LearnLiberty.org

I received an e-mail from LearnLiberty.org with links to the embedded video and to and its site.  The video address a little understood characteristic of human society, spontaneous order which result in human action but are not of human design.  These orders can solve most economic and other societal problems without planned orders, which are also necessary.  Government officials often oversell the importance of their solution and fall prey to what Hayek called the “fatal conceit,” that government planners can organize society as if it were an assembly line or a military operation.  They should recall Hayek’s admonition, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”Replace this text with...
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Spontaneous vs. Government Order and Oil

In 1973, Arab oil producers cut production and began an embargo of the United States in response to the government’s decision to supply the Israeli military during the Yom Kippur War.  In the short run, neither demand nor supply are responsive to prices.  As Arab nations withheld oil, prices surged and in a misguided attempt to manage rising prices, the government instituted price controls that added fuel to the crisis and energized a government subsidized search for alternatives to oil.  

Wind, solar and ethanol have largely been failures and still heavily rely on subsidies.  Programs to encourage conservation have spent taxpayer dollars but were the expenditures necessary?  In the summer of 2008, did consumers need incentives from Uncle Sam to conserve gas?

The spontaneous interactions of consumers and producers has mitigated the problem.  High prices encouraged oil exploration.  New sources oil were found.  Deep water drilling and other technologies were developed.

This is but one chapter in a long story of the battle between scarcity and market led innovation in oil production.  Jonathan Fahey reports in “New drilling method opens vast oil fields in US” that a new and non subsidized drilling technology first developed for extracting natural gas but now applied to oil has the potential to greatly expand U.S. production.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day — more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

As with other market developed technologies, it is cost effective.

…drilling for shale oil is not dependent on high oil prices. Papa [chief executive of EOG Resources, the company that first used horizontal drilling to tap shale oil] says this oil is cheaper to tap than the oil in the deep waters of the Gulf of Mexico or in Canada's oil sands.

Problems remain.  Oil is still a finite resource and like all energy sources, it pollutes.  If environmental critics are right, and burning oil results in global warming by releasing carbon into the atmosphere and warming is costly, then developing relatively cheap new sources of oil is a mixed blessing, but a blessing nonetheless.  Other things equal, I would rather struggle with carbon emission with relatively cheap oil prices.
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David Brooks on Foundational Rules and Spontaneous Order

Mankiw refers to, "Bentham vs. Hume," as "David Brooks at his best." Jeremy Bentham was a contemporary of Adam Smith who believed that an activist government could improve societal well being. He believed that government should actively order resources. David Hume was also a contemporary of Adam Smith who greatly influenced Smith's thoughts. He believed the spontaneous order of markets best organized economic activity. As Acemoglu reminds us, all markets are constrained by law and conducted valuable historical research establishing foundational rules to maximize wealth created by spontaneous interactions. Too many rules might result in what von Mises called a hampered market economy.

David Brooks places the two philosophers in a modern setting.

Mr. Bentham knows everything. He went to Stanford, then to the Kennedy school before getting a business degree. He’s got multivariate regressions coming out of his ears, and he sprinkles C.B.O. reports on his corn flakes for added fiber.

Mr. Hume is very smart, too, but he doesn’t seem to make much use of his intelligence. He worked on Wall Street for a little while, but he never could accurately predict how the market was going to move tomorrow or the day after that.

He describes how they would approach government.

If you put Mr. Bentham in charge of the government, he’d proceed with confidence. If you told him to solve a complicated issue like the global-warming problem, he’d gather the smartest people in the country and he’d figure out how to expand wind, biomass, solar and geothermal sources to reduce CO2 emissions. He’d require utilities to contribute $1 billion a year to a Carbon Storage Research Consortium. He’d draw up regulations determining how much power plants would be allowed to pollute.

Mr. Hume, I’m afraid, wouldn’t be so impressive. If you asked him to take on global warming, he’d pile up reports on the problem. But if you walked into his office after a few days, you’d find papers strewn in great piles on the floor and him at his desk with his head in his hands.

“I don’t know the best way to generate clean energy,” he’d whine, “and I don’t know how technology will advance in the next 20 years. Why don’t we just raise the price on carbon and let everybody else figure out how to innovate our way toward a solution? Or at worst, why don’t we just set up a simple cap-and-trade system — with no special-interest favorites — and let entrepreneurs figure out how to bring down emissions?”

I would hope that, if elected, Hume would undue a few of Bentham's overzealous programs.  The original Hume did after all fight against mercantilist fetters on markets in the 18th century.  David Brooks ends on a depressing note for free marketers.

So let’s have the debate [spontaneous order vs government order]. But before we do, let’s understand that Mr. Bentham is going to win. The lobbyists love Bentham’s intricacies and his stacks of spending proposals, which they need in order to advance their agendas. If you want to pass anything through Congress, Bentham’s your man.

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Ants, Markets and Spontaneous Order (Repost I)

One of the difficult ideas to explain in economics is how a spontaneously ordered markets result in such a marvelous outcome: the greatest benefit to society from the allocation of resources. Markets, with proper laws and foundational regulations, guide self-interested or greedy agents into creative, innovative actions that are not only good for the involved economic agent, but society as a whole.

It is not easy to convey the efficiency of spontaneously ordered markets to students. They seem to understand how self-interest or greed orders an individual’s activities profitably, but not how this benefit extends to society. Russ Roberts, in his EconTalk interview with Deborah Gordon, "Gordon on Ants, Humans, the Division of Labor and Emergent Order," discovers a brilliant example to describe spontaneous order—ant colonies.

Ant colonies are well ordered and appear to operate under some sort of central command, but it is not so. The colonies have no central planner. Each ant secretes pheromones and hydrocarbons based on conditions surrounding the colony. Other ants smell the pheromones and hydrocarbons, and use these scents to guide their actions into digging, patrolling, and foraging. As the scents change, ants alter their behavior and the colony adapts and prospers.

Imagine the confusion that would result if a queen ant did order activity in the colony. How would the queen know the conditions around the colony? Should the ants dig, and how deep? How many ants should patrol and where? Once patrolling is accomplished, how many ants should forage and in what direction? Each reporting function would be new to the colony, time consuming, contain less information than spontaneously ordered functions, and be totally unnecessary.

Humans behave in a manner similar to ants. Each has an infinitesimal knowledge about the overall functioning of the economy. The best home builder (brightest, hardest working and most honest) probably has no idea how roof tiles are produced, let alone how automobiles are assembled. Each individual collects information provided by prices and profits and directs his or her activities accordingly. As prices and profits change, economic activity through individual action changes. Resources are reallocated, products are innovated, and the economy adapts and prospers.

Collective behavior in a human colony creates confusion based on insufficient information if colony planners attempt to alter the reallocation of resources and innovation within society. Planners just don’t have the information possessed by thousands of economic agents. Diverting resources to information gathering and planning is time consuming and costly; diverted resources cannot be used to produce goods and services.

It is here I believe that the analogy between ants and humans breaks down. Ants follow secreted chemicals that dictate their actions. The human brain allows for a wider range of behavior that may profit the individual but be destructive to others and the entire human colony. Foundational rules such as the prohibition on theft and definition of property rights support the spontaneous ordering of resources and innovation. While there is disagreement among economists just how broad these foundational rules and regulations should extend, it is clear that nearly all economists believe that society should maintain through collective actions the greatest freedom possible on resource allocation and innovation.

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Taxes and Tea Parties

My first thought was to ignore the tea parties held on tax day, a national day of mourning and lamentation full of wailing and gnashing of teeth, but a Wall Street Journal op-ed and a statement by President Obama changed my mind.  The tax parties may be more spontaneous than I believed, and there is a deepening chasm between the intense beliefs of tax protesters and President Obama's vision for America. 

The op-ed is titled, "Tax Day Becomes Protest Day: How the tea parties could change American politics," (April 15, 2009) and was written by Glenn Harlan Reynolds, the author of "An Army of Davids: How Markets and Technology Empower Ordinary People to Beat Big Media, Big Government, and Other Goliaths" (Thomas Nelson, 2006)."  I believed that the tea parties were an outgrowth of the Republican party.  He convinced me that new technology empowered diverse individuals to organize spontaneously.  I do not profess profound knowledge of voting models, but many try to measure intensity of belief of an issue as well as how widely it is held.  The spontaneity of the events suggests intensity of belief.  The use of new technologies to organize also suggests that intensity of belief may be easier to express in the future than it was in the past. Reynolds writes,

Today American taxpayers in more than 300 locations in all 50 states will hold rallies -- dubbed "tea parties" -- to protest higher taxes and out-of-control government spending. There is no political party behind these rallies, no grand right-wing conspiracy, not even a 501(c) group like MoveOn.org.

So who's behind the Tax Day tea parties? Ordinary folks who are using the power of the Internet to organize. For a number of years, techno-geeks have been organizing "flash crowds" -- groups of people, coordinated by text or cellphone, who converge on a particular location and then do something silly, like the pillow fights that popped up in 50 cities earlier this month. This is part of a general phenomenon dubbed "Smart Mobs" by Howard Rheingold, author of a book by the same title, in which modern communications and social-networking technologies allow quick coordination among large numbers of people who don't know each other...

The protests began with bloggers in Seattle, Wash., who organized a demonstration on Feb. 16. As word of this spread, rallies in Denver and Mesa, Ariz., were quickly organized for the next day. Then came CNBC talker Rick Santelli's Feb. 19 "rant heard round the world" in which he called for a "Chicago tea party" on July Fourth. The tea-party moniker stuck, but angry taxpayers weren't willing to wait until July. Soon, tea-party protests were appearing in one city after another, drawing at first hundreds, and then thousands, to marches in cities from Orlando to Kansas City to Cincinnati.

As word spread, people got interested in picking a common date for nationwide protests, and decided on today, Tax Day, as the date. As I write this, various Web sites tracking tea parties are predicting anywhere between 300 and 500 protests at cities around the world. A Google Map tracking planned events, maintained at the FreedomWorks.org Web site, shows the United States covered by red circles, with new events being added every day.

According to Reynolds, the organizers of the tea parties "aren't especially friendly to the GOP," despite intense disagreement with Obama administration policy.  I could not find a survey of the demographics of the attendees.  Were they all Republicans or were some Democrats as well?  What percentage of the protesters voted for candidate Obama?  I would imagine the percentage is very small, but even five percent could be significant, sending a strong message to candidates in swing districts.  To ultimately influence policy they must somehow join the decision making process defined by the constitution.  Although expressing angst is part of that process, I don't think it will be sufficient.     

On the same day, in another part of the Wall Street Journal, Henry J. Pulizzi wrote, "UPDATE: Obama Vows To Rewrite, Simplify 'Monstrous' US Tax Code," describing President Obama's plans to change the tax code.  Pulizzi quotes President Obama,

We will make it quicker, easier, and less expensive for you to file a return, so that April 15 is not a date that is approached with dread each year.

We need to stop giving tax breaks to corporations that stash profits or ship jobs overseas so that we can invest in job creation at home. And we need to end the tax breaks for the wealthiest 2% of Americans, so that folks like me are paying the same rates that the wealthiest 2% of Americans paid when Bill Clinton was President.

I doubt that many of the protesters were strong Obama supporters, and I doubt that the President's remarks were intended to pacify their concerns, but President Obama's comments seem out of context given the spontaneous rise of tax protests.  These people are worried about rising tax rates that the huge budget deficits portend, not about tax complexity.  Simplifying the tax code by removing their deductions will not quiet their descent.   

Their desire to avoid high taxes may be a function of greed as President Obama has insinuated, but greed is bipartisan.  The tax problems of Obama nominees Geithner and Daschle appear to spring from an effort to avoid high taxes.  One might reasonably conclude that the desire of President Obama to transfer resources from the private sector to the public is a greedy attempt to enact his personal vision of America. 

Tax protesters seem concerned with taxes where the tax burden will fall, not with who writes the check to the government.  Most realize that in the long run, a business must make a normal profit, and that costs will be passed on to consumers.  They also realize that a cap-and-trade system is a tax on carbon based fuels that they will pay.  Members of Congress seem in a rush to pass new spending mandates, but slow to increase taxes to pay for them.  This creates two issues for the opponents of President Obama: a much larger government measured as a percentage of GDP and large, possibly unsustainable budget deficits.
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Ants, Markets and Spontaneous Order

One of the difficult ideas to explain in economics is how a spontaneously ordered markets result in such a marvelous outcome: the greatest benefit to society.  Markets, with proper laws and foundational regulations, guide self-interested or greedy agents into creative, innovative actions that are not only good for the involved economic agent, but society as a whole.

It is not easy to convey the efficiency of spontaneously ordered markets to students. They seem to understand how self-interest or greed orders an individual’s activities profitably, but not how this benefit extends to society. Russ Roberts, in his EconTalk interview with Deborah Gordon, "Gordon on Ants, Humans, the Division of Labor and Emergent Order," discovers a brilliant example to describe spontaneous order—ant colonies.

Ant colonies are well ordered and appear to operate under some sort of central command, but it is not so.  The colonies have no central planner.  Each ant secretes pheromones and hydrocarbons based on conditions surrounding the colony.  Other ants smell the pheromones and hydrocarbons, and use these scents to guide their actions into digging, patrolling, and foraging.  As the scents change, ants alter their behavior and the colony adapts and prospers.

Imagine the confusion that would result if a queen ant did order activity in the colony.  How would the queen know the conditions around the colony?  Should the ants dig, and how deep?  How many ants should patrol and where?  Once patrolling is accomplished, how many ants should forage and in what direction?  Each reporting function would be new to the colony, time consuming, contain less information than spontaneously ordered functions, and be totally unnecessary. 

Humans behave in a manner similar to ants.  Each has an infinitesimal knowledge about the overall functioning of the economy.  The best home builder (brightest, hardest working and most honest) probably has no idea how roof tiles are produced, let alone how automobiles are assembled.  Each individual collects information provided by prices and profits and directs his or her activities accordingly.  As prices and profits change, economic activity through individual action changes.  Resources are reallocated, products are innovated, and the economy adapts and prospers.

Collective behavior in a human colony creates confusion based on insufficient information if colony planners attempt to alter the reallocation of resources and innovation within society.  Planners just don’t have the information possessed by thousands of economic agents. Diverting resources to information gathering and planning is time consuming and costly; diverted resources cannot be used to produce goods and services.

It is here I believe that the analogy between ants and humans breaks down.  Ants follow secreted chemicals that dictate their actions.  The human brain allows for a wider range of behavior that may profit the individual but be destructive to others and the entire human colony.  Foundational rules such as the prohibition on theft and definition of property rights support the spontaneous ordering of resources and innovation.  While there is disagreement among economists just how broad these foundational rules and regulations should extend, it is clear that nearly all economists believe that society should maintain through collective actions the greatest freedom possible on resource allocation and innovation.

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Steven Chu as Energy Secretary

President Elect Obama has named his new Energy Secretary, Steven Chu a brilliant man who won the Nobel Prize in Physics in 1997 for cooling and trapping atoms using lasers. His selection signals a shift in priorities for the department from development of nuclear weapons and spent fuel disposal to alternative energy development and reduction of greenhouse gas emissions and therein lays my disagreement with the president elect.

For now, I will set aside any discussion of externalities such as greenhouse gasses, and focus on economic organization. It is the same disagreement that I have with my father-in-law, an engineer and former employee of the International Atomic Energy Agency who held diplomatic rank with the United Nations. He's a smart guy to and a good man. He believes more in a top-down organization of society in which politicians have broad visions for society's direction. They present these visions to physicists, engineers, and others even if they are not workable today. In the long run, ten to twenty years, scientists overcome the barriers and implement the politicians' vision.

I believe in a more spontaneous organization. When traditional energy sources become expensive, individual consumers acting in their own interest, change consumption habits, switching to more efficient vehicles, refrigerators, insulating homes, etc. Companies selling these products are incentivized by profit to increase their efficiency. Energy consuming firms also demand more energy efficient equipment, and their suppliers are incentivized by profit to provide it.

Simultaneously, energy producing businesses are incentivized by high profits to expand energy production. If one source of energy, say oil, becomes expensive they will find the next best source and when it is cost efficient bring it to market.

When push comes to shove, I trust the private sector's ability to produce cheap alternative energy through self interest more than the government's ability to produce it through benevolence.

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Winds of Creative Destruction

The Internet has dramatically changed the newspaper industry.  Rather than wait for the morning paper to check out sports scores, and then be disappointed that the paper does not contain the scores of late night west coast games, I go online and read ESPN.  For news, I rely on the Drudge Report, The New York Times, Pajamas Media, The Washington Post, blogs and many other sources.  Circulation is down, but readership is up.  Through the Internet search engines, I find information faster and in more depth than in the past.  For example, if you want a good description of the changing print media, you might try, Reflections of a Newsosaur--a blog.

Competition is up, circulation is down, but readership is up.  It is a dynamic industry, and many traditional newspapers are making the transition to the Internet.  Some are distressed.  According to Alan Mutter of Newsosour, operating earnings are falling as circulation and sales decline.  Great institutions like the New York Time's profits are down, the Tribune Co declared bankruptcy. 

I'm not distressed, nor are you.  The winds of creative destruction are bringing a better product at a lower price. Markets are cool. 

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The Car Czar

The auto industry bailout legislation proposes a "car czar" who would oversee the implementation of the Detroit automakers' sweeping restructuring plan.

I wonder who will be the car czar? He or she will need more knowledge about the auto industry that thousands at GM, Ford and Chrysler who have spent their careers and considerable talent trying to make cars Americans want to buy at affordable prices.

In addition to extensive information about auto production, and consumer tastes, David M. Herszenhorn, of the New York Times, that the Democrats’ legislation calls for the czar and his or her team to have "appropriate expertise in such areas as economic stabilization, financial aid to commerce and industry, financial restructuring, energy efficiency and environmental protection."

Congress seems to believe that the automakers don't desire to capture the profit that a truly innovative product would bring, that other automakers have also purposely avoiding making or cannot make a green, fuel efficient car, that the knowledge to make such a vehicle is readily available to Detroit automakers, but not their rivals, if they just try a little harder.

With all that knowledge, the czar will also need to be a benevolent souls with a strong hand, able to sit down with interested parties, automakers, unions, creditors, suppliers, auto dealers etc., and hammer out agreements to implement the plan.

The same New York Times article also quoted Dana M. Perino, the White House Press Secretary who said "Mr. Bush would insist on aiding only those automakers that can survive long term."

Gee, the car czar must be near to all knowing, all powerful, and benevolent. I wonder who that could be?

A Few Side Notes:

1. Russ Roberts of Cafe Hayek has two great quotes, one by Hayek and the other by Adam Smith about knowledge and economic organization.

2. Russ Roberst also of EconTalk interviewed Jonathan Rauch, of the Brookings Institution and the Atlantic Monthly, about the Chevy Volt, GM's planned electric car. You can listen to the podcast.

3. Mark Phelan of the Freep.com writes 7 myths about Detroit automakers. Detroit's cars are not as bad as many believe.

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