Robert E. Wright's Blog, page 5

A Subversive Take on Captive State

A Subversive Take on Captive State
The apparent intent of the creators of the recently released film Captive State is that all it will take to destroy the evil capitalist system currently destroying both humanity and the environment is for a highly-placed, well-intentioned insider like John Goodman to spark a revolution.
My interpretation, though, is rather more subversive.
The movie’s aliens come not to annihilate or even enslave humanity but to become the alpha dogs of our current world, or at least the wet nightmare crony version of it conjured by many on the Left. The unequivocal message is that although the aliens and their capitalist betas employ super scary weapons and tracking technologies, they can be defeated with ingenuity, their own weapons, and the blood of a few martyrs.
While it seems likely that people throughout the globe indeed would try to expel alien overlords, termed “Legislators” in the movie, if they had any hope of success, the global proletariat has yet to unite or otherwise cast off the “chains” Marx imagined.
Communist revolutions occurred in backwards places like Russia, China, and Cuba because most people in those places had nothing to lose. That is clearly not the case in the developed world. America may yet slide into an alcohol soft middle aged socialism but it will be due to intellectual laziness, not violent revolution, and certainly not this so-so movie.

Applying Game Theory Models to Games (Athletic Contests)

Applying Game Theory Models to Games (Athletic Contests)By Robert E. Wright, Nef Family Chair of Political Economy, Augustana University for the 30thAnnual Teaching Economics Conference, McGraw-Hill Higher Education/Robert Morris University, Moon Township, Pennsylvania, 22-23 February 2019.“In theory, there is no difference between theory and practice. In practice there is.” Or so baseball legend Yogi Berra once reputedly quipped. He may have said that -- it sounds like Yogi -- but he wasn’t the first to utter those words, an upperclassman at Yale in 1882 was ( https://quoteinvestigator.com/2018/04/14/theory/ ). Similarly, I am not the first to apply game theory to sport (see, e.g., Mottley 1954) but I hope to add to the discussion by suggesting that game theory’s application to coaching territorial team sports like basketball, football, hockey, lacrosse, rugby, soccer, and water polo, can be powerful, but it is not a panacea and even can be counterproductive. Game theory is often more powerfully applied to various non-territorial sports, including baseball (see, e.g., Weinstein-Gould 2009; Turocy 2014) and volley sports like tennis and volleyball (Lin 2014).I would not call strategic problems in the actual playing of territorial team sports “wicked,” in the technical sense of “wicked social problems” that have no stopping rule, have solutions that are only better or worse rather than right and wrong, and so forth (Peters 2017). But they are certainly “complex” problems a la Nason (2017) and even “chaotic” a la Fergus Connolly (Connolly and White 2017), who incidentally consults for the Robert Morris University Colonials, among other elite level teams. His hyper-interdisciplinary systems-within-systems approach to territorial sports forms the core of the masters course that I teach at Augustana University on the Business of Coaching.But Connolly’s approach does not make absolutely clear to readers that successful coaches must engage in strategiccompetition, where strategy refers to the anticipation of the moves of their opponents and not some vague notion of planning, as in the term “game plan.” Game theory, which of course is intrinsically interesting for many students and a key tool in the honing of strategic sensibilities (Dixit 2005), barely registers in Connolly’s otherwise seminal/ovanal/gaminal 2017 opus, Game Changers. Two player/team/coach games, especially zero-sum ones, seem like a natural way to apply game theory to sport. The realities of on-field competition, however, quickly reveal the shortcomings of simultaneous one-shot games, much as happened when Chicken was applied to the Cuban Missile Crisis (Zagare 2014) and the Prisoner’s Dilemma (PD) was applied to the actual behaviors of criminals (Khadjavi and Lange 2013). In both instances, it quickly became apparent that PD and other simple games exist within larger game structures and cannot in themselves always satiate real world decision makers. For example, HBO’s The Wire showed that the simple PD description we all work through in class (a la Tucker 1983) is, in the reality of Baltimore’s drug scene, embedded in another game, actually referred to on the street as TheGame, where “snitches get stitches,” or worse, creating a payoff structure where players keep their mouths shut no matter what (Cherrier 2012).Simple games also break down due to the speed of competitive play. Time to think through payoff structures does not exist; reactions must be instinctive to be fast enough to matter. The best that can be done is for coaches and players to think through and model various game scenarios and then drill the rational responses, much as ex-NHL player Nicklas Lidstrom has done regarding one-on-one plays in hockey, and so forth (Lennartsson, Lidstrom, and Lindberg 2015).Many games applicable to sport have mixed strategy equilibria and hence dissolve into Minimax with random strategy solutions (see, e.g., Flanagan 1998), a fact that the offensive coordinator of the Los Angeles Rams seems not to have fully grasped during the recent Super Bowl LIII. Several studies have shown that minimax predictions do not hold up well in the laboratory (Levitt, List, and Reiley 2010) but do on the field, at least where strategy randomization and outcomes can be precisely measured, as in tennis serves and soccer penalty kicks (Palacios-Huerta 2003). Similarly, McGarrity and Linnen (2010) leverage a natural experiment, the injury of a starting quarterback, to show that NFL football teams play the equivalent of a matching pennies game wherein the defense tries to match the offense’s decision to run or pass and the offense tries to not match the defense’s decision. I suggest that football teams actually run three types of plays -- run, pass, and hybrids like draws, options, play action, and screens -- so a rock-paper-scissors type game might be even more realistic (Spaniel 2011).In any event, working through mixed strategy examples can be helpful for aspiring coaches to see that randomness can be optimal under specific conditions. That does not alleviate their angst concerning their replacement by, if not just computers, then nerds using computers (Davenport 2016; Jones 2018), but it can help them to overcome behavioral biases like the risk aversion that apparently induces baseball pitchers to throw too many fastballs (Kovash and Levitt 2009), football coaches to punt too frequently on fourth down and to run the ball too much, and basketball players not to attempt as many three-point shots as they should (Fichman and O’Brien 2018).The best applications of game theory to territorial sports often occur off the field but can still be of immense importance to coaches. Aspects of sport design, a huge arena ably surveyed, albeit over 15 years ago now, by Szymanski (2003), are amenable to game theoretic modeling. How to keep up fan interest is a core concern as it forms the basis for all sports funding, except in amateur pay-to-play leagues, in which case maximization of player and/or parent utility is paramount. Most research suggests that fans want the home team to win, but in a close contest, rendering mechanisms for ensuring something like on-field parity of prime interest. That leads in many fruitful directions, like rules for demoting teams from the top tier, as in European soccer leagues, and drafting new players. Forty years ago, for example, Brams and Straffin (1979) showed, with a simple PD game and four fairly realistic assumptions about complete information and incomplete collusion, that North American-style drafts could lead to Pareto inefficient outcomes. As Syzmanski (2010) has shown, however, many early treatments of competitive balance made unrealistic assumptions about the correspondence between individual athletic talent and team wins. In sum, the sum of individual talent can be greater than, equal to, or less than actual team performance.The need to maintain competitive balance also raises the largely intractable issue of doping, or the use of performance-enhancing substances (Kirstein 2009). Frank Daumann of the Institute for Sports Science in Jena, Germany, recently (2018) offered a game theoretic analysis of the doping strategies of two athletes that can be easily modified to a scenario where two head coaches must decide whether or not to allow their players to use performance enhancing substances not explicitly banned by the league or conference in which they compete. Benefits of doping include a higher probability of winning and hence of job retention (Fizel and D’Itri 1997), advancement, bonuses, and a burnished reputation. Costs include the price of the substances themselves and reductions in athlete health, both presumably small in present value terms, and the risk of a tarnished reputation (Butler 2014). This, Daumann shows, could be modeled as a one-off PD such that both coaches will decide to allow their players to dope although both teams would be better off if they did not use performance enhancing substances. But of course in team sports, especially the territorial ones considered here, athletes may try to free ride on their teammates. In other words, simply because a coach signals that athletes may dope does not mean that they will choose to do so as players may hope that enough of their fellows will bear the costs of doping to improve team performance without having to bear the costs themselves.The prospect of free-riding raises the specter of coaches forcing their players to dope, or leveraging asymmetric information to trick them into doping (Johnson 2003), either of which would radically change the payoff structure the coach faces as he or she may have to bear all of the cost of the enhancement substances and any negative social and reputational effects if league officials, competitors, or fans discover the doping, which seems more likely if the coach forces it than if he or she simply allows it (Dunbar 2014). Coercion seems unlikely, moreover, because team sport coaches regularly face free rider problems in a variety of areas and have techniques for mitigating them analogous to the techniques used by those drug dealers in Baltimore that I mentioned earlier. Like the leaders of drug dealers and criminal gangs (Spergel 1990), organized crime “families” (Shvarts 2002), and most military units (Rose 1945-46; Montgomery 1946), coaches reduce free riding by creating a culture of trust, an ideology of service to others, and pseudo-familial bonds through various rituals and shared adversity. In effect, they try to reduce the economic rationality of their athletes by convincing them that they love their teammates more than they love themselves (Connolly and White 2017), thus inducing them to place a large weight on their colleagues’ well-being in their own utility functions (Bergstrom 1997). Game theory aficionados will recognize the similarities of this with the Battle of the Sexes, the iconic version of which features a husband who wants to go to a football game and a wife who wants to go to the opera but both prefer that outcome only if they can persuade the other spouse to attend with them (Hahn 2003).Of course, cultural manipulations sometimes fall short or break down under stress, so coaches have other tools for reducing free riding. One I call the wildebeest solution after a technique that wildebeest herds reputedly use to cross crocodile-infested waters during their great migrations across the African savannah. They force the putatively oldest, weakest, least fertile member of the herd into the waters first. As the voracious crocs devour her, the younger, stronger, healthier members of the herd safely cross (Sapolsky 2017). No strategic choice is involved as the wildebeests force one of their number into the river first, but costly signaling may be involved. The key to survival is to appear not to be the oldest, weakest member of the herd or, in our case, team, where death-by-crocodile is substituted with getting cut from the team. Coaches, in other words, can reduce defection, free riding, and shirking by making it clear that players who do not signal that they are “team players,” who do not stand ready to forgo the temptation to free ride, may end up making the ultimate sacrifice (Spence 1973).Despite some recognition that Braess’s paradox may apply to territorial team sports like basketball (Skinner 2010), superstar athletes know that coaches cannot costlessly bench them, much less cut them from the team, so some may shirk or defect by going for individual statistics instead of wins (Berri and Krautmann 2006; Krautmann and Donley 2009), which is why it is wise to make team performance, short of championship bonuses, a major component of elite athlete compensation (Frick 2003). For most players, though, fear of being labelled the wildebeest is enough to induce them to take one for the team, even if that means injecting or imbibing some new or unusual substance not yet banned.In sum, coaches and other sports administrators can leverage the insights of game theory to improve competitive outcomes but they need to employ theory carefully and switch toolkits when need be, or face becoming the expendable wildebeest themselves.
ReferencesAudas, Rick, John Goddard, and W. Glenn Rowe. (2006) “Modelling Employment Durations of NHL Head Coaches: Turnover and Post-succession Performance.” Managerial and Decision Economics27, 4: 293-306.Azar, Ofer H. and Michael Bar-Eli. (2010) “Do Soccer Players Play the Mixed-Strategy Nash Equilibrium?” Applied Economics 43, 25: 3591-601.Bergstrom, Theodore C. (1997) “A Survey of Theories of the Family.” In Mark R. Rosenzweig and Oded Start, eds. Handbook of Population and Family Economics, Vol. 1A, New York: Elsevier.Berri, David J. and Anthony C. Krautmann. (2006) “Shirking on the Court: Testing for the Incentive Effects of Guaranteed Pay.” Economic Inquiry 44, 3: 536-46.Brams, Steven J. and Philip D. Straffin, Jr. (1979) “Prisoners’ Dilemma and Professional Sports Drafts.” The American Mathematical Monthly 86, 2: 80-88.Butler, Nick. (2014) “Coaches Can Influence Whether Athletes Decide to Dope, Claims Scottish Study.” Inside the Games: The Inside Track on World Sport 6 March.Cherrier, Beatrice. (2012) “To Teach or Not to Teach Economics with The Wire?” Institute for New Economic Thinking Blog 1 November.Connolly, Fergus and Phil White. (2017) Game Changer: The Art of Sports Science. New York: Victory Belt Publishing. Daumann, Frank. (2018) “Doping in High-Performance Sport -- The Economic Perspective.” In The Palgrave Handbook on the Economics of Manipulation in Sport, Markus Breuer and David Forrest, eds. New York: Palgrave Macmillan, 71-90.Davenport, Mike. (2016) “Will a Robot Take Your Coaching Job?” CoachingSportsToday 27 March. https://coachingsportstoday.com/will-robot-take-coaching-job/ Dixit, Avinash. (2005) “Restoring Fun to Game Theory.” Journal of Economic Education 36, 3: 205-19.Dunbar, Graham. (2014) “Lance Armstrong’s Coach Banned 10 Years for Dope Promotion.” Las Vegas Review Journal 22 April.Fichman, Mark and John O’Brien. (2018) “Three Point Shooting and Efficient Mixed Strategies: A Portfolio Management Approach.” Journal of Sports Analytics 4, 2: 107-120.Fizel, John L. and Michael P. D’Itri. (1997) “Managerial Efficiency, Managerial Succession and Organizational Performance.” Managerial and Decision Economics 18, 4: 295-308.Flanagan, Thomas. (1998) “Game Theory and Professional Baseball: Mixed-Strategy Models.” Journal of Sport Behavior 21, 2: 121-38.Frick, Bernd. (2003) “Contest Theory and Sport.” Oxford Review of Economic Policy 19, 4: 512-29.Hahn, Sunku. (2003) “The Long Run Equilibrium in a Game of ‘Battle of the Sexes’.” Hitotsubashi Journal of Economics 44, 1: 23-35.Hsu, Shih-Hsun, Chen-Ying Huang, and Cheng-Tao Tang. (2007) “Minimax Play at Wimbledon: Comment.” American Economic Review 97, 1: 517-23.Johnson, Michael. (2003) “Athletes Must Take Share of the Blame.” The Telegraph25 October.Jones, Dean. (2018) “How Close Are We to Having Robots as Managers in the Premier League?” Bleacher Report 23 November. https://bleacherreport.com/articles/2806980-how-close-are-we-to-having-robots-as-managers-in-the-premier-league Khadjavi, Menusch and Andreas Lange. (2013) “Prisoners and Their Dilemma.” Journal of Economic Behavior and Organization 92: 163-75.Kirstein, Roland. (2009) “Doping, the Inspection Game, and Bayesian Monitoring.” Working Paper. 8 October.Kovash, Kenneth and Steven D. Levitt. (2009) “Professionals Do Not Play Minimax: Evidence from Major League Baseball and the National Football League.” NBER Working Paper 15347.Krautmann, Anthony C. and Thomas D. Donley. (2009) “Shirking in Major League Baseball Revisited.” Journal of Sports Economics 10, 3: 292-304.Lennartsson, Jan, Nicklas Lidstrom, and Carl Lindberg. (2015) “Game Intelligence in Team Sports.” PLOS One 13 May.Levitt, Steven D., John A. List, David H. Reiley. (2010) “Stays in the Field: Exploring Whether Professionals Play Minimax in Laboratory Experiments.” Econometrica 78, 4: 1413-34.Lin, Kai. (2014) “Applying Game Theory to Volleyball Strategy.” International Journal of Performance Analysis in Sport 14, 3: 761-74.McGarrity, Joseph P. and Brian Linnen. (2010) “Pass or Run: An Empirical Test of the Matching Pennies Game Using Data from the National Football League.” Southern Economic Journal 76, 3: 791-810.Montgomery, Bernard. (1946) “Morale in Battle: Address Given to the Royal Society of Medicine.” British Medical Journal 2, 4479: 702-4.Mottley, Charles M. (1954) “Letter to the Editor -- The Application of Operations-Research Methods to Athletic Games.” Journal of the Operations Research Society of America2, 3. Nason, Rick. (2017) It’s Not Complicated: The Art and Science of Complexity in Business. Toronto: UTP-Rotman Publishing.Palacios-Huerta, Ignacio. (2003)  “Professionals Play Minimax.” The Review of Economic Studies70, 2: 395-415. Peters, B. Guy. (2017) “What Is So Wicked About Wicked Problems? A Conceptual Analysis and a Research Program.” Policy and Society 36, 3: 385-96.Rose, Arnold. (1945-46) “Bases of American Military Morale in World War II.” The Public Opinion Quarterly 9, 4: 411-17.Sapolsky, Robert W. (2017) Behave: The Biology of Humans at Our Best and Worst. New York: Penguin.Shvarts, Alexander. (2002) “Russian Mafia: The Explanatory Power of Rational Choice Theory.”International Review of Modern Sociology 30, 1/2: 69-113.Skinner, Brian. (2010) “The Price of Anarchy in Basketball.” Journal of Quantitative Analysis in Sports6, 1.Spaniel, William. (2011) Game Theory 101: The Complete Textbook. Createspace IPP. Spence, Michael. (1973) “Job Market Signaling.” Quarterly Journal of Economics 87, 3: 355-74.Spergel, Irving A. (1990) “Youth Gangs: Continuity and Change.” Crime and Justice 12: 171-275.Szymanski, Stefan. (2003) “The Economic Design of Sporting Contests.” Journal of Economic Literature 41, 4: 1,137-87._______. (2010) “Teaching Competition in Professional Sports Leagues.” Journal of Economic Education 41, 2: 150-68.Tucker, Albert W. (1983) “The Mathematics of Tucker: A Sampler.” The Two-Year College Mathematics Journal 14, 3: 228-32.Turocy, Theodore L. (2014) “An Inspection Game Model of the Stolen Base in Baseball: A Theory of Theft.” Working Paper. 22 August.Weinstein-Gould, Jesse. (2009) “Keeping the Hitter Off Balance: Mixed Strategies in Baseball.” Journal of Quantitative Analysis in Sports 5, 2.Zagare, Frank C. (2014) “A Game-Theoretic History of the Cuban Missile Crisis.” Economies 2: 20-44.

Why the History of Capitalism Subfield Got Slavery (and Almost Everything Else) so Terribly Wrong

Why the History of Capitalism Subfield Got Slavery (and Almost Everything Else) so Terribly WrongBy Robert E. Wright, Nef Family Chair of Political Economy, Augustana University
Abstract:This article summarizes the argument of my 2017 book, The Poverty of Slavery: How Unfree Labor Pollutes the Economy, which critiques the work of “historians of capitalism,” especially Ed Baptist’s The Half Has Never Been Told. It then explains how those historians were able to convince themselves, despite all the evidence to the contrary, that slavery and other forms of unfreedom can spark economic growth and development. It concludes by suggesting that governments should continue to ban even so-called “voluntary slavery” because they cannot effectively enforce labor contracts.JEL codes: J10, N00, N01, O12, P51Keywords: slavery, economic growth, economic development, negative externalities, deadweight losses
The thesis of my 2017 book, The Poverty of Slavery: How Unfree Labor Pollutes the Economy, will seem trite to many readers of this journal. It is, simply, that enslaving others, which I define according to a 20 point scale, has never anywhere caused economic growth or development. From the beginning of recorded history, enslavers have coerced laborers to build great monuments, complex systems of infrastructure, and even entire cities. Their societies, however, were poor in per capita terms and their economic development was stunted and always eventually reversed. Vide, for example, the Dark Ages that followed the fall of Rome. Although some slave nations, like the U.S. and U.K., grew rich, others, like Holland, Switzerland, and the Asian Tigers, grew wealthy without being slave societies, proving that the widespread enslavement of human beings is not a necessary cause of growth. Moreover, the U.S. and the U.K. jettisoned forced labor in its most virulent forms as slavery’s inimical effects on growth and development became ever clearer with the aid of natural experiments, especially that offered by the division of the United States into free and slave states. Freedom leads to prosperity and unfreedom to poverty. Communist and other types of rent-seeking dictators essentially enslaved their populations, depleting their incentive to work harder and smarter, i.e., to make the innovations necessary to drive productivity growth. Economic stagnation, it turns out, is just one of the many negative externalities created by unfreedom. Numerous others abound, like the deadweight losses associated with restricting the economic and civil liberties and controlling the behavior of the enslaved. In the aggregate, the negative externalities created by slavery swamp the marginal profits of slaveholders, past and present. Slavery, in this view, is the most socially expensive and virulent form of pollution in history.Why would I spend years writing about something so obvious? In short, for almost the last decade ‘historians of capitalism,’ the group of scholars writing in the new subfield called the ‘new history of capitalism,’ have been asserting the exact opposite. In their view, most clearly stated in Ed Baptist’s screed The Half Has Never Been Told, slavery caused the Industrial Revolution and hence America’s and Great Britain’s current economic prosperity. I trash that view in Poverty and eminent economic historians, from Alan Olmstead to Peter Rousseau, have subjected the book to detailed criticism, down to its own bailiwick, the interpretation of narrative primary sources (Murray et al 2015). Richard Kilbourne also argues that historians of capitalism also have badly misunderstood the financial system’s role in America’s system of chattel slavery, while David Blair shows that they have missed the large negative externalities created by the international trade in human beings. Putting all this criticism together, any objective observer must conclude that Adam Smith and today’s economic historians are right and that slavery did not, and cannot, cause economic growth, which of course was the consensus view in the century and a half between the start of the U.S. Civil War and the rise of the history of capitalism subfield circa 2008. (Historians of capitalism have also botched most other topics they have tried to address but there is insufficient room to detail their failures here and, thanks to a recent article by economist historian Eric Hilt, little incentive to do so.)This conclusion of course raises the troubling question of why historians of capitalism were so wrong about the economic effects of slavery. At one level, the answer is that they are engaged in low-quality activist scholarship that seeks to make a case for the payment of reparations to the descendants of American chattel slaves. The general gist of their story is that slavery made America rich so its government ought to make restitution to the descendants of slaves. None of the historians of capitalism, however, propose adequate answers to the difficult decisions that such a policy would entail. Would, for example, the descendants of slaves fathered by plantation owners have to pay reparations to themselves? Would an impoverished Appalachian whose great, great, great, great grandfather owned a single slave for a single year have to pay reparations to a multi-millionaire actor, basketball player, or entrepreneur who happened to be descended from a slave on one half of his or her family tree? Would the descendants of coal miners and textile factory operatives who were subjected to coercive labor methods themselves have to contribute to the reparation fund as well? The mind quickly boggles at the complexity of the problems a real world reparations policy would entail even without considering the political mire into which it would almost certainly fall. It seems likely, then, that historians of capitalism are simply trying to score ideological points rather than set forth an actual policy agenda.But in trying to put themselves on the ‘right side’ of history, historians of capitalism have put themselves on the wrong side of the present. By some counts, over 40 million people in the world today are enslaved, as in physically and/or psychologically prevented from leaving a place of work to seek employment elsewhere. Many are the victims of the sex trade, but about half beg, fish, or manufacture bricks, carpets, cigarettes, or other commodities entirely for the benefit of their masters. Slavery, arguably worse than the chattel slavery of the Old South because the market price of slaves has plummeted to just a few dollars (and hence the incentive to keep them alive and well is low, creating what Kevin Bales [1999] calls “disposable people”), remains endemic in parts of South Asia, Southeast Asia, Africa, and Latin America. Many governments, including the U.S. government, have been pressuring nations with significant ‘human trafficking’ problems to shape up or face various sanctions.Today’s enslavers and the local government officials tasked with stopping them are thrilled to hear that slavery creates economic growth because it gives them an excuse to maintain the status quo. They point to the claims of historians of capitalism and say, in effect, see, the West got rich off of slavery and now wants to keep us poor by denying us the goose that laid their golden eggs. (They use similar logic to argue in favor of looser pollution controls, higher tariffs, and a host of other policies that favor special interest groups rather than actually drive economic growth and development.) So, to score some points for a policy that has little to no chance of ever being implemented, but which sounds good in certain ideological circles, historians of capitalism have helped to doom to slavery tens of millions of people alive today.How could historians of capitalism justify such a tradeoff? Simply put, they had no clue on either end of the transaction. None of them really understand the economics of growth or slavery, past or present, because they know almost nothing about economic theory or thought. Most graduate programs in history do not require any training in economics, even for those students interested in pursuing topics with significant economic content. Field and dissertation advisers are supposed to guide history Ph.D. candidates to read the books they need to understand their areas of interest. The problem is that most top Ph.D.-granting history departments have no real economic or even business historians on their staffs and those that do typically have only one, who since the revival of interest in economic and business topics in history departments following the Crash of 2008 are stretched unconscionably thin (Townsend 2015).History departments, in other words, have a real human capital problem, and it is one of their own making. Prior to 1970 or so, historians considered economic history to be an important subfield and hence stayed staffed up. After the so-called Linguistic Turn, history departments began leaving economic history slots unfilled, concentrating their increasingly meager resources on various types of cultural history. By the mid-1990s, when I was earning my Ph.D. in History, it was difficult to find any economic historians still taking graduate students. Some, like Stu Bruchey and Ed Perkins, were getting too old and disillusioned, while others, like John McCusker and Thomas Doerflinger, fled the Research I life for smaller institutions or left academe altogether. At SUNY Buffalo, I had to study under Richard E. Ellis, a brilliant historian but a specialist in political and legal history, and teach myself economics by reading Hume, Steuart, Smith, Hamilton, Ricardo, Mill, and eventually modern economists. By the time I was on the tenure track job market in the late 1990s, literally no History department wanted anything to do with economic history so I taught economics at the University of Virginia and the Stern School of Business instead! The few other graduate students so brazen and/or daft to study economic history in that era suffered similar fates instead of ending up in the Research I history departments where we belonged. So when the worm of historiography finally turned after 2008, not only were we not available to mentor History Ph.D. students interested in the history of capitalism, our work was not even as widely known or read by historians and their students as it should have been. The result was the disastrous path the history of capitalism subfield has taken.Thankfully, Robert Plant’s admonition in Stairway to Heaven, that there is still time to change the road you are on, holds here. The past failures of the history of capitalism subfield are sunk costs that can never be recovered but they need not be repeated. For a start, History departments need to admit that they have a problem. They should not allow graduate students to conduct research, even in a hot field like the history of capitalism, without having the proper professors on staff in sufficient numbers. That means making senior level hires, many at salaries that will have to be more akin to those paid to economists and business or law professors. (They can think of it as reparations for not hiring such people at the assistant level ten, twenty, or thirty years ago, as they should have. But economists will recognize it simply as the result of competing for talent with the professional schools where most such scholars sought remunerative work after being eschewed by the History Establishment.) When making hiring decisions, History departments will have to forgo the usual signals of quality, like publication in the American Historical Review, and defer to the judgments of journals like Business History Review, the Journal of Economic History, and even the American Economic Review, as well as book review authors they have never heard of before. They should look for historians, in other words, who have proven that they are astute in business, economic, and financial matters because they alone are the ones who can guide graduate students in History to make substantive contributions to academic and policy discourse in economic history. Think people similar to Naomi Lamoreaux, now at Yale, one of the few bona fide economic historians helping to train history graduate students.Despite its obvious conclusion, The Poverty of Slavery is still worth reading for all the details it provides about slavery, in all its many forms, from prehistory to the present. It is also valuable as a teaching tool because it situates something that almost Americans today find repulsive, slavery, on a scale of economic unfreedom. Every downward tick in a state’s or the nation’s economic freedom index, therefore, can be thought of as a step closer to government enslavement of the population and hence economic impoverishment (Miller and Kim 2017). Finally, Poverty also clarifies a few seeming anomalies in libertarian thought, especially the concept of “voluntary slavery,” which posits that free individuals should be allowed to contract to become slaves if they so choose (Block 2003). The book shows that society should never allow a free individual to give up the right to seek new employment because governments cannot be trusted to enforce labor contracts fairly. In other words, employers can, and do, break contract terms with impunity and the right of a worker to leave is the ultimate self-enforcement mechanism in the face of almost inevitable government failure. Ergo, even "voluntary slavery" should be against state policy.
ReferencesBales, Kevin. 1999. Disposable People: New Slavery in the Global Economy. Berkeley: University of California Press. Baptist, Edward E. 2014. The Half Has Never Been Told: Slavery and the Making of American Capitalism. New York: Basic Books.Block, Walter. 2003. “Toward a Libertarian Theory of Inalienability: A Critique of Rothbard, Barnett, Smith, Kinsella, Gordon, and Epstein.” Journal of Libertarian Studies 17 (2): 39-85.Hilt, Eric. 2017. “Economic History, Historical Analysis, and the ‘New History of Capitalism’.” Journal of Economic History 77 (2): 511-536.Miller, Terry and Anthony B. Kim. 2017. 2017 Index of Economic Freedom. Washington, DC: The Heritage Foundation.Murray, John E., Alan L. Olmstead, Trevon D. Logan, Jonathan B. Pritchett, and Peter L. Rousseau. 2015. “Review of The Half Has Never Been Told: Slavery and the Making of American Capitalism.” Journal of Economic History75 (3): 919-931.Townsend, Robert B. 2015. “The Rise and Decline of History Specializations Over the Past 40 Years.” Perspectives on History (December). https://www.historians.org/publications-and-directories/perspectives-on-history/december-2015/the-rise-and-decline-of-history-specializations-over-the-past-40-yearsWright, Robert. 2017. The Poverty of Slavery: How Unfree Labor Pollutes the Economy. Cham, Switzerland: Palgrave Macmillan.

Some Nuanced Perspective on The "Failing" New York Times/Fake News Phenomena

It is easy for intellectuals completely to dismiss certain absurdities spouted from on high but most actually have some basis and it is better to listen and understand why people hold the views they do rather than to dismiss them out of hand.

For example, back during the debates over the Affordable Health Care Act (aka Obamacare), people worried about "death panels." It seemed bizarre but was rooted in a profound insight: one should not have a life annuity (like Social Security retirement) and health insurance (like Medicare) through the same insurer (Uncle Sam) because of the incentive problem -- the annuity provider wants you to die so it can stop paying you.

Fake news is similarly rooted in a profound insight: the New York Times, WaPo, and so forth are written by and for members of the Eastern Establishment. One example of this appeared recently in the guise of a story about a play that critiques the now famous Hamilton musical. The reporter goes for comment to Eric Foner of Columbia, an esteemed doyen for sure but not an economic historian, and comes away with a quotation about the effect of slavery on the economy that most economic historians would have questioned or rejected. Like me, for example. I also critiqued Hamilton via a short rap song and alternative scene. Did the NYT reporter contact me? Of course not! I went to the University of Buffalo for my Ph.D. and teach in South Dakota. How could I know anything? I've only published like 18 books versus Foner's 22. It matters not that I'm 25 years younger than he is, and that he has never really studied the economics of slavery, he is right there at Columbia, where he also took his Ph.D. so he automatically knows more about the economic effects of slavery than I do, or any other economic historian (is that a thing?). My Poverty of Slavery can be safely ignored because the NYT Review of books did not review it, so it does not, in effect, exist. Except it does, and people who live outside of "the bubble" know it, and that it shows that slavery has never anywhere induced economic growth, it just enriches enslavers. But don't take my word for it. So the story, reporter, editor, and paper come across as perpetrators of news that is obviously incomplete and misleading. (Fake of course goes too far.)

My response to May's response to my review of his biography of Albert Gallatin

My response to May's response to my review of his biography of Albert Gallatin
I recently reviewed Gregory May’s biography of Albert Gallatin, Jefferson’s Treasure, on EH.NET here: http://eh.net/book_reviews/jeffersons-treasure-how-albert-gallatin-saved-the-new-nation-from-debt/ As anticipated, he has responded, as is his right. Rather than provide his book with more publicity than it deserves, I rebut his response here on my blog, where only interested parties are likely to find it.
As Deidre McCloskey explains in her excellent Economical Writing , if an author has to inform a reviewer what his or her book is really about, the author has already lost readers. May seems not to have understood a point that I made clear in my review, i.e., that my assessment would have been quite different if written for a different audience, e.g. political historians. He at least concedes that he has written a political biography, i.e., a work not usually of interest to economic historians, which was the thesis of my review for EH.NET (to wit, an audience of economic historians).
May also seems to have misunderstood my critique of his generalizations about early US bond ownership, which was not that some rich city dudes did not own bonds but that they were far from the only people to own them and that it is not clear that they owned a disproportionate share of them given their relative wealth. He also fails to see the importance of the fact that the bonds were actively traded, i.e., that ownership was not static but in fact changed frequently.
Ditto May’s complaint about the whiskey tax. My claim was not that the whiskey tax was solely to prevent distortion of the domestic economy, only that May failed to mention that fact, which is a highly pertinent one to economic and policy historians.
May’s book contains no bibliography, rendering it bloody difficult indeed to know for certain what he did or did not cite someplace in the book. My complaint about missing Freeman’s Affairs of Honor refers to specific passages where it should have been, but was not, cited. Moreover, it was meant as only one of numerous examples where the best sources were missed.
May’s complaint about my summoning of charivari again misses my point, which was that economic historians and other readers not conversant with “rough music” might think the Federalists who serenaded Gallatin one night were acting in an unusual way when in fact they were not. The fact that such tactics were employed primarily on “not important persons” only reinforces the notion that in fact Gallatin was not important at that time, that he was more infamous than famous, at least according to Federalists.
If May had read books like Bill White’s America’s Fiscal Constitution or Robert Hormats’ The Price of Liberty , he would know that the United States did NOT, in fact, “embrace … debt finance” long ago but did so only recently, basically since Bush II according to White. That is an important point because it means there is still time to revert to our superior Hamiltonian (and Gallatinian, etc.) fiscal constitution, which allowed for deficit financing only in wartime, with the debt paid down in nominal and real terms during periods of peacetime prosperity.
So I stand by my original conviction that May’s biography is well-written but that it contains little new and is not astute enough economically to be of much interest to economic or policy historians.

Loving the Bank Run Scene in It’s a Wonderful Life

Loving the Bank Run Scene in It’s a Wonderful LifeBy Robert E. WrightNOTE: This is the original, and much more personally revealing, version of the piece that appeared on 6 December 2018 on Zocalo here http://www.zocalopublicsquare.org/2018/12/06/george-baileys-building-loan-company-can-still-teach-us-banking/ideas/essay/ under the title "What George Bailey's Building and Loan Company Can Still Teach Us About Banking."
The bank run scene in It’s a Wonderful Lifealways makes me cry the tears of one whose lover may never return from prison, or battle. If you care about America, you should love the scene too, because it is a brilliant piece of cinematic storytelling but more importantly because it encapsulates the promise of the financial system, the reason that policymakers not only tolerate but actively encourage the development of institutions and markets powerful enough to make, or break, the lives of all Americans.Technically, the scene fulfills all the requirements of brilliance laid out in Robert McKee’s classic Story: Style, Structure, Substance, and the Principles of Screenwriting (1997). It builds tension through a progression of “beats” that constantly defies the viewer’s expectations as protagonist George Bailey battles antagonist Henry F. Potter, first with his words and vision and then with a timely infusion of cash. The protagonist starts the scene in a negative position but ends in a positive one, with the stakes in his struggle with Potter over the fate of Bedford Falls higher than ever, helping the story to arc towards its bell-ringing climax.The scene begins with George and Mary in the back of a taxicab on a cold, rainy day when the driver informs the newlyweds that a run on the local commercial bank, the only one in town given the policies of the era, appears to be in progress. George immediately hustles to his beloved eponymous Building and Loan, only to find it closed and hence in mortal peril. He lets his distraught depositor-investors in and opens for business. He learns that the bank ordered the immediate repayment of the loan it made to the Building and Loan, thus denuding the mortgage lender of all its cash. That premise was plausible because financial intermediaries often made short-term loans to each other that stipulated repayment upon demand. The subtext revealed in this and a previous scene is that the Bailey Building and Loan needed to borrow from the bank because some of its own borrowers were in distress and not making payments. Rather than foreclose, evict, and sell, George, like other community bankers with the means, allowed delinquent borrowers time to get back on their feet. The loan did not seem risky to George because at the time he took it out the bank was not yet under Potter’s complete domination.But then the evil Potter telephones to offer George his backhanded assistance, threatening that if George doesn’t sell out to him on the cheap like the bank just did, he’ll have to dispatch the police to prevent the “mob” from doing bodily harm to George and his relatives/employees after the Building and Loan goes bankrupt before the official close of business at six that evening. George hangs up and attempts to talk his way out of the jam but wailing sirens immediately trounce his attempt to calm the fears of his customers by asserting that the economic crisis, one of the several waves of bank failures that swept the nation during the Great Depression, “isn’t as black as it appears.” When Tom demands repayment of the $242 he invested in the institution, George correctly explains to him that building and loans are not commercial banks and that Tom owns time deposit-like shares in the institution payable in sixty days, not a checking deposit payable on demand. Despite George’s heartfelt, and accurate, reminder that the Building and Loan’s assets consist of long-term loans to his neighbors, Tom insists, implying that something must be wrong if the institution cannot pay out a mere $242.Randall then enters and tells the crowd that they can sell their shares in the Building and Loan to Potter for fifty cents on the dollar, cash. Tom immediately threatens to sell his shares to Potter because “it’s better to get half than nothing.” As the crowd starts to head for the door, George vaults the counter and blocks their path while plausibly explaining that if enough of the Building and Loan’s investors sell out, Potter will gain control of the institution and monopolize the town’s financial system and housing market, which will allow him to raise borrowing costs and rents to oppressive levels.An intimate knowledge of his investors and borrowers, the telltale attributes of a good community banker, enables George to draw out the implications of Potter’s control in personal, detailed terms, which stops the crowd long enough for him to expose Potter’s intent: the old codger is buying shares, not selling them, because he is using the financial crisis to get rich at the expense of the poorer and presumably less astute and informed townsfolk. The crowd seems to agree with George’s assessment, which triggers Americans’ long-standing hatred of monopolists, but the atmosphere remains thick with panic because everybody needs cash to feed their kids, pay medical bills, and hold them over until a family member can find employment once again. That’s when Mary steps up with $2,000 in honeymoon money that George begins to lend out, starting with $242 for the recalcitrant Tom. The next two customers, however, request only $20 each and George foreshadows the end of the run when he kisses Mrs. Davis for seeking only $17.50.The scene ends with the Building and Loan with just $2 left at the close of the business day, the employees drinking and joking that they hope the two bills will make love and reproduce like rabbits in the safe that night. Unstated is the fact that if the Federal Reserve System (“the Fed”) had been doing its job, it would have lent funds to the local commercial bank (or its correspondent bank in Manhattan), which then could have remained independent of Potter and would have had no reason to demand immediate payment of its callable loan to George’s institution.Then, as now, one of the Federal Reserve’s major functions was to act as a lender of last resort, to make emergency loans to troubled but solvent banks during crises. It failed to do so during the Great Depression, greatly exacerbating the misery. Since then, the federal government and its central bank have gone too far in the other direction on several occasions, bailing out bankrupt institutions that took on too much risk and should have been liquidated in an orderly fashion instead. Worst of all, its policies, most notoriously Too Big to Fail doctrine but numerous others as well, have actually increased the likelihood of financial crisis.As McKee shows, many other scenes in cinematic history are technically perfect but few of them, even those designed to elicit powerful emotions, make me cry more than once, let alone every dang time. My emotions arise not so much from lusting after Donna Reed or even the film’s hoary, classic arch plot of “good versus evil” as they do from the details of the struggle, which poignantly illustrate a point that I have been trying to establish since my pitiable career began a quarter century ago: To remain prosperous, America needs a robust, innovative financial system, but its policymakers need to ensure that Americans do not have to rely on a lucky good guy (George or the Federal Reserve) to thwart the numerous bad guys who happily hurt others (cause a financial crisis) in order to “make a bar” (Wall Street slang for a million dollars). Crises ultimately stem from the structure of incentives, institutional and individual, and hence that is where regulators should concentrate their efforts.That seems like an easy point to establish but it is not when almost everybody, Left and Right, approaches financial system regulation with more ideological baggage than they could check gratis on a Southwest flight. A cacophony of “isms” that block clear thinking and stymie learned judgement reduces incentive structures to “greed,” with the Left clamoring for less and the Right for more. But the devil lurks in the details, in precisely what people are rewarded for doing, and not so much in the amount they will be paid for doing so. In an age, however, when “capitalism” contends with “capitalisn’t” in sound bites and tweets, many swapped by people who cannot clearly differentiate supply from demand or micro from macro, making good sense just is not good enough. So I labor and blubber on, hoping not to end up some snowy night on a bridge over an icy river next to some modern day community banker, knowing full well that, despite our best efforts, America has become Pottersville.
ROBERT E. WRIGHT IS THE NEF FAMILY CHAIR OF POLITICAL ECONOMY AT AUGUSTANA UNIVERSITY IN SIOUX FALLS, SOUTH DAKOTA. HE IS THE AUTHOR OF 19 BOOKS ON U.S. FINANCIAL AND POLICY HISTORY, INCLUDING GENEALOGY OF AMERICAN FINANCE (WITH RICHARD SYLLA).

Econogogy: Embedding Economics Concepts in Pedagogical Decision-Making

I have been so busy, I forgot to blog! I think the slides capture the gist of my STL Fed presentation earlier this month: 

Reducing Financial Discrimination in America

Reducing Financial Discrimination in AmericaBy Robert E. Wright, Nef Family Chair of Political Economy, Augustana University for the ASHE/NEA Conference in Polson, MT, June 2018America’s financial history is rife with examples of financial exclusion, discrimination, and predation. Exclusion occurred when women or people of certain ethnicities, races, religions, or sexual orientations were as a group denied access to portions of the financial system. It was outlawed, more or less, and is relatively rare today because it is costly to work around even for the most committed bigots. Discrimination, whereby specific individuals are denied credit, insurance, or other financial service despite being objectively qualified for it, is more subtle and hence difficult to detect. Sometimes, instead of outright denial, it takes the form of higher interest or premium rates but always for ostensibly objective reasons. Its extent is difficult to discern statistically and real world experiments, whereby people with practically identical qualifications but different genders, ethnicities, skins colors and so forth apply for financial services at the same provider, cannot, for legal reasons, go all the way to the formal application stage. Predation is the inverse of discrimination, occurring when an individual who objectively does not qualify for a financial service, usually a loan, is allowed, even encouraged, to contract under the expectation of default and a windfall for the lender. Again, pinning down exact numbers is fraught in our messy real world, but predation certainly occurs and of course was common in the subprime mortgage and payday lending markets of the early Third Millennium AD. Determining the extent of predation is difficult, too, because high rates of interest are not prima facie evidence of it, as it is costly to make small, short term loans and of course annualizing rates can be deceptive. Most people balk when they hear a loan has a 1,000% interest rate but when that loan is described as costing $23 and was taken out to avoid a $50 late fee, it suddenly seems like a mutually beneficial transaction.Three ways of reducing financial discrimination have been tried in the U.S. The worst approach was implemented in the 1990s, when regulators began to encourage lenders to lower credit standards. That approach encouraged predatory lending by granting lenders ample access to borrowers with poor or no credit histories, few assets, and relatively little secure income. In other words, targeting borrowers most vulnerable to predatory lenders became acceptable, even mainstream. Lowering credit standards also encouraged mortgage securitization and ultimately led to the subprime mortgage crisis and resultant financial panic and global recession, the negative effects of which are still being felt.Lowering credit standards was the regulatory response to failed attempts to mandate an end to financial discrimination via laws like the Community Reinvestment Act or CRA, which, regulators had hoped, would be as effective as outlawing outright financial exclusion had been in the 1960s. Alas, it was much easier to enforce a law stating that banks and insurers could not reject the applications of all women, African-Americans, Hispanics, Native Americans and so forth than it was to cajole them into not discriminating against individual members of those same groups. Lenders and insurers had to have the last say in who they would lend to or insure and of course the government itself did not want to directly enter the loan business. Various U.S. colonies and states had tried that game and gotten burned more often than not, even when making loans to presumably prime borrowers.Traditionally, the U.S. had handled discrimination not with top-down regulations like the CRA, but rather via markets. This third approach is not a panacea for reasons I will explain later but it was more effective than eroding standards or trying to regulate institutions that have proven themselves both too big to fail and too big to regulate. It was called self-help and entailed regulatory gatekeepers allowing groups that felt discriminated against to form their own financial institutions. The logic was that if a group that felt discriminated against was really not, if it was composed of individuals who should not receive loans or insurance or whatever, or if group members could indeed obtain service at existing companies, the new institution would soon fail. That would impose a cost on the regulatory safety net but a light one. If members of the group were actually being discriminated against, then the new institution should succeed, thrive, grow, and so forth, thus reducing if not ending the discrimination. Self-help, in other words, was a market test of discrimination and a way of allowing Gary Becker’s insight that competition destroys discrimination to work itself out in the real world.The Lumbee Guaranty Bank, for example, charges its borrowers a higher interest rate than the local bank run by Euroamericans. So Dobbs Oxendine, a Lumbee entrepreneur, borrows from the latter. The very fact that he can do so suggests that the Lumbee Guaranty Bank may not be necessary. Regulatory approaches that rely on markets have a far better chance of success, of actually helping those groups that regulators purport they would like to help, than those that try to repress markets.The self-help approach worked amazingly well throughout U.S. history. Early in the nation’s history, commercial banks catered mostly to wealthy merchants. When artisans, farmers, and manufacturers complained, lawmakers allowed them to form their own commercial banks. They did, and it was good, as the new entrants thrived and the established institutions began to re-think their prejudices. Then philanthropists created new institutions, called mutual savings banks, that allowed another unbanked group, the poorest of the poor, to safely earn market returns on any pennies they were able to save. Members of the working classes took note and, excluded from both the savings banks by maximum deposit regulations and commercial banks, which would not cater to consumers until the twentieth century, they gained permission from lawmakers to form their own financial institutions, which they called building and loans. Later, the working classes would form and join credit unions, Morris Plan banks, and industrial banks. Their fraternal organizations competed with industrial life insurers in the provision of low-cost burial and life insurance.Members of the immigrant groups that streamed into America over the course of the nineteenth century also found it difficult to gain access to established financial institutions. In case you aren’t aware of this history, many Americans considered Irish Catholics to be almost simian. But when they wanted to form their own commercial and savings banks, building and loans, credit unions, and life insurers, lawmakers allowed them to, setting a precedent followed by all the subsequent waves of European immigrants, from the German Forty-Eighters fleeing political persecution to Eastern Europeans seeking a better life.Some of those immigrants were Jews who found themselves discriminated against on Wall Street. So they established their own investment banks, including Kuehn Loeb and Goldman Sachs. Well after World War II, various big investment banks, brokerages, life insurers, and investment funds were associated with different religious groups, some Jewish, some Catholic, some WASP.  The rhetoric of free enterprise meant that any group that could put up their own capital and/or find financial backers had the right to enter and compete for business on any basis. There were even African-American brokerages by the 1950s.Blacks, Hispanics, women, and even some American Indians joined the self-help bandwagon and formed their own banks and insurers. Black-owned life insurers were particularly successful, as were black-owned banks where ever African-American businesses thrived, as they did in Tulsa until the infamous white riot there in 1921. In 1943, Edwin Embree, a high ranking executive in several important philanthropic foundations, summarized the state of black financial enterprise prior to World War II as follows: The insurance companies, which grew out of the widespread burial and mutual societies, have flourished because of the discrimination against Negro policyholders by the large white companies. Banks, which despite a number of failures rank close to insurance in financial importance, have as one of their chief reasons for existence the refusal of general banking institutions to give credit on equal terms with others to Negro individuals and businesses.Self-help was less effective when levels of bigotry were high, however, because the self-help institutions themselves were discriminated against. In early postwar Chicago, for example, 21 lending companies with assets of almost $8.9 million were run by African-Americans but they found raising adequate capital “all but impossible” because “non-Negro institutions” would not buy, or lend on the collateral of, their mortgages. Savers therefore tended to eschew them for the higher rates or greater safety afforded by lending institutions run by whites. At the same time in Philadelphia, however, a black banker named Edward C. Brown leveraged his reputation for financial wizardry to obtain loans on favorable terms from institutions run by whites.So some banks owned and operated by African-Americans, women, Hispanics, and other oppressed groups did manage to survive and even thrive. And new ones continued to form, though at a rate barely above the rate of exit, a few from bankruptcy but most from mergers. The great merger waves that swept the life insurance and banking industries, the latter following the deregulation of first intra-state and then interstate branching in the final three decades of the last century and the first decade of the present one, greatly reduced the salience of self-help. Between 2000 and 2014, for instance, the number of banks owned and operated by American Indians increased from 14 to just 19 on net. Regulators apparently did not find the stagnation of self-help problematic as they believed that the CRA and/or lowered credit standards had, or would, virtually eliminate discrimination. They were wrong about that but enough time has passed since its heyday that few regulators remember the historical importance of the self-help approach. And it hasn’t helped that de novo banking went extinct for everybody following the Panic of 2008, when I was part of a group, led by a wealthy paraplegic, just starting to develop a proposal for a bank to service people facing a wide range of physical and psychological challenges. Yes, a handi-bank for lack of a better term. Discrimination comes in many forms, which is why we should prefer market responses. Markets, after all, are usually much more nimble and subtle than top down regulations.The effectiveness of self-help can also be reduced when few members of the group being discriminated against possess the human capital, the skills, education, and experience, needed to successfully enter banking, insurance, or other financial services. Thankfully, commercial banking is not rocket science. One does not need an MBA from a top tier business school to become a good community banker. In fact, such a pedigree would probably be a disqualification. Actuarial work is rocket science -- almost literally as many actuaries trained as physicists -- but actuarial and other highly technical services can be outsourced, at least at first. Where you need members of the group being discriminated against is in the trenches were loan and insurance applications are received, processed, and decided. That is where their understanding of their own group can do the most good, first by enticing people to apply and second by providing more nuanced judgments about applicants’ ability to repay or minimize claims. A banker from off the Reservation, for example, may think that an applicant’s income is too low but a fellow American Indian might realize that the applicant has significant income that he can’t show as it may come from the applicant’s own subsistence activities or in-kind aid from members of his clan. An outside banker also doesn’t understand land tenure systems on Reservations and has little incentive to, but an Indian banker would. An outside banker won’t make a loan on a car that she can’t find an approximate market value for on the Internet, but an Indian banker can estimate the value of a Rez car. And so on and so forth. And similar scenarios can be imagined for every group that can’t get loans or insurance, from members of the LBGTQ community to rednecks to African-Americans.None of this means that regulators should allow just anyone to enter any financial service and completely wing it. Philanthropies and regulators can help jumpstart self-help success by supplying start up capital and subsidizing the education and maybe even some work experience for members of groups underrepresented in the financial services sector and work with them to help build their businesses. But they need to step aside at some point and allow the bank or insurer to sink or swim on its own merits.Recently, the Minneapolis Fed and the Philadelphia Fed, implemented programs designed to help African-Americans and American Indians to create their own financial institutions. Much more remains to be done but regulators need to combat the inclinations of incumbent financial institutions, which would rather face ineffective top-down regulations like CRA than additional competition.Regulators should also work to minimize business-to-business discrimination. A bank owned and operated by American Indians or, I don’t know, Furries, should not have to pay a higher interest rate for overnight funds than any other bank of its size, region, and longevity. Insurers should be able to obtain reinsurance on rational terms, and so forth.I cannot stress enough that self-help is not a panacea. It cannot overcome systemic racism. But it is a more market-oriented approach than top down regulations and much less of a systemic risk than lowering application standards. Throughout U.S. history, it frequently worked completely but even where its success was limited we have to remember that self-help banks and insurers still helped their customers to obtain needed financial services, even if it was just for a few years or decades, or in just a few places. Moreover, some groups may be able to make more headway with self-help than in the past as bigotry and prejudice, while still lamentably powerful, are perhaps not quite as ubiquitous as in the past. There is only one way to find out and that is for regulatory gatekeepers to once again encourage new entry by any group that believes it is being discriminated against.Thank you!

Capitalism Has To Go. Same with Socialism.

Capitalism and socialism are deeply flawed and need to be eradicated. I speak not of the economic systems sometimes labeled capitalist(ic) or socialist(ic) but rather of the intellectual constructs, which consistently obscure more than they reveal. Capitalism and socialism are to political economy what air and wind are to climatology, much too vague to be of significant analytic value.
Karl Marx and other political economists popularized the terms capitalism and socialism in the nineteenth century. Like many other -isms, neither enjoy a clear, quantifiable definition. Like beauty, capitalism and socialism reside in the eye of the beholder. Like pornography, experts believe that they know it when they see it.
Unsurprisingly, definitions of both terms reproduced rapidly, culminating in 111 discrete definitions of capitalism according to legal historian Edward Purcell. Economists Kate Waldock and Luigi Zingales recently responded to this jargon sprawl with a clever podcast call Capitalisn’t.
Socialism has been similarly fecund, spawning libertarian, religious, and other hyphenated offspring logically possible only by liberally contorting the core concept. “Definitions of socialism,” John Martin noted, “are almost as numerous as the combatants for and against socialism.” (If you have not heard of John Martin, that is probably because he wrote those words in the American Economic Reviewin 1911!)
Many on the Left use the term capitalism as a sneer or a schmear, as a sort of trump card whenever their logic or knowledge of economics flags or falters. In their view, everything wrong in the world, including problems clearly caused by governments, stems from capitalism, which controls all in a vain attempt to satiate its inherent greed and bloodlust.
Many on the Right have deified and reified the term capitalism, essentially reducing it to competition or economic freedom so they can use it to bludgeon sundry apostates who dare question the Citizens’ United decision or the corporate governance status quo. For many conservatives, capitalism can do no wrong, even when the financial system implodes and CEOs get big bucks for bankrupting their own companies.
Conversely, conservatives have recently conflated socialism with hyperinflation in Venezuela. Milton Friedman, who famously said that inflation is always and everywhere a monetary phenomenon, must be spinning! At the same time, many liberals seem to think that socialism, their version of it anyway, would be a panacea for all our socioeconomic ills.
If they are ever to understand America’s economic system thoroughly enough to aid its functioning, scholars, pundits, and policymakers need to be more specific than X-ism. If prices seem too high, they should investigate market power (monopoly; monopsony), not capitalism. If income seems maldistributed, they should not blame capitalism, but look instead at tax incidence and the redistributional effects of Social Security. If corporate welfare waxes in importance, they should invoke concepts like rent-seeking and regulatory capture, not banalisms like capitalism.
And conservatives need to understand that capitalism does not make nations wealthy, good institutions that create incentives for individuals to work harder and smarter do. Regulations do not hurt capitalism, they hurt some economic entities while benefiting others. Competitive markets, not the financial well-being of wealthy capitalists, drive efficiency gains.
Economic policymaking cannot improve if members of this nation’s reputed intelligensia continue to discuss crucial economic policy issues using only hackneyed, vague concepts like capitalism and socialism, any more than analysis of the climate could improve if scientists only spoke of air, instead of its constituent gases and their many, complex interactions. So the next time you hear Bernie or Sarah Sanders invoke capitalism or socialism, ask them to specify precisely what they mean. If they cannot, consider instead the policy advice of someone with a more nuanced grasp of our nation’s economic and policy landscape.

Legalizing Mary Jane and Freedom

Many people across this great (again?) land are finally joining the pot legalization bandwagon. I like the groundswell though I have never touched the stuff myself and hope never to do so. I wish, however, that more people could extrapolate from marijuana to ... LIFE.

Why did we ever let the government tell us what we can legally put into our own bodies in the first place? Are we a free people or not? If X's actions endanger no one except X (and maybe not even X him or herself) what business is it of anyone else's? Americans should be free to smoke pot, take experimental medications, change their genders, work for any sum of money they can negotiate (including volunteering), and pay whatever rent or interest rate they think fit, so long as they aren't hurting anyone else in the process. (Yeah, abortion gets a bit tricky so I won't discuss it here.)

Oh, you say, but the people who do Y need more assistance from Public Program Z. That may or may not be (they might cost Medicaid more but never collect Social Security, for example) but did you ever think that maybe Public Program Z shouldn't exist in the first place? Cardi B wants to know where her taxes are going. The short answer is ... the Upside Down, the Sunken Place, the Onion's bottomless money pit ... doing things that most Americans don't want done at all, or wouldn't want done if they would simply think about their negative effects on the economy and our individual freedoms.

So I won't thank Trump for reducing taxes, but I will thank him when he cuts total federal expenditures by getting rid of wasteful stuff, like the enforcement of federal marijuana laws.