How Capitalism Gave Us Thanksgiving

So the rather unique American holiday of Thanksgiving comes upon us tomorrow and I wish all our readers a happy and tasty one. Though the official holiday itself began during the Civil War period as Lincoln declared a day of thanksgiving in 1863, we are all familiar with the origins being traced back to the Pilgrims in the Plymouth Colony. As every school child knows, a great feast of celebration was had after the abundance of a large harvest, which followed the previous long period of suffering in the new wilderness.

The story that few school children will ever know however, is why it took until 1623 to have this abundant harvest, three years after the colonists first landed in 1620 (there was a celebration in 1621, celebrated by the original survivors after making it the first year, but the first feast of abundance that we associate the turkey and the other mythological imagery with was in 1623). By the short simple answer, the Pilgrims for the first two years suffered under socialism and in 1623 were saved by capitalism. The original colony was set up as a communal farming community. Every man worked on common fields and all produce was shared collectively. The result was the tragedy of the commons. Because all of the benefit of an individual's work would be shared but all of the cost of one's work must be assumed alone, the incentive to work is greatly diminished. One begins to free ride off of others. However when every worker thinks this way, total output rapidly declines and harms the greater whole.

Seeing these results over the first two seasons, reforms were made. The colonial governor, William Bradford, wrote in his diary on this problem:

So as it well appeared that famine must still ensue the next year also, if not some way prevented. Therefore [the colonists] began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, [I] (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. And so assigned to every family a parcel of land.

And there for the first time, the colonists of Plymouth had private property rights. Each family was solely repsonsible for the upkeep of its land, but in return was able to keep the produce from it. The result was a massive increase in farming output that season as every man had an incentive to work hard and efficiently. Bradford further wrote:

This had very good success...for it made all hands very industrious, so as much more corn was planted than otherwise would have been. By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many.

A very similar pattern also happened in Jamestown, where the original settlers were largely indentured servants, and their work was split communally with the colony. After the first 500 or so settlers largely perished, the new governor Thomas Dale abandon the indentured servant model and gave each family a parcel of land. The result was the thriving of the colony. Famous settler John Rolfe stated that once men were granted property they went about, "gathering and reaping the fruits of their labors with much joy and comfort.” The settlers went from bartering for food from the local natives to selling excess food.

So this Thanksgiving when you're feasting on turkey and other delights, omong other things, make sure you take a little time to be thankful for property rights, free markets and capitalism. :)

-EJB


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Leave it to EJB to bring free market theory into Thanksgiving festivities. I only have a few random thoughts to add to this one.

First, the "tragedy of the commons" is a questionable theory; and I emphasize the word "theory" because there are no great societal examples of this phenomenon. The author of the phrase (which served as the title of his article) was Garrett Hardin, professor of sociology at California. His article purports to base the "tragedy of the commons" theory on the old English "Commons," communally owned pastures where shepherds would bring their sheep to graze. These "Commons" were eventually replaced by private farms. Hardin would have you believe that the downfall of the communally owned pastures was an inevitable consequence of letting property be owned communally in the first place. New research confirms (or, at least, strongly supports the idea) that the Commons fell because of other reasons.

Besides the complete lack of empirical evidence, the "tragedy of the commons" theory, upon closer inspection, seems to be flawed rationally as well. Hardin premised his theory on the assumption that if a resource were left to communal rule, and thus not protected by individual property rights, there would be a rush by individuals within the community to use all of that resource for themselves - thus destroying the resource and the environment. This article, by Ian Angus, notes that that assumption appears slightly myopic:

"Contrary to Hardin's claims, a community that shares fields and forests has a strong incentive to protect them to the best of its ability, even if that means not maximizing current production, because those resources will be essential to the community's survival for centuries to come."

A community, just like any individual person, can foresee, comprehend and adequately prepare for future scarcity.

My last point is more social than economic. It is a sad fact of history that "tragedy of the commons" theory - or, more broadly, the Lockean theory of private property supported by "tragedy of the commons" thinking - has been used to forcibly displace and destroy indigenous populations and civilizations. There is no better time to consider this embarrassment than Thanksgiving. The brutal oppression of the Colonists over Native Americans was fueled and subsequently "justified" by theories of private property. This is made clear by a conveniently on-point quote from Chief Justice John Marshall in his opinion in the case of Johnson v. McIntosh (wherein the Court held that private citizens could not buy land from Native American tribes):

"But the tribe of Indians inhabiting this country were fierce savages, whose occupation was war, and whose subsistence was drawn chiefly from the forest. To leave them in possession of their country, was to leave the country a wilderness..."

Thus, while EJB suggests being thankful for Locke, Friedman and property rights this Thanksgiving, I suggest that those with the good fortune of being descendants of the peoples who have most benefited from the imposition of private property rights consider themselves lucky and give thanks - descendants of the conquered (the few left, of course) might not consider themselves as lucky.

~JSK

Financial Bailout Act III

So I earlier posted on the financial bailout and among other things talked about how in our panic, the purpose of the $850 billion bill was quickly evolving, and that Congress basically gave the Treasury an open ended check. First it was to buy bad mortgage securities, then it was to buy equity stakes in banks, eventually forcing nine institutions to sell part of themselves to the government. Now, as lobbying forces descend on Washington armed with the precedent of government bailouts, other industries are lining up for their share.

Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.

The betting is that many with their hands out will be successful, especially with financial markets in a stomach-churning dive and predictions the economy is about to tumble into a deep recession.

Lobbying efforts are intensifying.

The Financial Services Roundtable wrote Treasury officials on Friday requesting that the initiative to buy $250 billion in bank stock grow to cover insurers, auto companies, securities dealers and U.S. subsidiaries of foreign companies, including banks.

Who's going to be next? Lets just socialize all risk in the economy and make the government part owner in every industry? I've lost some money in the stock market recently. Where's my bailout?

-EJB


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I must preface my response by noting that there is a certain, noticeable, interior inconsistency between the first and second parts of my blabbering. This is because the first part (in which I defend the policy) is premised on the idea that the bailout was intended to remedy the current credit freeze. The second part, which seems contradictory, is only so if one rejects the premise underlying the first part; namely, that the bailout is not going to increase liquidity and stimulate bank loans, but will, instead, simply act to reshape the relationship between industry and government.

I think allowing other industries to accept some of the bailout money is actually a pretty good idea. The open-endedness of the bailout plan allows for a high degree of flexibility in its approach to dealing with the financial crisis. If the 850 billion came conditioned upon its use for one or two narrowly defined purposes, then the Treasury would be unable to alter its plan in the event that lawmakers and economists discover new and better ways to help ease the crunch. I think it's also important to note that the article does not assert that these industries are asking for a larger bailout. Thus, the bailout amount would stay the same; however, different portions of it would go towards various uses which had not been originally discussed.

Now I see that part of EJB's argument is a type of slippery slope idea and it's probably a valid one. Allowing different industries to take a piece of the government handout would, perhaps, set a dangerous precedent for the future - should the economic condition worsen.

However, the credit market is absolutely frozen. I supported the bailout because, originally, it was intended to improve the liquidity of these major banks - thus allowing them to loan and borrow more money. The article EJB links to seems to suggest that allowing these other industries to take a piece of the pie will also help to unfreeze the credit market:
"The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market," Bartlett wrote Neel Kashkari, the Treasury Department official running the bailout program.

If that were true, I'd have to fully support the move (especially since I'm crossing my fingers that my law school loans come through for one more year).

Unfortunately, there's this news from the NY Times. It turns out banks aren't actually using the new money to make new loans - they're simply buying out smaller banks. I was going to make a separate post about this, but I figure this is as good a time as any to break the bad news. Under the guise of "improving liquidity in the market by incentivizing new bank loans," the Treasury has essentially begun to fund a new round of bank consolidations.

This is not good. Instead of targeting the crippling credit freeze, the government has decided it would rather try to reshape the banking industry. I'm not bothered by the pro's or con's of this move - I'm bothered by the fact that I don't know the pro's or con's of that move because we never heard any debate on the issue. The government's ulterior motive was never discussed ex ante. We ought to have been fully informed so that Congress could have had a meaningful debate on the subject.

So, linking this back to EJB's initial post. The article he links to seems to claim that letting other industries in on the bailout money would help to improve liquidity and would require no extra tax-payer money. The truth of that proposition, though, must be seriously scrutinized in light of the fact that "improving liquidity" by helping banks to make new loans has seemingly ceased to be a governmental priority. EJB asks, "Where's my bailout?" Until this week, I could have responded that he doesn't get one because bailing him out would not significantly help improve the status of our credit market. But, apparently, no part of the bailout is doing this anyway. Nuts.

~JSK

Argentina's Property Grab - Should We Be Worried?

So quite the timing; Argentina just announced that due to deteriorating fiscal conditions, the government will be seizing all private retirement accounts (their equivalent of 401ks and IRAs) and nationalizing them. In a country that has a long history of intervention in financial markets as well as cycles of over spending that along with other factors, ultimately end up causing economic woes and civil unrest, this is not an unexpected move. This is interesting to think about in relation to me recent post on the banking bailout and what it means for property rights, and my post yesterday dealing with the quote on the fall of democracy due to "loose fiscal policy."

Our own entitlement programs are reaching insolvency. Will our government some time in the future, now armed with the precedent of semi-nationalizing the financial industry, look to take over the private retirement accounts of the "rich" in order to "protect" our public pensions?

Though obviously we have a much stronger tradition of property rights then a Latin American republic, it is an interesting thought to ponder. Up until this last month, the government buying a stake in the banking industry would have been considered more then improbable to say the least. Will the next financial crisis create the political capital to move ahead with this kind of move as well?

-EJB

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Argentina is, and I quote:
a country that has a long history of intervention in financial markets as well as cycles of over spending that along with other factors, ultimately end up causing economic woes and civil unrest.

Fears of the US government taking it's cue from Argentina are unwarranted. Government did not seize the assets of the wealthy elite during the Great Depression. Instead it relied on loans from those men. I would be much more inclined to predict that that will be the outcome again.

~JSK

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I wouldn't be so sure. In Argentina's case, this wasn't an outright grab. It basically transferred the private accounts into a public pension much like social security. The argument being that it was a move to "protect" these accounts from turmoil in the stock and bond markets, as the President said, "While the U.S. and other countries are stepping in to rescue their banks, Argentina must protect our retirees." For more details on the process, you can read this. But the reality is, this was done so that just like how the US and virtually every other country raids their social security funds to fund the general government and then just gives IOUs to the fund, this will allow Argentina to take this money, and just owe it back.

Likewise if the crisis becomes big enough, I can see the potential of the US taking 401k money placing it into a national pension which will "protect" those close to retirement from the "woes of the stock market." But the government will just tap these new funds, providing a cheap source of funding for government bonds. Or, it can indirectly do this if it does not have the political capital to do so, by starting to tax these accounts, which by design are supposed to be tax sheltered. After all, those who have IRA's and 401ks tend to be middle to upper middle class individuals. These "rich" people can surely join in with the regular social security fund that the "working class" people depend upon to help those who are in need of social security checks. It is after all the "fair" thing to do, is it not?

I highly doubt we would ever have an outright talking of these accounts, but either through taxing them, or transferring them into public funds, the money will be raided one way or another. Once again, we wouldn't have tolerated a bank buyout just a year ago. What type of political pressure do you think would exist if tens of millions of retirees, who tend to vote in high numbers, were faced with the situation of the fund drying up?

And I'm not really sure what you are referring to by "relied on loans from those [rich] men" in the Great Depression. The government didn't actually take large deficits then; between Hoover and FDR, it drastically raised taxes and confiscated all gold coins making their ownership illegal. I think that move is very similar to the process I've outlined that could potentially happen.

-EJB

"War [Crisis] is the Health of the State"

Yesterday, the Treasury announced that it will embark on an historically unprecedented semi-nationalization of a major industry. With the continuing evolution of the “bail out” package, the Treasury will now force nine major financial institutions to sell $250 billion in preferred stock to the government.

I don’t wish to discuss here the economic argument for and against this or whether it will help us in our current situation. Personally, I think there is some merit in this in the short run for stabilizing the economy, but I want to address the broader picture.

What really bothers me is the long term implications of this action with regards to the role of government, the preservation of freedom, and the very system that this country was founded upon. It was famously said by Randolph Bourne, that “War is the health of the state.” I think in general "crisis" is more accurately the health of the state, because in our panic we tolerate the enhancement of unprecedented government power. The problem is, that almost always these extended powers never get removed after the crisis ends. There are a number of areas with this recent action where I have some concerns and questions.


1. What does this mean for property rights? Even though some of these institutions are more then willing to participate in this deal, others are having this forced upon them. By issuing more shares to the government, even if they are being bought, this necessarily dilutes the stake of existing share holders, reducing the percent of the company that they own. In effect, they are having a portion of their property forcibly taken from them. Paulson allegedly told the officers of these nine firms that “they needed to participate in the program for the good of the national economy.” Having this rationale in the wake of the recent Kelo decision, where the Supreme Court ruled that a local government can seize property for the sole purpose of “economic development,” begs the question is there anything fundamentally sovereign about property rights anymore? Do we as individuals only have rights to property in so far as government does not see a better use for it? This completely falls in the face of the principles of no unreasonable search or seizure of the 4th Amendment, where with the exception of eminent domain and punishment for crime, property is protected. Will this set the precedent that government can take your personal property for any reason it sees fit?

2. This only expands the corrupt and disastrous merging of corporate and government power into a Corporatist system. Much of our problem with Fannie Mae and Freddie Mac was its hybrid public/private nature. The government backed private risk taking. These private firms were some of the largest campaign donors to the very people who are charged to oversee them (including our fellow PC alum Chris Dodd, chairman of the Senate Banking and Finance Committee). There were accounting scandals in 2004 that would have been punished by courts in the private sector but largely overlooked because of political influence. Essentially now, the Federal Government has a huge conflict of interest in partially owning a private industry, while at the same time the private industry will be able to wield tremendous power in the halls of government.

3. What happened to personal responsibility? Despite having many incentives to engage in risky lending in recent years, some banks such as Wells Fargo largely avoided this. Now they are being punished for their prudent action. What is the incentive for participants to act responsibly moving forward? What is the disincentive to not act recklessly in the future?

4. This is a major increase in the power of the state and the executive in particular. The “bail out” bill essentially gave a 700 billion dollar blank check to the Treasury Secretary to use as he sees fit. And the purpose of this seems to be changing by the day. First it was to purchase bad mortgage securities via a reverse auction from willing institutions. Then it was extended to include all forms of debt. Then, as the Democrats in Congress wanted, the Treasury COULD buy equity stakes if the firms voluntarily agreed to it. Now the government is forcibly buying equity stakes in these firms. What will it be tomorrow? The forced nationalization of the entire industry? Furthermore, there is no requirement regarding when the government must sell these shares in the future. They could simply keep them indefinitely.

I feel like I need to read my copy of Hayek’s The Road to Serfdom again. I suggest those who have never read it get a copy.


-EJB

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While I agree with your concerns, EJB, I believe I'm less worried about this Congressional act than you might be. Thus while I concur with your basic argument, I must write separately to point out a few things.

First, the comparison to Kelo. Now, as those of you who know me know, I am a strong supporter of private property rights and a staunch opponent of eminent domain (to the point where I would suggest abolishing it in all cases). I've even been thrown out of my Constitutional Law class for telling Supreme Court Justice Stephen Breyer that his decision to join the majority in Kelo makes him partially responsible for the fourth worst Supreme Court case in history (closely behind Plessy v. Ferguson, Korematsu v. US, and Buck v. Bell). I also recognize that you are NOT equating the two cases...you are NOT arguing that the bailout is just like Kelo.

However, you do make the argument that: "By issuing more shares to the government, even if they are being bought, this necessarily dilutes the stake of existing share holders, reducing the percent of the company that they own. In effect, they are having a portion of their property forcibly taken from them." This is not exactly the case. Nothing is actually being taken from shareholders, because the preferred stock that is being sold to the Treasury is being created for this specific purpose. Yes it dilutes the value of the stake of the shareholders, but that's all it does. For eminent domain purposes, it would be similar to the government putting a prison right next to your house...it would certainly decrease the value of your property, but it would not constitute a taking. Unless your argument is that the AMOUNT of stock is not the property, but the VALUE of the stock is - however, nothing like this has ever been upheld by the Supreme Court and, in fact, Palazzolo seems to expressly close that avenue of argument.

Similarly, you make the point that the government paid for these shares. This is crucial in any examination of a Takings Clause violation, because takings are allowed if the property owner is "justly compensated." This is why I hate our current Takings Clause analysis. What is "just compensation?" Does it include idiosyncratic value or subjective valuation? (No.)

It's also interesting that you mention the Fourth Amendment. Nowhere in that Amendment is there mentioned an explicit right to private property. But I agree with you that Eminent Domain and other unjustified takings violate the spirit of the Amendment! Does this mean you recognize an implicit fundamental right to both private property and privacy!? I can't believe this is the same EJB that I knew in college!

I completely agree with #2 and #3.

Finally, a few comments on #4. First, "a 700 billion dollar blank check," is logically impossible, because a blank check, by definition, includes no written value. But that's technical. To your point about the drastic increase in executive power, I will say that I'm not as alarmed about that as one might be if this were the executive acting AGAINST the express will of Congress. In Youngstown, the inherent power of the President was examined because Truman tried to take over the steel industry when its workers went on a mass strike during the Korean War. Justice Jackson's concurring opinion is, to this day, the lodestar for such analysis. Basically, the Executive's power is at its strongest when he acts according to the express or implied authority of Congress. His power is at its weakest when he acts contrary to their express or implied will. And there is a middle zone that gets murky when we're not sure what Congress has said on the issue. In this case (the banking crisis), I feel slightly more comfortable with this increase in executive power because it was expressly authorized by Congress. These two forces are naturally opposed to one another, so the fact that they are working in tandem should probably evidence the fact that the increase in power is necessary to quell a pressing problem. Perhaps your "parade of horribles" argument is right and this is the first step towards the nationalization of industry. But with Youngstown firmly in place, I trust it will never come to that point.

~JSK