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No! God Did Not Create all Slave-Holders Equal

In these troubled times, I find it hard to think and write about economics, so this post will be drawn largely from Abraham Lincoln’s great Cooper Union Speech which helped him gain the Republican nomination for President in 1860. What a difference a century and a half makes!

I am drawn to this speech because we are told that if we take down the statue of Robert E. Lee — a Virginian slave-holder who was once a hero of mine — in Charlottesville, Virginia, that will set us off on a road that will inevitably lead us to take down monuments to George Washington and Thomas Jefferson, who were also Virginian slave-holders. At least that’s what Tucker Carlson said on his show on Fox News on Tuesday night.

On Monday a mob tore down a civil war soldier’s memorial in Durham, North Carolina. Police stood idly by and liberals across the country applauded it. Which statues are next, the president asked today, George Washington, Thomas Jefferson? . . .

Thomas Jefferson indisputably was a great man. He was the author of the Declaration of Independence. Founder of the University of Virginia and maybe, most importantly, the greatest thinker in American political history.

All of us live in his shadow. Unfortunately, however, Jefferson was also a slave holder. That’s real. It’s a moral taint. We ought to remember it.

But to the fanatics on the left it means that Jefferson must be purged from public memory forever. The demands are already coming that we do that.

In 2015, the students at the University of Missouri demanded the removal of a Jefferson statue. Two years ago, on CNN, anchor Ashleigh Banfield suggested the Jefferson Memorial in Washington might have to go. . . .

Now, to be clear, as if it’s necessary, slavery is evil. If you believe in the rights of the individual, it’s actually hard to think of anything worse than slavery.

But let’s be honest. Up until 150 years ago when a group of brave Americans fought and died to finally put an end to it, slavery was the rule, rather than the exception around the world. And had been for thousands of years, sadly.

Plato owned saves, so did Mohammed — peace be upon him.

Many African tribes held slaves and sold them. The Aztecs did, too. Before he liberated Latin America, Simon Bolivar owned slaves.

Slave-holding was so common among the North American Indians that the Cherokee brought their slaves with them on the Trail of Tears. And it wasn’t something they learned from European settlers.

Indians were holding and trading slaves when Christopher Columbus arrived. And by the way, he owned slaves, too.

None of this is a defense of the atrocity of human bondage. And it is an atrocity.

The point however is that if we are going to judge the past by the standards of the present. If we are going to reduce a person’s life to the single worst thing he ever participated in, we had better be prepared for the consequences of that. And here’s why: Forty one of the 56 men who signed the Declaration of Independence held slaves.

James Madison, the father of the Constitution, had a plantation full of slaves.

George Mason, the father of the Bill of Rights, also owned slaves, unfortunately. But does that make what they wrote illegitimate?

Carlson made no mention of George Washington, but others have.

Of course, the argument is sophistical, because it conflates all slave-holders, suggesting that all slave-holders are equal, so that to deny Robert E. Lee and other Confederate heroes the privilege of being immortalized in stone or in bronze would require us, on principle, to consider all other slave-holders equally unworthy of such honor. But here’s the difference: most slave-holders — people like Washington and Jefferson and Madison and Mason — held slaves, because they lived in societies in which slave-holding was condoned and socially acceptable. But not all slave-holders had the audacity to claim that slave-holding was a natural and inalienable right of theirs, for the vindication of which they would go to war against their fellow countrymen to establish a new regime that would preserve, protect and defend that sacred right till the end of time. Not all slave-holders dared to justify their slave-holding as a high principle; it was only those Secessionists who started the Civil War to create the Confederate States of America to uphold a society dedicated to the proposition that some men are divinely entitled to “wring their bread from the sweat of other men’s faces” who entertained that audacious and repugnant conception of their own natural and rightful supremacy.

In his Cooper Union speech (see a marvelous re-enactment of the speech by Sam Waterston here), Lincoln conclusively showed how vast a difference there was between the attitude to slavery of the Founders of the American Republic — including those who owned slaves — and that of the Secessionists who chose to make war rather than allow the Republic to survive.

Herewith are selections from Lincoln’s magnificent address:

In his speech last autumn, at Columbus, Ohio, as reported in “The New-York Times,” Senator Douglas said:

“Our fathers, when they framed the Government under which we live, understood this question just as well, and even better, than we do now.”

I fully indorse this, and I adopt it as a text for this discourse. I so adopt it because it furnishes a precise and an agreed starting point for a discussion between Republicans and that wing of the Democracy headed by Senator Douglas. It simply leaves the inquiry: “What was the understanding those fathers had of the question mentioned?”

What is the frame of government under which we live?

The answer must be: “The Constitution of the United States.” That Constitution consists of the original, framed in 1787, (and under which the present government first went into operation,) and twelve subsequently framed amendments, the first ten of which were framed in 1789.

Who were our fathers that framed the Constitution? I suppose the “thirty-nine” who signed the original instrument may be fairly called our fathers who framed that part of the present Government. It is almost exactly true to say they framed it, and it is altogether true to say they fairly represented the opinion and sentiment of the whole nation at that time. Their names, being familiar to nearly all, and accessible to quite all, need not now be repeated. . . .

What is the question which, according to the text, those fathers understood “just as well, and even better than we do now?”

It is this: Does the proper division of local from federal authority, or anything in the Constitution, forbid our Federal Government to control as to slavery in our Federal Territories?

Upon this, Senator Douglas holds the affirmative, and Republicans the negative. This affirmation and denial form an issue; and this issue – this question – is precisely what the text declares our fathers understood “better than we.” . . .

In 1789, by the first Congress which sat under the Constitution, an act was passed to enforce the Ordinance of ’87, including the prohibition of slavery in the Northwestern Territory. The bill for this act was reported by one of the “thirty-nine,” Thomas Fitzsimmons, then a member of the House of Representatives from Pennsylvania. It went through all its stages without a word of opposition, and finally passed both branches without yeas and nays, which is equivalent to a unanimous passage. In this Congress there were sixteen of the thirty-nine fathers who framed the original Constitution. They were John Langdon, Nicholas Gilman, Wm. S. Johnson, Roger Sherman, Robert Morris, Thos. Fitzsimmons, William Few, Abraham Baldwin, Rufus King, William Paterson, George Clymer, Richard Bassett, George Read, Pierce Butler, Daniel Carroll, James Madison.

This shows that, in their understanding, no line dividing local from federal authority, nor anything in the Constitution, properly forbade Congress to prohibit slavery in the federal territory; else both their fidelity to correct principle, and their oath to support the Constitution, would have constrained them to oppose the prohibition.

Again, George Washington, another of the “thirty-nine,” was then President of the United States, and, as such approved and signed the bill; thus completing its validity as a law, and thus showing that, in his understanding, no line dividing local from federal authority, nor anything in the Constitution, forbade the Federal Government, to control as to slavery in federal territory. . . .

In 1803, the Federal Government purchased the Louisiana country. Our former territorial acquisitions came from certain of our own States; but this Louisiana country was acquired from a foreign nation. In 1804, Congress gave a territorial organization to that part of it which now constitutes the State of Louisiana. New Orleans, lying within that part, was an old and comparatively large city. There were other considerable towns and settlements, and slavery was extensively and thoroughly intermingled with the people. Congress did not, in the Territorial Act, prohibit slavery; but they did interfere with it – take control of it – in a more marked and extensive way than they did in the case of Mississippi. The substance of the provision therein made, in relation to slaves, was:

First. That no slave should be imported into the territory from foreign parts.

Second. That no slave should be carried into it who had been imported into the United States since the first day of May, 1798.

Third. That no slave should be carried into it, except by the owner, and for his own use as a settler; the penalty in all the cases being a fine upon the violator of the law, and freedom to the slave. . . .

The sum of the whole is, that of our thirty-nine fathers who framed the original Constitution, twenty-one – a clear majority of the whole – certainly understood that no proper division of local from federal authority, nor any part of the Constitution, forbade the Federal Government to control slavery in the federal territories; while all the rest probably had the same understanding. Such, unquestionably, was the understanding of our fathers who framed the original Constitution; and the text affirms that they understood the question “better than we.”

But, so far, I have been considering the understanding of the question manifested by the framers of the original Constitution. In and by the original instrument, a mode was provided for amending it; and, as I have already stated, the present frame of “the Government under which we live” consists of that original, and twelve amendatory articles framed and adopted since. Those who now insist that federal control of slavery in federal territories violates the Constitution, point us to the provisions which they suppose it thus violates; and, as I understand, that all fix upon provisions in these amendatory articles, and not in the original instrument. The Supreme Court, in the Dred Scott case, plant themselves upon the fifth amendment, which provides that no person shall be deprived of “life, liberty or property without due process of law;” while Senator Douglas and his peculiar adherents plant themselves upon the tenth amendment, providing that “the powers not delegated to the United States by the Constitution” “are reserved to the States respectively, or to the people.”

Now, it so happens that these amendments were framed by the first Congress which sat under the Constitution – the identical Congress which passed the act already mentioned, enforcing the prohibition of slavery in the Northwestern Territory. Not only was it the same Congress, but they were the identical, same individual men who, at the same session, and at the same time within the session, had under consideration, and in progress toward maturity, these Constitutional amendments, and this act prohibiting slavery in all the territory the nation then owned. The Constitutional amendments were introduced before, and passed after the act enforcing the Ordinance of ’87; so that, during the whole pendency of the act to enforce the Ordinance, the Constitutional amendments were also pending.

The seventy-six members of that Congress, including sixteen of the framers of the original Constitution, as before stated, were pre- eminently our fathers who framed that part of “the Government under which we live,” which is now claimed as forbidding the Federal Government to control slavery in the federal territories.

Is it not a little presumptuous in any one at this day to affirm that the two things which that Congress deliberately framed, and carried to maturity at the same time, are absolutely inconsistent with each other? And does not such affirmation become impudently absurd when coupled with the other affirmation from the same mouth, that those who did the two things, alleged to be inconsistent, understood whether they really were inconsistent better than we – better than he who affirms that they are inconsistent?

It is surely safe to assume that the thirty-nine framers of the original Constitution, and the seventy-six members of the Congress which framed the amendments thereto, taken together, do certainly include those who may be fairly called “our fathers who framed the Government under which we live.” And so assuming, I defy any man to show that any one of them ever, in his whole life, declared that, in his understanding, any proper division of local from federal authority, or any part of the Constitution, forbade the Federal Government to control as to slavery in the federal territories. I go a step further. I defy any one to show that any living man in the whole world ever did, prior to the beginning of the present century, (and I might almost say prior to the beginning of the last half of the present century,) declare that, in his understanding, any proper division of local from federal authority, or any part of the Constitution, forbade the Federal Government to control as to slavery in the federal territories. To those who now so declare, I give, not only “our fathers who framed the Government under which we live,” but with them all other living men within the century in which it was framed, among whom to search, and they shall not be able to find the evidence of a single man agreeing with them.

Now, and here, let me guard a little against being misunderstood. I do not mean to say we are bound to follow implicitly in whatever our fathers did. To do so, would be to discard all the lights of current experience – to reject all progress – all improvement. What I do say is, that if we would supplant the opinions and policy of our fathers in any case, we should do so upon evidence so conclusive, and argument so clear, that even their great authority, fairly considered and weighed, cannot stand; and most surely not in a case whereof we ourselves declare they understood the question better than we.

Some of you delight to flaunt in our faces the warning against sectional parties given by Washington in his Farewell Address. Less than eight years before Washington gave that warning, he had, as President of the United States, approved and signed an act of Congress, enforcing the prohibition of slavery in the Northwestern Territory, which act embodied the policy of the Government upon that subject up to and at the very moment he penned that warning; and about one year after he penned it, he wrote LaFayette that he considered that prohibition a wise measure, expressing in the same connection his hope that we should at some time have a confederacy of free States. . . .

But you will break up the Union rather than submit to a denial of your Constitutional rights.

That has a somewhat reckless sound; but it would be palliated, if not fully justified, were we proposing, by the mere force of numbers, to deprive you of some right, plainly written down in the Constitution. But we are proposing no such thing.

When you make these declarations, you have a specific and well-understood allusion to an assumed Constitutional right of yours, to take slaves into the federal territories, and to hold them there as property. But no such right is specifically written in the Constitution. That instrument is literally silent about any such right. We, on the contrary, deny that such a right has any existence in the Constitution, even by implication.

Your purpose, then, plainly stated, is that you will destroy the Government, unless you be allowed to construe and enforce the Constitution as you please, on all points in dispute between you and us. You will rule or ruin in all events.

This, plainly stated, is your language. Perhaps you will say the Supreme Court has decided the disputed Constitutional question in your favor. Not quite so. But waiving the lawyer’s distinction between dictum and decision, the Court have decided the question for you in a sort of way. The Court have substantially said, it is your Constitutional right to take slaves into the federal territories, and to hold them there as property. When I say the decision was made in a sort of way, I mean it was made in a divided Court, by a bare majority of the Judges, and they not quite agreeing with one another in the reasons for making it; that it is so made as that its avowed supporters disagree with one another about its meaning, and that it was mainly based upon a mistaken statement of fact – the statement in the opinion that “the right of property in a slave is distinctly and expressly affirmed in the Constitution.”

An inspection of the Constitution will show that the right of property in a slave is not “distinctly and expressly affirmed” in it. Bear in mind, the Judges do not pledge their judicial opinion that such right is impliedly affirmed in the Constitution; but they pledge their veracity that it is “distinctly and expressly” affirmed there – “distinctly,” that is, not mingled with anything else – “expressly,” that is, in words meaning just that, without the aid of any inference, and susceptible of no other meaning.

If they had only pledged their judicial opinion that such right is affirmed in the instrument by implication, it would be open to others to show that neither the word “slave” nor “slavery” is to be found in the Constitution, nor the word “property” even, in any connection with language alluding to the things slave, or slavery; and that wherever in that instrument the slave is alluded to, he is called a “person;” – and wherever his master’s legal right in relation to him is alluded to, it is spoken of as “service or labor which may be due,” – as a debt payable in service or labor. Also, it would be open to show, by contemporaneous history, that this mode of alluding to slaves and slavery, instead of speaking of them, was employed on purpose to exclude from the Constitution the idea that there could be property in man.

To show all this, is easy and certain.

When this obvious mistake of the Judges shall be brought to their notice, is it not reasonable to expect that they will withdraw the mistaken statement, and reconsider the conclusion based upon it?

And then it is to be remembered that “our fathers, who framed the Government under which we live” – the men who made the Constitution – decided this same Constitutional question in our favor, long ago – decided it without division among themselves, when making the decision; without division among themselves about the meaning of it after it was made, and, so far as any evidence is left, without basing it upon any mistaken statement of facts.

Under all these circumstances, do you really feel yourselves justified to break up this Government unless such a court decision as yours is, shall be at once submitted to as a conclusive and final rule of political action? But you will not abide the election of a Republican president! In that supposed event, you say, you will destroy the Union; and then, you say, the great crime of having destroyed it will be upon us! That is cool. A highwayman holds a pistol to my ear, and mutters through his teeth, “Stand and deliver, or I shall kill you, and then you will be a murderer!”

To be sure, what the robber demanded of me – my money – was my own; and I had a clear right to keep it; but it was no more my own than my vote is my own; and the threat of death to me, to extort my money, and the threat of destruction to the Union, to extort my vote, can scarcely be distinguished in principle. . . .

A few words now to Republicans. It is exceedingly desirable that all parts of this great Confederacy shall be at peace, and in harmony, one with another. Let us Republicans do our part to have it so. Even though much provoked, let us do nothing through passion and ill temper. Even though the southern people will not so much as listen to us, let us calmly consider their demands, and yield to them if, in our deliberate view of our duty, we possibly can. Judging by all they say and do, and by the subject and nature of their controversy with us, let us determine, if we can, what will satisfy them. . . .

These natural, and apparently adequate means all failing, what will convince them? This, and this only: cease to call slavery wrong, and join them in calling it right. And this must be done thoroughly – done in acts as well as in words. Silence will not be tolerated – we must place ourselves avowedly with them. Senator Douglas’ new sedition law must be enacted and enforced, suppressing all declarations that slavery is wrong, whether made in politics, in presses, in pulpits, or in private. We must arrest and return their fugitive slaves with greedy pleasure. We must pull down our Free State constitutions. The whole atmosphere must be disinfected from all taint of opposition to slavery, before they will cease to believe that all their troubles proceed from us.

I am quite aware they do not state their case precisely in this way. Most of them would probably say to us, “Let us alone, do nothing to us, and say what you please about slavery.” But we do let them alone – have never disturbed them – so that, after all, it is what we say, which dissatisfies them. They will continue to accuse us of doing, until we cease saying.

I am also aware they have not, as yet, in terms, demanded the overthrow of our Free-State Constitutions. Yet those Constitutions declare the wrong of slavery, with more solemn emphasis, than do all other sayings against it; and when all these other sayings shall have been silenced, the overthrow of these Constitutions will be demanded, and nothing be left to resist the demand. It is nothing to the contrary, that they do not demand the whole of this just now. Demanding what they do, and for the reason they do, they can voluntarily stop nowhere short of this consummation. Holding, as they do, that slavery is morally right, and socially elevating, they cannot cease to demand a full national recognition of it, as a legal right, and a social blessing.

Nor can we justifiably withhold this, on any ground save our conviction that slavery is wrong. If slavery is right, all words, acts, laws, and constitutions against it, are themselves wrong, and should be silenced, and swept away. If it is right, we cannot justly object to its nationality – its universality; if it is wrong, they cannot justly insist upon its extension – its enlargement. All they ask, we could readily grant, if we thought slavery right; all we ask, they could as readily grant, if they thought it wrong. Their thinking it right, and our thinking it wrong, is the precise fact upon which depends the whole controversy. Thinking it right, as they do, they are not to blame for desiring its full recognition, as being right; but, thinking it wrong, as we do, can we yield to them? Can we cast our votes with their view, and against our own? In view of our moral, social, and political responsibilities, can we do this?

Wrong as we think slavery is, we can yet afford to let it alone where it is, because that much is due to the necessity arising from its actual presence in the nation; but can we, while our votes will prevent it, allow it to spread into the National Territories, and to overrun us here in these Free States? If our sense of duty forbids this, then let us stand by our duty, fearlessly and effectively. Let us be diverted by none of those sophistical contrivances wherewith we are so industriously plied and belabored – contrivances such as groping for some middle ground between the right and the wrong, vain as the search for a man who should be neither a living man nor a dead man – such as a policy of “don’t care” on a question about which all true men do care – such as Union appeals beseeching true Union men to yield to Disunionists, reversing the divine rule, and calling, not the sinners, but the righteous to repentance – such as invocations to Washington, imploring men to unsay what Washington said, and undo what Washington did.

Neither let us be slandered from our duty by false accusations against us, nor frightened from it by menaces of destruction to the Government nor of dungeons to ourselves. LET US HAVE FAITH THAT RIGHT MAKES MIGHT, AND IN THAT FAITH, LET US, TO THE END, DARE TO DO OUR DUTY AS WE UNDERSTAND IT.

So, Mr. Carlson, before you start opining about slavery again, instead of citing Plato and Muhammed, peace be upon him, why not try reading some of the speeches of the sixteenth President of the United States?

What’s Wrong with the Price-Specie-Flow Mechanism? Part I

The tortured intellectual history of the price-specie-flow mechanism (PSFM), which received its classic exposition in an essay (“Of the Balance of Trade”) by David Hume about 275 years ago is not a history that, properly understood, provides solid grounds for optimism about the chances for progress in what we, somewhat credulously, call economic science. In brief, the price-specie-flow mechanism asserts that, under a gold or commodity standard, deviations between the price levels of those countries on the gold standard induce gold to be shipped from countries where prices are relatively high to countries where prices are relatively low, the gold flows continuing until price levels are equalized. Hence, the compound adjective “price-specie-flow,” signifying that the mechanism is set in motion by price-level differences that induce gold (specie) flows.

The PSFM is thus premised on a version of the quantity theory of money in which price levels in each country on the gold standard are determined by the quantity of money circulating in that country. In his account, Hume assumed that money consists entirely of gold, so that he could present a scenario of disturbance and re-equilibration strictly in terms of changes in the amount of gold circulating in each country. Inasmuch as Hume held a deeply hostile attitude toward banks, believing them to be essentially inflationary engines of financial disorder, subsequent interpretations of the PSFM had to struggle to formulate a more general theoretical account of international monetary adjustment to accommodate the presence of the fractional-reserve banking so detested by Hume and to devise an institutional framework that would facilitate operation of the adjustment mechanism under a fractional-reserve-banking system.

In previous posts on this blog (e.g., here, here and here) a recent article on the history of the (misconceived) distinction between rules and discretion, I’ve discussed the role played by the PSFM in one not very successful attempt at monetary reform, the English Bank Charter Act of 1844. The Bank Charter Act was intended to ensure the maintenance of monetary equilibrium by reforming the English banking system so that it would operate the way Hume described it in his account of the PSFM. However, despite the failings of the Bank Charter Act, the general confusion about monetary theory and policy that has beset economic theory for over two centuries has allowed PSFM to retain an almost canonical status, so that it continues to be widely regarded as the basic positive and normative model of how the classical gold standard operated. Using the PSFM as their normative model, monetary “experts” came up with the idea that, in countries with gold inflows, monetary authorities should reduce interest rates (i.e., lending rates to the banking system) causing monetary expansion through the banking system, and, in countries losing gold, the monetary authorities should do the opposite. These vague maxims described as the “rules of the game,” gave only directional guidance about how to respond to an increase or decrease in gold reserves, thereby avoiding the strict numerical rules, and resulting financial malfunctions, prescribed by the Bank Charter Act.

In his 1932 defense of the insane gold-accumulation policy of the Bank of France, Hayek posited an interpretation of what the rules of the game required that oddly mirrored the strict numerical rules of the Bank Charter Act, insisting that, having increased the quantity of banknotes by about as much its gold reserves had increased after restoration of the gold convertibility of the franc, the Bank of France had done all that the “rules of the game” required it to do. In fairness to Hayek, I should note that decades after his misguided defense of the Bank of France, he was sharply critical of the Bank Charter Act. At any rate, the episode indicates how indefinite the “rules of the game” actually were as a guide to policy. And, for that reason alone, it is not surprising that evidence that the rules of the game were followed during the heyday of the gold standard (roughly 1880 to 1914) is so meager. But the main reason for the lack of evidence that the rules of the game were actually followed is that the PSFM, whose implementation the rules of the game were supposed to guarantee, was a theoretically flawed misrepresentation of the international-adjustment mechanism under the gold standard.

Until my second year of graduate school (1971-72), I had accepted the PSFM as a straightforward implication of the quantity theory of money, endorsed by such luminaries as Hayek, Friedman and Jacob Viner. I had taken Axel Leijonhufvud’s graduate macro class in my first year, so in my second year I audited Earl Thompson’s graduate macro class in which he expounded his own unique approach to macroeconomics. One of the first eye-opening arguments that Thompson made was to deny that the quantity theory of money is relevant to an economy on the gold standard, the kind of economy (allowing for silver and bimetallic standards as well) that classical economics, for the most part, dealt with. It was only after the Great Depression that fiat money was widely accepted as a viable system for the long-term rather than a mere temporary wartime expedient.

What determines the price level for a gold-standard economy? Thompson’s argument was simple. The value of gold is determined relative to every other good in the economy by exactly the same forces of supply and demand that determine relative prices for every other real good. If gold is the standard, or numeraire, in terms of which all prices are quoted, then the nominal price of gold is one (the relative price of gold in terms of itself). A unit of currency is specified as a certain quantity of gold, so the price level measure in terms of the currency unit varies inversely with the value of gold. The amount of money in such an economy will correspond to the amount of gold, or, more precisely, to the amount of gold that people want to devote to monetary, as opposed to real (non-monetary), uses. But financial intermediaries (banks) will offer to exchange IOUs convertible on demand into gold for IOUs of individual agents. The IOUs of banks have the property that they are accepted in exchange, unlike the IOUs of individual agents which are not accepted in exchange (not strictly true as bills of exchange have in the past been widely accepted in exchange). Thus, the amount of money (IOUs payable on demand) issued by the banking system depends on how much money, given the value of gold, the public wants to hold; whenever people want to hold more money than they have on hand, they obtain additional money by exchanging their own IOUs – not accepted in payment — with a bank for a corresponding amount of the bank’s IOUs – which are accepted in payment.

Thus, the simple monetary theory that corresponds to a gold standard starts with a value of gold determined by real factors. Given the public’s demand to hold money, the banking system supplies whatever quantity of money is demanded by the public at a price level corresponding to the real value of gold. This monetary theory is a theory of an ideal banking system producing a competitive supply of money. It is the basic monetary paradigm of Adam Smith and a significant group of subsequent monetary theorists who formed the Banking School (and also the Free Banking School) that opposed the Currency School doctrine that provided the rationale for the Bank Charter Act. The model is highly simplified and based on assumptions that aren’t necessarily fulfilled always or even at all in the real world. The same qualification applies to all economic models, but the realism of the monetary model is certainly open to question.

So under the ideal gold-standard model described by Thompson, what was the mechanism of international monetary adjustment? All countries on the gold standard shared a common price level, because, under competitive conditions, prices for any tradable good at any two points in space can deviate by no more than the cost of transporting that product from one point to the other. If geographic price differences are constrained by transportation costs, then the price effects of an increased quantity of gold at any location cannot be confined to prices at that location; arbitrage spreads the price effect at one location across the whole world. So the basic premise underlying the PSFM — that price differences across space resulting from any disturbance to the equilibrium distribution of gold would trigger equilibrating gold shipments to equalize prices — is untenable; price differences between any two points are always constrained by the cost of transportation between those points, whatever the geographic distribution of gold happens to be.

Aside from the theoretical point that there is a single world price level – actually it’s more correct to call it a price band reflecting the range of local price differences consistent with arbitrage — that exists under the gold standard, so that the idea that local prices vary in proportion to the local money stock is inconsistent with standard price theory, Thompson also provided an empirical refutation of the PSFM. According to the PSFM, when gold is flowing into one country and out of another, the price levels in the two countries should move in opposite directions. But the evidence shows that price-level changes in gold-standard countries were highly correlated even when gold flows were in the opposite direction. Similarly, if PSFM were correct, cyclical changes in output and employment should have been correlated with gold flows, but no such correlation between cyclical movements and gold flows is observed in the data. It was on this theoretical foundation that Thompson built a novel — except that Hawtrey and Cassel had anticipated him by about 50 years — interpretation of the Great Depression as a deflationary episode caused by a massive increase in the demand for gold between 1929 and 1933, in contrast to Milton Friedman’s narrative that explained the Great Depression in terms of massive contraction in the US money stock between 1929 and 1933.

Thompson’s ideas about the gold standard, which he had been working on for years before I encountered them, were in the air, and it wasn’t long before I encountered them in the work of Harry Johnson, Bob Mundell, Jacob Frenkel and others at the University of Chicago who were then developing what came to be known as the monetary approach to the balance of payments. Not long after leaving UCLA in 1976 for my first teaching job, I picked up a volume edited by Johnson and Frenkel with the catchy title The Monetary Approach to the Balance of Payments. I studied many of the papers in the volume, but only two made a lasting impression, the first by Johnson and Frenkel “The Monetary Approach to the Balance of Payments: Essential Concepts and Historical Origins,” and the last by McCloskey and Zecher, “How the Gold Standard Really Worked.” Reinforcing what I had learned from Thompson, the papers provided a deeper understanding of the relevant history of thought on the international-monetary-adjustment  mechanism, and the important empirical and historical evidence that contradicts the PSFM. I also owe my interest in Hawtrey to the Johnson and Frenkel paper which cites Hawtrey repeatedly for many of the basic concepts of the monetary approach, especially the existence of a single arbitrage-constrained international price level under the gold standard.

When I attended the History of Economics Society Meeting in Toronto a couple of weeks ago, I had the  pleasure of meeting Deirdre McCloskey for the first time. Anticipating that we would have a chance to chat, I reread the 1976 paper in the Johnson and Frenkel volume and a follow-up paper by McCloskey and Zecher (“The Success of Purchasing Power Parity: Historical Evidence and Its Implications for Macroeconomics“) that appeared in a volume edited by Michael Bordo and Anna Schwartz, A Retrospective on the Classical Gold Standard. We did have a chance to chat and she did attend the session at which I talked about Friedman and the gold standard, but regrettably the chat was not a long one, so I am going to try to keep the conversation going with this post, and the next one in which I will discuss the two McCloskey and Zecher papers and especially the printed comment to the later paper that Milton Friedman presented at the conference for which the paper was written. So stay tuned.

PS Here is are links to Thompson’s essential papers on monetary theory, “The Theory of Money and Income Consistent with Orthodox Value Theory” and “A Reformulation of Macroeconomic Theory” about which I have written several posts in the past. And here is a link to my paper “A Reinterpretation of Classical Monetary Theory” showing that Earl’s ideas actually captured much of what classical monetary theory was all about.

Hayek and Temporary Equilibrium

In my three previous posts (here, here, and here) about intertemporal equilibrium, I have been emphasizing that the defining characteristic of an intertemporal equilibrium is that agents all share the same expectations of future prices – or at least the same expectations of those future prices on which they are basing their optimizing plans – over their planning horizons. At a given moment at which agents share the same expectations of future prices, the optimizing plans of the agents are consistent, because none of the agents would have any reason to change his optimal plan as long as price expectations do not change, or are not disappointed as a result of prices turning out to be different from what they had been expected to be.

The failure of expected prices to be fulfilled would therefore signify that the information available to agents in forming their expectations and choosing optimal plans conditional on their expectations had been superseded by newly obtained information. The arrival of new information can thus be viewed as a cause of disequilibrium as can any difference in information among agents. The relationship between information and equilibrium can be expressed as follows: differences in information or differences in how agents interpret information leads to disequilibrium, because those differences lead agents to form differing expectations of future prices.

Now the natural way to generalize the intertemporal equilibrium model is to allow for agents to have different expectations of future prices reflecting their differences in how they acquire, or in how they process, information. But if agents have different information, so that their expectations of future prices are not the same, the plans on which agents construct their subjectively optimal plans will be inconsistent and incapable of implementation without at least some revisions. But this generalization seems incompatible with the equilibrium of optimal plans, prices and price expectations described by Roy Radner, which I have identified as an updated version of Hayek’s concept of intertemporal equilibrium.

The question that I want to explore in this post is how to reconcile the absence of equilibrium of optimal plans, prices, and price expectations, with the intuitive notion of market clearing that we use to analyze asset markets and markets for current delivery. If markets for current delivery and for existing assets are in equilibrium in the sense that prices are adjusting in those markets to equate demand and supply in those markets, how can we understand the idea that  the optimizing plans that agents are seeking to implement are mutually inconsistent?

The classic attempt to explain this intermediate situation which partially is and partially is not an equilibrium, was made by J. R. Hicks in 1939 in Value and Capital when he coined the term “temporary equilibrium” to describe a situation in which current prices are adjusting to equilibrate supply and demand in current markets even though agents are basing their choices of optimal plans to implement over time on different expectations of what prices will be in the future. The divergence of the price expectations on the basis of which agents choose their optimal plans makes it inevitable that some or all of those expectations won’t be realized, and that some, or all, of those agents won’t be able to implement the optimal plans that they have chosen, without at least some revisions.

In Hayek’s early works on business-cycle theory, he argued that the correct approach to the analysis of business cycles must be analyzed as a deviation by the economy from its equilibrium path. The problem that he acknowledged with this approach was that the tools of equilibrium analysis could be used to analyze the nature of the equilibrium path of an economy, but could not easily be deployed to analyze how an economy performs once it deviates from its equilibrium path. Moreover, cyclical deviations from an equilibrium path tend not to be immediately self-correcting, but rather seem to be cumulative. Hayek attributed the tendency toward cumulative deviations from equilibrium to the lagged effects of monetary expansion which cause cumulative distortions in the capital structure of the economy that lead at first to an investment-driven expansion of output, income and employment and then later to cumulative contractions in output, income, and employment. But Hayek’s monetary analysis was never really integrated with the equilibrium analysis that he regarded as the essential foundation for a theory of business cycles, so the monetary analysis of the cycle remained largely distinct from, if not inconsistent with, the equilibrium analysis.

I would suggest that for Hayek the Hicksian temporary-equilibrium construct would have been the appropriate theoretical framework within which to formulate a monetary analysis consistent with equilibrium analysis. Although there are hints in the last part of The Pure Theory of Capital that Hayek was thinking along these lines, I don’t believe that he got very far, and he certainly gave no indication that he saw in the Hicksian method the analytical tool with which to weave the two threads of his analysis.

I will now try to explain how the temporary-equilibrium method makes it possible to understand  the conditions for a cumulative monetary disequilibrium. I make no attempt to outline a specifically Austrian or Hayekian theory of monetary disequilibrium, but perhaps others will find it worthwhile to do so.

As I mentioned in my previous post, agents understand that their price expectations may not be realized, and that their plans may have to be revised. Agents also recognize that, given the uncertainty underlying all expectations and plans, not all debt instruments (IOUs) are equally reliable. The general understanding that debt – promises to make future payments — must be evaluated and assessed makes it profitable for some agents to specialize in in debt assessment. Such specialists are known as financial intermediaries. And, as I also mentioned previously, the existence of financial intermediaries cannot be rationalized in the ADM model, because, all contracts being made in period zero, there can be no doubt that the equilibrium exchanges planned in period zero will be executed whenever and exactly as scheduled, so that everyone’s promise to pay in time zero is equally good and reliable.

For our purposes, a particular kind of financial intermediary — banks — are of primary interest. The role of a bank is to assess the quality of the IOUs offered by non-banks, and select from the IOUs offered to them those that are sufficiently reliable to be accepted by the bank. Once a prospective borrower’s IOU is accepted, the bank exchanges its own IOU for the non-bank’s IOU. No non-bank would accept a non-bank’s IOU, at least not on terms as favorable as those on which the bank offers in accepting an IOU. In return for the non-bank IOU, the bank credits the borrower with a corresponding amount of its own IOUs, which, because the bank promises to redeem its IOUs for the numeraire commodity on demand, is generally accepted at face value.

Thus, bank debt functions as a medium of exchange even as it enables non-bank agents to make current expenditures they could not have made otherwise if they can demonstrate to the bank that they are sufficiently likely to repay the loan in the future at agreed upon terms. Such borrowing and repayments are presumably similar to the borrowing and repayments that would occur in the ADM model unmediated by any financial intermediary. In assessing whether a prospective borrower will repay a loan, the bank makes two kinds of assessments. First, does the borrower have sufficient income-earning capacity to generate enough future income to make the promised repayments that the borrower would be committing himself to make? Second, should the borrower’s future income, for whatever reason, turn out to be insufficient to finance the promised repayments, does the borrower have collateral that would allow the bank to secure repayment from the collateral offered as security? In making both kinds of assessments the bank has to form an expectation about the future — the future income of the borrower and the future value of the collateral.

In a temporary-equilibrium context, the expectations of future prices held by agents are not the same, so the expectations of future prices of at least some agents will not be accurate, and some agents won’tbe able to execute their plans as intended. Agents that can’t execute their plans as intended are vulnerable if they have incurred future obligations based on their expectations of future prices that exceed their repayment capacity given the future prices that are actually realized. If they have sufficient wealth — i.e., if they have asset holdings of sufficient value — they may still be able to repay their obligations. However, in the process they may have to sell assets or reduce their own purchases, thereby reducing the income earned by other agents. Selling assets under pressure of obligations coming due is almost always associated with selling those assets at a significant loss, which is precisely why it usually preferable to finance current expenditure by borrowing funds and making repayments on a fixed schedule than to finance the expenditure by the sale of assets.

Now, in adjusting their plans when they observe that their price expectations are disappointed, agents may respond in two different ways. One type of adjustment is to increase sales or decrease purchases of particular goods and services that they had previously been planning to purchase or sell; such marginal adjustments do not fundamentally alter what agents are doing and are unlikely to seriously affect other agents. But it is also possible that disappointed expectations will cause some agents to conclude that their previous plans are no longer sustainable under the conditions in which they unexpectedly find themselves, so that they must scrap their old plans replacing them with completely new plans instead. In the latter case, the abandonment of plans that are no longer viable given disappointed expectations may cause other agents to conclude that the plans that they had expected to implement are no longer profitable and must be scrapped.

When agents whose price expectations have been disappointed respond with marginal adjustments in their existing plans rather than scrapping them and replacing them with new ones, a temporary equilibrium with disappointed expectations may still exist and that equilibrium may be reached through appropriate price adjustments in the markets for current delivery despite the divergent expectations of future prices held by agents. Operation of the price mechanism may still be able to achieve a reconciliation of revised but sub-optimal plans. The sub-optimal temporary equilibrium will be inferior to the allocation that would have resulted had agents all held correct expectations of future prices. Nevertheless, given a history of incorrect price expectations and misallocations of capital assets, labor, and other factors of production, a sub-optimal temporary equilibrium may be the best feasible outcome.

But here’s the problem. There is no guarantee that, when prices turn out to be very different from what they were expected to be, the excess demands of agents will adjust smoothly to changes in current prices. A plan that was optimal based on the expectation that the price of widgets would be $500 a unit may well be untenable at a price of $120 a unit. When realized prices are very different from what they had been expected to be, those price changes can lead to discontinuous adjustments, violating a basic assumption — the continuity of excess demand functions — necessary to prove the existence of an equilibrium. Once output prices reach some minimum threshold, the best response for some firms may be to shut down, the excess demand for the product produced by the firm becoming discontinuous at the that threshold price. The firms shutting down operations may be unable to repay loans they had obligated themselves to repay based on their disappointed price expectations. If ownership shares in firms forced to cease production are held by households that have predicated their consumption plans on prior borrowing and current repayment obligations, the ability of those households to fulfill their obligations may be compromised once those firms stop paying out the expected profit streams. Banks holding debts incurred by firms or households that borrowers cannot service may find that their own net worth is reduced sufficiently to make the banks’ own debt unreliable, potentially causing a breakdown in the payment system. Such effects are entirely consistent with a temporary-equilibrium model if actual prices turn out to be very different from what agents had expected and upon which they had constructed their future consumption and production plans.

Sufficiently large differences between expected and actual prices in a given period may result in discontinuities in excess demand functions once prices reach critical thresholds, thereby violating the standard continuity assumptions on which the existence of general equilibrium depends under the fixed-point theorems that are the lynchpin of modern existence proofs. C. J. Bliss made such an argument in a 1983 paper (“Consistent Temporary Equilibrium” in the volume Modern Macroeconomic Theory edited by  J. P. Fitoussi) in which he also suggested, as I did above, that the divergence of individual expectations implies that agents will not typically regard the debt issued by other agents as homogeneous. Bliss therefore posited the existence of a “Financier” who would subject the borrowing plans of prospective borrowers to an evaluation process to determine if the plan underlying the prospective loan sought by a borrower was likely to generate sufficient cash flow to enable the borrower to repay the loan. The role of the Financier is to ensure that the plans that firms choose are based on roughly similar expectations of future prices so that firms will not wind up acting on price expectations that must inevitably be disappointed.

I am unsure how to understand the function that Bliss’s Financier is supposed to perform. Presumably the Financier is meant as a kind of idealized companion to the Walrasian auctioneer rather than as a representation of an actual institution, but the resemblance between what the Financier is supposed to do and what bankers actually do is close enough to make it unclear to me why Bliss chose an obviously fictitious character to weed out business plans based on implausible price expectations rather than have the role filled by more realistic characters that do what their real-world counterparts are supposed to do. Perhaps Bliss’s implicit assumption is that real-world bankers do not constrain the expectations of prospective borrowers sufficiently to suggest that their evaluation of borrowers would increase the likelihood that a temporary equilibrium actually exists so that only an idealized central authority could impose sufficient consistency on the price expectations to make the existence of a temporary equilibrium likely.

But from the perspective of positive macroeconomic and business-cycle theory, explicitly introducing banks that simultaneously provide an economy with a medium of exchange – either based on convertibility into a real commodity or into a fiat base money issued by the monetary authority – while intermediating between ultimate borrowers and ultimate lenders seems to be a promising way of modeling a dynamic economy that sometimes may — and sometimes may not — function at or near a temporary equilibrium.

We observe economies operating in the real world that sometimes appear to be functioning, from a macroeconomic perspective, reasonably well with reasonably high employment, increasing per capita output and income, and reasonable price stability. At other times, these economies do not function well at all, with high unemployment and negative growth, sometimes with high rates of inflation or with deflation. Sometimes, these economies are beset with financial crises in which there is a general crisis of solvency, and even apparently solvent firms are unable to borrow. A macroeconomic model should be able to account in some way for the diversity of observed macroeconomic experience. The temporary equilibrium paradigm seems to offer a theoretical framework capable of accounting for this diversity of experience and for explaining at least in a very general way what accounts for the difference in outcomes: the degree of congruence between the price expectations of agents. When expectations are reasonably consistent, the economy is able to function at or near a temporary equilibrium which is likely to exist. When expectations are highly divergent, a temporary equilibrium may not exist, and even if it does, the economy may not be able to find its way toward the equilibrium. Price adjustments in current markets may be incapable of restoring equilibrium inasmuch as expectations of future prices must also adjust to equilibrate the economy, there being no market mechanism by which equilibrium price expectations can be adjusted or restored.

This, I think, is the insight underlying Axel Leijonhufvud’s idea of a corridor within which an economy tends to stay close to an equilibrium path. However if the economy drifts or is shocked away from its equilibrium time path, the stabilizing forces that tend to keep an economy within the corridor cease to operate at all or operate only weakly, so that the tendency for the economy to revert back to its equilibrium time path is either absent or disappointingly weak.

The temporary-equilibrium method, it seems to me, might have been a path that Hayek could have successfully taken in pursuing the goal he had set for himself early in his career: to reconcile equilibrium-analysis with a theory of business cycles. Why he ultimately chose not to take this path is a question that, for now at least, I will leave to others to try to answer.

Roy Radner and the Equilibrium of Plans, Prices and Price Expectations

In this post I want to discuss Roy Radner’s treatment of an equilibrium of plans, prices, and price expectations (EPPPE) and its relationship to Hayek’s conception of intertemporal equilibrium, of which Radner’s treatment is a technically more sophisticated version. Although I seen no evidence that Radner was directly influenced by Hayek’s work, I consider Radner’s conception of EPPPE to be a version of Hayek’s conception of intertemporal equilibrium, because it captures essential properties of Hayek’s conception of intertemporal equilibrium as a situation in which agents independently formulate their own optimizing plans based on the prices that they actually observe – their common knowledge – and on the future prices that they expect to observe over the course of their planning horizons. While currently observed prices are common knowledge – not necessarily a factual description of economic reality but not an entirely unreasonable simplifying assumption – the prices that individual agents expect to observe in the future are subjective knowledge based on whatever common or private knowledge individuals may have and whatever methods they may be using to form their expectations of the prices that will be observed in the future. An intertemporal equilibrium refers to a set of decentralized plans that are both a) optimal from the standpoint of every agent’s own objectives given their common knowledge of current prices and their subjective expectations of future prices and b) mutually consistent.

If an agent has chosen an optimal plan given current and expected future prices, that plan will not be changed unless the agent acquires new information that renders the existing plan sub-optimal relative to the new information. Otherwise, there would be no reason for the agent to deviate from an optimal plan. The new information that could cause an agent to change a formerly optimal plan would either affect the preferences of the agent, the technology available to the agent, or would somehow be reflected in current prices or in expected future prices. But it seems improbable that there could be a change in preferences or technology would not also be reflected in current or expected future prices. So absent a change in current or expected future prices, there would seem to be almost no likelihood that an agent would deviate from a plan that was optimal given current prices and the future prices expected by the agent.

The mutual consistency of the optimizing plans of independent agents therefore turns out to be equivalent to the condition that all agents observe the same current prices – their common knowledge – and have exactly the same forecasts of the future prices upon which they have relied in choosing their optimal plans. Even should their forecasts of future prices turn out to be wrong, at the moment before their forecasts of future prices were changed or disproved by observation, their plans were still mutually consistent relative to the information on which their plans had been chosen. The failure of the equilibrium to be maintained could be attributed to a change in information that meant that the formerly optimal plans were no longer optimal given the newly acquired information. But until the new information became available, the mutual consistency of optimal plans at that (fleeting) moment signified an equilibrium state. Thus, the defining characteristic of an intertemporal equilibrium in which current prices are common knowledge is that all agents share the same expectations of the future prices on which their optimal plans have been based.

There are fundamental differences between the Arrow-Debreu-McKenzie (ADM) equilibrium and the EPPPE. One difference worth mentioning is that, under the standard assumptions of the ADM model, the equilibrium is Pareto-optimal, and any Pareto-optimum allocation, by a suitable redistribution of initial endowments, could be achieved as a general equilibrium (two welfare theorems). These results do not generally hold for EPPPE, because, in contrast to the ADM model, it is possible for agents in EPPPE to acquire additional information over time, not only passively, but by investing resources in the production of information. Investing resources in the production of information can cause inefficiency in two ways: first, by creating non-convexities (owing to start-up costs in information gathering activities) that are inconsistent with the uniform competitive prices characteristic of the ADM equilibrium, and second, by creating incentives to devote resources to produce information whose value is derived from profits in trading with less well-informed agents. The latter source of inefficiency was discovered by Jack Hirshleifer in his classic 1971 paper, which I have written about in several previous posts (here, here, here, and here).

But the important feature of Radner’s EPPPE that I want to emphasize here — and what radically distinguishes it from the ADM equilibrium — is its fragility. Unlike the ADM equilibrium which is established once and forever at time zero of a model in which all production and consumption starts in period one, the EPPPE, even if it ever exists, is momentary, and is subject to unraveling whenever there is a change in the underlying information upon which current prices and expected future prices depend, and upon which agents, in choosing their optimal plans, rely. Time is not just, as it is in the ADM model, an appendage to the EPPPE, and, as a result, EPPPE can account for many phenomena, practices, and institutions that are left out of the ADM model.

The two differences that are most relevant in this context are the existence of stock markets in which shares of firms are traded based on expectations of the future net income streams associated with those firms, and the existence of a medium of exchange supplied by private financial intermediaries known as banks. In the ADM model in which all transactions are executed in time zero, in advance of all the actual consumption and production activities determined by those transactions, there would be no reason to hold, or to supply, a medium of exchange. The ADM equilibrium allows for agents to borrow or lend at equilibrium interest rates to optimize the time profiles of their consumption relative to their endowments and the time profiles of their earnings. Since all such transactions are consummated in time zero, and since, through some undefined process, the complete solvency and the integrity of all parties to all transactions is ascertained in time zero, the probability of a default on any loan contracted at time zero is zero. As a result, each agent faces a single intertemporal budget constraint at time zero over all periods from 1 to n. Walras’s Law therefore holds across all time periods for this intertemporal budget constraint, each agent transacting at the same prices in each period as every other agent does.

Once an equilibrium price vector is established in time zero, each agent knows that his optimal plan based on that price vector (which is the common knowledge of all agents) will be executed over time exactly as determined in time zero. There is no reason for any exchange of ownership shares in firms, the future income streams from each firm being known in advance.

The ADM equilibrium is a model of an economic process very different from Radner’s EPPPE, because in EPPPE, agents have no reason to assume that their current plans, even if they are momentarily both optimal and mutually consistent with the plans of all other agents, will remain optimal and consistent with the plans of all other agents. New information can arrive or be produced that will necessitate a revision in plans. Because even equilibrium plans are subject to revision, agents must take into account the solvency and credit worthiness of counterparties with whom they enter into transactions. The potentially imperfect credit-worthiness of at least some agents enables certain financial intermediaries (aka banks) to provide a service by offering to exchange their debt, which is widely considered to be more credit-worthy than the debt of ordinary agents, to agents seeking to borrow to finance purchases of either consumption or investment goods. Many agents seeking to borrow therefore prefer exchanging their debt for bank debt, bank debt being acceptable by other agents at face value. In addition, because the acquisition of new information is possible, there is a reason for agents to engage in speculative trades of commodities or assets. Such assets include ownership shares of firms, and agents may revise their valuations of those firms as they revise their expectations about future prices and their expectations about the revised plans of those firms in response to newly acquired information.

I will discuss the special role of banks at greater length in my next post on temporary equilibrium. But for now, I just want to underscore a key point: in the EPPE, unless all agents have the same expectations of future prices, Walras’s Law need not hold. The proof that Walras’s holds depends on the assumption that individual plans to buy and sell are based on the assumption that every agent buys or sells each commodity at the same price that every other transactor buys  or sells that commodity. But in the intertemporal context, in which only current, not future prices, are observed, plans for current and future prices are made based on expectations about future prices. If agents don’t share the same expectations about future prices, agents making plans for future purchases based on overly optimistic expectations about the prices at which they will be able to sell, may make commitments to buy in the future (or commitment to repay loans to finance purchases in the present) that they will be unable to discharge. Reneging on commitments to buy in the future or to repay obligations incurred in the present may rule out the existence of even a temporary equilibrium in the future.

Finally, let me add a word about Radner’s terminology. In his 1987 entry on “Uncertainty and General Equilibrium” for the New Palgrave Dictionary of Economics, (Here is a link to the revised version on line), Radner writes:

A trader’s expectations concern both future environmental events and future prices. Regarding expectations about future environmental events, there is no conceptual problem. According to the Expected Utility Hypothesis, each trader is characterized by a subjective probability measure on the set of complete histories of the environment. Since, by definition, the evolution of the environment is exogenous, a trader’s conditional probability of a future event, given the information to date, is well defined.

It is not so obvious how to proceed with regard to trader’s expectations about future prices. I shall contrast two possible approaches. In the first, which I shall call the perfect foresight approach, let us assume that the behaviour of traders is such as to determine, for each complete history of the environment, a unique corresponding sequence of price system[s]. . .

Thus, the perfect foresight approach implies that, in equilibrium, traders have common price expectation functions. These price expectation functions indicate, for each date-event pair, what the equilibrium price system would be in the corresponding market at that date event pair. . . . [I]t follows that, in equilibrium the traders would have strategies (plans) such that if these strategies were carried out, the markets would be cleared at each date-event pair. Call such plans consistent. A set of common price expectations and corresponding consistent plans is called an equilibrium of plans, prices, and price expectations.

My only problem with Radner’s formulation here is that he is defining his equilibrium concept in terms of the intrinsic capacity of the traders to predict prices rather the simple fact that traders form correct expectations. For purposes of the formal definition of EPPE, it is irrelevant whether traders predictions of future prices are correct because they are endowed with the correct model of the economy or because they are all lucky and randomly have happened simultaneously to form the same expectations of future prices. Radner also formulates an alternative version of his perfect-foresight approach in which agents don’t all share the same information. In such cases, it becomes possible for traders to make inferences about the environment by observing prices differ from what they had expected.

The situation in which traders enter the market with different non-price information presents an opportunity for agents to learn about the environment from prices, since current prices reflect, in a possibly complicated manner, the non-price information signals received by the various agents. To take an extreme example, the “inside information” of a trader in a securities market may lead him to bid up the price to a level higher than it otherwise would have been. . . . [A]n astute market observer might be able to infer that an insider has obtained some favourable information, just by careful observation of the price movement.

The ability to infer non-price information from otherwise inexplicable movements in prices leads Radner to define a concept of rational expectations equilibrium.

[E]conomic agents have the opportunity to revise their individual models in the light of observations and published data. Hence, there is a feedback from the true relationship to the individual models. An equilibrium of this system, in which the individual models are identical with the true model, is called a rational expectations equilibrium. This concept of equilibrium is more subtle, of course, that the ordinary concept of equilibrium of supply and demand. In a rational expectations equilibrium, not only are prices determined so as to equate supply and demand, but individual economic agents correctly perceive the true relationship between the non-price information received by the market participants and the resulting equilibrium market prices.

Though this discussion is very interesting from several theoretical angles, as an explanation of what is entailed by an economic equilibrium, it misses the key point, which is the one that Hayek identified in his 1928 and (especially) 1937 articles mentioned in my previous posts. An equilibrium corresponds to a situation in which all agents have identical expectations of the future prices upon which they are making optimal plans given the commonly observed current prices and the expected future prices. If all agents are indeed formulating optimal plans based on the information that they have at that moment, their plans will be mutually consistent and will be executable simultaneously without revision as long as the state of their knowledge at that instant does not change. How it happened that they arrived at identical expectations — by luck chance or supernatural powers of foresight — is irrelevant to that definition of equilibrium. Radner does acknowledge that, under the perfect-foresight approach, he is endowing economic agents with a wildly unrealistic powers of imagination and computational capacity, but from his exposition, I am unable to decide whether he grasped the subtle but crucial point about the irrelevance of an assumption about the capacities of agents to the definition of EPPPE.

Although it is capable of describing a richer set of institutions and behavior than is the Arrow-Debreu model, the perfect-foresight approach is contrary to the spirit of much of competitive market theory in that it postulates that individual traders must be able to forecast, in some sense, the equilibrium prices that will prevail in the future under all alternative states of the environment. . . .[T]his approach . . . seems to require of the traders a capacity for imagination and computation far beyond what is realistic. . . .

These last considerations lead us in a different direction, which I shall call the bounded rationality approach. . . . An example of the bounded-rationality approach is the theory of temporary equilibrium.

By eschewing any claims about the rationality of the agents or their computational powers, one can simply talk about whether agents do or do not have identical expectations of future prices and what the implications of those assumptions are. When expectations do agree, there is at least a momentary equilibrium of plans, prices and price expectations. When they don’t agree, the question becomes whether even a temporary equilibrium exists and what kind of dynamic process is implied by the divergence of expectations. That it seems to me would be a fruitful way forward for macroeconomics to follow. In my next post, I will discuss some of the characteristics and implications of a temporary-equilibrium approach to macroeconomics.


A Tale of Three Posts

Since I started blogging in July 2011, I have published 521 posts (not including this one). A number of my posts have achieved a fair amount of popularity, as measured by the number of views, which WordPress allows me to keep track of. Many, though not all, of my most widely viewed posts were mentioned by Paul Krugman in his blog. Whenever I noticed an unusually large uptick in the number of viewers visiting the blog, I usually found Krugman had linked to my post, causing a surge of viewers to my blog.

The most visitors I ever had in one day was on August 7, 2012. It was the day after I wrote a post mocking an op-ed in the Wall Street Journal by Arthur Laffer (“Arthur Laffer, Anti-Enlightenment Economist”) in which, based on some questionable data, and embarrassingly bad logic, Laffer maintained that countries that had adopted fiscal stimulus after the 2008-09 downturn had weaker recoveries than countries that had practiced fiscal austerity. This was not the first or last time that Krugman linked to a post of mine, but what made it special was that Krugman linked to it while he on vacation, so that for three days, everyone who visited Krugman’s blog found his post linking to my post, so that on August 7 alone, my post was viewed 7885 times, with 3004 viewing the post on August 8, 1591 on August 9, and 953 on August 10. In the entire month of August, the Laffer post was viewed 15,399 times. To this day, that post remains the most viewed post that I have ever written, having been viewed a total 17,604 times.

As you can see, the post has not maintained its popular appeal, over 87 percent of all views having occurred within three and a half weeks of its having been published. And there’s no reason why it should have retained its popularity. It was a well-written post, properly taking a moderately well-known right-wing economist to task for publishing a silly piece of ideological drivel in a once-great newspaper, but there was nothing especially profound or original about it. It was just the sort of post that Krugman loves to link to, and I was at the top of his blog for three days before he published his next post.

Exactly a year and a half later, February 6, 2014, I wrote another post (“Why Are Wages Sticky?“) that Krugman mentioned on his blog. I wasn’t mocking or attacking anyone, but suggesting what I think is an original theoretical explanation for why wages are more sticky than most other prices, while also reminding people that in the General Theory, Keynes actually tried to explain why wage stickiness was not an essential element of his theoretical argument for the existence of involuntary unemployment. Because it wasn’t as polemical as the earlier post, and because I didn’t have Krugman’s blog all to myself for three days, Krugman’s link did not generate anywhere near the traffic for this post that it did for the Laffer post. The day that Krugman linked to my post, February 7, it was viewed by 1034 viewers (333 of whom were referred by Krugman). Very good, but nowhere near the traffic I got a year and a half earlier. For the entire month of February, the post was viewed 2145 times. Again, that’s pretty good, but probably below average for a post to which Kruman posted a link. But the nice thing about the wage stickiness post is that although the traffic to that post dropped off over the next few months, the decline was not nearly as precipitous as dropoff in traffic to the Laffer post. During all of 2014, wage-stickiness post was viewed a total of 6622 times.

What I also noticed was that after traffic gradully dropped off in the months after February, traffic picked up again in September and again in October before dropping off slightly in December and January,  only to pick up again in February. That pattern, which has continued ever since, suggests to me that somehow econ students, on their own or perhaps at the suggestion of their professors, are looking up what I had to say about wage stickiness. Here is a WordPress table tracking monthly views of this post.

So unlike the Laffer post, the vast majority of the visits to the wage-stickiness post (almost 88%) have occurred since the month in which it was published. So for about two years I have been watching the visits to my wage-stickiness post gradually move up in the rankings of my all-time most viewed posts until I could announce that it had eclipsed the fluke Laffer post as my number one post. The price-stickiness post is now within less than fifty views of passing the Laffer post. Yes, I know it’s not a big deal, but I feel good about it.

But over the past six months, suddenly since October, a third post (“Gold Standard or Gold Exchange Standard: What’s the Difference?“), originally published on July 1, 2015, has been attracting a lot of traffic. When first published, it was moderately successful, drawing 569 visits on July 2, 2015, which is still the most visits it has received on any single day, mostly via links from Mark Toma’s blog and Brad DeLong’s blog. The post was not terribly original, but I think it did a nice job of describing that evolution of the gold standard from an almost accidental and peculiarly British, institution into a totem of late nineteenth-century international monetary orthodoxy, whose principal features remain till this day surprisingly obscure even to well trained and sophisticated monetary economists and financial experts.

And I also tried to show that the supposed differences between the pre-World-War I gold standard and the attempted and ultimately disastrous resurrection of the gold standard (GS 2.0) in the 1920s in the form of what was called a gold-exchange standard were really pretty trivial. So if the gold standard failed when it was reconstituted after World War I, the reason was not that what was tried was not the real thing. It was because of deeper systemic problems that had no direct connection to the nominal difference between the original gold standard and the gold exchange standard. I cconclluded the post with three lengthy quotations from J. M. Keynes’s first book on economics Indian Currency and Finance, which displayed an excellent understanding of the workings of the gold standard and the gold exchange standard, the latter having been the system by which India was linked to gold while under British control before World War I. Here is the WordPress table tracking monthly views of my post on the gold exchange standard.

The number of views this month alone is a staggering amount of traffic for any post — the second most views in a month for any post I have written. And what is more amazing is that the traffic has not been driven by links from other blogs, but has been driven, as best as I can tell, at least partially, by search engines.

The other amazing thing about the burst of traffic to this post is that most of the visitors seem to be coming from India. Over the past 30 days since February 28, this blog has been viewed 17,165 times. The most-often viewed post in that time period was my gold-exchange standard post, which was viewed 7385 times, i.e., over 40% of all views were of that one single post. In the past 30 days, my blog was viewed from India 6446 times while my blog was viewed from the United States only 4863 times. Over the entire history of this blog, about 50% of views have been from within the US. So India is clearly where it’s at now.

Now I know that the Indian monetary system was implicated in this post owing to my extended quotation from Keynes’s book, but that reference is largely incidental. So I am at a loss to explain why all these Indian visitors have been attracted to the blog, and why the attraction seems to be growing exponentially, though I suspect that traffic may have peaked over the last week.

At any rate here is how a WordPress table with my 11 most popular posts (as of today at 3:07 pm EDST).

So, as I write this it is not clear whether my hopes that my price-stickiness post will become my all-time most viewed post will ever come to pass, because my gold exchange standard post may very well pass it before it passes the Laffer post. Even so, over the very long run, I still have a feeling that the wage stickiness post will eventually come out on top. We shall see.

At any rate, if you have ever viewed either one of those posts in the past, I would be interested in hearing from you how you got to it.

PS I realized that, by identifying Paul Krugman’s blog as the blog from which many of my most popular posts have received the largest number of viewers, I inadvertently slighted Mark Thoma’s indispensible blog (, which really is the heart and soul of the econ blogosphere. I just checked, and I see that since my blog started in 2011, over 79,000 viewers have visited my blog via Mark’s blog compared to 53,000 viewers who have visited via Krugman. And I daresay that when Krugman has linked to one of my posts, it’s probably only after he followed Thoma’s link to my blog, so I’m doubly indebted to Mark.

Deconstructing Judge Bybee’s Disingenuous Dissent

On January 27, 2017, Executive Order 13769 was issued; among other things the order instructed cabinet secretaries to stop immigration from seven previously identified countries (Iran, Iraq, Libya, Somalia, Sudan, Syria, and Yemen), the officials being authorized to issue exemptions on a case-by-case basis. The order was immediately challenged in a number of suits in the federal district courts, with at least one court (in Boston) upholding the order. However, the court in the Western district of Washington, finding that the order was likely to be ruled unconstitutional in a trial on the merits, issued a temporary restraining order (TRO) blocking the government from enforcing the order. The government immediately appealed the TRO to the Ninth Circuit Court of Appeals. A three-judge panel of the court heard the appeal, and unanimously dismissed the government’s request for a stay of the TRO in a per curiam decision. Rather than appeal the decision of the 3-judge panel to the full court of appeals, or to the Supreme Court, the government chose to withdraw the initial order, mooting the decision, and began to redraft the order to address the defects in the original order identified by the district court trial judge and the 3-judge panel of the Ninth Circuit.

The opinion of the 3-judge panel upholding the TRO, focused on three provisions of the order: first the 120-day ban on entry into the US by any nationals from the seven listed countries, including nationals who are legal permanent residents, holders of green cards, or other valid non-immigrant visas permitting them to work or reside in the US, second the suspension for 120 days of the refugee resettlement program for nationals of the seven listed countries, and, upon completion of the 120-day period, the prioritization of granting refugee status to religious minorities (i.e., non-Muslims) from those countries, and third, the indefinite suspension of all Syrians from the refugee resettlement program.

Although the cause of action underlying the Washington case was removed by the withdrawal of executive order 13769, the decision of the 3-judge panel remains valid and may be cited as authority by other courts. However, one (unnamed) judge on the Ninth Circuit moved for the opinion to be vacated, a technical term meaning that the decision and the opinion are reduced to the approximate status of, say, a law review article, but become devoid of any precedential authority. A motion by a judge on the court of appeals to vacate a decision is typically not made unless a judge wants to signal his or her strong disagreement with the decision, and the opinion written by Judge Jay Bybee of the Ninth Circuit and concurred in by four other judges of the Ninth Circuit, including the former Chief Judge, Alex Kozinski.

The main points of the opinion of the 3-judge panel were: 1) the states of Washington and Minnesota had standing to act as plaintiffs on behalf of resident aliens and on behalf of citizens whose rights or interests were incidentally harmed by the executive order; 2) the executive order was subject to judicial review notwithstanding broad Constitutional powers assigned to the executive branch in matters of foreign policy and explicit grants of authority by Congress over immigration policy; 3) the TRO issued by the district court was a procedural order based on a finding by the court that the plaintiffs had established a substantial likelihood of success at trial; 4) in seeking to stay the TRO, the government bore the burden of rebutting the decision of the trial court that plaintiffs would prevail on the merits, which could be done either by proving that the wrong standard of judicial review was applied, or by showing that there was a compelling national security justification for the order; 5) the district court was correct in ruling that the plaintiffs had a strong likelihood of success in establishing that the Constitutionally granted rights of due process to which nationals from the seven listed countries who were either legal resident aliens, green-card holders, or holders of valid travel visas are entitled had been violated by the executive order; 6) the likelihood that claims by plaintiffs that they were victims of religious discrimination would be upheld is not clear, but a likelihood of success in establishing their due-process claims having been established, plaintiffs could continue to raise their religious discrimination claims in subsequent proceedings.

In his opinion arguing for the decision and opinion of the 3-judge panel to be vacated, Judge Bybee focused his attention primarily on the standard under which Executive Order 13769 may properly be reviewed. The key point of contention is whether the Supreme Court’s decision in Mandel v. Kleindienst sets the limits to what factors a court may take into consideration in reviewing the Executive Order, the failure of the 3-judge panel to abide by the Mandel standard constituting the fundamental error justifying the panel’s per curiam opinion to be vacated. But before considering the relevance of Mandel v. Kleindienst to the Washington case, I want to take note of some of Judge Bybee’s remarks about the Constitutional status of aliens and the rights to which they are entitled.

Having acknowledged that decisions by the government in the fields of foreign affairs and immigration policy are not entirely beyond the scope of judicial review, Judge Bybee asks how the requirements of judicial review can be reconciled with the deference owed to the political branches in those areas. He responds by invoking an old case:

The Supreme Court has given us a way to analyze these knotty questions, but it depends on our ability to distinguish between two groups of aliens: those who are present within our borders and those who are seeking admission. As the Court explained in Leng May Ma v. Barber,

It is important to note at the outset that our immigration laws have long made a distinction between those aliens who have come to our shores seeking admission, . . . and those who are within the United States after an entry, irrespective of its legality. In the latter instance the Court has recognized additional rights and privileges not extended to those in the former category who are merely “on the threshold of initial entry.” 357 U.S. 185, 187 (1958) (quoting Mezei, 345 U.S. at 212). (pp. 10-11)

The panel did not recognize that critical distinction and it led to manifest error.

This is a quite remarkable assertion by Judge Bybee, because two paragraphs earlier, criticizing the 3-judge panel for having merely paid lip-service to the deference owed to the President in the field of foreign affairs, Judge Bybee commented acidly:

The panel began its analysis from two important premises: first, that it is an “uncontroversial principle” that we “owe substantial deference to the immigration and national security policy determinations of the political branches,” 847 F.3d at 1161; second, that courts can review constitutional challenges to executive actions, see id. at 1164. I agree with both of these propositions. Unfortunately, that was both the beginning and the end of the deference the panel gave the President. (p. 9)

A rather peculiar criticism for Judge Bybee to have made inasmuch as his invocation of the critical distinction between aliens coming to our shores seeking admission and those already within the US after entry is both the beginning and the end of his own recognition of that distinction. But aside from its peculiarity, the criticism was completely misplaced, the distinction between two classes of aliens actually being central to the reasoning by which the panel justified its opinion.

The bedrock of Judge Bybee’s dissent rests is the case Kleindienst v. Mandel decided in 1972. Before Mandel, the doctrine of Consular Nonreviewability was absolute. Thus, in Knauff v. Shaughnessy the Supreme Court rejected the appeal of a former American soldier who wanted to bring his German wife to America under the War Brides Act. His wife’s application for a visa having been denied on the basis of confidential undisclosed information transmitted to the counselor official processing Mrs. Knauff’s visa application, Mr. Knauff filed suit seeking judicial review of the consular decision. The Court ruled that, as an alien applying for admission to the United States, Mrs. Knauff had no due-process claim for a review of the consular decision. The best commentary on the Court’s reprehensible decision was delivered by Justice Jackson in his dissenting opinion (which follows Justice Frankurter’s dissent in the link). “Security is like liberty” wrote Justice Jackson, “in that many are the crimes committed in its name.”

In Mandel, the doctrine of consular nonreviewability was extended, and modified ever-so slightly, to take into account not the non-existent right to due process of non-resident aliens, but the implicated rights of American citizens claiming some injury as a result of the consular official’s rejection of the alien’s visa application. Mandel, a Marxist journalist and scholar invited to speak at an academic conference, had unsuccessfully applied for a visa to enter the United States to attend the conference, his application having been denied by a consular official. In an earlier visit to the US to lecture and participate in academic conferences, Mandel had made an unscheduled appearance not authorized by his visa. Mandel and co-plaintiffs brought suit against Richard Kleindienst to require him to grant a waiver to the denial of Mandel’s visa request on the grounds that denial of Mandel’s request had violated the First and Fifth Amendment rights, not of Mandel, but of the US citizens who had invited him to participate in their conference. Mandel is, sadly, a well-established precedent, but its holding is orthogonal to the point of law – the rights to due process of aliens legally present within our borders – for which Judge Bybee invokes its undeserved authority.

Having both acknowledged and lamented Mandel’s status as an authoritative precedent on which much current immigration law depends, I will digress briefly to that a fair reading of the dissents by Justice Douglas and especially Justice Marshall ought to create substantial doubt in the mind of any disinterested reader that the case was correctly decided. Justice Marshall’s powerful and eloquent dissent deserves particular attention.

Today’s majority apparently holds that Mandel may be excluded and Americans’ First Amendment rights restricted because the Attorney General has given a “facially legitimate and bona fide reason” for refusing to waive Mandel’s visa ineligibility. I do not understand the source of this unusual standard. Merely “legitimate” governmental interests cannot override constitutional rights. Moreover, the majority demands only “facial” legitimacy and good faith, by which it means that this Court will never “look behind” any reason the Attorney General gives. No citation is given for this kind of unprecedented deference to the Executive, nor can I imagine (nor am I told) the slightest justification for such a rule.

Even the briefest peek behind the Attorney General’s reason for refusing a waiver in this case would reveal that it is a sham. The Attorney General informed appellees’ counsel that the waiver was refused because Mandel’s activities on a previous American visit “went far beyond the stated purposes of his trip . . . and represented a flagrant abuse of the opportunities afforded him to express his views in this country.” App. 68. But, as the Department of State had already conceded to appellees’ counsel, Dr. Mandel “was apparently not informed that [his previous] visa was issued only after obtaining a waiver of ineligibility and therefore [Mandel] may not have been aware of the conditions and limitations attached to the [previous] visa issuance.” App. 22. There is no basis in the present record for concluding that Mandel’s behavior on his previous visit was a “flagrant abuse” — or even willful or knowing departure — from visa restrictions. For good reason, the Government in this litigation has never relied on the Attorney General’s reason to justify Mandel’s exclusion. In these circumstances, the Attorney General’s reason cannot possibly support a decision for the Government in this case. But without even remanding for a factual hearing to see if there is any support for the Attorney General’s determination, the majority declares that his reason is sufficient to override appellees’ First Amendment interests.

Thus, the Mandel court’s own invocation of the “facially legitimate and bona fide reason” by which it justified the government’s refusal to grant Mandel a visa was itself neither facially legitimate nor bona fide, but a flagrant exercise of bad faith by the majority, invoking a made-up and pretextual justification for the refusal to grant Mandel a visa that even the government had not offered as a justification of its position. After disposing of this sham argument, Justice Marshall addressed the heart of the majority opinion, the broad grant of power to the Executive to exclude whole classes of aliens from the US.

The heart of appellants’ position in this case . . . is that the Government’s power is distinctively broad and unreviewable because “the regulation in question is directed at the admission of aliens.” Brief for Appellants 33. Thus, in the appellants’ view, this case is no different from a long line of cases holding that the power to exclude aliens is left exclusively to the “political” branches of Government, Congress, and the Executive.

These cases are not the strongest precedents in the United States Reports, and the majority’s baroque approach reveals its reluctance to rely on them completely. They include such milestones as The Chinese Exclusion Case, 130 U.S. 581 (1889), and Fong Yue Ting v. United States, 149 U.S. 698 (1893), in which this Court upheld the Government’s power to exclude and expel Chinese aliens from our midst.

But none of these old cases must be “reconsidered” or overruled to strike down Dr. Mandel’s exclusion, for none of them was concerned with the rights of American citizens. All of them involved only rights of the excluded aliens themselves. At least when the rights of Americans are involved, there is no basis for concluding that the power to exclude aliens is absolute. “When Congress’ exercise of one of its enumerated powers clashes with those individual liberties protected by the Bill of Rights, it is our ‘delicate and difficult task’ to determine whether the resulting restriction on freedom can be tolerated.” United States v. Robel, 389 U.S. 258, 264 (1967). As Robel and many other cases5  show, all governmental power — even the war power, the power to maintain national security, or the power to conduct foreign affairs — is limited by the Bill of Rights. When individual freedoms of Americans are at stake, we do not blindly defer to broad claims of the Legislative Branch or Executive Branch, but rather we consider those claims in light of the individual freedoms. This should be our approach in the present case, even though the Government urges that the question of admitting aliens may involve foreign relations and national defense policies.

The majority recognizes that the right of American citizens to hear Mandel is “implicated” in our case. There were no rights of Americans involved in any of the old alien exclusion cases, and therefore their broad counsel about deference to the political branches is inapplicable. Surely a Court that can distinguish between pre-indictment and post-indictment lineups, Kirby v. Illinois, 406 U.S. 682 (1972), can distinguish between our case and cases which involve only the rights of aliens.

I do not mean to suggest that simply because some Americans wish to hear an alien speak, they can automatically compel even his temporary admission to our country. Government may prohibit aliens from even temporary admission if exclusion is necessary to protect a compelling governmental interest.6  Actual threats to the national security, public health needs, and genuine requirements of law enforcement are the most apparent interests that would surely be compelling.7  But in Dr. Mandel’s case, the Government has, and claims, no such compelling interest. Mandel’s visit was to be temporary.8  His “ineligibility” for a visa was based solely on § 212(a)(28). The only governmental interest embodied in that section is the Government’s desire to keep certain ideas out of circulation in this country. This is hardly a compelling governmental interest. Section (a)(28) may not be the basis for excluding an alien when Americans wish to hear him. Without any claim that Mandel “live” is an actual threat to this country, there is no difference between excluding Mandel because of his ideas and keeping his books out because of their ideas. Neither is permitted. Lamont v. Postmaster General, supra.

Writing for the majority, Justice Blackmun – yes, that Justice Blackmun – attempted to deflect the clear violation of the First Amendment rights of American citizens resulting from the denial of Mandel’s visa application.

Appellees’ First Amendment argument would prove too much. In almost every instance of an alien excludable under § 212(a)(28), there are probably those who would wish to meet and speak with him. The ideas of most such aliens might not be so influential as those of Mandel, nor his American audience so numerous, nor the planned discussion forums so impressive. But the First Amendment does not protect only the articulate, the well known, and the popular. Were we to endorse the proposition that governmental power to withhold a waiver must yield whenever a bona fide claim is made that American citizens wish to meet and talk with an alien excludable under § 212(a)(28), one of two unsatisfactory results would necessarily ensue. Either every claim would prevail, in which case the plenary discretionary authority Congress granted the Executive becomes a nullity, or courts in each case would be required to weigh the strength of the audience’s interest against that of the Government in refusing a waiver to the particular alien applicant, according to some as yet undetermined standard. The dangers and the undesirability of making that determination on the basis of factors such as the size of the audience or the probity of the speaker’s ideas are obvious. Indeed, it is for precisely this reason that the waiver decision has, properly, been placed in the hands of the Executive.

This response might have been persuasive if there had in fact been a bona fide reason for denying Mandel’s visa application. However, the stated reason was clearly pretextual and a sham; the real reason for denying the application was Mandel’s political opinions, so the First Amendment argument raised by Appellees was entirely correct and unrebutted by Justice Blackmun’s majority opinion. Mandel v. Kleindienst was wrongly and dishonestly decided, and, like similar wrongly decided cases, e.g., Korematsu v. United States, deserves, as a matter of simple justice, no precedential weight.

Despite its having been demolished by Justice Marshall’s dissent, I am willing to stipulate for present purposes that the majority opinion in Mandel would be controlling if it were not distinguishable from the case decided by the 3-judge panel. But let us keep in mind two important takeaway points from Justice Marshall’s discussion: first, the disgraceful, racist lineage of the plenary powers doctrine as it relates to immigration, and second, and more importantly for assessing Judge Bybee’s dissent, the absence in Mandel v. Kleindienst of any distinction between the Constitutional rights or interests of citizens that are incidentally abridged by the refusal to admit non-resident aliens into the Unites States and the Constitutional due process rights of aliens legally residing in the United States, precisely the distinction that, Judge Bybee incorrectly asserts, is addressed by Mandel.

Judge Bybee begins by criticizing the 3-judge panel for distinguishing Mandel, in which the Attorney General’s refusal to grant a waiver allowing Mandel entry to the US after a consular official denied his visa application, from an Executive Order promulgating sweeping immigration policy. Judge Bybee offers the following rebuttal:

First, the panel’s declaration that we cannot look behind the decision of a consular officer, but can examine the decision of the President stands the separation of powers on its head. We give deference to a consular officer making an individual determination, but not the President when making a broad, national security-based decision? With a moment’s thought, that principle cannot withstand the gentlest inquiry, and we have said so. See Bustamante v. Mukasey , 531 F.3d 1059, 1062 n.1 (9th Cir. 2008) (“We are unable to distinguish Mandel on the grounds that the exclusionary decision challenged in that case was not a consular visa denial, but rather the Attorney General’s refusal to waive Mandel’s inadmissibility. The holding is plainly stated in terms of the power delegated by Congress to the Executive.’ The Supreme Court said nothing to suggest that the reasoning or outcome would vary according to which executive officer is exercising the Congressionally-delegated power to exclude.”) (pp. 12-13)

Judge Bybee’s sarcasm is as misplaced as it is inappropriate. Mandel is a case about the exercise of a Congressionally authorized power to make a factual determination, normally delegated to a consular official, but in this case the determination at issue was made by the Attorney General reviewing the consular decision. In Bustamente the decision was made at the consular level. Big deal! The Mandel court ruled that such consular decisions to deny visas or higher- level decisions to deny waivers to lower-level decisions were not reviewable on the merits, even if the denials incidentally infringed upon the Constitutional rights of American citizens, provided that “a facially legitimate and bona fide reason” for the decision was provided. The deference accorded by Mandel to the factual decision of a consular official – or his superior — to deny the visa application of a non-resident alien, albeit one that incidentally affected the rights of an American citizen, is in no way comparable to a Presidential decision denying or abridging the Constitutional due-process rights of legally resident aliens, green-card holders and non-immigrant aliens holding valid visas.

Second, the promulgation of broad policy is precisely what we expect the political branches to do; Presidents rarely, if ever, trouble themselves with decisions to admit or exclude individual visa -seekers. See Knauff, 338 U.S. at 543 (“[B]ecause the power of exclusion of aliens is also inherent in the executive department of the sovereign, Congress may in broad terms authorize the executive to exercise the power . . . for the best interests of the country during a time of national emergency.”). If the panel is correct, it just wiped out any principle of deference to the executive. (p. 13)

Is there no deference to the executive unless we allow the Constitutional rights of American citizens and legally resident aliens to be trampled upon by the executive? Since when does “deference” mean “abject submission?” The implications of Judge Bybee’s argument lead straight to Korematsu v. United States. If Judge Bybee is correct, what Constitutional rights may not be abridged by the executive in the process of excluding aliens? Deference to the executive need not entail acquiescence in the denial of due process rights on an industrial scale.

Judge Bybee then invokes Fiallo v. Bell to support his position that broad policy decisions – in this case by Congress, which accorded preferential treatment to the natural mothers of illegitimate children over the natural fathers – are immune from scrutiny despite having discriminatory effects (pp. 13-14). In Fiallo, the Supreme Court upheld a provision of the 1952 Immigration and Nationality Act giving preference for immigration into the US to the legitimate parents of American citizens and to the illegitimate mothers (but not illegitimate fathers) of American citizens as well as to the legitimate children of American parents and to the illegitimate children of American mothers (but not American fathers). A group of illegitimate fathers of American children and illegitimate offspring of American fathers challenged this provision for discriminating on the basis of sex and legitimacy. The Fiallo Court relied on the Mandel “facially legitimate and bona fide reason” test to rule against the plaintiffs.

The panel’s holding that “exercises of policy making authority at the highest levels of the political branches are plainly not subject to the Mandel standard,” id., is simply irreconcilable with the Supreme Court’s holding that it could “see no reason to review the broad congressional policy choice at issue [there] under a more exacting standard than was applied in Kleindienst v. Mandel,” Fiallo, 430 U.S. at 795.

Having thoughtlessly embarked on the wrong road, Judge Bybee keeps marching relentlessly forward. Fiallo, like Mandel, is a case brought by American citizens claiming that their Constitutional rights not to be discriminated against had been incidentally abridged by a Congressional policy decision concerning which aliens, not otherwise eligible for entry into the US, shall be granted special waivers. While the case is related to Mandel, it was not entailed by Mandel, because deference to a consular decision about a question of fact need not entail deference to Congress about a matter of policy. Indeed, both the majority and the minority in Fiallo suggested reasons why the Congressional policy might have been judged to serve a legitimate public purpose. But again the key point is simply that the holding of the Fiallo court did not address the issue addressed by Washington, which is whether the President, by Executive Order, may deny the Constitutional rights of resident aliens, green card holders, and aliens holding valid visas.

Judge Bybee’s wrongheaded attack on the decision of the 3-judge panel reaches a crescendo of confusion in his discussion of Kerry v. Din (pp. 14-16), once again citing a case involving the Constitutional claim of an American citizen as a basis for challenging the denial of a visa to a non-resident alien. In Din, a US citizen whose Afghani husband had been denied an entry visa, claimed that her Constitutional right to live with her husband had been violated without due process. After the Ninth Circuit Court of Appeals upheld her claim, the Supreme Court reversed that decision on appeal. Not only does Judge Bybee misunderstand the relevance of Din to the issues addressed by the 3-judge panel, he fails to recognize that the holding of the Din court has essentially no precedential weight, because the majority that upheld the decision not to grant Din’s husband a visa did not agree on the grounds for rejecting Din’s claim, three justices rejecting Din’s claim that she had a Constitutional right to live with her husband, and two justices arguing that even if she had such a Constitutional right, the consular decision to her husband’s visa request satisfied the Mandel “facially legitimate and bona fide reason” test.

Believing that, because Justice Kennedy’s opinion invoking the Mandel test was controlling, that opinion has precedential authority for other cases, Judge Bybee admonishes the 3-judge panel for ignoring Din. Judge Bybee is wrong on both counts; Din is irrelevant to the opinion of the 3-judge panel, and, even if it were relevant, the 3-judge panel would not have had to reckon with it, because the majority could not agree on the basis of the decision. And I can’t help but observe that, on its face, Justice Kennedy’s opinion that the decision of the consular official that Din’s husband was a terrorist threat merely because he had held a civil-service position under the Taliban government did not obviously satisfy even the weak Mandel test, as Justice Breyer cogently observed in his dissenting opinion.

When Judge Bybee finally does get to a discussion of relevant precedents 16 pages into his 25 page opinion, the best he is able to come up with is Rajah v. Mukasey. After the September 11 attacks, non-immigrant resident males over the age of 16 from 24 Muslim-majority countries plus North Korea were required to appear for registration and fingerprinting. The Second Circuit Court of Appeals upheld this requirement in view of potential risks of further terrorist attacks. Although these requirements were burdensome and discriminatory, those requirements were hardly comparable to exclusion from the United States, so the willingness of the Rajah court to approve such provisions in the wake of the worst terrorist attack in US history does not come close to proving what Judge Bybee wants it to prove: that the law allows the President to revoke the Constitutional rights of resident aliens and prevent them from re-entering the country without even granting them a hearing. In other words, under Judge Bybee’s understanding, resident aliens denied re-entry into the country by Executive Order 13769 would be denied even the minimal “additional rights and privileges not extended to those on the threshold of entry” that, according to the Court in Leng May Ma v. Barber cited above, have been recognized by the Court.

The logical confusion of Judge Bybee’s conflation of two completely different classes of cases is actually quite impressive.

Judge Bybee (p. 20) also invokes 8 U.S.C. 1182f as a legal basis for the executive order at issue. However, the statutory authority of the US Code does not automatically override the Constitutional right to a hearing of a legal resident alien denied re-entry into the United States. Nor is it obvious that the statute in question referring to “the entry of any aliens or of any class of aliens into the United States,” includes resident aliens seeking re-entry into the United States. That is a question of statutory interpretation and the courts are entitled to have the final say on matters of statutory interpretation.

Judge Bybee (p. 20-21) considers that the reasons offered by the President in issuing the executive order were facially legitimate and bona fide reasons, but he acknowledges that in Din, Justice Kennedy indicated that evidence of bad faith on the part of a consular officer who denied a visa might be grounds for questioning whether the reasons offered by consular officer were “facially legitimate and bona fide.” After again chiding the 3-judge panel for not discussing Din, Judge Bybee (p. 21-22) then makes the interesting remark that “it would be a huge leap to suggest that Din’s ‘bad faith’ exception also applies to the motives of broad-policy makers as opposed to those of consular officials.” Because the grounds for suspecting that the executive order was issued in bad faith are so varied and abundant, it is astonishing that Judge Bybee would consider it a leap to conclude that a bad-faith exception might apply to a policy maker, especially after Judge Bybee was so insistent earlier in his opinion that the Mandel “facially legitimate and bona fide reason” test originally applied to the consular nonreviewability doctrine applied seamlessly to both consular decisions and to broad policy decisions.

There are other defects of Judge Bybee’s decision that I could have touched on, but this post is already much too long, and I have devoted too much of my time to tracking them down and explaining them. But I hope others will continue.

Roger Farmer’s Prosperity for All

I have just read a review copy of Roger Farmer’s new book Prosperity for All, which distills many of Roger’s very interesting ideas into a form which, though readable, is still challenging — at least, it was for me. There is a lot that I like and agree with in Roger’s book, and the fact that he is a UCLA economist, though he came to UCLA after my departure, is certainly a point in his favor. So I will begin by mentioning some of the things that I really liked about Roger’s book.

What I like most is that he recognizes that beliefs are fundamental, which is almost exactly what I meant when I wrote this post (“Expectations Are Fundamental”) five years ago. The point I wanted to make is that the idea that there is some fundamental existential reality that economic agents try — and, if they are rational, will — perceive is a gross and misleading oversimplification, because expectations themselves are part of reality. In a world in which expectations are fundamental, the Keynesian beauty-contest theory of expectations and stock prices (described in chapter 12 of The General Theory) is not absurd as it is widely considered to be believers in the efficient market hypothesis. The almost universal unprofitability of simple trading rules or algorithms is not inconsistent with a market process in which the causality between prices and expectations goes in both directions, in which case anticipating expectations is no less rational than anticipating future cash flows.

One of the treats of reading this book is Farmer’s recollections of his time as a graduate student at Penn in the early 1980s when David Cass, Karl Shell, and Costas Azariadis were developing their theory of sunspot equilibrium in which expectations are self-fulfilling, an idea skillfully deployed by Roger to revise the basic New Keynesian model and re-orient it along a very different path from the standard New Keynesian one. I am sympathetic to that reorientation, and the main reason for that re-orientation is that Roger rejects the idea that there is a unique equilibrium to which the economy automatically reverts, albeit somewhat more slowly than if speeded along by the appropriate monetary policy, on its own. The notion that there is a unique equilibrium to which the economy automatically reverts is an assumption with no basis in theory or experience. The most that the natural-rate hypothesis can tell us is that if an economy is operating at its natural rate of unemployment, monetary expansion cannot permanently reduce the rate of unemployment below that natural rate. Eventually — once economic agents come to expect that the monetary expansion and the correspondingly higher rate of inflation will be maintained indefinitely — the unemployment rate must revert to the natural rate. But the natural-rate hypothesis does not tell us that monetary expansion cannot reduce unemployment when the actual unemployment rate exceeds the natural rate, although it is often misinterpreted as making that assertion.

In his book, Roger takes the anti-natural-rate argument a step further, asserting that the natural rate of unemployment rate is not unique. There is actually a range of unemployment rates at which the economy can permanently remain; which of those alternative natural rates the economy winds up at depends on the expectations held by the public about nominal future income. The higher expected future income, the greater consumption spending and, consequently, the greater employment. Things are a bit more complicated than I have just described them, because Roger also believes that consumption depends not on current income but on wealth. However, in the very simplified model with which Roger operates, wealth depends on expectations about future income. The more optimistic people are about their income-earning opportunities, the higher asset values; the higher asset values, the wealthier the public, and the greater consumption spending. The relationship between current income and expected future income is what Roger calls the belief function.

Thus, Roger juxtaposes a simple New Keynesian model against his own monetary model. The New Keynesian model consists of 1) an investment equals saving equilibrium condition (IS curve) describing the optimal consumption/savings decision of the representative individual as a locus of combinations of expected real interest rates and real income, based on the assumed rate of time preference of the representative individual, expected future income, and expected future inflation; 2) a Taylor rule describing how the monetary authority sets its nominal interest rate as a function of inflation and the output gap and its target (natural) nominal interest rate; 3) a short-run Phillips Curve that expresses actual inflation as a function of expected future inflation and the output gap. The three basic equations allow three endogenous variables, inflation, real income and the nominal rate of interest to be determined. The IS curve represents equilibrium combinations of real income and real interest rates; the Taylor rule determines a nominal interest rate; given the nominal rate determined by the Taylor rule, the IS curve can be redrawn to represent equilibrium combinations of real income and inflation. The intersection of the redrawn IS curve with the Phillips curve determines the inflation rate and real income.

Roger doesn’t like the New Keynesian model because he rejects the notion of a unique equilibrium with a unique natural rate of unemployment, a notion that I have argued is theoretically unfounded. Roger dismisses the natural-rate hypothesis on empirical grounds, the frequent observations of persistently high rates of unemployment being inconsistent with the idea that there are economic forces causing unemployment to revert back to the natural rate. Two responses to this empirical anomaly are possible: 1) the natural rate of unemployment is unstable, so that the observed persistence of high unemployment reflect increases in the underlying but unobservable natural rate of unemployment; 2) the adverse economic shocks that produce high unemployment are persistent, with unemployment returning to a natural level only after the adverse shocks have ceased. In the absence of independent empirical tests of the hypothesis that the natural rate of unemployment has changed, or of the hypothesis that adverse shocks causing unemployment to rise above the natural rate are persistent, neither of these responses is plausible, much less persuasive.

So Roger recasts the basic New Keynesian model in a very different form. While maintaining the Taylor Rule, he rewrites the IS curve so that it describes a relationship between the nominal interest rate and the expected growth of nominal income given the assumed rate of time preference, and in place of the Phillips Curve, he substitutes his belief function, which says that the expected growth of nominal income in the next period equals the current rate of growth. The IS curve and the Taylor Rule provide two steady state equations in three variables, nominal income growth, nominal interest rate and inflation, so that the rate of inflation is left undetermined. Once the belief function specifies the expected rate of growth of nominal income, the nominal interest rate consistent with expected nominal-income growth is determined. Since the belief function tells us only that the expected nominal-income growth equals the current rate of nominal-income growth, any change in nominal-income growth persists into the next period.

At any rate, Roger’s policy proposal is not to change the interest-rate rule followed by the monetary authority, but to propose a rule whereby the monetary authority influences the public’s expectations of nominal-income growth. The greater expected nominal-income growth, the greater wealth, and the greater consumption expenditures. The greater consumption expenditures, the greater income and employment. Expectations are self-fulfilling. Roger therefore advocates a policy by which the government buys and sells a stock-market index fund in order to keep overall wealth at a level that will generate enough consumption expenditures to support maximum sustainable employment.

This is a quick summary of some of the main substantive arguments that Roger makes in his book, and I hope that I have not misrepresented them too badly. As I have already said, I very much sympathize with his criticism of the New Keynesian model, and I agree with nearly all of his criticisms. I also agree wholeheartedly with his emphasis on the importance of expectations and on self-fulfilling character of expectations. Nevertheless, I have to admit that I have trouble taking Roger’s own monetary model and his policy proposal for stabilizing a broad index of equity prices over time seriously. And the reason I am so skeptical about Roger’s model and his policy recommendation is that his model, which does after all bear at least a family resemblance to the simple New Keynesian model, strikes me as being far too simplified to be credible as a representation of a real-world economy. His model, like the New Keynesian model, is an intertemporal model with neither money nor real capital, and the idea that there is an interest rate in such model is, though theoretically defensible, not very plausible. There may be a sequence of periods in such a model in which some form of intertemporal exchange takes place, but without explicitly introducing at least one good that is carried over from period to period, the extent of intertemporal trading is limited and devoid of the arbitrage constraints inherent in a system in which real assets are held from one period to the next.

So I am very skeptical about any macroeconomic model with no market for real assets so that the interest rate interacts with asset values and expected future prices in such a way that the existing stock of durable assets is willingly held over time. The simple New Keynesian model in which there is no money and no durable assets, but simply bonds whose existence is difficult to rationalize in the absence of money or durable assets, does not strike me as a sound foundation for making macroeconomic policy. An interest rate may exist in such a model, but such a model strikes me as woefully inadequate for macroeconomic policy analysis. And although Roger has certainly offered some interesting improvements on the simple New Keynesian model, I would not be willing to rely on Roger’s monetary model for the sweeping policy and institutional recommendations that he proposes, especially his proposal for stabilizing the long-run growth path of a broad index of stock prices.

This is an important point, so I will try to restate it within a wider context. Modern macroeconomics, of which Roger’s model is one of the more interesting examples, flatters itself by claiming to be grounded in the secure microfoundations of the Arrow-Debreu-McKenzie general equilibrium model. But the great achievement of the ADM model was to show the logical possibility of an equilibrium of the independently formulated, optimizing plans of an unlimited number of economic agents producing and trading an unlimited number of commodities over an unlimited number of time periods.

To prove the mutual consistency of such a decentralized decision-making process coordinated by a system of equilibrium prices was a remarkable intellectual achievement. Modern macroeconomics deceptively trades on the prestige of this achievement in claiming to be founded on the ADM general-equilibrium model; the claim is at best misleading, because modern macroeconomics collapses the multiplicity of goods, services, and assets into a single non-durable commodity, so that the only relevant plan the agents in the modern macromodel are called upon to make is a decision about how much to spend in the current period given a shared utility function and a shared production technology for the single output. In the process, all the hard work performed by the ADM general-equilibrium model in explaining how a system of competitive prices could achieve an equilibrium of the complex independent — but interdependent — intertemporal plans of a multitude of decision-makers is effectively discarded and disregarded.

This approach to macroeconomics is not microfounded, but its opposite. The approach relies on the assumption that all but a very small set of microeconomic issues are irrelevant to macroeconomics. Now it is legitimate for macroeconomics to disregard many microeconomic issues, but the assumption that there is continuous microeconomic coordination, apart from the handful of potential imperfections on which modern macroeconomics chooses to focus is not legitimate. In particular, to collapse the entire economy into a single output, implies that all the separate markets encompassed by an actual economy are in equilibrium and that the equilibrium is maintained over time. For that equilibrium to be maintained over time, agents must formulate correct expectations of all the individual relative prices that prevail in those markets over time. The ADM model sidestepped that expectational problem by assuming that a full set of current and forward markets exists in the initial period and that all the agents participating in the economy are present and endowed with wealth enabling them to trade in the initial period. Under those rather demanding assumptions, if an equilibrium price vector covering all current and future markets is arrived at, the optimizing agents will formulate a set of mutually consistent optimal plans conditional on that vector of equilibrium prices so that all the optimal plans can and will be carried out as time happily unfolds for as long as the agents continue in their blissful existence.

However, without a complete set of current and forward markets, achieving the full equilibrium of the ADM model requires that agents formulate consistent expectations of the future prices that will be realized only over the course of time not in the initial period. Roy Radner, who extended the ADM model to accommodate the case of incomplete markets, called such a sequential equilibrium, an equilibrium of plans, prices and expectations. The sequential equilibrium described by Radner has the property that expectations are rational, but the assumption of rational expectations for all future prices over a sequence of future time periods is so unbelievably outlandish as an approximation to reality — sort of like the assumption that it could be 76 degrees fahrenheit in Washington DC in February — that to build that assumption into a macroeconomic model is an absurdity of mind-boggling proportions. But that is precisely what modern macroeconomics, in both its Real Business Cycle and New Keynesian incarnations, has done.

If instead of the sequential equilibrium of plans, prices and expectations, one tries to model an economy in which the price expectations of agents can be inconsistent, while prices adjust within any period to clear markets – the method of temporary equilibrium first described by Hicks in Value and Capital – one can begin to develop a richer conception of how a macroeconomic system can be subject to the financial disturbances, and financial crises to which modern macroeconomies are occasionally, if not routinely, vulnerable. But that would require a reorientation, if not a repudiation, of the path on which macroeconomics has been resolutely marching for nigh on forty years. In his 1984 paper “Consistent Temporary Equilibrium,” published in a volume edited by J. P. Fitoussi, C. J. Bliss made a start on developing such a macroeconomic theory.

There are few economists better equipped than Roger Farmer to lead macroeconomics onto a new and more productive path. He has not done so in this book, but I am hoping that, in his next one, he will.

The Incoherence and Bad Faith of Antonin Scalia’s Originalism — Updated

UPDATE: I just realized that yesterday I mistakenly published a rough draft of this post instead of the version that I had intended to publish. I apologize for that unforced error.

My previous post about judge-made law was inspired by a comment by Scott Sumner on the post before that about Judge Gorsuch. Well, another commenter, gofx, who commented on the post about judge-made law, has inspired this post. Let’s see how long we can keep this recursive equilibrium going. Here’s what gofx had to say:

David, I think your original post criticizing Gorsuch for a “monumental denial of reality” is confusing a normative statement and a positive statement. Textualists, like Scalia and others try to balance the effects common law, statutory, and executive (administrative) law. Yes, English common law is one of the bases of American law. But even the supreme court placed limits on federal judges creating common law with respect to certain areas of state law (Erie Railroad Co. v. Tompkins). So while common law remains important, judges are no longer the King’s agents attempting to standardize decisions and principles across the realm. Along came democracy, legislatures and executive-branch regulations. There is still plenty of scope for common law, but there is more and more “prescribed” laws and rules.

I agree that there is a problem here with confusing “normative” and “positive” statements about the law and the role of judges in making – or not making – law. But I don’t think that the confusion is mine. This is an important point, which will come up again below. But first, let me quote further from gofx’s comment:

Here is Scalia in “Common Law Courts in a Civil Law System: The Role of United States Federal Courts in Interpreting the Constitution and Laws:”

But though I have no quarrel with the common law and its process, I do question whether the attitude of the common-law judge – the mind-set that asks, “What is the most desirable resolution of this case, and how can any impediments to the achievement of that result be evaded?”– is appropriate for most of the work that I do, and much of the work that state judges do. We live in an age of legislation, and most new law is statutory law. As one legal historian has put it, in modern times “the main business of government, and therefore of law, [is] legislative and executive …. Even private law, so-called, [has been] turning statutory. The lion’s share of the norms and rules that actually govern[} the country [come) out of Congress and the legislatures. . . . The rules of the countless administrative agencies [are] themselves an important, even crucial, source of law.” This is particularly true in the federal courts, where, with a qualification so small it does not bear• mentioning, there is no such thing as common law.”

I am grateful for the reference to this essay based on two lectures given by Scalia in 2010, which I have now read for the first time. The first thing to note about the lecture is that despite his disclaimer about having “no quarrel with the common law and its process,” Scalia adopts an almost uniformly derogatory and disdainful attitude toward the common law and especially toward common-law judges; the disdain, bordering on contempt, is palpable. Here are some examples aside from the one gofx kindly provided:

As I have described, this system of making law by judicial opinion, and making law by distinguishing earlier cases, is what every American law student, what every newborn American lawyer, first sees when he opens his eyes. And the impression remains with him for life. His image of the great judge — the Holmes, the Cardozo — is the man (or woman) who has the intelligence to know what is the best rule of law to govern the case at hand, and then the skill to perform the broken-field running through earlier cases that leaves him free to impose that rule — distinguishing one prior case on his left, straight-arming another one on his right, high-stepping away from another precedent about to tackle him from the rear, until (bravo!) he reaches his goal: good law. That image of the great judge remains with the former law student when he himself becomes a judge, and thus the common-law tradition is passed on and on.

[T]he subject of statutory interpretation deserves study and attention in its own right, as the principal business of lawyers and judges. It will not do to treat the enterprise as simply an inconvenient modern add-on to the judges’ primary role of common-law lawmaking. Indeed, attacking the enterprise with the Mr. Fix-it mentality of the common-law judge is a sure recipe for incompetence and usurpation.

But the Great Divide with regard to constitutional interpretation is not that between Framers’ intent and objective meaning; but rather that between original meaning (whether derived from Framers’ intent or not) and current meaning. The ascendant school of constitutional interpretation affirms the existence of what is called the “living Constitution,” a body of law that (unlike normal statutes) grows and changes from age to age, in order to meet the needs of a changing society. And it is the judges who determine those needs and “find” that changing law. Seems familiar, doesn’t it? Yes, it is the common law returned, but infinitely more powerful than what the old common law ever pretended to be, for now it trumps even the statutes of democratic legislatures.

If you go into a constitutional law class, or study a constitutional-law casebook, or read a brief filed in a constitutional-law case, you will rarely find the discussion addressed to the text of the constitutional provision that is at issue, or to the question of what was the originally understood or even the originally intended meaning of that text. Judges simply ask themselves (as a good common-law judge would) what ought the result to be, and then proceed to the task of distinguishing (or, if necessary, overruling) any prior Supreme Court cases that stand in the way. Should there be (to take one of the less controversial examples) a constitutional right to die? If so, there is. Should there be a constitutional right to reclaim a biological child put out for adoption by the other parent? Again, if so, there is. If it is good, it is so. Never mind the text that we are supposedly construing; we will smuggle these in, if all else fails, under the Due Process Clause (which, as I have described, is textually incapable of containing them). Moreover, what the Constitution meant yesterday it does not necessarily mean today. As our opinions say in the context of our Eighth Amendment jurisprudence (the Cruel and Unusual Punishments Clause), its meaning changes to reflect “the evolving standards of decency that mark the progress of a maturing society.”

This is preeminently a common-law way of making law, and not the way of construing a democratically adopted text. . . . The Constitution, however, even though a democratically adopted text, we formally treat like the common law. What, it is fair to ask, is our justification for doing so?

The apparent reason for Scalia’s disdain for common-law judging is basically that judges, rather than deferring to the popular will expressed through legislation, presume to think that they can somehow figure out what the right, or best, decision is rather than mechanically follow the text of a statute enacted by a democratic legislature. Scalia hates judges who think for themselves, because, by thinking for themselves, they betray an insufferable elitisim instead of dutifully deferring to democratically elected legislators through whom the popular will is faithfully expressed. For Scalia it is the only the popular will that matters, the rights and interests of the litigants appearing before the judge being of little consequence compared to upholding the statutory text, the authoritative articulation of the popular will. Moreover, even if the statutes don’t achieve the right result, the people can at least read the statutes and regulations and know what the law says and how it will be enforced. And how can the people ever know what those high and mighty judges will decide to do next? And we all know — do we not? — the countless hours of their spare time spent in libraries and on-line by the unwashed masses poring over the latest additions to US Code and the Federal Register. Just think how all those long hours devoted to reading the US Code and the Federal Register would be wasted if those arrogant judges could simply ignore the plain meaning of the statutes and regulations and were allowed to use their own judgment in deciding cases.

I will forego, at least for now, indulging my desire to comment on Scalia’s critique of common-law judging. I want to focus instead on the positive case that Scalia makes for his textualist theory of statutory interpretation. To do so, let me quote liberally from Richard Posner’s withering 2012 review of Scalia’s treatise (co-authored by Bryan Garner), Reading the Law: The Interpretation of Legal Texts, which exposes the both the incoherence and the bad faith of Scalia’s textualist arguments. The entire review is worthy of careful study, but I will pick out a few paragraphs that highlight Scalia’s tortured relationship with and attitude toward the common law.

Judges like to say that all they do when they interpret a constitutional or statutory provision is apply, to the facts of the particular case, law that has been given to them. They do not make law: that is the job of legislators, and for the authors and ratifiers of constitutions. They are not Apollo; they are his oracle. They are passive interpreters. Their role is semantic.

The passive view of the judicial role is aggressively defended in a new book by Justice Antonin Scalia and the legal lexicographer Bryan Garner (Reading Law: The Interpretation of Legal Texts, 2012). They advocate what is best described as textual originalism, because they want judges to “look for meaning in the governing text, ascribe to that text the meaning that it has borne from its inception, and reject judicial speculation about both the drafters’ extra-textually derived purposes and the desirability of the fair reading’s anticipated consequences.” This austere interpretive method leads to a heavy emphasis on dictionary meanings, in disregard of a wise warning issued by Judge Frank Easterbrook, who though himself a self-declared textualist advises that “the choice among meanings [of words in statutes] must have a footing more solid than a dictionary—which is a museum of words, an historical catalog rather than a means to decode the work of legislatures.” Scalia and Garner reject (before they later accept) Easterbrook’s warning. Does an ordinance that says that “no person may bring a vehicle into the park” apply to an ambulance that enters the park to save a person’s life? For Scalia and Garner, the answer is yes. After all, an ambulance is a vehicle—any dictionary will tell you that. If the authors of the ordinance wanted to make an exception for ambulances, they should have said so. And perverse results are a small price to pay for the objectivity that textual originalism offers (new dictionaries for new texts, old dictionaries for old ones). But Scalia and Garner later retreat in the ambulance case, and their retreat is consistent with a pattern of equivocation exhibited throughout their book. . . .

Another interpretive principle that Scalia and Garner approve is the presumption against the implied repeal of state statutes by federal statutes. They base this “on an assumption of what Congress, in our federal system, would or should normally desire.” What Congress would desire? What Congress should desire? Is this textualism, too?

And remember the ambulance case? Having said that the conclusion that an ambulance was forbidden to enter the park even to save a person’s life was entailed by textual originalism and therefore correct, Scalia and Garner remark several hundred pages later that the entry of the ambulance is not prohibited after all, owing to the “common-law defense of necessity,” which they allow to override statutory text. Yet just four pages later they say that except in “select fields such as admiralty law, [federal courts] have no significant common-law powers.” And still elsewhere, tacking back again, they refer approvingly to an opinion by Justice Kennedy (Leegin Creative Leather Products, Inc. v. PSKS, Inc.), which states that “the Sherman Act’s use of ‘restraint of trade’ invokes the common law itself … not merely the static content that the common law had assigned to the term in 1890.” In other words, “restraint of trade” had a specific meaning (and it did: it meant “restraints on alienation”) in 1890 that judges are free to alter in conformity with modern economics—a form of “dynamic” interpretation that should be anathema to Scalia and Garner. A few pages later they say that “federal courts do not possess the lawmaking power of common-law courts,” ignoring not only the antitrust and ambulance cases but also the fact that most of the concepts deployed in federal criminal law—such as mens rea (intent), conspiracy, attempt, self-defense, and necessity—are common law concepts left undefined in criminal statutes.

Scalia and Garner indicate their agreement with a number of old cases that hold that an heir who murders his parents or others from whom he expects to inherit is not disqualified from inheriting despite the common law maxim that no person shall be permitted to profit from his wrongful act. (Notice how common law floats in and out of their analysis, unpredictably.) They say that these cases are “textually correct” though awful, and are happy to note that they have been overruled by statute. Yet just before registering their approval they had applauded the rule that allows the deadlines in statutes of limitations to be “tolled” (delayed) “because of unforeseen events that make compliance impossible.” The tolling rule is not statutory. It is a judicial graft on statutes that do not mention tolling. Scalia and Garner do not explain why that is permissible, but a judicial graft disqualifying a murdering heir is not.

Scalia and Garner defend the canon of construction that counsels judges to avoid interpreting a statute in a way that will render it unconstitutional, declaring that this canon is good “judicial policy.” Judicial policy is the antithesis of textual originalism. They note that “many established principles of interpretation are less plausibly based on a reasonable assessment of meaning than on grounds of policy adopted by the courts”—and they applaud those principles, too. They approve the principle that statutes dealing with the same subject should “if possible be interpreted harmoniously,” a principle they deem “based upon a realistic assessment of what the legislature ought to have meant,” which in turn derives from the “sound principles…that the body of the law should make sense, and…that it is the responsibility of the courts, within the permissible meanings of the text, to make it so” (emphasis added). In other words, judges should be realistic, should impose right reason on legislators, should in short clean up after the legislators.

I would just note in passing that Posner shows that the confusion between normative and positive which gofx in the comment above ascribed to me is obviously running rampant, if not amok, throughout Scalia’s treatise. But Posner’s evisceration of Scalia’s bad faith does not go far enough, because the bad faith extends beyond Scalia’s willingness to invoke (or smuggle in) common-law principles to cover up the gaps in his textualism. Scalia’s whole originalist doctrine that the text of the Constitution should be interpreted according to the original meaning of the text of the Constitution relies on the premise that the judicial interpretations of the Constitution had always been governed by the original meaning that had been universally attributed to the Constitutional text. It was only much later, say, in the middle of the twentieth century, on or about May 17, 1954, that the interpretation of the Constitution was perverted by the reprehensible judges and their academic handmaidens who invented the notion of a living constitution that adjusts to the “evolving standards of decency that mark the progress of a maturing society.” Let me quote once more from Posner’s review:

Scalia and Garner contend that textual originalism was the dominant American method of judicial interpretation until the middle of the twentieth century. The only evidence they provide, however, consists of quotations from judges and jurists, such as William Blackstone, John Marshall, and Oliver Wendell Holmes, who wrote before 1950. Yet none of those illuminati, while respectful of statutory and constitutional text, as any responsible lawyer would be, was a textual originalist. All were, famously, “loose constructionists.”

Scalia and Garner call Blackstone “a thoroughgoing originalist.” They say that “Blackstone made it very clear that original meaning governed.” Yet they quote in support the famous statement in his Commentaries on the Laws of England that “the fairest and most rational method to interpret the will of the legislator, is by exploring his intentions at the time when the law made, by signs the most natural and probable. And these signs are either the words, the context, the subject matter, the effects and consequence, or the spirit and reason of the law” (emphasis mine, except that the first “signs” is emphasized in the original). Blackstone adds that “the most universal and effectual way of discovering the true meaning of a law, when the words are dubious, is by considering the reason and spirit of it; or the cause which moved the legislator to enact it.”

Just so! But, once again, Posner goes too easy on Scalia, because Scalia’s whole premise in his essay on common law courts, to which gofx pointed me, is that the modern theories of Constitutional interpretation so abhorent to Scalia are basically extensions, albeit extreme extensions, of common-law judging in which the judge tries to find the best possible outcome for the case he that he is deciding, unconstrained by any statutory or Constitutional text. It is the lack of subordination by common-law judges to any authoritative legal text with a fixed meaning that they are bound to accept that is the ultimate heresy of which all common-law judges, in Scalia’s eyes, stand convicted. But when the US Constitution was ratified all the judges in America and Britain were common-law judges. And Blackstone’s magisterial Commentaries on the Laws of England was a four-volume paean to the common law of England. So, under Scalia’s own originalist doctrine, the meaning of the judiciary in the US Constitution, written by the Framers under Blackstone’s thrall, was the kind of judging practiced by common-law judges. The judges who interpreted the Constitution for almost two centuries after the Constitution was ratified were common-law judges and they were interpreting the Constitution using the very interpretative methods of common-law judges that Scalia so violently condemns.

Scalia has literally hoisted himself by his own originalist petard. Couldn’t have happened to a finer fellow.

Yes, Judges Do Make Law

Scott Sumner has just written an interesting comment to my previous post in which I criticized a remark made by Judge Gorsuch upon being nominated to fill the vacant seat on the Supreme Court — so interesting, in fact, that I think it is worth responding to him in a separate post.

First, here is the remark made by Judge Gorsuch to which I took exception.

I respect, too, the fact that in our legal order, it is for Congress and not the courts to write new laws. It is the role of judges to apply, not alter, the work of the people’s representatives. A judge who likes every outcome he reaches is very likely a bad judge . . . stretching for results he prefers rather than those the law demands.

I criticized Judge Gorsuch for denying what to me is the obvious fact that judges do make law. They make law, because the incremental effect of each individual decision results in a legal order that is different from the legislation that has been enacted by legislatures. Each decision creates a precedent that must be considered by other judges as they apply and construe the sum total of legislatively enacted statutes in light of, and informed by, the precedents of judges and the legal principles that have guided judges those precedents. Law-making by judges under a common law system — even a common law system in which judges are bound to acknowledge the authority of statutory law — is inevitable for many reasons, one but not the only reason being that statutes will sooner or later have to be applied in circumstances were not foreseen by that legislators who enacted those statutes.

To take an example of Constitutional law off the top of my head: is it an unreasonable search for the police to search the cell phone of someone they have arrested without first getting a search warrant? That’s what the Supreme Court had to decide two years ago in Riley v. California. The answer to that question could not be determined by reading the text of the Fourth Amendment which talks about the people being secure in their “persons, houses, papers, or effects” or doing a historical analysis of what the original understanding of the terms “search” and “seizure” and “papers and effects” was when the Fourth Amendment to the Constitution was enacted. Earlier courts had to decide whether government eavesdropping on phone calls violated the Fourth Amendment. And other courts have had to decide whether collecting meta data about phone calls is a violation. Answers to those legal questions can’t be found by reading the relevant legal text.

Here’s part of the New York Times story about the Supreme Court’s decision in Riley v. Califronia.

In a sweeping victory for privacy rights in the digital age, the Supreme Court on Wednesday unanimously ruled that the police need warrants to search the cellphones of people they arrest.

While the decision will offer protection to the 12 million people arrested every year, many for minor crimes, its impact will most likely be much broader. The ruling almost certainly also applies to searches of tablet and laptop computers, and its reasoning may apply to searches of homes and businesses and of information held by third parties like phone companies.

“This is a bold opinion,” said Orin S. Kerr, a law professor at George Washington University. “It is the first computer-search case, and it says we are in a new digital age. You can’t apply the old rules anymore.”

But he added that old principles required that their contents be protected from routine searches. One of the driving forces behind the American Revolution, Chief Justice Roberts wrote, was revulsion against “general warrants,” which “allowed British officers to rummage through homes in an unrestrained search for evidence of criminal activity.”

“The fact that technology now allows an individual to carry such information in his hand,” the chief justice also wrote, “does not make the information any less worthy of the protection for which the founders fought.”

Now for Scott’s comment:

I don’t see how Gorsuch’s view conflicts with your view. It seems like Gorsuch is saying something like “Judges should not legislate, they should interpret the laws.” And you are saying “the laws are complicated.” Both can be true!

Well, in a sense, maybe, because what judges do is technically not legislation. But they do make law; their opinions determine for the rest of us what we may legally do and what we may not legally do and what rights to expect will be respected  and what rights will not be respected. Judges can even change the plain meaning of a statute in order to uphold a more basic, if unwritten, principle of justice, which,under, the plain meaning of Judge Gorsuch’s remark (“It is the role of judges to apply, not alter, the work of the people’s representatives”) would have to be regarded as an abuse of judicial discretion. The absurdity of what I take to be Gorsuch’s position is beautifully illustrated by the case of Riggs v. Palmer which the late — and truly great — Ronald Dworkin discussed in his magnificent article “Is Law a System of Rules?” aka “The Model of Rules.” Here is the one paragraph in which Dworkin uses the Riggs case to show that judges apply not just specific legal rules (e.g., statutory rules), but also deeper principles that govern how those rules should be applied.

My immediate purpose, however, is to distinguish principles in the generic sense from rules, and I shall start by collecting some examples of the former. The examples I offer are chosen haphazardly; almost any case in a law school casebook would provide examples that would serve as well. In 1889, a New York court, in the famous case of Riggs v. Palmer, had to decide whether an heir named in the will of his grandfather could inherit under that will, even though he had murdered his grandfather to do so. The court began its reasoning with this admission: “It is quite true that statues regulating the making, proof and effect of wills, and the devolution of property, if literally construed [my emphasis], and if their force and effect can in no way and under no circumstances be controlled or modified, give this property to the murderer.” But the court continued to note that “all laws as well as all contracts may be controlled in their operation and effect by general, fundamental maxims of the common law. No one shall be permitted to profit by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime.” The murderer did not receive his inheritance.

QED. In this case the Common law overruled the statute, and justice prevailed over injustice. Game, set, match to the judge!

Wherein Hayek Agrees with DeLong that Just Because You’re Rich, It Doesn’t Mean You Deserve to Be

Recently Brad DeLong expounded on the extent to which the earnings that accrue to individuals do not correspond to the contributions total output that can be ascribed to the personal efforts of those individuals or the contributions made by resources owned by thoe people. Here’s DeLong:

Pascal Lamy: “When the wise man points at the moon, the fool looks at the finger…”

Perhaps in the end the problem is that people want to pretend that they are filling a valuable role in the societal division of labor, and are receiving no more than they earn–than they contribute.

But that is not the case. The value–the societal dividend–is in the accumulated knowledge of humanity and in the painfully constructed networks that make up our value chains.

A “contribution” theory of what a proper distribution of income might be can only be made coherent if there are constant returns to scale in the scarce, priced, owned factors of production. Only then can you divide the pile of resources by giving to each the marginal societal product of their work and of the resources that they own.

That, however, is not the world we live in.

In a world–like the one we live in–of mammoth increasing returns to unowned knowledge and to networks, no individual and no community is especially valuable. Those who receive good livings are those who are lucky–as Carrier’s workers in Indiana have been lucky in living near Carrier’s initial location. It’s not that their contribution to society is large or that their luck is replicable: if it were, they would not care (much) about the departure of Carrier because there would be another productive network that they could fit into a slot in.

All of this “what you deserve” language is tied up with some vague idea that you deserve what you contribute–that what your work adds to the pool of society’s resources is what you deserve.

This illusion is punctured by any recognition that there is a large societal dividend to be distributed, and that the government can distribute it by supplementing (inadequate) market wages determined by your (low) societal marginal product, or by explicitly providing income support or services unconnected with work via social insurance. Instead, the government is supposed to, somehow, via clever redistribution, rearrange the pattern of market power in the economy so that the increasing-returns knowledge- and network-based societal dividend is predistributed in a relatively egalitarian way so that everybody can pretend that their income is just “to each according to his work”, and that they are not heirs and heiresses coupon clipping off of the societal capital of our predecessors’ accumulated knowledge and networks.

On top of this we add: Polanyian disruption of patterns of life–local communities, income levels, industrial specialization–that you believed you had a right to obtain or maintain, and a right to believe that you deserve. But in a market capitalist society, nobody has a right to the preservation of their local communities, to their income levels, or to an occupation in their industrial specialization. In a market capitalist society, those survive only if they pass a market profitability test. And so the only rights that matter are those property rights that at the moment carry with them market power–the combination of the (almost inevitably low) marginal societal products of your skills and the resources you own, plus the (sometimes high) market power that those resources grant to you.

This wish to believe that you are not a moocher is what keeps people from seeing issues of distribution and allocation clearly–and generates hostility to social insurance and to wage supplement policies, for they rip the veil off of the idea that you deserve to be highly paid because you are worth it. You aren’t.

And this ties itself up with regional issues: regional decline can come very quickly whenever a region finds that its key industries have, for whatever reason, lost the market power that diverted its previously substantial share of the knowledge- and network-based societal dividend into the coffers of its firms. The resources cannot be simply redeployed in other industries unless those two have market power to control the direction of a share of the knowledge- and network-based societal dividend. And so communities decline and die. And the social contract–which was supposed to have given you a right to a healthy community–is broken.

As I have said before, humans are, at a very deep and basic level, gift-exchange animals. We create and reinforce our social bonds by establishing patterns of “owing” other people and by “being owed”. We want to enter into reciprocal gift-exchange relationships. We create and reinforce social bonds by giving each other presents. We like to give. We like to receive. We like neither to feel like cheaters nor to feel cheated. We like, instead, to feel embedded in networks of mutual reciprocal obligation. We don’t like being too much on the downside of the gift exchange: to have received much more than we have given in return makes us feel very small. We don’t like being too much on the upside of the gift exchange either: to give and give and give and never receive makes us feel like suckers.

We want to be neither cheaters nor saps.

It is, psychologically, very hard for most of us to feel like we are being takers: that we are consuming more than we are contributing, and are in some way dependent on and recipients of the charity of others. It is also, psychologically, very hard for most of us to feel like we are being saps: that others are laughing at us as they toil not yet consume what we have produced.

And it is on top of this evopsych propensity to be gift-exchange animals–what Adam Smith called our “natural propensity to truck, barter, and exchange”–we have built our complex economic division of labor. We construct property and market exchange–what Adam Smith called our natural propensity “to truck, barter, and exchange” to set and regulate expectations of what the fair, non-cheater non-sap terms of gift-exchange over time are.

We devise money as an institution as a substitute for the trust needed in a gift-exchange relationship, and we thus construct a largely-peaceful global 7.4B-strong highly-productive societal division of labor, built on:

  • assigning things to owners—who thus have both the responsibility for stewardship and the incentive to be good stewards…
  • very large-scale webs of win-win exchange… mediated and regulated by market prices…

There are enormous benefits to arranging things this way. As soon as we enter into a gift-exchange relationship with someone or something we will see again–perhaps often–it will automatically shade over into the friend zone. This is just who we are. And as soon as we think about entering into a gift-exchange relationship with someone, we think better of them. Thus a large and extended division of labor mediated by the market version of gift-exchange is a ver powerful creator of social harmony.

This is what the wise Albert Hirschman called the doux commerce thesis. People, as economists conceive them, are not “Hobbesians” focusing on their narrow personal self-interest, but rather “Lockeians”: believers in live-and-let live, respecting others and their spheres of autonomy, and eager to enter into reciprocal gift-exchange relationships—both one-offs mediated by cash alone and longer-run ones as well.

In an economist’s imagination, people do not enter a butcher’s shop only when armed cap-a-pie and only with armed guards. They do not fear that the butcher will knock him unconscious, take his money, slaughter him, smoke him, and sell him as long pig.

Rather, there is a presumed underlying order of property and ownership that is largely self-enforcing, that requires only a “night watchman” to keep it stable and secure.

Yet to keep the fiction that we are all fairly playing the reciprocal game of gift exchange in a 7.4 billion-strong social network–that we are neither cheaters nor saps–we need to ignore that we are coupon clippers living off of our societal inheritance.

And to do this, we need to do more than (a) set up a framework for the production of stuff, (b) set up a framework for the distribution of stuff, and so (c) create a very dense reciprocal network of interdependencies to create and reinforce our belief that we are all one society.

We need to do so in such a way that people do not see themselves, are not seen as saps–people who are systematically and persistently taken advantage of by others in their societal and market gift-exchange relationships. We need to do so in such a way that people do not see themselves, are not seen as, and are not moochers–people who systematically persistently take advantage of others in their societal and market gift-exchange relationships. We need to do this in the presence of a vast increasing-returns in the knowledge- and network-based societal dividend and in spite of the low societal marginal product of any one of us.

Thus we need to do this via clever redistribution rather than via explicit wage supplements or basic incomes or social insurance that robs people of the illusion that what they receive is what they have earned and what they are worth through their work.

Now I think it is an open question whether it is harder to do the job via predistribution, or to do the job via changing human perceptions to get everybody to understand that

  • no, none of us is worth what we are paid.
  • we are all living, to various extents, off of the dividends from our societal capital
  • those of us who are doing especially well are those of us who have managed to luck into situations in which we have market power–in which the resources we control are (a) scarce, (b) hard to replicate quickly, and (c) help produce things
  • that rich people have a serious jones for right now.

Compare with Hayek’s Law, Legislation and Liberty volume 2, pp. 73-74

It has been argued persuasively that people will tolerate major inequalities of the material positions only if they believe that the different individuals get on the whole what they deserve, that they did in fact support the market order only because (and so long as) they thought that the differences of remuneration corresponded roughly to differences of merit, and that in consequence the maintenance of a free society presupposes the belief that some sort of “social justice” is being done. The market order, however, does not in fact owe its origin to such beliefs, or was originally justified in this manner. This order could develop, after its earlier beginnings had decayed during the middle ages and to some extent been destroyed by the restrictions imposed by authority, when a thousand years of vain efforts to discover substantively just prices or wages were abandoned and the late schoolmen recognized them to be empty formulae and taught instead that the prices determined by just conduct of the parties in the market, i.e., the competitive prices arrived at without fraud, monopoly and violence, was all that justice required. It was from this tradition that John Locke and his contemporaries derived the classical liberal conception of justice for which, as has been rightly said, it was only ‘the way in which competition was carried on, not its results’, that could be just or unjust.

It is unquestionably true that, particularly among those who were very successful in the market order, a belief in a much stronger moral justification of individual success developed, and that, long after the basic principles of such an order had been fully elaborated and approved by catholic moral philosophers, it had in the Anglo-Saxon world received strong support from Calvinist teaching.It certainly is important in the market order (or free enterprise society, misleadingly called ‘capitalism’) that the individuals believe that their well-being depends primarily on their own efforts and decisions. Indeed, few circumstances will do more to make a person energetic and efficient than the belief that it depends chiefly on him whether he will reach the goals he has set himself. For this reason this belief is often encouraged by education and governing opinion — it seems to me, generally much to the benefit of most of the members of society in which it prevails, who will owe many important material and moral improvements to persons guided by it. But it leads not doubt also to an exaggerated confidence in the truth of this generalization which to those who regard themselves (and perhaps are) equally able but have failed must appear as a bitter irony and severe provocation.

It is probably a misfortune that, especially in the USA, popular writers like Samuel Smiles and Horatio Alger, and later the sociologist W. G. Sumner, have defended free enterprise on the ground that it regularly rewards the deserving, and it bodes ill for the future of the market order that this seems to have become the only defence of it which is understood by the general public. That it has largely become the basis of the self-esteem of the businessman often gives him an air of self-righteousness which does not make him more popular. [If only!]

It is therefore a real dilemma to what extent we ought to encourage in the young a belief that when they really try they will succeed, or should rather emphasize that inevitably some unworthy will succeed and some worthy fail — whenever we ought to allow the views of those groups to prevail with whom the over-confidence in the appropriate reward of the able and industrious is strong and who in consequence will do much that benefits the rest, and whether without such partly erroneous beliefs the large number will tolerate actual differences in rewards which will be based only partly on achievement and partly on mere chance.

About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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