Aristotle The Geek has written a partial response to the debate on my previous post. He writes

What is an “unfree” market? Let me ask the question the other way round – what is a “free” market? It is a market in which the State does not interfere (the only “interference” would be of the enforcement of contracts kind). Political/ economic freedom is always defined in terms of the State, not in terms of non-State actors. The latter don’t lay any claim to morality when they engage in fraud, theft, murder, confinement etc. It is the State which does that. So, an “unfree” market would be one with State interference.

At this point I would ask “What is the State?” Ayn Rand defines government (which I will use interchangeably with State) as
A government is an institution that holds the exclusive power to enforce certain rules of social conduct in a given geographical area. (emphasis in original)

I will modify it to make one aspect of it more explicit
A government is an institution whose exclusive power to enforce certain rules of social conduct in a given geographical area is generally accepted.

Compare that to a modern democracy. Modern democracies are characterized by the lack of acceptance of any fundamental rule for social conduct. Any rule or law (no matter how fundamental) passed by a legislature may be repealed, completely modified or contradicted in its next session. Read this very illuminating article about how Oliver Wendell Holmes’ dissent in a famous case has served to create a legal orthodoxy that believes that the American constitution does not contain any fundamental principle. In a modern democracy, there is no inviolate fundamental principle that the state or its members are bound by. This means that the modern state lacks an identity. The state is a collective and the identity of a collective is determined by the identity of its constituents. But the modern democratic state is highly disparate. The only thing that is generally accepted is that there are no fixed rules.

The state in a modern democracy is an ever-changing group of men who enforce certain ever-changing rules of social conduct in a given geographical area.

This is about as close to anarchism as I think (and hope) we will ever get. Anarcho-capitalists such as Rothbard (based on some quotes by ATG) write of competing (while also cooperating with each other) private defence agencies. If these competing-yet-cooperating private agencies bind themselves by fundamental principles and refuse to allow other private agencies that do not accept those principles, then they together form an entity which is remarkably similar to a state. If they do not bind themselves by any fundamental principles but still cooperate among themselves, then they are remarkably similar to a modern democracy – a disparate set of power wielders that manages to avoid open warfare.

The only difference between anarchism and modern democracy is the issue of the size of government. But the size of the government is an inessential characteristic. What is essential is the principles that make up its identity. Modern democracies are constantly increasing the size of government and at the same time destroying its identity. But no entity can last long without an identity, especially large ones. A large government devoid of any fundamental identity is just waiting for some autocratic group to seize it (something that seems to be beginning in the U.S.). Anarchists want to do away with government altogether. But that is something that can never happen. Anarchy must degenerate into smaller states (waiting to be conquered by a more powerful state intent on conquest) or into a democracy for the reasons in the paragraph above.

Plenty of work coupled with a lack of motivation to spend time on editing has meant that its been quite a while since I last wrote a proper,  thought-out post although I do have plenty of accumulated material to write about. While the lack of motivation hasn’t changed, I thought I should just put this down.

In a short conversation over lunch, one of my colleagues talked about how hedge funds are now back in business after all the losses they made recently (probably based on a report from bloomberg.com). He then went on to say that there should be some protection – government regulation – for the consumers. As I resisted, the discussion went on to the food and drug industries. I mentioned how regulations against drugs prevents people from using new drugs even if they sorely need them and are willing to take the risk. He countered by saying that it is not possible for any individual to take responsibility for evaluating all the available goods (be they drugs or foods) and so a government agency is needed. I replied that doctors should certainly be capable of doing the required evaluation. He replied “saare doctors bike hue hain” – all the doctors are mercenaries and have been bought over (presumably by drug companies). I asked “And how about the employees in the government?” and that was the end of the conversation.

Note the reason given to justify the existence of regulation – the people who are competent to evaluate are mercenaries and so, will not act in the interests of consumers, whereas a neutral government body not motivated by profit, will. There is plenty of evidence – living in India, I will not bother to write about it – about how “neutral” government bureaucrats – known, not so fondly as babus - act. How then does an intelligent guy offer such a reason? The short answer is altruism. Just a week back we had a discussion about altruism in which I argued that it is for moral reasons and not economic ones that people accept socialist ideas. My colleague is well aware of my views and probably does not explicitly believe in altruism himself. But he has not explicitly rejected it as evil either. The deeply rooted morality of altruism makes him look with implicit suspicion at the profit motive and – by extension – at all private activity. It seems safer to trust a faceless bureaucrat working in a non-profit organization than to trust a doctor who stands to profit by selling you unproven drugs regardless of all the corruption that the bureaucracy is famous for. After all, by the altruist morality, the non-profit government organization has a noble aim – to serve others. The private doctor is just a lowly human driven by his own profit (which tends to morph into greed). According to the altruist morality, the doctor would have to make a sacrifice to forego the quick cash that he could make by being unscrupulous. And as everyone knows, very few people make sacrifices. So the altruist morality implicitly implies that private individuals will tend be more unscrupulous than public organizations. The facts do not bear this out. And it is simple to see why. Once one assigns a face to a bureaucrat instead of referring to a convenient collective called the government, it is clear that the bureaucrat is also working for profit. And unlike the doctor, whose career depends on his reputation, his career depends on - as Ayn Rand eloquently described in Atlas Shrugged - the aristocracy of pull. If a doctor makes a mistake or even if he is simply thought to have made a mistake by the public, his career is ruined. The faceless bureaucrat has no such responsibility. The profit motive cannot be abolished just by choosing to think of a certain group of individuals in terms of a collective – government. Within a framework of voluntary trade, the profit motive is not evil but good. It is what makes individuals want to prosper. It is what motivates them to work. Within a coercive framework of government regulation, the profit motive produces what is called “corruption”. A bureaucrat has nothing to gain by being scrupulous and a lot to gain by being unscrupulous at little risk. So he chooses to be unscrupulous. If his actions ever get traced back to him, the altruists have a field day damning his greed and the profit motive. But what is it that is corrupt? An unthinking bureaucrat doing what everyone around him does? Or the ethical system that invariably sets up men in situations where they stand to gain by duping others?

One should also look at the secondary consequences of oppressive regulations (take a look at other pages on FA/RM too). Regulations enormously raise the cost of compliance to standards – both directly in terms of the costs of running a regulatory agency and indirectly through the aristocracy of pull (lobbying is a nice euphemism). This effectively puts local small-scale industry at an enormous disadvantage and gives an unfair advantage to the bigger players. It also converts local, easily correctable problems such as occasional food poisoning into large systemic problems (in the same way as centrally controlled money supply creates systemic problems in the financial sector). The first strengthens the aristocracy of pull. The second creates even more demands for its continued existence.

At the end of the discussion, another colleague with whom I recently had a long discussion about the concept of sacrifice (note the reference to sacrifice above) mentioned that it will take another 50 years for people to reject socialist ideas. Today people look to the government for a solution to every problem. That is true. But socialist ideas will never be rejected until one first rejects their basis – the altruist morality – and discovers the alternative – egoism. The history of the U.S. which is now descending into just the sort of socialism that India is coming out of is proof of this fact.

This post (via Gus Van Horn) shows how the government operates in the U.S. these days. There doesn’t seem to be much difference between it and a criminal gang. Except that unlike a criminal gang, it has the entire coercive apparatus of the state behind it. Scary.

Donald Luskin asks “Is TARP a criminal enterprise?” and goes on to describe a number of dubious details such as:

…it was disclosed that “nearly 20 preliminary and full criminal investigations” are underway, including “large corporate and securities fraud matters affecting TARP investments, tax matters, insider trading, public corruption, and mortgage-modification fraud.”

…Perhaps this refers to the controversy that surfaced last January when it was said that Barney Frank (D., Mass.), the powerful head of the House Financial Services Committee, intervened to get TARP funding for a favored constituent, Boston’s OneUnited Bank.

…It’s easy to guess that Barofsky is looking into the possibility that Treasury Secretary Henry Paulson coerced the CEOs of the nine largest banks to accept capital investments from TARP, even though several of them didn’t want the government as a stakeholder.

…Cuomo writes that according to a deposition by CEO Lewis, “Bank of America did not disclose Merrill Lynch’s devastating losses . . . and would have done so but for the intervention of the Treasury Department and the Federal Reserve.”

But the important question to ask is not “Is TARP (or any other particular program) a criminal enterprise?”. The important question is “Could it have been otherwise?” The government is nothing more than an organization of people. A private organization does not have the authority to confiscate people’s property and use it for its own purposes, whatever those purposes may be. Neither does a government. The proper term for such confiscated property is loot. Is there a non-criminal way to acquire or distribute loot? I think not.

A while back I came across this infuriating story (via A Little Lower than The Angels) of a man who did not send his children to a public school against the law of his state and so was shot dead by the agents of the state. Since I have written a bit lately on the moral and political implications of public education, this is a good time to relate this story to that debate. The legal murder of John Singer is the logical conclusion to any arguement that advocates public education. Here’s how.

a) The state has the power to tax me to provide public education.

b) Therefore I have a legal responsibility to the state for the welfare of others.

c) Therefore the state may decide that my children’s education is essential to the welfare of others (free and compulsory education)

d) Therefore  the state may decide what this education must consist of.

e) Therefore the state may punish me (ultimately by death if I resist) if I refuse to accept the state’s requirements.

Do you agree with (a) but not with (e)? Examine your premises. Logic has a way of catching up with people even if they do not choose to be logical.

Arguing that government should fund education T.R asks (somewhat rhetorically),

Isn’t it our social and moral responsibility to give equal opportunity to all?

Even if it were, that does not necessarily mean that government should fund education. Note that government funds come from taxation – they are not voluntary. Using the force of law to take my money and spend it without my consent can only be justified if I have a legal responsibility (such as the collection of a fine). A moral responsibility is not enough. For example, it is my moral responsibility not to spend all my money on drink. If I were to do so however, the government would not be justified in putting me in rehabilitation or preventing me from buying drinks. This is because I am not legally responsible for not spending all my money on drinks. However, I do not wish to get into the differences between moral and legal responsibilities. My point is that I do not even have a moral responsibility to “give” equal opportunity to all.

What does moral responsibility mean? The moral qualification restricts the scope of the term to those actions that are open to choice. Clearly that which is outside my power of choice cannot be a moral issue. Since it is individuals who have the power of choice, moral responsibility refers to the responsibility of individuals for the consequences of their choices. A collective can never have a moral responsibility. Only individuals can. Therefore the question should actually be “Isn’t it my (or your, but not our) moral responsibility to give equal opportunity to all?” (I have dropped social responsibility from the question. More on that later.)

Put this way, the question becomes much easier to understand. The simple fact is that it is not within my power to give equal opportunity to all. That men are born and live in different environments (geographical, social, political, economic) is an unalterable fact outside of my power of choice. Different environments necessarily mean different opportunities. Moreover the very concept of an equal opportunity is quite shaky. If A is taller than B, could they ever have an equal opportunity to succeed at basketball? Even if A and B are equally tall and are brought up in similar environments, suppose A works harder and becomes rich as a star player while B does not. Do A and B now have an equal opportunity to buy a house? Clearly not. You may say that this is not what you mean and A earned this so this is OK. Now take it further. Do A’s and B’s children have an equal opportunity in their lives? Would taking away part of A’s money and giving it to B make their childrens’ opportunities equal? No. A’s children would still have the advantage of being brought up by a hardworking and successful parent. There is no way to make the childrens’ opportunities equal. Equality of opportunity is merely a watered-down version of the concept of equality of outcome. As such it might appear more plausible on the surface but is just as unrealizable. Opportunities come from previous outcomes or from chance. Neither of those can be equalized.

You might argue that even if it is impossible to equalize opportunity, it is my moral responsibility to reduce inequalities as much as possible. But that arguement is worse than the previous one. A doctrine that holds the impossible as a moral standard is extremely destructive since it can never be successfully practiced. Consider what it means when put into practice. It means that I should redistribute values from the wealthy to the poor, from the hardworking to the indolent, from the wise to the foolish, from the talented to the ordinary, from the strong to the weak, from the fortunate to the unlucky – in short, from the “haves” to the “have-nots” – because the former have more opportunities than the latter. What can be more destructive than that? Most people realize (at some level) that putting the doctrine of equality into practice fully is destructive. And so they practise it inconsistently. But that is destructive too in another way. It destroys his self-esteem or causes him to reject all moral ideas as idealistic, leaving him with no moral guidance.

Where does this incredibly destructive doctrine come from? It comes from a misunderstanding of the difference between the metaphysically given and the man-made. That men are unequal is metaphysically given - outside the power of choice of any individual. It cannot be right or wrong, just or unjust. The metaphysically given forms the basis for concepts such as right, wrong, just, unjust etc. Labeling the metaphysically given as unjust is a perversion of all moral concepts. The existence of inequality, like the existence of the sun, simply is. It is neither right nor wrong, neither just nor unjust, neither fortunate nor unfortunate.

So, it is not my moral resposibility to give equal opportunity to all. What about social responsibility though? To me, it is an empty term, devoid of meaning. It is usually used to obfuscate an arguement rather than to clarify one. I have moral responsibilities (as long as I choose to live – moral responsibilities are always chosen) to act in a certain way. I have legal responsibilities to act in accordance with laws (atleast when the laws are just). Beyond that, I have no responsibilities to some nebulous collective.

In an email exchange (which has already produced two posts), a friend asked “What are the alternatives you suggest to taxing/ law and order maintainance / public healthcare/ public education etc?”  This is what I wrote as a response:

Education and healthcare are certainly not areas where the government needs to enter. Consider the private tuitions / coaching class business in India for example. They exist for all levels of education and almost everybody attends them. They are also quite profitable. And this is inspite of the fact that parents are forced to pay for both official schools and coaching classes.

I do not have any significant personal experience of the health care industry, so I will merely link to the website of Americans for Free Choice in Medicine

Law and order (Police, courts, army) is a government responsibility and the question of how it is to be funded is certainly a pertinent one. A fee for the protection of business contracts could be one way. Banks requiring tax payments from borrowers (as a proof of responsibility) could be another. Voluntary taxation does seem an unworkable idea today, but men do give to charities and spend time and effort on activism. If the government is restricted to the maintenance of law and order, the revenue requirement will be way smaller (of the order of a few percent) than the level of taxation today (more than 40% for corporates and top earners in most of the world). Since men will be freed from a big tax burden (much of which is wasted by the government today), they will have more to give voluntarily. Anyhow, if the kind of reforms I desire are ever to be realized, abolishing taxation will be one of the last things to happen. A society that genuinely respects self-interest (instead of denigrating it through mis-concepts like greed) and allows economic as well as political freedom will be very different from the society today. What seems (and is) unworkable today need not be unworkable in such a society.

What I am writing about is a vision, not just political but also moral. Taking just a part of that vision and considering it in today’s context will not work. This does not mean that we can dispense with the vision however. No one can live a directed, purposeful life without a vision. The same holds for a country. Atleast the older generations (in India) had a vision (socialism), misguided though it might have been. Today’s generation has no vision at all. Look at some of the recent campaigns for example. Against reservation, against corruption etc. Read this article in today’s Bombay Times as another example. All empty words, no content. What do these people want? They all say they will vote. For whom? “Somebody who sticks to his or her word”, “A young, educated and responsible leader who loves the country whole heartedly. Somebody who puts the country first while discharging his duties.”, “A person we can depend on and trust. A leader who will not just concentrate on one aspect of development, but look around and bring about a positive change in all areas.”, “A young, healthy leader to lead India.”, “A leader who has the vision of a great and young India.”, “A leader who can look after all classes and give young India a path to follow.” These are people who know that the ideas that have always been preached to them have failed miserably. And as a consequence they have rejected ideas as such. They think they are smart, pragmatic and energetic. But what are they directing their energies toward? They don’t think it is necessary to know that, as long as they are pragmatic. But they are only deceiving themselves. Without a vision, they won’t be able to change anything.

My last post on Social Planning did not address the issue of externalities as well as I would have liked so I decided to write some more on it.

For the first part of the arguement, consider the example of a lighthouse from George Reisman’s book Capitalism: A Treatise on Economics (pdf version available here. Note: I have not read it fully). A lighthouse benefits all the ships that use its light whether their owners have paid for the construction and maintenance of the lighthouse or not. So there is no immediate incentive for any individual shipowner to pay. In such cases, it is claimed that lighthouses will be under produced. Reisman writes that ship owners could make their payments contingent on the payment of a sufficient number of other ship owners’ payments thus creating an incentive for everyone who wants a lighthouse to pay for it. These kinds of solutions do not figure in economic models based on the assumption that individuals act to maximize their utility, with no consideration for what effect their acts have in a wider context. This is simply not true. How would such a model explain the existence of this blog, activist groups, charities etc? Man is not homo-economicus. He is capable of a wider understanding of the world. Stripped of all the mathematics, the externalities arguement is essentially a claim that men are too short-sighted to act for their long term good. It is ironic that proponents of social planning use economic models based on short-sighted decision making to “prove” that the free market must fail and then use this “proof” to argue that people should elect a government which will magically not be hampered by short-sightedness. How do the votes of millions of short-sighted men result in an elite group that is not short-sighted? The fact is that governments voted into power by short-sighted men are far more short-sighted than any of the voters. Witness the incredible spending sprees that governments around the world are indulging in, with no thought of who, when and how will create the goods to support all the extra money being created and what will happen to the economy when the money is finally presented for consumption. Witness the fact that the liabilities of all social support programmes keep on increasing.

Secondly, as I mentioned briefly in my previous post, the solution suggested by the proponents of social planning – taxing/subsidizing – necessarily violates the property rights of individuals. Once the government has the power to violate property rights, a different kind of “externality” sets in. Henry Hazlitt describes the process

Special interests, as the history of tariffs reminds us, can think of the most ingenious reasons why they should be the objects of special solicitude. Their spokesmen present a plan in their favor; and it seems at first so absurd that disinterested writers do not trouble to expose it. But the special interests keep on insisting on the scheme. Its enactment would make so much difference to their own immediate welfare that they can afford to hire trained economists and public relations experts to propagate it in their behalf. The public hears the argument so often repeated, and accompanied by such a wealth of imposing statistics, charts, curves and pie-slices, that it is soon taken in. When at last disinterested writers recognize that the danger of the scheme’s enactment is real, they are usually too late. They cannot in a few weeks acquaint themselves with the subject as thoroughly as the hired brains who have been devoting their full time to it for years; they are accused of being uninformed, and they have the air of men who presume to dispute axioms.

Each time such a project gets through, it establishes a further precedent for the violation of rights. This leads to ever increasing government interference until government becomes nothing more than an unstable coalition of special interest groups. The proposed cure for economic “externalities” ends up creating a political “externality”.

In the same edition of the The Times of India that carried the news report on Hafiz Contractor, there was a report on a more interesting case. Titled “Coaching class ad leaves IIT dean red-faced”, the report states:

A newspaper advertisement for an IIT entrance coaching class had the campus in a flutter recently. Reason: The ad carried a photograph of IIT Bombay’s dean for student affairs, Prakash Gopalan, along with a note from him praising the coaching class.
    The ad … carried a handwritten note from Gopalan, … “Based on our experiences with our son, we very strongly recommend (this coaching class) to every parent and student in the process of choosing the best coaching class for JEE at Mumbai.’’
“I did not endorse the coaching class,’’ … “I had sent my son there and had written the note as a feedback. The note was written by me in good faith and in my capacity as a parent. I had not written the note as an IIT dean. I had no idea that it would be published in the newspapers. My permission was not sought for using my feedback in an advertisement,’’ Gopalan told TOI… 
   Praveen Tyagi, MD of the class, said he would not have used Gopalan’s feedback in the advertisement had he known it would have caused him so much trouble. Tyagi, however, felt there was nothing wrong with the ad. “If the dean’s son has studied at my coaching class and he is satisfied with the teaching he received, why should it not be publicised? I have the utmost regard for IIT professors and their feedback means a lot to me. I haven’t used this for personal gains. I just wanted parents to be aware of the calibre of my class. Many ads make false claims, but I was only telling the truth,’’ said Tyagi.

Apart from the issue of permission for using the feedback in an advertisement (a narrow technical issue that depends on how the feedback was given, privacy policies etc), just what is wrong with the advertisement? A conflict of interest between the dean’s roles as a parent and as a dean? How so? As Tyagi says, “I was only telling the truth”. Can the truth create a conflict of interest? Also note, how Tyagi feels it necessary to include the rather comic “I haven’t used this for personal gains” as part of his defence. How is it not personal gain? And what is wrong with personal gain anyway?

Part of the reason for the flutter over the incident is that most of the policy makers want to discourage coaching classes. But the coaching classes are there for a reason. The government-approved syllabus and examinations for the years leading up to undergraduate courses holds no challenges (and therefore provides no motivation) for students who aspire to join IIT Bombay. Nor does it prepare them for the highly competitive and challenging Joint Entrance Examination conducted by the IITs (Atleast it used to be challenging. Attempts have been made to lower the bar to make coaching classes irrelevant). The coaching classes (atleast the good ones) actually provide a much better education than the government recognized and mandated pre-undergraduate courses. Coaching classes are so prevalent that most students attend them in addition to regular (government-mandated) school. Indeed, there are government recognized colleges that allow students to take the mandated board examinations but do not require daily attendance (I do not know whether this is legal, but it is definitely widespread). The students attend coaching classes instead of the regular colleges, create fake records of laboratory courses which the coaching classes do not have and clear the board examinations with no trouble at all. All this because regular education is protected from commercialization by state decree. I do not know all the details of what is allowed and what is not but the end result is that any professional needs to hold a government recognized degree from a non-commercial government recognized and regulated organization, while the actual education that the degree is supposed to certify comes from parallel higly profitable commercial organizations. The parents (few students finance their own education) end up paying for both and the students end up wasting a lot of their time at useless institutions where they learn nothing.

Recently Diana Hsieh (of NoodleFood) raised the question ”What is the difference between laws and regulations?” Since I consider myself opposed to all regulations but firmly believe that laws are necessary, this is an important question.

Before I get to law or politics, the first thing to note is that the word regulate derives from the word regular as in regular behavior, regular schedules etc. Anything that is regular is easier to understand, easier to predict, easier to work with. Regularity therefore is a desirable state. But it is not desirable in itself. It is not an end. It is desirable because it usually makes the achievement of actual ends easier. Consider an example. Fixed (or regular) office timings make it easier for people to collaborate, to plan their work, to plan their personal lives etc. But there can be any number of good reasons to break the regular schedule. And the decision to adhere to or ignore a regulation is based on a lot of narrow context. Laws on the other hand are inescapable. Consider the laws of logic or the laws of physics for example. They are general principles inherent in the nature of reality. In a legal or political context, laws are the principles that are necessary for men to live together in a society – necessary because of the very nature of man and society. Without laws, society would break down.

Since the role of a government is to preserve men’s rights and since rights only have meaning in a social context, it is the role of a government to establish laws. Since laws are general principles, there can’t be too many laws. Moreover they rarely need to change over time. Unless a fundamental change occurs in the nature of man or of society (it is conceivable that advances in technology might lead to such changes) laws do not need to change. This is the reason for measures such as checks and balances, separation of powers etc.. in good political theory.

Since regulations (a set of rules intended to make things regular) are highly dependent on context (both in their formulation and in their use), a government is completely unsuited to either formulate or enforce them. Regulations are best created and enforced by the particular set of individuals who need them. More importantly, when a government enforces regulations, it necessarily violates the rights of men to judge what is in their best interests.

Finally, there were some comments on Diana’s post to the effect that “Once Congress passes a law, agencies must write regulations to put the law into effect”. This is a badly wrong idea. It is like saying that the laws of physics are implemented by using rules of thumb. What is needed to put a law into effect is an interpretation of the law to specific cases. That role belongs to the judiciary, not to the executive.