At Cato Unbound I argue for libertarian social engineering:
The better markets work, the less the demand for the state. By improving markets and other voluntary organizations, libertarians can make their political vision more attractive while at the same time making people better off.
Modern libertarianism began after many of the market institutions that we take for granted had already been developed. Fee simple property, for example, dates to 1290. Could we have a libertarian society without fee simple property? In theory, yes. In practice, the free society is attractive because it generates wealth. Without fee simple property it is, at the very least, more difficult to create a rich, industrialized society. The limited liability company dates much later than fee simple property, to the 19th century. Without the limited liability company, it would probably have been much more difficult to raise large amounts of capital. As a result, without limited liability, markets would be at a great disadvantage compared to the state in conducting economic activity on a large scale. Thus fee simple property and the limited liability company are among the technological/legal institutions that have made a free society possible, not because they are constitutive of a free society, but because they make a free society work better and compete better against statist alternatives.
So how can we improve markets? Public goods are one of the biggest challenges to markets and it was long thought that because of the free rider problem markets could not produce public goods. In Tabarrok (1998) I showed that such reasoning was wrong; a large class of public goods can be produced voluntarily using what today would be called a crowdfunding contract with a refund bonus or what I called at the time, the dominant assurance contract (DAC). My piece at Cato Unbound describes the DAC and also some other ideas for libertarian social engineering in more detail.
What’s important about dominant assurance contracts is not simply that they solve the public good problem but that:
Dominant assurance contracts open the provision of public goods to entrepreneurship, innovation, and the market discovery process.
The first thing we do, let’s kill all the regulations.
The second thing we do, let’s kill the Fed, the FDIC, OCC, CFPB, HUD, FHA, FNMA, FHLMC, . . .
The Fed, the FDIC, the OCC? Why not select agencies which are actually damaging in some way? I mean in the world in which we live, not in the Austrocrank imagination.
Art, I love you, man.
Specifically, which agencies would you kill?
I am not an Austrian or a libertarian. I am not a “Jeckyll Island” kill the Fed ignoramus. I worked 38 years in financial services. I know how things work and how things went wrong.
The agencies attained unprecedented prominence precisely because of their policy failures. Hat tip to Henry Kaufman.
The recent subprime crisis and great recession could not have happened without the Fed, FDIC, and OCC. Since 1913, the Fed has made things worse. All three agencies were supposed to be supervising banks. But, they allowed the massive financial bubble and then were blind-sided by the meltdown.
The FDIC and moral hazard: with deposit insurance, the corporate elites were empowered (assuming the reported capital balances ratios to assets/risk assets met capital maintenance reg. standards for “well-capitalized”) to raise unlimited cash funds at risk-free rates and the depositors didn’t need to concern themselves with banks’ financial conditions.
[…]
I could go on all day. But, the plumber is coming in five minutes.
The recent subprime crisis and great recession could not have happened without the Fed, FDIC, and OCC.
I think the complaint about the OCC is that it ran interference for shizzy bankers with state banking superintendents. There are two sets of complaints about the Fed of which I’m aware, one offered by Steve Hanke and the other by Scott Sumner. Personally, I’m skeptical of both, but I’m just a layman. I’m not sure what role you fancy the FDIC had. As far as I could see, Sheila Bair was the adult in the room through the whole mess.
As far as I can see, the most salient problems were incorporated into technical chances emerging ca. 1995, statutory legislation in 1999, and into regulatory decisions made ca. 1998, i,e, the permission granted to deposits-and-loans banks to delve into the capital markets, the advent of credit-default-swaps, and the abortion of Brooksley Born’s efforts to require exchange trading of derivatives. Conjoined to that was the decision by Freddie Mac in 2003 to slash underwriting standards. The regulator in that case was not any of the agencies you named, it was OFHEO (which now has a different name and is a stand-alone agency rather than a component of HUD).
I know there’s a prominent economist who fancies there’s no such thing as bubbles. Personally, I think bubbles happen. When they break, people lose money, which is a problem if they went into debt to buy the asset and the lender did not make adequate provision for losses. The uncertainty over the composition of the mortgage pools from which the GSE securities were derived spread risk – like a virus. However, the most salient set of destructive acts were undertaken by the Financial Products Unit of AIG. That was a failure of both prudence and prudent regulation.
The regulators themselves were operating in a political matrix, one formed by the Democratic Party contra which the Republican Party was ineffectual when not complicit. The political matrix put pressure on parties to lend to borrowers of dubious character, provided for universal banking (which created institutions the resolution of which was outside the FDIC’s skill set), and did nothing about the threat Mr. Cassano’s minions posed.
There’s a great deal of discussion about subprime mortgages and what not. IIRC, about 75% of the value of underwater mortgages concerned prime borrowers. Recall also that the failure of Washington Mutual was processed quite rapidly. My wager would be that if we’d had legislation which provided for debt-for-equity swaps (applicable to deposits-and-loans institutions and mortgage conduits), debarred insurance companies and deposits-and-loans banks from taking positions in futures, options, swaps, and derivatives; and maintained the distinction between investment banking and commercial banking, the whole mess could have been quickly resolved with losses rapidly imposed on parties holding shares in insolvent institutions, bonds issued by insolvent institutions, and mortgage-backed securities from insolvent institutions. Failures of legislation are failures of Congress, not regulators. Drexel-Burnham-Lambert failed in 1990 without blowing up the world. Why should Lehman’s failure have done so?
Not my trade, of course.
Specifically, which agencies would you kill?
1. The Department of Education: 1.Turn its assessment and statistical collection function over to the Labor Department and create a modest regulatory commission to issue rules regarding inter-state and international transactions for educational services – such matters as mandatory disclosures and billing formats). 2. Shut the department down and liquidate all of its spending programs.
2. HUD. Transfer the lead-paint regulators to the EPA and shut the department down, liquidating all its spending programs. Housing is a frequently replenished good (billed monthly) which is consumed according to considerations of taste and amenity. It does no good to subsidize it specifically (in contrast to medical care, long-term care, schooling, and legal services – which pose problems). Concern about the real income of the impecunious can be addressed through cash transfers and tax credits.
3. USDA: you have therein a couple of regulatory agencies, a statistical collection service, an in-house research service, an agency which combats infestations, an agency which conducts reclamation projects, and the Forest Service. Retain these and shut the rest of the department down. The implications of that will be a 90%+ cut in the department’s budget. Concerns about the competitive position of American farmers and ranchers can be addressed with tariffs and concerns about the real income of SNAP beneficiaries can be addressed through income transfers and tax credits. (You needn’t subsidize groceries any more than you need to subsidize housing). Extension services can be undertaken by state agencies, nutritional promotions can be undertaken by various parties, and subventions to rural electric rates can cease, as can subsidies to the professoriate.
4. USDOT. Maintain the air traffic control system, the safety inspectorates (NOT the safety grant kitty), the other regulatory agencies, the Hazmat crews, and the Merchant Marine Academy. Maintain the sub-agencies which build roads on federal property and define the Interstates and U.S. Routes; add to their functions that of distributing signage for these roads. Create a new agency which collects tolls on long-haul Interstates and distributes the proceeds to a trust fund for each state (apportioning according to acres of macadam each has. Liquidate the department’s other functions. Most of the department’s budget consists of patronage delivered to state and local governments. The toll revenue aside, all of that should end.
5. HHS. (1) Set up five departments or stand-alone agencies which incorporate welfare functions: one for overseas development and relief, one for civil defense and disaster relief, one for distributing veterans’ benefits, one an assemblage of ~ 10 small agencies with small clientele receiving in-kind benefits (e.g. the federal public defender, the Bureau of Indian Affairs, the Office of Refugee Resettlement, the Job Corps, the Commissioned Corps of the Public Health Service, the Indian Health Service, the Legal Services Corp), and one to administer the big five programs (Social Security, Medicare, Medicaid, unemployment compensation, and SSI). (2) Transfer the FDA, NIH, and the CDC to another department or to the pool of stand-alone agencies. (3) Shut the rest of the department down and liquidate it’s programs. Again, if you’re concerned about the real income of the impecunious, income transfers and tax credits.
6. [Academic pork barrel and baubles for professors]: That would be the National Science Foundation (less the polar programs, which could be transferred to the Interior department), the grant machine at the NIH, the NEA, and the NEH (deeding the National Humanities Center over to Chapel Hill); the Corporation for Public Broadcasting, the grant facility of the National Laboratories, the grant facility of NASA, the grant facility of the Defense department. Any domestic grants offered by the African Development Foundation and the Inter-American Foundation.
7. Miscellanous patronage. Grants, subsidies and contributions distributed to state and local government, incorporated private parties, and individual households by the Departments of Justice, Homeland Security, Interior, Commerce, EPA, and small stand-alone agencies NOS.
8. Corporation for National and Community Service.
9. The miscellany of ‘training’ programs offered by the Department of Labor
10. The Small Business Administration. the Economic Development Administration, and the Minority Business Development Agency
11. The SJW apparat (above and beyond the Office for Civil Rights at the Education Department): the Civil Rights Division, the Equal Employment Opportunity Commission, the Civil Rights Commission, and allied contract compliance programs in the Labor Department
.
12: The Department of Energy. Send the weapons construction to the Defense Department, the site cleanup programs to the Interior Department or the EPA, the statistical agencies to the Commerce Department, and make the regulatory component and the power authorities stand-alone agencies. Retain the National Laboratories as subsidiaries of a stand-alone agency, restricting them to in-house and contract work and appointing a panel to ascertain their future. Sell the loan portfolios
13. Federal credit services and loan portfolios: sell them all at auction and get out of the lending business. (That’s Ginne Mae, Farmer Mac, the ExIm Bank, SBA loans, etc).
14. Postal Service: transfer bits and pieces elsewhere (the Postal Inspection Service, the philatelic service & c) and put it on the auction block. You’ll likely have some preparatory work to do to improve the soundness of its pension system, have a regulatory agency to monitor service, and let out contracts to postal service providers (UPS, USPS, DHL, and FedEx to provide delivery to remote locations at subsidized rates).
15. Miscellaneous federal enterprises (e.g. Amtrak and Conrail): auction block.
16. Miscellany of federal landholdings: auction block provided the necessary preparatory work can be completed. The BLM landholdings would be a priority, in re which you’d have to have a buy-back scheme for the grazing permits.
Tax reform and the institution of an unrestricted subvention to state governments (not local governments) distributed according to formula would be in order.
Art’s mostly right here, but you need to also consider the mark-to-market rules, which had successfully kept banking crises contained since 1937, were changed in 2006 so that banks had to mark their assets to market even in a collapse regardless of their true value/cash flow. When Barney Frank got the regulators to go back to the old system on March 9, 2009 the stock market literally bottomed that day and never looked back.
“The FDIC and moral hazard: with deposit insurance, the corporate elites were empowered (assuming the reported capital balances ratios to assets/risk assets met capital maintenance reg. standards for “well-capitalized”) to raise unlimited cash funds at risk-free rates and the depositors didn’t need to concern themselves with banks’ financial conditions.”
The savings deposits used to fuel the mortgage crisis were money market funds that WERE NOT FDIC INSURED AND NOT SUBJECT TO ANY BANK REGULATION.
At least not until the bank runs began and the (shadow) banks stopped lending and in many cases started foreclosure on outstanding debt to have cash to give panicked savers.
I paid close attention to the events in the late summer and early fall to see if the predictions I heard circa 1969-1971, which I ended up being convinced by, would come true, in the debate over deregulation money funds like Reserve Primary Fund, the number one fund to be freed of regulation. From wikipedia:
“In 1971, Bruce R. Bent and Henry B. R. Brown established the first money market fund.[4] It was named the Reserve Fund and was offered to investors who were interested in preserving their cash and earning a small rate of return. Several more funds were shortly set up and the market grew significantly over the next few years. Money market funds are credited with popularizing mutual funds in general, which until that time, were not widely utilized.[5]
“Money market funds in the United States created a solution to the limitations of Regulation Q,[6] which at the time prohibited demand deposit accounts from paying interest and capped the rate of interest on other types of bank accounts at 5.25%. Thus, money market funds were created as a substitute for bank accounts.”
But that understated the debate over regulations that led up to and allowed Bent and Brown to offer uninsured demand deposit savings accounts to retail customers they had little knowledge of, just like banks, S&Ls, credit unions did.
I remember Milton Friedman declaring money market funds would never make bad loans and thus never suffer bank runs because no one would ever fear their deposits in money funds would be at risk from bad loans.
Art, Your right,. I don’t like the OCC.
Mark Twain, “If you don’t read the papers, you are uninformed. If you rad the papers, you are misinformed.” Academia is even worse.
All of you are partly correct. I can’t start to set you all straight.
I’ll try a quick rejoinder to msgkings (are you a bank exec?): “. . . .also consider the mark-to-market rules, which had successfully kept banking crises contained since 1937, were changed in 2006 so that banks had to mark their assets to market even in a collapse regardless of their true value/cash flow. When Barney Frank got the regulators to go back to the old system on March 9, 2009 the stock market literally bottomed that day and never looked back.”
Half correct and half bankers’ propaganda – it had big write-ups in the WSJ – misinformation(?). Around 2005, FASB promulgated the “Fair Value Option” rule which allowed GAAP reporting to move away from historical cost on a voluntary basis. The only times that fair value write-downs are required are when an asset is “other than temporarily impaired (OTTI” and when there is a loss. OTTI is complicated both in determination and in the estimated FV/loss/recovery, which is bifurcated between a credit cash flow estimate discounted at the contract rate and a market estimated cash flow discounted at the market rate for such assets which is relatively high considering the defaulted nature – the credit loss is a charge against the loan loss reserve or asset if a security, the market deficiency is added to a reserve, not incudable in Tier 2 regulatory capital). I misspent the last nine years of my career fighting bankers and CPA’s over their refusals to recognize losses. The other case is when a loss is incurred. Again, I spent half of my 38 year “career” fighting with bankers and CPA’s over refusals to timely recognize asset losses. There is no GAAP definition of a loss. FASB is now slowly (the effective dates keep being moved back) instituting a new (from the incurred loss model) loss recognition model: estimated losses over the life of an asset. Of course, the bankers squealed like pigs over this.
Irony or serious?
If the later you mean like killing the regulations that establish the concept of property rights? Don’t see that really getting us far in the direction most want to go regarding expanding the idea of market ordered socieities.
Which regulations establish “the concept of property rights?” That would be laws, common law, the UCC, not 8,000,000 pages of regulations.
Anyhow, a good start would be killing CRA, HMDA, AML/BSA, . . .
We have to start by defining “regulation”.
160 million pages of common law is simpler to comprehend?
Well laws and regulation are simply instances of social rule that govern/mediate our social interactions so I think trying to differentiate them I a bit pointless unless the one looks ate the process of establishing the rule. You mention common law and I’m rather partial to that process. My personal view of economic regulation/rules is that one can evaluate them on three metrics: price incentives, quality incentives, negative externalities (shifting costs to others intentionally or not). Regulations should deliver incentives to lower prices, increase quality and prevent negative externalities — not suggesting 100% solutions for any but just the lens we evaluate.
Then allow the market participants in each locality assess those regulations — if they can show in their market/location that the regulation is failing at an unacceptible degree — via a court case and jury trial of peers (basically what’s commonly call stakeholders these days) the regulation can be over turned in that market/locality. Messy, yes. Need to layered courts, sure. But provides a check and balance on government that should be part of our political system that’s largely lost with the introduciton of regulatory powers by government agencies.
“The first thing we do, let’s kill all the regulations.”
Start with which ones?
Thou shalt not kill?
Or just, thou shalt not steal?
As I see it, every regulation under attack are simply refinements of those seemingly simple regulations that were first recorded to our knowledge about 1754 BC, Code of Hammurabi.
Wage laws are defining theft in fine detail. OSHA is defining murder. Clean air and water regulations are defining theft and murder.
In the Constitution, government sanction of theft is authorized, which citizen Trump made use of by asking unelected technocrats to give him the money of savers that he spent and squandered, wealth redistribution by bankruptcy. That part of the Constitution was a reaction to debtors prison, et al which was a refinement of earlier practices of slavery of the children of debtors.
Common law is regulation by unelected technocrats replacing regulation by men in power with a stake in the actsame. But it is a guide to the future acts only after judging past acts to be violations of thou shalt not steal.
Would it be simpler just to purge 10% of federal employees every year?
I’m sure randomly canning a mess of building custodians, security guards, and accountants every year will do wonders for public policy.
You really should be reading https://niskanencenter.org/
Alex goes part way to enlightenment, Niskanen goes the rest of the way: If free markets and growth require a government framework, optimize that framework for free markets and growth. Don’t hold the internal contradiction in your mind that the empowering framework is “statist” and evil at the same time.
The internal contradiction is helpful to the vanity of certain parties, so will be maintained.
I don’t know about 10%, but laying off the less productive and especially the problem employees who complain all the time can increase efficiency and lead to a better functioning organization with less back-biting and drama in the office. You can get more with less. And that’s not limited to government employees either.
At the beginning of the Lincoln administration there were 16 employees in the Dept. of Agriculture, which apparently existed to disseminate information to improve the production of food. Today farmers have unlimited access to any information that they might need and can use incredibly sophisticated equipment to create surplus food, like the 1.19 billion pounds and growing of cheese, much of it stored in government warehouses. In order to create this warped market the Dept. of Agriculture now employs about 110,000 people that disperses $140 billion dollars.
“The USDA also is concerned with assisting farmers and food producers with the sale of crops and food on both the domestic and world markets. It plays a role in overseas aid programs by providing surplus foods to developing countries. This aid can go through USAID, foreign governments, international bodies such as World Food Program, or approved nonprofits. The Agricultural Act of 1949, section 416 (b) and Agricultural Trade Development and Assistance Act of 1954, also known as Food for Peace, provides the legal basis of such actions. The USDA is a partner of the World Cocoa Foundation.”
Farmers, like anyone else, should be expected to finance their own marketing and research efforts.
So, why don’t you praise the African agricultural sector as the absolute proof the free market ensures farmers and consumers are both well served with plenty of quality food at stable prices and farmers earn fair incomes that ensure their sustained prosperity, all thanks to no government interference in their operations or the market?
Why not argue that African farms produce five times the yeold per acre of US farms thanks to the free market rewarding r&d to the degree Africa has done far more in 5000 years than the US government has funded in the nearly two centuries since farmers ran the government and sought to control the growth of the economy they saw as based on farming.
Undoubtedly dominant assurance contracts would increase the private provision of public goods, but they would not generally lead to the efficient provision of public goods. For something like a bridge, much of the value is to future users, who either have not been born yet or do not know that future circumstances will lead them to use the bridge. Thus the total willingness to pay of current users is less, perhaps far less, than the social value of the bridge. I can’t imagine how a private entrepreneur can solve this aspect of the problem.
Bridges are easy. Toll booths. Bridges, being very excludable, are not public goods.
If so, then bridges aren’t a good example. For actual public goods, the point remains.
Almost everything is excludable if you are prepared to be aggressive enough. A lighthouse could be turned on only when there are ships that pay for it nearby. National defense could be made excludable by moving the non-payers to the border regions of the country and not defending that region.
The point is that making something with a positive externality excludable you lose the positive externality and, thus, overall welfare is diminished. Assurance contracts don’t have this downside.
Sure, but if you’re talking about avoiding the costs of making something excludable, assurance contracts and state provision of the good both serve that purpose.
All goods and services are excludable in principle if you want to make the effort to do so. In the case of a bridge you could ban certain people, on the basis of any criteria you care to use, from using it– hence an excludable good. Politically, that’s not viable of course– but politically excluding desperately ill people from healthcare is also not viable, yet how many people here would accept that healthcare is therefor a public good?
IMO, the entire definition of “public goods” is suspect and the subject needs to be rethought from the ground up.
“Bridges are easy. Toll booths. Bridges, being very excludable, are not public goods”
So, why are the Tea Party of Kentucky so opposed to a toll bridge to Cincinnati? Is the Tea Party a bunch of big government socialists opposed to the free market?
Why are the Tea Party opposed to the electric utilities hiking rates to build the four nuclear reactor in the Mid Atlantic States? Big government socialists opposed to the free market?
New England is the region where zero power generation can be build by charging electric utility customers. Where Republicans dominate, electric utilities can charge electric customers for building power generation before any power is generated.
In Tabarrok (1998) I showed that such reasoning was wrong; a large class of public goods can be produced voluntarily using what today would be called a crowdfunding contract
Isn’t that cute? Right at this moment, you have state agencies providing what are not public goods (primary and secondary schools) and financing them in such a way as to impose financial penalties on families who would rather not use them. We might just address this before we go about crowdfunding sewer construction. The enthusiasm the moderators have for doing so is manifest in yesterday’s post on school vouchers. Soi-dsant libertarians might give some thought to the freedom of contract and association to be exercised by non-adolescents – like, you know, running a bakery or letting out rental properties.
Well, evangelicals – whether they be college students who’d like to hear a lecture by Anthony Esolen without the antifa nuisances disrupting it, parents with school children, landlords, or bakers, don’t rate when compared to illegal aliens, adolescent stoners, or elderly professors who want the latest in pharmaceuticals, so you’ll never hear a word from the Mercatus crew on their behalf.
“Political society avoids the problem of free riders at the expense of creating forced riders, people who are forced to pay for a public good that they value at less than their cost.” — Tabarrok
“fee simple property” can not truly exist if government property taxes exist — if they can tax it — you don’t own it.
Timid libertarians never have any solution to deal with the 800 lb-Gorilla (coercive government) in every economic equation.
If I’m not mistaken the fee-simple history is that the person “owning” the property really didn’t own it. The Lord (noble or the king) owned it and the “owner” paid a fee to ue the property largely as they wanted but not as an owner in the alodial sense that the Lord owned the property s/he collected the fee on.
Just chage fee to tax and we’re in the modern world.
Just a guess here but I suspect the history would should that the whole emminant domain thing for the government taking property goes back to the origins of the fee-simple structure..
The property tax is most benign of interferences with ownership.
The massive interventionist limitations on how one can use “their” fee-simple property overseen by the government has severely limited “private” property. There is no need for title, if control over use is exercised. The ownership question becomes simply rhetorical.
In the last 50 years, we’ve seen these land-use regulations move from the mostly benign balance of separating residential from commercial/industrial to de facto takings for the benefit of others without compensation.
Not until we are in the New Jerusalem will we ever get rid of “coercive government”. The best we can do is have representative government where the entire adult citizen body has an equal share in determining the policy of the government, and where certain bedrock rights are established.
The road to hell is paved with utopian ideals, whether of the left or the right.
Yeah, I think Art Deco lands near the mark here.
I know several libertarians IRL. Most of them have no problem with the basic public utilities offered by local government (sewer/water/fire/police/etc.) If you do not like the services, you are free to move to a different community, or even unincorporated community. There’s a town with well-supply just 5 minutes north of me, and if you head another 15 minutes north you can have your own septic field AND your own well (if that strikes your fancy).
These really aren’t practical political problems. We can probably talk more about the roads (heavy state and federal intervention there), and schools (touchy topic for other reasons), but there’s no serious dispute about gas supplies. Libertarians also have a lot of problems with zoning and stupid ordinances, which are legitimate gripes, but even libertarians I meet tend to think “move if you don’t like it.”
The big intractable political issues involve distinctly private goods, like healthcare services or old-age retirement savings, that are financed largely at the federal level or the state level. Libertarians I know think you should save for your own retirement and pay for your own bills. These are the MAJOR disputes.
We can then have a separate conversation about the one bloated truly public good at the national level, which is the military.
Basically, a solution in search of a problem….though, sure, let’s see how it works Indian charter cities. Could be interesting.
We can then have a separate conversation about the one bloated truly public good at the national level, which is the military.
The ratio of military expenditure to domestic product is quite near its post-1939 nadir. We have a working military, not an ornamental military. The latter can be found just north of the border in Canada.
Libertarians would probably prefer an ornamental military.
That’s one reason libertarians should have very little influence. (The chronic kvetching about the drug laws is another).
Re: you have state agencies providing what are not public goods (primary and secondary schools) and financing them in such a way as to impose financial penalties on families who would rather not use them.
Huh? What “financial penalties”? Are people being fined because they do not send their children to public school?
Meanwhile I certainly hope I am never housed in a jail, and I have been successful in my first fifty years in avoiding that outcome– yet I do not regard the taxes I pay which provides for jails, which are a necessary if regrettable adjunct to civilized life. (Hint: some things work to the general public good whether one specifically uses them or not. Hence it is entirely just to require payment from the general public. This is true of jails– and of schools)
Huh? What “financial penalties”?
They pay twice for schooling. This isn’t that difficult.
Hey, each landowner can build the quality of road he wants, and charge any toll he wants, to provide passage across his land to those he approves of, using the means of carriage he approves of.
Free markets can solve every problem!
It would be fun to know to what degree people who first started sites like Kickstarter were aware of the theory of dominant assurance contracts. To me the idea feels kind of trivial, but maybe it’s just because I’m already so used to the idea of crowdfunding. They say that a groundbreaking idea is always preposterous when it’s first conceived and then becomes a foregone conclusion (is this the right word here? I had to look up the translation for the word from my native language).
I’ve also always thought that informational goods produced via crowdfunding should be public goods and not protected by copyright, patents or trademarks. The only reason we have these things is to secure more funding for informational goods. If the funding comes from crowdfunding (or dominant assurance contracts), then there is no reason to apply these restrictions to the product.
“Foregone conclusion” makes sense in the context you used it in.
Absent the coercive power of the government to impose and collect taxes for public goods, anarchy and foreign invasion are the likely result. That’s what the founders believed when they wrote the constitution at Philadelphia. https://www.amazon.com/Framers-Coup-Making-United-Constitution/dp/019994203X/ref=asap_bc?ie=UTF8 Freedom is hard, requiring a constant search for the middle ground between libertarianism and oppression. Tabarrok is searching for the “voluntary” solution for finding the middle ground. Of course, that was the approach in the articles of confederation, but it failed because some states chose not to impose and collect the taxes necessary to operate a stable and effective national government. I believe Tabarrok is sincere in his efforts to find a non-coercive approach to finding the middle ground. Unlike some self-professed libertarians.
…so you favor the ‘coercive middle ground’ as the most practical society.
How exactly do you control the coercers to keep them in the middle?
(the founders/constitution failed miserably at that task, viewed from year 2017)
The Constitution actually does a pretty decent job. It distributes power widely and makes change difficult. It’s a small contributing factor in the differences between the US and other Western European nations. Note how much progressives at Vox scream about procedural rules like the filibuster because it prevents them from just ramming whatever they want down our throats.
Any set of rules, though, is utterly ineffective when the judges and enforces simply elect to ignore the rules.
There may also be a trade-off in the early republic…a stronger federal government in 1820 means a too-strong government in 2020, but a weaker government in 1820 might just mean the death of the republic.
No, the constitution’s a wreck and has no reliable features which promote and secure decentralization. The decline in professionalism in and among the legal profession has proved a problem. That’s a prelude to saying you should never rely exclusively on lawyers and judges for much of anything. What it does have (in conjunction with political custom) is features which empower rent-seeking veto groups.
“Tabarrok is searching for the “voluntary” solution for finding the middle ground. Of course, that was the approach in the articles of confederation, but it failed because some states chose not to impose and collect the taxes necessary to operate a stable and effective national government.”
I hate this kind of argument. Tabarrok wrote most of his article about dominant assurance contracts. Rather than say anything about his actual point, you make some general point about voluntaryism and then compare it to the Articles of Confederation, as if this says anything about dominant assurance contracts!
If you find it so difficult to respond to Tabarrok’s actual points, then maybe the reason is because his points are hard to argue with.
“What if donor A thinks that every other donor will donate? In this case, A knows that if he donates he won’t get the refund bonus, since the contract will succeed. But he also knows that if he doesn’t donate he won’t get anything, but if does donate he will pay $80 and get a public good which is worth $100 to him, for a net gain of $20.”
But if donor A believes every other donor will contribute, then doesn’t he retain the option of not donating and getting that $100 public good for $0 rather than $80? So I don’t see how this solves the free-rider problem — what am I missing?
I was thinking the very same thing. This is either not explained very well or a very rudimentary oversight in the logic.
In the simple example that I gave all 10 potential donors are required to donate for the entrepreneur to produce the public good so if Donor A thinks that every other donor (i.e. the other 9) will contribute he becomes pivotal, i.e. his only choice is to contribute and get the public good or not contribute and get nothing. Hence, I write Donor A “also knows that if he doesn’t donate he won’t get anything”.
In more general examples, RPLong is correct. The point is not to maximize the number of donors but to get enough to produce the public good which is what the contract accomplishes.
It doesn’t eliminate free riders, it just ensures that there is always enough donors. This point isn’t fully clear using such a low-value example as a $100 public good and a $5 payout. Think in terms of a $10 million dollar road development and a much higher payout. Corporations would be the main donors and the rest of us would be free riders.
“Corporations would be the main donors and the rest of us would be free riders.”
In the real world, the opposite seems to hold. Corporations demand that local taxpayers provide infrastructure improvement and tax breaks in exchange for agreeing move to (or remain in) the region. Would funding infrastructure via DAC/kick-starter strategies really change that dynamic?
Yes, if the dominant assurance contract was a replacement for public policy or if the payout for failing to fully fund the campaign was sufficiently large. You’re right that it wouldn’t work if the corporations could simply choose between lobbying and dominant assurance.
I don’t really get this response. Doesn’t it require some explanation onwhy people behave differently with a crowd funding approach than with any other approach to voluntarily funding some public good?
The problem in the “free-rider problem” is not that someone gets the public good without paying for it. The problem is that it doesn’t get produced at all if people have the possibility to free-ride. Since someone getting the thing for free doesn’t reduce the benefit others get from it, free-riding a public good that gets produced anyway doesn’t really matter.
Anonymous is spot on.
Glad to hear that the years of reading this blog are finally paying off in terms of understanding of economics (which is not my professional field at all). 🙂
In NH, children are see as free riders, so public policy is designed to force every child have a wealthy benefactor.
Thus, NH is a rapidly aging society dependent on immigration from big government tax and spend on public goods since New Hampshire was picked as the libertarian Free State.
If it weren’t for Massachusetts, New Hampshire would have less population and be poorer. But we’re become the destination for people like Mitt Romney, Scott Brown, after their children free rode off Mass taxpayers.
(No “broad based” taxes, with property tax the primary tax, with towns mandating minimum value of housing by land area requirements and other regulations to force the property owner bear all marginal costs plus base costs. Thus housing to raise kids is much more costly than across the border in Massachusetts, Maine, Vermont. By reducing the number of kids, the demand for education is lower, except for employers, who are expected to source well educated workers from other States. Like Massachusetts. As well as customers.)
The problem with markets is not the underproduction of public goods (positiive externalities for free and the free-rider problem). In fact that’s easily solved by innovations to eliminate the positive externality that provides some (I would suggest limited) free-riding problem thereby internalizing the benefits and improving the incetive strucutre in the allocation of resouces by individuals within the society.
The real problem markets need to resolve are going to be the negative externalities and pubic bads that exist.
People don’t distrust markets because they are not getting a little more of something good that they cannot avoid getting. They don’t trust makets because they don’t like getting stuck with shit they don’t like and cannot avoid while others are directly benefitting from making the distrusting person or group worse off.
I would say that the fact that the positive externality has to be eliminated in order to fund the good is a pretty big problem. What are the costs of companies not being able to use patented technologies freely or people not being allowed to copy copyrighted works freely? Looking at how huge profit margins the most successful companies and individuals working in high patent / copyright sectors have, I would say that the societal costs of this system are huge. Not probably larger (or even the same) as costs from negative externalities like pollution, but still not exactly negligible.
The fact that people often think of negative externalities as more of a problem than the elimination of positive ones is probably something related to the availability bias. If there’s a clear negative consequence from something, you see it and you protest against it. However, absence of a positive thing is not so visible to you – you would have to imagine what the benefits of the thing could be – and you tend to think less about it.
? The patent is not freely used in most case by others — it’s licenses for a fee. The patent creates the increase in innovation — supposedly (perhaps that was just one of the first big rent-seeking activities).
The point of positive externalities is that if someone does value them more than other things they are buying they will shift their allocation to fund the increase in the positive externality. If they don’t value that output more than other thnigs they buy why is forcing them to support the increase a good or efficent action?
As far as I can tell, everyone arguing that we need to fix the public goods problem (positive externalities) is actually trying to get a freer ride by forcing others to fund what they don’t really want to fund and it has nothing to do with the costless benefit those extra pockets get from the status quo output.
Is a Limited Liability Corporation libertarian? It allows people to benefit from committing torts, and then, despite having resources available to recompense the injured parties, the government absolves them of that responsibility due to a legal fiction that an imaginary person is actually responsible.
Do you think people should be able to sue public officials private assets for decisions made in their public role?
Yes, I’m in favor of eliminating things like qualified immunity that serve a similar function to the corporate liability shield for public officials.
As long as everybody’s clear on the terms of the lending contract at the beginning, what’s the issue? Borrower and lender can sign a lending agreement specifying what assets the lender has recourse to in the event of default. The lender can then factor expected recovery into risk premium of the rate. What’s wrong with the government agreeing to enforce the terms of the contract?
You’re assuming the only people harmed are lenders. What if the corporation does something that affects totally unrelated third parties?
Apologies for replying so late. I think you’re making a good point but in practice these edge cases are dealt with through regulation or insurance or both. Basically you’re talking about situations where a labor, environmental, etc. liability swamps the value of the company. I’m no naïf, of course that happens, but the more cartoonishly evil stuff is generally off he table nowadays.
Yeah, I’m just thinking that not having the limited liability wouldn’t actually make that much difference today because companies would just get more extensive insurance, so as to protect shareholders. You would have a contract where the insurance company takes on the full liability, so in the end who ever is harmed ends up suing the insurer and not the shareholders. In other words we have more sophisticated ways of limiting liability that by government fiat.
There’s that too.
I would also say, at some level we’re talking about a difference of degree rather than kind. What if a company’s liabilities extend to me personally and my assets don’t cover it? Do I have to have my wages garnished indefinitely and live on pure subsistence consumption? Sell myself into indentured servitude? Sell my kidney and have my body incinerated to generate electricity? At some level the law places a limit to how far that sort of thing can go on before bankruptcy is allowed. At least with the LLC there’s the advantage that Joe Schmoe can confidently say, “I’m putting this dollar, and only this dollar, into this investment, and I don’t have to worry about the tentacles of the state reaching back out to drag me in.” That seems like a freedom win to me.
Every money market fund depositor fully understood their contracts and should have been punished for trying to withdraw their money for any reason in September 2008?
Ie, you believe the actions of Sheila Bair was just totally wrong to act extending FDIC insurance and money market funds should have been driven into insolvency by continuing the 10% of total funds withdrawal in of the week ending September 19, 2008? That many more funds should have paid out no more than 97 cents on the dollar on money market deposits? Many more money funds should have gone though Federal bankruptcy liquidation?
Money market funds are exactly lending contracts.
I came here to write the same thing. I see the LLC as an un-libertarian concept. Allowing people to shield themselves from the downside of risky behavior and spread that risk to parties not involved in the transaction is the antithesis of libertarian thought to me. i.e Think of a mining company with just enough assets to make a go of it, that goes bankrupt after the booty has been recovered and distributed to shareholders; and that leaves a century of reclamation in it’s wake for other parties to deal with. In my libertarian mind, bonding for any venture where the downside risk extends beyond the assets/life of the company should extend to the personal assets of the shareholders.
I also see this as problematic.
We need some sort of distinction between liability for harms to involved parties such as direct customers, lenders, employees, and shareholders, who can all be considered voluntary actors, and liability for harms to innocent third parties, who can’t. If the chemical plant next door blows up and destroys my house, I should have some sort of recourse against the shareholders in the LLC, not just the assets of the LLC.
Nozick solved this by requiring such entities to carry liability insurance. But if an LLC isn’t liable, they don’t need to carry as much insurance as they would otherwise have to. Essentially we could still have protection for shareholders if the corporation is liable, as long as the corporation has to carry sufficient insurance to pay for harms to third parties. It would merely increase their costs, especially for corporations involved in very high risk activities. (But what’s wrong with that?)
Of course then we have to deal with defalt by the insurance company or simply it’s efforts to deflect and claim they don’t have to make the payments. But at the end of the day we’re all liable for the costs we incur in any form during our lives and simply hope to recoup a good portion of what is not really due to our choices and actions.
Sure, but hopefully that would be a smaller problem than companies just going broke and not paying compensation at all. Maybe in the future there will be some meta-insurer that back stops the insurance companies.
“I see the LLC as an un-libertarian concept. Allowing people to shield themselves from the downside of risky behavior and spread that risk to parties not involved in the transaction”
The point was that the LLC led to end with a greater amount of personal Liberty. If the only party that allowed people to shield themselves from the downside of risky behavior was government, then government would often be the only solution possible. Which would lead to a world that was distinctly more statist having less personal Liberty.
Looking at the big picture, a world with LLC corporations balanced with smaller government, has historically turned out better than the countries with little private enterprise and a massive government.
State laws used to generally have minimal capitalization requirements for corporations. To my knowledge, few have minimal capitalization requirements for LLCs. These minimal capital requirements were very minimal, however. Indiana’s was $1,000 as of the early 1990s. The LLC has supplanted the corporation for nearly all business enterprises, however.
Lenders and contractors with LLCs can, or should, be sophisticated enough to provide resource to collateral through personal guaranties and collateralized security agreements.
With regard to torts committed against non-related parties, P & L insurance effectively substitute for, and effectively magnifies the resources of the LLC members would have to satisfy obligations. And in fact, court cases that permitted injured parties to “pierce the corporate (LLC) veil” were sometimes permitted to proceed when the corporation did not secure adequate insurance.
Libertarians do a great job of persuading people that they have three modes of thinking: crankish, adolescent, and twee.
This is wildly over broad. Is Richard Epstein a crank? What about Milton Friedman and Gary Becker?
I’ll see you those three and raise you Gottfried Dietze and Thomas Sowell. Friedman (1912-2006), Becker (1930-2014), Dietze (1922-2006), Sowell (1930- ) and Epstein (1943- ). All have one thing in common, which is that someone who is of median age among the population of working adults is more than 30 years their junior. Or was. An ordinary academic of Prof. Epstein’s cohort would have retired a half-dozen years ago, of Sowell’s nearly 20 years ago, and the others are all dead.
What’s left are a collecting pool of people with various tendencies: those pushing open borders, those pushing a currency board, those contending empirical research in the social sciences is nonsense, those pushing neo-confederate historiography, those pushing paulbot/buchananite/rothbardian historiography of the inter-war period and the Cold War, those kvetching about the drug laws, those kvetching about the police, and those investing their time chattering about debatable puzzles and trivia because referring to anything of much consequence is status lowering in the faculty rathskellar.
Once upon a time, they had something to say.
Where does CATO fall in this spectrum?
So in the lead essay, Kuznicki writes that libertarian social engineering is “the deliberate attempt to create, on an incremental, case-by-case basis, the new, voluntary institutions and practices that a society would need if it were to become significantly more private, more decentralized, and more free.” Face palm. New voluntary institutions will arise spontaneously, if given the space, if they actually fulfill human needs. No need for some libertarian board of supervisors to review on a case-by-case basis what society needs. With the cancer of pro-big government ideology spreading from the Niskanen Center tumor and now infecting Cato, fanned by Tyler’s neo-bolshevist advocacy of a violent revolution to instill yet more social control, it is safe to say that libertarianism in the US is defunct. But ignore all that and ask yourself, why ignore the vast diversity of the inventory of voluntary institutions that humanity has accumulated through the ages? One would think they would flourish again rather nicely if regulators at the local, county, state, federal, and international levels would back off a little. But no. “Libertarianism” is now about demanding an EU style body to oversee every dimension of human existence. Branding social engineering as libertarian is not the way to subvert the dominant authoritarian paradigm. With our next president Bernie Sanders demanding that all Christians be denied or removed from public office, Rob Dreher’s Benedictine Option seems like the more relevant and practical approach. Its time to run. Stick a fork in the US. Its over.
With the cancer of pro-big government ideology spreading from the Niskanen Center tumor and now infecting Cato, fanned by Tyler’s neo-bolshevist advocacy of a violent revolution to instill yet more social control, it is safe to say that libertarianism in the US is defunct.
Or it’s defunct because it’s advocates form a collecting pool of stoners and sectaries.
I’ve actually thought alot about this concept. I was looking at the worn out tennis court nets across the street in a public park that have been useless for years. I think the threshold is a good idea. I also like as more people pay, everyone pays less. So there is an incentive to spread the word. I thought there needs to be a “hustler” or promoter as well to organize everyone. The hustler could take a cut and could be reviewed on previous jobs. Before we can do bridges, etc, it would be interesting to try at parks, etc.
Only pay if threshold is met.
Only pay a preset maximum
Preset maximum decreases in ratio with more payers
Hustler takes a cut
Tennis court nets get fixed
Bet the nets are in great shape at Mar a Lago. Only costs $250,000.
Random thought:
Is it possible to regard liberty as a public good?
And might it be possible to provide liberty as a public good via some mechanism other than meta-regulation at the level of government?
I don’t agree with the Markets vs Government framing. And I don’t get the appeal of an entirely transactional society. If anything, I think we might be over-transactionalized already.
Better alternatives to an enormous national bureaucracy are family, religion, civic organizations, community, local government, that sort of thing. “Markets,” particularly in the context of multinational corporations, are supposedly doing better than ever (and perhaps they are for themselves), yet they, along with the government, grow increasingly hated. Neither Big Government nor Big Market will make up for the deterioration of more basic social institutions and culture. Nor will Big Non-Profit which is similarly over-scaled and largely exists for tax avoidance and virtue signaling.
There is an old paper by Victor Goldberg (circa 1970s) about Administered Contracts in the Bell Journal (now the Rand Journal). It was an excellent article – and I believe the only article ever published in the Bell Journal that had no formal mathematics whatsoever! Anyway, he characterizes the markets vs government as a false dichotomy. Instead, he traces it to the nature of the good or service that is being provided. Relying on markets to deal with pollution, for example, means that a contractual approach will have to deal with many (but not necessarily all or the same) difficulties that government policy faces. The choice is generally between two imperfect approaches and it is a mistake to compare either pure form (libertarian or government) to the imperfect form of the other. It is a well developed and written piece to read.
Dealing with free riders is insufficient, because there are also cons and hostile agents. Our body’s immune system is very inefficient, but without it, i.e. “free market cell growth”, we’d be quickly dead.
Wrong.
Limited liability companies are older than the 19th century. The First must have been the VOC (vereenigde oostindische compagnie, est 1602), so the Award for greatest business policy of all time goes to the dutch who, with an pinch of socialism, improved capitalism and thus the life of gazillions of people till this day.
I set up a site https://aethelontis.wordpress.com/ in order to join in on the conversation at Cato-Unbound. I think that it is premature to socially engineer a market place when we do not properly identify the players nor understand the forces that lead to the production of public goods. We need to start at the very beginning.