George Soros’ Theory of Reflexivity

I just read a speech by George Soros where he describes what he calls the theory of reflexivity.

It’s a truly fascinating idea, and another counterargument to classical economics’ assertion that markets are perfect.

In the stock market, there’s supposedly fundamentals like earnings per share and earnings growth that are determined by factors outside of the markets.  These fundamentals determine the true value of a company.  Stock prices are based on investors’ beliefs about these fundamentals.  Fundamentals may change, and beliefs may be mistaken, but the classical theory is that over time they tend to an equilibrium that accurately reflects the underlying reality.

The theory of reflexivity, on the other hand, says that people’s beliefs about market fundamentals can actually change the underlying fundamentals.  This can lead to instability and disequilibrium.

The simplest way I can explain it is with the old game rock-paper-scisors.  If I know my opponent is choosing rock, I will choose paper.  But if my opponent knows I am choosing paper, he will choose scissors.  But if I know he is choosing scissors I will choose rock, and so on forever.

The information I have about what my opponent will do changes my actions, and if my opponent has correct information about my actions he will change his actions which will cause me to change my actions…

In this game, it will always be the case that either one player has incorrect information, or one player wants to change his action.  There is no equilibrium.


To illustrate my environmental views I’ll start by posing a question.  What good is New York Times columnist George F. Will?  Did he make any money for me this past year?  NO!  Did he give me anything or do anything to help me?  NO!  In fact, I think George Will has never done anything to benefit me in his entire life!  George will is completely useless to me.  Why should I keep him around?

Of course, this reasoning is flawed.  George Will does not exist for my benefit.  He is a separate being with his own innate value.  He has the right to exist for his own purposes regardless of whether he benefits me.  The core belief of environmentalism is that human beings are not the only things in the universe with this innate right to exist for one’s own purposes.  A deer living in the forest doesn’t have to justify itself by being useful to us. I firmly believe this is true.

There are however, two deeply flawed attitudes held by some of those in the environmental movement.  I’m not sure how widespread these attitudes are, whether they are held by most of those who consider themselves environmentalists, or only by a vocal minority.  The two attitudes are anti-humanism and the golden age that never was.

There are environmentalists that are anti-human.  They believe that people are a pollution that has spread over the world and we should get rid of us to allow “nature” to return to its “pure” state.  This is rediculous because people are part of nature.  We have just as much right to use the world as other animals and plants do.  Not more, but just as much.  We have the right to use our fair share of the Earth’s resources.  It’s our moral responsibility to figure out what that fair share is.  It’s wrong to hold the anti-environmental attitude that our fair share is everything.  But equally wrong is the anti-human attitude that our fair share is nothing.  Feminism makes a good analogy here.  The core feminist belief is that women are equal to men.  There are definitely feminists who are anti-men, but the core belief is not anti-men.  Likewise, there are environmentalists who are anti-human, but environmentalism is not anti-human.

The second flaw is the golden age that never was.  This is the idea that the world used to be in some perfect state, and any change we make automatically degrades or destroys nature and takes us further from that perfect state.  This perfect state is usually conceived of as whatever existed just before humans started changing it.  Opponents of global warming rightly point out that the cretaceous period was much warmer than today with higher CO2 levels.  There was a different mix of plants and animals.  There were more rain forests and swmaps and fewer glaciers.  Even the continents were in different locations.  That environment was created by nature, so why should we prefer the environment that existed in 1800 AD over what existed in 100 million BC?

I’ve glossed over a couple things so far.  I said that human beings are not the only things in the universe with a right to exist, but how far does that extend?  Do plants have rights? What about bacteria?  Maybe non-human organisms don’t have individual rights, but species and ecosystems do.  You can eat meat, but you can’t extinct a species.  What about inanimate objects?  Some would claim we shouldn’t colonize Mars because we would destroy its natural state.  But even if inanimate things do have rights, how could we know what they would want?  Maybe Mars is hoping we’ll come and plant trees there.  You could say that it’s so beautiful that nature figured out a way to increase the biosphere by evolving humans to bring life to another planet.

The short answer is that I don’t know.  I haven’t figured out an answer that I have total confidence in and no doubts.  I don’t know how far the right to exist should extend, and I don’t know how to decide which natural state we should be trying to protect.  But I do have a couple guidelines:

1) Be conservative.  When we don’t know we should err on the side of caution.  Avoid losing what we have right now because we might not be able to get it back.  We should avoid unintentional changes to the environment.  For global warming, we should not be asking, “Is it definitely happening?”  We should be asking “Is the probability of it happening great enough that we should start taking precautionary measures?”

2) Intentional changes should be carefully considered.  I don’t reject the possibility that it could be good to change the world’s climate to be more like the cretaceous.  But we would need to make an intentional decision to do that after including all stakeholders in the decision making process.  For global climate change, all stakeholders would have to include everyone in the world and proxies representing the interests of non-human species.  It would not require consensus, but it would require a democratic process where everyone was represented.  Until we do that it’s immoral of us to take the decision into our own hands and do things that will change the global climate.

3) Costs should be shared fairly.  Environmental changes create economic winners and losers.  For global climate change, those hardest hit would be non-human species, and the worlds poor living subsistence lifestyles closely tied to the local climate with few resources to retool for a changed climate.  Those who benefit most from current consumption of fossil fuels have the most resources to adapt to climate change, while those who benefit least will suffer most from the side effects.  This isn’t fair.  We need to change that.  On a more local scale, environmental regulations have had the effect of making individual propery owners pay the full cost of protecting the environment, something that benefits everyone.  We need to make sure these costs are shared fairly too.

4) Biodiversity and biomass make good metrics for the health of the environment.  I like lots of living things, and a lot of different kinds of living things.

5) Environmental justice is not optional.  The libertarian approach to the environment is that each land owner can decide to protect the environment if he wants, and if no one does, and a species goes extinct too bad for that species, not my problem.  That’s wrong.  Environmental protection is everyone’s moral responsibility.

Why I’m Not a Libertarian, Part 4, People Should Care About Each Other

I have an old card that I’ve kept for a long time that has a quote from Ralph Waldo Emerson.

“To laugh often and love much; to win the respect of intelligent persons and the affection of children, to earn the approbation of honest critics; to appreciate beauty; to give of one’s self, to leave the world a bit better, whether by a healthy child, a garden patch or a redeemed social condition; to have played and laughed with enthusiasm and sung with exultation; to know even one life has breathed easier because you have lived — that is to have succeeded.”

I kept this card because the first time I read it I noticed what it didn’t say. It didn’t say “to maximize financial return on investment”. It didn’t say “to look out for one’s own interests with no concern for others”. It didn’t say “to make sure you are insulated from other people’s problems”.

Libertarians think that the interpersonal relationships that are forced upon us by living within a community are chains that must be broken before we can be truly free. They are wrong. Those relationships are the very things that make life worth living.

Why I’m Not a Libertarian, Part 3, The Duty to Help Exists

One of the principles of libertarianism is that there is no duty to help others.  You can go through your entire life helping no one but yourself, and as long as you don’t hurt others you haven’t done anything wrong.

This is something that I disagree with, and I’d like to illustrate my point with a hypothetical situation.  Imagine that you are driving along a lonely country road and you see a car wrecked in the ditch up ahead.  As you draw closer you see a small child, maybe about three years old crying near the car.  The child’s parents are laying on the ground nearby.  They were thrown from the car during the accident.  They are not moving.

You know it will get dark and cold soon.  You also know that it’s not likely anyone else will drive past here soon.  You could help this child at negligible cost to yourself by just dialing 911 on your cell phone and telling the police the location of the crash.  You wouldn’t even have to stop and get out of your car.

But instead you say, “It’s not my problem.”  You drive off and do nothing.  Later you read in the paper about a child who survived a car crash, but died of hypothermia before he was found.

Did you do anything wrong?  Don’t try to hide behind what’s legally allowed under current law.  Law should follow morality, not the other way around.  Would you feel bad that you didn’t do anything?  Would your conscience bother you?

I certainly hope so!  Anyone who wouldn’t feel bad in that situation doesn’t have their moral compass set right.  That fundamental moral sense is telling us the truth.  You had a moral duty to help that child and it was immoral for you not to.

But what about the right of self preservation?  Libertarians come up with examples like you are stranded on a desert island with only enough food to keep yourself alive so if you help someone you will die.  How can that be reconciled with a duty to help?

I would suggest that the duty to help and the right of self preservation both exist.  Sometimes they come into conflict, and which one takes precedence depends on the situation.  This kind of arrangement exists for other rights and duties.  For example, you have a right to free speech, but you can’t yell fire in a crowded theater.

If you compare my stranded child example against the libertarian’s desert island example you can see that each one is slanted as far to one side as possible to make it easy to discern what’s right in that situation.  And of course there will be difficult gray areas in the middle.  For some things the only solution is to hash it out on a case by case basis through legal case law precedent.

The duty to help and the right of self preservation both exist.  Sometimes self preservation will take precedence, but that doesn’t change the fundamental fact that a moral duty to help others exists.

Supply and Demand Theory of Pay; Response to Gestalt Production

A commenter on my gestalt production post had a lengthy comment lost by the web form, and hasn’t had time to rewrite it. He did leave a short comment mentioning the supply and demand theory of pay. Jacob, I’m going to try to describe the theory I think you were referring to and then write a response. If I get it wrong please correct me. This grew too long to be a comment so I’m making it its own post.How are wages determined? According to traditional economic theory they are determined by the marginal revenue of labor. Essentially, if adding another worker will allow the company to make $50,000/year additional revenue then the company will make more money if they can hire that worker for any amount up to $50,000/year. This is the marginal revenue of that worker. In this context, marginal means the change in output due to a small change in input.

According to the law of diminishing returns, each additional worker will produce less marginal revenue than the one before. As a company hires more people, the marginal revenue of labor goes down. This creates a demand curve for labor. If a company currently has few workers it is willing to pay more because the marginal revenue of the next worker is high. Likewise, if a company has many workers it won’t be willing to pay as much because the marginal revenue of the next worker is lower.

The supply of labor is governed not only by the number of workers, but also by their relative preference for money vs. leisure. If jobs are only paying $6/hr maybe I’d prefer to just work part time, live in a hovel, and enjoy more leisure time. If jobs are paying $100/hr, the extra compensation will motivate me to work more hours. Basically, to get me to work an hour, the company has to pay me more than how much I value an hour of leisure. How much I value money vs. leisure also has diminishing returns so to get my first dollar to buy food I’m willing to work a lot, and to get my last hour of leisure a company would have to pay me a lot.

This creates the traditional supply/demand relationship where increasing wages create more labor supply and less labor demand. Where they meet is the equilibrium point. If a worker has scarce skills, or skills that can create more marginal revenue per hour, such as a CEO, then that affects the supply and demand curves for that type of worker and the equilibrium wage might be higher. It might be a lot higher, but there’s nothing wrong with that. Wages are always set by the impartial forces of supply and demand, and markets always operate at equilibrium so prices are always right.

Jacob, let me know if I got that wrong, or if there’s anything you’d like to add.

The above was my understanding of the traditional theory. Below is my response.

I’m not really going to address the issue of whether the supply and demand theory of pay is an accurate description of how wages work in our real economy. I think it has some problems like the difficulty of a firm actually being able to predict the marginal revenue from an employee, especially a unique high-profile employee like the CEO, whether workers are really as free to choose between work and leisure as the theory assumes, and frictional effects like CEOs being on each other’s boards of directors and tacitly agreeing to give each other higher wages.

But I’m not going to focus on that here. For now, let’s just assume that wages really are equal to a worker’s marginal revenue. My main point in the gestalt production post was that marginal revenue is not equal to how much each worker produced.

One idea that libertarians hold to be a self-evident truth is that every individual has an inalienable right to own the economic product of his or her individual efforts. A further idea that libertarians believe is that when you work for wages, whatever you are paid must automatically be equal to the economic product of your efforts. Finally, according to the supply and demand theory of pay, this is equal to the marginal revenue of your labor. What my gestalt production post was primarily about is that these three claims taken together produce a contradiction.

In general, there is no reason why summing the marginal revenue of each worker should add up to the total revenue of the firm. In fact, if you believe the supply and demand theory of pay I can prove that they must be unequal. The marginal revenue that determines the pay for all workers (or all workers of one type) is equal to the revenue change of adding or firing a single worker, the so-called “last worker”. But due to diminishing returns, the last worker must be the least productive. So the actual productivity of all workers of that type other than the last one is greater than their marginal revenue. Marginal revenue of the last worker times the number of workers must be less than summing the actual revenue over all workers.

So the firm will be left with a residue of funds, the difference between marginal revenue times number of workers vs. actual revenue. Capitalist theory takes a left turn at this point, and assumes that this must be the economic productivity of capital goods, the machines that the workers use. But why should we assume that these two quantities are equal? It sure is a convenient idea, but why should it be true? Wouldn’t it be fair to judge capital by the same standards as labor? Lets take each machine out of the process, one at a time, see how much less we would produce without that machine, and that’s the marginal revenue of that machine. The economic productivity of each machine, and how much profit the owner of that machine deserves, should be the marginal revenue of that machine, just like labor. Once again, there’s no reason why the sum of marginal revenue over all workers plus all machines should equal total revenue.

So what do I think I’ve proven? Libertarians believe the following two statements:

#1: In a group effort, the total economic product can be divided up into separate parcels where each parcel contains what was produced by the individual effort of one of the individuals in the group, and what each individual deserves to be paid is the value of their individual effort.

#2: In a group effort, what each individual deserves to be paid is the marginal revenue loss of removing that individual form the group.

What I’ve proven is that the two quantities, “the value of what was produced by an individual’s effort”, and “the marginal revenue loss of removing that individual from the group”, are in general not equivalent.  If you take all of the parcels of individual production and add them all up they had better add up to the total production of the group.  But if you add up the marginal revenue of all individuals, it won’t necessarily add up to the total revenue for the group.  So the two quantities can’t be the same.

Therefore, these two statements are incompatible because they say these two unequal quantities are both equal to the quantity “what each individual deserves”. Capitalist theory has tricked us into thinking that they are the same so that the philosophy of “each individual deserves what they individually produce” can be used to justify the policy, “each individual receives the marginal revenue loss to the firm of firing them”

I haven’t proven that either of these ideas is wrong. I’ve just proven that they can’t both be right. Now I’ll shift gears a little and talk about these two ideas separately.

First let me say that these two statements are two value judgments. They both define what an individual in a group effort deserves. They are both definitions, not the consequence of a line of reasoning. These are not the only possible definitions of what an individual deserves. Fundamentally, when we agree with one of these it’s because we believe it is fair. Have a look at my posts on values and federalism to see how I believe we should handle these kinds of value questions. Basically, I think we should live and let live, and use federalism to have many different kinds of societies so people can choose to live in a society that matches their values. Here I’ll be telling you my values, but I don’t expect everyone to agree with me.

For #1, I think that in a group effort the quantity “what was produced by the individual effort of one of the individuals in the group” is undefined. Splitting the product up in this way is like dividing by zero. It can’t be done. There is no sensible definition of this quantity that guarantees that the sum of all the individual products is equal to the actual total product of the group. If someone could come up with a definition I would like to hear it.

I actually think the idea “each individual deserves what they individually produce” is morally acceptable. It’s not my most preferred definition, but I wouldn’t find fault in anyone who believed this. The problem is that it’s totally unusable in practice since almost everything is produced by group effort. Even if you go off into the woods by yourself there are still questions of equal opportunity. How much of your productive ability came from the fact that you grew up in a first world nation and got a good education as opposed to growing up in a third world nation having to struggle to avoid starvation? Wasn’t your production affected by the people who helped create the environment in which you find yourself? Is there really anything at all that you do where you can say it was totally unaffected by anyone else?

For #2, as far as I can tell, the only moral argument for this was the idea that marginal revenue is equal to what you produce, which has now been debunked. It’s a convenient and easy-to-implement system because you just have to allow anything-goes negotiation, but despotism is convenient and easy-to-implement too. That doesn’t make it fair. There is another argument for the idea that whatever you can negotiate is what you deserve, which is basically that no one owes anything to anyone. Life is the war of all against all so anything goes is fair. I don’t agree with that argument, and I wouldn’t respect someone who did.

What do I think is the definition of who deserves what? First of all, I don’t believe that everyone always deserves the same. There’s a liberal line of thought that no one can deserve more that someone else so any time one person has more than others it must be unfair. I totally disagree with that. If you work harder, you deserve more. What people deserve should be based on what they do and the choices they make.

I don’t have a hard and fast definition. I haven’t figured it out yet. But I do think that our common sense can serve as a “sanity test” to detect situations that are obviously unfair and where the system is obviously broken. For example, what should the ratio be between the salary of the best CEO in the world and an average worker? CEOs do work longer hours. Maybe the CEO works 120 hours per week (that’s 18 hours a day, 6 days a week plus 12 hours on Sunday) while the worker works 40. The CEO should earn 3x for that. And then there’s the amount of effort spent while working. There’s a difference between busting your butt to do the best you can and just punching your timecard. I’ll give another 3x for that. Then there’s the unpleasantness of the job. Sewer workers should be paid more than candy taste-testers. It would be hard to argue that flying around in corporate jets and staying in executive suites is unpleasant, but I suppose the job is stressful, and you have to be away from your family a lot on travel so 2x for that. Then there’s how skilled a person is at their work. This is an area open to some debate. If a person was born with talent do they deserve to be paid more when they didn’t do anything to “earn” their talent? And how much of being skilled is due to things under a person’s control as opposed to inborn talent? I won’t answer this question. I’ll just give the CEO 2x for being highly skilled instead of just an average manager. Then there’s the value of the work itself. I will step back and talk about that a little.

Different arrangements of labor in our workforce can produce different amounts of economic value. A factory making delicious cookies certainly produces more value than if those same people spent the same time and effort making mud pies. And even within an existing organization, changing from a bad manager to a good manager can increase the total output by more than changing from a bad delivery boy to a good delivery boy. I don’t think the manager can take credit for all that difference by himself as if the people he is managing had nothing to do with it. But I can’t deny that there are some positions that have more leverage on the total economic output of a group effort, and it’s more important to have the best people in those positions than in other positions.

Now I think a lot of the “value to society” of your job is outside your control. For example, I’m a computer programmer. There are many highly paid jobs programming computers nowadays because computers help produce a lot of economic value. I happen to have a talent for doing this so I get paid more because I work in this field. But I could easily have been born fifty years ago before these jobs existed. I could have wound up as a high school math teacher earning half or a third (inflation adjusted) of what I’m earning now. There’s no difference in my skills or how much effort I put into pursuing my career. Frankly, I don’t feel like I did anything to deserve this extra money. I was just lucky enough to be born at a time when the career that interests me and that I’m good at happens to have higher than average economic value.

But, there’s another argument that people might choose a job that produces more economic value over a job they would rather do that is less valuable. Maybe our CEO is a very talented manager, but loves music. He is sacrificing himself by working in a job that can produce more economic value to society rather than trying to be a concert bassoonist, which he would really prefer, but would result in less economic value being created. He should be compensated for his sacrifice.

And then there’s the argument that we need to pay more as a motivational incentive to get the best people in these positions separate from any argument that they deserve more. I don’t really know what the answer is, but I’ll give my CEO 5x for his job being a more valuable job.

So if you multiply these out you get: 3x3x2x2x5 = 180. I would have no problem if the best CEO in the world earned 180 times the median wage. The median wage in the US right now is around $45,000/yr. That would give the CEO $8.1M/yr. Not bad, probably higher than most liberals would feel is right, but much lower than a lot of current executives. And the analysis I did was for the best CEO in the world, not an average CEO. Maybe an average CEO works 80 hour weeks (2x), works 2x as hard as an average worker, still gets 2x for the stressful job, gets 1.5x for having above average management skills (average for a CEO), and still gets the 5x for the value of the job. That’s 2x2x2x1.5×5 = 60 or $2.7M. That’s what I think would be fair.

More important than the number is the idea that we need to look to external standards of fairness for why should someone deserve more than someone else. We can’t expect our economic system to tell us who deserves what. We need to decide on what factors make one person deserve more than another based on our values, and then make sure our economic system produces wages in line with that definition of fairness. Our current corporate capitalist system does not do a fair job for super-high earners.

What is a Liberaltarian, from a practical viewpoint?

I haven’t spent much time studying what exactly Liberaltarianism is, but for me it is a simple short hand for my general political philosophy in which, on non-economic issues, I prefer the government to stay away … or at least neutral. But on economic issues, with money and material being the center of modern society, government has a role to level the playing field. In short, money is power and a democracy is best that tries to keep power widely distributed rather than concentrated. When it comes to economic issues, power is widely distributed by regulating against excess. When it comes to social issues, power is widely distributed when people can do as they wish. Here’s a rundown of issues that were approved in the Virginia General Assembly, and how I would say a liberaltarian should vote. Not surprisingly, a liberaltarian disagrees with both parties on many non-economic issues (tending to vote with the Democrats when the issue is one fraught with religiosity, and with the Republicans when the issue is one of public health, like banning cigarettes in bars), and tends to agree with the Democrats on economic policy.


Drunken Driving. Would require people convicted of their first DUI to equip their vehicles with breath-testing machines for six months (HB2041). NO

Death Penalty. Would expand death penalty for capital murder to also include perpetrators who knowingly participated in a capital murder with the intent to kill, but didn’t take a life (HB2358, SB961). NO

Novelty lighters. Prohibits the sale of novelty lighters to juveniles and requires stores place lighters out of children’s reach (HB2578). NO

Handgun training. Specifies that handgun competence training can be completed electronically or online (SB1528). YES


Fighting blight. Would allow cities to offer tax abatement incentives to prod people to renovate or demolish vacant, boarded-up houses and to fast-track the permitting process for doing so (HB1671, SB1094). YES


Bullying. Directs the Board of Education to adopt guidelines to help schools deal with the use of electronic means to bully, harass and intimidate, otherwise known as “cyberbullying” (HB1624). NO

Truancy. Would allow parents and principals to petition a juvenile court judge to suspend the driver’s license of a student under 18 who misses 10 consecutive days of school (HB1826). NO


Smoking ban. Would ban smoking in restaurants and bars but amended to allowing smoking during hours minors are admitted, permits smoking in room from rest of establishment only by a door and permits smoking when rented for private parties. Ban would begin Jan. 1, 2010 (SB1105). NO

Smoking and driving. Imposes $100 fine for smoking in a motor vehicle in which a minor is present (SB1106). NO

Autism. Would provide tuition assistance for private schooling of autistic children. (HB2104) YES


Prayer and State Police. Would restrict the State Police superintendent from forbidding volunteer chaplains to express religious beliefs and require a disclaimer in event programs that chaplain’s expressed beliefs are not endorsed by State Police (HB2314). NO

Abortion. Would require women to be given the opportunity to see an ultrasound image of their fetus before an abortion (HB2579). Would require doctors to offer to anesthetize a fetus before abortion and provide information that a 20-week-old fetus can feel pain (HB2634). NO


Seat belts. Would make failure to wear a seat belt a primary offense, meaning police could stop a driver solely that offense (SB1161). Riders in the back seat of a vehicles would be required to wear seat belts (SB1502). NO

Teens and cell phones. Police could ticket a teen driver with a provisional license who is using a cell phone while driving (SB1227). NO

Text messaging. Would make sending and reading text messages while driving a secondary offense (HB1876). NO


Fundraising. Prohibits governor, lieutenant governor, attorney general and legislators from attending fundraising events during the General Assembly session (HB1634). Bans campaign contributions made through stored value cards such as a prepaid credit card. (HB1658). YES

Redistricting. Would establish a seven-member redistricting commission, with one member a compromise between the two political parties. (SB926). YES

Early voting. Qualified voters may vote in person 3 to 15 days before an election at a specified time and site provided in the locality (SB819). Qualified votes may cast absentee ballots in person without an excuse for not voting on Election Day (SB810). YES

Campaign gear at polls. Permits voters to wear buttons, stickers, or items of apparel that contain a candidate’s name or a political slogan when voting (SB867). YES


Union limitation. Resolution to enshrine in Virginia’s constitution a state law barring mandatory union membership (HJ640). NO

Why I’m Not a Libertarian, Part 2, Capitalism is Not a Religion

Libertarians seem to have a religious-like dogma about capitalism. They believe that capitalism is a perfect economic system, and the only economic system compatible with libertarian values. To a great extent libertarianism is capitalism, and capitalism is libertarianism.

From my previous posts, you probably know that I don’t believe capitalism is perfect. The academic proofs that capitalism is perfect make simplifying assumptions that aren’t true in the real world, and you’d have to be an idiot, or a willfully ignorant true believer, to think that market failure never happens in our economy.

In my own field of computers, there are many examples. Companies use incompatibility as a weapon to lock in their customers and extract more money from them. A recent example is that Apple doesn’t allow people to run any non-Apple software on their iPhone.


In capitalist theory it’s impossible for suppliers to make more money by doing things that are bad for their customers, but in the real world it happens.

The recent financial meltdown provides another example. The reason so many banks have failed is that they bought mortgage backed securities at a price that was totally disconnected from how much those loans would really pay off. And this wasn’t an isolated incident of one person paying too much for something. This was widespread market equilibrium prices being far off from the true value of the asset. In capitalist theory, the collective intelligence of the market makes sure that the price is always right, but in the real world it isn’t always.

Capitalism isn’t a bad system. Most of the time market failure doesn’t happen. But I can’t buy in to the libertarian capitalist creed. Capitalism is a tool, nothing more. We should use it in situations where it works, and not be afraid to meddle with it or use other systems in situations where it doesn’t.

Why I’m Not a Libertarian, Part 1, Absentee Property Ownership is Not a Fundamental Right

I’ve found that the easiest way to describe how I see liber(al)tarianism is to contrast it to libertarianism.  I often find myself thinking, “Libertarians have many good points, but I could never be a libertarian because…”  So I’m starting on a series of posts about the fundamental philosophical disagreements I have with libertarians.  This first one is on property rights.

One of the basic beliefs of libertarianism is that people have the right to “life, liberty, and property.” Why property? Why should ownership of property rank equal to the very right to breathe? I don’t believe it does.

Where did this right to property come from in the first place? Think about the world in which the enlightenment philosophers lived. The economy in those times was primarily agricultural. Most people were farmers. But most farmers didn’t own their land. The land was owned by the upper class, the nobles. People who didn’t own land were lower class. The lower class people worked and part of what they produced they had to give to the nobles who didn’t work. You can imagine a conversation between a peasant farmer and his son who is still too young and naïve to accept the status quo:

“Dad, why do we give 15% of our crops to the Baron? He didn’t help us grow them.”

“He’s the Baron, that’s his right.”

“But why do we have to give them to him? Why don’t other people give their crops to us?”

“The Baron is the son of the previous Baron. He inherited his right to our crops from his father.”

“Did he do anything to deserve it?”

“No, that’s not the way it works. He owns the title to this land. He inherited it, and now he owns it. It’s his right to take a share of the crops we grow on his land.”

Doesn’t seem like a very fair system. Nowadays, we look back at feudalism and wonder, “Why did the lower classes put up with it for so long?”

But at the time there was a new phenomenon emerging called the middle class. These people were not upper class because they worked. They were not supported in leisure by a right to claim a share of what others produced. And yet, they were not lower class because they didn’t have to give a share of what they produced to anyone else. These middle class people were not born into servitude of others who were born into wealth. This is the state that enlightenment philosophers were trying to achieve. They were concerned with freedom and in particular freedom from economic coercion where your only choices are to work for the man or stave.

But the enshrinement of the right to property shows how their thinking was limited by their times. In many nations the lower classes did not have the legal right to own land. Enlightenment philosophers thought that if society would merely remove this legal barrier then everyone would quickly be free. And since most people were farmers, merely owning enough land so that you could grow enough food to feed your family truly did give you economic autonomy. When they said the word property they meant land, and in particular productive cropland that would free you from economic coercion by the nobles. I’m sure John Locke would be aghast that his idea of a right to property is guaranteeing the right of shareholders in a real estate investment trust to collect rent from an inheritable title to someone else’s house.

Now that we have 300 years of hindsight, how well does the right to property hold up in the modern world? First, I would say that the right to own property certainly doesn’t guarantee the freedom from economic coercion that enlightenment philosophers thought it would. Many people today feel trapped in the corporate world. Even if they have more than one job to choose from, they don’t feel there’s any alternative to a job at a corporation. And second, the right to property is being used to defend a system that takes on a lot of the characteristics of feudalism. Those with property use it not just to secure their own freedom, but to extract an unearned share of other people’s production.

The true goal is to increase freedom by eliminating economic coercion. Making absentee property ownership a fundamental right does not achieve that goal. That’s not to say that a property ownership system can’t be a useful tool to achieve economic goals, but it’s just a tool, not a fundamental right.

Gestalt Production

There was a woodworking shop with two workers. One was a skilled carpenter, but he was short, and the switch to turn on the power tools was high up on the wall so there was another worker who was tall that came in each day to turn on and off the power tools. Working together they could produce ten chairs each day. If the tall switch flipper was sick and didn’t come to work, the carpenter had to use hand tools and could only make one chair a day. If the short carpenter didn’t come to work, the switch flipper could turn on the power tools, but he didn’t know how to use them so by himself he could make zero chairs per day.

How productive is each worker? Together, the two workers can make ten chairs a day, but I don’t want to know what they can produce together. I want to know what each one is producing individually so I can figure out what share of the profit each worker deserves! We can clearly credit the carpenter with one of those chairs because he can make one all by himself. But what about the other nine chairs? The switch flipper could argue that his presence makes the difference between one and ten chairs so all nine of the extra chairs should be credited to him. However, the carpenter could make the same argument noting that the switch flipper by himself makes zero chairs so all ten are due to the carpenter. Asking how much less would be produced if each worker were individually removed from the equation is clearly not a valid answer because the total for all workers might not add up to 100%.

Maybe we should split the extra nine chairs 50/50. So the carpenter makes 5.5 chairs, and the switch flipper make 4.5. But then they hire another short carpenter. All three together can make 20 chairs per day, with the two carpenters by themselves able to make two chairs. Now there are 18 extra chairs to divide three ways. So the switch flipper now makes 6 instead of 4.5. How is he making more chairs when he’s doing the exact same thing as he used to? Even stranger, the original carpenter is now making 7 chairs instead of 5.5. How does having the switch flipper flip switches for another carpenter cause him to make extra chairs?

The term gestalt means an integrated structure that has properties which can neither be derived from the elements of the whole nor considered simply as the sum of those elements. The whole is greater than the sum of its parts. Most of the time, work and productivity is a gestalt. You attend to some small aspect of the system, and many other people attend to other small aspects, and together you produce valuable things, but none of you have produced any of that value individually. In the carpenter/switch flipper example the only valid answer is that none of the extra nine chairs can be attributed to the individual efforts of either worker.

How does this relate to liber(al)tarianism? One of the primary tenants of libertarianism is that an individual has the fundamental, absolute, inalienable right to take ownership of the results of his individual efforts. But what does that mean when we can’t even define what the results of one individual’s efforts are in a gestalt production situation.

The libertarian answer to this is that the parties will negotiate how to split up the profits, and whatever the result of the negotiation is must be equal to what each person produced (since supposedly negotiation is always fair.) Hopefully you read my last post that argued that negotiation is not always fair. It just reflects the fairness or unfairness of the situation surrounding the negotiation. If the carpenter were starving, the switch flipper could offer him a little more than one chair and the carpenter would accept it because he has no better alternative. Likewise if the situation was reversed and the switch flipper was starving he would accept a very small share. Negotiation might result in absolutely any possible distribution of the extra nine chairs, and it has nothing to do with how much each worker produced individually, or what would be fair. It only reflects who is in a better position to turn the thumb screws on the other party. And that’s not a moral way to decide a fair distribution of the profits.

Now replace the carpenter and switch flipper with labor and management. Workers are more productive if raw materials are scheduled to arrive at the right time, and if the right number of workers are set up with the right machines to make just the right number of products that customers what to buy. So management isn’t worthless, but capitalism asks, “How much less would workers produce without management?”, and says that’s the share that management produced. But that ignores the carpenter’s counterexample, “How much would management produce without any workers?”

Let me finish with a simple question. What share of the profits does each one deserve? To answer this question we need to find a moral basis for why does anyone deserve anything? We need to define the word “deserve”.