Robert E. Wright's Blog, page 8

"Wells Fargo Withholds Top-Level Bonuses" by Emily Glazer and Austen Hufford

In today's (3/2/17) Wall Street Journal, Emily Glazer and Austen Hufford describe how the board of directors of Wells Fargo has stripped 8 top execs of bonuses tied to the fake account creation scam. That is certainly a step in the right direction. What the Wells Fargo board and investigative reporters need to look into, though, are the scams that Wells Fargo ran on borrowers who had defaulted on their mortgages during the subprime mortgage fiasco. This included hiding behind  "holder in due course" doctrine though WF (or at least some persons employed by WF) knew the bank was buying tainted paper and colluding with the lawyers of mortgage defaulters to induce their clients to settle deficiency suits when it best suited WF execs. (When anything is collected on debts previously written off as bad the funds go right to the bottom line.) Finding sufficient evidence would take some digging, and will probably require a whistle blower, but the story would be worth a Pulitzer or at least a Peabody.

UPDATE: The WSJ reported today (4/6/17) that Wells Fargo did indeed screw over additional groups of customers, including credit card holders. Reporters who keep pushing will be rewarded! So, too, will regulators. The big evil bank's transactions going back to the subprime crisis -- ALL OF THEM -- need to be scrutinized. If the bank dies in the process, so be it. There are PLENTY OF CREDIT UNIONS that will be happy to hold deposits, etc. safely and ETHICALLY for former WF customers.

UPDATE 2: The WSJ reported today (4/11/17) that the "clawbacks" on executive compensation were being increased at the top level. A 113-page report essentially blames the former CEO for the bank's unethical practices. This is a flawed narrative! WF has been "evil" since at least 2000. They are throwing Stumpf under the bus (as they well should) not for justice but to try to minimize the damage by limiting wrongdoing to the reign of the most recent CEO. The FEDERAL RESERVE and FDIC need to investigate Wells Fargo's activities carefully, all of its activities, going back to Kovacevich if not Hazen.

See Genealogy of American Finance for background!!!!

Selling Slavery: Conflating Profits with Prosperity in the Early Republic

Apologies for the last post but I hit both the ASSA/AEA and the AHA this year, while teaching an intensive January course to boot! So this slipped my mind until now.



Selling Slavery: Conflating Profits with Prosperity in the Early Republic Robert E. Wright, Augustana University, at the American Historical Association Conference, Sheraton Denver, CO, 7 January 2017, 1:30-3:00 p.m. Governor’s Square 15
Slavery in America was often called the “Peculiar Institution” but what is truly peculiar is the historiography of slavery. From about 1850 until about 2010, people opposed to slavery held that slavery hurt economic growth, defined as increased, inflation-adjusted per capita aggregate output and measured by indices like GDP, and development, defined as the capacity for growth and measured by various indices of literacy, education, technology, and infrastructure. People who argued during that period that slavery aided economic growth and development were racist, pro-slavery advocates like George Fitzhugh, or, like Robert Fogel and Stan Engerman, they were castigated as racist, pro-slavery advocates by various liberals and progressives.That equilibrium made good intuitive sense because it allowed anti-slavery thinkers to advocate abolition on both moral and economic grounds. No tradeoff between morality and growth was necessary on either side; either slavery was all bad or it was all good. In recent years, however, a spate of books by Ed Baptist, Sven Beckert, Robin Blackburn, Walter Johnson, Calvin Schermerhorn, and others has attempted to break the equilibrium by maintaining that slavery, while a moral evil, aided, nay caused, U.S. economic growth and development. None of those authors has been called racist because their goal is to make a case for general reparations from taxpayers to the descendants of slaves. Such a policy, though, would be fraught with difficulties, the most important of which is that slavery actually hurt the overall U.S. economy. As I show in Poverty of Slavery: How Unfree Labor Pollutes the Economy, which Palgrave is publishing in early March of this year, slavery creates profits for enslavers but it does not stimulate growth or development. Most obviously, only a few slave nations grew rich and some grew rich without, or before, becoming slave powers. Without having to run a single regression, we therefore know that slavery is neither a necessary nor a sufficient cause of economic growth.Poverty of Slavery also shows that slavery could not have aided growth or development at the margins either. That is because slavery creates huge negative externalities, or costs not born by enslavers. So while slavery was often profitable for enslavers, its marginal net effect on the economy was clearly negative when the costs of controlling slaves and numerous other negative externalities, like decreased innovation, population, and non-slave wages, are accounted for. That holds not just for the antebellum U.S. but for every slave society the globe over since prehistoric times. Those few slave nations that attained wealth and development did so despite slavery, not because of it.Without the concept of negative externalities, which economists did not formally name until the early 20th century, identifying the poverty induced by slavery is difficult to discern. That is why prior to about 1850 or so abolitionists were often silent about the economic effects of slavery. They knew that slavery was a ubiquitous institution because it was usually profitable and feared that those profits meant that slavery stimulated growth and development. So they remained fixated on the moral and religious aspects of the institution, a message that many Americans did not find compelled them to action. Early proslavery thinkers also did not calculate the negative externalities created by slavery, yet they often downplayed the profitability of enslaving others for rhetorical and competitive reasons, so they, too, generally concentrated on the cultural and religious effects of enslavement.Those who came to see the negative externalities created by slavery became abolitionists because it removed all doubt from their minds. Hinton Helper was the most famous of these. His Impending Crisis is basically an extended, if somewhat sloppy, analysis of the negative externalities created by slavery. “Slavery,” he wrote, “benefits no one but its immediate, individual owners, and them only in a pecuniary point of view.” “Does the slaveholder, while he is enjoying his slaves,” Helper wondered, “reflect upon the deep injury and incalculable loss which the possession of that property inflicts upon the true interests of the country?” Or my favorite: “Slaveholders! … You are daily engaged in the unmanly and unpatriotic work of impoverishing the land of your birth. … Your conduct is reprehensible, base, criminal.”Helper was not the first to separate profits from growth and development, nor was he the first to point to the many costs that slaves imposed on the larger economy. In 1764, Philadelphia merchant Nicholas Waln wrote to Richard Waln: “The illicit Trade wch has been carryed on a long time has probably enriched the Individual, but I believe in the Event will extremely derogate from the Good & true Interest of the Colonies.” A few years later, a writer in New York also noted that “a Merchant may, and often does, get rich by a Trade that makes his Country poor.” In one of his famous state papers, Alexander Hamilton also noted that profits and economic growth were sometimes incompatible. In 1817, Littleton D. Teackle of Maryland noted that “merchants, speculators, stock-jobbers and money changers … may flourish and get rich though the country be ruined.”The notion that the enslavement of others was one of the activities by which a few became enriched at the expense of the whole can be dated back to at least Jean Bodin, a sixteenth century French philosopher, who argued that the profits created by slaves were offset by the fear induced by the institution in both slaves and the general population. As Bodin put it, slave societies were “always in daunger of trouble and ruine, by the conspiracie of slaves combining themselves together: All Histories being full of servile rebellions and warres.” Eighteenth century German scholar Johann Gottfried Herder also clearly saw that slavery created social costs not borne by slave masters. He attributed to slavery the spread of syphilis and the devastation of three continents.In the early nineteenth century, the notion that slavery imposed large costs on non-slaveholders gained traction in America. In 1805, Thomas Branagan of Philadelphia compared slavery “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.” George Mason had also likened slavery to a “slow Poison” and in 1832 fellow Virginian Henry Berry argued that slavery was akin to raising tigers, something the state certainly had an interest in arresting, even if it was “a very lucrative business.” Virginians would not be allowed to raise “the far-famed Upas tree” (the “Tree of Death”), he argued, even if it grew entirely on their own private land. That same year, Charles James Faulkner said the same thing but much more directly before the Virginia House of Delegates: “Slaves are injurious to the interests and threaten the subversion and ruin of this Commonwealth.” Just a year later, on the other side of the Atlantic, Joseph Conder argued that free laborers cost society less than slaves did because slavery encouraged “a wasteful and deteriorating husbandry” due to its reliance on monoculture and primitive tools as well as “contingent social evils, which demand a precautionary provision.” “The ultimate cost of slavery,” he concluded, also included “the state expenditure which it renders necessary in order to provide against the dangers inseparable from the existence of a servile class.”Such arguments could at first be dismissed as mere rhetoric but as the years turned into decades one of the greatest natural experiments in history, the division of the United States into free and slave slaves, helped observers to test the negative externality hypothesis. As early as 1824, the economies of Pennsylvania and Virginia were compared and the former found superior. Several decades later, the economic differences between otherwise comparable free and slave states were even more pronounced, a point made forcefully by Cassius Clay, a Kentucky slaveholder ‘mugged by reality’ and converted to the antislavery cause. Despite Virginia’s natural advantages over New York, the latter exceeded the former in “the elements of National prosperity and glory; wealth, numbers in new countries, literature, industry, the mechanic arts, scientific agriculture, &c.” Slavery, Clay concluded, was clearly to blame. “The twelve hundred millions of capital invested in slaves is a dead loss to the South,” he declared, predicting, accurately, that the free North would defeat the slave South in a civil war.At the outset of that war, Irish economist John Elliott Cairnes established the orthodox view that held until about 2010:Those who are acquainted with the elementary principles which govern the distribution of wealth, know that the profits of capitalists may be increased by the same process by which the gross revenue of a country is diminished, and that therefore the community as a whole may be impoverished through the very same means by which a portion of its number is enriched. The economic success of slavery, therefore, is perfectly consistent with the supposition that it is prejudicial to the material well-being of the country where it is established.Before closing, I need to make clear that the issue of externalities and the economic effects of slavery is not a merely academic one. In case you haven’t heard, slavery did not end in the nineteenth century, it merely changed form, into debt peonage, bonded labor, sex trafficking, child soldiers, and myriad other forms. Although unfree laborers compose a much smaller portion of the global work force than ever before, in absolute numbers they are now more numerous, between 30 and 45 million by common estimates, than at any time in history. The notion that slavery can jumpstart economies can, and has, been used to justify enslaving people today. Claims that Britain and the U.S. grew rich due to slavery have emboldened those in developing nations to ignore international anti-trafficking protocols on the supposition that it is not fair for the rich nations to prevent poor nations from catching up economically by outlawing a key growth driver. What this paper, and Poverty of Slavery, re-establish is that slavery is not just immoral, it is bad economics because any economic benefit produced by enslavers’ marginal profits, the profits earned above and beyond what would have been earned using a less coercive labor regime, is more than wiped out by the societal costs created when people are forced to work against their will. This in no way diminishes the sacrifices of African-American slaves or indeed any other group enslaved in the past, which, by the way, would include most people alive today. It does, however, suggest that general reparations for slavery are not merited and that the descendants of slaves should look to the profits created by their ancestors for recompense.Thank you.

Punched in the Gut, Twice

This first appeared on the blog of Historians Against Slavery.



Whenever I hear anyone earnestly claim that slavery is/was good for the economy, I feel like I have been punched in the stomach, twice. That is because I’m a neo-abolitionist and a scholar of economic growth who knows that slavery causes only poverty.
My first seven books, from my dissertation (unpublishable at 1,300 pages) through Financial Founding Fathers, explored the finance-led growth hypothesis, the notion that financial services like intermediation and risk management cause economic growth. While writing those books, I noticed the crucial role played by the protection of human rights, especially the rights to life, liberty, and property, underlying financial development. That led to books like One Nation Under Debt and Little Business on the Prairie. I also noticed that economic growth was often impeded by irrational institutions and public policies of dubious quality, themes I explored in books like Broken Buildings Busted Budgets, Bailouts, Fubarnomics, Corporation Nation, Genealogy of American Finance, and, ultimately, The Poverty of Slavery .
Nobody seriously doubts the claim that slaves were important components of many economies, especially the economies of slave societies like the antebellum U.S. South. But many important factors of production can be adduced and none of them are causal in any fundamental sense. What differentiates wealthy (high real output per capita) economies from poor ones is the incentive to produce goods for market. People in poor countries fear for their lives and property, just as the colonists in British North America did before, during, and just after the Revolution. The Constitution, and the policies enacted during the Washington administration, changed that and the U.S. economy has been growing at more or less modern rates ever since, subject only to the periodic and temporary reversals associated with business cycles.




The U.S. economy should have, indeed would have, grown faster early on but it was held back by slavery, which created enormous negative externalities, or costs not borne by enslavers. Slave patrols, public whipping stations, standing military garrisons, and fugitive slave acts were among the most palpable ways in which enslavers milked taxpayers to keep their wretched system alive. The fact that slaveholders were heavily subsidized became widely understood by the late antebellum period and helped lead to the sectional break that ended in civil war.
The Poverty of Slavery describes the negative externalities created by enslavement in great detail, not only in America but in every major slave society across the globe, from 10,000 BCE to the present. It pays particular attention to the ways in which enslavement changed in response to the Great Emancipations of the nineteenth century and, while doing so, defines slavery along a 20-point scale of freedom designed to allow scholars and activists to identify subtle differences in the lived experiences of sundry types of laborers, both free and unfree, across time and space.
The final chapter explains that slavery must be ended, once and for all, because it is always a moral abomination and a drag on prosperity. Eradication must entail catching and convicting enslavers and stripping them of their wealth. Then, and only then, will they conclude that slavery does not pay and give it up. We will all be the better, both spiritually and materially, for de facto abolition.

Dying in the Last Ditch, Or the Final Refuge of the Damned: The Ad Hominem Attack and Academe

I was thrilled that my colleague Reynold Nesiba emailed the following regarding my recent op ed, "Are We Going to Steal from the Poor (Again)?." Apparently, he bcc'd a bunch of friends/acolytes on the message, as a form of posturing. As in, "I am not afraid of this guy and I can prove it by showing you all that I emailed this ridiculous message to him." Of course it is just an ad hominem statement ... an attack on me rather than my argument. My op ed shows that it is perfectly rationale to borrow small sums for short periods at "high" rates of interest when the total cost of borrowing, in dollars, is less than some other penalty, e.g. a late fee on a parking ticket, a bounced check, a late fee for rent, etc. Professor Nesiba can't dispute that but he can call me names. While his response might seem more typical of an elementary school playground bully than a professor, it is actually quite common behavior in academe when people have much at stake. I like to call it dying in the last ditch. We can't well expect Prof. Nesiba to admit that his usury policies are wrong when he spent all that time cajoling people into signing his petitions, so he resorts to calumny.

The irony of the whole thing is that while he was making his ad hominem attack, I was in an archive in Florida working on my 18th book, Jim Crow Finance. See the registration form below. Nesiba has publicly admitted that he has not read my corpus , even the books that I gave him copies of, yet he purports to know my arguments and evidence and can characterize them in a single broad generalization. Perhaps if he was more widely read and published he would have a more nuanced and sophisticated view of the world? He certainly wouldn't have the time to send such silly emails. Just because one has the academic freedom to do something doesn't mean one ought do it. But like I said, he had to lash out because there is no rational retort to my op ed.

Just wait until I hit him with the evidence of the utter failure of his minimum wage law!


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Does Enslaving Others Help the Economy or Not?

Does Enslaving Others Help the Economy or Not?Robert E. Wright, Nef Family Chair of Political Economy, Augustana University, for the Historians Against Slavery Symposium, Loyola University, New Orleans, La., 19 February 2016.
For millennia, the answer to the query posed in the title of this talk would have been “of course slavery helps the economy.” Even early abolitionists believed that slavery was an economic “necessity,”so they concentrated on the many immoral aspects of the institution. These early views were premised on the well-supported belief that enslaving others was profitable for enslavers. Surely some enslavers owned too many slaves or otherwise botched the management of their households or commercial enterprises but no economic institution of such ubiquity and longevity could have been unprofitable on average. Slavery of course began in prehistory and touched every major society on every inhabited continent.In the eighteenth century, Benjamin Franklin, Adam Smith, and others argued strenuously that slavery was unprofitable because slaves did not have much incentive to work hard or smart. Enslavers and abolitionists alike knew claims of unprofitability were wrong, so their arguments, eloquent as they were, fell flat. In the nineteenth century, by contrast, U.S. observers like Cassius Marcellus Clay, Hinton Rowan Helper, and Frederick Law Olmsted noted that slave districts did not keep pace economically with regions relatively devoid of slaves. Real per capita incomes were lower in the slave states, which also lagged the so-called free states in education, infrastructure, and other measures of development, i.e., the capacity to generate growth. All three authors blamed slavery for the discrepancy. It was not that slavery was unprofitable for slaveholders, they argued, it was that profitability did not ensure economic growth or development. During the Civil War, Irish economist John Elliott Cairnes made the matter clear:Those who are acquainted with the elementary principles which govern the distribution of wealth, know that the profits of capitalists may be increased by the same process by which the gross revenue of a country is diminished, and that therefore the community as a whole may be impoverished through the very same means by which a portion of its number is enriched. The economic success of slavery, therefore, is perfectly consistent with the supposition that it is prejudicial to the material well-being of the country where it is established.That slavery led to enslaverprofit but economic backwardness became the standard interpretation, as in Lewis C. Gray’s History of Agriculture in the Southern United States to 1860, save of course in the racist literature inspired by Ulrich Bonnell Phillips, which argued that slavery was too paternalist to be profitable. Stan Engerman and Bob Fogel put that notion to bed in Time on the Cross and Without Consent or Contract. Subsequent studies, like John Majewski’s A House Dividing, documented the South’s relative economic backwardnesswithout challenging slavery’s profitability for individual enslavers or even its economic efficiency, narrowly defined.Recently, however, a bevy of books by Ed Baptist, Calvin Schermerhorn, RobinBlackburn and others have claimed that slavery was an indispensable part of the Industrial Revolution, the development of capitalism, and so forth. In their view, slavery was both profitable and crucial for economic growth and development. These good folks are trying to lay the grounds for reparations but at the same time putting living people at increased risk of enslavement by providingdeveloping world officials with yet another reason not to clamp down on human trafficking, debt peonage, child soldiering, and so forth. If slavery made the U.S. wealthy, as Baptist and his buddies claim, such officials reason, then aren’t antislavery efforts just another imperialist attempt to keep their nations impoverished? Perhaps slavery should even be encouraged. Maybe slavery is immoral, they reason, but the ends justify the means.I believe that Baptist et al are wrong and Helper et al were right. For starters, slavery can’t be a necessary cause of growth because the Dutch became wealthy before they began enslaving others and the Scandinavians after they gave it up. It also can’t be a sufficient cause of growth because most slave societies did not experience sustained economic growth or development. The best that can be said of slavery is that it did not completely stop the growth or development of some economies, like that of the antebellum U.S. South.But let me be clear that slavery did not help the overall U.S. economy. In fact, I’m sure that enslaving others always hurts the overall economy regardless of how profitable it is for individual enslavers or how efficient it is in narrow economic terms. That is because slavery creates very large negative externalities, or costs imposed on society rather than on enslavers. Slavery, in other words, is akin to pollution spewing from an unregulated factory. The factory ownersget rich and the factory appears to be very efficient because it produces goods at a relatively low cost, but only because the people downwind and downstream of the factory pay the bulk of the costs in the form of dirty and poisonous air and water.The negative externalities created by slavery are, unfortunately, more difficult to see than smoke plumes and dead fish but they did, and do, exist. They range from the socialized costs of controlling slaves by means of slave patrols, fugitive slave acts, public whipping posts, and insurrections to the opportunity cost of slaves’ lost talents. Other factors equal, slaves die youngerthan free people and are more likely to spread disease and suffer from debilitating accidents and psychological disorders. They are much less likely to be literate or to invent new tools or techniques. In short, masters deprive society of their slaves’ full human potential. Thomas Fuller, for example, did drudge work at his masters bidding instead of mathematicsalthough he could solve complex arithmetic problems in his head faster than any of his educated, white challengers could do using pen and paper. From society’s standpoint, Fuller should have been a merchant or a census enumerator, not part of a potent military threat.The problem with all of the recent studiesthat purport to show that slavery helped the U.S. economy is that they ignore the numerous negative externalities created by slavery. In other words, they forgot the lesson of Bastiat’s Window, or “That Which is Seen, and That Which is Not Seen.” In that parable by French political economist Frederic Bastiat, a boy breaks a shopkeeper’s window. Onlookers beseech the shopkeeper not to be angry with the boy because he has provided employment for a window maker. Bastiat grants that fact but notes “All this is that which is seen.” That which is unseen, Bastiat points out, is that due to the broken window the shopkeeper has less money with which to buy bread, wine, cheese, and so forth. So the boy’s actions did not help to stimulate the economy, as the onlookers suggested, but merely redistributed wealth from the bread maker to the window maker. Plus, the little bastard broke a window.In Bastiat’slanguage, the profits of slavery are that which is seen. That which is not seen are the negative externalities caused by slavery, the death, destruction, and rapine that always accompanies the enslavement of others and that imposes significant costs onto society at large, i.e., the overall economy. In Baptist’s language, negative externalities are yet another half untold.Measuringall the many negative externalitiescreated by slavery with any degree of precision is difficult if not impossible but thankfully we do not need a close accounting to be convinced that they outweigh the benefits of slavery, which of course are only marginal. In other words, to discern the effects of slavery on the overall economy we should not compare the negative externalities to profits but only to those profits due to the use of enslaved labor, or, in other words, the enslavers’ profits minus the profits that he/she or it would have earned without the use of slaves. That is also difficult to measure precisely but we knowit is usually relatively small, on the order of a few percent of total profits at most.While developing this argument, it became clear to me that we should not maintain binary definitions of slave and free. Julia O’Connell Davidson’s Modern Slavery: The Margins of Freedomcemented that conclusion for me. I have therefore created a scale of freedom that ranges from 0 to 20 based on 20 questions about a given worker’s ability to make decisions for him or herself. Chattel slaves in a gang system score 0 on my freedom scale and today’s CEOs 20. Modern debt peons in India score a 3 or 4. Wage laborers in the antebellum Northscore about a 10, while wage laborers in the U.S. todaygenerally score around a 15. The higher the score, the smaller the negative externalities that are created. So public policy should encourage increasing every worker’s freedom by as much as possible, starting, of course, with those with the lowest freedom scores, who we term modern slaves.When I had lunch with Kevin Bales back in September, he responded enthusiastically to the notion of a scale of freedom but I have not yet heard back from him on thedetails. With your permission, I’d like to read the questions, which I have divided into three sections, direct methods of control, working conditions, and personal life, to you for your comments. You might think of your own work situation as I go through these. Yes answers get a 1, no a 0, sometimes or it depends a .5. Keep in mind throughout that these questions relate directly to the employer-employee relationship and not to all constraints that workers face. A laborer confined to a wheelchair due to polio, for example, is not physically restrained by his or her employer but rather by reality. Similarly, workers who are allowed to seek, but cannot find, other employment are constrained by economic conditions, not by their respective employers.  Direct Methods of Control : 1.      Is the laborer paid primarily in cashor other liquid asset (e.g., company stock)? 2.      Can the laborer own property on the same terms as his or her employer? 3.      Is the laborer free from physical restraints? 4.      Is the laborer free from psychological constraints? 5.      Is the laborer not legally required to work?6.      Is the laborer inalienable (unsalable or otherwise nontransferable to another employer without his or her consent)?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?8.      Has the worker not been subjected to “seasoning” designed to break his/her will to find other employment?9.      Does the laborer have freedom of movementin order to search for other employment? 10.  Can the laborer quit without monetary or other loss? Working Conditions:11.  Can the laborer control his/her work schedule?12.  Can the laborer control the total hours s/he works?13.  Can the laborer control the tempo of his or her work?Personal Life:14.  Is the laborer not legally “dead,” “socially dead,” or otherwise alienated from the formal or dominant social order?15.  Does the laborer not belong to a group that has been “dishonored?”16.  Can the laborer determine his/her own name?17.  Can the laborer determine what to consumeand where to buy consumption goods? 18.  Can the laborer choose his/her place of residence? 19.  Is the laborer able to marry on the same terms as his or her employer?20.  Does the laborer control his or her own children on the same terms as his or her employer?Again, the argument is that less worker freedom means more negative externalities which means less growth and development. The effect is most pronounced with slaves but any increase in freedom for any workershould have beneficial effects on the overall economy. Any questions or observations on any of this?

A Libertarian Perspective on Economic Inequality

This was slated for Prairie Fire but it has been shuttered, perhaps for good, so I post it here.



It is one thing to document income and wealth disparities, as the Urban Institute has done (republished in Prairie Fire), and quite another to explain why the disparities exist and persist. Conservatives are infamous for blaming the poor (culture, personal characteristics, race) while liberals tend to castigate society (capitalism, racism). As the Urban Institute’s troubling research has shown, neither side has helped matters because economic inequality continues to grow. Perhaps it is time to consider a libertarian view of the problem
Based on data collected by the Fraser Institute, many libertarians believe that “economic freedom” leads directly to national prosperity. Estimating economic freedom is complex but the concept itself is simple. According to researchers James Gwartney, Robert Lawson, and Walter Block, “individuals have economic freedom when (a) property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and (b) they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others.” The correlations are striking. At the national level, more economic freedom, as defined above, is usually associated not only with higher per capita income but also with longer life expectancy, higher literacy, lower infant mortality, less corruption, and a host of other positive indicators of human health and happiness
Correlation does not prove causation, but so-called “natural experiments” strongly suggest that economic freedom does indeed stimulate higher per capita incomes. Korea is the clearest of such experiments because outsiders arbitrarily drew a line dividing the country into two, each of which was very similar to the other in terms of climate, culture, history, resources, and so forth. The economic freedom of the citizens of each nation, however, could hardly be more different: in the Democratic People’s Republic of Korea (North Korea), economic freedom is essentially zero, while in the Republic of Korea (South Korea), it is 29th highest in the world. Unsurprisingly for advocates of economic freedom, North Korea’s economy is so weak that famines still strike with regularity while South Korea was the world’s 30thrichest country in 2012.
A similar experiment took place in Germany, which after World War II the Allied powers divided into a communist (low economic freedom) East and a free market (high economic freedom) West. West Germany was such a better place to live than East Germany that the Soviets had to build walls to keep the Easterners from fleeing into the sunset. Just a quarter century after reunification, the East is well on its way to catching up to the West. (By way of comparison, it took the U.S. South a full century to catch up to the North after the Civil War.)
Consider, too, China, which colonialism and war split into three pieces, Hong Kong, Taiwan, and the mainland proper. The first two were havens of economic freedom and thrived economically while the communist (again, read low economic freedom) mainland remained mired in poverty and famine until a long series of reforms (read slowly increasing economic freedom) unleashed its latent potential. Today, mainland Chinese enjoy some economic freedom (ranked 139th in the world) and some economic success (ranked 82ndin the world in terms of GDP per capita in 2012). Improvements in Chinese economic freedom stalled recently and, almost as if on cue, so too has the nation’s stock market. Meanwhile, Taiwan remains economically free (#14) and thriving (#18).
Recently, researchers at the Fraser Institute began publishing estimates of the economic freedom of the states and provinces of Canada and the United States of America and Mexico. Lo and behold, provinces and states that accord their denizens with higher levels of economic freedom, like Alberta and the Central Plains states (both Dakotas, Nebraska, and Wyoming), have more vibrant economies than jurisdictions, like the Canadian Maritimes, Maine, West Virginia (and most Mexican states), that are more restrictive. The differences within North America are less stark than those across the globe but no less compelling evidence for the centrality of economic freedom to key economic outcomes like per capita income and employment rates.
While writing a history of entrepreneurship (and hence economic freedom) in South Dakota, Little Business on the Prairie , it dawned on me that economic freedom could vary even within a state. The explanation for the great miseries experienced on the state’s Indian Reservations did not reside in culture or genes, as conservatives would have it, or in insufficient budgets for the Bureau of Indian Affairs, as many liberals have claimed. Rather, poverty was a simple matter of political economy: Indians who live on reservations have almost no economic freedom as defined by the Fraser Institute. Although U.S. citizens, they are more akin to North Koreans (or pre-unification East Germans, or pre-reform mainland Chinese) than to mainstream Americans when it comes to their ability to borrow to start new businesses, to obtain clear title to real property, and to have their property rights protected and respected by the government. No wonder poverty is endemic, measures of health are poor, and so forth!
The same critique could be extended to members of other groups, most obviously undocumented workers and prisoners. A case could me made that poor people of every race and color enjoy less economic freedom than wealthier people do. For example, impoverished wage workers cannot choose between unemployment and the minimum wage, they must accept the former if employers are unwilling to pay the latter. Higher income workers, by contrast, are free to accept a lower wage rather than lose their jobs. And it is notorious that in many jurisdictions, like intercity public housing projects, police do not enforce property laws. Rather than protecting all citizens, police often harass and even sometimes torture and kill members of minority groups.
A libertarian policy for addressing wealth disparities, then, would concentrate on economic freedom, basically on ensuring that all Americans, regardless of creed, ethnicity, gender, place of residence, race, and so forth, have equal access to the same set of protections, rules, and freedoms. Independent researchers at Fraser and elsewhere should measure the economic freedom of Indians and other suspected freedom-deprived groups to ensure actual convergence with national levels of economic freedom.Once equal access is established, wealth disparities by gender, race and so forth should dissipate over several generations. Economic inequality will continue, but within a century of convergence no one should be able to predict anyone’s general income level just by looking at them, or so predicts this libertarian theorist.

Why Not Base Representation on the Number of VOTES rather than population?

Reading John Gunther, Inside U.S.A. (New York: Harper Brothers, 1947), 701 for my book on financial discrimination when I ran across a discussion of votes vs. representation: "South Carolina has precise equality of representation in the House -- six seats -- with the state of Washington, with 793,833 voters out of a total voting population of 1,123,725! Similarly Georgia gets ten seats for 312,539 votes; Wisconsin gets ten for 1,941,603." That prompted the question posed in the title of this post. 

Basing representation in the House on the number of votes cast, rather than on population, it seems to me, is a "market" (really incentive-based) solution to the problem of states trying (once again) to restrict voting by members of certain groups, e.g. Amerindians, Hispanics, or African Americans. Successful attempts to keep people from voting would hurt the states that allowed it by reducing the number of reps they could send to the House of Representatives and thereby also their impact on presidential elections through the electoral college.

Basing representation on votes cast would also give individual voters more incentive to turn out and vote because they would be helping to keep up their representation rather than just picking between frick and frack. Voting, I predict, would get a whole lot easier. We might even see negative poll taxes.

Have You Stopped Beating Your Wife, Answer Yes or No; Or, What About Those of Us Who Don't Want Any of the Presidential Candidates?

Did you know that the Iowa caucus, the New Hampshire primaries, etc. are not in the Constitution? That isn't to say that they are un-Constitutional, just that they are not mandated by the supreme law of the land. In other words, we can change the system whereby presidential candidates are selected and, in fact, have done so several times throughout the nation's history. Perhaps it is time to do so again, to make it even more "democratic." While the current system allows for more popular choice than previous ones, which were controlled by party stalwarts from start to finish, it is far shy of the goal of government "by the people" if said people can only choose between Frick and Frack, Flack and Whack, Loser and Schmoozer.

In short, I think we should hold an election right away to ascertain if at least half of the electorate thinks that any of the current slate of major candidates is acceptable. If not, then the two major parties should have to start over from scratch with new candidates. 'Cuz right now, we are essentially being asked if we have stopped beating our spouses, answer yes or no. Either way, we're screwed.

Out of Respect for the Dead: C'mon Fargo, that ain't East River So. Dak.!

I love dark comedies, especially, now that Breaking Bad is over, the TV series Fargo. So I was excited to hear repeated mentions of Sioux Falls in this second season after some tantalizing references to a "Sioux Falls incident" in season one.

Last night, Fargo finally showed "Sioux Falls" but placed it in a pine forest in the Black Hills! I moved to Sioux Falls in 2009 and the second season is set in 1979 but I'm 99.9999999% sure that Sioux Falls was always in the eastern part of the state, over 350 miles from Mount Rushmore.

The episode also featured Canistota So. Dak., which it correctly placed as vaguely near Sioux Falls but therefore also erroneously in the Black Hills. It referenced a lake near Vermillion, apparently conflating Lewis and Clark lake, which is near the city of Vermillion, SD, with East Vermillion Lake, which is about 5 miles east of Canistota. Both the lake and Canistota are on the open prairie, not in the pine forests depicted in the show.

It actually is not illegal to shoot movies or TV shows in South Dakota. (See my Little Business on the Prairie for details.) So it isn't clear to me why Fargo won't shoot in the actual locations they mention (99% sure its Luverne is not the real Luverne, Minn.), or at least get the ecosystem correct. It can't be part of the joke as so few people know what Canistota, etc. actually looks like.

Of course shooting 1979 Sioux Falls in panorama would be impossible because the city is so much larger today and greatly revitalized. But setting it in the Coteau des Prairies instead of in the Black Hills would add to the show's verisimilitude.You know, out of respect for the dead.

Mutualism: A Little Appreciated Alternative to Capitalism and Communism

I wrote the following to help my students to understand an assignment I had given them, the write a paper based on a book. Most in their drafts wrote book "reviews" or even "reports" instead, and even labelled them such. What I want is for them to take a book and develop a thesis from it, as I do below with my own Corporation Nation . I share it because the thesis I came up with is kind of neat imho. MUTUALISMA LITTLE APPRECIATED ALTERNATIVE TO CAPITALISM AND COMMUNISM___By Robert E. WrightBy all accounts, communism, the complete control of an economy by an autocratic government, is a failure. Whether in Europe (Eastern Bloc), Asia (USSR, North Korea, Vietnam), North America (Cuba), or elsewhere, communist states have all failed, some quite miserably. After a seemingly propitious start, the Soviet Union and its Eastern European satellites fell apart, China became communist in name only, and Cuba and North Korea wallow in poverty under dictatorial rule [A History of Western Society]. Capitalism is more difficult to define and hence dismiss, or, for that matter, defend. Economist Will Baumol has identified several types of capitalism, only one of which leads to both economic growth and widespread respect for human rights. [Will Baumol et al, Good Capitalism, Bad Capitalism] But even Baumol’s “good capitalism” has some ugly aspects, greed [Arthur Pollard, ed., The Representation of Business in English Literature], crises [Peter Garber, Famous First Bubbles; Charles Kindleberger, Manias, Panics, and Crashes; Walter Bagehot, Lombard Street], and wide disparities in income and wealth foremost among them [A History of Western Society].Democratic socialism is often proffered as a third or middle path between communism and capitalism [A History of Western Society]. The nations of Scandinavia seem to offer the best of both worlds, including growing economies, political democracy, and social justice. The ability to extend the Scandinavian model to nations elsewhere has yet to be demonstrated, however, and may not prove possible given that not all nations have ample energy resources and small, racially and culturally homogenous populations. Moreover, democratic socialist economies may rely on more capitalist economies to spur innovation and technology. Socialist economies may be able to persist in Europe, in other words, only because companies in more capitalist North American and East Asian countries push them to higher levels of productivity through trade and competition. An entire world of socialist economies may prove as economically barren as the communist bloc [A History of Western Society].Under communism, “the people” nominally owned all the means of production and distribution (banks, farms, factories, transportation systems, wholesalers and retailers, etc.) but in actuality the communist party or the government owned everything and ran it in its own short term interest. Under capitalism and socialism, wealthy elites own the major means of production, either privately or in conjunction with the government. In either case, a select few run matters to suit their own short term interests in order to win the next election or to meet or exceed quarterly profit expectations. Control by the few is the key feature of capitalism, even “good” capitalism. In some nations, like the U.S.A. and Great Britain, large numbers of people own stocks and bonds through investment vehicles like pension funds, insurance policies, bank accounts, and mutual funds. They exert little or no control over those assets, however, because corporate elites usurped them long ago.Augustana University professor Robert E. Wright details the process of usurpation in his 2014 book, Corporation Nation. Using a variety of primary sources, including corporate account books, corporate by-laws and charters, legal cases, pamphlets, and statutes, Wright argues on the basis of numerous examples and a dearth of counterexamples that most early U.S. corporations were at first controlled by their stockholders. Those men, and a surprising number of women, exercised control not on a quotidian basis, which would have been time consuming and awkward, but on a strategic basis. In other words, stockholders ensured that hired managers worked hard in the best long-term interests of the company, did not steal the company’s resources, and sought ways of reducing expenses without hurting the quality of the company’s output (which ranged from financial services to manufacturing to transportation).Using contemporary pamphlets as well as a wide variety of secondary sources, Wright also shows, however, that by the end of the nineteenth century stockholders had lost control of most publicly traded corporations as managerial elites came to control stockholder proxies (votes when the stockholder was not physically present at meetings), to limit stockholder rights (for example to audit the company’s account books), and to reduce stockholders’ voting powers. By the Great Depression, the separation of ownership from control was pronounced at most large joint stock corporations. Rather than owning many shares in a few companies of which they knew quite a bit as they traditionally had (and as “focus investors” like Charlie Munger of Berkshire Hathaway do today), investors responded to the loss of control by owning a few shares in many companies of which they knew little. That diversification of course provided managerial elites with yet more power. By the early Third Millennium, U.S. corporate elites (board chairmen, CEOs, presidents) were able to pay themselves exorbitant sums and even to craft the “heads I win, tails I win” contracts that led directly to the financial crisis of 2008.Not all corporations, however, are publicly traded. Wright also shows that most mutual corporations weathered the financial troubles of 2008 (as well as previous panics) with little difficulty. Unlike a joint-stock corporation, which sells tradable equity or ownership shares (stocks) in itself to investors (stockholders), mutual corporations are owned by their customers. Profits accrue but they are paid to the customer-owners, not to a separate group of stockholders. Mutuals do not issue shares that trade on exchanges. To participate in a mutual’s profits, one must become its customer, for example a policyholder or depositor. Because mutuals issue no shares, there is no pressure to make quarterly numbers so managers can run the company for the long-term. That generally means slow but steady growth. Unsurprisingly, many mutuals, Wright shows, are life insurers that date from the second half of the nineteenth century and are still going strong. They bear names like Guardian, MassMutual, and Northwestern Life, which long touted itself as “The Quiet Company” because it quietly provided quality life insurance at low cost to millions of policyholders.Policyholders do not control mutual life insurers, Wright argues. Rather, managers in conjunction with sales agents run mutual insurers. In successful mutuals, the two groups check and balance each other. The sales agents push the managers to keep up with the competition while the managers make sure the agents do not engage in unethical or illegal sales practices. And they both make sure the other group does not pay itself too much. The CEO of Guardian, a Fortune 500 company by assets, earned less than $1 million per year at a time when CEOs of similar sized joint stock companies paid themselves 10 to 100 times that amount.Credit unions, a type of depository institution like a bank, are also mutuals. Outside of finance, mutual companies often call themselves cooperatives or co-ops. They have flourished when allowed to do so but neither socialists nor capitalists are eager to see them spread because of their potential to render both big (publicly traded) business and big government less, or even un-, necessary. A system of political economy built on mutualism, after all, would encourage competition and innovation, and hence economic growth and development, without unduly enriching or empowering elites. If Karl Marx and Friedrich Engels had been more intelligent and less ideological, they may well have called for mutualism instead of communist.It is important to point out that the mutual form is not perfect. Sometimes mutuals fail but that can be seen as a good thing because it means that competition is at work, weeding out inferior companies the way that natural selection eliminates individuals (and their genes) that are not sufficiently adapted to the present environment. Competition is a key component of Baumol’s “good capitalism.” So mutualism is not anti-capitalism per se but rather a different, and many think more just, way of organizing and controlling the means of production, a method that does not require elite control of corporate boardrooms and stock exchanges or government economic planning commissions.Wright’s book has received rave reviews in scholarly journals thus far but it has had no discernible effect on public policy so its importance to date is essentially nil. One implication of the study, for example, is that instead of reforming Social Security’s disability insurance program, the government ought to privatize it by encouraging the development of mutual disability insurers. Recent reform proposals, however, have supported the general status quo instead.