I Ask Ron Paul: Mises, Hayek, or Rothbard?

Ron Paul, candidate for president in 2012 and one of the very few politicians I have ever legitimately liked, made a campaign stop in St. Cloud, Minnesota today.  Thanks to a generous invitation from a friend of mine, I was able to join a small group of supporters and actually meet Dr. Paul. 

I have been following his career in Congress for a long time, and I know he is the only national politician paying any attention to the Austrian school of economics. 

If I asked any other politician “Mises, Hayek, or Rothbard?” I am sure I would be greeted with a blank stare.  Ron Paul on the other hand would likely have something interesting to say.  So I have always wanted to ask him, just to see how he would handle it.

Today I got that chance.

Paul’s response: “Mises.”  (Yes!  I’ve always been a Mises man myself.)

But he went on:

“Mises, but Rothbard was the one I knew the best.  I also had lunch with Hayek once.  Of course, in terms of approach to communication and connecting with the common person, I have always liked Leonard Read.”

Well, I’d say he’s wrapped up my vote.

A Quick Apology and a Quick Video

First, a small apology for being away for so long.  My life has changed greatly, in ways anticipated and otherwise, over the last month or so.  I’ve gone from flying high to getting punched in the gut (rhetorically), and it has been quite a rollercoaster.  I sometimes pine for the simpler days of general boredom.

But lest you be too concerned over the fate of this blog, or if you are quite charitable, the state of its author, please know that I’ll be back in posting form.  We are not done here.  As Ludwig von Mises said, “tu ne cede malis, sed contra audentitor ito.”

In the meantime, here is a short video on the history of copyright and its various changes over the years.  Of course, the extension of copyright terms has been to benefit companies set up by the success of the original authors, but 100+ year terms clearly contradict the original spirit and intent of the copyright laws, which was to foster and encourage the creation of original works. Instead, in an ironic turn, the copyright laws now manage to stultify the creative processes.

Against Copyright – Part 1, the “Benefit” Side of Cost-Benefit Analysis

My recent post on copyright trolls has been rebutted by Jeff Cobia, writing at his blog here.  I suppose I should have expected it, since I kept the post short and fairly conclusory, as I realize I have a tendency to run on quite a bit.  My own lack of cited support seems to have been an invitation to trouble.

Nevertheless, I disagree with Jeff’s assertion that my post was “rubbish,” and I will accept his invitation to war.  However, since I respect his intellect, I imagine that this will be an exceedingly polite one.  That said, I shall now cry havoc, and let slip the blogs of war.

The Benefit Side of Cost-Benefit Analysis

Jeff immediately goes after my parenthetical – “Even if you were to concede that economic benefits flow from IP protections (and I would argue that, empirically, they do not)” – and I am not terribly surprised that he has.  My use of the term “empirically” was, I concede, a mistake, and that is precisely because the question of economic benefit to authors under copyright is an empirical one.  Ironic, no?

Of course, one cannot prove that the author will benefit, in the strictly pecuniary sense, more under a system without copyright, and this is so for exactly the reason that Jeff has pointed out.  If one assumes that the work is unique, one cannot compare its protected sale with its unprotected sale unless one has access to parallel universes.

However, I believe that authors would absolutely not be cast into penury with the removal of copyright.  Casual observers note the attachment of copyright and the flow of economic benefit and assume a cause-effect correlation.  I propose that this may very well be far weaker than commonly assumed.

I do have some empirical backing, of course.  This will obviously not be an exhaustive list, but I will point out a few highlights.

Germany and England

First, there is the case of Germany and England before the rise of copyright.  Copyright is a relatively new invention, with England adopting it in 1710.  Germany, by contrast, had no central government and no copyright by default until 1871.  This century and a half provides a very useful empirical resource for assessing authors’ relative ability to prosper with and without copyright.

Historian Eckhard Hoffner has compared the data between the countries.  In England, authors were paid for sale of rights to their work, as has continued in the modern age.  In Germany, where pirate publishing was “virtually allowed,” authors tended to be paid by sheet and edition, and by self-publication through subscription.  Even best-sellers were reprinted quickly by “pirate” publishers.  In both countries, however, book authors tended to earn a comparable average, and in both countries, writing was a viable career.

The biggest difference was at the poles.  In England, the >1% who were wildly successful (think of the J.K. Rowlings, the Stephanie Meyers, the Stephen Kings of our current age) could make a fortune.  The “fat middle” of the bell curve, however, was very comparable to Germany.

In Germany, however, the skew was more toward the other end – because writing was viable and the publishing industry was made far more efficient through the lack of copyright, there were many more books published, by a factor of 10 at the height (n.b. Germany had twice the population, but fewer urban citizens).

While the top >1% in Germany never attained the dazzling fortunes of their English counterparts, far more Germans were writing, making a living writing, and more importantly writing more.

The Lengthy History of Publishing

The common viewpoint of publishing is a static one (this is not limited to publishing, of course).  Publishing is what it is, and its implications are derived only from the present state of affairs.  However, the internet has come along, and the game is changing.  In a historical blink of an eye, the rules will be completely rewritten.

Funny that we find this so amazing.  Although the internet is a complete and total revolution in the publishing world, it is not the first, and it will not be the last.  Consider the long history, and the question “how will authors be paid without copyright?” becomes less relevant, because it soon becomes clear that the question itself is saddled with assumptions from the present day.  As it happens, authors have always been paid, and the assumptions from the present day are quite limited in their usefulness in explaining history beyond their short timeframe.

Scribes’ work had been largely unchanged for centuries until the advent of moveable type in the mid-1400s.  Serious consternation within the monastic class followed, but within decades, monasteries had set up their own printing houses and contracted out scribes’ work to established private printing houses.

The quantity of published books skyrocketed.  According to historian Michael Clapham, within the 50 years following the invention of moveable type, there were more books published than had been published since “Constantine founded his city in A.D. 336.” The number of editions since the 15th century must number in the billions.  (Michael Clapham, “Printing,” in Charles Singer et al., eds., A History of Technology, vol. 3, From the Renaissance to the Industrial Revolution, Oxford University Press, 1957. p. 37)

Perhaps more importantly, works beyond the Bible, Augustine, and Etymologiae were being published.  Despite having no copyright protections, the author was born.

Digital distribution has the potential to do for books what the moveable type did, but on a much larger scale, and like the monks of the 1400s, copyright hawks are similarly concerned.  But remember that copyright law is a relatively recent invention.  Even in England, the earliest adopter, copyright was not established until the 18th century.  In the meantime, we certainly did not find that authors were discouraged from their pursuits.

Although there could never be an empirical study of the future of publishing (a history of the future?), one can reasonably expect that, if allowed to do so, history will tend to follow similar courses, albeit through different channels.  The internet is no less a revolution than the printing press, but in both cases, I think the evidence has – and will – accrue to side of non-restrictionists.

Far from discouraging publishing, I think the internet has so far fostered an explosion in publishing of all types, and for the most part, copyright has never been vigorously enforced in digital media.  I expect that authors will find ways to monetize their own publications outside of the restrictive licensing system of traditional, fixed-media copyright.  Jeff has already mentioned one who does – Cory Doctorow – but that is merely one avenue (and one that is probably more common than it seems).  Perhaps the most profitable has not been conceived of yet.

Monetization in a Pirate’s World

This leads into the discussion of monetization, and I am sure that I will be accused of unwarranted assumptions if I did not elaborate on the above.  I do not think that monetization of authorship outside of the copyright context is at all a pie-in-the-sky concept.  In fact, it has been done before, and to great effect.

Consider the music industry.  Despite the fact that the RIAA and [some of] its members have somehow managed to survive, it seems as though it is mainly a vehicle for lawsuits.  People simply do not buy CDs anymore.  What is left of the physical CD industry will soon be dead.  Even iTunes, the great creative destroyer, may not survive long on its first-mover advantage unless it can continue to give the people what they want.  Overwhelmingly, what the people want is “free” music.

So how would artists be paid?  Well, it did not take the internet to come up with an answer for this.  Bands like the Grateful Dead have been doing it since the age of vinyl.  Their entire business model was at one point based on the bootleg; they actively encouraged their fans to record, swap, and distribute their concerts.  They found, unsurprisingly, that this had the effect of driving customers to their concerts.  In fact, by encouraging people to act outside the scope of copyright, they have likely driven more fans to pay for more-lucrative concert tickets that would otherwise have been possible.

Before this is dismissed as a case isolated to music, or even to jam bands whose music is only “good” while one is still under the influence, consider what the Mises Institute found when it put the Ludwig von Mises book Omnipotent Government online for free download, as related by Jeffrey Tucker.

The Institute set about freeing the book from its copyright shackles by contacting its original publisher.  Although the book was never a strong seller, the Yale Press still insisted that the Institute pay it in advance for what they assumed would be lost sales.  The Institute did so, and put the book online.

By opening up the text for reading, discussion, linking, printing, etc., the Mises Institute sold more copies of Ominpotent Government  in the month after its free release than it had in the 10 years prior.  Yale Press ended up with both a payment for lost sales and a plethora of extra sales.  It turns out you do not even need a ticketed performance to monetize freely-released copyrightable works.

Non-Pecuniary Benefits

Of course, all of the above has assumed that pecuniary gain has driven authorship, when in many instances throughout history it clearly has not.  For example, although academia has never been one to take copyright lightly (with the notable exception of MIT, which leads the world in Open Courseware), many academics have found that non-remunerative publication, even self-publication, has led to consequences beyond a lack of royalty checks.

In the world of “publish or perish,” many academics have found that being noticed is far more useful than getting a small check for publication in a low-circulation scholarly journal.  Of course, this can be monetized as well, with prestigious professors being offered positions at prestigious universities, and professors of more practical fields being paid for consultations or a selective group of clients.  But prestige can be satisfying in its own right.

The fame and esteem derived from wide adoption of an eponymous theory or process can be overwhelmingly positive.  Imagine how many cocktail party invitations Jeff would get as the progenitor of the lifesaving “Cobia Technique.”  But I digress.

Conclusion

In the end, the situation comes down to cost-benefit analysis, and I do concede that not enough data are available or even possible to determine the exact amount of benefit.  However, on the strength of the above, and other similar scenarios, I would argue that the benefits of copyright are far overstated by copyright trolls similar to the Las Vegas outfit referenced in my original post.  I would also argue that they are likely to be overstated even by those with their feet more solidly on the ground, like Jeff.

There is no way to prove it, to be sure.  But there is no way to disprove it either.

So perhaps it is more useful to look at the cost side of the cost-benefit analysis.  That, naturally, is what I will take up next.  Stay tuned.

Removal vs. Efficiency, and the Forest vs. the Trees

In a slow period at work, I found myself browsing the literature for nothing in particular.  In a circuitous route that took me from the Mises Institute website, to Stephan Kinsella’s website, to Leonard Peikoff’s (I find the cult of Rand endlessly fascinating), and back to Kinsella, I landed on a post that challenges the conventional wisdom on Milton Friedman.

As many readers of this blog are aware, Milton Friedman is often championed as a defender of laissez-faire and free markets.  He was indeed no such thing.  Methodologically, and therefore ultimately in practice, Friedman was deeply flawed.  The underpinnings of his political and economic philosophy were no different than those of Keynes. 

My methodological arguments against Friedman included his insistence on the validity of “macroeconomics” as a science.  I have said it many times, and I will say it again – when you correct your macroeconomic models to take into account all of the possibilities of individual decisionmaking, what you’re left with is quite simply microeconomics.  (More properly, “economics.”)  However, I have managed to find an article that explains Friedman’s shortcomings far better than I ever could. It is an article by Murray Rothbard, originally published in The Individualist in 1971, entitled “Milton Friedman Unraveled.”  Compare Rothbard’s objections to Friedman with mine:

The [disastrous] idea is that there are two sharply separated and independent worlds of economics.  On the one hand, there is the “micro” sphere, the world of individual prices determined by the forces of supply and demand. … But, they assert, there is also a separate and distinct sphere of “macro” economics, of economic aggregates of government budget and monetary policy, where there is no possibility or even desirability of a free market. …

In short, Friedmanites as well as Keynesians concede the vital macro sphere to statism as the supposedly necessary framework for the micro-freedom of the free market.

Forty years on (and fifteen years gone), and Rothbard hasn’t aged a bit!  But there’s more, and it is of a more practical nature.  Many friends of liberty occupy themselves with the political issues of the day rather than ideas.   I admit I am susceptible to the bias towards the present (mea culpa!), despite how much I try to make this a forum for ideas. 

But in the end it is easy to lose the forest for the trees, and it is easy to see why.  In the face of rampant corruption, waste, fraud, and unintended consequences, we may quickly lose sight of the fact that an idea is at their root.  There are overriding moral defenses against statism that we need not invoke consequentialism to understand.  And so we must constantly determine whether our desire for a smoothly functioning world is actually in furtherance of the ultimate goal of individual freedom.

And I quote again from Rothbard (the “scheme” in question being the guaranteed income floor proposed by George McGovern in his presidential campaign):

In this catastrophic scheme, Milton Friedman has once again been guided by his overwhelming desire not to remove the State from our lives, but to make the State more efficient.  He looks around at the patchwork mess of local and state welfare systems, and concludes that all would be more efficient if the whole plan were placed under the federal income tax rubric and everyone were guaranteed a certain income floor.  More efficient, perhaps, but also far more disastrous, for the only thing that makes our present welfare system even tolerable is precisely its inefficiency, precisely the fact that in order to get on the dole one has to push one’s way through an unpleasant and chaotic tangle of welfare bureaucracy.  The Friedman scheme would make the dole automatic, and thereby give everyone an automatic claim upon production.

I can think of any number of parallels.  For example, the tax code is thousands of pages (let’s not even talk about IRS regulations and “voluntary” guidance), but the government has no incentive to simplify.  If they did simplify, there would be a far more common understanding of the tax system and increased pressure to even further rationalize it.  The administrators of the tax system prefer popular ignorance to the disinfectant of transparency. 

Furthermore, the system of tax withholding not only makes government spending and budgeting far freer than it otherwise would be, it spares taxpayers the pain of a lump sum payment.  Sparing them this pain means sparing the government pressure to reduce individual tax bills.  If you think taxes are low now, just imagine how low they would go if you forced the general public to confront the actual reality of how much is confiscated.  (Not coincidentally, Milton Friedman was behind the system of mandatory withholding, being a primary driver of the policy when he worked at the Treasury.)

Ultimately, the question for people in favor of a free society is not how things work, but whether they should at all.  I understand the appeal of an incrementalist approach – the chances of the Social Security ponzi scheme disappearing because of an act of Congress are perhaps one in a billion.  I expect that its ultimate demise will come from bankruptcy and nothing more.  In the meantime, however, what good does it do us to make the system more viable?  How does it help to prolong the pain? 

By necessity this takes us far beyond the mainstream of current public opinion.  I do not see this as a bad thing – remember that long term, the world is run by ideas, not issues.

****January 12th Update.  Speaking of missing the forest for the trees, Rep. Chellie Pingree misses the forest, the trees, and everything else due to her head being up her own ass.  Check out the article by Peter Suderman at Reason.  If these are the types of “issues” that people are seriously debating, then I am very proud to say that I am a man of ideas.

Incredible banking news from across the pond!

In news that should warm the heart of any Austrian economist, or anyone with a built-in skepticism of fiat money, or anyone who isn’t a fan of the boom-and-bust business cycle (that should cover everyone, right?), two MPs in England are proposing a bill that would mitigate the effects of runaway money creation. 

MPs Douglas Carswell and Steven Baker have addressed the problem of bank “ownership” of deposited funds with a new bill requiring that banks not lend depositors’ money without explicit permission of the depositor.  Read about it in the Wall Street Journal (from Steven Baker himself), the Telegraph (Toby Baxendale), and more in the Telegraph (from Daniel Hannan).

Although the Steven Baker article is worth reading in its entirety, it hits hard right from the very beginning:

If you borrow a friend’s painting and promise that you will give it back on demand, and you then lend that same painting to somebody else, you have committed a fraud. The same rules do not apply, however, to bankers. British parliamentarians have an opportunity to change that today, and I hope they do.

Today, banks enjoy the legal privilege of fractional reserve banking, meaning they may lend out what they already owe depositors. By lending and investing on-demand deposits, banks create money by extending credit. When the bank’s investments turn sour—and investments often turn sour at some point—the bank cannot pay back the deposits and goes bust. Unless it manages to convince politicians that it is too large to fail, in which case it will be bailed out by taxpayers.

This skewed relationship between bank deposits and normal contract and property rights, combined with state interventions like the central planning of interest rates and various guarantees, is what causes boom and bust. Today I will be supporting my colleague Douglas Carswell, member of Parliament for Clacton, as he introduces a bill to phase out fractional reserve banking. Our friends in the U.S. and Europe are watching closely, for the same crony capitalism afflicts the world.

By way of further exposition of the issue, I would like to point out a sadly all too common misconception about the banking industry.  Whereas the common bank depositor believes that he is leaving his money in the bank for safekeeping, and is thus able to withdraw “his” money at any given time, the reality is quite different.  The legal structure of bank deposits is that of debtor-creditor.  In other words, loaning your friend $20 with repayment to be made on demand is roughly the same as depositing that $20 in the bank – both are loans repayable on call. 

Banks have taken advantage of the fungibility of fiduciary media to create a system where effective “ownership” of deposited funds transfers to the bank, which can then do whatever it likes with the money without prior permission of the depositor.  This leads to the cycle of credit creation (which hopefully doesn’t have to be explained here).  The creation of credit leads to inflation, and it leads to the business cycle by encouraging use of the funds, especially via capital spending, in ways that are well beyond sustainable given the actual capital reserves. 

We’ve seen this play out before – The decade between roughly 2000 and 2010 has seen historically low interest rates targeted by the Fed.  The natural response was a rise in asset prices (real estate) and capital investment beyond that which was sustainable (housing construction).  The aftermath was a market and credit contraction, the likes of which hadn’t been seen in more than 20 years.

Egregiously missing from the modern discourse on banking (read: fractional-reserve banking dependent on centrally-controlled fiduciary media) is any sense of history regarding the banking process itself.  Banks qua banks began as deposits of gold under the safekeeping of goldsmiths.  Goldsmiths issued notes indicating the amount and type of metallic goods under safekeeping, and traders soon realized that these notes could be used as a convenient proxy for the metal itself.  This was a form of decentralized fiduciary media.  (“Fiduciary media” itself being a rough translation of umlaufsmittel, or “means of circulation,” from Mises’s Theory of Money and Credit.) 

Various landmark court cases over the years have utilized not much more than semantics in defining the legal status of the metal under the care of these goldsmiths, and later, bankers.  The original theory was safekeeping, as noted above, for which we use the modern legal term “bailment.”  Perhaps the first known case to challenge this bailment relationship was Querini v. Bank of Mariono Vendelino from 1342, in which the court considered whether Querini left her money with the bank for safekeeping or as an investment, when no explicit understanding was reached.  At the English common law, to which Americans owe the greater part of their legal culture, the relationship was changed in the courts in the seventeenth century to favor “investment” over bailment.  (Jesus Huerta de Soto has written extensively on the legal history of banking, and much of my distilled history comes from that source, generally.)

Fast forward to modern times, and no one with significant political power seems to have thought particularly hard about whether the “investment,” or loan-type, deposit structure is actually beneficial.  In other words, we have seen no real push toward treatment of deposited funds as the depositors’ money, regardless of the effects of fractional-reserve banking on the business cycle. 

Instead, the legal structure of banking treats all money as if it is risk capital.

Certainly, where a depositor is desirous of treating their demand deposits as risk capital, they should be allowed to do so, and Carswell and Baker’s bill does not change that.  However, if depositors are given the choice between bailment and loan (a choice that they haven’t had for centuries), I don’t doubt that a significant portion would choose bailment. 

Carswell and Baker’s bill is step in the right direction.  By reining in banks’ free use of funds for the artificial creation of credit, it is possible to mitigate the business cycle and help preclude future bank bailouts.