On April 10, 2013, Liberty Fund and Butler University sponsored a symposium, "Capitalism, Government, and the Good Society." The evening began with solo presentations by the three participants--Michael Munger of Duke University, Robert Skidelsky of the University of Warwick, and Richard Epstein of New York University. (Travel complications forced the fourth invited participant, James Galbraith of the University of Texas, to cancel.) Each speaker gave his own interpretation of the appropriate role for government in the economy and in our lives. This was followed by a lively conversation on the topic moderated by Russ Roberts of Stanford University, host of the weekly podcast, EconTalk.
We are also pleased to include the video of the symposium, available on youtube at EconStories.
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Readings and Links related to this podcast
Podcast Readings
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About this week's guests:
Mike Munger's Home page
Richard Epstein's Home page
Robert Skidelsky's Home page
About ideas and people mentioned in this podcast:
Books:
Principles of Political Economy, by John Stuart Mill. "No one would build...". On Econlib.
Articles:
John Maynard Keynes. Biography. Concise Encyclopedia of Economics.
Friedrich Hayek. Biography. Concise Encyclopedia of Economics.
Adam Smith. Biography. Concise Encyclopedia of Economics.
Podcasts, Videos, and Blogs:
Previous podcasts with Michael Munger. EconTalk.
Previous podcasts with Richard Epstein. EconTalk.
Previous podcasts with Robert Skidelsky EconTalk.
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00:00:00
N.B. Time stamps below are for the video. For the audio (mp3 file, the podcast), add 30 seconds to each time stamp.
Legend. The speakers, in order of appearance, are:
RR: Russ Roberts, host
CW: Chuck Williams, Dean of Butler University's College of Business
CT: Chris Talley, President and CEO of Liberty Fund
MM: Michael Munger, Duke University, guest speaker
RS: Robert Skidelsky, University of Warwick, guest speaker
RE: Richard Epstein, New York University, guest speaker
00:00:14
RR: It's a pleasure to be here on the campus of Butler University for this event: Capitalism, Government and the Good Society sponsored by Butler University and Liberty Fund. My name is Russ Roberts. I'm a research fellow at Stanford University's Hoover Institution and host of the weekly Podcast, EconTalk, which is part of the Library of Economics and Liberty which is sponsored by Liberty Fund. I want to begin our program by introducing Chuck Williams, Dean of the College of Business here at Butler University and Chris Talley, President of Liberty Fund. Please welcome them.
00:00:53
CW: Good afternoon. I'm Chuck Williams, Dean of Butler University's College of Business. It is indeed my pleasure to welcome you to Butler University's Clowes Hall for a panel discussion of Capitalism, Government and the Good Society. Today our esteemed panel of leading thinkers will address and debate the role capitalism plays in the good society. Whether policies should be more bottom-up or maybe top-down and whether the sphere of government activity should be larger or smaller. To anyone doubting the importance of these questions I direct you to the pages of the world's leading newspapers and magazines which over the last few days have furiously debated the legacy of British Prime Minister Margaret Thatcher who passed away earlier this week. Supporters praised Mrs. Thatcher, the Iron Lady, for saving Britain from economic ruin by taming labor unions, privatizing nationalized industries, strongly reducing taxes on income and capital and shrinking inflation which ran as high as 27 percent. In other words they favor the role of capitalism and the good society. Critics condemn Mrs. Thatcher as confrontational, dogmatic and abrasive. For policies that threw people out of work, that harmed the poor, that favored the rich, that divided the nation. In other words, they support the role of larger government in the good society. At Butler's College of Business our mission is experiential education, or what we call "Real life. Real Business". And one way in which we fulfill that mission is through extensive partnerships with the business and non-profit communities. Today's event is the result of one such partnership with Liberty Fund. And it's my honor to introduce Chris Talley, President and CEO of Liberty Fund. Please join me in thanking him and Liberty Fund for their support and sponsorship of today's event.
00:02:56
CT: Thank you Professor Williams. I'll take just a brief moment to explain a little bit about what Liberty Fund, about what kind of organization Liberty Fund is and join in the warm welcome for this evening's program. Liberty Fund is the legacy of an Indianapolis businessman. An Indianapolis based lawyer by the name of Pierre Goodrich. He was a very successful businessman, practiced law for a few years but more than that he was a very curious intellectual. He spent his life striving to understand what it is in man's nature that makes him want to be free. Mr. Goodrich founded Liberty Fund in 1960. Resulting from a long process of self-education, driven by that curiosity, along with in depth conversations with family, friends and business associates. He hoped that through educational activity liberty might be restored and be preserved. Mr. Goodrich believed that liberty in all of its dimensions: religious, economic, political and intellectual offers the greatest chance to release the fullest measure of the creative potential of the individual and therefore of society. Liberty Fund and the Pierre Enid Goodrich Foundation are delighted to have the opportunity to join with Butler University, in working with professor Williams, to provide this evenings educational program discussing the commanding heights of economic activity. Again I join with dean Williams in welcoming all of you to this program and the ensuing presentations and conversation. Thank you all for coming out. Professor Roberts.
00:04:50
RR: We're here to talk about government, capitalism and the good society. My view of capitalism has always been that under capitalism man oppresses man. And under socialism it's the other way around. It's not my line. I'm told it came from MAD Magazine. And to be honest it's not my view but it does capture the reality that all political and economic systems are imperfect. The ideal mix between free markets and government intervention was the central, political and economic issue of the 20th century. And it gives every indication of being the central question of the 21st century. We're still arguing about the appropriate role for government in stabilizing the business cycle, the appropriate levels of government intervention in health care, how we should regulate the financial sector, the role of the government in the distribution of income and plenty more. The big questions really haven't changed very much. What role does capitalism play in creating the good society? What's the appropriate role for government? Should economic activity emerge voluntarily from the bottom up? Should it be steered and imposed from the top down? What changes in the interaction between the marketplace and the government should be put in place in the aftermath of the 2008 financial crisis? Should government sphere be larger or smaller? Is market failure or government failure the right starting point for tackling these questions? What are the right rules of the game? The right policies that let the human creativity and self expression to flourish. We have a remarkable group of speakers here today. Each with their own philosophical and policy perspectives to help us think about these issues. Each speaker is going to talk for about 10 to 15 minutes and that will be followed by an informal hour long conversation that I'll moderate. So let's get started. Our first speaker is Michael Munger. Mike is a professor of political science at Duke University where he directs the Philosophy, Politics and Economics program. Trained as an economist, Mike is the author of numerous journal articles at the interface between economics and politics, as well as the author of Analyzing Policy Choices: Conflicts and Prices. He blogs at Euvoluntary Exchange and at Kids Prefer Cheese. He leads all guests in appearances on EconTalk with 22. Our last conversation was on John Locke and Hurricane Sandy. And he is also the best living economist to appear in the Keynes-Hayek rap videos. Please welcome: Mike Munger.
00:07:35
MM: Well thanks very much, how are ya'll doing? The other panelists really are very distinguished just as they said. I'm actually just the eye candy. The only person who actually laughs at that joke is my wife. Well those, those who favor...I can wait...Those who favor liberty and free enterprise are actually more often accused of being idealistic and naïve. And I think exactly the opposite is true. There are some real problems of information, collective incentives and externalities. But if we're realistic about the alternatives, which are equally bad, and in many ways worse, I think we can have a more useful discussion than the kind of dichotomy we usually get: we need more government, we need more markets. The truth is a little more complicated than that. Now I'm a professor at Duke, as Russ told you. In North Carolina at the state fair, we have what in effect are beauty contests for pigs. So you might imagine in one of the categories at the state fair there is a Big Pretty Pig contest. And there aren't many entrants because there's big pigs, and there's pretty pigs. But there's not many big pretty pigs. So there's just two. We have the two entrants. The first one comes out and the judge goes, "Oh, God, that's an ugly pig! Let's give the prize to the second one." Well, he hasn't seen the second pig. Now it's true that the first pig is ugly. But why would you have a decision based on the fact that there's problems with one system, the other one must be better? But that's precisely what people who want to reject market solutions in some ways are advocating. So the world is imperfect, our knowledge is limited, that particular pig of market solutions is in many ways pretty ugly. The world is hard. The problem is that advocates of state intervention often want to award the prize to the invisible pig: the state. But when you actually take a look under bright lights, government failures are just as ugly, just as prevalent, and in some ways harder to control than market failures. Now the kind of research that I do is called public choice. I'm interested in the consequences of policies, of the results of different combinations of rules and incentives, and I've reached the conclusion that limiting the role of government, not eliminating, but limiting the role of government in the lives of citizens in both markets and in society, has the best consequences for society, and for human flourishing. So I want to make two points in this regard. First, society and the state are different things. In fact, the state can sometimes crowd out society. But society's not the market either, it's something else. And then second, the real question is not between more regulation and less regulation. The real question should be what I call the "right kind of nothing." Well if I say that society and the state are different things and society and the market are also different things, government's a political collective organization that uses coercion. Markets are a set of shared institutions that reduce the transactions cost of impersonal exchange. Society is everything else, society is all the complicated relationships that you have with people around you that are neither coercive nor based on price and exchange. When you think about your lives, an awful lot of what you do is in that third category. Society is a really big pig, and in some ways it's prettier than either the state pig or the market pig. So if all we did is vote, if all we did do is discharge our obligations by going to the grocery store or pulling the lever in the voting booth, or buying a car, we would have a society that, as Alexis de Tocqueville said, would be enfeebled. If we rely exclusively on the state to carry out our moral obligations, or if we rely exclusively on the market to obtain the things that we want in our lives, society is enfeebled. Let me give an example. John Stuart Mill in his 1848 book, Principles of Political Economy said that no one would build light houses from motives of personal interest, because they wouldn't collect the fees that were necessary to cover costs. So Mill's conclusion was, it's the proper office of government to build and maintain light houses, since it is impossible that the ships at sea which are benefitted would be made to pay a toll. So his conclusion was, markets are a pretty ugly pig, let's just give the prize to the second, which is the state. But the fact is, as early as 1820 in England, which was the home of John Stuart Mill, more than three quarters of all lighthouses had been built and at that time were operated, the very time that he said this, were being operated by private individuals. Now how can that be? How can it be that it could be that light houses could be provided? How could it be that lighthouses, which were supposed to be public, could be provided privately? Well, there were sailor societies that had sprung up as part of society, not truly market nor truly state, that provided insurance, pensions, ways to provide for widows whose husbands had been killed at sea. A group of people got together and formed a voluntary, private organization. So it's true that government officials back a lot of the enforcements of those contracts. But how exactly did it work with light houses? Well if you put in to a port, the proprietors of the port, the people who operated the stores, would charge something extra and then that money would go to the private lighthouse. So lighthouses being provided privately by these societies didn't require state action. Now when I tell people this, sometimes they say "Well but that sounds like the government was acting." In a way it is, if you go into the Circle K and buy a Coke and try to steal it, the government enforces those contracts. So there's some mix, there's some proper mix of private voluntary action in groups and enforcement by the state. What I'm objecting to is the automatic awarding of the prize to the pig we haven't even seen which is the state must provide the lighthouses. That's not true. There are many ways that, that creative individuals can come up with voluntary organizations to provide those services. So the lighthouses of coastal England in 1840 weren't pure market entities, but a kind of hybrid. The point is there's no hope if we stick to these binaries. If we say more markets, more government, we have no hope of solving the problem. We have to do it on a case by case basis. Well, second. The right kind of nothing. I hope we can get away from that, the kind of dichotomy that I've talked about. And the objection that I often hear--I'm a kind of libertarian economist in terms of my own politics--people say: "Well you just want the government to do nothing." Well that's not right. What I want is for the government to do the right kind of nothing. And what would I mean by the right kind of nothing? In 2009 I taught for a semester in Germany in Friedrich Alexander University in Erlangen, Germany. And I don't speak any German, so at least twice a day I would end up saying: "Look, I'm sorry, I don't speak any German," and in some way I'd embarrass myself and something awful would happen and I would go home and hide in the bathtub. But, the problem was I would sometimes get hooked on what appeared to be cultural cognates. And I thought I knew how a grocery store worked. So I'd go to the grocery store, and in the US, if you're in a grocery store and you see an elderly woman pushing the shopping cart back towards the store you say: "I'll take that for you ma'am." You take the shopping cart in, she doesn't have to walk all the way in and you get the shopping cart. So I tried that. I'm in very large [?] an underground parking lot at a grocery store, and I see this elderly woman, kind of about five feet tall, in heels, "Uber Oma," a grandmother, walking along, pushing the shopping cart. And so I think, okay I know what to do, and I pantomimed to her "I'll take that" and her reaction surprised me. She dodged hard to the right. I had on more sensible shoes and I was younger. And so I dodged that way too and I was gonna intercept her. And she dodged pretty hard to the left, but I had the angle and I grabbed the shopping cart. It's surprising how loud an old lady's screams are in an enclosed area like that. Cause she started screaming. And then I saw a policeman running. In Germany you don't usually see policemen running, they're very placid individuals. If they want to talk to you they go... He was running and looking at me and I thought: this is bad! And I was practicing my speech: I don't speak German, I don't speak German. He gets to me and starts yelling and I said, "I don't speak German." And he says in perfect English, fortunately, "What are you doing?" Now many of you know, and usually people from Germany or Europe at this point are cringing because they know that in most of Europe, in order to put the shopping cart back, you re-chain it, you get back a Euro. So there's a deposit. So I was trying to steal a Euro from an old lady. I didn't think I was, but in the policeman's eyes I was, and in his defense, I was. It didn't just look that way, that's what was going on. So he demanded ID, and I wasn't carrying my passport, but I pulled out my wallet and he saw my Duke ID and he said "Oh my, my nephew went to the executive MBA program at Duke." And I go, "Thank God." By this time I could see the corners of his mouth starting to pull up and I said, look I've never seen a shopping cart, I had no idea, I'm sorry. And okay, this was going to be fine. But now he was smiling and he said, without turning around, "She's still looking isn't she?" And I looked, and she was peering out from behind a pillar, ready to see justice done. And so he said, "Ok," and he starts shouting, I'm not gonna shout loud cause I have a microphone on and poking me hard in the chest. "You have to understand! I don't think she speaks English! We're done here today!" That, I submit, is the right kind of nothing. Now you can understand that someone on the Left might say, "Well you libertarians you just want the cops to do nothing." As if they were going to sit in the car and smoke cigarettes and say, "Oh another grandma's getting robbed, where do you want to have lunch?" That's the wrong kind of nothing. If that's what you mean by deregulation, I don't want that either. But also, there was something he could have done. He could have said, "This guy is trying to steal a Euro from an old lady," because I was. In his defense, I was. He could have arrested me. Probably the charges would have been dropped, but as it was, the old lady was happy, and yes, I went home and hid in the bathtub. I admit, that, that part was bad. But his choice to do a particular kind of nothing, I thought, was an illustration of what I would hope we could think of as the proper role of government. The proper role of government is to serve as a referee. The proper role of government is to participate to the extent necessary to allow people to reach a full realization of their hopes, their dreams. Now as I said the two points, and to summarize, the two points that I wanted to make, of taken together, I think are more a program for conciliation. I've actually become convinced, myself, that a lot of the more extreme forms of deregulation are the wrong kind of nothing. So I hope we can talk more here today about the right kind of nothing. Thank you for listening.
00:21:03
RR: Our next speaker is Robert Skidelsky. He is an emeritus professor of political economy at Warwick University. His three volume biography of John Maynard Keynes won five prizes, and a single volume abridgment appeared in 2002. A revised edition of his book on the current crisis, Keynes: The Return of the Master, was published in September of 2010. He was made a member of the House of Lords in 1991 and was elected a fellow of the British Academy in 1994. His most recent book, How Much is Enough: The Love of Money and the Case for the Good Life, co-written with his son Edward was the subject of an EconTalk episode in October of 2012. Please welcome Robert Skidelsky.
00:22:01
RS: Ladies and gentlemen, I'm not going to talk about Margaret Thatcher. Though I will answer, make any comments you want on her, on the Iron Lady, afterwards. Certainly we've been overwhelmed by news of her, by her achievements, and also of course quite a few criticisms of her divisiveness. So I'll be very happy to talk to that, but rather, I'm going to talk about the conditions of liberty, which seems a good topic of conversation for a Liberty Fund event. Owing to the hazards of the weather, I find myself the sole representative of common sense, this, this afternoon. So the question really is, what policies and structures are best suited to maintain the system of liberty? And I want to consider that question through the prism of the two great rivals of 20th century economics, John Maynard Keynes and Friedrich Hayek. They were the colossi that bestrode the world of economics. Curiously enough, although they were near contemporaries they hardly ever engaged. They were near contemporaries, they lived in the same country, but they only had a couple of engagements over a long life. The first was in 1931 when they reviewed each other's books. Well, like most professors they reviewed each other's books badly. Hayek complained that Keynes' treatise on money lacked any principle of equilibrium. And Keynes was a bit more [?] in his review of Hayek's prices and production. He called it an example of how starting with a mistake a remorseless logician can go mad. Hayek never reviewed Keynes' big book which was his General Theory of Employment, Interest and Money. He said that by the time he had finished the review, Keynes would have changed his mind so it wasn't worth reviewing it in any case. But I do think that was a cop-out, he didn't know how to review it. However, I now come to their second and most fruitful encounter, which was in 1944. And in 1944 Hayek published his Road to Serfdom, his famous critique of central planning. He attacked the idea of democratic central planning because he said there would never be enough voluntary consent in a democracy for the goals of a central plan. Therefore, democratic central planning was an oxymoron. Partial planning, by which he meant a mixture of planning and markets, he also thought wouldn't work because, I quote: "Any attempt at such partial planning involved a progressive suppression of that economic freedom without which personal political freedom has never existed in the past." And fascism and communism, the two big rival ideologies in 1944, were totalitarian culminations of what had started as democratic planning. That was his thesis. Western democracies were fighting fascism without realizing they were on the same slippery slope to serfdom. The originality of Hayek's book was of course this argument that what he called serfdom need not be brought about by evil men like Hitler and Stalin. But by the actions of good men, the road to serfdom was paved with good intentions and was covered at a creep rather than at a gallop. Well, Keynes read this book. He was on the high seas traveling to the United States on the third of his wartime missions, treasury missions to America. And he wrote to Hayek in a letter dated 28th of June, 1944, which perhaps was rather surprising in view of their huge differences on economics. Keynes congratulated Hayek on having written a grand book: "Morally and philosophically I find myself in agreement with virtually the whole of it. And not only in agreement, but in deeply moved agreement. But..." There was a but. In fact, there were three buts. And I just want to go through the buts because I think they're very ,very apposite to what we're thinking about this evening. "First, you admit," Keynes wrote, "That it is a question of knowing where to draw the line between the state and the market. You agree that the line has to be drawn somewhere." This is Keynes, "But you give us no guidance whatever as to where to draw it. As soon as you admit that the extreme is not possible you are, on your own argument, done for. Since you're trying to persuade us that so soon as one moves an inch in the planning direction you are necessarily launched on the slippery path which will lead you in due course over the precipice." So that was his first but: Hayek doesn't give us any guidance as to where to draw the line between the markets and the state. And that's a good criticism. It's a cogent criticism. Libertarians have always regretted Hayek's concessions, in particular the concession he made that you have to have a limited welfare state. In fact, some of them have detected in Hayek a dangerous tendency towards socialism. The libertarian writer Ayn Rand denounced Hayek as a compromiser, and another famous libertarian philosopher argues that Hayek leaves the state's role ad hoc, open ended, and indeterminate. Now Hayek did try to draw the line in a number of ways. For example he tried to distinguish between general rules, which he thought were admissible, and rules designed to benefit particular groups, which he thought were wrong. But this doesn't do the work in defense of liberty he quite wants it to. Because general rules like conscription for example, can be highly coercive. And ... Nazi Germany and Soviet Russia were conscriptive societies. But everyone was conscripted, those rules weren't aimed at any particular groups. And Hayek also argues that a social safety net is okay, provided its aim isn't redistributive. But of course it's bound to be redistributive since in practice a social safety net involves a transfer from wealthy, who don't need a social safety net, to the poor who do. It is more accurately called forced charity. Well that was the first of Keynes' criticisms. Second: Keynes argued that an enlarged role for government was needed to prevent, I quote, "disillusion with the results of your philosophy." This was a sound conservative, even Whig-ish position. Because what Keynes was arguing, was that rejection of government policies to prevent slumps for example or to overcome extreme poverty, would likely produce a flight from liberty. In other words he was arguing for government intervention as an insurance policy. Because if you neglect that insurance you're likely to get far worse. Now this had just happened in four years in Germany. There was a flight from liberty, and Keynes said you need precautionary measures. You need government to intervene to prevent those situations from getting out of hand, which produce political extremism. And there were other criticism Keynes could have made. On the other hand, let me not leave the argument too strongly weighted in favor of Keynes at this point. Hayek was right to point out, but he only did so after Keynes' death, that by destroying belief in the balanced budget rule, Keynes had opened the door to unrestrained, expansive government spending. I mean, that I think is how you balance that particular argument. So this brings me to Keynes' final point, his last point. After emphasizing the need for planning, Keynes went on, "But the planning should take place in a community in which as many people as possible, both leaders and followers, share your own moral position." Remember he's writing to Hayek. "Moderate planning will be safe if those carrying it out are rightly oriented in their own minds and hearts to your moral position. Dangerous acts can be done safely in a community which thinks and feels rightly, which would be the road to hell if they were executed by anyone, those who think and feel wrongly." So that's Keynes' defense of dangerous acts. In communities with democratic traditions they don't lead to serfdom. In short, moderate planning was consistent with the preservation of liberty. And I think Keynes' view here was echoed by many of the American reviewers of Hayek's Road to Serfdom when it appeared. For example, Professor T. V. Smith of Chicago University noted that, "Preparation for an electrocution, and preparation for an electro-cardiograph were the same up to a point. What the outcome would be in either case depended on the traditions of the particular society. And," Smith wrote, "no country has yet wittingly or unwittingly slipped into serfdom whose presuppositions are democratic, whose customs, hopes and habits are full of sympathy for men and replete with respect for laws." So basically it depends on the society whether these acts, whether big government leads to serfdom or doesn't. However, Hayek has a good come-back on this, though he obviously, he didn't reply to Keynes' letter by the way. Keynes' argument was essentially static. What it ignored was the consideration, this is Keynes, "That right feelings and democratic customs can be depleted and eroded by continuous government intervention. That their continuation is not independent of the acts being done. A society in which Keynes' dangerous acts are frequent will lose its understanding of why they're dangerous. That is, it's sense of what it is to be free." And this has happened to some extent. Political liberty is, remains, we are free to vote, and to speak as we choose at least on occasions like this provided we're polite. But we now accept many more curbs on our personal liberty than we did in Keynes' day or Hayek's day, in the name of all kinds of desirable things to be sure. Like health and safety and security, all those sort of things we accept restrictions on our liberty which we never would have. And we don't associate them with curbs on our freedom because we've lost our sense of what that kind of freedom is. The war on terrorism offers leaders opportunities unrivaled opportunities for oppressive legislation, surveillance, and pre-emptive justice, which comes straight out of George Orwell's great dystopia, 1984. But most of us are completely unaware of how far down that slippery slope we've already slipped. The more that we do not escape, more statism of this kind may perhaps be the result of Hayek's salutary warning. Now this is the skeleton of the great debate which should have been, but never was. It never was because Keynes died less than two years after The Road to Serfdom appeared, and therefore never engaged properly with Hayek on this very important field of political economy. The question of course is, is a Keynesian state more or less likely to preserve political and individual liberty than a Hayekian state? And we'll talk, maybe discuss this perhaps more in our conversation, what I think the essential functions of a state are in the modern age: an economic stabilization, provision of public goods and I would argue, a redistribution of wealth and income. But my own view is that a state which does what Keynes wanted a state to do would be less vulnerable to political extremism and political authoritarianism than a state which followed Hayek's road. And in practice, underneath all the rhetoric we hear, post-war western states have been more Keynesian than Hayekian. And that is true of the United States too. And remarkably stable, I would argue, as a consequence, in their democracy. Let me put it this way, in conclusion, an economic system which tolerates periodic crashes in the name of freedom from financial regulation, which tolerates cuts in public spending in face of rising unemployment, which tolerates rising inequality in the name of sanctity of private, sanctity of contract, is more unlikely to suffer creeping authoritarianism, by way of political reaction to those things, than a state pursuing the middle way, commended by Keynes, which Hayek saw as the slippery road to serfdom. Thank you.
00:36:59
RR: Our next speaker is Richard Epstein. He is the Lawrence [?] professor of law at New York University School of Law, and the Peter and Kirsten Bedford Senior Fellow at Stanford University's Hoover Institution. His latest book is Designed for Liberty: Private Property, Public Administration, and the Rule of Law. His regular legal column "The Libertarian" can be found at Hoover.org. He's been a guest on EconTalk seven times and he will be appearing for the eighth time soon, to discuss constitutionalism. Please welcome Richard Epstein.
00:37:38
RE: On this particular occasion, what I want to express is that I actually started out life as a professional lawyer. And what lawyers do is something in many ways quite different from what economists do and political theorists do. What they do is they basically spend a lot of their time in the engine room trying to figure out how it is that you make these grand ships of states go. And we have basically two major functions that we try to discharge in these cases: one of them is to figure out how it is that we grease the wheels so that transactions can take place, whether they be done by private individuals or by government. And then secondly what we're trying to do is to put in a set of mechanisms whereby disputes can be resolved short of force by the introduction of the state, in neutral judiciary and some cases juries, and our opportunities to be heard, and so that in effect we can substitute adjudication for warfare in the operation of the overall system. What is the lawyer's role in this situation is, I think, important to know. Lawyers are remarkably uncreative people, I think it's important to say. We have never had a bright idea of how to organize a new industry, how to get people together with respective collective actions, we are essentially the keel on the boat, we are not the sail that propels it forward. But a boat needs a keel as well as a sail because what it has to do is to find a way to make sure that your enthusiasms do not exceed your capacity. So inside the engine room, our particular job is to do what the great economist and my personal friend Ronald Coase has said: figure out how it is that you've tried to organize a system so as to minimize frictions and transactions costs, where the transactions costs are to the social interactions what frictions are to the operations of physical systems. They never do you any good, and so to the lawyer the way in which you try to maximize the level of social welfare from the center is to figure out how it is that you drive those transactions costs down in order for creative activities to take place. And in order to do that, what we then have to do is to figure out what are the two kinds of things which by and large tend to frustrate the organization of a political system. And it turns out that they are as follows: One of them is good old fashioned aggression. It's a situation where you use force in all of its forms. You punch people over the head, you start to set traps of one kind or another so they fall in and die, you mislead them by fraud so that they fall to their death, things of that sort. And essentially what we can say is most people who engage in that kind of activity do so for some kind of private gain. But we're equally confident that the losses that come out on the other side of the transaction are far greater, so that it's not a situation in which the way in which you combat force is to have more aggression. What you have to do is to define some sort of collective institutions which can restrain that in the name of the self-preservation of the liberty of all persons in question. This is, I think, the fundamental condition of a society in introducing the rule of law, which essentially finds ways to curb that kind of aggression, is in fact the first and paramount task. But it's not the only task that you have to face when you're trying to organize a society. There are problems of coordination that also take place that sometimes cannot be achieved by voluntary means. Ideally if you could get everybody together by way of a contract that would be perfectly wonderful because you could be confident, if it were indeed a voluntary contract, everybody would come out the winner. But when it comes to organizing certain kinds of organizations it turns out that voluntary solutions are not possible, and we have to start thinking of collective type of arrangements. And in doing this I think it's important to remember from the very beginning of the legal system, it had never been devoted solely and exclusively to the protection and organization of private property. One of the subjects that I teach on a regular basis now over forty years is Roman law. And if you go back and you read the beginning texts on this particular subject the first thing they start to talk about is common property. And only after they've understood what makes property common work do they start to talk about private property. And if you want to get a sort of wholly biological analogy as to what this situation starts to look like what I recommend you do is to think about your own bodies for a second. And you realize that you have two kinds of organs inside of you. One of them are the long and skinny, you have a neural system which goes from one end to the other, and then you also have a blood supply which has exactly the same kinds of situation. If in fact you were to cut into the nerves on the one hand and the blood supply on the other the entire system would fall to pieces. When you're talking about a social system, you also have a long and skinny. Think of them as rivers and trails, streets and highways and so forth. And the key point to understand, it's only if these things are subject to various kinds of rules of open access can you have communication back and forth between individuals who occupy private parts of land. And to put the analogy again one step further, inside the body not only do we have the long and skinny, but we also have the short, square and squat. The various kinds of organs which are highly specialized in what they do, which are communicated or connected with each other through these other two systems. And in a social system the private property is in fact the factories, the farms, the houses that are beside the road, so that the ideal nature of the particular system in question requires that you have common and open access to a communication network of one kind of another, coupled with productive centers that start to take place with houses, farms, factories and so forth. And indeed this is not a peculiar feature of this or that society, no matter where you go and no matter what you do, that kind of dichotomy exists. And it's important to understand that because many of the critics of private property do not understand the way in which the more sophisticated defenders of private property argue for an optimal mix of those things which are collectively operated for the communication transportation and so forth, and those things which are privately controlled. Now, once you look at these two things you can see what the perils turn out to be. With respect to these highways and so forth, what you have to do is to make sure that they do not get divided, they do not get snipped. The famous Treaty of Westphalia in 1648 was designed to make sure that there weren't an endless series of tollgates along the Rhine river, which would in fact destroy communication. So what you needed was collective action to make sure that the rivers would not be privatized. On the other hand if you have land which is privately developed, privately owned, privately defended and you allow somebody else to take it, what happens is those who are not allowed to sow will not be willing to, will not be able to be reaped. Or to put it in another way, if you wish to get something at the back end, you have to give an incentive for people to put the front end investment in so that you now have the explanation as to how it is long, endurable private property lies with these farms and so forth can create the overall system in question. So the question is, what kind of legal system do we start to use in order to organize these kinds of complex objectives? And here what we do is we first have rules of acquisition, how it is somebody gets the property. I'm not going to defend the elaborate and novel proposition that each of us owns our own body, because the alternative is either the system of collective ownership which immobilizes us all, or a system of slavery which allows the few the exploit the many. But once you have those people, they cannot take something out of the common if it's a river or a trail, but they can take land, occupy, build and develop it so you get private property running in that way. Once you get these two institutions together, the next question that you have to ask is how do you maintain and defend? And here you get two other great bodies of law which help put the system in greater coherence. The first of these is what we call the law of tort. And what that means, in effect, is we now have a general rule which says that one person is not allowed to trespass against the person or the property of another individual. That's the way in which we want to control against aggression. Sometimes we say we're controlling against externalities, that later term is much too broad to be truly safe, you have to be much more careful in the way in which you use it. Why is that the case? Because many people get disappointed. If it turns out that a competitor comes along and offers a good for a lower price and a higher quality so that all their efforts to create wealth by their own labor is now smashed by that kind of opposition. But the key thing to start to remember is that if we start with the trespass situations, we're stopping these negative sum games where everybody is made worse off by the repeated application of force by one person against another, but if you now combine classical liberal theory in the legal side with modern economic theory, what you understand is that the competition which results in disappointed competitors necessarily results in a higher level of social output than any alternative system known to man, including that of state monopolies whereby the government decides who can produce what and how much can start to take place of various kinds of activities. If one wants to figure out what the great decline in the United Stated and in Europe has been with respect to social policy, it has been exactly the confusion I just mentioned between physical externalities, fraud externalities, and competitive externalities whereby what we do is we say in effect that certain people suffer from ruinous competition, when somebody else comes up with a better mousetrap or a cheaper good to sell, and so therefore the state has to intervene in order to prevent these things from taking place. And the great transformation that is associated with the move from classical liberal philosophy, which is not libertarianism in the sense that its collective action by the state is not appropriate to the modern progressive system which believes in lots of government management and so forth, is that the class for permissible externalities for government regulation is to the modern progressive and to some extent the modern Keynesian, various kinds of competitive distortions taken by innovation. And it is exactly that mistake which creates the biggest problem that we face, because it means that we turn an efficient economy which has a competitive industry into one that becomes much more monopolistic. And now, there was something which was said by Mr. Skidelsky which I think, in fact, is worthy of some kind of comment about our good friend Hayek. And indeed I have actually written an article called "Hayekian Socialism" which attacked Hayek for doing exactly the thing that he should not have done. Which was to understand that you have to understand the limitations of an ordinary libertarian theory involving force and fraud it means that what you have to do is to go into a huge set of [?] subsidies and the redistributive state. One of the things that lawyers have always known is that there are actually three states of the world that you have to take into account. One is pure competition, which is generally speaking an extremely good and benevolent type of situation, the other is naked aggression which you have to forestall, but the middle case has to do with the situation of monopolies. Now what is striking about the difference between lawyers on the one hand and political philosophers, like Keynes on the one hand and Hayek on the other, is that the philosophers tend to ignore this middle case, even though it explains huge portions of the economy that you are familiar with under the rubric of public utility regulation and railroad regulation, internet regulation, and so forth. It turns out that the creation of certain kinds of complex networks and services are not amendable to competitive solutions. Because unless everybody can cooperate nobody can in fact benefit from these operations. Think of how it would be if the telephone business were organized by competitive industries and competitive firms, none of which could connect to one another. So what the good ole lawyer starts to think about is how it is that you can create the gains from these networks without getting monopoly exploitation. And the mechanism that is introduced in order to control that, is in fact, a non-discrimination rule which says that people are entitled to fair and reasonable investment returns on a non-discriminative basis from their assets. And this in effect is a way of saying: well let the monopolist get as much money in order to operate his facilities, but we won't give it the [?] control over prices so that it can exploit everybody else. Now there's an instructive lesson that comes from this, because this model of essentially trying to limit what monopolists can do in the private market by these rules on just rates of return and nondiscrimination is in fact the template for the way in which the state when it exercises its monopoly of force should operate as well. And all the rules about forced exchange through taxation and condemnation are illustrations of how it is that you don't have to have a pure market so long as you understand that just compensation principle offsets the exercise and use of public force. This leaves only one issue left that one has to deal with, mainly the question of redistribution. And here I disagree I think with most [?]on this state, on this issue... The first thing on the list is always to expand the growth by controlling aggression and controlling monopolies and then if that starts to fail you figure out how private incentives can fill the gap. In most cases the tradition of laissez faire was notable for its willingness, indeed its insistence that voluntary charity was required of all those who had something to help those who did not. And that leads you back to the voluntary associations of friendly societies that my friend Mike Munger started to talk about. But understand that when you run this thing through, the redistribution function should not be allowed to wag the dog. And if you're trying to find why it is that the state today has failed in both Europe and the United States, its willingness to create monopolist institutions in competitive industries like labor and agriculture, and the moment you start in fact to use government power to create monopolies instead of to limit them, you're going to run a downward course. Thank you very much for your attention.
00:52:27
RR: We're now going to move to the second part of our event, our conversation, and as was mentioned earlier we lost a participant to weather. He's on his way. Maybe. If he doesn't make it, I find myself cast in a strange position of defending government intervention and making sure that poor Robert Skidelsky doesn't get ganged up on. So we'll see how that goes, but let's welcome our three speakers back to the stage.
[Applause]
00:53:12
RR: So just to put names to faces again, we are very pleased to have with us in this conversation Michael Munger, Robert Skidelsky, and Richard Epstein. I want to start us off with a challenge of Twitter, and I'm going to ask each of our three participants, now I have to be fair to them, I didn't tell them much in advance about this opening question so I'm not going to hold them to it precisely, but I want them to tweet their appropriate role for government. So I'm going to give them a hundred and forty four characters. Since that's a little bit brutal, I'm going to give them a few more sentences, but I want them to start by telling us, briefly, what do they see as the appropriate role for government. And we'll go around the group here one by one and then we'll open up the conversation: Michael.
00:54:05
MM: Alright, I said, in a way, a very short kind of haiku answer is that government should be a referee. Government shouldn't be a participant, and government shouldn't be too active in actually making the rules on the fly. There should be a set of rules and then government should be in charge of enforcing them.
00:54:27
RR: Robert.
00:54:08
RS: Uh, three functions, I think, first of all economic stabilization. Market economies don't ensure continuous full use of resources. Secondly, public goods, that is goods which can't for various reasons be produced by markets. Richard talked a bit about that. And thirdly, enough redistribution to secure fair equality of opportunity for people to realize their potential.
00:54:54
RR: Richard.
00:54:55
RE: Well, I mean, I start off with the maxim: cooperation, yes, coercion, no. Qualified by saying: monopoly, maybe, because sometimes you need them [?]. And redistribution when the first three things fail. Added, in the following way, again as a lawyer, that you must have a very complicated and sensible system of administrative rules, which will tell you how you do civil procedure, criminal procedure, administrative procedure, that's the stuff in the engine room, it's probably the bulk of what I do as a day to day lawyer and no one should ignore it.
00:55:31
RR: So let's turn to the problems of capitalism. Mike, what do you see as the biggest challenges that capitalism faces, what are its weaknesses? Should we be worried about it?
00:55:42
MM: I think we should be very worried about capitalism and the reason paradoxically is that government is in some ways too cooperative with the wishes of capitalists. And I mean that in a, what we economists call, rent seeking. Suppose I own a large corporation, or I'm a manager of a large corporation, I have two choices. I can spend money trying to make better, cheaper, new products that people want to buy. I can create value. And the profits that I make from that actually redound to everyone's benefit. Yes, I make profits, but the big benefit is to consumers who are paying for something, they're paying less than its value to them. So that's the way capitalism is supposed to work. But the alternative, and it's identical from the perspective of the owners of the capital itself, is I lobby members of Congress for contracts which, if I were to make them privately, would violate the anti-trust laws. I want to have contracts in violation of restrictive trade laws. Now I can't do that because it would violate the Sherman Act [?] but I can if I get a cooperative member of the Senate that you can introduce legislation that's far more unassailable, far more difficult for my competitors to overcome, whether those competitors be in other countries or my competitors be new start-ups here in the United States. Now from the perspective of the owner, the stock holders, the people who I answer to as the manager of this corporation: "which one should I do?" They don't care. And in fact if I refuse to do the rent seeking, lobbying, use government to protect my profits route, I'll be fired. Or I'll suffer from an unfriendly take-over, because that capital has a higher value of use in rent seeking. So government must somehow armor itself against the blandishes of interest groups, so the problem that we have is precisely that government is too susceptible, and this, I sound like a Marxist at this point, but this is actually, I think Marx was the first public choice theorist.
00:57:48
RS: No you didn't.
00:57:51
RE: You don't sound like a Marxist to me.
00:57:53
MM: Marx is a different conclusion. Marx is: get rid of the corporations. I say, find a way to prevent government being bought and paid for by corporations.
00:58:02
RR: Richard? Did you also have any weaknesses that needed to be addressed?
00:58:03
RE: Yeah, I, well of course. On the Marxist point I don't think he thought that was the central issue; I think he thought exploitation of labor through contracts which were winning on one side and losing on the other, and I think he was wrong about that. I think the fundamental difference on that point is that most of us believe that voluntary contracts result in mutual gains between the parties, and the problem is whether or not, as with monopoly, the external effects are negative and override those gains. But I think in many ways the situation is even worse than Mike says it is because I'm going to go back into the engine room again. One of the great contributions of the American anti-trust law is the case for Parker and Brown in 1943. And what you did is you found that the states organized a raisin cartel where all the cost would be paid by people outside the state. And the Supreme Court was so enamored with the fact that there was government protection for this that it said it was legal against the Sherman Act, precisely because the state ratified it, whereas a good economist would say: "Oh my God, a state run cartel in fact is durable, it won't break down for cheating," so this is essentially the problem that you see is that you look at these societies and we are busy in the United States and in many other places, taking competitive industries using government resources to convert them into monopolies. When I wrote a book called Takings Now some twenty-eight years ago, the basic logic of this book was that every transaction that you have, either voluntary or coercive should result in positive sums for all the people who are involved. Monopoly always creates negative sums and positive cost so it's a double loser. And controlling that I think is the most important thing, and to the extent that monopolization and capitalization are equated, it does a great disservice to the capitalist institutions.
00:59:48
RR: Robert?
00:59:49
RS: Yeah, I'd like to disagree with both Michael and Richard, sorry, can I call you by your Christian names? I think that, sure, there's a bit too much collusion between the state and certain of interests. I mean, particularly financial interests. I mean, basically the state has deregulated the financial sector at the behest of the financial sector to the point at which a lot of its activities, quite simply, are waste. I mean a lot of finance is simply rent extraction and has no social justification, and people at the top of the profession get paid far too much for the value they actually render to society.
01:00:40
MM: Is this the part where you disagree?
01:00:42
RS: This is the part where, I am going to disagree in a second. This is the part where I think, you know, I agree. Now, and then to go to the part where I disagree with Richard, I don't think monopoly, I mean monopoly is bad, monopoly is a great source of misallocation, and all that. But even if you had a perfectly competitive market system, without any of these distortions, you would still need an economic growth of the state and stabilization, because you would not get a full utilization of resources under a freely competitive market system, because you have severe information problems. And if you take the argument for, saying that a market system would always achieve optimal equilibrium, you find it does depend on perfect information. Now we do not have perfect information. The future is very uncertain. And we have asymmetric information problems anyway.
01:01:42
RE: You know, I disagree with that and let me explain why. As I mentioned earlier on the central problem of every legal system is how to deal with friction. Imperfect information is one of those things. But it is a very dangerous leap to say that by virtue of the fact that there are gaps in the information markets that only government can stabilize them. One of the things that private markets do is they introduce all sorts of intermediates who have exactly that kind of role. These are people who are brokers in various kinds of exchange and entities and the theory is they have enough information they can basically organize both sides of...
01:02:16
RS: That's a theory.
01:02:17
RE: But it's, no, no, it's not a theory. It's a theory in which you look at the thousands upon thousands of people who filled exactly those kinds of roles, getting people paying on both sides of the market for their services, it's fine. One of the great achievements with respect to the financial markets apart from the disaster, is the creation of such institutions that...
01:02:36
RS: That's a huge qualification, Richard.
01:02:38
RE: No, no, no, no, no, let me explain what the system is. You know, look the financial markets will never be pure and competitive from the simple observation that it runs on back of the kinds of things which it's very difficult for private institutions to control against. And so you have to worry about that, and remember when I said you needed to regulate anti-trust laws, that' a concession of government roles in some kind of market values. But the ability essentially for a large number of people to participate in markets depends on the ability to create intermediates who in effect will take certain kinds of financial instruments which would be much too risky if concentrated in some hands, and to spread them out over a larger situation. And those markets, most of them have actually succeeded, some of them have failed. Where they have failed most notably has been in the real-estate market. But that's the area in which the intermediation has been covered with government guarantees and alterations of public money supply, so you can't treat it as purely a private failure. There' also some serious technical problems in that market, most of the people who are in fact engaged in the securitization thought they were diversifying against all risk, that turns out to be wrong, there are many risks which are systemic and for which securitization and partition of assets doesn't work. You need to point though, there are market failures in that case, but interestingly enough, none of the regulations of the SEC and so forth that were designed to counteract those things had any positive effect on the way these were organized.
01:04:01
RR: Okay, I'm going to let Robert respond and then Mike's going to jump in if he'd like to. Go ahead, Robert.
01:04:05
RS: Well the market failures here are colossal, or this particular market fa