Some Old News (Net Neutrality)

In an effort to continue to add some new blog content, I'm going to cheat and recycle a blog-worthy (I hope) email I sent a few months ago in response to inquiries from a couple of folks about my opinion on a) this article by Tim B. Lee and b) the D.C. Circuit's opinion in Comcast v. FCC. My reply follows:

Tim B. Lee's (not to be confused with Internet pioneer Tim Berners-Lee) paper has a lot of good content. Where it falls apart is on its competition analysis. Lee's fundamental premise is that interfering with network openness decreases the value of the network, service providers have an interest in maximizing the value of the product they're selling, and, therefore, service providers will not want to interfere with the openness of the network. On p. 23, Lee says this will hold true even in the case of a monopoly. This analysis, I think, ignores a critical factor: the elasticity of the market. Lee's argument holds true only in an elastic market, where consumers will be highly responsive to changes in the value of the good. I would argue that broadband Internet access is a very inelastic market. If you look at usage statistics for people under the age of 65 (and even more dramatically for those under 50), virtually everyone uses the Internet. It plays an integral role in virtually every facet of people's lives--personal communication, social and family relationships, entertainment, education, work and employment-seeking, access to government services, etc. It is not something people will do without based on incremental changes in the value of the product. So if you are hypothesizing a monopoly market, consumers have very little leverage with which to discipline service providers. Service providers would have to do tremendous damage to the product value before they saw a significant change in consumer behavior. Consequently, service providers are free to consider ways in which to make the network more lucrative for themselves (charging content providers for access to exclusive fast lanes and the like), even if it moderately decreases the value of the product they are offering consumers.

To take that one step farther, if service providers can get away with decreasing the current value of the network, they have absolute freedom with respect to controlling the emergence of future services that might add value to consumers. They already have a captive market based on the present value of the offering, so they would have nothing to lose by steering future developments in ways that benefit their bottom line, even if in doing so they diminish the overall value of these developments to their consumers. This is the most concerning aspect. It would be bad to diminish the availability or value of existing Internet-based services, but it would be tragic to undermine the Internet as a source of creativity and innovation.

The crux of this dispute, at present, is video services. Based on the history of the Internet, I think we have to assume that there will continue to be unforeseen developments and emerging new services, and some of these will probably require very high bandwidth connections. But at present, the only applications that really require 30+ Mbps connections are video services (and even then this is mostly for high def, and, in the relatively near future, 3d video). Lee touches on the fact that cable and fiber-based service providers already have a walled-garden for video, but acts as if this stands separate from the net neutrality discussion. It doesn't. I have participated in discussions on net neutrality with the Assistant Secretary for NTIA (outside of the 5 FCC commissioners, probably the most influential government official on this matter), and these walled-off video services were very much a part of the discussion. And the service providers are hardly content to rest on the status of their present walled-gardens for video. Look at the pricing for FiOS or for the emerging DOCSIS 3.0 cable services. Low speed Internet connections (5-20 Mbps) are priced similarly to the prices from other Internet service providers, but the high speed connections (50+ Mbps), which could potentially threaten their video services, are always set at such a high price point that the Internet-only price exceeds the price of getting a lower-speed video connection bundled with video service. It's a pricing structure designed to protect the video services. Meanwhile, Time Warner and Comcast are openly attempting to lock down online distribution rights for cable TV content. They have stated that they will make online access to this content contingent on the user having a subscription to their video service. AT&T and Verizon have not publicly disclosed any parallel efforts, but I would be shocked if they were not working behind the scenes to lock down content of their own. And Comcast is now in the midst of a high profile effort to acquire NBC Universal, bringing in a huge library of content and programming to add their exclusive access system. Acquiring NBC will also give Comcast partial control over Hulu, which will be one of its primary online TV competitors.

All told, this is a broad and comprehensive effort to lock down a high-value, high-bandwidth data service. And the general unavailability of high speed connections combined with market uncertainty over licensing and content access issues has successfully prevented the development of any true innovative competitors in the IPTV space. Moreover, because one element of the service provider strategy is to price high speed connections out of the market, this has had the collateral effect of slowing or preventing the development of other potential high speed services and applications (this is why Google is now proposing to create a city-wide testbed for a 1 Gbps fiber-to-the-home network). Letting Internet service providers into the online content and services market completely upends our expectations, per Lee, of how they should behave to improve the value of their Internet service product. Net neutrality advocates need not restrict themselves to worrying about hypothetical future harms, the real thing is happening right in front of our faces.

In discussing the potential threat of walled-gardens, Lee raises the example of AOL. AOL famously began as a walled-garden with exclusive content, then eventually, grudgingly, gave their users access to the Internet, and finally the exclusive content was dropped entirely. According to Lee, this illustrates that walled-gardens are not profitable. The key point that Lee omits is that AOL was not a monopoly (or even a duopoly). AOL's actions were driven by intense competition, mostly with mom-and-pop Internet service providers, at a time when all it took to be an ISP was to park a computer at the end of a copper phone line. The current service providers are generally monopolists or duopolists. The cost of entry to the market is prohibitively expensive (and economically inefficient). And the incumbents are so large that their collective actions can shape the development of content and services on the Internet in a way that AOL never could. The fact that walled-gardens failed in the 1990's tells us nothing about whether they could be economically viable for Comcast, Verizon, AT&T, and TWC today.

This brings us to the D.C. Circuit's decision last week. In 1996, Congress passed a Telecommunications Act that set up a regime for competitor access to the phone companies' last mile networks, allowing them to compete with the phone companies to provide phone and Internet service over their own infrastructure. At the time there were no commercial cable Internet service providers. As the cable companies became a larger and larger part of the broadband Internet service market, the disparity between phone companies (who were forced to share their plant with competitors) and cable companies (who weren't) became pronounced. Lawsuits by competitive Internet service providers attempting to gain access to the cable companies' plant forced the FCC to make a decision as to how to reestablish parity between the phone and cable companies. By this time (2002), Bush II was in office, and the default Republican position of helping the big guys prevailed. The FCC decided to designate Internet service as an "information service". The Communications Act gives the FCC a powerful tool box of regulatory controls over "telecommunications service" (generally referred to as Title II), but very little authority over "information services". The FCC had to shamefully torture the statutory definitions for telecommunications service and information service in order to make this determination, but that is neither here nor there. Several years later, after the case of a small phone company (Madison River Communications) blocking VoIP services that competed with its voice services, the Commission realized that they might want to regulate the behavior of Internet service providers in some cases. Having excluded Internet service from Title II, they didn't really have the statutory authority to do so, but decided to release a list 4 of non-binding network openness principles. A couple years after that, various members of the public were able to definitively prove that Comcast was interfering with BitTorrent traffic on its network, and they filed complaints with the FCC. After a long proceeding, in 2008, the Commission found the Comcast had violated the 4 principles, and required them to stop. Comcast challenged in the D.C. Circuit, asserting, among other things, that the FCC lacked statutory authority to enforce the 4 principles. They were right. Immediately following the FCC's Comcast decision, I did the first draft of a memo on the decision for a client. I predicted that Comcast would win the case in exactly the manner they did. So I can't say that I disagree with the D.C. Circuit's opinion.

At this point I think there is little question that the FCC will continue to enforce net neutrality principles. It was really the only big ticket item in Barack Obama's 2008 platform that related the FCC. Obama has reiterated his commitment to net neutrality on multiple occasions since taking office. It has to be at the top of the Democratic FCC commissioners' priority lists. So, to me, the question is not if, but how. Already there is a lot of talk on Capitol Hill about creating new legislation to give the FCC authority to enforce net neutrality. However, given the state of the senate, and the other major legislative efforts under way, it seems unlikely that anything like this could become law for a year or two, if at all. One quick way for the FCC to fix the problem by themselves would be to reclassify Internet service as a Title II telecommunications service. Two of the Democratic commissioners (Copps and Clyburn) appear to be inclined to doing this. The chairman, however, has indicated reluctance to do so. Reclassification would not only allow the Commission to enforce net neutrality, but would expose service providers (now including cable providers) to a whole suite of requirements under Title II. This would be a major change in regulatory approach, and the service providers will spend hundreds of millions of dollars over the next year or two to lobby against it. And even once the Commission acts, the service providers will then tie it up in lawsuits for years (as they did to the 1996 Act, from the time it was passed until the Bush-led Commission threw in the towel). It wouldn't be a pretty picture. But I nonetheless think it would be the right thing to do.

Moving Internet services back into Title II would allow the Commission to enforce net neutrality, but more importantly it would give them the tools to force the service providers to open their network to competitors. If done well, that could negate the need for net neutrality. Net neutrality is a regulatory framework designed for non-competitive markets. In a competitive market, consumers can respond to changes in the value of goods being offered, and Lee's thesis above would actually apply. Service providers that cripple their networks in the interest of building walled-gardens will see their subscribers go elsewhere, and the market will provide sufficient discipline to ensure good behavior. The only net neutrality regulation that would be required would be a network management disclosure requirement to ensure that consumers were making informed decisions. I think net neutrality is necessary given the current state of the market, but it is not an optimal solution. Competition would be far preferable. And, of course, for the service providers, competition is a far scarier prospect that net neutrality. Consequently, what we are likely to see is Chairman Genachowski publicly wavering on whether to join with his fellow Democratic commissions in favor of classifying Internet service as a Title II service until the service providers cry uncle and agree to some sort of non-Title II regulatory framework in which the FCC will be able to enforce net neutrality. Again, not my preferred solution, but it's what I view as the most politically feasible approach for Genachowski, and it has a distinctly Obama-esque feel to it.

The Outrage Game

As a follow-up to last week's post, Joe Klein has a fine column on the AIG bonus outrage:

There is a real crisis out there. It has existed for a while. It has been spreading slowly as factory after factory has shut down, as the gap between rich and poor ballooned, as the rich found ways to get richer betting on exotic financial instruments with all the economic substance of a roulette wheel, as the middle class found it harder to pay for college, for health care, for gasoline.

But most of the anger we see and hear comes from people who are paid to be angry, on cue, on cable television--as opposed to people with actual grievances. Suddenly, the White House press corps goes barking mad over the AIG Bonuses. It is said that the bonuses are an aspect of the bust that the "public" can understand; in truth, the bonuses are an aspect of the bust that reporters can understand. Suddenly, the Obama Administration has a "crisis." The President has to go on television and act as if he's angry, even though he knows these bonuses are the tiniest outcropping of outrageousness.

A bunch of people on Wall Street engaged in high-stakes gambling with a lot of other people's money and the reputations and stability of financial institutions that had endured for many decades. They amassed personal fortunes that the rest of us could scarcely imagine while burning down their firms and taking the entire global economy down with them. That's outrageous. That is un-fucking-believably outrageous. That a CEO at AIG who had been installed by the federal government to clean up the mess (along with some folks in the Treasury Department) decided it wasn't worth fighting in court over $150m in bonuses that the company was contractually obligated to pay--that's not outrageous.

Financial Regulation

I'm somewhat perplexed by this blog post by Richard Posner on financial regulations. Posner argues that there should be no new financial regulations until the current recession has bottomed out. There is a basic intuitive support for this argument in that additional regulations could limit risk-taking and drive up the cost of lending at a time when the federal government is desperately trying to encourage new lending. But Posner's position is focused primarily on uncertainty in the marketplace. He writes:

Any regulatory initiatives at this time will simply increase the already great uncertainty in which the financial industry is operating; and as Keynes pointed out, anything that increases uncertainty in a depression causes hoarding, which can in turn precipitate a deflation likely to deepen and protract an economic downturn.

His point is well taken, but I think he gets the matter of uncertainty backwards. The uncertainty Posner appears to be worried about is already priced into the market. The one thing that investors are not uncertain about at this point is that there will be new financial regulations. I don't think anyone doubts that at this point. The uncertainty is about what those regulations will be. The sooner the government can spell that out, the sooner this uncertainty will be diminished. The additional benefit is that the financial crisis has severely undermined public confidence in the banking system, and if the new regulations are well-crafted (or at least are broadly perceived to be), they can begin to restore some confidence. And in any case, when it comes to the Obama administration and Democratic congressional leaders, all of these concerns may be secondary to the fact that there is huge public support for financial regulations at present, leading to a desire to strike while the iron is hot.

Understanding an Economic Apocalypse

This is tremendously useful:


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Good Quote

I was just listening to some lectures on the Birth of the Modern Mind in the background while working on a take home exam from one of my Stats classes when I heard this quote.

Though the Episcopal and Presbyterian sects are the two prevailing ones in Great Britain, yet all others are very welcome to come and settle in it, and live very sociably together, though most of their preachers hate one another almost as cordially as a Jansenist damns a Jesuit.

Take a view of the Royal Exchange in London, a place more venerable than many courts of justice, where the representatives of all nations meet for the benefit of mankind. There the Jew, the Mahometan, and the Christian transact together, as though they all professed the same religion, and give the name of infidel to none but bankrupts. There the Presbyterian confides in the Anabaptist, and the Anglican depends on the Quaker's word. At the breaking up of this pacific and free assembly, some withdraw to the synagogue, and others to take a glass. This man goes and is baptized in a great tub, in the name of the Father, Son, and Holy Ghost: that man has his son's foreskin cut off, whilst a set of Hebrew words (quite unintelligible to him) are mumbled over his child. Others retire to their churches, and there wait for the inspiration of heaven with their hats on, and all are satisfied.

If there were only one religion in England, there would be despotism to fear; if there were but two, they would cut one another's throats; but there are thirty, and they live happily and in peace.

Voltaire, "Letters on the English" c. 1778

I thought it bore (indirectly admittedly) on the relation between commercialism and religious tolerance. I've been thinking a good bit on the idea that economic and commercial freedom and the prosperity that tends to accompany them have been the driving force behind the rise of political freedom and civil rights. So the quote just kind of struck me. Anyway, back to work.

Too Big to Be Privatized

There has been buzz for the past several days that the federal government would move to bail out Fannie Mae and Freddie Mac, and now appears the rumors have proven correct. This follows not so long after the bailout of Bear Stearns. I don't know enough about the banking market to say whether the government has made the right moves with respect to these bailouts, but it strikes me as odd that any private entity should be considered "too big to fail". It seems there two potential routes around this: either ensure that no single firm in a given market obtains enough market share to make its collapse catastrophic, or simply put the critical functions under public control. The former option is problematic in that a) it would require a far more robust (and I mean FAR more) and aggressive type of antitrust regulation than we currently have, and b) it is easy to imagine that, even with a larger number of firms, intense competition might lead the firms to adopt similar approaches such that numerous firms would teeter on the edge of collapse at the same time, and a bailout would be required anyway. The latter option is problematic for the obvious reason that markets are generally more efficient than government management. But this system where private companies are free to reap really impressive profits (as the investment banks have), but the public ultimately bears the downside risk seems untenable.

This problem has always been at the foundation of my opposition to any sort of privatization of social security. In fact, it's worse for social security than for the banking system, because with social security you've got two levels risk to deal with--the institutional and individual. Because even if whatever private institutions we hand the system over to don't fail, if a significant number of individuals managed their risk poorly and get cleaned out, I find it inconceivable that the government wouldn't step in to rescue them. That is, after all, the entire point of the program. It's social security. And once that happens, of course we'd expect everyone else to try to shoot the moon with their investments, because what's the downside? This is the sort of risk we don't want to be distributed. It only works when the risk is pooled. Look for similar problems with some sort of hybridized public/private health insurance. Once we've made a social decision that some service is necessary, for whatever reason (economic stability, national security, moral obligation), handing it over to private entities will necessarily create serious problems with risk management and moral hazard.

I'm not necessarily arguing that, for example, our entire banking system or health care system should be government run. But I do think that in terms of structuring the mix of government and private management of such critical functions we need to try to identify key breaking points and either put them under direct government control or develop some clever system to ensure that private entities approach these functions with the right set of incentives.

Update (7/14): Sebastian Mallaby appears to have a similar take on the issue to mine.

What if the government subsidized the employment of displaced workers?

I was contemplating where I disagreed with the previous post when the following idea occurred to me. It could probably use a more rigorous development, but I think it’s at least interesting.

I'm kind of uncomfortable with the concept of government run retraining programs.

One major problem is figuring out what to train people to do. Do those being retrained get to choose what they are trained for?

If so, what will stop them from seeking training in a field for which they are unsuited, or one in which the demand for workers is little stronger than the field they just left?

If not, then it seems that the government would have to specify what fields show sufficient demand to bear an influx of newly trained workers, and then place workers in training programs that are best suited to their skills and abilities. I dislike this idea both because of its impact on the self determination of the workers, and because it would have a distortionary effect on the economy (as the training programs would act as subsidies for the selected industries by increasing labor supply and hence reducing labor costs).

Another issue is that an artificial training program might be a very ineffective way to train workers.

Even in many fields where formal education is routinely required, I suspect that the majority of learning tends to take place in the field, after placement. I think that this would be even truer of blue collar workers than others. So something along the lines of an internship/apprenticeship might be most efficient.

Yet having the government take industry partners and place workers in artificial internships, again, is not to my taste. It seems too likely to result in inefficient placements.

Instead, think briefly about the relationship between an industry with a growing demand for labor and an unemployed person. It’s likely that the unemployed person would gladly accept a position at a reduced wage in exchange for the opportunity to master the trade. Likewise, the firm would like to obtain another trained employee so long as they could make up the cost of training through the production of the worker. So both parties stand to benefit by working together on this. But there is a problem.

In a way the problem is akin that of intellectual property.

If I develop a new product or manufacturing technique I do so at some cost. If a competitor is allowed to use the fruits of my development and produce the same product or use the same technique they will be able to sell the output profitably at a price such as would require me, with my sunk cost, to take a loss. So, without a patent to protect my innovation, I have little incentive to develop it in the first place.

Similarly if I train an employee, I do so at some cost. If I am to retain that employee at a net benefit to my firm, I must therefore compensate the employee less than one which we had hired fully trained (i.e. with no training cost). But if the employee achieves the status of fully trained before I have recovered the full cost of her training, another firm will be able to entice her away by offering her compensation equal to her productivity, while I could not do so without suffering a loss. So unless I can monopolize her labor, I have little incentive to offer her training.

My desire to monopolize her labor is equivalent to an innovator’s desire to monopolize the use of their innovation through the use of a patent. But employees have rights that innovations do not. I cannot simply apply to the government to secure my right to exclusive use of this employee. Rather I must contract with her in order to ensure that she will stay with my firm. Of course, she would have little incentive to accept the contract after her training is complete, so we would have to agree to it before her training began. But here a couple of problems arise.

There is asymmetrical information.

The employer does not really know how productive the employee will be after training, so they will make an offer that would be appropriate for the average employee. But highly able workers will recognize that the contract would not benefit them as much as it should. So they would tend to refuse the offer. This would bring down the average productivity of the workers accepting the contract. So the employers would have to readjust the contract to account for the new, lower, average productivity. This would begin to push the next tier of most productive workers out of the contract, etc. And the spiral would continue until the market broke down.

Even without asymmetrical information there would still be a moral hazard problem. Provided with long-term contracts the workers would have less incentive to exert themselves in the service of their employers. Again this would lead the employers to make lower offers, in effect pushing the hardest working employees away from the contracts.

Between these two problems it seems unlikely that such arrangements would come about. In some industries, where an intensive amount of expert attention is required during the training process these problems may be fatal to in-job training. If the employer cannot break even over the duration of the training process, even if they provide zero compensation, then there is little to be done. But in some other cases there may be a solution. Now we return to my opening question.

What if the government subsidized the employment of displaced workers?

In the above scenario, it was not true that no training took place. Training could and would take place if the firm could extract sufficient benefit from the worker’s labor during the training process to break even prior to the worker becoming sufficiently trained to be attractive to other employers. By subsidizing the work of untrained workers (e.g. for some fixed period of time paying them some quantity per hour worked in addition to the compensation offered by the firm) and thereby reducing the compensation the firm must offer to retain the services of the employee, the government could increase the quantity of training that a firm could viably provide without loss, and thus give workers the opportunity to overcome larger experience barriers. Of course such a program would require monitoring to ensure that the employees were only being subsidized for skilled labor in which they were inexperienced and that the industry retained a sufficient proportion of the trainees to justify the subsidy. But I think that this monitoring would be much easier than hand picking industries and developing government implemented training programs. And I believe the outcomes would be much better.

The Role of Work

Andrew Sullivan pointed out this fascinating article on the psychological impacts of employment (and unemployment). I take issue with many of the conclusions the author, Arthur C. Brooks, draws from the data he presents, but the data is worth taking a look at. In particular I'm drawn to the studies on the devastating impact of unemployment, as in the case of the Marienthal villagers or the University of Chicago survey that found that even a brief bout of unemployment drastically increased the tendency of respondents to feel hopeless or worthless.

Brooks concludes his survey of the data by stating that the only thing we need to do is "protect the free market so that people can find and choose the types of employment that suit each of us best." I find this conclusion difficult to reconcile with the data on unemployment. The implications of that data suggest to me that employers have a devastating non-economic advantage to wield over employees, and that normal market churn can have significant psychological externalities that aren't generally considered in economic models.

One need not be a bleeding-heart sympathizer with the poor or the unemployed to be concerned with such issues. Witness the current political dialogue on topics such as economic globalization, outsourcing, and immigration. I would suggest that the rising populist positions on all of these issues share two traits: they are motivated by fear of unemployment and all its consequent harms, and they are deleterious to the overall health of our economy. Note also that these issues tend to span across the usual political divides. You can find vehement opposition to immigration on the right, fierce opponents of globalization on the left, and distaste for outsourcing on every side. People have a tremendous fear of losing their jobs, a fear that viewed in purely economic terms may seem irrational, but taking into account the additional psychological effects perhaps it is not so irrational after all (although I guess you could conclude that the psychological impact is itself irrational).

Brooks points out that remedies such as welfare do little to address the psychological harm of unemployment. He also notes that making jobs more secure comes at a price. Brooks argues that more secure jobs tend to be less meaningful. I don't see the data for that, and I'm not sure it's right although I can see where he's coming from. In any case, certainly there is an economic price to be paid for making it more difficult for employers to adjust their workforce (European economies demonstrate this).

These considerations about welfare and job security seem to drive Brooks's conclusion that nothing should be done other than to support the market. And certainly, the market may provide enough of a remedy for some of the unemployed, particularly the highly skilled and well-educated. However, that does not address the whole of the topic. Particularly where globalization and outsourcing are concerned and where we see massive shifts in the market, people may find that skillsets in which they had invested a great deal of time, effort, and money are no longer needed, not just by their previous employer, but by any domestic employer. There is room here for the government to be involved in retraining and job placement for displaced workers. If we know that job churn is necessary and healthy for the economy, but that the impact on individuals of this churn can be severe, that seems the most sensible route to pursue. Not only can this have direct impacts on the social welfare of those affected, but the existence of such a safety net may also help reduce the fear that drives the dialogue on economic policy in the wrong direction. There is an obvious connection between this suggestion and our past discussions of Rawlsian fairness and political compromise (as seen here), but I'll leave that as an exercise for readers...

Liberalism, the State, and Free Markets

I promised last week to eventually to get to the discussion of Rorty and Rawls. For various reasons, I've decided I'd rather not. But if anyone wants to read the discussion on their own, it goes something like this: Yglesias, Linker, Yglesias, Linker, Sullivan, Douthat.

Also, before getting to my main topic, and because it tangentially relates to that topic, I'd like to throw this in. Christopher Hayes has a column on the merits of bureaucracy and the fine people who inhabit our federal bureaucracy. If you look into the details of the DoJ scandal, it's hard to be as dismissive as Hayes about the lasting impact of the Bush administration on the bureaucracy, but he makes good points nonetheless. An excerpt:

It's slander with a long pedigree--Cicero called the bureaucrat "the most despicable" of men, "petty, dull, almost witless...a holder of little authority in which he delights, as a boy delights in possessing a vicious dog"--but in the last forty years, conservatives have converted this casual contempt into an ideological fixture. Since as far back as the Goldwater campaign, the American right has generally found that "the government" is too abstract an entity for most people to actively loathe. It's far more effective to demonize the people who execute its daily functions. Bureaucrats are to conservatives what the bourgeoisie was to Marx: an oppressive class of joyless knaves. Milton Friedman quipped that "hell hath no fury like a bureaucrat scorned"; Ronald Reagan said in 1966 that "the best minds are not in government" because if any were, "business would hire them away"; and George Wallace expressed his desire to "take those bearded bureaucrats" in Washington who were in the process of desegregating the South, "and throw them in the Potomac."

But a funny thing has happened over the past six years. At a time when the press failed to check a reactionary Administration, when the opposition party all too often chose timidity, it was the lowly and anonymous bureaucrats, clad in rumpled suits, ID badges dangling from their necks, who, in their own quiet, behind-the-scenes way, took to the ramparts to defend the integrity of the American system of government.

...

But the moral of the Comey story specifically, and of the failures of the Bush Administration more broadly, is the sublime value of bureaucracy. Not only is governance of any kind impossible without it; so too are the checks and balances of a constitutional republic. Red tape is what binds those in power to the mast of the law, what stands in the way of government by whim. That's why an Administration hostile to any checks and balances has sought to reconstitute the federal civil service as just another lever in its machine.

So, anyway, on to the main course. Harvard economist Dani Rodrik has a blog post excerpting from a lengthy article by Stephen Holmes in the American Prospect (from a few years back) on the views of classic liberals on the role of government. The basic gist of the excerpts is that the liberal ideals of individual rights and free markets are tied inextricably to the existence of a strong state to protect them. It very much reminds me of my previous discussion with Henry on libertarian paternalism and Rawls where I wrote:

This, in fact, has always been my biggest objection to libertarian theory. I simply cannot see how a libertarian state could ever remain so for any appreciable length of time. The initial structure of the government will not bind it in libertarian form, even if you had a constitution without amendment procedures. It was not a constitutional amendment that allowed the development of the administrative state in the US, but judicial interpretation. And it wasn't just uppity judges responsible for that (although I'm not sure it would be significant to my argument even if it were), but intense political pressure placed on them by political branches motivated by quite serious concerns about social stability and unrest (and rising socialist sentiment). Whether it's a Great Depression and populist outrage or rent-seeking businesses and other economically powerful interests, a state will always be subject to pressures (of varying intensities) to do non-libertarian things. The state will always have the power to do those things; it is inherent in being a state. That power cannot be ignored, and there is no structural way to make it go away. It just sits there begging to be used.

I have a strong suspicion that some of the policies necessary to keep those pressures at bay (to the greatest degree possible) are themselves non-libertarian (e.g. some level of redistributive tax policy and regulation of finances and political speech, etc.). In the end, I tend to believe that our rights (which may or may not be limited only to life, liberty, and property) are likely best protected by a state that overtly recognizes the threat of instability and subversion of state power and is structured to best address that threat, even if that structure is not a strictly libertarian one. The state may need to be more powerful and far reaching than a night watchman state in order to be a stable, free-standing system. What good is the night watchman if it ends up being overthrown by communists or turning into a plutocracy?

Tying in to the Hayes column: a robust state can be less prone to abuse and authoritarianism than a more easily captured minimal state.

One of the fundamental premises of Rawls's political liberalism is that the point of a liberal state is to create a platform for social cooperation that is the prerequisite for everyone to share in the benefits of, among other things, free markets. Libertarians suppose that you can rip away the institutions that result from this political compromise while still gaining the benefits they are meant to provide. This seems to miss something fundamental about human nature and social interaction.

Political compromise is necessary to create stable institutions, and stable institutions are necessary to enforce the rules of the market (e.g. to protect property rights, enforce contracts, settle disputes, and police fraud). Institutions that are not broadly considered legitimate will, as Rawls argues, be subject to instability, as each faction that even briefly manages to achieve power will attempt to tear down illegitimate institutions and replace them with institutions of their own preference.

So it becomes important to try to determine how people assess legitimacy. Rawls suggests fairness as a crucial benchmark. That seems to have a lot of merit. We've had Boys Weekend discussions on the topic before, noting psychological studies to the effect that people are willing to sacrifice their own benefit in order to enforce a system of fairness, even when there will be no opportunity for direct reciprocity. (I thought it interesting to see recently that humans are not alone in this behavior.) This suggests that even if a libertarian institution is quantitatively superior to some non-libertarian institution it might still be regarded as less legitimate if it produces outcomes that are perceived to be unfair.

Returning then to Dani Rodrik. Rodrik's main specialty is economic globalization. He argues that globalization promoters have been shooting themselves in the foot by ignoring populist complaints about trade unfairness, countering these arguments only with statements of the quantifiable benefits of more trade. Economists too often ignore procedural fairness in favor of simple economic gain. Regular people tend towards the opposite. Rodrik argues that domestic political perceptions of the globalization process are the key to further progress on trade. In other words, to create the social platform for cooperation necessary for global markets to expand we will require a more robust social safety net to remedy distributional unfairness and create perceived legitimacy for the whole endeavor. Otherwise the social compromise on which economic globalism is built collapses into a morass of protectionism. The market can only go as far as the state can carry it.

UPDATE (6/25): Rodrik posted again today with further evidence for his thesis on globalization. He cites a recent academic paper studying a survey of people from 18 countries that found an inverse relationship between the size of the state (measured by percentage of GDP) and preferences for protectionism. Rodrik quotes from the paper:

Our results provide microeconomic evidence consistent with the long-standing argument that the state and the market are in fact complementary. Openness and globalization can introduce uncertainty into peoples’ lives, and this additional risk can lead some people to oppose trade. Government expenditure can help to reduce this risk, and thus shore up support for open markets. It would seem that the ‘grand bargain’ that was embedded liberalism is politically effective.

Blocking Innovation

As Vonage and Verizon having been battling in court since early this year over Verizon's claims of having patented some faily obvious elements of VoIP used by Vonage, software patents have again fallen under scrutiny. Tim Berners Lee, the inventor of the World Wide Web, has an OpEd in the New York Times arguing against software patents. He quotes Bill Gates writing in 1991 that if early computer pioneers had understood how to patent their works "the industry would be at a standstill today."

Software has always seemed poorly suited to patents for a number of reasons. Most of what software does is fairly obvious. The really innovative stuff tends to fall into either broad conceptual ideas (like the web) that would be inappropriate for patents or clever algorithms (like quicksort) that are basically mathematical discoveries, abstract intellectual concepts of the sort not traditionally patentable. The rest of it, however complex and difficult, tends to be fairly mundane implementation, requiring little originality (but often a huge effort in coordination).

Existing patent law, in theory, should prevent unoriginal things from being patented. But in reality it does not seem to do a good job of this, particularly in the initial granting of patents. And even if questionable patents can still be challenged and overturned in court, this is a remedy of limited value to small developers and open source projects. Going up against Microsoft or IBM's legal team is often an insurmountable barrier to entry. And both patent examiners and judges appear to struggle with the concepts of computer science in their efforts to determine what is or is not an obvious development. As the OpEd points out, two of Verizon's patents in this case cover the painfully obvious concept of converting between phone numbers and internet addresses.

From the economic analysis side as well, software development is ill-suited to patents. For one, there is, as the OpEd discusses, alternative protection available for software developers in the form of copyrights. Any direct copying already gives rise to a legal claim. And copyright is, as the article notes, considerably less cumbersome and expensive. Also crucial, copyright does not create liability for independent invention, while patent does. So if Verizon has valid patents on basic elements of VoIP they can bar anyone else from offering a VoIP service until those patents expire. With a copyright they could only prevent people from actually copying their system, but they would have no claim against a competitor who developed their own, even if it worked the same way.

It is important to recall the purpose of intellectual property protections: to allow inventors and developers to profit from their investments in new technologies and innovations, thereby promoting more such investments. The need for strong protection is much lower in the software space than for, say, pharmaceuticals. Development costs are relatively low and innovation occurs rapidly enough in software that there is a significant first-mover advantage even without patent protections. As long as competitors cannot rip off a new program wholesale (which copyright prevents) and have to independently develop their own version, the first innovator will be rewarded for her efforts. Look at how YouTube still dominates over other video-sharing systems. Some of its competitors are offering technically superior systems, but YouTube got there first. The software market, before these big companies realized they could patent everything under the sun, was wildly innovative and fiercely competitive. They didn't need patents to achieve that. Patents impose signicant transactional costs and barriers to entry without adding any meaningful beneficial incentives to the software business. This system is a mess, and I hope the Verizon case will help to spark reform.

Losing the Independent Press and the Price We Pay

Bill Moyers made waves this week with his special report on the role of the press in the run up to the war in Iraq. His story dovetails nicely with PBS Frontline's ongoing series of reports on the state of the press. Both are available online, and well worth watching. I would start with with Part III of the Frontline series, followed by Moyers's Buying the War.

Moyers has few true revelations and little new information, but it is well worth going back and seeing how badly the press got this war wrong, and revisiting some of the more egregious false claims of the pundits. Those pundits, as Moyers points out, are alive and well in American journalism. Many have been promoted. No one has been called to account.

The Frontline report helps to illustrate why American journalism is failing. No one does real reporting anymore, save a few national newspapers, and even they are cutting back. The newspapers are still highly profitable, but their readership and their revenue is in steady decline, and so sacrifices must be made for them to maintain their high margins and keep the corporate overlords happy. This was very much my concern while researching the media ownership rules last summer. Maintaining the prohibition on TV-newspaper crossownership has long been a central goal of the Democrats with respect to the media ownership rules. While I certainly see the value in that policy, for me the financial well-being of our newspapers has to be the top concern. I'm frankly not sure whether they would be helped or hindered by relaxing the cross-ownership rule. But I think we have to be willing to try anything that might preserve our last bastions of actual journalism.

Of course, the Moyers piece illustrates that even when newspapers have the resources to perform serious research they can fail to use them when caught up in the political conventional wisdom (as was the case of the New York Times and the Washington Post with Iraq). The conventional wisdom is created in part by the efforts of political actors (the White House in particular), but also by the media itself when it parrots the lines fed to them by those political actors. When real journalism is a small slice of the news media universe it seems that it is easily cowed by the overwhelming majority of the press for whom statements issued by the White House define reality. There needs to be a critical mass of independent press for news outlets to gain the courage of numbers to be willing to take risks.

Neither of these two pieces paints the whole picture on its own, the business of the news and the politics of the press, but together I think they give us a good look at what has gone wrong. The newspapers have a long way to go before they can recoup their lost hard-copy profits through their online presence. Given how much the internet has shaken up other industries, it's not clear they ever will. If they don't we can look forward to further setbacks to the quality of journalism in the US. We need to start to consider the degree to which quality reporting is a public good. In my opinion, in a democratically governed nation, journalism is the highest order of public good. The public cannot make informed choices if there is no one to inform them. If the market is unable to provide what we need, we will have to explore other avenues.

The Housing Market Bailout

I'm usually on here defending regulation from Henry and V, but this story just irks me. Ohio is raising $100m to bail out homeowners with ARMs facing foreclosure. Who the hell gets an ARM when interest rates are at their lowest levels in many decades? An ARM is a wager between you and your lender: if interest rates fall, you win, if they rise, they win. If you start from an historic low, who do you think is going to win that wager? This is a market populated by predatory lenders and foolish debtors. Dumping tax dollars in to keep it afloat may not be the brightest idea.

The Commanding Heights

I watched The Commanding Heights (TCH) earlier this week and I figured that, per Joe's request, I would post a comment. It was great. I was actually teary eyed more than once while watching it. I don't suspect that anyone would be too surprised by my evaluation. It did support many my preexisting beliefs. I found the perspective on post-communist Russia to be particularly interesting and informative.

I think we could use a lot more of this sort of media. Although TCH portrays a world in which the ideas of liberal economics have triumphed, I feel that that triumph is more practical than political. That is, I believe that many governments were forced into accepting more market oriented policies because command economies had been such a debacle. But I'm not so sure that liberal economics has gained any sort of ascendancy amongst the minds of the ordinary people of the world.

I fear that should the economic winds change, people are as ready as they have ever been to embrace socialistic policies. Not to put too fine a point on it, TCH paints a picture of a grand cycle going from the economically liberal beginning of the twentieth century, through an period of government dominance, and back to the modern era of world markets, and I suspect we might well repeat the same errors in the coming century that we did in the last. This would, of course, be tragic.

Really, as an American on the ground, do you see the weight of public opinion as being in favor of free market policies? In particular, amongst the free market sentiment that you do see, is it there for the right reasons? It seems to me that socialism is still far stronger than liberalism in terms of underlying public support. It is simply a far more intuitive system. Though I may sound like some sort of conservative crank, I think that we have to acknowledge that the overwhelming majority of educators and educational institutions in the U.S. still guide students toward a preference for socialism and planning over markets and individual freedom. We must simply face the fact that organization and government intervention are the products of genuine popular movements, and that laissez faire economics has probably never had widespread support.

Just look at the labor and (largely equivalent) anti-globalization movements portrayed in TCH. Do we, at any time in history see any similar movements in favor of liberalism? No, not really. I guess the American Revolution is about as close as you get. Socialism just makes for way better slogans. People want to hear that their problems are caused by the greed and evil of the rich and powerful, not that scarcity is an inevitable phenomenon and that economic limitations hold with the force of natural law. I have argued before that the drive towards communism is likely maintained by the same forces that first inspired worship of the Gods. As human beings we have a built-in tendency to interpret events in terms of purposeful action. This facility is essential to our functioning as members of complex human societies. But it also causes us to anthropomorphize and personify natural forces. Because the natural forces of scarcity manifest themselves through the market, it makes perfect sense that we blame our problems on the human faces of corporate leaders and government officials. Though such scapegoating is satisfying, it is dangerously counterproductive. We have to recognize that when oil prices, for instance, become unpleasantly high, it is not because oil producers are greedy, it is because the relationship between supply and demand has changed. We can try to deny this fact by imposing government controls, but such a lie hurts no one more than ourselves.

All right, I'll stop jabbering about free markets. If you've watched TCH you probably already have a pretty clear idea of what I'm talking about. But I do still want to comment on instabilities in the modern financial system. This is a very significant aspect of the third part of TCH. These are a very challenging problem. The solution is not at all clear. My opinion is that what we need is, in fact, a greater degree of deregulation. This is totally opposed to what most economists would suggest. But I'll say it nonetheless.

I think that governments go way to far in guaranteeing stability in their banking systems, and that we need to make it much easier for banks to fail. You see, I believe that the operation of central banks brings about a system of risk pooling in which the possibility of failure is aggregated. There is no doubt that it is possible to do away with the risk of individual bank failures by creating a centralized guarantor, but to me it seems equally clear that such a system does not eliminate risk. It merely spreads it. But this spreading means that risk is externalized, so it is entered into far more often. It means that risk goes unrecognized, so it is underpriced. And it means that the realization of risk is quickly contained, so systemic purges of risk are much less frequent. Overall, the result is that the economy ends up containing way more risk than it could have ever supported prior to bank cartelization. In a way this is good. It allows much more lending to take place, and so we have lower interest rates, and hence more development and entrepreneurship. But it is bad in the sense that the economy builds up huge amounts of risk.

Just as the containment of moderately sized forest fires allows the buildup of large amounts of fuel mass, thus increasing the possibility of huge uncontrollable blazes, so the containment of moderately sized failures in the credit system makes much more dangerous failures more likely, if not inevitable. So what I'm saying is that we need to do away with the belief that we can control risk. We need to accept the fact that risk is an inherent result of our inability to foresee the outcomes of economic decisions. Given that recognition, the best solution is to break economies into smaller cells capable of failing individually and thus making failure more common, more recognizable, and more contained.

I think that today there is more unrecognized risk in the world economy than most people could possibly imagine, and that a systemic world economic collapse is more likely than most would like to think. It is in this risk that I see the possibility that the recent trend toward economic liberalization will be undone. If we do see a global economic catastrophe, few will choose to blame it on governments doing too much to safeguard economic stability, and many more will interpret it as a predictable failure of under-regulated markets.

I'm not sure that disaggregation is possible from where we now stand. Risks that have been taken cannot be undone, and disaggregation would almost certainly bring about immediate painful realization of this fact. And even if the central banks of the world were to cast risk back upon subunits of their economies, it would not undo the recent creation of a world derivatives market, which is essentially a privatization of the role of risk aggregation. This market may truly be a market failure: a making of poor decisions that could not be subjected to the strictures of market forces until it had become to big to stop without immeasurable harm being done. But it is too late to do anything about it.

In summary, TCH is very encouraging, and made me feel very warm and fuzzy. But I for one am afraid that the trend that it illustrates might be short lived. I may be wrong. I certainly hope that I am. But if I'm not, the tragedies of the twentieth century could well be revisited in the twenty-first.

From the Wacky World of Legal Compensation

Dahlia Lithwick on Supreme Court clerkship signing bonuses. Sure they're silly, what about big firm pay scales isn't?

Commanding Heights

I wanted to point out a fantastic documentary we've been watching called Commanding Heights: the Battle for the World Economy. It's a 3-part, 6 hour show created by PBS in 2002 based on a book of the same title by Daniel Yergin and Joseph Stanislaw. You can actually watch the entire thing from that web page (although we netflixed it). It is tremendously educational about the economics of the second half of the 20th century (the entire first episode is devoted to the competition between the ideas of John Maynard Keynes and Friedrich von Hayek). It pulled together a lot of previously unconnected pieces for me. I recommend it highly, and I would be very curious to hear Henry's thoughts about it.

Also, unrelated, I believe this might be the greatest news report of all time (and it happened in Oconomowoc).

Insurance Industry as Environmental Activist

The Washington Post has a good story insurance adjustments for climate change. The author could have done a better job of parsing out how much this is actually focused on climate change and how much is just a reaction to the insurance industry getting pasted by Katrina (or whether and to what extent those are actually different stories). I'm also a little curious as to why the insurance industry refuses to offer insurance at all to high risk areas rather than just raise prices to cover the increased risk. Risk markets are, in general, pretty interesting stuff. I'm looking forward to my insurance course next semester.

Having recently visited the Outer Banks in North Carolina, I find it a little shocking that the insurance industry is just now waking up to the fact that it is a disaster waiting to happen. It is essentially just a big sand bar sitting off the coast that people have built houses on. I can't say I have a lot of sympathy for people who view one of those houses as a good vehicle for retirement investment. Might as well take that money to Vegas...

The Other Side of Hugo Chavez

Hugo Chávez played into American caricatures with his anti-Bush campaign at the UN, but it bothered me in the aftermath of the speech to hear certain US officials and commentators refer to him as some sort of tyrant or dictator. We would do well to recall the he is, in fact, wildly popular in Venezuela. Current polls have him beating his opponent in tomorrow's election by a 2-1 margin. Like most South American countries Venezuela suffers from an immensely unequal division of wealth (the article cites one claim that the poverty rate in Venezuela is 70%). Chávez has redirected oil wealth to provide education, health care, and basic sustenance for the nation's many impoverished citizens. It's far from clear whether Chávez's policies will accomplish much in the long term, but he has at least taken steps to address the problem, which itself represents a change from past leadership.

In posts past I've wondered what is the proper means to address the lingering impacts of colonialism in South America and other developing regions. Even a hardened libertarian like Nozick calls for redistributive policies where an allocation of resources was achieved through means not consonant with Lockean justice in acquisition. Until the recent wave of populist leaders was elected in South America redistribution of this sort was likely impossible as the wealthy by and large controlled the levers of power. Now that it is possible, the West and the international development institutions (the UN, IMF, World Bank) appear to have little interest in providing assistance, guidance, and advice in this process. This sort of pure redistribution is heretical to modern economic principles, but I think we need to recognize these situations as a special case, one where the general principles don't apply well (which is why all these populist leaders were elected in the first place). I don't know if what Chávez is doing is right, but if it's not I wish we could respond with constructive criticism rather than blanket condemnations...

Posner on Friedman, Libertarianism, Dogmatism

I've been meaning to blog this for the past week, but better late than never, I guess. Over on the Becker-Posner blog, Richard Posner has a nice comment on Milton Friedman's passing. In it he discusses Friedman's influence and liberal economics, and takes a position I find myself largely in agreement with. Frieman's greatest contribution, Posner says, was to hammer home the point that, in general, people are better at representing their own interests than third parties (i.e. the government) are. But, Posner argues, there are exceptions to this general rule (and Posner gives an example of one), and Friedman failed to recognize them. Friedman's market efficiency advocacy became a dogma in which he was too deeply personally invested.

Additionally, Posner takes issue with Friedman's theory (shared with Friedrich Hayek) about the correlation between economic and political freedom. He looks at China and India as counterexamples running in opposite directions (and also mentions European social democracies).

I tend to share Posner's caution with respect to market dogmatism. I feel the need every now and again to point out that this is not necessarily the same as being a market skeptic. Posner certainly is not a market skeptic; he's a legal pioneer precisely for his tendency to bring economic arguments into legal analysis. I'll take this opportunity to duck behind his cover to note that I am a great fan of distributed solutions to many problems, and markets are a wonderful form of distributive problem-solving. But I tend to doubt that there are any one-size-fits-all solutions to human social problems, and dogmatism for any particular solution will sometimes run amiss.

Rawlsian Justice

I want to respond mostly on the topic of Rawls and his theory, but I'd like to briefly address the normative effect of civic institutions. I think institutions can create a much broader range of norms than simple expectation. The U.S. constitution provides a fine example of the sort of impact that civic institutions can have. You can look at the debate over the war on terror detainees and habeus corpus. Modern Americans have instincts about this that I don't think most people would have had in 1787. A lot of our popular conceptions about due process come from our institutions. Consider net neutrality. Right now both sides are advancing plausible moral values-based arguments for their positions. In the next year or two Congress is going to rule thumbs or thumbs down on net neutrality. My guess is that 10-15 years from now if someone raises the moral argument of the losing side of this debate (whichever way Congress goes) our instict will be to reject it (and similarly to accept the winning side's argument). We rely on our political and legal processes to help navigate through the innumerable moral and ethical dilemmas of modern society and to provide some sense of resolution to these sorts of questions. Consequently there are many more norm-setting opportunities for civic institutions than mere expectation.

Moving on to Rawls then. First, it's important to note that Rawls is not a utilitarian. In fact, in A Theory of Justice utilitarianism is the bogeyman against which Rawls argues his case. On the first page he writes:

Each person possesses an inviolability founded on justice that even the welfare of society as a whole cannot override. For this reason justice denies that the loss of freedom for some is made right by a greater good shared by others. It does not allow that the sacrifices imposed on a few are outweighed by the larger sum of advantages enjoyed by the many.

There is, however, an element of utilitarianism in Rawls's Original Position. The objective of the Original Position contractors is supposedly to maximize their likely outcome in society. This is sort of utilitarian, with a curveball thrown in (the veil of ignorance blinds them to exactly what represents utility to them as individuals).

But Rawls's excursion into utilitarianism, in my humble view, is a mistake. I don't think he actually meant it. It really doesn't follow from his justifications of why we should have the Original Position that it should necessarily be a maximizing exercise, nor does his output from the Original Position (the two principles) reflect a maximizing approach. A maximizing approach would produce, as Henry noted, basically whatever principles would maximize the average amount of primary goods (Rawls's stand-in for utility) for everyone. Instead what Rawls claims the Original Position contractors will embrace is a maximin approach (maximizing the amount of primary goods provided to the least well off member of society). You can see this in the difference principle (part of Rawls's second principle of justice): social and economic inequalities are permissible only if they are to the greatest benefit of the least advantaged members of society. This would make no sense as output from the Original Position as Rawls proposes it. So something doesn't fit here, and I think there has to be a better explanation linking Rawls's fundamental premises to his two principles of justice.

Rawls's entire argument is motivated by his conception of justice as fairness. At this point I think I need to try to flesh out the basic Rawlsian argument (I am, of course, skipping over many, many details). Rawls views the benefits of social cooperation as the product of everyone acquiescing to a social ordering that allows for and facilitates that social cooperation. Those benefits should therefore be allocated in such a manner as to ensure such cooperation, resulting in what Rawls calls a well-ordered society. This requires that "(1) everyone accepts and knows that the others accept the same principles of justice, and (2) the basic social institutions generally satisfy and are generally known to satisfy these principles." Lacking a well-ordered society various factions will vie for the power to reorder the state to fit their own needs, and the resulting instability will hinder social cooperation and deny everyone its benefits. Rawls conceives of the Original Position in order to satisfy condition (1) above; to create principles of justice that everyone can accept. In the Original Position our theoretical contractors will evaluate the question of social justice in a completely unbiased manner and generate broadly acceptable principles of social justice. He appears to assume (initially!) that what people will all accept will be principles designed to produce the greatest average outcome.

So far, so good. But there's a problem here, one that Rawls acknowledges (and that informs his choice of the maximin approach), but that he strangely does not allow to alter the conceptual setup of the Original Position. There are certain social outcomes that people will simply not accept, no matter how well conceived the principles of justice are. A utilitarian principle (which is what the Original Position as Rawls proposes it would produce) could, for example, result in some people being made slaves in order to improve the overall average utility of the society. No matter what their Original Position alter-ego might have thought, the actual slaves could never recognize this principle as just, and consequently you would not have a stable, well-ordered state.

So the instruction to the Original Position contractors really ought not to be to maximize the average amount of primary goods, but rather to devise principles of justice that everyone can agree to. Of course, that was what we created the bloody thing for anyways. How should that be approached? We can assume (without too much controversy, I think) that the people least likely to agree to any principle of justice will be those who gain the least benefit from it. Hence the maximin approach. These least well off people should certainly agree to a principle that would maximize their welfare.

A first blush approach to maximin would be to simply be divide the social benefit in equal shares. However, as Rawls recognizes, that only makes sense if the social benefit is fixed and unchangeable. But we know that the benefits of social cooperation are not fixed, that by providing people with incentives we can get them to produce greater social benefits. This requires allowances for some inequality so that we can provide those incentives for increased cooperation. Of course, if those greater benefits only go to the well off, we have gained nothing from a maximin approach. Increasing the size of the pie is only beneficial to the extent that some of the increase goes to the least well off. And so we arrive at the difference principle: inequalities that in some way benefit the least well off are acceptable, those that don't are not. And you hopefully by now can see why I say that I don't believe Rawls took the utilitarian aspect of the Original Position very seriously.

Now, with my Rawlsian primer complete let me address your comments more directly. I read your argument to be compatible, in principle, with Rawls's difference principle. It is a 'rising tide lifts all boats' argument. In essence any inequality produced by a free market will operate to the benefit of the least well off. The difference principle would only limit market inequalities or justify redistributive policies to the extent that this is not true. Of course, the other part of the second principle, fair equality of opportunity would also support redistributive policies (public education, for example) that would conflict with your position.

Rawls writes at length about economics in the latter part of A Theory of Justice (which I have not read). Scanning through it, Rawls does not engage in serious discussion regarding exact details of market structure and regulations (and in fact brushes this off to some extent as being dependent on "the traditions, institutions, and social forces of each country, and its particular historical circumstances" and some evaluation of the impact of various policies in practice). But it is clear that he believes that some baseline minimum standard needs to be maintained through redistributive policies to protect against the "contingencies of the market". Beyond that "it may be perfectly fair that the rest of total income be settled by the price system, assuming that it is moderately efficient and free from monopolistic restrictions, and unreasonable externalities have been eliminated."

Rawls also hints at another objection related to the quote at the top of my post regarding the inviolability of individual rights. While he does conceive of the maximin principle being based on long run expectations, he would not allow the justice of particular groups of people to be sacrificed to long term generalized gains. There would need to some line-drawing to determine what is an acceptable short term sacrifice in the long term interests of those least well off, and those sacrifices that treat those people as means to achieve some remote end. This also harkens back to the motivation for the maximin approach. Outcomes that are bad enough to cause social unrest (those that the victims cannot possibly regard as being the products of a just society) need to be avoided even if temporary and in the long run interest of everyone.

To a considerable degree the dispute here has to be an empirical one. Your claim about charitable giving could be interpreted as a counter to many of Rawls's arguments. Suffice it say I find the claim that charity could completely replace redistributive policy somewhat dubious. There would also be arguments about the existence and degree of market failures, of anticompetitive strategic behavior, externalization of costs, collective action problems, behavioral critiques, etc. I think there would also have to be discussion as to the general degree of churn in markets and the degree to which it is possible and probable that some proportion of people would fall through the cracks, including but not limited to those who are disabled or suffer serious health ailments and impairments or possess limited natural talents and abilities. I don't see us resolving such issues at this moment, but to the extent any such problems exist they would suggest a conflict between a minimal state and Rawls's difference principle.

Liberalism

Before I get started addressing your major points I would just like to note that I disagree with your view of Locke. Though Nozick may lean on Locke, this only indicates that Nozick is poised for a fall, as, I assure you, Locke is not leaning back (I must note that this statement is predicated upon my limited knowledge of Nozick's arguments). Also, the State of Nature does not characterize human behavior. It is a legal structure: the absence of any formal agreements. I would discuss this further but it probably isn't relevant enough here to justify the time.

I will not properly counter your suggestion that public institutions are good tools for cultural transformation. This is a very complicated issue and I don't think I have the time now to do it justice. I will make a few general statements that may give you some sense as to what points I think are important in this regard.

You point out that there is a relationship between culture and institutions. I can't argue. To do so would be absurd. In fact, there are things which we call institutions that are obviously nothing but culture (here of course I am using a much broader definition of institution than just public institutions). Hell, I could make a pretty decent argument that all institutions are primarily culture (I first began to grasp the potential complexity of this topic when I tried to carefully define culture and its aspects, institutions and their types, got two pages in, and still had not worked out a satisfactory framework). Once these particulars where hashed out I'm pretty sure I could make a good case for my point. But in doing so I would have to elaborate most of my theory of culture; and I know from experience that I can't do that in brief. So I'm not going to try here.

When I think about examples of public institutions that have a strong cultural complement it seems that these are primarily institutions that were created because the cultural 'institution' already existed (an example here would be marriage). So that’s one point. Public institutions often have cultural counterparts, but it is usually the culture that brings about the public institutions rather than vice versa.

Another point would be that public institutions are only good at creating an inferior sort of gross culture. I did indicate, unintentionally, that institutions can create norms. This is true. But a norm in this sense is a very feeble sort of culture. It is a simple expectation. I can modify a rat's behavior by establishing the norm that it will be fed every day at 9AM, but even for rats this is not a very impressive utilization of their brainpower. In the modern use of the word 'culture' such ideas are dominant. You could have a culture that hates blacks, or favors democracy, or values punctuality, etc. This is culture as merely a set of irrational preferences. It is definitely true that such things can be an important part of a culture, and that they can have major impacts on people's behavior. It is also true that there are many examples of public institutions having succeeded in changing these aspects of culture. This is not however a part of what gives a culture 'richness'. You cannot develop a meaningful appreciation for Shakespeare, Hume, or Darwin, with posters and PSAs. These things are deep and thought provoking. They utilize the human mind's capacity for nuance, intuition, and rationality. I think that they are infinitely more powerful as means for improving social outcomes than mere propaganda. I also think that to not use these sorts of culture is to squander the potential of the human mind. This potential is infinite. Propaganda is a cop out. It is what we resort to in order to control people when we can't figure out how to make proper use of them. Human intelligence is a hindrance when you want to manage society from the top down like a block of clay (as, in a non-rich culture, the idle brain power is bound to bring about all manner of wickedness), but it is a great asset when you approach society at the fine structure level and try to change it from the bottom up.

I do not think that I could be said to fetishize an ideal culture. I do talk about a rich culture, a healthy culture, a natural culture, etc. but there are infinitely many cultures which would be worthy of these appellations. These are cultures that are of sufficient complexity to utilize the potential of the human brain, that contain the notions necessary to maintain the well-being of their hosts, and that in other ways resemble the cultures that coevolved with the human body. The methods I suggest for improving culture have less to do with the contents of culture than with how it is transmitted. I certainly believe that the contents of a particular culture have a huge impact on its ability to improve human well-being, but any healthy culture is better than none. In any case, the problem is much less important in modern times. So long as the culture we create includes an understanding of the value of rationality, free information, and self-determination, it will naturally accumulate the best and most valuable ideas (since we have so many available ideas and such facility in the distribution of information).

Your argument against the idea that government is increasing is an empirical one. Facts require a lot more effort to generate than ideas. So I'm not going to argue this thoroughly. I don't have the time. Here's my gut reaction (and there are more nerve ending in my gut than in my brain you know). You address the issue from a legal perspective. You certainly are in a better position to make this judgment than I. And from what I do know about the actions of the courts your assessment seems justified. This is encouraging. I'm tempted to vote republican just to get more Chicago school libertarians onto the Supreme Court. But I think this is really an elite movement. It is an ideological battle being waged by a group of intellectuals (and hooray for them). But I think its pretty crazy to argue that the trend in government over the last century is not decidedly up. Government spending as a percentage of GDP has certainly increased dramatically. I don't have any hard figures, but I bet that the quantity of legislation has increased (both in aggregate and in pages issued annually). I'm pretty sure the size of the federal register has grown over the period. What is more difficult to measure, but perhaps more meaningful is the change in people's attitude toward government. Whenever there is a problem today it is automatically assumed that we should turn to government for the solution. When government regulates and prohibits, modern Americans see this as natural and unsurprising. I think we have a much more submissive attitude toward government than we did a century ago.

Your closing paragraph addresses what is probably the core of the difference between the understanding of the modern liberal and the classical liberal. I will use a few different approaches to describe how libertarianism is an appropriate model for guiding social policy working from your comments.

Rawls derives his principles of justice from what he calls the Original Position. Where we assume that we are choosing the structure of rules of the world into which we are going to be born prior to having any knowledge as to what our initial physical or social condition will be. In this way we will not be biased by any particular class assumptions. I think this is a fine way to assess social welfare. It appears to be roughly equivalent to a judgment based on utilitarianism, if by that term we mean the greatest satisfaction to the most people. Another way of stating this principle would then be to maximize the happiness of the average person. This seems to fit the Rawlsian problem. In the Original Position my expectation is that I will be the average person (in statistics that is the very definition of 'expectation') and so I seek, by arranging the rules of society, to maximize my expected happiness as such. That's all fine. Where I would disagree with Rawls is in the supposition that using the redistributive and regulatory powers of government will enhance the common welfare. From the Original Position I would choose a libertarian structure. Let me give a couple of examples.

Would I choose a rule structure that supports the existence of unions? Certainly not. I must consider what impact it would have on me as a random member of society. The only circumstance in which I would be benefited would be if I happened to be a member of a union during the first generation or so of that union's existence. If I am a member after the union has been long established, the economic inefficiencies of the union's existence will have already eroded my well being sufficiently to negate any benefits it might provide. If I am not a member of a particular union, it harms me in at least two ways and quite possibly more. The union harms me because I, as a consumer, must pay more for, and hence consume less of, the product that the unionized industry produces. In the long run the inefficiencies of the unionized labor market further harm everyone by reducing overall economic output. If I am an unemployed laborer in the unionized industry, I am harmed because the union impairs my opportunity to find employment by offering my services at a more competitive rate. If I have invested in an industry prior to its unionization, the value of my fixed capitol will be reduced by the appearance of the union. So, since a union only benefits a small group of people for a short period of time it would be irrational to create rules supporting unionization from the Original Position.

Would I support government-financed distributions of wealth to the poor? No. Admittedly, in the first generation or so this policy will enhance my well being if I happen to be poor, but if I should be born at some later date I would be better off without it. The policy will reduce capitol investment by removing wealth from the people who have a sufficient quantity to invest (and who largely have such sums because they are skilled at allocating capitol efficiently). It will imply annual structural costs involved in administering the taxation and distribution system. It will dramatically reduce the incentive of my parents and their parents to strive to improve their economic standing. As the allocation of a dollar is a production order, it will, in essence, transfer the direction of the economy from those who have established economic prowess to those who have demonstrated economic incompetence. These forces will both further degrade my relative economic standing and will put a drag on the development of the economy as a whole. A five percent increase in my share of the total wealth of the economy at the cost of a half percent reduction in economic growth is not a good long-term trade off. Rationally, I would prefer the situation where I have more real wealth, even if inequality is higher.

Those are the sorts of arguments I would make against Rawls's principles of justice. I don't think his principles follow from his idea of the Original Position. Superficially policies of economic equalization seem like a good idea, but in the long run they are detrimental even to those they are intended to benefit.

One might argue that there is a threshold of poverty below which one experiences such an acute level of suffering that its intensity would weigh down the average well being so much that we must do something to alleviate it. Sure; of course. But it seems ridiculous to me to suppose that we need government to provide this support. Honestly, people aren't monsters. Even in the presence of extensive government support systems Americans contribute hundreds of billions of dollars to charity every year. I have to imagine that if people kept a much larger portion of their income, and if they did not expect that the government would take care of every problem under the sun, they would probably be even more generous. Even if they weren't, I sincerely believe that, had our government not become so interventionist over the past century, our current output would be several times what it is today, so that even if people only contributed the same amount that they currently do, as a percent of GDP, it would at least equal, in real terms, what is currently provided to the poor through government programs and private charity (and the want this money would serve would be less intense).

I think the fear that, if the government did not provide all of its supports and regulations, we would experience a humanitarian disaster is just a scare tactic used by people with a relatively extreme class warfare agenda. Kids may have to work in sweatshops in the third world out of economic necessity, but this would never happen in modern America. Nobody, anywhere in the world, would accept such a situation if they had the economic wherewithal to avoid it. There is a stage in economic development when atrocious conditions are common. But it replaces a preexisting state in which atrocious conditions are universal. Dickens may have been miserable when he was a boy, but he grew up to be a famous author. That could never have happened before the industrial revolution. Had he been born two hundred years before, no one today would ever have heard of him. He would have been just another miserable boy, just like every other boy in the world. The point is that liberal policies had been so successful by his time that people finally realized that it was actually possible for many people to not be miserable. We like to think that we're very superior. We imagine that people in the past thought it was wonderful to work a hundred hours a week and to live in piss reeking hovels. But I think that in this we are mistaken. We think that we wised up, passed laws against living like that, and moved on. But perhaps the economic development that followed naturally from the adoption of liberalized policies had already largely done away with those things and all we did was ban the vestigial remains of ways of life that had once been universal. I believe that this is the case. I believe that the most rapid way to eliminate terrible living conditions is to allow the market to operate unhindered.

That is a very important point. Liberal institutions did not create child labor. They did not cause people to have long working hours or low wages. Liberal institutions were the very force that made these things so uncommon that what remained of such practices began to appear abominable. It is a wonderful thing that the wealth that liberalism had created made people's moral sentiments more gentle and sensitive. If this should cause them to aid and succor those who still must suffer this is a very good thing. But if this should cause them to destroy the very system which is creating the wealth necessary to lift others out of poverty, then it is a genuine tragedy.

It goes without saying today that people work fewer hours, for greater wages, and under better conditions than they did in the past because we have passed regulatory laws to make it so. This belief is nonsensical. These laws would have no effect if the physical wealth that make this standard of living possible had not already been brought into existence by liberal policy. We could go and pass such laws in Afghanistan or North Korea but that would not make people better off. Laws do not improve living standards, wealth does. It is an indisputable fact that prior to the time when we began passing laws to constrain working conditions, wages had been going up, hours worked had been going down, and working conditions had been getting better for centuries. There can be no reasonable doubt that this trend would have continued on its own throughout the twentieth century in the absence of any interference. From my perspective, it is obvious that, in each of these regards, the average worker today would be better off had no paternalist regulations been created.

I could go on in this vein indefinitely. I guess the point is that the argument between liberals and statists is not what ends we should aim towards but what means will best achieve our ends. Liberals do not believe that poverty is good. They do not loathe children. I might like to bring down the welfare state, but in doing so I would intend to promote social welfare. I have come to despise communism, but this does not mean that I do not value community. I once thought that Jesus was a communist. After all, he said that everyone should give their wealth to those less fortunate than themselves. But this is not equivalent to communism. There is a vast gulf between suggesting that charitable action is righteous and emptying people's wallets into the basket at gunpoint. I don't recall Jesus saying anything about 'overthrow thy neighbor'. I guess that's a diversion. What I'm trying to say is that I believe in libertarianism for entirely pragmatic reasons. It may happen to be true that freedom is a pleasure in itself. That liberty is an ennobling and dignifying status. But I did not come to embrace liberalism for such reasons. I honestly believe that it is the best system for enhancing the well being of every person in society.