scratch-mark

“Enormous Questions”

In comments to this entry at QandO Blog, David Sculer asks what Billy Beck characterizes as an enormous question:

Yes, that idea occurred to me as well and I pitched it at a dozen or so
econ-bloggers but didn’t get much reaction. A detail that probably
should be considered in this regard is how such a thing could be privatized.

The
first alternative that occurred to me was insurance. But, of course,
flood insurance is the province of the federal government, too, and the
way it’s been explained to me is that the federal government does it
because the private sector just won’t do it. It’s a market failure. I’d
be interested in being corrected on this.

Every other mechanism I could think of sounded pretty darned medieval like the castles on the Rhine collecting tolls.

How do you see it being done?

Now, read Billy’s answer carefully; very carefully:

Dave Schuler—You ask an enormous question. And the enormity of it goes
to point out the fact of what I keep calling "The Endarkenment". What
this is really about is learning all over again
what values are, what production is, how it happens, and why. There is
a huge complex of concepts between your question and action on the
street, and they have been lost in the place where they were born,
which fact is the essence of what I just today said is "something that
borders on the religious concept of mortal sin". The fact that you
cannot imagine the answers to your question is appalling, but don’t
take it personally: you’re not the only one who can’t see, and you’ve
been positively taught not to. We are many generations into this. It
started happening long before you were born.

You’re talking
about producing enormous values. I put it to you that they are no less
possible to private concerns than (in generally accessible examples
that I’ve used before) General Motors or General Electric. You write:

"A detail that probably should be considered in this regard is how such a thing could be privatized."

The
very first thing is to realize that this would only be a restoration of
the proper ethical and political order by which this country flourished
in the first place, to the limited extent that it actually found
practice here. Everyone fond of the constitution should realize that
the public works of New Orleans that we’re talking about are direct
descendents of Section Eight of that document and its presumption of
authority to produce certain goods that are certainly no less "public"
than Wal-Mart is, today, in that millions of people benefit from them.
That premise has merely been extended from "roads", into the sort of
thing that we’re talking about: the assertion of an interest
so "public" that it is simply taken for granted and never seriously
questioned. And that’s how people grow up to wonder how these things
could possibly happen without government.

They’re going to have
to be taught that there is no such thing as a "market failure". The
entire essence of that complaint is that some people are not producing
what others want them to. The consequence is rationalization
of forcing them to do so. And that is the point at which positive
destruction of values, per se, begins, in myriad ways. They
are destroyed in the epistemic fact that people no longer seriously
consider what values are or where they come from, and in the practical
facts of billions of dollars worth of individuals’ blood, sweat, and
tears going down the drain when defective principles grind up against
THE REAL WORLD, as it’s constantly shouted at me by the lame.

Well, we’re looking at THE REAL WORLD, now.  Everyone should look long and hard.

There is a hell of a lot of work to do, and it goes far beyond the scope of comment here.

But the very first thing to do is to teach people how to think.

Once
that happens, it will be possible to point out to them not only that
production of values on this scale is possible without government, but
that it is actually far easier and more effective with the directly
simple device of a division-of-labor economy than with the obviously decrepit device of government.

[…]

Richard Nikoley

I'm Richard Nikoley. Free The Animal began in 2003 and as of 2021, contains 5,000 posts. I blog what I wish...from health, diet, and food to travel and lifestyle; to politics, social antagonism, expat-living location and time independent—while you sleep—income. I celebrate the audacity and hubris to live by your own exclusive authority and take your own chances. Read More

50 Comments

  1. Rich on September 8, 2005 at 13:29

    Doug:

    Before I answer, go read this:

    POLICE, COURTS, AND LAWS—ON THE
    MARKET

    If you go to the root URL, there's other stuff you might be interested in reading.

  2. Billy Beck on September 8, 2005 at 15:06

    I, for one, am not remotely interested in "the betterment of society".

    I am concerned with real live human beings, sir.

    Big — categorical — difference.

    One of these days, maybe I'll tell you about "justice", my Harley destroyed by a drunk driver, and what the state of Georgia did to him and me.

    Go ahead: accuse me of being bitter.

    "Look into my eye."

  3. Rich on September 8, 2005 at 15:20

    Doug:

    I'm preparing for a trip out of town, leaving in wee hours tomorrow. Will be wall-to-wall busy Fri-Sun, so I don't know if I'll get to any of this.

    I'm hoping that maybe Kyle can pick up the slack, if he has the time/inclination. As I understand it ('cause he told me), he once engaged Dr. Friedman on Usenet with much the same objections, and got his ass handed to him (his words, as I recall them).

    I will enjoy kicking in, but time is very limited over the next three days.

  4. Kyle Bennett on September 8, 2005 at 16:23

    Doug,

    Do you know what the conditions in present-day Somalia are? I don't.

    But more importantly, how does a monopoly government with no accountability address your concerns any better than private entities, or even the dreaded "feudalism"?

    Statements like " The courts would be chosen by the perpatrator after the fact. If I were a criminal, I would simply hire *all* the protection agencies, picking and choosing which one suited my needs of the moment."

    show at the very least an appalling lack of imagination, let alone what it says about your understanding of free markets. Do you think that *all* the protection agencies would let a perpetrator hire them after the fact? Don't you think they'd be aware that a client that is even accused of a crime, rightly or wrongly, is the most expensive client they can have? Don't you think that they would either turn him down outright, or charge him so much that he couldn't afford them? Further, do you think that they, when asked to take him on as a client after the fact, wouldn't look at the evidence against him and pre-judge him – yes PRE judge him – in regards to wether they want him as a client?

    You're unable to make the leap from the kind of artificially constrained pseudo-market commerce we live in today, and a situation in which anybody can make ANY trade they can get away with. Yes, there's no constitution to "protect" our rights, but then there's no leviathan to prevent us from protecting them ourselves. Which way society then goes will hinge on which is more economical in the long run, in full context: stealing or trading. You know where I stand.

    P. S.

    "As usual in life, the right path does not lie in the extremes… it lies somewhere in the middle. "

    Doug, you've been interesting to talk to here, but not when you fall back on worn out old crap like that. It's self-contradictory, for starters. (Care to figure out why? You've had enough clues from our previous conversations) And even if I take your meaning rather than what you literally say, it's still wrong.

  5. Kyle Bennett on September 8, 2005 at 16:39

    Rich,

    Yes, my fist ever post on HPO was to Friedman saying something like: "your 'anarchy' will eventually devolve into government".

    The results weren't pretty. I'm still taking it out on the likes of Doug to this day.

  6. Billy Beck on September 8, 2005 at 17:01

    "I'm only arguing that there are some functions of government that are neccesary."

    When government cannot dispatch these functions, then tell me where the necessity is.

  7. Doug Wolf on September 8, 2005 at 12:29

    Rich,

    Curiosity… do you believe there are *any* functions that are best left up to government?

    What about law enforcement?

    I've been thinking this carefully (i.e., individual values, and how the notion of taxes and government usurps them)… and so far the only valid functions of government I can come up with are law enforcement (i.e., you steal, you go to jail) and a few other things that come to mind.

    Do you believe a patent or copyright system should exist?

    — Doug

  8. Rich on September 8, 2005 at 21:01

    Doug:

    A quick general barrage before I shut down and get ready for my trip; in no specific order and not in specific response to your comments.

    Foremost, your line of objections amounts to a massive exercise in question begging. Most, if not all of your objections seem to prescribe that "we need government because we need to have ‘x’ result." The problem is that you're assuming facts not in evidence. In other words, the government, no government, delivers the results you are claiming must be met in order for market anarchism to even be considered.

    It would be like arguing against taking a child away from egregiously abusive parents with the argument: "we can't take them away, they need love and to be with people who genuinely care about them."

    Next, you're arguing against a strawman you've erected. No one here is arguing to impose anarchism, or any system or any values on anyone. Anarchy, by definition, means we impose nothing on anyone. We demand only to be left alone to associate with those of like values and see to our own well-being and self-defense without your system.

    But we can't. We are literally prisoners. You probably know that the US is one of only a few countries that assert their jurisdiction to citizens worldwide, particularly in the area of taxes. You can relocate to a different country, have zero contact with the US and anyone in it, and the US still asserts its tax claim on you for life.

    Think you can renounce your citizenship? You can, but you can't renounce your tax liability. If the IRS determines that you are renouncing citizenship to escape tax liability, it will simply assert its claim nonetheless.

    If you are an American citizen, you are indeed a tax slave for life and there is no escape.

    Now, can you work through the implications of exactly why that is? Here’s a hint: with whom do you believe the producers of the world would associate if we were left alone? Next hint: do you believe that we would agree to associate with you, on your terms? So, do you see who has the genuine (earned) power, and who must initiate force in order to assert unearned power?

    That’s all, for now.

  9. Doug Wolf on September 8, 2005 at 14:53

    Rich,

    I'm at work and it will take a few hours of uninterrupted thought to be able to codify my real objections to the notion of "pure free market justice", but my gut reaction is that it has about as much a chance of supporting a productive society as pure communism does. I strongly believe that a system as proposed by the website you pointed to would quickly devolve into feudalism.

    Some obvious flaws:

    1) Without a uniform, enforceable patent system, real innovation in science and engineering would simply halt. One of the great advancements in human enterprise is the notion that "he who does the work should reap the reward". By way of example, why would a pharmacuetical company *ever* spend tens or hundreds of millions of dollars in research if another company could come along after the fact and simply replicate their newly synthesized drug?

    2) "The most serious objection to free-market law is that plaintiff and defendant may not be able to agree on a common court… If the court were actually chosen by the disputants after the crime occurred, this might be an insuperable difficulty.

    The courts would be chosen by the perpatrator after the fact. If I were a criminal, I would simply hire *all* the protection agencies, picking and choosing which one suited my needs of the moment.

    The real issue is one of national strength. The elimination of government in toto implies the elimination of the United States as a nation… which leaves us incredibly vulnerable to invasion by a larger force.

    The original reason that people banded together into villages, then city-states, then nations… was protection. Protection against outsiders, protection from lawless members of their own tribe, protection against nature… the fundamental principle of safety in numbers.

    There was a very serious flaw in reasoning very early in the essay about private justice: they used modern commercial arbitration as an example of "governmentless" free-market justice.

    Arbitration works precisely because their is a government (i.e., burly men with guns) ultimately backing it up. The agreement to binding arbitration is part of a contract… and contracts are enforced by the government. If you engage in arbitration, the arbitration goes against you, and you then decide to ignore the arbitration results… the ultimate consequence is that the guys with guns and badges *make* you obey the arbitration results. The reason they are able to make you obey the arbitration results is that the United States law enforcement is more powerful than any "private army" you could hope to raise in your defense.

    There's a number of valid objections against the idea of "private justice", but these strike me as a couple very obvious ones.

    I think I have to agree with Rand (and on my life xperience) with this one: a pure free-market driven society isn't possible. As usual in life, the right path does not lie in the extremes… it lies somewhere in the middle. And yep, that leaves lots of room for disagreement on exactly *where* in the middle the correct path lies.

    If you have the time, there is a sci-fi writer named S.M. Stirling who writes *truly* cheesy (but entertaining) stories. He has a recent book called "Dies the fire" that gives a pretty decent exposition of how and why governments form, and the natural advantages they have over truly anarchistic systems. ("Anarchistic system" may have been an oxymoron, but you know what I mean.) Similar, Niven and Pournelle wrote a book called "Lucifers Hammer" that does a decent job of exploring human nature and the need for some fashion of government.

    I'm not saying our government does a good job, or that it is fair, or just… only that *some* fashion of government appears to be neccesary for the betterment of society.

    — DW

  10. Doug Wolf on September 8, 2005 at 15:05

    One more comment:

    Taken from an essay by David D Friedman:

    There are three ways in which such conflicts [between private protection agencies] might be dealt with. The most obvious and least likely is direct violence-a mini-war between my agency, attempting to arrest the burglar, and his agency attempting to defend him from arrest. A somewhat more plausible scenario is negotiation. Since warfare is expensive…

    Expensive is a relative term. Assume I have money… LOTS of money. I can now afford to make it worth the while of my "security agency" (i.e., private army) to defend me no matter what privations I may have visited upon my fellow man.

    "Private security agencies" is exactly the current law enforcement setup in Somila, Afghanistan, the Sudan, etc. These are hardly advanced societies.

    — DW

  11. Doug Wolf on September 8, 2005 at 15:53

    Billy,

    I for one, am not remotely interested in "the betterment of society". I am concerned with real live human beings, sir.

    As am I. A definition of society that does not begin with "a collection of individuals who share a collective interest" is pure propaganda.

    The only "society" I'm truly interested in is those individuals I have to interact with in some fashion to get through life. Everyone else is simply a nebulous concept, and I have little to no opinion about the way they should lead their lives.

    One of these days, maybe I'll tell you about "justice", my Harley destroyed by a drunk driver, and what the state of Georgia did to him and me.

    Billy, I truly feel your pain… I've been equally (and possibly, more than equally) screwed by the "justice" system.

    But I'm not arguing that *our* government is fine-and-dandy (and indeed, I would argue that it is not)… I'm only arguing that there are some functions of government that are neccesary. (The enforcement of uniform patent law comes to mind.)

    — DW

    P.S. Rich, Kyle… I'd be interested in hearing a rationale that distinguishes "private justice sans government" from present day Somalia.

    Hope your trip goes well!

  12. Doug Wolf on September 8, 2005 at 17:01

    Kyle,

    A quick response:

    I didn't say hire them after the fact… I said (or meant to say) "hire them all (before the fact) and choose which one to use at your leisure.".

    But more importantly, how does a monopoly government with no accountability address your concerns any better than private entities, or even the dreaded "feudalism"?

    You used a good word there to describe feudalism: "dreaded". It (mostly) doesn't exist in the world anymore. (Except of course in places like Somalia, Afghanistan, etc.) The reason it doesn't work is that it's ineffectual against real power… the sort of power that is possesed by nations.

    Two questions that deserve explanations:

    1) How does "privitized justice" not become "he with the most money and guns wins"?

    2) The uniform patent code problem… how do you solve it?

    When you argue for the decommissioning of the entire government, you realize you are arguing for the dissolution of the United States and a nation, yes?

    Which way society then goes will hinge on which is more economical in the long run, in full context: stealing or trading. You know where I stand.

    From the standpoint of the individual, if you are sufficiently well armed, it is almost always more efficient to steal. This has been shown historically more times than I can count.

    Being an engineer by trade and passion, the question that really drives me in this discussion is the patent question. Patent law isn't simply something to keep the law clerks busy… without it, non-trivial "innovation for profit" *stops*. Without enforcable patent law, what do I do to prevent someone from ripping off my intellectual property? Shoot them?

    — DW

  13. Doug Wolf on September 8, 2005 at 17:15

    Billy,

    The courts enforce the myriad of rules as they are written.

    If that is not to our satisfaction, it's time to change the rules.

    How someone arrested for drunk driving can not be sentenced to real jail time, I'll never know. I fail to see how drunk driving on a public road is different than discharging a gun at random towards a crowd.

    Please don't keep giving me examples of places where the courts enforcement of the law has been at odds with justice… you will win in a heartbeat. But the problem lies in *the laws themselves*, not in the concept of "laws".

    This is one place I most definitely do *not* lean to the left. If someone seriously and recklessly endangers the life of another (but fails to actually cause harm because they were either too drunk to make it more than a mile down the road, or were a bad shot), they should be punished as though their actions had succeeded in causing harm. I don't care that the perpatrator has a family to support, I don't care that it's a first offense, I don't care if the perpetrator suffers from some ailment that will cause him pain and suffering in jail… remove him from the population.

    — DW

  14. Doug Wolf on September 8, 2005 at 22:12

    Rich,

    Valid points, but you're still skipping my two vital question…

    1) Defense. These little "island nations" of people will never be able to defend themselves against another country.

    2) A patent system.

    That second question seems trivial, but it's not. Ignoring for a moment all the issues with "might and money make right" that come with "private courts"… how will you enforce a patent system? You don't get to escape that question… and without it, commercial innovation for profit is doomed.

    The government should absolutely not be in the business of wholesale wealth redistribution. But I think you're throwing the baby out with the bathwater.

    — DW

    P.S. I fully understand your arguments concerning the producers versus those who would usurp the wealth they create… and agree with them. I'm simply not an absoluteist. I *literally* make my living through intellectual property. Without a system in place to protect that intellectual property, I (and my cohorts) would literally find another line of work… and the people of the world would be poorer for it.

    Seriously, I *get* (and generally agree) with your arguments about stealing wealth from the producers ("Atlas Shrugged, the Cliff's notes"), but before you can convince me (and most people) that we are better off with *no* government, you've got to fill in the gaps. Start by filling in the enforcement of intellectual property. How are you going to do it?

    — Doug

    P.S. You're not wholly correct on the tax issue. A U.S. Citizen living abroad is exempt from paying taxes on the first $80,000 of income. And if you give up your U.S. Citizen ship, the IRS can only come after you if you continue to live in the United States more than 30 days a year.

  15. Kyle Bennett on September 9, 2005 at 08:16

    Doug,

    A couple of quick points for now. I may have time to engage this more fully over the weekend. This argument over anarcho-capitalism can get huge if we get bogged down in the minutia of how everything could work. See my first comment in the Q and O thread that Richard linked to for why I won't even get involved in that.

    My main agument is that we all have the right to choose our values, how we pursue them, and who we enlist in helping us do so. Those people we seek help from also have the right to choose whether they will help us or not, and on what terms.

    Government is a monopoly. All the evils that most people attribute to free-market monopolies (which are all but impossible in a truly free market) apply to government a thousand times over.

    Yes, we need protection for intellectual property. It's no different from any other kind of property, and up until the last ten years or so, government has actually done a fairly good job of protecting it. But the internet and the fully global economy have rendered the old ways of protecting IP all but worthless. Copyright and software IP laws are now almost entirely unenforcable, and even patents on more concrete inventions are being eroded in the face of elements outside of US jurisdiction who simply ignore them. A new way will have to be found. I have no idea what that new way will be, I only know that it cannot be found through the mechanisms of government.

    Government has always been slow to adapt. Up until recently, we have been able to work around it, to see it as little more than an inconvenience. But now the world is moving too fast, innovations in science and technology, but also in economics and business, hgo through many generations of change in the time it takes government to react to the first change. This is exposing the inherent contradictions in government – contradictions that have always been there for anyone who cares to see, but are now blindingly obvious to everyone, and which are no longer inconveniences, but dire threats to the well-being of everyone on the planet. Markets can and do respond as fast as these changes can occur.

    Richard's point about needing 'X' result is very important. You start from what the result should be, and then determine that only government can acheive that result. Start from another point. Start from a problem that needs to be solved, and from the realization that the solution need not be the same for everyoen. That the solutions will be different for every individual. There may be some commonality, but that commonality will be discovered among the individual solutions people find for themselves.

    Do you know the idea about how to plan the paths on a campus? You don't lay down pavement where you think everyone wants to walk, you watch where people actually walk, and then lay down pavement over the grass that is the most trampled down.

    Markets do that. When those commonalities emerge in individual solutions, markets evolve to provide those common needs. Government by its very nature can't do that.

    Yet government does do it, in a way. Many of the laws we have that are now hailed as acheivements not possible without government have only been codifications of existing practises discovered by the free market prior to their becoming law. Child labor laws, building codes, business practice regulations, the list goes on. Doing so goes against the essense of government however. That is why it's supporters have to twist history to make it appear that these were government innovations – because if goverment is seen as a follower, everyone will realize that it wasn't needed in the first place, and that it's slow response and broad-brush application to all circumstances of solutions that ave worked in some circmstances is silly and useless at best, and life-and-death dangerous at worst.

    Doug, use your imagination. Not only to find the worst that could happen, but to find the best that could happen. Imagine ways in which you could protecte yourself from the worst if given complete freedom, but even more, the ways that you could propser from the best if given complete freedom.

    And most of all, trust your fellow man to be rational and to take care of himself. Most of the doom and gloom of what would happen without government relies on the fallacy that man is inherently weak, incompetent, and even evil. The evidence presented for this view are the weakness, incompetence, and evil that all men are capable of, but that only some men every fall into. That such men can survive and even prosper like that is solely a function of government, and so the results of government become an example of the things that government must be there to protect us from.

    Man is by design good enough. We wouldn't have survived the millenia before governmen if that were not true.

    Dammit, now I'm late for work again.

  16. Doug Wolf on September 9, 2005 at 12:30

    Kyle,

    First things first… I want to clarify the boundaries of this debate. We're not debating whether the U.S. Government in particular is efficient, or natural, or anything else… we're debating whether government as a concept is neccesary and inevitable.

    This argument over anarcho-capitalism can get huge if we get bogged down in the minutia of how everything could work.

    I'm not going for the minutia… I'm talking about two fundamental neccesities for the survival of a society: defense and technological advancement.

    There's a good reason I keep hammering on these: even with the best of intentions, any time someone tells me to look at the big picture and don't worry too much about the details or implications, it's a fair bet they're trying to sell me snake-oil or, worse, religion. For better or for worse, James Randi is my hero 🙂

    But the internet and the fully global economy have rendered the old ways of protecting IP all but worthless

    Let's examine that argument for a moment:

    Agreed, the rise of the internet has put a serious twist in the enforcement of certain types of intellectual property, namely media: books, music, movies. etc… but the internet has hardly made patent law obsolete. (It's worth pointing out that the internet has made a mockery of *copyright* law… not patent law.)

    The fully global economy HAS had a serious affect on patent protection… and that's where the government steps in to deal with *other governments* and "encourage" them (with threats of various types) to more strictly enforce the protection of intellectual property.

    I have no idea what that new way will be, I only know that it cannot be found through the mechanisms of government.

    It would be interesting to see evidence for that.

    Government has always been slow to adapt.

    I wouldn't say "always", but I'd agree with "usually". It's called "Conservatism".

    Richard's point about needing 'X' result is very important. You start from what the result should be, and then determine that only government can acheive that result.

    That's not quite accurate. I'm not positing that only government can create an enforceable intellectual property system… I'm pointing out that it currently does so and asking what such a plan would look like under an anarchistic system. You and Rich have made the claim that such a plan can be implemented… it's logically up to you to supply the evidence.

    Do you know the idea about how to plan the paths on a campus? You don't lay down pavement where you think everyone wants to walk, you watch where people actually walk, and then lay down pavement over the grass that is the most trampled down.

    I agree completely.

    Now let us examine, historically, how people have responded to the two universal values (i.e., "being alive" and "eating"): Across history, for hundreds of thousands of years, regardless of geography, race, climate, culture, or environment… they have formed governments.

    In order for a race (and the individuals within it) to survive, all other values (including the notions of freedom and a free-market) are subbordinate to "defense" and "eating".

    Historically, I can guess (though admitaddly, it's only a guess) how and why governments have arisen.

    As soon as you've created an efficient method of food production, you will need to *defend* that food (and the tools neccesary to create it) from those who would steal it. That implies the need for a standing military force. Inarguably, the most effective form of a military paradigm is a heirarchial "chain of command", culminating in a commander in chief. It literally comes down to this: if you want to eat, you *must* have a commander in chief. It is ultimately the commander in chief (and then men at his disposal) that stand between the populace and death by starvation or murder.

    People, by there very nature, *will* band together, and through various processes, will designate a commander in chief. They will do this, or they will die. Governments exist because of the process of natural selection as it applies to societies.

    Another reason governments exist is that some governing body must be designated to control the money supply. (Either that, or all transactions have to be conducted via direct barter, which is damned inconvenient.) Without a single body to control and enforce the money supply, multiple parties are free to act in their own best interest (i.e., to print money) and the resulting inflation makes the currency worthless. Direct barter is sufficiently inconvenient as to render large-scale economies impossible.

    When those commonalities emerge in individual solutions, markets evolve to provide those common needs. Government by its very nature can't do that.

    A heirarchial government is, demonstrably, the most efficient form of the universal need for self defense. And if you don't believe the heirarchical system of command used in an army is "government", you're kidding yourself.

    And most of all, trust your fellow man to be rational and to take care of himself.

    Kyle, if all men (or even most men) were of the ilk of yourself and Richard, I would buy into this utopia in a heartbeat. The problem is, they're not, and the utopian notion of a pure free-market economy requires it.

    If I consistently bet that any given person would act in their own long-term best interest, I'd be broke. It can be shown time, and time again that people do *not* act in their own best interest.

    When I look around at the people that are my closest and most cherished friends, they one thing they all seem to have in common is that they are rational, self-reliant, self-motivated, intelligent, creative, trustworthy individuals. (And, given my line of hobbies, a number of times I have literally put my life in their hands… and vice-versa.) These people are my loved ones *because* they are so different than the rest of the population.

    Most of the doom and gloom of what would happen without government relies on the fallacy that man is inherently weak, incompetent, and even evil.

    Nope. It relies on the observable fact that a minority of men are inherently evil, but that this minority can cause great damage. It also stems from the observable fact that those people willing to *stop* the evil minority are themselves a minority. That great mass of humanity in the middle are largely sheep.

    As you read that paragraph, you're probably mentally scanning your roll of friends and loved ones and saying "nope, he's wrong… none of THEM are sheep!". I'd like to point out that the people you're thinking of are likely your friends and loved ones precisely because they aren't sheep… because they are different than most other people you know.

    That such men can survive and even prosper like that is solely a function of government

    And I disagree again. That such men can survive and prosper is (ultimately) largely a function of their willingness to do violence to those that create and produce value. Even if such violence is not in their long term best interest. Our government wrongly props up a *lot* of morons (via wealth redistribution), but don't think for a second that many of those people would suddenly become upstanding citizens if their government handouts were taken away. A few would… but quite a few would seek other methods of theivery to replace the one they lost.

    Man is by design good enough. We wouldn't have survived the millenia before government if that were not true.

    Kyle… *which* millenia before government? Can you name a few pre-government societies that survived even long enough to leave us a record of their existence? The oldest records we have (Sumeria, Babylon, Egypt, China) are records of governments.

    I'll give you one point: Man (as a race) *is* by design "good enough". There have been enough of the good, strong, intelligent ones to counteract the evil ones. But the method they have used, throughout history, to defend themselves against evil… is to form governments. That our race still exists is a testament to that minority of men and women that had the courage and forethought to *lead* (and did it well).

  17. Rich on September 12, 2005 at 14:10

    *all* the needs of a functioning society…

    Doug, you still don't get it. I don't care about ALL the needs of ANYONE, except myself, and certainly not "society."

    I care about all my needs, a huge number of the needs of my wife, a substantial amounts of the needs of other family, a reasonable portion of the needs of friends and employees, and that's about it.

    I have respect for my fellow man, believe in paying a bit more than my exact fair share, and enjoy helping people out, even strangers sometimes.

    I do not NEED government for any of the above.

    As to Iraq, I'm happy to kill as many terrorists as possible as quickly as possible. Don't care much about any of the rest.

  18. Rich on September 12, 2005 at 15:59

    Every time I use the word "society", you guys think I'm using it in the sense of some nebulous construct concerning "the people"

    I'm not sure, but that could be because the word "society" refers to some nebulous construct concerning "the people."

    Doug, you keep asking me to prescribe solutions for you and othert people, and I continue to insist that I'm not qualified to do that. Why not prescribe your own remedies?

    I don't live by means of force. I simply ask to to be left alone. And just to be straight, being left alone means left alone to produce any product or service that I godamned well want to produce, and to trade with anyone on any terms we mutual agree to.

  19. Doug Wolf on September 12, 2005 at 11:36

    Rich & Kyle,

    I had a thought this weekend. (Yeah, I know… one per weekend is about my limit! *Grin*)

    If indeed you believe that government is wholly evil and *all* the needs of a functioning society can be brought to fruition by a free-market economy… doesn't it then follow that the *best* thing we could do for the Iraqi people would be to pull out *immediately* before a government is formed and operating? (I guess technically, the most opportune time to pull out would have been immediately after the fall of Hussein's regime.)

    If free markets and free-markets alone can answer all of society's needs and ills… why are you for a continued presence in Iraq and the creation of a new government there?

    (This really isn't a political question so much as a logical implication of the notion that all government is evil.)

    Hope you guys had a good weekend!

    — DW

  20. Doug Wolf on September 12, 2005 at 14:36

    Rich,

    Every time I use the word "society", you guys think I'm using it in the sense of some nebulous construct concerning "the people". When I say "society", I'm using it as a shorthand for "the specific individuals: me, my loved ones, and those people with him I choose to associate."

    Here are the specific things *I* (me, the individual) believe I need from a government, and that cannot be provided by a free market:

    1) Physical Defense from outsiders
    2) A single controlled currency and coinage.
    3) A uniformn system of patent enforcement. (i.e., protection of intellectual property.)

    Back to the Iraq thing: Would you agree that, if all government is evil, the best thing we could do for the people of Iraq (though not neccesarily the best for *us*) would be to pull out now before any real government has a chance to form?

    If the answer is "yes, the best thing we could do for them would be to pull out", then whether or not I agree with you, I at least have to admit that your position is consistent with "all government is evil".

    — DW

  21. Doug Wolf on September 12, 2005 at 16:28

    Rich,

    To avoid the use of the word "society" (and it's negative connotations), is there some good word I can use to represent the notion of "me, my loved ones, and those with whom I chose to trade and associate with"?

    Doug, you keep asking me to prescribe solutions for you and othert people, and I continue to insist that I'm not qualified to do that.

    What I'm trying to get at is strictly your opinion on something specific. You (and others here) have stated clearly that all government is coercion and evil. I'm just curious if you also believe (in your personal opinion) it would be in the best interests of the citizens of Iraq to be left with no government and to let the free market sort out their ills? (i.e., would it be in their best interest to simply leave them alone?)

    I don't live by means of force.

    Whether you realize it or not… you do. You live by the force of those people with uniforms and guns that stand ready to protect you against those that would gladly take away your ability to live and produce as you please. (This is nothing special to the U.S. This has been true always, everywhere.)

    And that's the crux of my argument. Force, ultimately and always, entails government. (Because a sufficiently efficient armed force *becomes* a de-facto government.)

    — DW

  22. Doug Wolf on September 12, 2005 at 16:32

    Rich,

    I simply ask to to be left alone

    That's not entirely true either. You ask for some abstract, controlled representation of "value" (i.e., money) to use as a currency with which to trade the value you produce.

    You also ask for a sufficiently robust economy to allow for their to be someone for you to trade with.

    And economies don't exist without a single governing body to control the currency. (At least none that I know of.)

    — DW

  23. Kyle Bennett on September 13, 2005 at 08:21

    Doug,

    I'd be in favor of ceasing nation building in Iraq with a few caveats. First, remedy the one deliberate atrocity the US forces have committed there, which was the confiscation of so many of the guns that were in private hands.

    The second is that the US reserves the right to counter any and all violent Islamic forces there, including any that might acheive influence or control in any supposedly legitimate government created in Iraq.

    Third, US forces can base in Iraq for as long as necessary to counter the violent Islamic elements in neighboring countries, even to the extent of launching invasions of Iran, Syria, and others should it be deemed necessary to US interests.

    Even that leaves a lot of moral ambiguity. 'US interests' is itself a fallacy. It is up to us as individuals to determine what our interests are and who will represent them in countering threats to them. But so long as the US military has usurped that role, it then has an obligation to actually act in support of our interests as best they can define them. It's a matter between us and the government here, but in regards the interests and rights of the Iraqis, that issue has no bearing on what they can demand vis a vis our troops on the ground there.

    Iraq is not 'their' country any more than the US is Bush's country, and, so ong as individual rights are respected (which they clearly are not, in the present nation-building efforts), no individual nor government there can demand that they have a right to the absence of US troops.

    And remember, that even appealing to rights in Iraq presupposes the value provided by those troops in the securing of those rights to the extent that they have been.

    As an aside, Doug, the only valid definition of 'society' is the pattern of relationships and interactions between individuals. It is not a collecion of individuals nor an entity in its own right. Seen in that way, the claiming that relationships and interactions can have rights or interests is much more obviously ludicrous.

  24. Rich on September 13, 2005 at 12:13

    I was under the impression that you were both advocating for no government… that there was no such thing as "legitimate government" and that the very nature of government (as compared to a purely free market) is evil.

    Though I no it's not yuour intention to do so, Doug, you seem to want to be cornering us into advocating some sort of nihlistic approach to all this.

    Government tentacles are everywhere, and even if virtually everyone was in agreement to dump governmnet, it would take years and potentially decades to transition. The government has made tons of promises to people who have bargained big portions of their life and work on thos promises, and I certainly don't advocate destroying their values.

    A good example is SS and other forms of retirement. The promises already made need to be kept.

  25. A College Student on September 13, 2005 at 05:40

    Banks can distribute currency, in fact that's what state and local banks did before we had federal dollars. Or, people can just agree on something of standard value (gold, silver, etc.), or some combination of either.

  26. Kyle Bennett on September 13, 2005 at 14:47

    Doug,

    ""including any that might acheive influence or control in any supposedly legitimate government"

    Hmmm… maybe I've been misunderstanding you guys (or at least misunderstanding Rich.)

    I was under the impression that you were both advocating for no government…"

    See the word 'supposedly' in there? I'm recognizing that there will be some kind of government, and that it will be thought of as 'legitimate' by most of the world. I am not calling it that myself, although even when advocating for no government, it is irrational to fail to recognize essential differences in the characters of the individual governments actually in existence. An easy way to refer to those differences is with the concept of legitimacy in this narrow context. That is not to be confused with legitimacy taken in full context.

    As to small government vs no government, (minarchy vs anarchy), only anarchy* is fully integral in full context. However, if I woke up tomorrow to find myself living in a real minarchy, I'd be ecstatically happy. I'd go about my life and probably not feel much need, for a while at least, to complain that it is not ideal.

    *And please understand that, in full context, I do not advocate zero government. I advocate individual choice in government – for individuals to choose their governments the way they choose their grocer (including the option of growing your own, if you can), where every vote is a unanimous 1-0 and every vote counts 100%, and where governments have to provide value and negotiate with their customers if they want to stay in business.

    Rich,

    "The government has made tons of promises to people who have bargained big portions of their life and work on thos promises, and I certainly don't advocate destroying their values.

    A good example is SS and other forms of retirement. The promises already made need to be kept."

    Yes, by the individuals that made them. If that is not possible, either by them directly or through contractual obligations, then those promises had no value to begin with, and thus no value can be destroyed. The people who bargained big portions of their life away for those promises made a horrible mistake. Perhaps an understndable one, but it's nobody's fault but theirs that they did so.

    That said, I'd probably be willing to contribute to easing the shock of people suddenly discovering that those promises are and always have been worthless, but only so long as it is recognized as charity and not an obligation or the fulfillment of a promise, and that it can continue only so long as I find value in continuing it, and not one minute longer. Oh, and on the condition that Ted Kennedy is digging ditches in the hot sun 14 hours a day to pay off his share of the fraudulent promises he made.

  27. Kyle Bennett on September 13, 2005 at 14:59

    Doug and College Student,

    Gold is no more an objective standard of monetary valuation than Federal Reserve Notes, except that there are physical limits on how much of it can be produced. Those limits are not nearly so strict as the gold standards advocates would have us believe, and fractional reserve banking (a perfectly legitimate practice, and fundamental to the very concept of banking as we know it) all but eliminates even that loose limitation.

    The problem is not the standard on which money is based. I could argue that pure fiat money is the best medium of exchange. What is the problem is monopoly money, which inevitably becomes as worthless as Monopoly(R) Money. Only markets can regulate the price of money, and despite Alan Greenspan's chanting and arm-waving, that's how it is regulated now.

    Doug, you won't need to measure and assay gold on every trip to 7-11, unless you want to. You will have to do something much harder and less convenient, which is to judge for yourself the value of whatever it is you are trading for that Big-Gulp, whether it be greenbacks, gold, or rutabagas.

    Like any other commodity sold on a truly open market, money's value will vary. Of course, there is a value to knowing it's market price at any given moment, and where there is a value unmet, the market will provide a way to acheive that value, at a price commensurate with it's value to you.

  28. Rich on September 13, 2005 at 15:25

    Very glad to hear that Kyle is not a money mystic.

    In fact, fiat currency is undeniably a huge part of our financial boom since 1980. That, and debt. Debt (leverage) is a hugely powerful tool for generating wealth.

    So, though I object to government force, that is a different matter from acknowledging that fiat currency works and anyone intending to create a private currency needs to meet and beat the performance of what already exists.

  29. Kyle Bennett on September 13, 2005 at 16:18

    " There's an interesting argument to be made that (because we choose to live in and be citizens of the U.S.), we have chosen the system that most closely matches our values. (Note that I didn't say "closely"… I said "most closely")"

    The problem with invoking choice is that there is an absolute geographical monopoly. You rememeber what happened the last time somebody tried to choose otherwise?

    "I don't believe that governments are established for defense and currency control… I think that people naturally form systems of defense and currency control and these *become* the de-facto government."

    Not just de-facto, they are governments. The fact is that the governments we have now are the result of exactly the market processes that Rich and I have been arguing for. So why argue for it?

    First is that I have a right to not be governed by what we have now. As always, in all of these arguments, that comes first.

    Second is that 'we' now know a lot more than we did when these governments were working their way through the markets of ideas and force that formed them, and so there is reason to believe the result would be different.

    Third is that the need for freedom is greater now than it ever was. Prior to even as recently as the 60's, when I was born, the human race could (and did) advance rapidly even under the yoke of a government. But things are different now.

    The endeavors that human beings are attempting are far greater than what government is capable of managing. It's not simply that government has grown and is now too inefficient to handle things – it is that it has not and cannot scale to the level that new technologies demand.

    We have reached a fundamental limit to what government can even facilitate, let alone actively manage. It would have to grow as exponentially fast as everything else is, and, the dangers of what that growth would mean aside, it is not capable of growing as much as it would need to.

  30. Rich on September 13, 2005 at 16:20

    To be clear, I was saying "fiat currency" in a general sense, meaning, it could be that the element of fractional reserve is what has helped super-charged the economy, among other things.

    Why not since 1971? Don't know. Perhaps it took that much time for enough elements to come together.

    It's probably that it all goes hand-in-hand. Fiat currency, fractional reserve, and debt-leverage being used by everyday people, not just the super wealthy.

    It's easy to dismiss all of this as just a force-backed government scheme. I don't want anything force backed, but I believe we should not throw the baby out with the bathwater. There are reasons that we have done so well, economically, in spite of huge deficits (debt leverage?). I don't demand, but I trust that a private system (digital currency?) should do at least as well, and even out-perform the force-backed system.

    I don't advocate market anarchism because I want to live in a primitive caste system. When I think of market anarchism, I think of companies like Wal-Mart, Microsoft, GM, Ford, GE, etc. Granted, they have made a lot of money off governments, but it's clearly not their core business.

  31. Kyle Bennett on September 13, 2005 at 16:21

    Doug,

    "If the system of currency we choose is "gold","

    Who's "we"? You might choose gold, I'm going to choose rutabagas. (I'm going to have to rethink the design of my wallet, though). Of course, if 7-11 chooses neither, we're out of luck, but I hear that Circle-K might be accepting both Gold and Rutabagas, so I'll meet you there.

    The opposite of a monopoly is not a different monopoly.

  32. Kyle Bennett on September 13, 2005 at 16:38

    " The value of "fiat money" is what everyone collectively agrees it is."

    No, the value of anything is what you decide it is. Value is always relative to an individual valuer. The price is determined by the market, and even in the market for FRNs, there is no constant agreed upon price. It's price changes minute to minute, and differently in relation to different things: gold, foreign currencies, waffles, you name it.

    Money is a medium of exchange, but remember that everything is still just a value to value trade. It is as legitmate to talk of the cost of dollars in units of waffles as it is to talk of the cost of waffles in units of dollars.

    One reason that fiat money works as a medium of exchange is precisely because it has no value of its own, apart from what it can be traded for. Anything that does have independent value distorts the exchange it is being used to mediate to the extent of the 'intrinsic' value of the medium.

    "The value of gold varies from person to person, but will always *have* value because"

    No. There is no such thing as 'intrinsic' value, (hence the quotes when I used it above). Gold does not have any intrinsic value. But you are correct that it has value (to nearly everyone) other than its value as a medium of exchange. This is why there is the illusion that it is an objective standard of value.

    "2) What's to prevent the government from causing hyperinflation by simply printing more money with which to pay off it's debts?"

    The market effects of competing currencies. Now that we are off the gold standard, gold is a competing currency. Even on the gold standard, gold competes with dollars to some extent. That is why for many years private ownership of gold (aside from jewelry) was illegal in this country – the market effects of private gold dampened the ability to produce offical counterfieit FRN's with government printing presses. The gold standard was not what prevented that, it was the competition.

  33. Doug Wolf on September 13, 2005 at 11:49

    Kyle,

    "including any that might acheive influence or control in any supposedly legitimate government"

    Hmmm… maybe I've been misunderstanding you guys (or at least misunderstanding Rich.)

    I was under the impression that you were both advocating for no government… that there was no such thing as "legitimate government" and that the very nature of government (as compared to a purely free market) is evil.

    If you've been advocating "small government " (as opposed to "no government"), then I haven't been paying close enough attention.

    Spending the past few weeks reading this site (and your site) and having these conversations has caused me to spend a great deal of time thinking about my actions (and statements) and how they reflect my values. It's also gotten me thinking about human interactions, and the (often questionable) neccesity of government, and what the proper function of government actually is. (I'm absolutely convinced there *is* a proper function of government and that it is not wealth redistribution.)

    In my mind, once I strip away all the legal-ese and high-minded doctrine… the notion of "wealth redistribution" strikes me as "you have too much… give me some"… at the point of a gun.

    Pity we can't shoot those people. 🙂

    — DW

  34. Doug Wolf on September 13, 2005 at 11:57

    College Student,

    "Banks can distribute currency, in fact that's what state and local banks did before we had federal dollars. Or, people can just agree on something of standard value (gold, silver, etc.), or some combination of either."

    You're right… banks used to distribute their own currency. And the reason we stopped doing that was because those currencies of often became devalued to the point of being worthless. Private currencies are simply not an efficient, safe way to store your wealth. (Which is why they went the way of the dodo.)

    I'm still thinking about the notion of everyone (somehow) agreeing on an arbitrary naturally occuring substance (gold? shells? acorns?) to use as a currency.

    Gold got its start as a medium of currency because it's *not* abstract… gold is incredibly useful stuff, even moreso if you're a society that doesn't have access to modern metallurgical knowledge.

    So… the idea of trading raw lumps of gold and everyone carrying a scale and an assay-kit to determine the weight and purity of the gold is worth considering. Seems *damned* inconvenient to me, but I'm still thinking it through.

    I suspect governments began issing gold coinage specifically to get around the inefficiency of everyone needing to carry a scale around and be required to have the tools and knowledge to assay gold!

    — DW

  35. Doug Wolf on September 13, 2005 at 12:44

    Rich,

    Doug, you seem to want to be cornering us into advocating some sort of nihlistic approach to all this.

    Truly, I'm not. I was trying to momentarily move the conversation away from ideals and philosophies into the practicality of "OK, what should we do about it?" (Or to at least understand what you think should be done about it.)

    And I'll admit… if you were advocating that all government is evil and that there is *no* proper function of government… that was a debate worth having.

    Given the "state of the state" right now… I wonder how we convince people that a radically smaller government is neccesary?

    — DW

  36. Doug Wolf on September 13, 2005 at 15:10

    Kyle,

    I think that, at long last, we agree.

    I suspect you and I might choose slightly different variants of which sort of government we choose to live under… but that's the whole point. We would choose a system that matches our values as closely as possible.

    There's an interesting argument to be made that (because we choose to live in and be citizens of the U.S.), we have chosen the system that most closely matches our values. (Note that I didn't say "closely"… I said "most closely")

    — Doug

  37. Doug Wolf on September 13, 2005 at 15:18

    Kyle,

    you won't need to measure and assay gold on every trip to 7-11, unless you want to.

    If the system of currency we choose is "gold", and that currency is not backed by a central agency (i.e., a government), then yes… we really do need to measure and assay gold at every transaction. (Well… either that, or risk being taken advantage of through fraud.)

    We can have some measure of confidence that the currency we use today is "legitimate" because the government goes after counterfeiters aggressively. Counterfeiting can't be reduced to zero percent, but it can be reduced to a fairly inconsequential fraction of the the money supply.

    I believe the notion of "abstract currency" works because there are large armies behind the issuing body that do a relatively efficient job of establishing and enforcing standards.

    I don't believe that governments are established for defense and currency control… I think that people naturally form systems of defense and currency control and these *become* the de-facto government.

    (I realize I've been moving this debate from "is government evil" to "how do governments form? Hope you don't mind.)

    — Doug

  38. Doug Wolf on September 13, 2005 at 16:04

    Rich and Kyle,

    OK, go dlow for me on this one… my background is math, science and engineering, not economics.

    I've done enough reading in the last hour to grasp the meanings of fait currency and fractional reserve.

    Two obvious questions:

    1) Rich, why do you say fait currency is a huge part of our financial boom since 1980? (And why 1980, instead of 1971, the year when the gold standard was dropped?)

    2) What's to prevent the government from causing hyperinflation by simply printing more money with which to pay off it's debts?

    The value of "fiat money" is what everyone collectively agrees it is.

    The value of gold varies from person to person, but will always *have* value because gold has very real, tangible uses. (Hmmm… for that matter, I suppose one could generalize the currency backing from "gold standard" to "asset standard", gold being just one of the assets.)

    Is that what gives money it's value? Being based on some sort of an asset standard? (i.e., does a "dollar" have value because it is theoretically redeemable for some fraction of the assets of the U.S. Government?)

    I wish I knew enough here to put up a reasonable argument. 🙂

    — Doug

  39. Doug Wolf on September 13, 2005 at 17:15

    Kyle,

    I'm going to pick a nit. 😉

    Who's "we"? You might choose gold, I'm going to choose rutabagas.

    You might choose rutabagas… but probably not. Especially if most other people have been choosing gold. (i.e., the more people that have chosen gold, the more efficient it becomes for other people to choose gold.)

    For a brief exposition of why gold and silver are commonly chosen as currencies, see chapter 3 of this at Mises.org

    I'm not saying that gold and silver are the only possible currencies… only that you would probably choose whatever else seems to be choosing.

    I'm not sure I've ever even tasted a rutabaga 🙂

  40. Doug Wolf on September 13, 2005 at 17:17

    OK, I give… what's an FRN?

    — DW

  41. A College Student on September 13, 2005 at 20:11

    Federal Reserve Note

  42. Kyle Bennett on September 14, 2005 at 07:48

    Doug,

    "For a brief exposition of why gold and silver are commonly chosen as currencies, see chapter 3 of this at Mises.org"

    Give me a little credit, and read more carefully. I assumed that it would be understood that our choices could not be completely arbitrary, and that we would generally, all else being equal, prefer the currency thost most other people are using. I figured that my reference to us being out of luck if 7-11 does not take rutabagas or gold would be enough to acknowledge that without spending a lot of time explaining it.

    But the important question is still how to design a wallet to hold rutabagas. They don't fold well.

    There are subtle distinctions in meaning between 'money', 'dollars' and 'FRNs'. For example, the total of all FRNs out there represents only a fraction of all the dollars in the total money supply. The remainder are purly electronic, and are in theory redeemable for FRNs. This is not normally a problem, but their relative value can vary, for instance, in the case of a bank run.

    I'm glad to see you're reading Mises, BTW.

  43. Kyle Bennett on September 14, 2005 at 14:33

    "Fractional reserve banking works well… until there's a run on the banks. Then what?"

    Then one or more of a few possible things happens:

    –You that realize you misjudged the bank you trusted your money to and learn an expensive mistake.

    –You re-evaluate the safety of the other banks you have the rest of your money in, because of course you diversified your risk, right?

    –A bigger bank steps in and either bails out the one with the run, or offers to buy your account, either way taking a nice profit, of course.

    –The private insurance you had previously purchased pays on your claim, and then does the first two steps for itself.

    –Competing banks raise their minimum reserve to calm the jittery nerves of their clients who wonder if they are next, but then have to pay a slightly lower interest rate on savings accounts because that is always the tradeoff.

    –The President starts paying people to move rocks from one pile to another, then paying other people to move those same rocks back to the original pile, while also creating massively intrusive laws and institutions, all of which are designed to pretend that the law of supply and demand has finally been overcome, thus extending a local crisis to the entire planet, and lengthening its duration for nearly a decade, which has the side effect of making the reparations payments still demanded of one short-tempered European country from the last war so onerous, (in combination with a massive trade protection bill passed by the last President that makes it impossible for them to earn any money by actually exporting anything) that they are literally impossible to keep up with, prompting this short-tempered country to throw a tantrum the likes of which has never been seen on earth, thus empowering a previously backward agrarian nation that helped us send them back to their room without supper, a nation currently experimenting with a novel new approach to ruining their economy that not-so coincidentally also involves pretending that the law of supply and demand does not exist, to massively industrialize to the point where they can threaten the skyscrapers of New York from afar, causing us eventually to have to pay a small rebel band in an insignificant Middle-Eastern country to help us stop them, from which money and influence this small rebel band trains some of its members to fly airplanes and fool metal detectors in order to actually destroy some of the skyscrapers of New York. But the bank run was stopped… Whew, that was a close one!

  44. Kyle Bennett on September 14, 2005 at 15:33

    Any award I share with Dave Barry is a better award then I've ever gotten, so thanks. I don't have time to directly address your first few objections, but as a general rule for the kinds of positions I am taking, think about what the consequences of those knee-jerk reactions would be, and realize that those people would not be artificially insulated from those consequences. Also remember that knowing ahead of time that you will not be so insulated does wonders for your willingness and ability to plan ahead to minmize risk.

  45. Kyle Bennett on September 14, 2005 at 15:36

    Oh, yeah, one more thing:

    By the way… is there such a thing as private deposit insurance?.

    Not now, no, but under my plan, who's gonna stop you?

  46. Kyle Bennett on September 14, 2005 at 16:25

    Doug,

    The consequences I'm thinking of would be much more immediate and personal than a general deflation.

    Fractional reserves allow institutional lending, for one. A bank with a 100% reserve requirement cannot loan money, and cannot pay interest. It allows capital to work instead of just being stored.

    Or, more technically, it smooths out liquidity demand fluctuations. For one individual, his demand to liquidate any particular dollar in his account is zero until it suddenly becomes 100%. Any loan using this money would have to be subject to immedate call – no good for a mortgage or for starting a business.

    Statistically, when you pool many users, the liquidity demand at any given time fluctuates in a narrow range, say around 10% (I'm making up numbers here). Add a buffer to that, and set your reserve requirement at 15%, and you can put the other 85% to productive uses with low liquidity without ever denying any customer his full account in cash on demand. You've in effect 'created' a little over 5 times the amount of money you actually have (even under a gold standard, this works). Change the reserve to 10% and you've 'created' 9 times the amount of money, all without even owning a printing press. All this newly created money lets you and me get a house long before we've saved the full amount in cash, (and making no interest on it while we save it).

    There's similar higher liquidity, lower risk methods for also putting a portion of that 15% reserve to productive use. One instrument allowing for that is known as Fed Funds, which is one of the magic rates that Greenspan gets to set. It is basically an on demand, short term loan on the order of days or even hours, (from funds the fed creates literally from nothing, their reserve is 0%) that banks can use to correct their reserve if it gets too low. (Someone correct me if I'm wrong on that, I'm digging up some rusty recall here)

  47. Doug Wolf on September 14, 2005 at 11:59

    Kyle,

    The reason I never give you any credit is for statements like this one:

    But the important question is still how to design a wallet to hold rutabagas. They don't fold well.

    Slices, man, slices! Have you no imagination? 🙂

    Gotta get me a plaque for my office: "The rutabaga stops here!"

    I'm poking around Mises.org and a few other places. Economic and monetary theory (beyond basic supply and demand) is *very* new to me.

    I'm still getting my head around the implications of fractional reserve banking, and still trying to work through my uneasiness at the fact that the Federal Reserve is a privately held corporation(!).

    Fractional reserve banking works well… until there's a run on the banks. Then what?

    — DW

  48. Doug Wolf on September 14, 2005 at 15:21

    Kyle,

    First, I hope that you realize by now that whatever position you take, I will usually take something of it's opposite, just so we (or at least I) can learn something in the course of the debate. 🙂

    You that realize you misjudged the bank you trusted your money to and learn an expensive mistake.

    And here is where we run into the nasty, pointy edges of extreme individualism as a personal philsophy.

    In the situation given above, you and I and perhaps even that neaderthal that runs this place (Rich) would say "oops!, that was an expensive misjudgement!" and get on with making sure our other (diversified) assets were secure.

    I think a great many people would do no such thing… they would start sticking money under their mattress, in holes in their back yard, etc. (Reasoning that granny's matress is safer than a bank.)

    I, as a producer, *need* these people to put their cash into circulation, otherwise there is the possibilty of deflation (due to constriction of the currency supply) resulting in me not being able to sell my goods for what it cost me to produce them.

    The "you should be more careful with the bank you choose" theory doesn't do me a lot of good if I get screwed because other people weren't careful enough with their choices.

    You re-evaluate the safety of the other banks you have the rest of your money in, because of course you diversified your risk, right?

    From a purely personal level… agreed. But again, my suspicion is that many folks are just going grab a shovel and stick their cash in the First Bank of the Back Yard.

    A bigger bank steps in and either bails out the one with the run, or offers to buy your account, either way taking a nice profit, of course.

    This assumes that there wasn't a run on all banks simultaneously.

    The private insurance you had previously purchased pays on your claim, and then does the first two steps for itself.

    Now THAT makes a lot of sense. When people ask me how I think the free-market could have serviced the aftermath Katrina disaster (as opposed to government), my response is always "Ever heard of insurance?".

    By the way… is there such a thing as private deposit insurance?

    Competing banks raise their minimum reserve to calm the jittery nerves of their clients…

    I'll buy that.

    WWI/WWII rant snipped

    You get the award for the funniest reference to the Smoot-Hawley act I've ever read. (You may have to share the award with Dave Barry though.)

    — DW

  49. Doug Wolf on September 14, 2005 at 15:55

    Kyle (and Rich),

    This is mostly in response to Kyle's last post, but I'd like to make the argument that part of enlightened concern for one's self involves being concerned about society as a whole.

    Kyle, you are correct in saying that those people who bury their money in the back-yard will not be artifically insulated from the consequences of their decisions. They will indeed suffer from the rapid spiral of deflation just as inevitably as you and I.

    The difference is, they won't know why.

    Keep in mind that a vast number of people lack such a basic understanding of ecnomics, that they believe that the wealth of the nation could be increased by the simple expedient of printing more money. (I don't think I'm being terribly cynical here, either.)

    People who do not (or cannot) recognize the cause and effect relationship of their decisions (i.e., "if we all bury our money in the ground, deflation results.) cannot be counted upon to make decisions in their own self interest. The specific decision I'm worried about them making is "lets all run to the bank and draw our money out".

    NO financial institution that relies on fractional reserve can withstand that. There is literally no bank using fractional reserve that would be a safe place to put my money, unless of course the feds (or a private company) are willing to insure my deposits. (Which of course the feds do.)

    I'm assuming you would argue that Federal Deposit Insurance is a bad thing (because it makes taxpayers pay for my bad judgement in selecting a bank.) I argue that Federal Deposit Insurance is what makes people trust the banks to begin with… and that is a good thing for *all of us individually*.

    Let me ask you this… what's the benefit (to the economy) of fractional reserve banking?

    — DW

  50. Doug Wolf on September 14, 2005 at 17:05

    Kyle,

    Quick comment:

    Fractional reserves allow institutional lending, for one. A bank with a 100% reserve requirement cannot loan money, and cannot pay interest.

    Sure they can.

    When *any* corporation is formed, there is working capital, usually in the form of cash raised from a public stock offering. Initially loans could be made from this working capital, and later from the profits of previous loans. Banks can (and do) make a further profit by imposing fees upon those people who deposit money with them. None of this requires fractional reserves.

    Fractional reserve banking works right up until the moment when a sufficient number of people who up at the bank demanding their money, and that aggregate amount of money exceeds the banks reserve. If this happens simulataneously to most of the banks in the country (remember, the depositors only have to demand an aggregate 10% of total deposits), the Fed has no choice but to print more currency to satisfy the demands of the depositers… and hyper-inflation begins.

    And we know that it's possible for this situation to occur because it *has* occured… most famously in recent history in Argentina in the 90's.

    — Doug

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