Posted by on December 16, 2015

I just read an article in BloombergView yesterday by Cass Sunstein, who is a law professor at Harvard.  It was a roundup of a number of books published last year on “behavioral economics” (which is an absurd descriptor, since all economics is behavioral, but never mind).  For those who don’t know it, behavioral economics typically focuses on the biases and systematic errors in human behavior.

In his review of the book Phishing for Phools by George Akerloff and Robert Shiller, Sunstein concludes that one of the major contributions of the authors “is to show that if we care about people’s well-being, the invisible hand (ie, free markets) is often the problem, not the solution.”

I guess that this is the fundamental difference between the statist and the libertarian mindset.  A statist looks at the results of behavioral economics and concludes that, since peoples’ decision making is clearly fallible, we need someone else to make decisions for them.

A libertarian mindset looks at the same results and concludes that if people are fallible, then the absolutely last thing in the world we should do is to give them sovereignty not only over themselves but over other people as well.  Because, if people are prone to make bad decisions in their own lives, at least we know that:

  • They will bear the direct consequences of those decisions, which will give them a strong motivation to avoid errors and certainly not repeat them[1];
  • Their bad decisions will affect only one or a limited number of people, as opposed to having the widespread effects of a government policy; and
  • Their poor individual decision making will not be magnified through highly imperfect political processes, including voting and the distorted incentives of bureaucracies.

The collective decision making of politics contains none of these limitations on human fallibility. This makes it a total non sequitur to conclude that, since people are fallible, we should expand their power to coerce others.

Of course, the way that statists rationalize this is to assume that only “the best and brightest,” preferably someone a lot like them, will be empowered to make these decisions.  In other words, they rationalize this by ignoring the entirety of human history and common experience.

This logical fallacy is another manifestation of a phenomenon I have often discussed in this blog.  This is the totally destructive belief that, if it can be demonstrated that a free market is not perfect in some way, then this automatically creates an argument for government intervention.  This standard is way too low.  The real test should be whether an imperfect – but small-scale, competitive, subject to learning, non-coercive, incentivized, “antifragile”[2] and informationally efficient – market is better than a hugely imperfect political process.  By this correct standard, the case for intervention becomes far rarer.

Interest Rates

Later today, we should have some white smoke from the Federal Open Market Committee on interest rates.  The likely result is a small increase in interest rates, combined with a large amount of comforting verbiage about any future increases being gradual and “data dependent.”

It is clear that the US economy is slowing.  Consumption growth is weak, particularly when you factor out automotive sales, which benefit from some highly dubious and unsustainable lending practices.  Inventory ratios are deteriorating.  Sectors such as oil, which had accounted for a large amount of the employment gains and capital expenditures, are in a deep funk.  Capital markets are deteriorating, particularly high yield.  Employment appears OK, but this is a backward looking indicator and the headline figures overstate the true strength of the market.

Meanwhile, the global economy is doing the US no favors.  Europe continues to grow, but slowly.  Japan is unpredictable but unlikely to break out soon.  Emerging markets are largely basket cases, which are being made worse by capital outflows.  Everything that depended on the bubbly China commodities’ bid –exporters in the emerging markets, but also advanced economies such as Australia, New Zealand and Canada – is also suffering.

Put all of this together and it is clear that the Fed has waited too long to raise rates, which it should have started years ago.  There is an extremely high probability that we are going to see a repeat of the eurozone, Sweden, Canada, Israel and elsewhere, where small and tentative rate increases will be rapidly followed by new cuts, potentially into negative territory.

Worst of all, from a political point of view, the coming deceleration of the US economy – which I think is already baked into the cake – will be blamed on the rate increase.  This will be total nonsense, but I can already hear the likes of Paul Krugman spouting it.

Bernie Sanders to Prosecute Galileo

Bernie Sanders, the Democratic presidential candidate, has just published his climate plan.  Apparently, he couldn’t decide which misguided policies to support, so he simply went for all of them.

A carbon tax.  Federal subsidies for clean energy development.  Enhancements to the national grid. Subsidized home improvements.  Increasing the CAFE standards for cars.  Banning fracking, offshore drilling, and the export of oil and natural gas.  Phasing out nuclear power.  Making cities more walkable.  High speed passenger and cargo rail.  More electronic car charging stations.

Thank God we have Bernie to make all of these decisions for us!  I mean, without him, how would we mere mortals possibly figure all of this stuff out?

Bernie is truly a throwback to an earlier era.  Even most leftwing politicians would agree nowadays that, when faced with the right price signals, the free market can be pretty much counted on deliver the goods.  At least, better than the government can.

Which is why Bernie’s plan could have stopped at one thing: the carbon tax.  All the rest is counterproductive bumf.  But there is one aspect to it that is even worse.  And that is his vow to “bring climate deniers to justice.”

If anyone is still wondered about the fundamentally intolerant and coercive nature of the Left, then Bernie’s witchhunt against ExxonMobil should be the final proof.  If this gets established as a legal precedent – which is, fortunately, extremely unlikely – then the Left will finally have its Inquisition.

Donald Trump is Many Things, but Not a Fascist

Lately, it has become fashionable to either wonder whether, or assert that, Donald Trump is a fascist.  Here is the New York Times on the subject.  This creates a useful opportunity to discuss the meaning of the word “fascist.”

“Fascist” is a general word of opprobrium for the Left.  This harkens back to the Soviet-controlled Communist International (Cominter) of the pre-WWII period, which was resolutely anti-fascist.  Until, of course, the Soviet Union joined Hitler in the invasion of Poland.

The Left is rarely a respecter of the precise meaning of words.  Witness, for example, Obama’s deceptive use of insurance terminology with things like the “contraceptive coverage” or even the term “gay ‘marriage’.”  Its use of the word fascist is no different.

The root of the word is the Latin “fasces,” which was the bundle of rods that signified a magistrate’s power or jurisdiction in Rome.  In other words, the essence of fascism is government power.  The determining factor of whether something can rightfully be called “fascist” is the primacy of the government over the individual.  Although fascism has become associated with many unlikable things – adulation of a leader, intolerance against minorities, military aggression, a kitsch sense of style, etc. – without an exaggerated love of the state, something or someone cannot be fascist.

Donald Trump can be accused of many things, and I have certainly done this, but love of Washington is not one of them.  In fact, it virtually impossible for this belief to find a home in the Republican Party, although it could be much more easily accommodated among the Democrats.

So, if you want to insult Donald Trump, you will simply have to come up with something else.

Roger Barris

Weybridge, United Kingdom

[1] One of the fundamental flaws of behavioral economics, and much thinking about consumer choice, is that it ignores the ability and incentives of people to learn from their mistakes.  For example, much is made by certain social thinkers about the ability of marketing to influence consumer choice.  This ignores the fact that most things people do and buy are repeated, and whereas someone might be induced to try something through marketing, they are far less likely to be convinced to continue with it unless it performs.  This thinking also ignore the role of acquisition costs: it generally costs a lot of money to “acquire” a client.  A business that is built around acquiring clients and then losing them through poor performance will not last long.

[2] I am using term this in the way of Nassim Nicolas Taleb in his book Antifragile: Things that Gain from Disorder.  Taleb draw heavily on the work of Friedrich Hayek for this book.

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Posted in: Economics, Finance, Politics

Comments

  1. David H
    December 17, 2015

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    Behavioral economics is not necessarily about more government, my take on it has been that we need to be more mindful of presets and can’t rely on homo economicus. The research that has been done around defaults, especially for organ donations, is both common sense and shows the value of the government and other public bodies implementing behavioral economics in their programs. (http://www.sciencedaily.com/releases/2014/09/140924085129.htm).

    • Roger
      December 19, 2015

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      Hi David:

      I agree with you, behavioral economics is not necessarily about more government. In fact, if it is necessarily about anything, I think that it is less government. But, if you re-read the quote from Sunstein, he clearly interprets it as open season on more social engineering by the likes of Cass Sunstein.

      Interesting observations: Of everything published in my blog, this piece has been re-published by the largest number of other blogs. By far. So, it must have resonated with a lot of people. At least libertarians.

      Roger

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