Krugman the Mad on Bundy

Here is another incoherent piece on the Cliven Bundy’s case, this time, by Krugman.

1. Let’s indeed “start with the narrow issue of land use.” Why is the land owned by the government? Why the socialism? For “historical” reasons, the government of the Soviet Union owned all the means to production. Unless Krugman is still a commie, he should agree that this was bad. And it’s not this way anymore. Socialist “history” and traditionalist “the way it’s always been” in and of themselves are no arguments against a capitalist reform.

2. Krugman insists that Bundy was stealing from the federal government. And therefore, he is no “libertarian hero.” But no so fast. Bundy said: “I don’t recognize the United States government as even existing.” Libertarians do recognize that it exists as a definite organization, but only as a vicious gang of thieves and murderers who cannot — by reasons of their inherent criminality — legitimately own anything. Both Bundy and sufficiently radical libertarians come to the same conclusion — though for their slightly different reasons — namely, that Bundy owed nothing to the state.

3. Krugman further uses bad rhetoric. Failure to impose taxes or user fees does not constitute a subsidy. A subsidy is taking from Peter and giving to Paul, in which case it is a subsidy to Paul; failing to tax Peter is not a subsidy to Peter.

It is possible to use the term “subsidy” in the way Krugman does responsibly. Let a certain community be composed of 5 people, A, B, C, D, and E. The government taxes A – D and produces a definite public good X, yet fails to tax E who enjoys X (which by definition of “public” is non-excludable) for free. We can say that the government then subsidizes E, because if E, too, was taxed, then the tax burden on A – D would be reduced. But this scenario does not apply to the Bundy’s situation. In general, whenever the IRS finds a new victim to tax, it does not ipso facto reduce taxes on everyone else.

4. Krugman warns us darkly about externalities, as though any libertarian has not thoroughly grasped the problem. And here I was under the impression that he was still talking about Bundy. Which negative externalities did Bundy create? In his zeal to make an unrelated economic point, Krugman forgets all about him.

5. Suppose for the sake of argument that the government does have a role in controlling the externalities and that Bundy imposed costs on his fellow men. A libertarian could still object that in his case the government has gone too far. The marginal benefit of the smaller negative externality in Bundy’s case (whatever it may be; again, Krugman does not tell us) is dwarfed by the marginal cost to the private economy. To say that “the government can solve an externality” says nothing about whether a particular externality is at any moment being solved by the party presently in power correctly.

For example, a politician who runs for office promising to tax air polluters has not invented a wonderful new technology to produce the same amount of goods yet pollute less in so doing. The tax will discourage both pollution and production, and the presumed problem is to find an optimal point at which further reduction in pollution is not justified by reduction in material prosperity. The politician, then, is taking a side in an unpleasant choice. This choice is not made by each consumer for himself but by the people collectively or by the organization that manages the air commons, such as the government. However the decision is made, almost everyone will be disappointed: some people would have preferred more production than was ultimately decided; others, less pollution. Moreover, the market responds to changing preferences in real time, daily; opportunities to change the rate of the tax come far less often.

6. Krugman imagines the government as a convenient tool to nudge society to the greatest good for the greatest number, whenever absolute property rights have failed — through their invisible hand and all that — to yield the best possible result. Government is an ever-watchful presence in the market, penetrating deep into every human action to detect negative externalities and to neutralize them.

Of course, in the first place, this instantly does away with the very concept of freedom. For every human action will have to be screened for externalities and either permitted or checked by the authorities. The government will allow the market to operate only if it yields results that the externalities-watching bureaucrats approve of. Every innovation, every deviation from the already approved routine, no matter how small, will then be stalled in its last phase until it is formally approved by the Externalities Bureau. Life for every individual on the planet will come to resemble the miserable existence of drug companies under the rule of the US Food and Drug Administration.

(Here is a headline on the FDA’s website: FDA proposes to extend its tobacco authority to additional tobacco products, including e-cigarettes. What a surprise. Has the FDA ever proposed to withdraw its authority from anything? I didn’t think so.)

For this reason, most externalities are resolved according to the “live and let live” principle (hat tip to Walter Block for introducing me to it). For example, human breathing may contribute to climate change. Making all the assumptions in favor of the dangers of climate change, even Krugman should admit that having the government suffocate everyone is not a solution. Thus, each person can be said to enter into a “social contract” with everyone else, permitting them to “pollute” in order himself to receive the same right.

There are more problems. When the purpose of taxation is for the government to raise revenue, there is at final accounting a point of diminishing returns a la the Laffer curve. Tax rates beyond this point actually decrease revenues. But if taxing is meant to discourage a harmful activity, then there is no such equilibrium. An ambitious and fanatical bureaucrat can decide that no pollution at all is best. But every industrial process emits waste or contributes to climate change. The power to tax polluters is the power to destroy the economy, if the government chooses to set the maximum allowed pollution to zero. Further, we cannot give the government the power to regulate every company in the realm under pretext of pollution control. The government in conspiracy with big business can cartelize an industry, all the while publicly claiming that they are saving us from pollution. But what can we do? As long as air is owned in common, there will be neither justice in society nor peace. The market is not at fault; the absence of the market is.

Then there is the calculation problem. How can the government find out the “social costs” of “pesticides that contaminate the water supply, or antibiotics that speed the evolution of drug-resistant microbes”? Krugman is right that solutions based on “cap-and-trade or emissions taxes rather than rigid rules” have been proposed. The former are instances of market socialism; the latter, of using the tax system to discourage harmful behavior. However, one can engage in economic calculation of costs and benefits, profits and losses only within the market. There is no such thing as “environmental economics,” only environmental politics, precisely because one cannot calculate the “social costs” or social benefits and “correct the divergence between private costs and social costs,” as John Cassidy proposes. One cannot economize, when he cannot quantify benefits and costs. It is no surprise that “there remains little consensus on how far to restrict future greenhouse gas emissions, or — and this comes to the same thing — how high to set the carbon tax.” Any such decision is going to be arbitrary from the market point of view.

In addition, there is the issue of the market process. The market moves at the speed of business; the government moves at the speed of a snail. A given law may right now seem to improve an outcome regarding the externality. But should the market conditions change with economic progress, the law may no longer apply. Yet repealing it would likely be a monumental endeavor. In my book, I take on Steven Landsburg’s case for subsidizing anti-theft devices called LowJacks and argue against it as follows:

Second, let LoJacks be subsidized; perhaps the government pays some of the costs of their production. We may imagine the story unfold somewhere along the following lines. LoJack exists for a while and becomes an established company on the free market. At some point the government notices the positive externalities of this product and legislates a subsidy in order to spread these externalities far and wide. Suppose a new entrepreneur, Smith, invents an improvement to the LoJack, call it 0Jack. How is Smith supposed to compete with LoJacks, given the subsidy? Despite their higher quality and comparable to LoJacks cost to the consumer as it would be in the free market, the subsidy makes 0Jacks too pricey. As a result, Smith’s company never gets started in the first place, which deprives the public of an important innovation. For no entrepreneur embarks upon a business venture and begins to manufacture a product, the indispensable condition for whose success is first to change government policy, in particular, to convince the bureaucrats in change of taxing and subsidizing things to withdraw the subsidy from LoJacks and extend it to 0Jacks. Business does not work this way.

Last point: most if not all externalities are local occurring especially in cities between neighbors. I will concede that if an externality is serious enough and cannot negotiated away in a Coasean manner, then the city government can step in. The feds, including in Bundy’s case, however, have zero use in externalities control.

If government is some sort of a “tool,” then it’s an extremely crude and primitive one. To be skeptical about this “tool’s” utility is the opposite of anti-intellectualism.

In Defense of Monarchy

This provocative title assumes (1) the separation of powers, (2) that the executive king is only third among equals, and (3) local government, so that we’re dealing with the king of a city.

Hoppe supplies the first part of the argument, to quote from my book,

Hoppe (2002) has identified the transition from monarchy to democracy as a step towards decivilization (i.e., a process of regressing into savagery), in particular, because

  1. the monarch owns and is interested in preserving both the capital value of his “property” and its current income stream, while a democratic ruler owns only the latter and therefore, has an incentive to devalue long-term prosperity;
  2. the various positions of enforcers are in a democracy open to all, resulting in a competition of who can devalue that long-term prosperity more.

But there is a second part which he seems to have missed, and that is in order to succeed at staying rich and increasing his wealth, the king must exercise personal control over every aspect of the executive branch.

If the government becomes “big,” and the bureaucracy grows like cancer, the king will lose this control. The bureaucrats will become unaccountable to him. This will prevent the king from effective oversight and from conducting calculations of profits and capital gains.

The king then represents the final barrier protecting laissez-faire. The limitations of a single human being, the Hayekian “knowledge problem” ensure that the king would not want to turn into a despot socialist central planner or even an arch-interventionist, even if both the legislature and judges foolishly ordered him to do that.

The more power the abstract executive branch is given, the less powerful the concrete king becomes, until he loses all control over his “business,” the city, to Byzantine bureaucratic politics. This presents a potent incentive to the king to keep the government small.

Socialist Calculation for Crusoe

The simplest economy would be production and consumption of two goods by one person. To imagine a typical neoclassical graph, we have the production possibility frontier (PPF) designating the trade-off between the goods and the optimum point on it that corresponds to the highest tangent indifference curve (IC).

In a real economy, there are many complications:

  1. There are multiple consumers, and so preferences cannot be aggregated into a single IC, nor interpersonal utility comparisons made.
  2. There are millions of projects producing consumer goods with millions of types of resources, so both the PPF and the IC are multi-dimensional. Technological recipes are complex.
  3. ICs shift due to changes in consumer preferences.
  4. PPFs shift due to new technologies and discoveries of new resources.
  5. Unpredictable acts of God occur all the time.

Let’s abstract away from (1) by having only one person in our economy, Crusoe, who has somehow managed to build and operate an economy the size of our actual global economy. It is easy for him to rank bundles of consumer goods. (This will substitute nicely for our “heavenly” society, as well.) Let’s suppose at some time Crusoe has an evenly rotating economy with a system of technological equations like this:

m*P1 = m*(5a1 + 7a2 + 10a15…)
n*P2 = n*(9a1 + 3a15 + 22a42…)

z*P1,000,000 = …

P represents a product; a, some resource, whether original or produced. A utility is associated with each marginal P; Crusoe wants to arrange production by allocating resources in such a way as to maximize his happiness.

Resources like a1 are (1) scarce (Crusoe only has so many a1s), (2) heterogeneous (a1 cannot be fully substituted for a2), (3) partially specific (a1 can be used in production of many Ps). We do not grant Crusoe technological omniscience, so let’s suppose he discovers a new way of producing P7. By taking 3 marginal units of a1 (say, 12a1) from 3*P1 for use in the new method, Crusoe unemploys 3 units of all the other resources: 21a2, 30a15, etc. Where shall they go in the whole scheme of things? Suppose we suggest that 8a2 go into P50, although there are many other possibilities. But that means that the factors complementary to a2 for producing P50, such as a104, a451, …, also have to be increased. From what other projects shall they be taken away to be used in P50? And so on, in a branching fashion. The consequences of even a single change must result in the rearrangement of the entire production system. And there are numerous possibilities.

The problem is not to solve the system of equations; it’s to generate a new system that’s superior to the old one upon gaining some new knowledge. Crusoe’s problem is to deal with novelties, to improve his production as he learns things previous unknown and unsuspected. At every moment, Crusoe is not only ignorant of numerous things; he doesn’t even know what sorts of things he does not know. He is constantly surprised by new data.

With the new discovery, there is a new PPF. There are two distinct problems here. One is to find any improvement on the new PPF.

The other is to find the optimal point or point of highest utility on the new PPF.

Suppose now that Crusoe has access to a powerful computer. Can he program it to solve either of these problems? What sort of problem is it to find a better / best allocation of resources, computationally? Is it tractable or not? I suspect that neither is a class P-problem. I think they are both exponential-time O(2n) problems. Moreover, while the first problem is an NP-problem, as in, can be easily verified given a solution (simply compare the total utilities of the solution and the original system); the second problem is not even that, because to verify that a solution is best, you’d have to sift through all production possibilities, i.e., verifying a solution is as hard as finding it.

As a result, a real-world economy cannot be run by a single man even with great computational resources. It seems that Crusoe requires more people to own and run his factories. There must be a division not just of labor of workers within factories but also of productive activities among profit-seeking entrepreneurs running the factories. This is relevant to the question “What constrains the size of a firm?” Firms in the market economy cannot get too big, lest they become unable to adjust to new market data.

I conclude that Crusoe cannot run the world even if he is the sole human on earth and has a computer the size of the moon to assist him.

Advanced Slave Economy Is Impossible

First of all, slavery is an advance over autarkic total war in the Hobbesian state of nature. A slave is better off under this system than outside the polis. He has personal and job security.

But such an economy, if it is to “work,” must be accompanied precisely by division of productive activities between tribes. (Division of labor comes later, under feudalism.) There is trading going on between the socialist family-states.

Modern socialism would envision a return to a slave society without any such division of productive activities between tribe governments / entrepreneurs. This is the essence of the socialist calculation problem. An attempt to establish global socialism must result either in perfect stagnation or, since this is not really a possibility, in economic chaos. There is no way for the central planner to calculate a way toward improvements of production based on new knowledge. Human progress under socialism is impossible.

Socialist Computation Problem

I have 3 favorite papers on Mises:

  1. Jeff Tucker and Lew Rockwell, “The Cultural Thought of Ludwig von Mises.”
  2. Murray Rothbard, “The Laissez-Faire Radical: A Quest for the Historical Mises.”
  3. Joseph Salerno, “Ludwig von Mises as Social Rationalist.”

In particular, Salerno’s analysis of Mises is super-subtle and sophisticated.

Let me offer a slightly different take on it. Consider these two quotes of Mises Salerno uses:

Homo sapiens appeared on the stage of earthly events neither as a solitary food-seeker nor as a member of a gregarious flock, but as a being consciously cooperating with other beings of his own kind. …

We cannot even imagine a reasonable being living in perfect isolation and not cooperating at least with members of his family, clan, or tribe.


Where there are no money prices there… is no means for man to find out what kind of action would best serve his endeavors to remove his uneasiness as far as possible.

I think here “man” should be understood as species man, as a sufficiently large group of people “consciously cooperating within… family, clan, or tribe.”

But a man, such as solitary Crusoe, certainly can act in his own self-interest without prices. And that’s what I ask in an earlier post, whether Crusoe can run the world if somehow and under admittedly unreasonable assumptions put in charge of a huge economy.

I answer no, not because he can’t calculate, but because he can’t adjust production to novel data of whatever kind: changes in ends, technological means, environment, etc.

What’s after all the difference between socialism and capitalism? Under capitalism, each person seeks his own happiness. Under socialism, only one man, perhaps surprisingly also named Crusoe, acts; every other person simply robotically obeys his commands. There is no labor market, for example, or any other kind of market. The situation of socialism is no different from the situation of Crusoe alone on his island. Under socialism, other people are Crusoe’s mindless and obedient tools, like his axe and fishing rod under solitude. And, just like under solitude, Crusoe does not need to calculate in terms of money:

[Under socialism,] mankind is to be divided into two classes: the almighty dictator, on the one hand, and the underlings who are to be reduced to the status of mere pawns in his plans and cogs in his machinery, on the other.

If this were feasible, then of course the social engineer would not have to bother about understanding other people’s actions. He would be free to deal with them as technology deals with lumber and iron. (HA, 113)

Even under the free market, calculation is needed solely to deal with ordered introduction of novelties, what I call creative advance, change-amidst-permanence. For the market actors can simply be commanded by some great power to evenly rotate under threat of a terrible punishment. “From now on, unless still equilibrating, everyone shall do tomorrow and every day hence exactly what he did today (or else).” Money then becomes a mere token, a medium of exchange still but no longer a unit of account. Everything needful has already been calculated upon the forcible arrival of the equilibrium.

Now with other people, there are certainly additional complications, such that Crusoe must know their values scales and somehow maximize overall welfare rather than his own. But in order to get to the essence of the socialist quandary, we can assume that Crusoe “loves” all his billion slaves as his own children and “feels with them,” knowing every motion of their hearts, somewhat perhaps like a glorified saint. I know: Gulags, but stick with me. We can even assume with Mises that Crusoe “has made up his mind with regard to the valuation of ultimate ends. We do not question his decision.” (696)

So, let Crusoe be mysteriously put in the midst of a highly developed “evenly rotating” complex economy (meaning that he at this moment is unaware of a better allocation of resources) which he alone somehow labors in and manages. I suggest that the problem of adjusting production to new data is too hard computationally, even if Crusoe can juggle his utilities like a pro. And by “too hard” I mean impossible with all the computational resources the known universe might conceivably supply.

“New data” is a crucial proviso. If Crusoe were from the beginning of his adventure endowed with omniscience regarding (1) all possible technology, as well as (2) his own future valuations, and (3) future environmental changes, then even if he was practically immortal, he could make a perfect plan from now until kingdom come and grow his economy at the pace that maximizes his (or his “pawns'” and “cogs'”) long-term welfare.

Crusoe needs acting people, his fellow men, to come and rescue him, by taking ownership of his factories and becoming entrepreneurs, from the increasing complexity of his developing world.

P.S. In the paper, Salerno wonders about the meaning of “spontaneity” of action. “Spontaneous” action within the market is not purposeless action but generally unpredictable by other actors. Entrepreneurs try to predict future consumer preferences, but they cannot normally predict each other’s moves; or rather they make plans to ready production a year hence, say, without taking into account any innovations others might come up with during this period of production. The inner workings of competing firms are impenetrable to them. Smith’s introduction of novelty into the market is a genuine surprise to his competitor Jones. From Jones’ point of view, Smith’s actions were “spontaneous.”

Socialism Produces Either Chaos or Stagnation

An advanced capitalist economy can be converted into full-blown socialism, but on one condition: nothing in it would from then on ever change for all time.

There are some complications: the present economy is partially disequilibrated, and a transition to socialism will need to outlaw any future entrepreneurial actions and wait until equilibration somehow finishes. Further, preserving the state of equilibrium may prove difficult: the new generation may have different consumer preferences; there will be environmental changes and acts of God; foreign trade will muddy matters considerably. But abstracting from these, socialism is possible. There will be no new products, no new technologies, no new methods of production, no new factories, tools, or equipment. Whatever exists, will be maintained against the entropic forces, but that’s the extent of it. Each new generation will inherit the lifestyle of the old generation and will not improve in its own standard of living in any way. Each day will be just like every other day.

Such was indeed the manner of life for most of the human history before the ideological / industrial revolution that inaugurated the liberal capitalist age.

Now every evenly rotating economy is also stationary, i.e., one in which the people’s wealth and income and living standards do not change; not every stationary economy need evenly rotate. An ERE is marked by no changes and no improvement; a stationary economy, by some changes yet still no improvement. An ERE thus represents absolute stagnation; while a stationary economy permits minor adjustments though also fails to progress.

A stationary economy is compatible even with the existence of profits and losses. Thus, a capitalist economy can in principle stay put / shrink, if the sum of all entrepreneurial profits in it is perfectly counterbalanced by / outweighed by the sum of all losses. This is because profits signify that resources were reallocated well relative to their previous manner of use; losses, that they were reallocated poorly. In such a case the creative advance and destructive retreat cancel each other out, resulting in no overall change for the better. For example, during a business cycle, there may be frenetic activity that for all that fails to bear any fruit and results in mass losses at the end. Government interventionism has thereby caused social retrogression. Nevertheless, socialist stagnation is fundamentally different from merely interventionist stagnation. And under laissez-faire we can almost always observe continuous and speedy progress.

It would therefore be sufficient to prove that a socialist economy is at best stationary. However, we can assert even more, i.e., that socialism all but requires an ERE, because centrally shuffling resources between projects and factories within a country is a computationally intractable problem. The present argument is then a fortiori: if a socialist economy can survive only by evenly rotating, then by a still stronger reason it is stationary.

Compare and contrast now the old USSR with Cuba.

The chaos of the Soviet economy arose precisely because its central planners had the ambition to imitate the market and change things. They tried to improve their economy. When they did, the coordination between its parts broke down completely. A factory needed small nails for a new project; there were no small nails, only large ones. A collective farm needed a part to repair a tractor; the part was nowhere to be found; though by bribing some officials, a different and useless part could after a time be procured. Nothing connected; nothing worked. Production ground to a halt.

Take a look now at Cuba. In the Soviet Union, people were perpetually pestered with futile slogans like “Catch up and overtake America in the production of milk and meat!” Cuba would have none of that. What a “happy” country it is. People in it just sort of exist, like plants. (Not that they like it, mind you. Cuba is a tropical island without boats, where boats are outlawed, because if people could get their hands on them, they’d leave en masse.) It looks the same as it did in the 1950s. Since socialism was established in it, Cuba contributed nothing to the development of civilization. It hasn’t died out from famines, which many socialist countries have experienced, but it’s a completely arrested economy.

So, Cuba was smart enough not to ape the Soviets. Moreover, you might think, “The 1950s were a simpler and happier time.” Perhaps. But only coupled with the ability of the people to improve their lives. “It is in the nature of man continually to strive for an improvement in his material condition,” says Mises. “If he is forbidden the satisfaction of this aspiration, he becomes dull and brutish.” The world they and we have built is more complicated, but it was by our own choice. The Cubans are not enjoying their forced relaxation. Moreover, consider what will happen in 100 years. In America, it will be 2117. The wonders of that time will be amazing and numerous. All nostalgia for the 1950s will be long gone, and Cuba will be seen for what it is: a bizarre ancient decrepit museum.

If we reject both the crazy approach to the economy (USSR’s chaos), the ugly approach (Cuba’s stagnation), and the stupid approach (American-style interventionism), we arrive at the only reasonable option: laissez-faire capitalism.

The Austrian school of economics grasps this crucial issue of the market process which is the only means by which improvements into the economy can be orderly and rapidly introduced. Here’s a great recent article: Ryancare’s Fatal Logical Flaw. Note the appropriate reference to the market process: the proposed free market reform “is the only way to increase supply, improve supply, and by doing so bring costs down.”

Indeed, and to continue doing so for the next 100 years.

Two Parts of Socialist Computation

In Human Action, Mises considers a curious hypothetical scenario:

If the memory of all prices of the past were to fade away, the pricing process would become more troublesome, but not impossible as far as the mutual exchange ratios between various commodities are concerned.

It would be harder for the entrepreneurs to adjust production to the demand of the public, but it could be done nonetheless.

It would be necessary for them to assemble anew all the data they need as the basis of their operations.

They would not avoid mistakes which they now evade on account of experience at their disposal. Price fluctuations would be more violent at the beginning, factors of production would be wasted, want-satisfaction would be impaired.

But finally, having paid dearly, people would again have acquired the experience needed for a smooth working of the market process. (337)

Apparently, even a complex market like ours could recover after a wound as grievous as the destruction of the knowledge of all present / immediate past prices.

But can a socialist dictator also solve his many millions of simultaneous equations to determine the “shadow” equilibrium prices of the factors of production if similarly afflicted? I think not; this problem is too hard computationally.

And this is just the first part of the socialist calculation problem. Even if one has a fully solved system, the next task is how to improve it, to re-configure the entirety of the structure of production upon introductions of novelties into the system and inventions of new technologies and methods of production, and to do so every day.

This second problem is, in my view, completely intractable with a complex economy.

Knowledge vs. Computation Problem

I have described the socialist computation problem as consisting of two parts: first, to solve the system of linear equations (consisting of a vast number of entries and featuring numerous factors of production), generating shadow prices; second, to improve it while preserving and creating the knowledge of new prices.

I have concluded that this problem is utterly computationally intractable. Thus, the Mises’ calculation argument against socialism can now, with the development of computer science, be put in highly precise terms and proven with maximal rigor.

What then is the “knowledge” problem as described by Hayek? Perhaps it’s something that applies not just to socialism but specifically to interventionism. Mises assumes that “the crowd of experts and specialists which [the central planner] assembles in his offices provide him with perfect information and answer correctly all questions he may ask them. Their voluminous reports accumulate in huge piles on his desk.” (HA, 696) Mises does so in order to grant his socialist opponent his best case.

But perhaps the assumption is extremely generous in itself. Is it really possible for any human being to obtain and digest all those data? Even in merely regulating rather than running the economy, the interventionist is faced with a formidable problem. Could Hayek be interpreted as saying that “regulators” don’t and can’t know what they are doing?