Great thinkers do not live in a vacuum. When they enter their writing chambers, or perch upon some grand vista to compose a foundational treatise they don’t throw off the fetters of their reality. In fact, it’s that dominating, driving force of history which often dictates a great deal of what they argue. I tried to show how that interaction works in an essay I wrote about Pericles, Cicero and Paul. You can read the whole thing here; excerpt:

It’s recently been argued that central banks working as a lender of last resort makes no sense under a fiat money system. Being insolvent and being illiquid is virtually the same thing when the central bank can just print money. It’s not exactly clear why this should be the case. There is a finite number of dollars out there in the world, manipulatable by the Fed. When a banking panic sets in, and the value of assets is completely confused, credit lines seize up and illiquidity sets in — no one will lend to anyone else. That said, there are still institutions which, if given credit, can apply it to good use and pay their creditor back. As Felix Salmon points out, this is exactly what happened to Morgan Stanley in 2008. At one point, they owed the Fed $107 billion! Though they did pay this back, due to the extremely cheap rate at which the Fed was lending, MS made over $76 million dollars on the deal. This is acting as a lender of last resort, shooting huge amounts of money into the system to bolster banks and prevent complete collapse of the financial system and credit markets.

There are two questions that emerge from this. First, is there any real distinction between an illiquid and an insolvent company? After all, you just need to invest in US Treasuries to make an income, and in fact given that Morgan was loaned $107 billion at near-zero rates and only made about $76 million shows a tiny rate of return — hardly great evidence of solvency. At a certain point, if leant money at ~0% interest and given an investing opportunity that returns more (say, a US T bill) it’s essentially impossible not to make money. If the US govt leant me $100 billion dollars and charged me almost no interest, I could make some money too. Of course, the Fed could’ve listened to the founder of central banking Bagehot’s famous words, “lend freely, at a penalty rate.” But given that the banks were barely able to eke out a profit even at the absurdly cheap rates the Fed gave, it’s entirely possible that penalty rates would have wrecked the banking system completely. As Stephen Williams points out, lending freely and charging a penalty rate is kind of a contradiction in terms.

If that’s the case, the second question is: how can we solve general liquidity crises without rewarding the same bankers who in part created it? How can we avoid moral hazard? The real issue here is that we treat the banks as the only medium for solving liquidity crises. This makes a kind of sense, as they seize up and don’t lend to each other or anyone else. However, what the Fed is often doing when solving liquidity crises is managing expectations — will the money supply shrink? Will assets that we thought were safe stay valuable? Will NGDP grow? But expectations can be managed by means other than safeguarding banks. Because it’s the entire economy that’s uncertain, more direct means would be preferable.

For example, the U.S. might institute a minimum guaranteed income for all citizens as its form of welfare, subject to certain conditions (seeking work, scaling up when finding a job, etc). Even Hayek was in favor of minimum income! And to avoid bailing out the banks, the Fed could have control over the amount given every month. When a recession hits, the Fed would target NGDP by raising minimum income, directly raising the monetary supply and roughly fixing the liquidity crisis. Debt overhang is avoided; aggregate demand can stay roughly stable. And because liquidity crises raise the value of the dollar (by increasing demand for cash), this wouldn’t have to cause inflation if it’s aimed at propping up the growth in NGDP. In one fell swoop you can stabilize AD and avoid bailing out the banks.

Update: As Felix Salmon points out, Bloomberg’s assertion that the Fed leant these loans at below market rates is actually pretty unsubstantiated. The Fed claims that it usually leant at above market rates — a penalty rate. The point is that there’s a huge amount that just isn’t disclosed, and Bloomberg read things as being pretty bad. This doesn’t discount from the main argument here though, that giving money to the bank might not be the best way to solve a liquidity crisis while also avoiding moral hazard.

My picture, taken while flying back to Chicago on 11/27

Imagine you and a bunch of friends got together and started a gold mine. You had a plot of land with a lot of gold in it, and everyone in the group chipped in some money to hire people to build the mine, mine the gold out, etc. In return, all of your friends got a share of the company. Some other people, seeing that the gold mine was going to be super valuable, wanted to buy some shares in the company. People start trading shares. Soon the company starts turning a profit, and as it got better at mining gold and the price of gold shoot up, it made a killing.

But then you noticed that something weird was going on. All of this profit wasn’t going anywhere. It wasn’t being given out to the owners of the company (the shareholders). It wasn’t going to growth. In fact, it was just sitting there. So of course, the shareholders got together and demand that the money be handed out or invested or they’ll fire all the managers.

Or do they? Right now Apple (in the thought experiment, the gold mine) is sitting on $82 billion in liquid assets. To put that in some perspective, that’s $14 billion more than the combined annual GDP of Costa Rica and Ghana.  Matt Yglesias and Karl Smith argue that this is why Apple’s P/E ratio has been steadily declining — shareholders are realizing that Apple doesn’t treat them like owners. Really, they’re being treated like gamblers on the future profits of Apple. And that smacks of the total failure of public ownership in the case of Apple, maybe American corporations in general.

Better to be a sap sometimes than a good person never.

Image: My photo, taken two years ago in Alon Shevut, Israel

Image: My photo, taken this June

The thing is... everyone's actions here are voluntary

Libertarians like myself like to defend contracts and other exchanges because they’re voluntary. When two capable adults reach an agreement to exchange their legally owned objects, labor or money, then presumably they both believe they’ll be better off once the exchange has been made. The problem with this argument, as a friend of mine recently pointed out, is that it could be extended to virtually every human action, even ones we have no interest in defending. For example, if I were held at gunpoint I would think myself better off giving up my wallet, and my assailant would think himself better off with the wallet and no blood on his hands. Both of us are taking the actions we deliberately and rationally believe will advance our interests, but there’s something clearly wrong going on.

Now, this case is extreme and we can intuitively see that there are differences between it and an ideal voluntary situation. But what are the distinctions? The first one is that I’m being threatened with violence. Let’s set that aside for now. The other distinction is more interesting. Mike Munger, an economist at Duke, tries to define the perfect voluntary exchange in order to distinguish it from other scenarios which are problematically voluntary. The main difference he finds is in scenarios where, while both parties consider themselves advantaged by the deal, the difference in alternatives in huge. So in my previous example, my alternative to giving up my wallet was death, while my assailant’s alternative was to go without $100.

Munger argues that this intuition, that a major difference in alternatives is unfair, undergirds much of our support for economic regulation. We oppose selling ice at super high prices to people in disaster zones because the higher prices hardly compare to the need for ice; we are shocked at the sale of kidneys because kidney failure is so dramatically worse than not receiving a couple thousand dollars in compensation. This intuition is behind what we call exploitation: sweatshops appear to take advantage of people because workers in third world countries have so few alternatives, while corporations could always pay more for workers at home.

But when we blame the exchanges taking place — the selling of a kidney, the setting up of a sweatshop — aren’t we, as Munger argues, reversing causality? The problem isn’t the exchange, which if anything helps improve the situation, but rather the underlying causes which lead to a disparity in alternatives. It’s not the kidney seller who made your kidney fail, nor the sweatshop owner which left your country in crushing poverty. Outlawing these exchanges would be like prohibiting me from handing over my wallet, while leaving criminals free to stick me up. We should be combatting the source of differences in alternatives, not the exchanges which can alleviate them.

Image: Civil War era cartoon from the Library of Congress

Is our will just being bent by the winds of of determinism?

I recently read Steven Landsburg’s interesting but often befuddled book, The Big Questions. It’s a fun book because its view is so vast and its conclusions so sweeping. He tries to tackle basic questions of the universe in 200 pages or so, and inevitably stumbles many times. I’ll try to present a few problems I noticed, and offer alternative possibilities. In this post I’ll challenge Landsburg on his defense of free will.

In his first chapter, Landsburg tries to rid us of our doubts about free will once and for all. ”No college sophomore,” he writes, “has ever turned in a paper denying the existence of free will without first choosing to do so…. You simply cannot be a conscious human being without making choices all the time.” Though he admits that our actions are all initially determined, and that “if you know the state of a human being and his surroundings on Monday and have sufficient computational power, you can predict with certainty the actions of that human being next Friday…”, he still believes that the fact that our will has an effect on the world is sufficient to demonstrate our free will. Indeed, paraphrasing Robert Nozick he writes, “Determinism is true but thermostats can still control the temperature…. Likewise, determinism is true but you can still control your life.” And for those who think that the ultimate determined nature of this will quashes its claim to freedom, he dismisses them out of hand:

What caused your decision to get drunk and watch Mystery Science Theater the night before your philosophy finial? Free will. An insane person might object that free will can’t be it at all, because free will is just a shorthand term for an indescribably complex process involving trillions of neurons, which in turn can be described in terms of quadrillions of atoms… So what? You still have free will, and you know it.

Though he doesn’t cite him, this is all in the tradition of David Hume, who in An Enquiry Concerning Human Understanding posited that the entire free will debate was a semantic one, simply confused by what we meant by liberty.  “By liberty… we can only mean a power of acting or not acting, according to the determinations of the will, that is, if we choose to remain at rest, we may; if we choose to move, we also may.” Under this definition, free will could be fully determined and remain free.

John Searle in Freedom and Neurobiology, however, disagrees. By freedom we don’t mean merely that our decisions have an effect on the world and are made without overt coercion, but rather “The thesis of free will asserts that some actions are not preceded by sufficient causal conditions,” because determinism clearly “asserts that all actions are preceded by sufficient causal conditions that determine them,” these positions are in absolute disagreement. When we get drunk and watch Mystery Science Theater the night before our philosophy final (an example which says more about Steven Landsburg than free will, by the way) does our having made that choice matter more than the fact that we could not have made another? Can we really call it free?

Searle offers a possible way to grant us free will. His primary piece of evidence for free will is the feeling we experience when “I do not sense the antecedent causes of my action in the form of reasons, such as beliefs and desires, as setting causally sufficient conditions for the action… I sense alternative courses of action open to me.” But how is this “gap” between conditions and outcomes possible? Unfortunately, the science here is murky and Searle has to take to hand-waving. The only way to allow for indeterminism is to rely on quantum mechanics, and so Searle argues that if we are to believe our senses then we must believe that quantum mechanics is somehow allowing indeterminate rationality to act in the gap. How… well, he doesn’t say.

My essay on Hume and free will here.

Image: L’idiot via Barking up the Wrong Tree

The United States is in a medical crisis. This is not an issue of escalating healthcare costs or an overseas epidemic, but rather a homegrown problem: a massive shortage of kidneys. The lack of available kidneys leads to around 4,000 deaths annually in the US, and over 85,000 people are waiting for one currently. The fact that kidney transplants are now incredibly safe – the mortality rate is .03%, and immunosuppresants allow for a high quality of life for receivers – makes this situation especially unbearable. In a recent Triple Helix article, for which I interviewed Nobel Prize winning economist Gary Becker, I explore possible ways to close this gap – and why that hasn’t be done so far. You can read the article here. First couple paragraphs below the fold:

Image: cwwphotos

Twelve patients filed into six operating rooms; nine surgical teams set to work and ten hours later six people emerged with new, working kidneys [1]. Simultaneously transplanting six kidneys is an extraordinarily convoluted operation, and would only take place in the dismal context in which the United States finds itself: a desperate shortage of kidneys. The situation has degraded to such an extent that, as with the case above, patients and potential donors are resorting to bartering with their organs. Five of the six recipients had relatives who were immunologically unable to donate to them and, with the addition of an altruistic donor, were able to mix and match types so they all received kidneys. The operations were performed simultaneously so none of the parties could back out [1].

From: OPTN Report, 2008

This extraordinary story is just one sign of our current medical crisis. The dire shortage of kidney donations leads to nearly 4,000 deaths annually in the US [2]. And that’s a low bound; some estimates reach as high as 9,000 deaths per year [3]. Currently over 86,000 people are waiting for a donation [4], but perhaps the most fearful statistic is the change in death rate for people on the waiting list which, between 1998 and 2007, rose 76% [5]. While the demand for kidneys grows daily, many economists and medical professionals are exploring innovative and controversial solutions, like the kidney exchange above, which may reduce some of these disturbing statistics. While many of these solutions appear to be at least somewhat effective, they carry a number of moral concerns that must also be addressed.