, that its global supply chain was free of slaves, like the statement to that effect by The Financial Times , or that it would not damage the environment in certain ways, as McDonald’s announced in 1990 (McMillan 1996), would post a bond by investing financial assets in a trust account. The corporation would receive interest, dividends, and capital gains or losses on the assets just as if they remained on its balance sheet but would have to replace the assets with others of equal value and quality before the trustee would release them to the corporation for sale or hypothecation before the end of the bond’s term. In addition, the corporation would empower the trustees to sell any or all of the assets as needed to pay valid claimants (e.g., slaves discovered in its global supply chain or those who uncovered its use of polystyrene packaging), as ascertained by some third party arbitrator(s) specified in the bond.Some argue that corporate brands are a type of bond, an expensive investment that can decline in value if a corporation behaves in ways that offend its stakeholders (Dranove and Jin 2010; Fan 2005). Brands are indeed a type of bond (Allen 2011) but what the corporation loses, its brand value, is not received by those wronged by its untoward behavior. In addition, due to secret option backdating and other practices, stock price declines do not always chasten executives by decreasing their compensation (Fried 2008). Moreover, changes in brand equity can be difficult to measure (Simon and Sullivan 1993; Rao, Agarwal, and Dahloff 2004) but corporate malfeasance bonds represent “cash on the barrelhead,” as it were. Finally, brand value can be damaged by a wide range of corporate misbehaviors but malfeasance bond payments will be triggered only by pre-specified behaviors of particular concern to stakeholders. Brand value, in other words, might be considered a malfeasance bond of last resort.The corporate malfeasance bonds envisioned here would be entirely voluntary; stakeholders would pass judgement on their credibility based on each bond’s size and terms, which should be designed to serve as effective commitment devices. If people wonder, for example, if they should bank at HSBC after regulators allowed it to plead guilty to laundering billions of dollars for narcoterrorists and pay only a minimal fine, HSBC could post a malfeasance bond to “put its money where its mouth is” in its effort to convince potential customers that it had reformed itself (Naheem 2015). If HSBC posts a $1 bond stating that it will not break anti-money laundering laws (AML) anymore, it will lure fewer customers (fewer non-narcoterrorist customers anyway) than if it posted a $100 billion bond. The same holds for, say, Wells Fargo committing to not opening up any more unwanted customer accounts (Verschoor 2016), Facebook promising to shore up its privacy policies, and myriad other scenarios (Markkulla Center 2018).Holding the sum at risk constant, potential customers will find the commitments of HSBC and other corporate malfeasors more credible the more respected the trustees and arbitrators named in their bonds are (Kaplinksy and Levin 2008). The Bank of New York-Mellon, State Street, and other leading custodial banks would doubtless be unobjectionable to most, but the local barkeep is probably only a good place to safekeep a couple of sawbucks riding on the outcome of some sporting event (Klees 2012).Of course few situations are as cut-and-dried as the outcome of a sporting event, so the arbitration clause will be a crucial consideration for stakeholders when evaluating malfeasance bonds. A credible arbitration clause might randomize the selection of arbitrator over a large group so that no collusion could occur, or be expected. The terms of malfeasance should be defined as clearly as possible (e.g., slave as defined by the UN’s 1956 supplementary convention; money laundering as defined by the Financial Action Task Force) and precisely quantified when possible. Potential claimants need to be carefully specified as well and their remuneration from the corporate malfeasance bond’s assets should make economic sense. Victims should be rewarded, of course, but so too should whistleblowers, NGOs, certifiers, and perhaps even regulators, who discover, report, and bring to arbitration instances of malfeasance. Some thought should be given to minimizing spurious or “shot in the dark” claims by cranks and speculators, but existing statutory and case law related to qui tam litigation (whereby informants receive legal fees plus part of the fines and damages imposed on parties that try to defraud governments but do not recover their legal fees if their case fails) may be sufficient to minimize such behavior (West 2001; Broderick 2007).If corporate default on bond obligations is costly and compensation for those wronged relatively unimportant or diffuse, then the trustee arrangement can be dispensed with and marketable malfeasance bonds can be issued to investors. That type of malfeasance bond would oblige the issuing corporation to pay some extra fixed dollar amount with the next coupon payment(s) if an arbitrator rules that it had committed some specific corporate atrocity, like laundering money or exceeding a promised level of greenhouse gas emissions. The difference between yields on the malfeasance bonds and the issuer’s regular debt would create information about market perceptions of the likelihood of malfeasance. (For more on prediction markets, see Wolfers and Zitzewitz [2004] and Berg and Rietz [2014].) If everyone believed that HSBC would never break AML again, for example, the yield on its malfeasance bonds should be identical to the yield on its regular debt (holding term, liquidity, and so forth constant) in the secondary market. The yield on malfeasance bonds would decrease, however, as doubts about the issuing corporation’s continued commitment to keep its promise rises because the probability of a windfall payment would increase and hence the malfeasance bonds’ market price would rise.Regulators, securities holders, and D&O insurers would do well to watch for sudden increases in the yield spread as an indicator of potential problems (Baker and Griffith 2007). Moreover, if executive cash bonuses were tied inversely to the size of the spreads (and executives were banned from owning the bonds), the incentives of corporate leaders and stakeholders interested in the performance of corporate promises (e.g., not allowing dangerous chemical plants, oil rigs, or pipelines to leak or explode) would be more closely aligned because executives would suffer automatic financial penalties as malfeasance became more likely and spreads widened. Corporations should readily issue malfeasance bonds consonant with the brand narratives that they want stakeholders to believe because the expected costs of credibly committing to their narratives (like no sexual harassment will be committed by members of the C-suite) will be low if they have the proper screening and monitoring procedures in place to prevent malfeasance. To the extent that they are rational, corporations will not lose millions or billions on their bonds because they will keep their promises, especially if breaking the terms of their corporate malfeasance bonds is tied directly to executive compensation. The bonds will credibly signal their intent by putting some “skin in the game,” as the saying goes (Cremers, Driessen, Maenhout, and Weinbaum 2009). People who would otherwise have been victimized by corporate malfeasance will gain, as will long-term investors because the corporations they invest in will suffer from fewer scandals and attendant losses of stakeholder custom (Romani, Grappi, and Bagozzi 2013) and shareholder equity (Marciukaityte, Szewczyk, Uzun, and Varma 2006).Nothing can prevent all wrongdoing, but our society can certainly do a better job of discouraging corporate malfeasance by encouraging corporations, and their leaders, to keep their promises or suffer significant, automatic negative consequences. While new financial instruments can certainly cause great harm, they can also do great good when the incentives they create are carefully considered, as exemplified recently by the development of forest resilience bonds (Knight and Gartner 2018). Corporate malfeasance bonds will protect long-term equity holders and many others by reducing the incentives of corporations, and the people who run them, to engage in illegal or unethical practices. References Admati, Anat R. (2017) “A Skeptical View of Financialized Corporate Governance,” Journal of Economic Perspectives 31, 3 (Summer): 131-50.Allen, Douglas. (2011) The Institutional Revolution: Measurement and the Economic Emergence of the Modern World, Chicago: University of Chicago Press.Anderson, Greg. (2004) “The Emergence and Development of Fidelity Insurance in 19th Century Britain,” Geneva Papers on Risk and Insurance: Issues and Practice 29, 2 (April): 234-46.Anonymous. (1936) “Principal and Surety: Fidelity Bonds: Effect of Failure to Make Disclosures Regarding Bonded Employees,” Michigan Law Review 35, 2 (December): 345-47. Baker, Tom and Sean J. Griffith. (2007) “Predicting Corporate Governance Risk: Evidence from the Directors’ & Officers’ Liability Insurance Market,” University of Chicago Law Review 74, 2 (Spring): 487-544.Berg, Joyce E. and Thomas A. Rietz. (2014) “Market Design, Manipulation, and Accuracy in Political Prediction Markets,” PS: Political Science and Politics 47, 2 (April): 293-96.Bloch, Ruth H. and Naomi R. Lamoreaux. (2017) “Voluntary Associations, Corporate Rights, and the State Legal Constraints on the Development of American Civil Society, 1750-1900,” in Naomi R. Lamoreaux and John J. Wallis, eds., Organizations, Civil Society, and the Roots of Development, Chicago: University of Chicago Press.Bonini, Stefano and Diana Boraschi. (2010)  “Corporate Scandals and Corporate Structure,” Journal of Business Ethics 95, 2: 241-69.Broderick, Christina. (2007) “Qui Tam Provisions and the Public Interest: An Empirical Analysis,” Columbia Law Review 107, 4 (May): 949-1,001. Clark, Woodrow W. and Istemi Demirag. (2002) “Enron: The Failure of Corporate Governance,” Journal of Corporate Citizenship 8: 105-22.Cremers, Martjin, Joost Driessen, Pascal Maenhout, and David Weinbaum. (2009) “Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry,” Journal of Financial and Quantitative Analysis 44, 6 (December): 1,345-73.Dal Bo, Ernesto. (2006) “Regulatory Capture: A Review,” Oxford Review of Economic Policy 22, 2 (Summer): 203-25.Dranove, David and Ginger Zhe Jin. (2010) “Quality Disclosure and Certification: Theory and Practice,” Journal of Economic Literature 48, 4 (December): 935-63.Fan, Ying. (2005) “Ethical Branding and Corporate Reputation,” Corporate Communications: An International Journal 10, 4: 341-50.Fischel, Daniel R. and Alan O. Sykes. (1996) “Corporate Crime,” Journal of Legal Studies 25, 2 (June): 319-49.Fried, Jesse M. (2008) “Option Backdating and Its Implications.” Washington & Lee Law Review65: 853-86. Giannetti, Mariassunti and Tracy Yue Wang. (2016) “Corporate Scandals and Household Stock Market Participation,” Journal of Finance 71, 6 (December): 2,591-636.Gallagher, Edward G. and Mark H. McCallum. (2010) “The Importance of Surety Bond Verification,” Public Contract Law Journal 39, 2 (Winter): 269-83.Gordon, Jeffrey N. (2007) “The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder Value and Stock Market Prices,” Stanford Law Review 59, 6 (April): 1,465-1,568. Kaplinsky, Alan S. and Mark J. Levin. (2008) “Consumer Arbitration: If the FAA ‘Ain’t Broke,’ Don’t Fix It,” The Business Lawyer 63, 3 (May): 907-19.Klees, Edward H. (2012) “How Safe Are Institutional Assets in a Custodial Bank’s Insolvency?” The Business Lawyer 68, 1 (November): 103-35.Knight, Zach and Todd Gartner. (2018) “Fighting Fire with Finance: How Private Investment Can Restore Forests and Reduce Wildfire Risk,” PERC Reports 37, 1 (Summer): 42-43.Lee, Ian B. (2011) “Corporate Criminal Responsibility as Team Member Responsibility,” Oxford Journal of Legal Studies 31, 4 (Winter): 755-81.Manasakis, Constantine, Evangelos Mitrokostas, and Emmanuel Petrakis. (2013) “Certification of Corporate Social Responsibility Activities in Oligopolistic Markets,” Canadian Journal of Economics 46, 1 (February): 282-309.Marciukaityte, Dalia, Samuel H. Szewczyk, Hatice Uzun, and Raj Varma. (2006) “Governance and Performance Changes After Accusations of Corporate Fraud,” Financial Analysts Journal 62, 3 (May-June): 32-41.Markkula Center. (2018) “Corporate Wrongdoing,” Markkula Center for Applied Ethics: https://www.scu.edu/ethics/focus-areas/business-ethics/resources/articles/corporate-wrongdoing/. Matejek, Sabine and Tobias Gossling. (2014) “Beyond Legitimacy: A Case Study in BP’s ‘Green Lashing’,” Journal of Business Ethics 120, 4 (April): 571-84.  McMillan, G. Steven. (1996) “Corporate Social Investments: Do They Pay?” Journal of Business Ethics 15, 3 (March): 309-14.Naheem, Mohammed A. (2015) “AML Compliance -- A Banking Nightmare? The HSBC Case Study,” International Journal of Disclosure and Governance 12, 4 (November): 300-10.Partnoy, Frank. (2009) “Shapeshifting Corporations,” University of Chicago Law Review 76, 1 (Winter): 261-88.Patelli, Lorenzo and Matteo Pedrini. (2014) “Is the Optimism in CEO’s Letters to Shareholders Sincere? Impression Management Versus Communicative Action During the Economic Crisis,” Journal of Business Ethics 124, 1 (September): 19-34.Porter, Eduardo. (2012) “The Spreading Scourge of Corporate Corruption,” New York Times (10 July 2012).Porterfield, Amanda. (2018) Corporate Spirit: Religion and the Rise of the Modern Corporation,New York: Oxford University Press.Rao, Vithala, Manoj Agarwal, and Denise Dahlhoff. (2004) “How Is Manifest Branding Strategy Related to the Intangible Value of a Corporation?” Journal of Marketing 68, 4 (October): 126-41.Remus, Dana A. and Adam S. Zimmerman. (2015) “The Corporate Settlement Mill,” Virginia Law Review101, 1 (March 2015): 29-91.Romani, Simona, Silvia Grappi, and Richard P. Baggozi. (2013) “My Anger Is Your Gain, My Contempt Is Your Loss: Explaining Consumer Responses to Corporate Wrongdoing,” Psychology & Marketing 30, 12 (December): 1,029-42.Ross, Ezra and Martin Pritikin. (2011) “The Collection Gap: Underenforcement of Corporate and White-Collar Fines and Penalties,” Yale Law & Policy Review 29, 2 (Spring): 453-526.Simon, Carol J. and Mary W. Sullivan. “The Measurement and Determinants of Brand Equity: A Financial Approach,” Marketing Science 12, 1 (Winter): 28-52.Skeel, David A., Jr. (2001) “Shaming in Corporate Law,” University of Pennsylvania Law Review149, 6 (June): 1,811-68.Stringham, Edward. (2015) Private Governance: Creating Order in Economic and Social Life, New York: Oxford University Press.Verschoor, Curtis C. (2016) “Lessons from the Wells Fargo Scandal,” Strategic Finance 98, 5 (November): 19-20.Waddock, Sandra. (2004) “Creating Corporate Accountability: Foundational Principles to Make Corporate Citizenship Real,” Journal of Business Ethics 50, 4 (April 2004): 313-27.West, Robin Page. (2001) “Qui Tam Litigation,” Litigation 28, 1 (Fall): 21-25, 66-67.Wolfers, Justin and Eric Zitzewitz. (2004) “Prediction Markets,” Journal of Economic Perspectives 18, 2 (Spring): 107-26.

Economic Freedom and Economic Growth: Pennsylvania and South Dakota

Economic Freedom and Economic Growth: Pennsylvania and South Dakota
By Robert E. Wright, Nef Family Chair of Political Economy, Augustana University, Sioux Falls, S.D. For the Pennsylvania Economics Association Conference in Kutztown, Pa., 30 May – 1 June 2019NOTA BENE: I've been blogging extensively for the AIER, partly in support of my new book, Financial Exclusion, which you can (should?) buy here: https://www.amazon.com/gp/product/B07SC4CBDD. My AIER blog list page is here: https://www.aier.org/staff/robert-e-wright. Paper and slides:Pennsylvania and South Dakota are not as dissimilar as they might at first seem. While South Dakota is physically bigger (76K vs. 45K square miles) and flatter, both states share the same basic rectangular shape and, more importantly, they both have metropoles at either end, Philadelphia and Sioux Falls in the east and Pittsburgh and Rapid City in the west, and a capital on a major river in the middle, Pierre on the Missouri and Harrisburg on the Susquehanna. Euroamerican Pennsylvania is also two centuries older (c. 1680) than Euroamerican South Dakota (c. 1860), which helps to explain its much higher population (13 vs. .9 million) and population density (285 vs. 11 people per square mile). Per capita income is also higher in Pennsylvania ($51K vs. $48K) but its economic freedom score is somewhat lower (7.2 vs. 8.0). This is interesting because many people believe, on the basis of natural experiments like East and West Germany and North and South Korea, that economic freedom causes economic growth. Take that as you may, the two variables are incontestably highly correlated. Why, then, does South Dakota not have a higher per capita income than Pennsylvania?Three major hypotheses come to mind. The first is that what really matters for growth is something other than economic freedom. In other words, South Dakota suffers from some problem or problems that Pennsylvania does not.The second hypothesis is that specific types of freedom are more important to growth than the overall freedom score and that Pennsylvania is freer than South Dakota in those specific growth areas.The third hypothesis is that the reported economic freedom scores are incorrect and Pennsylvania is economically freer, or South Dakota is economically less free, than measured.I find little support for the first two hypotheses but a compelling story in support of the third, specifically the proposition that South Dakota’s freedom score, or its population, should be adjusted downward.Numerous studies show a very high level of correlation between economic freedom and per capita income. Parsing out causation is harder but it does make sense that places with lower taxes, fewer regulations, more fiscal responsibility, less onerous and expensive entry barriers, and so forth would create more incentives for people to work harder and smarter and hence lead to higher income growth. The best causal evidence comes from natural experiments at the national level. So, for example, Korea and Germany were divided for exogenous reasons and one part endowed with relatively more economic freedom than the other part. As predicted, the freer parts, South Korea and West Germany, did much better economically than their relatively unfree counterparts.But there is no such conclusive proof that economic freedom causes growth at the state level, so we should explore the possibility that something other than economic freedom might explain South Dakota’s relatively lower income. I cannot find anything, however, that makes sense, at least when the facts about both states are known. For instance, sometimes people intuit that South Dakota suffers because of its location, its size, its lack of fossil fuel production, its supposed reliance on agriculture, or its lack of diversity, finance, tourism, or education. These are all wrong and some are even silly.For example, South Dakota happens to be in the exact center of the continent. Its average distance to all the inland markets is therefore shorter than Pennsylvania’s. Consider, for example, the average travel distance from Sioux Falls to New York (1,361 miles), Chicago (573), Houston (1,083), and Los Angeles (1,640), 1,164 miles, compared to Philadelphia (94 miles; 759 miles; 1,549 miles; 2,711 miles), which is 1,278 miles.Size per se can’t matter. Many of the world’s richest countries, like Iceland and Monaco, are small. The population of South Dakota is about the same as that of my former home county,  Montgomery, an affluent set of suburbs and exurbs just north of Philadelphia.It is true that South Dakota does not produce fossil fuels. If you think it does, you have it confused with North Dakota, the oil fields of which do nothing for South Dakota’s economy according to a careful study by the Minneapolis Fed. South Dakota gets much of its electricity from hydro plants along the Missouri River and, like most states, imports gasoline, but mixes it with home grown, and unsubsidized, ethanol.South Dakota is, however, not dependent on agriculture. Not even its farmers and ranchers are, as most learned in the 1980s that it is important to diversify into financial assets, town jobs, and hunting leases. Agriculture represents only about 6 percent of state GDP, much more than Pennsylvania’s .5%, but much less than the FIRE industry (finance, insurance, and real estate) in either place. In fact, South Dakota is much more reliant on FIRE (26% of GDP) than Pennsylvania (19% of GDP) is!And tourism is much bigger in South Dakota, where it accounts for 6.4 percent of employment versus only 3.9 percent in Pennsylvania.The population of South Dakota is not as diverse as that of Pennsylvania by some measures but the metropoles, particularly Sioux Falls, are amazingly diverse, and in diverse ways. There are more straight up Africans in Sioux Falls than African-Americans, for example. Most are Christians relocated from Ethiopia and Somalia by Lutheran Social Services. South Dakota has actually elected two people of Lebanese descent, one Democrat and one Republican, to the U.S. Senate!And, contrary to stereotypes based on inputs (teacher salaries) instead of outputs (student learning), South Dakotans are not appreciably dumber than Pennsylvanians. In 2013, for example, South Dakota high school seniors scored 4th highest in the country in mathematics. That same year, though, they stumbled in reading, coming in only 5th nationally, a mere 20 places ahead of Pennsylvania. The second hypothesis also fails under close scrutiny as South Dakota’s economic freedom score in all three major areas of government spending, taxes, and labor market freedom are superior to those of Pennsylvania and have been since 1981, with only the very slight and very recent exception of labor market freedom, which is Pennsylvania’s freest area since the demise of private sector unions in steel and coal. Meanwhile, South Dakota slipped in the labor freedom category by enacting a state minimum wage above the federal one and indexing it to inflation.That leaves us with the third hypothesis, that economic freedom is lower in South Dakota than reported, or rather that the population that enjoys a freedom score of 8.0 is some 80,000 people lower than reported. These are not due to measurement errors per se but rather to counting people living on Indian Reservations. South Dakota has 8 Indian Reservations and the 3 huge ones located west of the Missouri River, to wit the Cheyenne River, Rosebud, and Pine Ridge reservations, are desperately poor. Their denizens basically live under socialism and hence have very little economic freedom. The Bureau of Indian Affairs is a central planner run amok and Indian Health Services is socialized medicine at its worst. Most damning of all, Reservation Indians have little access to decent financing because the land tenure system on the Reservations is completely different from that of the rest of the country and the criminal justice system is even more farcical. Any way you slice it, Indian Reservations, which have per capita incomes of $10,000 or so, drag down the state averages. Remove the three poorest counties in the state, which are perennially among the poorest in the nation, Ziebach, Todd, and Oglala Lakota, from the state’s income statistics and South Dakota’s per capita income exceeds that of Pennsylvania by almost $3,000, an appropriate figure given the state’s higher economic freedom score.Conversely, if that thought is too jarring for a Pennsylvania audience, we need to lower South Dakota’s economic freedom score to account for the fact that a large percentage of its population subsists at a level of economic freedom at best half that of the rest of the state. In that case, Pennsylvania has a higher per capita income than South Dakota but is also more economically free, on average.If the issue of the dearth of economic freedom in Indian Country interests you, I supply many more details in my 2015 book, Little Business on the Prairie, which is a history and policy analysis of entrepreneurship in South Dakota from 10,000 BC to the present. You can buy a copy when you visit South Dakota’s Badlands, Mount Rushmore, or Crazy Horse monuments or just want to hunt dinosaurs. If a trip to South Dakota is not on your bucket list, though, you can pick up a copy on Amazon.Thank you!

What the College Admission Scandal Really Means

As usual, Americans lose their minds whenever money takes center stage, as it does in the college admission scandal. I mean that figuratively and literally, as in they go bonkers and then miss the main point, which in this case is that some people are willing and able to millions to send their kids to certain schools. That is good news, if properly handled.

The scandal is not without merit, of course, but the key problem is one of private emolument.
The admissions officers should not be personally enriched by the payments.
But their schools ought to be.
If you’re a statist, simply consider it a voluntary tax.
If you believe in the power of markets, it is just an instance of price discrimination.
But, some will surely protest, if college admission is based solely on the highest bidder, then only the rich
will be able to attend Elite U. Not so! If Elite U. only takes dumb rich kids,
it will not remain elite for very long. Unless it is sitting on a big endowment, it won’t last long accepting
only dirt poor geniuses either. The problem is simply one of optimization, of admitting some
rich dumb kids without having to water down the curriculum and some poor prodigies without breaking
the bank.

Most students will remain bright young people from a variety of socioeconomic backgrounds. And,
thanks to the Richie Riches’ fat checks, they will pay a little less for school and/or have a little better
experience.

Program Note for The Lehman Trilogy

The Lehman Trilogy opened in New York last night. I urge everyone who can to check it out, and quickly, because the run at the Park Avenue Armory last only about a month. Check here for details: http://www.armoryonpark.org/programs_events/detail/lehman

Two program notes were not run due to a miscommunication between the various parties involved. Like a Lannister, however, the Armory honored its commitment to pay me for the piece, which I see no reason to allow to lay dormant, unread, on my hard drive. So here is what I submitted:

Imprisoned by ideology and conceptual confusion, economic growth and development today mystify. Henry Lehman and his contemporaries labored under no such constraints, correctly equating America with abundant economic opportunity.The Constitution consorted with Alexander Hamilton’s policies, which included anchoring the dollar to silver, funding the national debt, and establishing the Bank of the United States, to produce a national government energetic enough to protect Americans from foes foreign and domestic, but insufficiently powerful to threaten Americans’ liberties. Before Hamilton left Treasury, privately-owned stock exchanges, banks, and insurers formed to provide the financial infrastructure needed to increase agricultural yields, build the nation’s transportation infrastructure (toll bridges, canals, and turnpikes, followed in the 1830s by railroads), and jumpstart America’s industrial evolution.Expecting to reap as they sowed, Euroamerican males, as well as non-trivial numbers of women and free people of color, worked harder and smarter than ever before to accumulate more assets than liabilities, i.e., to build net worth or “capital.” De jure barriers to enterprise were few, so competition ruled. Many contented themselves with the small but steady profits of the average artisan, farmer, or retailer by keeping pace with innovations others developed. Some strove for more, a few by cajoling favors from government, but most by developing new goods or producing existing ones more efficiently.Most Americans abhorred, if not slavery, then the fact that the South was ruled by, and for, slaveholders. Many native-born, slave and free, left if they could, as it was no place for aspirants or those interested in their own health. The South’s disease environment, worsened by infectious slaves circulating in the infernal internal slave trade, destroyed many lives. The Lehman brothers were lucky to sit shiva only once in Alabama.The surviving brothers belatedly fled to Manhattan, which only recently had overtaken Philadelphia as America’s financial and commercial capital. Success in Gotham, though, was not guaranteed, as the city remained subject to epidemics, riots, and conflagrations. Moreover, the economy experienced troubling reversals, like those following financial panics in 1819 and 1837. Another panic, in 1857, initiated the sequence of events that led to the Civil War, which in four years destroyed the South’s economy and proved cotton no monarch.Rooted in brutal exploitation of land and labor, the South’s agricultural and industrial sectors could not match the dexterity of Northern enterprise, which quickly adapted to wartime conditions. By switching from retailing cloth and agricultural implements to brokering cotton, coffee, and other commodities, the Lehmans proved themselves more Billy Yanks than Johnny Rebs. After Emancipation, the South continued to exploit its laborers via systems described as “worse than slavery” and “slavery by another name” -- convict labor, debt peonage, and Jim Crow. Even with the aid of Lehman and other Northern capital, its economy would not catch up to that of the North for over a century.Under Philip, the Lehman brothers’ partnership became a full-blown investment bank, an intermediary that resold to investors the stocks and bonds that corporations issued to fund their expansion. Newly-issued securities were safely underwritten by packs of banks, called syndicates, that exposed to loss only a portion of the Lehman’s own capital and the deposits of wealthy individuals and institutions. (Small businesses and poorer individuals banked with building and loan societies, mutual savings banks, and, a little later, credit unions.) Scale, volume, and time, not excessive risk, created and safeguarded the Lehman fortune.After the Great War, entertainment investments proved shrewd. As Americans’ incomes continued to climb, so too did demand for leisure goods, like films, radios, and eventually televisions. When Depression struck, the still piddling federal government feared bailing out investment banks. The Federal Reserve, the nation’s putative lender-of-last-resort, did not even bail out the 9,000 commercial banks that failed during the 1930s! Nonetheless, FDR pinned blame for the unprecedented economic downturn not on government policies but on investment banks, which survived the stock market crash to the extent that they were just middlemen. After the economy rebounded, investment banks thrived again because they managed to write New Deal regulations that limited underwriting competition from commercial banks.Postwar, investment banking profoundly transformed. As family dynasties like Lehman’s weakened, partnerships conceded to publicly-traded corporations, dramatically altering bankers’ incentives. To steward resources for ensuing generations, partners nurtured long-term client relationships. Hirelings, by contrast, sought enormous bonuses based on short-term performance, which created macho corporate cultures that demeaned women, extolled the exploitation of clients, and encouraged risky international expansion and speculative trading.Due to the unpredictability of markets and the number and size of the risky bets taken, eventual failure was assured. But big bonuses and bailout expectations bested prudence. In 2008, the federal government, grown powerful continuously fighting hot and cold wars, bailed out almost everyone, except Lehman.

Universities Should Put More Skin in the Game

I thought that, once again, I would delight readers with an earlier draft of a piece published online elsewhere. This is partly cya on my part (sometimes important stuff has to get cut for word length reasons) but also shows all the work that goes into polishing pieces for publication. My name is not R.E.Wright for no reason! Finally, some readers might find this simple list easier to follow.

The published piece just came out on the Martin Center blog and is called "Universities Should Invest in Their Students, Not Securities."

Seven Reasons Universities Should Invest in Their Students, Not Securities
Tuition-driven universities should lend their students the money they need to attend their institutions. There are seven major reasons why they should do so.
11.      Skin in the gameWarren Buffett’s billions stand testament to the wisdom of ensuring that people and institutions stand to lose if they don't deliver as promised. Alas, misaligned incentives plague higher education because major players have little “skin in the game.” Most professors and administrators are good people but that means little at schools that need student tuition payments in order to survive. The existential imperative at many American universities is to get -- and this is a direct quotation I have heard more than once in my quarter century in higher ed -- “asses in classes.” What happens to students once they leave is of little concern to such schools, the majority of America’s institutions of higher education.22.      The Economics of InformationUniversities know more about their students than banks or the federal government ever could. They are therefore in the best position to make loan decisions, on which more below. In the securities market, by contrast, universities hold no advantages.33.      Leadership in the Incentive RevolutionMany universities purport to educate business, political, and social leaders but often fail to lead reform movements themselves. Instead of preaching from their Ivory Towers, universities can show other lagging sectors that meaningful improvements can be had by changing root incentive structures.Healthcare providers, for example, get paid for performing services, needed or otherwise, effectively or not. In the absence of robust competition based on price and quality, their profits are maximized by keeping people sick, not restoring their health. Misaligned incentives also plague government, the agencies of which are rewarded for accomplishing tasks like keeping endangered species endangered, wasting travelers’ time without improving their security, and ensuring that Indians living on reservations remain impoverished. Doctors and bureaucrats aren't any worse people than the rest of us. Most work hard to provide for their families, but even saints could not overcome the backwards incentives baked into how they do their jobs. That’s why the government itself admits that the Department of Education is a failure and why the healthcare sector sucks almost 1 in every 5 dollars of GDP into its gaping maw while producing lackluster results. If higher education can lead an Incentive Revolution that shores up the economy’s weakest sectors, it should be able to recoup some of the social prestige it has lost in recent decades.44.      PrecedentMany manufacturers of big ticket goods designed to the increase the purchasers’ income, like General Motors and General Electric, directly or indirectly lend the purchase price of their products to their customers. Many could obtain financing elsewhere, but the loan binds the interests of the manufacturers to those of their customers because if the products are not worth the price, purchasers are more likely to default on the loans. Extending a loan therefore serves as a sort of quality guaranty.The same holds for universities, at least one of which, Hillsdale College, indirectly lends to its own students through private loan funds. (At least two dozen well-endowed universities provide all or most students with outright grants. Bully for them and their students but they are far from the norm.)55.      Independence from WashingtonHillsdale and other colleges and universities do not allow their students to receive federal financial aid so they can remain free of federal bureaucrats. Many tuition-driven universities are now also beginning to pine for the freedom to teach their own students as they see fit. The backstory here is important, if you do not already know it. Superior programs that meet real world needs fill the seats with good students but creating such programs is difficult and expensive. So many schools opted instead for the illusion of quality combined with shrewd marketing. They filled seats by telling parents that their kids will be safe and get a job after graduation while convincing prospective students that fun awaits.If and when Joe and Jane graduated, often without the skills or knowledge necessary to contribute much to businesses, graduate programs, or nonprofit organizations, however, they didn’t land high paying jobs and felt burdened by debt. They complained, as did parents eager to reclaim their basements and employers desperate to hire quality workers. Even when the economy booms, more than one in ten graduates, and perhaps as many as one in three, default on their student loans, which their alma maters never prepared them to understand, much less pay off. Taxpayers heard about the worst abuses and rightly sought redress. Most Americans, though, swilled down the “everybody must get a college education” Kool Aid, so instead of ending federal subsidies for higher education they called instead for “accountability,” which Uncle Sam translated into increasingly onerous regulations.This being Murica, the Department of Education didn't dare tell professors what they could do in their classrooms. Instead, it told state regulators and regional accreditors to pressure university administrators into accepting “the assessment agenda.” Administrators, in turn, now threaten faculty members with accreditation or job loss if they do not comply. Yes, job loss. Most faculty members are now untenured, contingent faculty who can be terminated for any reason.If the “assessment agenda” had been scientifically constructed and carefully implemented, higher education might improve. But it was not. A charitable interpretation is that the directions set forth by the good, hardworking bureaucrats at the Department of Education got garbled as they worked their way down to poor professors, many of whom were blindsided by demands that they have to create “student learning outcomes” and then “assess” them. That of course is what they have been doing for centuries, but apparently not in ways sufficiently “legible” to government bean counters.Some administrators and professors welcome the assessment dictates, supposing that it will induce older professors to retire and lazy ones to finally update their courses and get off the bottom of Bloom's revised taxonomy, i.e. to move away from rote memorization and towards analysis, evaluation, and creativity. Other professors believe that while assessment might inspire positive change at some margins, under the imperative of filling seats most reforms will remain cosmetic, or even counterproductive because the lower levels of Bloom’s are the easiest to assess.Most importantly, though, the regulatory push for assessment shows that the federal government wields the proverbial “power of the purse” over all institutions of higher education dependent on tuition dollars and their consort, federally guaranteed student loans. Rather than blithely jump down Orwellian and Veblenian assessment rabbit holes into Wonderland, universities could go back to first principles and rearrange their incentives away from merely filling seats. To do that, they need to invest in their own students, not in the stock, bond, or derivatives markets.66.      Polycentric RegulationOnce properly incentivized by placing their own skin in the game, universities would soon do whatever it takes to enable, and induce, their students to repay them. If their students repay, schools will continue to exist; if their students default, schools will fail, sooner or later, no monolithic, top-down regulation necessary. Importantly, schools that fold or downsize will free up resources (like professors) to try something new.Similarly, the proposed reform would eliminate the need for stringent entry barriers into higher education. Students and their employers, not accreditors (Who are those people anyway? If they are such pedagogical experts, why aren't they teaching or administering?), will decide which schools pass muster and which do not. Professors unable to find good jobs at existing universities would be free to establish their own institutions, perhaps by pooling their resources in professional partnerships.77.      Ease of ImplementationUniversities should find investing in their own students instead of in securities markets relatively easy. Some already have the basic infrastructure in place because they provide grants that revert to loans if students leave before graduation or fail to fulfill occupational requirements after graduation, like teaching in a public school or practicing medicine in a rural area. Loan offers would come as part of the financial aid package. All students should have to put up some cash, their own “skin in the game,” but the amount, as well as the major loan repayment terms (interest rate, maturity, default penalties, etc.), should be a matter of competitive negotiation.Each university will develop its own plan, but I suspect you'll see much more curricular emphasis placed on ethics and personal finance. With investments in the form of loans rather than income sharing, I would not expect to see a dramatic move away from the liberal arts or preparing students for lower-paying careers like teaching or the ministry. Financially successful alums can still be urged to donate, but to stay viable universities will only need their graduates to service their debts.I suspect that universities that choose to invest in their students will learn how to integrate the liberal arts into career-oriented majors like business, education, nursing, or the performing arts. In other words, instead of forcing students to take random “general education” classes in anthropology, economics, history, or philosophy and merely asserting that they are relevant to various professions, professors will demonstrate their relevance by teaching courses in business history, the philosophy of education, the anthropology of nursing, the economics of entertainment, and so forth. Some schools will find other paths to success (or failure), creating the diversity at the heart of polycentric approaches to complex problems.New universities, or existing ones with endowments insufficient to fund operations for five or more years, can invest in their own students by borrowing money, relending it to their students at a higher rate, and capturing the gross spread, like a bank. State governments might consider endowing schools with enough cash to allow them to invest in their own students in lieu of annual appropriations. Generally speaking, a one-time subsidy for a specific purpose causes less distortion than annual subsidies.In any event, it is high time universities took direct responsibility for the quality of their product by funding their own students and telling Uncle Sam his deep pockets and meddling ways are no longer welcomed.
Robert E. Wright is the Nef Family Chair of Political Economy at Augustana University in Sioux Falls, South Dakota, and the author of 18 books on U.S. business, economic, financial, and policy history.