Risk Pollution, Market Failure & Social Justice

by John Holbo on November 19, 2009

I just listened to an EconTalk podcast interview with Richard Posner about his new book, A Failure of Capitalism: The Crisis of ‘08 and the Descent into Depression [amazon]. The book has gotten a bit of buzz for the way in which Posner semi-recants certain libertarian or Chicago-style economics positions he is known for. But certain other positions he has not recanted, such as his narrow view of economic actors’ duties to consider negative externalities of their activities (discussed at CT before here and here). In the podcast, Posner basically asserts that those actors in the financial sector who almost crashed the world economy were right to do so, in the sense that it was rational for them, individually, to be massive ‘risk polluters’ (to coin a phrase someone else has probably coined already.) He would probably go further, although he isn’t actually asked to in the podcast: some of these actors were obliged to take the risk. In at least some cases it would have been their strong, positive fiduciary duty, under the circumstances, to do something which – taking a larger view – seriously threatened to run the whole world economy off a cliff. Because that was the apparent route of profit-maximization. It was their job not to take the larger view. Posner blames regulators, not these profit-maximizing actors, for the market failure; for not seeing that the damage to everyone downwind of all that toxic risk was so great that it should not have been permitted.

As a Rawlsian, more or less, I actually sort of like the overall picture here, minus the excessive and rather perverse dogmatic-legalistic strict tidiness of the segregations of duties. It makes sense to have a market in which private actors basically look to their own interests within a system in which regulatory steps have been taken to ensure that they do not, in the aggregate, make a giant, intolerable mess of the whole world. Flawed as any regulatory system is sure to be, it’s less reasonable to expect all the individual actors to be sufficiently attentive to, hence to take individual responsibility for, the whole. We don’t need to go so far as to treat them as weirdly obliged to be totally blinkered to the whole system. But we shouldn’t make each individual responsible for solving what is, in effect, a collective action problem, and a snarly knowledge problem to boot.

But I wonder what Posner would say about the following. Take two cases.

1) there’s a severe recession.

2) there’s serious income inequality.

We’ve got both; the causes of both are broadly similar. Namely, a lot of actors individually engaged in narrowly self-interested, more or less rational economic activities. The regulations in place, such as they are, have permitted these results. But we take it for granted that trying to do something about the former is presumptively permissible. Why should there even be an issue (beyond a practical issue) about whether it’s appropriate to take steps to do something about the latter?

Some people might argue that the second isn’t necessarily bad, but I don’t think we should take that seriously. What this lot are thinking is just that 2 is a possible outcome of a lot of individually permissible activity. Since we don’t want to say those activities were wrong, we shouldn’t say the result is wrong. But even if you accept this (for the sake of argument) you should still reply as follows: no one argues that severe recession cannot be a bad thing, so long as it can be shown to be the result of a lot of activity that was permissibly engaged in. Recessions can be bad without needing to be anyone’s fault. Likewise, we ought to be willing to say, at the very least, that serious income inequality – some people are rich, others don’t have enough to eat – is a bad thing. Because people going hungry is bad thing. Whether any individual actors are to blame for the bad thing is a separate question.

And some folks might persist in quibbling, even past this point, that it’s tendentious to characterize a hunger problem – an absolute poverty problem – as though it were a relative income problem. But I don’t think so. Why do we regard a recession as a problem? Recession, too, is a relative wealth comparison. We take ‘recession’ to be the relevant category in part because the fact that we were doing significantly better just a year or so back suggests this is something we should be able to get out of. Likewise, income inequality is provoking to people, not because they are inherently resentful of the rich (not necessarily) but because it suggests to them, prima facie, that poverty in this environment ought to be get-outable-of. At least we ought to try.

Now: I think there is a tendency among liberals – hence by extension, conservatives, when engaging liberal views – to treat the case of a severe recession morally differently from that of income inequality. The latter is, presumptively, a ‘social justice’ issue. The former an unfortunate event. It isn’t unjust for the economy to go into recession. That would sound odd, because everyone takes for granted that no one wanted this result, let alone engineered it expressly. But no one wants income inequality either. Not per se. Yet we may be inclined to say the latter result is not just bad but unjust.

It would make a certain amount of sense to recalibrate our notions so that both problems look morally equivalent. When bad things happen, overall, that it is no individual’s job to fix – like recessions, or severe income inequality – then it is the job of the government to do something about it, if possible.

I think Posner would not like this result, as he would think it puts us on a slippery slope to more aggressive interventions against the entity formerly known as ‘social injustice’ – now excitingly rebranded as: big bad things – than he would think wise. That is, regulators acquire a mindset in which we assume that it is their (the government’s) job to fix anything big and bad that it’s no one else’s job to fix. But really, that is the government’s job, on Posner’s view. It isn’t anyone else’s job, by hypothesis, and – if it’s bad enough – the bad does need fixing. The only proper restriction on the government’s efforts, in this regard, are legal/Constitutional, plus a due sense of humility about the technical possibility of fixing any given ‘big bad’ thing, without making too many other things worse.

No one thinks trying to get out of a recession is, per se, wrong, just because we should let ‘the market decide’. We don’t like recessions. But then the same goes for anything else we really don’t like: like people going hungry. The effect of thinking this way would be to bleed ‘let the market decide’ of any vestige of moral, as opposed to prudential, authority. And the prudential point reduces to: don’t rock the boat too much. Don’t make regulatory interventions in complex situations that might make things worse. (Of course, if you are arguing with someone who doesn’t see any value in any market mechanisms whatsoever, then ‘let the market decide’ can amount to a substantive suggestion that, in general, markets can work pretty well. But, since liberals and progressives are not Maoists, we can ignore this as presently irrelevant – not that Glenn Beck will ignore it, oh no.)

Posner’s extreme position seems to me most useful for helping to map out a range of possible positions. We’ll start with his.

1) Individual economic actors are permitted to be (and may be obliged to be) borderline psychopathic in their solipsistic pursuit of narrow self-interest. In this case, you really need a government/regulatory system that is very actively concerned with the entity formerly known as social injustice – a.k.a. really big bad things.

2) Matthew Yglesias gets what he wants: “What’s really wanted here is for the United States to be a different kind of country with a more public-spirited business class wherein the bank executives could be persuaded to “do the right thing” in light of all the crap that taxpayers were doing on their behalf. But we live in the United States of America. Fundamentally, though, as with a lot of this stuff I think what’s being implicated is much less America’s financial crisis emergency response policies than our background conditions of social justice.”

3) We should ‘let the market decide’. That is, there is some reason to suppose the market gets things ‘morally right’, so if some people have less money, we should presume, prima facie, that this is the ‘right’ result. But then what is the justification for trying to moderate the business cycle? If we trust the market to decide what everyone deserves to have, then why not conclude that the reason why we all do less well in recessions, on average, is that we all become inherently less deserving people, on average. The business cycle has always been a bit of a mystery: maybe it’s fueled by an underlying moral cycle of inherent desert. Some years you get out of bed and you are just plain a worse person, economically, hence more likely to be unemployed for the next 18 months or so. And rightly so. (It’s a metaphysical thing. You wouldn’t understand.)

I could take 3 a bit more seriously, but I’m not really going to bother. The idea that you can’t make at least some judgments about what overall social-economic situations are desirable or undesirable, is pretty silly. Obviously there can be cases in which people really seriously do dispute whether a given arrangement is desirable or undesirable, in some global sense. But there are enough clear cases that we can stick with those, and grant upfront that the government has a lot less business – quite possibly none – intervening when it isn’t clear to everyone that we should want to get rid of state of affair x, if just waving a fairy wand were all it would take. (No one likes recessions or hungry poor people. We all agree that waving a fairy wand to eliminate those problems, if we could, would be an appropriate policy.) Once you grant this much, the rest is just arguing practical policy limits, pending the invention of functional fairy wands.

What I think is notable here is that liberals/progressives are more or less ok with 1 or 2, if they are spelled out in some satisfactory way. Whereas conservatives are really only happy with 3, philosophically. Very few of them will regard either 1 or 2 as philosophically tolerable, spell them out how you like. But this doesn’t seem to me like a good situation to be in.

I expect that one major line of resistance to all this would be: seriously, dude, you are underestimating the practical limits on government. You change one thing here and 12 things go wrong over there. Part of the problem with this is it assumes liberals and progressives are all Jacobin lunatics. Part of the problem is that it is actually an argument for 2 being a better option than 1. But mostly the problem is that it implicitly concedes that either 1 or 2 could still be philosophically correct.

I hammered all that out pretty quick. I’ll bet people won’t like it. I could write a post about fonts, if you want.

{ 48 comments }

1

Donald A. Coffin 11.19.09 at 7:08 am

“It isn’t unjust for the economy to go into recession. That would sound odd, because everyone takes for granted that no one wanted this result, let alone engineered it expressly. “

Well, no. The twin recessions of the early 1980s *were* deliberately engineered, for the purpose of combatting the rather severe (in terms of the US experience) inflation being experienced at the time. One could also make the case that at least one or two other post-World-War-II recessions were deliberately engineered for the purpose of restraining inflation. The recessions were not engineered for the purpose of having a jolly old recession, to be sure, but in pursuit of another onjective of macroeconomic policy.

Likewise, one might argue that income inequality might be deliberately engineered (indeed, I think some part of it has been) for the purpose of achieving faster growth and a higher average standard of living in the future. Whether one thinks the outcome (higher average standard of living) is worth the cost (greater inequality) is another question. Again, greater inequality isn’t the objective, it’s argued to be an inevitable outcome of a policy aimed at a different, but desirable, outcome.

2

John Holbo 11.19.09 at 7:25 am

Fair enough, Donald.

3

Henri Vieuxtemps 11.19.09 at 8:51 am

It certainly seems logical that individual economic actors (entrepreneurs) have to be psychopathic; not just borderline psychopathic, but more and more psychopathic, progressively psychopathic. All other things equal, a more psychopathic entrepreneur has the advantage, and he will run the less psychopathic one out of business. And now it’ll take an even more ruthless competitor to get rid of him.

This is why CEO compensation packages are fully justified. It’s a winner-takes-all championship; in the end there can be only one, and in real life it’s not going to be Christopher Lambert, it’ll be the other guy.

4

Martin Bento 11.19.09 at 9:58 am

Donald made a point I was going to. I would go a bit further though. It’s not clear to me that economic inequality is not desired for its own sake by the some of the elite. After all, studies suggest that once you get past the level of income needed for a reasonably comfortable life – about 40K for a single person in the US – the quest for money is mostly about status. Meeting your needs is not necessarily zero sum, but status is: my status can only be higher than yours to the extent that yours is lower than mine. The more inequality there is, the more status differentiation there is. Of course, there are other sources of status than money, but I’m talking specifically about people who value money for the status it confers. This is in addition to the “Donner Party Conservatism” calls to make sure the incentives to work are as strong as possible (to be fair, I think tolerating some inequality for the sake of incentives is worthwhile, but we seem to be well beyond that).

5

derek 11.19.09 at 10:18 am

Tolerating some wealth inequality for the sake of incentives is like tolerating some inflation for the sake of not having deflation: once you’ve got inflation at one or two percent, you’ve achieved that goal. One hundred or two hundred percent inflation is unnecessary and undesirable.

I’m not arguing with the previous commenter, but agreeing and then expanding on why I think the fact that some tiny amount of inequality might be tolerable, does not give libertarians and other inequalitarians carte blanche to argue in favor of unlimited inequality.

6

bob mcmanus 11.19.09 at 11:20 am

Adam Smith opposed “self-interest” to “selfishness” precisely in the spirit of giving the individual the benefit of the doubt and presuming a minimal amount of sociality. We should not presume, as the neo-classical economists do, that homo economicus is a sociopath. This is not only uncharitable, but is refuted by the facts as I know them. Just last night, I read a finance worker who probably makes mid-6 figures saying a) those damn CEO’s are making too much money, and b) if we have another crash, capitalism has failed and we should move to a command economy. He was very serious, his life-savings would be wiped out, and he would lose his personal “investment” in the free-market ideology. I encounter on the finance boards, at least as many nascent Maoists as Randians.

So if we accept the Smithian assumption that the vast majority are neither Randians or Benthamites, most of the questions become empirical, don’t they? How much inequality is tolerable, and what are the efficient ways to adjust incomes and wealth.

7

bob mcmanus 11.19.09 at 11:35 am

Empirical:as a Post-Keynesian, I believe that income/wealth inequality or maldistribution is the primary cause of financial instability. Not necessarily economic instability or recessions, we had recessions in the 50s or 60s, but the kind of credit collapse of 1929 and 2008 that is so catastrophic.

This also can be traced back to Smith, who distinguished between investors and speculators (not in those words) and accepted that the rich, without adequate counter-incentives, tended to gamble destructively. This was not a normative judgement, but a recognition that easy money tended to reduce safe investment opportunities and create “imaginary capital”. Smith fought with Bentham about usury laws (Smith was for limits on interest rates) because Smith thought high interest rates or excessive rates-of-return encouraged speculation.

To a large degree, the point and purpose of economics is to change normative or social justice questions into empirical questions, on the assumption that human beings are generally social and benevolent critters.

8

JoB 11.19.09 at 12:26 pm

6- that’s a question Rawls tried to answer.

9

kid bitzer 11.19.09 at 1:47 pm

interesting post.

“I expect that one major line of resistance to all this would be: seriously, dude, you are underestimating the practical limits on government.”

i take it that part of your larger point here is that this response is available only to conservatives who *also* think that govts and central banks ought to take no steps to intervene in recessions, either.

10

John Holbo 11.19.09 at 2:14 pm

“i take it that part of your larger point here is that this response is available only to conservatives who also think that govts and central banks ought to take no steps to intervene in recessions, either.”

I think it’s pretty hard to maintain that meliorating income inequality is just too damned technically hard, compared to moderating the business cycle. So, yes, I do think there’s going to be an insuperable hurdle here. But also the point is that abominating the very notion of ‘social justice’ as un-American, then turning and saying that the only reason we shouldn’t pursue it is that it’s too technically hard, is not a very convincing stance.

11

Ben Hyde 11.19.09 at 2:50 pm

“Some years you get out of bed and you are just plain a worse person, economically, hence more likely to be unemployed for the next 18 months or so.”

Some years you get out of bed with a greater talent as a risk polluter? Some years societies forget the good hygiene required to temper the risk polluters? Some years a new virulent species of risk polluters routes around society’s immune system?

Common cause in the face of inequality is harder to spin up, v.s. say the recession, since the problem’s costs and benefits are more perfectly aligned with the political fault lines. But both afflictions are pretty well aligned along that dialectic. In both cases the large economic actors are better able on average self insure against the risk, dodging the costs, and garner the benefits.

It is valuable to frame this issue around these as one of learning and forgetting. The recession is a powerful enough experience that even Posner can learn from it. Question: how cyclic is inequality, and what finally drives a society to learn to manage the fever? Where is Dicken’s when you need him!

12

Barry 11.19.09 at 3:51 pm

Donald: “Likewise, one might argue that income inequality might be deliberately engineered (indeed, I think some part of it has been) for the purpose of achieving faster growth and a higher average standard of living in the future. Whether one thinks the outcome (higher average standard of living) is worth the cost (greater inequality) is another question. “

Ath the risk of sidetracking things, I’d argue that those questions are actually third or fourth order questions, because the relationship between growth and inequality is weak, at best. [barring the extreme examples of almost perfect equality/extreme inequality, which I believe have been shown to be bad for growth]

13

Nicholas Weininger 11.19.09 at 4:41 pm

I think you’re arguing against a strawman here. Broadly speaking, the right-wing-ish people who think government ought to intervene against recessions don’t think there should be *no* government action against poverty; they just want there to be less than you do. The people who really think there should be no welfare state at all are also in general likely to reject government anti-recessionary measures. So you’re inveighing against an inconsistency of principle actually held by very few.

There are of course both prudential and moral grounds for rejecting antirecessionary government intervention, even if you believe that on its face a recession is a bad thing. On the prudential side, you can believe, for example, that recessions are important truth-signals: they tell you that economic actors have engaged in massive malinvestment and need to seriously reassess their resource allocation. And antirecessionary interventions obstruct that truth-telling, leading to worse problems later. Not to mention that (on this view) government intervention in the economy is a prime *cause* of most severe recessions, since it so often encourages malinvestment and socializes downside risk.

On the moral side, just because a recession makes people worse off on average doesn’t mean it makes everyone worse off. Suppose (purely hypothetically!) that a recession causes a large decline in housing prices. Then people who have patiently saved up and rented, waiting to buy a house they can easily afford, will be better off, whereas those who foolishly took out a subprime mortgage and are now underwater will be worse off. Antirecessionary interventions will tend to help the latter group at the expense of the former, which (again, on a libertarian moral view) is unjust. So it’s simply not true that those who think antipoverty intervention is unjust don’t also think antirecessionary intervention is unjust.

14

Donald A. Coffin 11.19.09 at 4:47 pm

Barry (#12)–Let me be clear. I do not agree with the “inequality is essential for growth” argument, just that it is not an argument that can be dismissed out-of-hand. If the question, as implied by your comment is really “What degree of inequality is optimal, given our other economic objectives, such as growth?”, then the answer does, in fact, become an empirical issue, not a theoretical issue. Once we’ve conceded that *some* inequality might be instrumentally acceptable, then we *are* asking if the cost of greater inequality is worth the benefit of faster growth/higher average standard of living.

15

mpowell 11.19.09 at 6:52 pm

Why beat around the bush here? We know what the problem is. It’s as plain as day for anyone with a clear head to see. It’s not just that economic inequality is morally bad, it’s also politically disastrous. We have a situation where a small band of elites, sometimes even constrained by their so-called fiduciary duty, are running the show. It’s not the market in action. It’s powerful economic players undermining the very rules the game is played by by buying out legislators and regulators. It would be one thing for Posner to argue that these folks have a fiduciary duty to advance the interests of their shareholders in a narrow market sense, but how can you coherently maintain that better regulation is the answer if you are also willing to provide these folks the tools to undermine that regulatory process as part of that same fiduciary duty. It’s a view that just completely misunderstands how the modern political/economic game is played.

In another world without market power we could have interesting debates with conservatives about whether economic inequality is ‘fair’ or not. But in this world, the only task worthwhile is to persuade people that the shape of your regulatory regime can and is being driven by the very actors it is meant to regulate.

16

Martin Bento 11.19.09 at 7:59 pm

Re: mpowell’s point about regulatory capture. It is worth nothing that Posner has explicitly endorsed the notion that if the wealthy have more influence than others, this is not undemocratic. The proper definition of democracy is purely formal. Here is the quote:

“Finally, I disagree with the suggestion, common though it is, that unlimited campaign spending impairs democracy by giving political power to the wealthy, or more precisely to any individuals or groups able and willing to spend disproportionately to support particular candidates or policies. The suggestion confuses democracy with equality. Democracy is the political system in which the principal officials are forced to stand for election at short intervals. The identity and policies of the officials may well be influenced by the underlying distribution of income and wealth in society, but that does not make the society less democratic.”

And here is the URL:

http://www.becker-posner-blog.com/archives/2005/11/campaign_financ.html

17

Charlie 11.19.09 at 8:47 pm

13: I think you’re arguing against a strawman here. … The people who really think there should be no welfare state at all are also in general likely to reject government anti-recessionary measures. So you’re inveighing against an inconsistency of principle actually held by very few.

Really? In the UK, at least, I see conservative politicians on the one hand saying things like this:

Conservatives support government action when the foundations of the banking system upon which free markets depend are threatened. We will approach any proposals in a constructive and pragmatic way. Our guiding principle should be to protect the taxpayer where possible and preserve the stability of the system where necessary.

(link)

While at the same time, when speaking of welfare, leaving only empty space where phrases such as ‘protect the taxpayer where possible’ might go.

Welfare had to be argued for, and then implemented. If all welfare reforms were repealed tomorrow, there are plenty of people who wouldn’t call for their reintroduction. Some of those people are politicians.

18

mpowell 11.19.09 at 9:07 pm

16: That is very interesting to hear. It’s amazing that Posner would be willing to concede that. I wonder if he realizes that the legislative values he claims to hold are actively undermined by the political process that he supports. I think that what is really going on here is that people like Posner really do believe in crony capitalism as an ideal political order. What is so silly about that is that at the end of the day all that is is a policy of might makes right with a little bit of cultural heritage flavoring thrown in. It’s an awful weak ideology to stand on, which is why it gets represented as something much different. What I would really like to know as a point of personal curiosity is the extent to which Posner understands the difference between what he is actually defending and what he claims to be defending. I expect that the result of a lifetime of cognitive dissonance is that Posner has very little awareness of the actual content of his political values. That would be why I encourage emphasizing to people the degree to which reasonably legitimate market processes are consistently being undermined by political influences. It goes far beyond regulatory capture.

19

JoB 11.19.09 at 9:22 pm

18- Yeah, but it’s not only the conservatives that are looking down at due process – it’s a pervasive feature of the last decade that people left & right frown on discussing such niceties as equal access to the legislative process (which is the real equality at stake, as it is the only one that’ll ensure due process as to determining the extent of disequality of income is to be allowed).

20

Henri Vieuxtemps 11.19.09 at 9:41 pm

@18, I think what Posner is defending is a garden variety social darwinism a la Herbert Spencer; recently with some minor caveats.

21

mpowell 11.19.09 at 10:17 pm

20: Well, I call it crony capitalism, you can call it social darwinism. But Posner claims to be advocating some kind of market economy, but that’s not what the policies he advocates get you. So is he being dishonest or is he just clueless.

19: Well, to the extent that the people who think that campaigns should be publicly financed and that corporations should not be allowed to make campaign contributions of any sort all live on the left, I’m not sure that I’d agree that both sides have equally overlooked this issue. But I’ll agree that what is accepted in mainstream political discourse in the United States doesn’t acknowledge it at all.

22

John Holbo 11.20.09 at 12:21 am

Nicholas Weininger: “Broadly speaking, the right-wing-ish people who think government ought to intervene against recessions don’t think there should be no government action against poverty; they just want there to be less than you do.”

I think this just goes to show that I could have made a different sort of argument, which would also have been good. Once you admit that, in principle, government action against poverty is obligatory (it would be shameful not to have it), what is the in principle objection against more action? In effect what you get from conservatives is a practical concession that a little bit is in order, but that tends to be backed by principles that could only mean that none was in order (ergo we shouldn’t do any more than we are doing). There isn’t any philosophical justification for the middle ground

23

Nicholas Weininger 11.20.09 at 1:55 am

Well, I suppose that depends on whether you count “this is a necessary evil, but it is an evil, so let’s do the absolute least amount of it we can get away with” as a principled argument. If it doesn’t, then what exactly is the distinction between “principled” and “absolutist”?

24

John Holbo 11.20.09 at 3:06 am

““this is a necessary evil, but it is an evil, so let’s do the absolute least amount of it we can get away with”

But what would be the principle that justifies this claim, Nicholas. This isn’t the principle itself, I take it. I take it the principle behind the thing you said is something like: you should always address necessary evils to the least possible extent, rather than doing the most you can to address them. But why not say, instead, that you should do the most you can (making sane allowances for a point of diminishing returns, of course) to mitigate necessary evils?

25

John Holbo 11.20.09 at 3:53 am

Actually, it occurs to me there’s a good illustration of why it’s not plausible that conservatives take this ‘do the least that you can to address necessary evils’ principle.

P1: taxes are a necessary evil
P2: you should do as little as possible to address necessary evils.
C: You should do as little as possible to lower taxes, because – let’s face it – there will always be taxes.

26

jsalvatier 11.20.09 at 5:30 am

I call myself a libertarian, and I generally agree with your thesis here. I dislike talk about “social justice”, but I do like talk about “bad” (ineqality and recessions) things and how to improve them.

27

Henri Vieuxtemps 11.20.09 at 8:04 am

I think maybe the weakness of the argument in the post is this characterization of two different phenomena as simply “bad”; a bit too reductionist. If I were Posner, I might respond: when your house is burning and your child refuses to get out – that’s bad, you grab the kid and drag her out; when your child refuses to finish her broccoli – it’s also bad (or rather ‘unfortunate’), but you don’t force-feed her, you probably do nothing. He’d probably tell you: if you’re so concerned about inequality, give to charity.

28

Martin Bento 11.20.09 at 9:00 am

But Henri that example presupposes that recession is a grave danger and inequality a trivial one, which certainly needs to be argued. Also, in neither case is the child’s behavior a necessary evil; it is just self-destructive. Simply constructing an analogy with very little resemblance to the matter discussed is not much of an argument and is very much too reductionist, among other faults.

29

Henri Vieuxtemps 11.20.09 at 9:33 am

I don’t see anything about “necessary evil” in the post. As I read it, it just says something like: recession is bad and inequality is bad, therefore if we agree that we should do something about the former, then it follows that we should do something about the latter as well.

that example presupposes that recession is a grave danger and inequality a trivial one, which certainly needs to be argued

My point exactly, except I don’t think that the burden of proof is on Posner. It’s JH who has to demonstrate that recession and inequality are bad in a similar way; “bad” alone doesn’t cut it, IMO.

30

Henri Vieuxtemps 11.20.09 at 9:49 am

What I’m saying, I guess, is that social darwinism seems logically consistent, and adding minor caveats (like emergency measures to avoid a meltdown) is not going to destroy it. You can easily attack it from another flank – call it barbaric, for example – but its logic is solid.

31

jholbo 11.20.09 at 12:19 pm

“recession and inequality are bad in a similar way; “bad” alone doesn’t cut it, IMO.”

I had sort of meant it to be obvious that ‘bad’ wasn’t really an adequate analytic category, but that it would be a clear enough placeholder for post purposes. At any rate, I now go on record: ‘bad’ alone doesn’t cut it. It will need to be spelled out in more detail.

32

ScentOfViolets 11.20.09 at 4:18 pm

It seems to me that there is a 2×2 layout of alternatives: more/less inequality and smaller/larger GDP/growth, etc. Until fairly recently it seemed that the normative trade-offs were smaller inequality/less wealth vs. larger inequality/more wealth, with both promoters of both alternatives more or less deadlocked in terms of the popular view of the legitimacy and force of their arguments.

However, I get the sense that this that what is being argued for in this 2×2 matrix is shifting to larger inequality/less wealth vs. smaller inequality/more wealth. Note that this can still be a normative argument, and in fact this is how it’s presented: that while there may be less total wealth in the former situation, it offers the possibility that a few individuals at the apex of the earnings pyramid can enjoy higher earnings and more assets than the latter case, even if on average everyone is worse off. And when it is these two alternatives presented, it seems that normative arguments seem to favor the side of smaller inequality/more wealth. At least in the public’s eye; who knows how long this will be the case? Let me quote a little something by Lem:

A certain learned constructor built the New Machines, devices so excellent that they could work quite independently, without supervision. And that was the beginning of the catastrophe. When the New Machines appeared in the factories, hordes of Drudgelings lost their jobs; and, receiving no salary, they faced starvation. . .”

“Excuse me, Phool,” I asked, “but what became of the profits the factories made?”

“The profits,” he replied, “went to the rightful owners, of course. Now, then, as I was saying, the threat of annihilation hung. . .”

“But what are you saying, worthy Phool!” I cried. “All that had to be done was to make the factories common property, and the New Machines would have become a blessing to you!”

The minute I said this the Phool trembled, blinked his ten eyes nervously, and cupped his ears to ascertain whether any of his companions milling about the stairs had overheard my remark.

“By the Ten Noses of the Phoo, I implore you, O stranger, do not utter such vile heresy, which attacks the very foundation of our freedom! Our supreme law, the principle of Civic Initiative, states that no one can be compelled, constrained, or even coaxed to do what he does not wish. Who, then, would dare expropriate the Eminents’ factories, it being their will to enjoy possession of same? That would be the most horrible violation of liberty imaginable. Now, then, to continue, the New Machines produced an abundance of extremely cheap goods and excellent food, but the Drudgelings bought nothing, for they had not the wherewithal. . .”

“But, my dear Phool!” I cried. “Surely you do not claim that the Drudgelings did this voluntarily? Where was your liberty, your civic freedom?! ”

“Ah, worthy stranger,” sighed the Phool, “the laws were still observed, but they say only that the citizen is free to do whatever he wants with his property and money; they do not say where he is to obtain them. No one oppressed the Drudgelings, no one forced them to do anything; they were completely free and could do what they pleased, yet instead of rejoicing at such freedom they died off like flies.”

I can see a future America with no middle class to speak of at all and a great deal of ‘freedom’ indeed – the freedom being similar to the ones lampooned by Lem in this story.

33

JoB 11.20.09 at 4:57 pm

30- assuming it’s consistent, whence the presumption that it should entail inequality & recessions – even the continued winnings of psychopaths? It might well be consistent & entail the most positive of outcomes.

At least you never indicate, afaik, anything in support of the pessimism you like & you like to associate with Darwinism.

34

Fred Fnord 11.20.09 at 5:43 pm

But no one wants income inequality either. Not per se. Yet we may be inclined to say the latter result is not just bad but unjust.

I think this is wholly incorrect. It is becoming more and more obvious to rational people that the current oil-fuelled, global-warming-causing lifestyle in the US is unsustainable. It would be a lot easier to cast 95% of the US into poverty than to figure out what a sustainable, non-poor post-petroleum society looks like. And certainly less disruptive for wealthy companies and people.

And, to be honest, there has always been less utility in being rich in an extremely rich nation than there has in being rich in a poor nation. When you are rich in a rich nation, you are still constrained by laws, and by the fact that people can always find another job if they don’t want to work in your company. When you are rich in a poor nation, in general there tend to be one set of laws for the poor and one set (which is to say, whatever you want as long as you don’t piss off other rich people) for the rich.

This situation is certainly developing in the US, to such an extent that a lot of our justice system is beginning to look like a third-world nation’s. This is much less possible if people are educated and well-enough-off that they can afford to look up from their jobs once in a while.

So yes, I think there are plenty of people who consciously believe that increasing income inequality is a positive good for them personally, and plenty more who don’t so much consciously believe that but whose actions show that the assumption underlies many of their conscious beliefs.

-fred

35

Henri Vieuxtemps 11.20.09 at 6:26 pm

To some people this world is a place where individuals compete against each other. To some other people it’s a place where groups (tribes, nations, races, classes) compete, while the individuals inside these group cooperate. Yet others see it as a place where all individuals mostly cooperate, and any strong rivalry is a distortion.

So, what’s a “positive outcome”? It’s a subjective judgment. What’s positive to Posner may be negative to Holbo.

36

JoB 11.20.09 at 6:47 pm

34- that’s glib, Posner will not say the world is worse if more people have opportunity, he merely says that the world is the best possible place without all people having some opportunity – which is obbnoxious but not obnoxious in the sociopathic sense that you are insinuating (whilst recycling some seriously out-of-date ‘The worst of Nietzsche.’)

37

jholbo 11.20.09 at 11:32 pm

“So, what’s a “positive outcome”? It’s a subjective judgment. What’s positive to Posner may be negative to Holbo.”

But Henri, suppose I fire back that we shouldn’t try to moderate the business cycle because no doubt there’s some oddball out there who is doing well enough in the down trough, who sort of likes the rollercoaster thrill of it all.

Do you really want to say that, say, people going hungry is so controversial as a ‘bad thing’ that we shouldn’t just agree that, in general, it’s a bad thing? I tried not to wander into territory that would actually be controversial in the post. That’s actually an important feature of what I’m proposing.

38

Dan Simon 11.21.09 at 1:13 am

John, I’m puzzled by your “risk pollution” model of economic behavior as it applies to the recent financial crisis. Is it your position that a few very wealthy, powerful people and institutions engaged in immensely profitable behavior, knowing full well that it would lead to financial disaster?

If so, this seems highly implausible to me. We in fact know of quite a few people who predicted imminent financial disaster, and their behavior was very different from that of the people who exacerbated it. On the contrary, the doomsayers were able to make a great deal of money out of the crash by in effect betting against the risk-takers. Their bets helped pop the bubble–cutting the mania short before it got even more out of hand, and thus limiting the damage to the global economy–and simultaneously made them far more money after the fact than those left holding the bag when everything went south. (Whether government bailouts that disproportionately benefited the reckless maniacs reversed the doomsayers’ net profitability advantage is a different matter, of course.)

Part of the problem here is that “risk” isn’t itself a risk-free asset (or liability), but is in fact subject to risk in its own assessment. The people who were gobbling up toxic assets a couple of years ago weren’t rubbing their hands with glee because they knew they were enriching themselves at the expense of the world economy. On the contrary, they genuinely believed that they had found a “sure thing”–that they had eliminated risk, rather than creating it–and that they were in the process of making a killing by spotting that lack of risk and taking advantage of it more quickly and decisively than other investors. Had they known otherwise, they would never have created the bubble in the first place, let alone ridden it all the way to its collapse. And had the government known otherwise, it would have been a simple matter to pop the bubble (say, by raising interest rates) before things got too out of hand.

But that’s simply not always (or even often) possible. An economic system that reliably prevents people from throwing their money away on foolish investments would have to pretty much eliminate normal economic activity. And if people can throw their money away on bad bets, they can–and eventually will–do so en masse, to disastrous effect.

39

Henri Vieuxtemps 11.21.09 at 9:38 am

Maybe I should listen to what Posner actually said in that interview (not that I’m particularly interested), but I highly doubt that a consistent libertarian would advocate for moderating the business cycle; it sounds way too infidel. I suspect he merely proposes some basic safeguards against the world falling apart. So, I think you are stretching here. If I am for private ownership of handguns, automatic assault rifles, bazookas and small artillery, but against private ownership of nuclear missiles, you can’t call me a gun-control advocate.

And you’re stretching waaay too far on the opposite side too. You know perfectly well that the statement “inequality is bad” is, in fact, controversial, very much so. So, instead you talk about hunger. ‘Hunger’ and ‘inequality’ are not the same. If I am a principled libertarian, my response is: sure, let’s organize soup kitchens. Preferably financed by charities.

40

Phil 11.21.09 at 9:58 am

If I am a principled libertarian, my response is: sure, let’s organize soup kitchens.

If you were a principled right-libertarian I think you’d say “let’s appeal to the self-interest of all those potential soup-kitchen organisers who would value the warm glow they would get from organising soup kitchens more highly than the financial loss involved”. Which would carry the risk of there not being anyone in that category, but (as a principled Rlibertarian) you’d trust the invisible hand to equilibrate supply of moneyed altruism and demand for same.

The point is that you can’t really say “we must do something about this” if you’re a libertarian (right or left), because [a] ‘must’ is fundamentally uncool and [b] who’s ‘we’? who’s going to make me be part of your ‘we’, huh, statist-boy? But you can, apparently, say “we must do something about this” if you’re Richard Posner. I read John as saying, “if you can ask that question, can you presumptively rule out some values of ‘this’ and ‘something’, and if so on what grounds?”

41

Henri Vieuxtemps 11.21.09 at 1:35 pm

I read John as saying, “if you can ask that question, can you presumptively rule out some values of ‘this’ and ‘something’, and if so on what grounds?”

The grounds are determined by reasoning, on a case by case basis. As I see it, all that’s been established here is that Posner is not a pure 100% fundamentalist fanatic. Which is not all that surprising, since he is not a complete idiot. But it doesn’t make him a liberal, he is still a hard-core libertarian.

Lenin introduced NEP, yet he was still a communist.

42

James Wimberley 11.21.09 at 5:29 pm

JH: “I could write a post about fonts, if you want.”
Yes please. Good fonts make the world a better place; cf Alcuin, Aldus, Sejong. And if you know your stuff, you have a somewhat better chance of getting a result than by writing posts like this one. What percentage of Russian history is explained by the illegibility of Cyrillic capitals?

43

Thiago Maciel Oliveira 11.21.09 at 9:17 pm

Henri wrote: “But it doesn’t make him [Posner] a liberal, he is still a hard-core libertarian.”

I think it is not accurate to portray Posner as a libertarian thinker — at least not anymore. Hasn’t he written a famous piece with the complete self-explanatory title: “How I became a Keynesian”?

http://www.tnr.com/article/how-i-became-keynesian

In fact, he is now advocating “old keynesian” p0licies, and has even been a vocal suporter of Obama’s 700 billion stimulus — which was “too shy” in Posner’s opinion(!).

44

John Holbo 11.22.09 at 8:09 am

“Maybe I should listen to what Posner actually said in that interview (not that I’m particularly interested), but I highly doubt that a consistent libertarian would advocate for moderating the business cycle; it sounds way too infidel. I suspect he merely proposes some basic safeguards against the world falling apart.”

First of all, ‘the world falling apart’, i.e. a second Great Depression, is just another example of a Big Bad Thing. If you are willing to admit that we should have basic safeguards against a Big Bad Thing, then you have more or less granted the principle, and now we are just haggling over details (degrees of Bigness and Badness).

But beyond that, my point – which I could have filled out more explicitly and fully – is that Posner actually is an infidel in this sense. I do concede that once you establish a moral equivalence between trying to moderate the business cycle and doing something about poverty, then there are two consistent positions: doing something about both. Doing nothing about either. I take it that the former is the more appealing consistent position. But libertarianism does have a certain contrarian purity to it, I concede.

Thiago is right that Posner is substantially off the libertarian reservation at this point. He’s turned Keynesian, to at least some degree.

45

John Holbo 11.22.09 at 1:21 pm

“John, I’m puzzled by your “risk pollution” model of economic behavior as it applies to the recent financial crisis. Is it your position that a few very wealthy, powerful people and institutions engaged in immensely profitable behavior, knowing full well that it would lead to financial disaster?

If so, this seems highly implausible to me.”

Dan, it’s almost the textbook definition of what people like this do that it involves the search for profit, while incurring the risk of financial disaster. There are just not that many ways to get immensely wealthy, as an investor, without incurring pretty serious risk. (You are with me so far? And yet you say this is highly implausible.)

Maybe I just need to change your ‘would’ to a ‘could’. But that’s trivial. No one really knows the future, especially not in a case like this.

As to the pollution model: the idea would be this. I make an investment of, say, $100, knowing there is a 1% of getting totally cleaned out but a reasonable shot at a giant upside. You can do the numbers different ways, but it doesn’t take that much of an upside to make a 1% total wipeout balance out and then some. It can very easily be rational to make a $100 bet under the circumstances. Now suppose that, if I lose that $100, then 10,000 other people will be cleaned out as well. What is more, they are not voluntary parties to the bet and won’t benefit from the upside. Now the bet got a lot ‘riskier’ and also less profitable, hence less rational, if you construe the betting party to include, in effect, the rest of these folks being roped into the risk, the catastrophic event. In a certain sense, the bettor is playing with other people’s money, in that the downside of the bet is very bad, and won’t be borne by him, in the event. This is Posner’s picture of what happened. This is why we call it a negative externality – risk pollution – rather than risk. It’s bad stuff borne by uninvolved third parties. Posner’s point is just that rational agents can %#$@#$ up the financial environment with risk pollution, just as factory owners can do it with regular pollution. All it takes is: not caring what happens to others in the environment.

46

Martin Bento 11.23.09 at 10:02 pm

The thing is: it’s hard to see how one can solve the risk pollution problem, which Posner now favors solving, with reducing the political influence of Wall Street. This, in turn, would require either or both of reducing the political power of wealth or drastically reducing the wealth of Wall Street. However, Posner seems adamantly opposed to both options. So he’s back in the position of advocating something, but not advocating the necessary conditions to achieving it. I wonder if he would not consider retracting his position, quoted in my previous comment, that the disproportionate influence of wealth is legitimate.

47

Martin Bento 11.23.09 at 10:04 pm

That’s “without reducing the political influence of Wall Street”

48

someguy 11.23.09 at 10:41 pm

“I think it’s pretty hard to maintain that meliorating income inequality is just too damned technically hard, compared to moderating the business cycle. “

That very much depends on how much you wish to meliorate income inequality.

The post that you link to defines hunger as

“The other two-thirds typically had enough to eat, but only by eating cheaper or less varied foods, relying on government aid like food stamps, or visiting food pantries and soup kitchens.”

Eliminating that is probably at least as or more difficult than eliminating the business cycle.

Even eliminating this

“About a third of these struggling households had what the researchers called “very low food security,” meaning lack of money forced members to skip meals, cut portions or otherwise forgo food at some point in the year. “

type of hunger is a very complex and difficult problem.

Like WFB said [paraphrase] “What do you want me to do? Brush their teeth for them?”

I am not happy about that and actually agree with your general POV in this post. But the difficulties are so enormous, that I can also completely understand, why some folks shrug their shoulders and say it isn’t possible.

And you want to meliorate income inequality way more than that.

Also, I think a very large number of conservatives have absolutely no problem with #2. Just change the words a little eliminating social justice. As long as they don’t happen to be the ones being asked to do the right thing. They are no different from anybody else in that regard.

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