thewonderofmodernlife - cato institute · 52 / regulation / summer 2018 in review...

52 / Regulation / SUMMER 2018

I N R E V I E W

The Wonder of Modern Life✒ REVIEW BY DAVID R. HENDERSON

Steven Pinker’s Enlightenment Now is, quite simply, a fantasticbook. In this fact-filled and incredibly well-footnoted tome,Pinker, a Harvard psychology professor, shows how the condi-

tions of life for ordinary people have gotten much better, not just forthose in wealthy countries, but also for most people around the world.

He shows that life expectancy hasincreased almost everywhere, health andnutrition have improved, and wealth andliving standards have skyrocketed. Theenvironment has improved. The destruc-tion caused by war—and war itself—havedecreased. Safety has increased and ter-rorism is a tiny problem. Literacy hasincreased. People have become generallymore tolerant of others’ differences andpeople are happier.

He attributes this progress to theEnlightenment, the four pillars of which—as the book’s subtitle suggests—are reason,science, humanism, and progress. In layingout the facts and his argument, Pinker alsoshows a knack for the punchy, and oftenhumorous, turn of phrase. Although heoccasionally slips, as when he criticizeslibertarianism, his slips are few and farbetween.

Longer lives, better lives / He opens hiscase by discussing why, despite the enor-mous improvement in human life, manypeople think conditions are regressing. Hefollows psychologists Amos Tversky andDaniel Kahneman in attributing this tothe “availability heuristic.” Most peopleestimate the probability of an event byhow easily instances come to mind. Amurder happens in your neighborhood?Murder must be on the rise. A horribleterrorist incident happens in an Orlandonight club? Terrorism must be a huge

Bush’s Council on Bioethics. Today Kassis a ripe 79; I wonder if his view of old agehas changed.

Not surprisingly, given that life expec-tancy has increased in the last two cen-turies, so has human health. Two of thebiggest breakthroughs were vaccinationand wide acceptance of the germ theoryof disease. Much later, on April 12, 1955,when scientists announced that the JonasSalk vaccine against polio was safe, therewere moments of silent tribute. There werealso the opposite: bells ringing, hornshonking, and factory whistles blowing incelebration. I was just 4 at the time, butmy sister had had polio three years earlierand my father 12 years earlier. I wouldn’tbe surprised if there had been much joy inthe Henderson household.

Pinker highlights some scientists whosenames most readers won’t recognize butwho saved tens of millions of lives—ormore. One, Karl Landsteiner, discoveredblood groups and thereby saved a billionlives.

Abundance / A major contributor to healthand life expectancy has been developmentsin food production and distribution. Thepercentage of people in the world’s poorcountries who are undernourished fellfrom 35% in 1970 to 13% in 2015. World-wide deaths from famine were above 600per 100,000 people as recently as the1920s, but they aren’t even detectable ona graph for the years 2010–2016.

Pinker points out that this advance-ment spectacularly contradicts the pre-diction made by Stanford biologist PaulEhrlich in his 1968 book The PopulationBomb. Ehrlich claimed that between thenand the 1980s, 65 million Americans and4 billion non-Americans would starve todeath. Now, many of us, including me,have the opposite problem: too manycalories.

Ehrlich’s type of thinking led to someabhorrent public policies. Pinker notesthat Robert McNamara, while president ofthe World Bank, “discouragedfinancing ofhealth care” not because it wouldn’t work,but because of his fear that it would work

DAV ID R . HENDER SON is a research fellow with theHoover Institution and emeritus professor of economicsat the Graduate School of Business and Public Policy at theNaval Postgraduate School in Monterey, CA. He was a senioreconomist with President Ronald Reagan’s Council of Eco-nomic Advisers. He is the editor of The Concise Encyclopedia ofEconomics (Liberty Fund, 2008).

problem. As a result, writes Pinker, eventhough the “world has made spectacular prog-ress in every single measure of human well-being … almost no one knows about it” (hisemphasis).

Is there a way around the availabilityheuristic? Yes, and Pinker gives it: “Theanswer is to count” (his emphasis). Checkthe data—which is what he does.

Start with life expectancy. Just 200 yearsago, the average life expectancy in the worldwas 29 years; in Europe and the Americasit was around 35. Today the average forthe world has more than doubled—71.4years—and for Europe and the Americasthe number is about 80. Even Africa, themost troubled of the world’s continents,has done well. Pinker writes, “An Africanborn today can expect to live as long as aperson born in America in 1950.”

What about the idea that for people inthe richer countries, the added years of lifein the last few decades aren’t worth muchbecause for most of them we are sick?Wrong. Pinker cites a study thatfinds thatof the 4.7 years of life expectancy gainedbetween 1990 and 2010 in the richer coun-tries, 3.8 of them are healthy years.

In making this case, he points to doc-tor and public intellectual Leon Kass’sclaim that those added years aren’t thatworthwhile. In his 2004 book Life, Lib-erty and the Defense of Dignity, Kass asked,“Would professional tennis players reallyenjoy playing 25 percent more games oftennis?” This was presumably a rhetori-cal question, but my own answer wouldhave been, “Obviously yes.” And Kass isnot just some unknown misanthrope;he was chairman of President George W.

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too well, leading to greater population.But why did the food supply grow so

much? One main factor was fertilizer,invented and perfected by chemists FritzHaber and Carl Bosch, respectively, inthe early 20th century. Another was theGreen Revolution, initiated in the 1950sand 1960s by Norman Borlaug. Borlaug,the most important practitioner of geneticmodification of wheat, “turned Mexicoand then India, Pakistan, and other fam-ine-prone countries into grain exportersalmost overnight.” Incidentally, Pinkerpoints out, contra the anti-biotechnol-ogy movement, “there is no such thingas a genetically unmodified crop.” Oneresult of this huge progressis that we may have alreadyreached “Peak Farmland”—the amount of acreage neededto feed humanity. To producea given amount of food nowtakes less than a third of theland it took before the GreenRevolution.

Wealth and income inequal-

ity / Sometimes you have toremind yourself that Pinkeris not a bona fide economistbecause he certainly under-stands some of the basics ofeconomics. In a chapter onwealth, he points out howmoves toward freer marketsin Eastern Europe, China,India, Indonesia, and other countries haveincreased wealth enormously and causedpoverty to drop like a stone. He quotesa great line from Georgetown Universityeconomist Steven Radelet: “In 1976, [Chi-nese communist] Mao single-handedlyand dramatically changed the directionof global poverty with one simple act: hedied.” In 2000, Pinker notes, the UnitedNations was thought to be overly opti-mistic in vowing to cut the 1990 globalpoverty rate by 50% by 2015. They wereoff, but in the other direction: that goalwas reached five years early.

What about income inequality? Hasn’tthat increased? Actually, no. International

income inequality fell slightly from 1950to 1990, and then fell a lot from 1990 on.Economic growth in poorer countries hasbeen high, due in part to freer marketsdomestically and to increased interna-tional trade, part of which is the result ofvastly lower shipping costs brought aboutby containerization.

Within America, notes Pinker, incomeinequality did grow between 1979 and2004. But over that same time, the per-centage of Americans with incomes (fora family of three) between $0 and $30,000(in 2014 dollars) fell from 24% to 20%, thepercentage with incomes between $30,000and $50,000 fell from 24% to 17%, and

the percentage in the middleclass fell slightly from 32% to30%. Where did those peoplego? There’s only one direc-tion left: up. What he callsthe upper middle class—families with an income of$100,000 to $350,000—rosefrom 13% to 30% of the pop-ulation.

He also cites Brook-ings Institution economistGary Burtless’s finding thatbetween 1979 and 2010, realdisposable incomes for thelowest four income quintilesgrew by 49%, 37%, 36%, and45% respectively. And it’simportant to note that pov-erty and income inequality

are two separate things. Also, if we measurepoverty by what people consume ratherthan by their income, Pinker notes, the U.S.poverty rate has fallen from 30% in 1960to only 3% today.

Greener world / Surely the environment hassuffered as higher population and higherliving standards have caused more pollu-tion, dirtier lakes, and fewer forests, right?Wrong. Pinker references an EnvironmentPerformance Index that measures the qual-ity of air, water, forests,fisheries, farms, andnatural habitats. Of 180 countries that theindex has tracked for a decade or more, 178show an improvement.

Why did this occur? It’s not despitehigher incomes, but because of them. Aspeople grow wealthier, they want moreenvironmental quality, not less. They get itby either providing it themselves—donat-ing land to a trust, for instance—or push-ing for regulations to reduce pollution.

One area about which Pinker wor-ries more than I do is climate change. Headmits that there are “judicious climateskeptics,” such as Judith Curry, who acceptmainstream science but are optimisticabout outcomes. He worries that they arewrong and that warming could be cata-strophic. To his credit, though, he doesn’tdo what many climate change believersdo: advocate a slowdown in growth in thepoorest parts of the world in order to cutcarbon emissions. Instead, he advocates asolution that has worked in pretty muchevery area of life: technological improve-ment. He advocates a carbon tax, which,if you need to do something now (I’m notconvinced that we do), would certainlyhelp reduce carbon usage. But he alsoadvocates nuclear power, arguing that reg-ulatory hurdles in the United States havekept us from enjoying the huge improve-ments in nuclear technology that havebeen successful elsewhere. Pinker is alsoopen to geoengineering, such as addingalkali to clouds or the oceans to dissolvemore carbon dioxide in water.

War / Pinker, who has written extensivelyelsewhere about war, writes a brief chapteron it in this book. The bottom line is thatthe last “great-power war,” the KoreanWar between the United States and China,occurred over 60 years ago. Wars todayare both smaller and much less bloody.That doesn’t mean there are no currenttragedies of war, such as the misery of the4 million refugees from Syria. But that isless than the 10 million displaced by Ban-gladesh’s’ war of independence in 1971.

Crime and terrorism / One of his outstand-ing discussions is on public safety. Pinkerprovides data showing that homicideshave fallen dramatically almost every-where over the last few centuries. Also,

Enlightenment Now:The Case for Reason,Science, Humanism,and Progress

By Steven Pinker

556 pp.; Viking, 2018


I N R E V I E W

more recently, the U.S. murder rate—though it rose in the late 1960s and early 1970s—is now lower than it was before that increase.

He presents fascinating data showing how granular the homicide rate is. It makes no sense, he shows, to think in terms of a high homicide rate in a country or even a state or province. You need to drill down to cities and even, within cities, to neigh-borhoods. He cites, as one example among many, his hometown of Boston, where 70%of the shootings take place in 5% of the city. Pinker notes that effective policing, combined with improvements in technol-ogy that take away opportunities for crime (e.g., people carrying credit cards instead of large amounts of cash are not attractive targets), has made robbing people far less appealing.

Some other notes on crime: In the United States, violence against wives and girlfriends fell by about 75% between 1995 and 2014. Rape and sexual assault fell by over 70% during the same period.

What about deaths from terrorism?Surely those are a huge problem today. Not in America. In 2015, for example, an American was 350 times as likely to be killed in a standard homicide as in a ter-rorist attack, and 800 times as likely to be killed in a car crash. Pinker notes that, fortunately, terrorism virtually never works in achieving the terrorists’ strategic goals, although, of course, it does terrify many of us. Surprisingly, while Pinker positively cites Ohio State University political scien-tist John Mueller in many other places in the book, he doesn’t cite—where it would have seemed de rigueur—Mueller’s Fall 2004 Regulation article “A False Sense of Inse-curity,” in which he makes the case that Pinker makes.

Safety / Motor vehicle fatalities per mil-lion miles driven have fallen almost steadily over time and were doing so long before 1960s regulations required safer cars. Ford, he notes, offered in 1956 a safety package that included seatbelts, a padded dashboard, a safer steering wheel, and other features that would become

mandatory a decade later. Deaths fromairplane crashes, fire, drowning, andoccupational hazards—and even fromnatural disasters—have fallen fairlysteadily.

How did those advances in safety comeabout? Pinker attributes them to “grass-roots activists, paternalistic legislators, andan unsung cadre of inventors, engineers,policy wonks, and number-crunchers.”While he’s right about the inventors,engineers, and number crunchers, hemisses the most important factor: eco-nomic growth. Safety, like environmentalquality, is a normal good: the higher ourincome, the more safety we want. And themarket responds. Safety in workplaces, forexample, is not due mainly to governmentagencies like the Occupational Safety andHealth Administration; it’s due to workersbecoming wealthier and demanding moresafety. Employers who ignore this demandin their decisions about workplace safetywill find themselves paying huge wagepremiums to compensate for risk. AdamSmith, in The Wealth of Nations, recognizedthat fact 242 years ago.

Liberal society / Are you tired of all thisgood news? Pinker’s not. He shows thatthere has been a rise in freedom of speech,the openness of the political process, andconstraints on leaders’ power in democra-cies since 1800. There was a big fall in the1920s and 1930s (thanks to people likeLenin, Stalin, and Hitler), an increase afterWorld War II, and then a fall in the 1960sand 1970s. Since then, the index measur-ing these liberal protections has climbeddramatically.

If I had more space, I could elaborateeven more on the ways Pinker shows thatlife has improved.

Are there downsides? Yes. Pinker wor-ries that one small mistake could lead tonuclear war and the devastation it wouldentail. Even here, though, he notes thedecline in nuclear weapons since theyreached their peak in the late 1980s. Pink-er’s thoughts on how to avoid nuclear warare terse and well worth reading. One wayis to announce a policy of No First Use.

Criticizing libertarians / In his last few chap-ters, Pinker makes a nuanced and largelypersuasive case for reason, science, andhumanism that is well worth reading butdifficult to summarize. One discordantnote, though, is his attack on “radical lib-ertarianism.” Radical libertarians—I countmyself as one—would seem to be Pinker’sstrongest allies. He often positively quotes,for example, Cato Institute senior fellowJohan Norberg’s 2016 book Progress. ButPinker goes out of his way to attack themwithout giving sufficient citations to helpthe reader evaluate his criticisms.

In the conflict over climate policy dur-ing the Obama administration, for exam-ple, he writes that evangelicals opted for“radical libertarianism over stewardshipof the Creation.” His cited source doesn’teven mention libertarianism; instead itdiscusses religious liberty. Elsewhere hewrites that “right-wing libertarians” in“their 21st-century Republican Party ver-sion” have claimed that “raising the mar-ginal tax rate for income above $400,000from 35 to 39.6 percent means turning thecountry over to jackbooted storm troop-ers.” Although I, like virtually all of thehundreds of libertarians I know (right-wing or otherwise), opposed that tax hike,I don’t recall any libertarian making thatclaim. Moreover, in a book with 1,288 end-notes, Pinker gives no citation for it. Onemight think he is exaggerating to makea point. That’s possible, but one of themany virtues of his book is how he eschewsexaggeration.

Conclusion / I mentioned earlier thatPinker has a knack for the pithy quote.One example is his response to HenryDavid Thoreau’s famous claim that “themass of men lead lives of quiet despera-tion.” Pinker writes, “How a recluse livingin a cabin on a pond could know this wasnever made clear, and the mass of menbeg to differ.”

I’ll close with this. A friend recentlyasked me why I’m optimistic in the faceof recent bad political news. I told himthat I had just finished reading every pageof Enlightenment Now.


Financial Crisis, Blame,Reform (Repeat)✒ REVIEW BY VERN MCKINLEY

Economist Allan H. Meltzer passed away in 2017. Beyond his role asa reliable critic of the Federal Reserve, one of his greatest contribu-tions to his profession was his multi-volume history of the Fed.

Recently a number of histories of the Federal Reserve have appearedwithdispersedfocusonvariousdiscreteaspectsofitsoperations.Irecently

V ER N MCK INLEY is a visiting scholar at George Wash-ington University Law School and co-author, with JamesFreeman, of Borrowed Time: Two Centuries of Booms, Busts andBailouts at Citi, forthcoming from HarperCollins.

reviewed Peter Conti-Brown’s The Powerand Independence of the Federal Reserve (“TheUlysses/Punch Bowl View of the Fed,”Winter 2016–2017). This review focuseson The Myth of Independence by SarahBinder and Mark Spindel. Both books citeMeltzer’s work liberally.

Binder is a professor of political scienceat George Washington University and isaffiliated with the Brookings Institution,while Spindel works at his own hedge fund,Potomac River Capital. The two bring tothe book differing perspectives, represent-ing both the academic world and the prac-titioner world.

It is useful to compare and contrastBinder and Spindel’s book with Conti-Brown’s, as both focus on the issues at thecore of the Fed’s independence: its interac-tions with Congress, its underlying enablinglegislation,anditsevolvinggovernance.Not-withstanding these areas of overlap, the twobooks are very different in their approach tothe topic of independence. Whereas Conti-Brown spends a great deal of time on thebroad range of functions housed within theFed, Binder and Spindel concentrate almostentirely on monetary policy. Conti-Brownalso focuses much more on the individualchairmen and staffwho have stood out overtime and influenced the Fed’s development,allowing his somewhat stronger storytellingskills to show through. In contrast, Binderand Spindel spend much of their time div-ing into the minutiae of the politics of the

Fed, as revealed through the recitation ofvote counts on many of the 19 times thatCongress chose to revisit theFederal Reserve Act after itsenactment in 1913 throughthe Dodd–Frank Act in 2010.

Independent or interdepen-

dent? / The title of the bookmakes clear that the Fed isactually not independent ofits government creators, not-withstanding the lip servicegiven to the concept bothinside and outside the gov-ernment. “We challenge themost widely held tenet aboutthe modern Fed: centralbankers independently craftmonetary policy, free fromshort-term political interfer-ence,” write Binder and Spin-del. They convincingly maketheir case that the conceptof the Fed’s power is still evolving whenthey discuss the cycle that has character-ized the Fed’s century of existence: “Crisisbegets blame and blame begets reform.”

The authors go a step further when theyrepeatedly argue throughout the book that

Congress and the Fed are interdepen-dent. From atop Capitol Hill, Congressdepends on the Fed to both steer theeconomy and absorb public blamewhen the economy falters.… In turn, theFed remains dependent on legislativesupport.… Fed power—and its capacity

and credibility to take unpopular butnecessary policy steps—is contingent onsecuring as well as maintaining broadpolitical and public support.

Three foundings / Conti-Brown labeled themajor sequential benchmarks in the Fed’searly development as the “three found-ings of the Federal Reserve”: the FederalReserve Act of 1913; the Banking Act of1935; and the Fed–Treasury Accord of1951. Three of Binder and Spindel’s eightchapters of the book crosswalk nicely tothese same three milestone periods.

The authors first focus on the Fed’senabling legislation, its decentralized sys-

tem, and the choice of thecities for the 12 individualreserve banks by the ReserveBank Organization Com-mittee (RBOC). Some of thechoices by the RBOC wereobvious financial centers(New York, Chicago, andPhiladelphia), but at the timeothers were not (Dallas, Rich-mond, and Atlanta). Binderand Spindel conclude thatthanks to President WoodrowWilson’s appointments to theRBOC, “Democrats exploitedtheir delegated power to molda politically optimal system—one that would simultane-ously attract the support ofthe system’s member banksand benefit the credit-poor,Democratic South.”

According to the authors, this decen-tralized system was a contributing factorto the Depression within a few decades ofits creation: “The signature achievement ofWilson’s administration proved incapableof generating effective monetary policyin the 1920s, contributing directly to theonset and severity of the Great Depressionin the early 1930s.” The aftermath of theDepression is the initial instance of crisis/blame/reform that Binder and Spindel useas a case study for their political models,as they identify two major power struggleswithin the decentralized Federal Reserve

The Myth of Indepen-dence: How CongressGoverns the FederalReserve

By Sarah Binder andMark Spindel

296 pp.; PrincetonUniversity Press, 2017


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System: disagreements over discount ratesand open market operations.

Although there were multiple amend-ments to the Federal Reserve Act from 1933to 1935, the power center for governancetook a decidedly Washington-based turn:

The Fed emerged far more centralizedand more powerful in 1935 than its 1913design…. The regional reserve banksretained a role in making national mone-tary and credit policies. But enactment ofthe 1935 Banking Act diminished theirability to resist policy decisions made bya reconstituted, reinvigorated Board.

The focus of The Myth of Independencethen turns to the third and final of thethree foundings of the Federal Reserve,which had even greater implications for itsindependence. Binder and Spindel write:

Even as lawmakers moved to centralizemonetary policy decisions in Washing-ton, the Fed did not become measurablymore independent…. The Fed founditself under the thumb of the Treasurythroughout the subsequent war years.

The Fed–Treasury Accord of 1951 trans-formed the relationship between the twomajor government players in the financialmarkets. Binder and Spindel explain:

As the ultimate buyer of U.S. governmentbonds, the Fed had been compelled toeffectively monetize U.S. debt at a low,fixed rate. The Accord ended this clearsubordination of monetary policy tofiscal authorities and empowered the Fedto set interest rates unencumbered by theTreasury’s postwar financing needs.

What they bring to light is Congress’sinvolvement in developing the Accord:

Congress was at the center of the 1951dispute [as] … key lawmakers empow-ered the Fed to reassert its controlover monetary policy…. In short, theFed–Treasury divorce allowed Congressto rebalance legislative oversight overmonetary and fiscal policy.

A few years earlier, the 1946 EmploymentAct laid the groundwork for a clearer man-

date and enhanced accountability for theFed’s operations.

Name, blame, and shame / A period ofstrong growth and modest inflation dur-ing the years of William McChesney Mar-tin’s Fed chairmanship came crashing toan end with the stagflation of the mid- andlate-1970s. Under the crisis/blame/reformcycle, a heavy dose of blame was laid at thedoorstep of the Federal Reserve. As a result,the now-familiar Humphrey–Hawkins“dual mandate” of maximum employmentand stable prices (with moderate long-terminterest rates) was formally imposed:

The public held the Fed responsible forthe economic downturn…. Lawmakersblamed the Fed as well…. Unlike previouscycles that largely endowed the Fed withmore centralized power, an emboldenedCongress imposed an explicit macroeco-nomic mandate on the Fed, and requiredfar more transparency and accountabil-ity—enduring reforms that continue toshape Congress and Fed interdependence.

During this timeframe, there was alsowhat the authors call “The Original Auditthe Fed” movement. This transparencymandate is now largely championed byRepublicans, but during the 1970s it waspromoted by the Democratic Party. Notsurprisingly, there was pushback from theFed in a defense of operational opaqueness:“The Burns Fed orchestrated an aggressivelobbying campaign against each of theselegislative efforts.” The smoking gun forthis lobbying can be found in former chair-man Arthur Burns’s papers, which “detailedthe Fed press office’s efforts to place ‘hor-ror stories’ about potential audits in theWall Street Journal, Washington Post, and otherprominent news and business papers.”

Unfortunately, Burns’s campaignworked to keep government auditors fromreviewing the most sensitive of Fed policyissues. Binder and Spindel write:

Burns’s efforts paid off…. With the [Gen-eral Accounting Office, now known asthe Government Accountability Office]banned from auditing monetary policy

decisions, the limited audit has survivednearly four decades since its creation inthe wake of the Fed’s 1970s failures.

Binder and Spindel devote thefinal his-torical chapter (“The Only Game in Town”)to the Fed’s response to the crisis in 2008and 2009: “Starting in late 2008, the Fed’sunconventional, untested and exigent cen-tral bank tools blurred the lines betweenmonetary and fiscal policy, exacerbatingthe Fed’s already-tense relationship withCongress at a time of severe economicstress.” Congress in particular fought theFed on its opaque implementation of prop-ping up the financial system:

The Fed sparked public and eliteoutrage. First, critics demanded publicdisclosure of the recipients of the Fed’sloans. Given the Fed’s resistance todisclosure, it took legal and ultimatelycongressional action to force the Fedto reveal the recipients of its emergencyloans…. Lawmakers from both partiesrejected the Fed’s position that disclo-sure would undermine the effectivenessof their emergency lending programs.

Typical of previous episodes of the cri-sis/blame/reform cycle, “in reopening theFederal Reserve Act, lawmakers gave theFed more responsibility while imposingmore transparency and clipping some ofits powers,” Binder and Spindel write. Theincreased transparency did not includethe “Audit the Fed” efforts that have nowbecome much more of a cause-célèbre forRepublicans than Democrats.

Conclusion / The Myth of Independence putsin historical perspective the evolution ofthe Fed’s powers and its imposed restric-tions, making clear that politics morethan any other factor drove its creationand maintains its continued existence.Based on my reading of Binder and Spin-del, the Federal Reserve Act we are leftwith still concentrates far too much powerto influence the economy in the hands ofthe Fed’s management and only requiresminimal transparency and restrictions onthe Fed’s underlying operations.


From the Republic of Lettersto the Great Enrichment✒ REVIEW BY PIERRE LEMIEUX

Born with the 16th century, the modern era brought the Enlight-enment, the Industrial Revolution, and economic growth ata rate that the world had never seen before. Northwestern

University economic historian Joel Mokyr’s A Culture of Growth tracesthis wondrous transformation as it occurred in the West’s economy.

Mokyr leads the reader on a fascinat-ing voyage that starts about the year 1500and ends three centuries later. To trace theorigins of the modern economy, he stud-ies the culture that led to the IndustrialRevolution, and the reciprocal influenceof culture on social institutions and indi-vidual incentives.

For too many social scientists, “culture”is a sort of black box that they invoke toexplain social and economic transforma-tion, but in doing so they really say nextto nothing. Recently, economists havebecome interested in this black box andMokyr attempts to offer a look inside it.

He defines culture as “a set of beliefs,values, and preferences, capable of affectingbehavior, that are socially (not genetically)transmitted and that are shared by somesubset of society.” He argues persuasivelythat cultural change is necessary to explainthe 18th century Enlightenment and theunendingflow of technological innovationsthat followedwiththeIndustrialRevolution.

Modern growth / To appreciate whatMokyr sets out to explain, consider Figure1, which I compiled from data by the lateeconomist Angus Maddison. (No figureor table appears in Mokyr’s book.) Notethat I used linear interpolations to coverthe long stretches of time for which Mad-dison’s estimates are not available. Theseinterpolations explain why a catastrophic

event like the Black Death of the 14th cen-tury doesn’t make a blip in the line.

From Year 1 of the Common Era untilthe 18th century, human living standardsscarcely changed. World gross domesticproduct per capita inched up slightly fromless than $500 per year during the firstmillennium, to $616 in 1700, and $712in 1820. Then, productionand income exploded. In lessthan two centuries, GDP percapita multiplied by morethan 10, reaching $7,814 in2010 (the last year availablein this series). These figuresare averages over the wholeworld, estimated in constant1990 dollars. In the UnitedStates, GDP per capita (againin constant 1990 dollars)reached $30,491 in 2010.

This one dramatic trans-formation is the story ofmankind from an economicstandpoint. In compari-son, the last century’s GreatDepression barely registered.

The resulting effect on liv-ing conditions has been dra-matic. During the 17 centuries betweenYear 1 and 1700, the world populationmultiplied a paltry 2.7 times. In the fol-lowing three centuries, it multiplied bymore than 10. And recall that, since 1820,real GDP per person also multiplied by 10.Since the mid-19th century, life expectancyat birth has increased from 30 years (whichis probably the maximum it had reached

over all of previous history) to more than70 years today. Literacy jumped. Thesewere only some of the consequences ofthe “Great Enrichment.”

Starting in the late 18th century, “Smi-thian growth” was replaced by “Schum-peterian growth.” The former refers toeconomic growth through more efficientmarkets, which Adam Smith observedand promoted; the latter works throughinventions, entrepreneurial innovations,and “creative destruction,” to use JosephSchumpeter’s term.

Mokyr argues that this stunning newgrowth cannot be explained by religion,which played an ambiguous role in theacceptance of new ideas, even factoring inthe Reformation. Nor can it be explainedby an increase in human capital—educationand knowledge—because capital increaseshad occurred before but had failed tolaunch self-sustained, explosive growth.

Besides, he notes, “the greatengineers and inventors whomade the Industrial Revo-lution were rarely well edu-cated.” Instead, they werefeeding on a whole infrastruc-ture of new knowledge.

The crucial factor in theGreat Divergence shown onthe chart was a new belief inprogress. It required “think-ing outside the box” and a“willingness to rebel againstaccepted practices andnorms.” A new culture ofgrowth developed that madeexplosive growth possible.

Culture / How can we explainthe appearance of this cul-ture of growth? Mokyr

adopts an “evolutionary approach to cul-ture” borrowed from anthropology andevolutionary biology. Such an approach,he argues, helps understand the culturalchange that created the institutions thatmade possible the Enlightenment andthe Industrial Revolution. Cultural evo-lution selects the most efficient culturalelements or features, as opposed to select-

A Culture of Growth:The Origins of theModern Economy

By Joel Mokyr

400 pp.; PrincetonUniversity Press, 2016(paperback 2018)

PIER R E LEMIEUX is an economist affiliated with theDepartment of Management Sciences of the Université duQuébec en Outaouais. His latest book is What’s Wrong withProtectionism? Answering Common Objections to Free Trade(Rowman & Littlefield, 2018).


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ing individuals. This sort of evolution isrendered even more potent by the capac-ity of individuals to be persuaded and toconsciously choose their beliefs. “Choice-based cultural evolution” leads to a morerapid spread of innovations.

Mokyr borrows from a large numberof scholars in differentfields. For example,he relates this culture of growth idea toDeirdre McCloskey’s “bourgeois values.”Surprisingly, however, nowhere in A Cul-ture of Growth does Mokyr cite FriedrichHayek. Many readers would like to knowwhat, if anything, differs between Mokyr’sand Hayek’s evolutionary approach. Bothauthors warn against a too-servile use ofthe methods of biology in social analysis,but both find evolutionary theory useful.As I mentioned in a recent review of hisfinal book, The Fatal Conceit, Hayek arguedthat an evolutionary approach to socialscience was actually pioneered by AdamSmith and Adam Ferguson in the 18thcentury, well before Charles Darwin used itin biology. (See “Against Tribal Instincts,”Spring 2018.)

Cultural entrepreneurs add to themenu of beliefs, values, and preferencesamong which individuals can choose.Mokyr devotes a chapter to each of twomajor cultural entrepreneurs who spreadthe ideas that would lead to the Enlight-enment and the Industrial Revolution:philosopher Francis Bacon and scientistIsaac Newton. Bacon and Newton bothemphasized observation and empiricalverification as opposed to the mere exe-gesis of ancient texts. “Bacon’s heritage,”Mokyr writes, “was nothing less than thecultural acceptance of the growth of use-ful knowledge as a critical ingredient ofeconomic growth.”

Useful knowledge is a crucial conceptin A Culture of Growth. Exemplified by theFrench Encyclopédie and numerous techni-cal textbooks published all over Europe,useful knowledge is scientific knowledgeapplied to production. It is related to theEnlightenment idea that “the human lotcan be continuously improved by betteringour understanding of natural phenomena.”Newton thought that science could only

explain how things work—as opposed totheir metaphysical nature—which impliesthat it could produce useful knowledge.

Why culture changed / It is not totally clearwhat were the causal factors, as opposedto favorable circumstances, that led to thenew cultural belief in progress. Perhapsthe point is that the different factors co-evolved (in an evolutionary sense) to pro-duce cultural change.

Mokyr seems to propose four majorfactors:

First, there are the cultural entrepre-neurs such as Bacon and Newton, as wellas many others who walked in their steps.They contributed to changing not onlythe scientific culture, but also the politicalculture. Perhaps Mokyr could have givenmore attention to the political evolutiontoward individual rights, the rule of law,and the division of power in the state.

A second factor is the shock of newknowledge. In the late 16th and the 17thcenturies, countless scientific theories ofthe Ancients—from Antiquity to the Mid-dle Ages, from Aristotle to Aquinas—weredisproved by new observations with thehelp of instruments such as the telescopeand microscope. Ptolemy’s vision of theuniverse yielded to the new observationsand theories of Nicolaus Copernicus andJohannes Kepler. Long-distance voyagesand geographic discoveries also changedthe image of the world.

Third, governments were unable to stopthe spread of new knowledge. As DavidHume noted, the political fragmentationof Europe prevented governments fromsuppressing the new ideas they deemeddestabilizing and dangerous. “In thepolitical environment of a politically frag-mented world,” Mokyr observes, “prog-ress cannot be blocked by the coercion ofa few reactionary powers.” Not only wasEurope fractured among multiple states,but even monasteries and universities were“quasi-autonomous self-governing bod-ies.” “Members of the ‘creative classes’ …moved all over the Continent.”

Tyranny thus suffered a “coordinationfailure.”

Republic of Letters / A fourth factor—amajor one— was the “Republic of Letters,”which emerged in the 16th and 17th centu-ries and stimulated the creation and spreadof new ideas. As Mokyr puts it, the “uniquecombination of political fragmentationwith the pan-European institution of theRepublic of Letters holds the key to thedramatic intellectual changes after 1500.”

The Republic of Letters was perhaps themost extraordinary spontaneous develop-ment in Europe. It was an informal andtransnational society of scholars—philoso-phers, scientists, and other intellectuals—who criticized, developed, and discussedideas through correspondence and publi-cations. Their correspondence, made pub-licly available, amounted to an ongoingpeer-reviewed journal. The “citizens” ofthe Republic of Letters followed strict rulessuch as replying to all letters, giving duecredit to the originators of ideas, and put-ting all knowledge in the public domain.They privately produced the public goodof new knowledge.

The small elite constituting the Repub-lic of Letters formed the backbone of afree market in ideas. This market was bothcompetitive and cooperative, Mokyr notes:

There is no contradiction between thecoexistence of such harmonious andcompetitive forces, as an analysis of anymarket demonstrates. Economists haveunderstood since Adam Smith thatthe glory of the market system is thisunique combination.

The Republic of Letters included mostof the great scholars of the time: men suchas Erasmus, Bacon, Voltaire, Hume, Smith,Newton, Descartes, Condorcet, and Spi-noza, along with numerous lesser-knownfigures. It covered many European coun-tries, including Great Britain, France, Italy,the Low Countries, Germany, and Spain.Its transnational character was essential:“At least in theory,” Mokyr observes, “acitizen of the Republic of Letters was sup-posed to be a person without a fatherland.”

The Republic of Letters was criticaland antidoctrinaire. According to Mokyr,“The liberal ideas of religious tolerance,


free entry into the market for ideas, andbelief in the transnational character of theintellectual community were essential toEnlightenment thought.”

It is true that many if not most scholarsdepended on the patronage of kings andnobles. But the Republic of Letters servedas an informal accrediting process, assur-ing that the subsidized scholars were notimpostors or puppets. The selfish competi-tion between patrons for the best scholarscontributed to freedom of thought andspeech, which was basically established bythe end of the 17th century.

The market for ideas remained largelyprivate. The printing press, invented inthe 15th century, played a big role. Print-ing houses spread all over Europe. Besidesproducing periodicals and books, they“were ‘international houses’ where dis-sident foreigners could find shelter anda meeting place.” Mokyr notes that “inEurope, by and large, encyclopedias andreference books were the product of pri-vate enterprise, sometimes published verymuch against the will of authorities power-less to stop them.”

The Republic of Letters “turned outeventually to be an institution unique inhuman history and a key tounderstanding where the longroad that led to modern eco-nomic growth began.” Ideasmatter. Free markets too.

Reactionary forces / Reaction-ary forces were representedby such figures as ThomasHobbes and Jean-JacquesRousseau, but they were moreand more isolated as moderntimes rolled on. Here again,the reader would have appre-ciated a reference to Hayek—in this case, the latter’s dis-tinction between “true” and“false” individualism andbetween British and conti-nental liberalism.

Many of Hayek’s false indi-vidualists were associated withthe Enlightenment and thus

nial question of why the Enlightenmentand the Industrial Revolution happenedin Europe but not in Asia, particularly inChina. He takes much care not to assignthe blame for this to an inferior Asian cul-ture compared to Europe. Is this partlya reflection of the political correctnessthat seems required today when discuss-ing such issues, or is it just scholarly pru-dence? In any event, we should not forgetthat the citizens of the Republic of Let-ters were skeptical of conventional wis-dom and were not very politically correctin their own times.

The Industrial Revolution that hap-pened in Europe, Mokyr argues, was a rareand unexpected event. Like evolutionarysurprises, it could have not happened, orit could have happened elsewhere. “Theadvantage of models of cultural evolution,”he writes, “is that they are contingent andconcern ex ante probabilities rather thandeterministic causal models.” An industrialrevolution required progress that—insteadoffizzling out as had happened in previousexamples, including in the East—wouldstart a “positive-feedback self-reinforcingexplosive technological trajectory.”

“What was missing in China,” Mokyrexplains, “was a high level ofcompetitiveness, both in themarket for ideas and at the levelof political power.” Despite avibrant intellectual life and manytechnological discoveries (includ-ing in shipbuilding and clock-making), China’s centralizedgovernment and its conservativebureaucracy—maintained by astifling examination system—choked progress. Barriers toentry in the market for ideas werehigh. Another scholar quoted byMokyr, Eric Baark of the HongKong University of Science andTechnology, observed that scien-tific knowledge was hampered by“political correctness.”

Because it did not have thenecessary culture and institu-tions, China missed both anindustrial revolution and an

Figure 1

REAL WORLD GDP PER CAPITA, YEAR 1 TO 2010(in 1990 dollars)

0 500 1000 1500 2000YEAR

$9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Sources: Angus Maddison, Contours of the World Economy, 1–2030AD: Essays in Macro-EconomicHistory (Oxford: Oxford University Press, 2007), and the Maddison Project, http://www.ggdc.net/maddison/maddison-project/home.htm (accessed March 11, 2018). Note: Data have been linearlyinterpolated by the author for the years data points are missing.

with Mokyr’s culture of growth. To whatextent did both “true” and “false” individu-alism play a role in creating the moderneconomy? Did these two strands of individ-ualism have more in common than Hayekled us to believe?

The “battle of the books,” or querelle desAnciens et des Modernes, that agitated Europewas emblematic of the clash between oldand new ideas. By the end of the 17th cen-tury, the moderns had won. The culturalchange that had brought scientific contest-ability, useful knowledge, human progress,and Lockean rights bloomed in the 18th-century Enlightenment and the IndustrialRevolution that started toward the endof that century. The entanglement of theEnlightenment and the Industrial Revolu-tion is a major thread in A Culture of Growth.

The book ties together many compo-nents of our understanding of modernity.For example, the victory of the modernswould end “the folly of mercantilistnotions that placed the state (and not theindividual) as the ultimate object of soci-ety.” Today’s reader cannot but reflect thatEnlightenment values are now under siege.

Why not in China? / Mokyr raises the peren-


I N R E V I E W

Grim Tales of Small-TownAmerica✒ REVIEW BY DWIGHT R. LEE

Robert Wuthnow, a sociologist and the Gerhard R. Andlinger’52 Professor of Social Sciences at Princeton University, alongwith his team of research assistants, has “conducted well over a

thousand in-depth qualitative interviews” in hundreds of small com-munities. He outlines his findings in The Left Behind, describing “whatpeople in these communities think—whattheir lives are like, what they value, andhow they arrive at their opinions aboutpolitical candidates and government.”

Wuthnow emphasizes that he tried tokeep his personal views out of the narra-tive, just as he and his assistants tried todo in the interviews. From my reading, he

enlightenment à la European:

The importance of the Enlightenmentfor Europe’s subsequent economicdevelopment goes beyond its impact onthe exploitation of useful knowledgefor material progress, the essence of theIndustrial Enlightenment. It also codi-fied and formalized the kind of institu-tions any society needed to maintain itstechnological momentum: the rule oflaw, checks and balances on the execu-tive, and severe sanctions on more bla-tant and harmful forms of rent-seeking.… The historical irony is that prosperityas it was experienced after 1750 requiredcreative destruction, the very oppositeof social and economic stability.

After it discovered China, the Westeagerly borrowed Eastern ideas andimported goods. For example, “chinaware”was exotic and much in demand, and didnot disguise its foreign origins. On theirside, the Chinese elite were not interestedin “cultural appropriation” from the West,so the country remained insular and miredin the past. It was soon lagging far behindthe West in economic growth.

Culture in Mokyr’s sense includes philo-sophical beliefs. A Culture of Growth showsthat philosophical beliefs in China, despitesome diversity, lacked several ingredients ofWestern philosophy. Perhaps we can go fur-ther and say that China lacked the individu-alistic philosophy that was necessary forintellectual enlightenment and economicprogress. (See “Confucius, Autonomy, andCapitalism,” Winter 2017–2018.)

If one values individual flourishing, allthis looks to me like saying that Chineseculture and institutions were inferior toEuropean culture, even if Mokyr does notcross that bridge. It might be worth cross-ing if we want to draw lessons for our times.The death of Mao Zedong in 1976 was fol-lowed by an explosion of economic andcultural entrepreneurship in China. Eco-nomic competition soared. Production andthe standard of living there started growingsomewhat like in 19th-century Europe.

After three decades of this regime, manyobservers thought that a Chinese Enlight-

enment and Industrial Revolution wereunder way, although serious analysts likeRonald Coase and Ning Wang realized thatthis movement would soon require a liber-ation of the market for ideas. (See “GettingRich Is Glorious,” Winter 2012–2013.) Asthe Chinese government has veered backtoward authoritarianism, the prospectsfor continuing growth have dimmed con-siderably, even if this does not yet showin economic statistics. Those who, oftenfor invalid protectionist reasons, fear theeconomic growth of China can relax.

Role of freedom / Mokyr paraphrases thelate science historian Reijeer Hookykaasin saying that, at the time of the Republicof Letters, “commercial and industrial cit-ies were intellectually dynamic, far moreso than university towns.” The coevolu-tion of ideas, commerce, and industry upto the explosion of economic growth inthe 18th and 19th centuries reminds us ofhow intellectual freedom, economic free-

dom, wealth, and individual autonomyare interrelated.

A related fact is how “in the North Amer-ican colonies and the United States, the oddmixture of Puritan values with elements ofthe French and Scottish Enlightenmentwere decisive in setting the culture of theyoung republic in the 1780s.” Thomas Jef-ferson and Benjamin Franklin were twoemblematic figures of the Enlightenment.

If cultural change explains the Enlight-enment and Industrial Revolution, hascultural change really been explained? Orhave we once again credited the black box?I am not sure. But this complex and richbook certainly provides many keys to theanswer. It strongly suggests that limits ongovernment and a free market in ideascreated the conditions necessary for theEnlightenment, the Industrial Revolution,and the Great Enrichment. After readingthis book, chances are that you won’t lookat the economic, social, and political worldin quite the same way as before.

is credible when he writes, “We’ve tried asbest we could to set aside our disagree-ments with some of the things we heard,seeking instead to listen and understand.”

It is not until his epilogue that he clearlyacknowledges, “I’m part of the liberal elite,… and … opposed nearly everything aboutthe Reagan and Bush administrations,favored much of President Obama’s effortsand voted for Hillary Clinton.” Despite hispolitical views, he conveys a genuine respectfor those he and his team interviewed. Thatsaid, he is not entirely successful at keeping

DW IGHT R . LEE is a senior fellow in the William J. O’NeilCenter for Global Markets and Freedom, Cox School ofBusiness, Southern Methodist University. He is a co-authorof Common Sense Economics: What Everyone Should Know aboutWealth and Prosperity, 3rd ed. (St. Martin’s Press, 2016), withJames Gwartney, Richard Stroup, Tawni Ferrarini, andJoseph Calhoun.


his political views out of the narrative, aswill become clear in this review.

Moral communities / Wuthnow statesearly in the book that “understandingrural America requires seeing the placesin which its residents live as moral com-munities” (his emphasis). I found his useof this term interesting because JamesBuchanan employed the same term inhis 1981 monograph “MoralCommunity, Moral Order, orMoral Anarchy” to describea situation in which a set ofindividuals identify “with acollective unit, a community,rather than conceive them-selves to be independent, iso-lated individuals.” Buchananrecognized that people will“identify simultaneously andwith various degrees of loy-alty with several [such] com-munities.”

Wuthnow doesn’t citeBuchanan but sees a moralcommunity in much thesame way. He, along withBuchanan, doesn’t make anyclaims as to whether moralcommunities are good or bad. Accordingto Wuthnow, such a

community draws our attention to thefact that people interact with one anotherand form loyalties to one another….Understanding communities this way dif-fers from the notion that people are inde-pendent individuals who form opinionsbased strictly on their economic interestsand their psychological needs.

Both Buchanan and Wuthnow recog-nize that the loyalties within moral com-munities can generate hostility betweencommunities. Wuthnow sees

a darker side to the togetherness towns-people experience, [with there being] astrong sense of “us” and “them.” Theresult “ranges from negative stereotypesto overt discrimination.

While he points out that not all small-

town residents engage in such exclusion-ary behavior, he follows up with:

It was one of the ways the subjects Iinterviewed maintained their sense ofidentity. They probably revealed morethan they realized when they said thepeople they knew were all the same.

Another similarity in Buchanan’sand Wuthnow’s understanding of moral

communities is that thosecommunities are not con-fined to geographically smallareas. Buchanan is clear onthis when he extends suchcommunities from those ofnuclear families to the nationstate, with ethnic, racial, andreligious groupings included,with each of us generallybeing in several moral com-munities at the same time,along with people outsideour small geographic area.

Given Wuthnow’s focus onsmall, rural towns, it wouldbe easy to assume he limitshis understanding of moralcommunities to geographi-cally small communities. But

much of what he sees as characteristics ofthese communities—such as shared viewsand ideologies that create common under-standing and a sense of “us vs. them”—don’tdepend on physical proximity. Consider hiscomment on a moral community and thosewho share such a community:

They know the norms of the communitywell enough to abide by them withouthaving to give them much thought. Acommon identity is publicly affirmed inthe stories they tell…. [The communityincludes] people who rarely [interact] with[each other]…. The norms they espousepertain to a large share of the popula-tion…. [This moral code] is enabling interms of the expectations its membersreliably take for granted and at the sametime is constraining in terms of the beliefsand activities it encourages and the ones itdiscourages.

I believe he agrees with Buchanan that wecan identify with, and be influenced by, theviews of widely dispersed people in severalmoral communities, including those per-taining to political ideology.

Does voting reflect morality? / Wuthnowdoes not include voting in his index. Yetmuch, though not all, of what he discussesinfluences the voting decisions of peoplein rural settings.

The book opens with six paragraphs dis-cussing the role of the rural vote in DonaldTrump’s 2016 election as president. Thisdiscussion includes such topics as racismand misogyny, grievance and resentmentat Washington and being left behind eco-nomically, and “backward” voters whoseconservative ideological beliefs ostensiblymotivated them to vote against their inter-ests as Wuthnow interprets them. Thesevoters were also affected by the view thatmorality in American is declining, a percep-tion that is discussed in Chapters 5 and 6.

Wuthnow notes that both rural andurban voters see the votes of the other asclear evidence of their moral deficiency. Heis cautious about making moral judgmentsabout rural voters. But his urge to do so, atleast subtly, is there, as I discuss below. Inhis defense, it is a common urge.

Many of us are far too quick to see thosewho vote differently than we do as morallyflawed, if not evil. In fact, research indicatesthat people’s voting decisions are not verygood indicators of their moral behavior.Voting decisions are overwhelmingly influ-enced by emotional attachment to particu-lar issues and political ideology, which aregenerally more the accident of people’sbackgrounds than thoughtful moral delib-eration. We are identifying with membersof our moral political community whenwe vote the way we know they are voting.We’ve all heard some updated version ofthe Pauline Kael tale where a Blue Statevoter says, “I can’t believe Trump won; Idon’t know anyone who voted for him.”That voter may be mythical, but her politi-cal moral community probably includesmillions of Americans. If Wuthnow hadinterviewed her, he could have written that

The Left Behind:Decline and Rage inRural America

By Robert Wuthnow



I N R E V I E W

she probably revealed more than she real-ized with that statement.

With the growing emphasis on iden-tity politics, how people’s votes are seen toreflect their views of others has taken onincreased moral significance. When votingfor policies to allegedly help a group suffer-ing from discrimination, the measure of avoter’s morality is his intentions, which formany are automatically considered good ifhe votes for the policy and bad if he votesagainst it. Good intentions are not irrel-evant to moral decisions, of course, butthey are hardly the whole story.

This is not to deny that members ofsome groups have been deprived of thebasic freedoms and legal opportunitiesavailable to others (African Americans,Native Americans and homosexuals cometo mind), and that the moral thing to dois give them those freedoms and opportu-nities. A policy doing this would generatepositive-sum benefits, leaving us all betteroff materially as well as morally.

Unfortunately, the policies motivatedby identity politics often exempt the mis-treated from the responsibilities that havehistorically been associated with the suc-cessful instead of providing them withmore freedom and opportunity. Further-more, identity politics has created a politi-cal dynamic in which increasing numbersof groups have benefited from claimingthat they have been treated unjustly. Theresult is an increasing number of peopleidentified as members of unjustly treatedgroups are being pitted against each otherin a negative-sum process of political trans-fers in which they compete over who issuffering most from social injustice. This ishardly an effective way to bring us togetherby promoting social justice or harmony.

It is hard to believe that a rural voterwho votes against such a policy because shebelieves it is socially divisive and harms thepeople it is supposed to help is less moral,or more bigoted, than a city voter whovotes for it because he believes the oppo-site. Wuthnow almost seems sympatheticto this view, at least momentarily, when hewrites, “Most people living in rural Amer-ica are probably no more prone toward

bigotry than many people living in suburbsand cities.” But in the very next paragraphhe states that the

anger that prompts rural Americans tolash out at Washington is a source ofbigotry as well. It can be a thin line fromarguing that Washington is broken tosaying that President Obama was illegal,stupid and untrustworthy because hewas African American.

No one can deny that there are big-ots in rural America, just as there are inurban America and everywhere else wherehumans live. We are instinctively andemotionally a tribal species. And whenexpressing ourselves through voting orpolitical speech, we sometimes embraceideas that we would never consciously

espouse or exhibit—or even tolerate—inother contexts. The line between how wevote and how we act is not thin; indeed,it is quite thick.

Unfortunately, politicians are veryeffective at harnessing these tribal pas-sions by demonizing political opponentsand those opponent’s voters in order toget their own voters to the polls. Hateis more effective politically, and divi-sive socially, when voting is depictedas having that same moral significancefor good or evil as decisive actions. Ourtribal instincts make expressing our moralanger at opposing voters far easier thanconsidering the possibility that voterswho disagree with us are decent peopledoing what we are doing: expressingtheir emotional attachment to what theygenuinely believe is good for America.Yet doing the latter would be far moreconducive to social harmony than judg-ing the morality of others by whether theyvote like us or against us. The former is far

too strong and evidence that too many ofour differences have become politicized.

Getting to know you / The most effec-tive way to moderate our “us vs. them”impulse is by interacting with “them”as individuals, as Wuthnow recognizes.He states, “Research on prejudice towardpeople unlike yourself shows that know-ing someone personally usually has a sig-nificant effect in reducing prejudice.” Hefollows up with some examples of thishappening in small communities.

Before talking about prejudice, heemphasizes that “the limited opportunityfor social interaction in small places forcepeople to mingle on an equal footing” andhe gives examples of people interactingsocially across class lines. It doesn’t elimi-

nate the “us vs. them”impulse, as he makesclear, but it surely helpsreduce it more thanidentity politics. Wuth-now seems to accept, atleast cautiously, the viewof the small-town peoplehe interviews when they

say that “when you live in a large place, …you can isolate yourself from people unlikeyourself if you want to, but in rural com-munities you can’t.”

He cites Harvard political scientist Rob-ert Putman on the importance of socialinteraction within communities. Put-man’s 2000 book Bowling Alone worriesthat Americans’ involvement in their com-munities (e.g., visiting neighbors, beingmembers of civic organizations, doingvolunteer work) has declined to troublinglevels. According to Wuthnow, Putmanobserves that this disassociation has notbeen the case in small towns and ruralareas. Wuthnow provides support for thisnotion by referring to a survey he did inthe late 1990s in which he found “thatresidents of small towns or rural areas weresignificantly more likely than residents ofcities or suburbs to feel they can count onthe neighbors for help if someone in theirfamily became seriously ill.”

The observed politeness of people in

Our tribal instincts make expressing ourmoral anger at opposing voters fareasier than considering the possibilitythat those voters are decent people.


Manipulating the Levers ofthe Regulatory State?✒ REVIEW BY SAM BATKINS

Does America have its current regulatory state because we’rean industrious, wealthy society that decided we could affordmore regulation? Or are we a productive, wealthy economy

because of the regulatory state? Naturally, libertarians and progres-sives will have different answers to those questions.

In Pricing Lives, Vanderbilt law andeconomics professor Kip Viscusi doesn’tdirectly answer either question, but he doeshint that the current regulatory environ-ment—and by some association, our tortsystem—is a result of America’s willingnessto pay for more environmental and work-force safety protections. Just as workers arewilling to pay to reduce risk and gravitatetoward higher paying, low-risk jobs, regu-lators are employing ever-higher figuresfor the Value of a Statistical Life (VSL) tojustify more stringent regulations. In asense, American prosperity has given regu-lators ample evidence to justify a myriadof new rules.

The crux of Pricing Lives rests on thebelief that society, and corporate Americaspecifically, should confront the tradeoffsof risk and think systematically aboutsafety, striking a balance between it andpossible profits. With a title like PricingLives, there is a robust discussion of VSLand its cousin in the regulatory world, theValue of a Statistical Life Year (VSLY). Pro-

gressives and some conservatives stronglydenounce VSL and its corollaries as placinga monetary value on a human being, a taskthat they say is impossible and that theywould not do directly with their childrenor loved ones.

In fact, Viscusi and other proponentsof cost–benefit analysis note, we frequentlyplace a value on lives, only in an indirectmanner. We purchase life insurance withcertain monetary values. We typically drivesafe cars but not impregnable tanks thatwould lower the risk of a fatality to near-zero. Courts and juries have monetized thevalue of a life for centuries.

Lives are monetized frequently. Theonly question is whether government orcorporations are rigorous in their meth-odology when doing this and transparentabout their process. Viscusi devotes a greatdeal of the book to the auto industry, fromthe troublesome General Motors ignitionswitches that resulted in several recalls in2014 to the infamous gas tank design ofthe 1970s Ford Pinto. The industry hashad several other public gaffes that haveresulted in hundreds of fatalities. Yet the

SA M BATK INS is director of strategy and research atMastercard. The views expressed in this review are his own.

small towns relative to that of people incities is, at least in part, a result of thegreater social mingling in the former thanin the latter. Wuthnow doesn’t emphasisthe politeness of small-town folks, if hementions it at all, yet it is clearly reflectedin the pattern of helping others that hedoes discuss in some detail as a strengthof small towns. Yet, toward the end of hisbook, he reveals his bias by indicatingthat people’s good acts do not reflect theirmoral status if those people do not votethe “right” way.

Do good intentions trump decisive action? /In addition to the greater social interactionbetween different social groupings in smalltowns than in cities, Wuthnow recognizesthat religion “plays an important role inholding the community together [and] …supports the family values that people holddear and tells them that they should carefor their neighbors.” Yet he sees a contradic-tion in the clergy’s and lay members’ caringfor neighbors. What they “usually missedseeing,” according to Wuthnow, “was thathow they voted also affected provisions forthe needy.” They voted for conservativeRepublicans who “opposed welfare spend-ing, favored regressive tax policies.”

Wuthnow sees this as a moral “blindspot” based on the “small-town view thatlocal charity and volunteering were betterthan government programs.” He doesn’tconsider the possibility that individualstaking decisive action with their ownmoney to help the poor are engaged in anact that is both more moral and effectivethan is expressing good intentions withan indecisive vote that costs the individualvoter effectively nothing for the purposeof having the government force everyoneto contribute the same way. And speak-ing of blind spots, he doesn’t considerhow much more likely the small-towncontributor is to follow up on his contri-bution to see if it is used effectively thanis the voter to follow up on his vote todetermine how much the policy he votedfor (if enacted) benefits the poor afterbeing processed through state or federallegislatures and bureaucracies.

Conclusion / I give Wuthnow credit fordescribing the concerns, resilience, vir-tues, andflaws found in small-town Amer-ica. My biggest concern with his book isits tendency, in most cases implicit, toattribute too much moral significance tohow people vote.

I recognize this tendency is not lim-ited to him or to those embracing thesame political views he does. He was more

explicit in describing how people in smallAmerican towns lived and interacted witheach other as friends and neighbors. Fromthose accounts I got the strong impres-sion that Wuthnow would give small-townAmerican higher marks for how they actedoutside the voting booth than for howthey voted in it. And he might agree withme that the former is a better measure oftheir decency than the latter.

64 / Regulation / SPRING 2018

book isn’t a Naderesque screed againstcorporate America, but rather a plea forits wider adoption of cost–benefit analysis.

Surprisingly, corporate risk analysiswas arguably more advanced decades agothan it was in the recent ignition switchfiasco. As Viscusi recounts, Ford engagedin a detailed risk analysis of the Pinto’sdesign, but that analysis wasflawed in a number of ways.Most notably, it valued livesbased on the level of tortliability damages in wrong-ful death cases. That resultedin a value of just $200,000 foreach burn death. Accordingto Ford’s math, the cost ofa design change to preventignition of the rear-mountedgas tank was triple the VSLfor potential victims. Whenjurors learned that the cost tofix each car was just $11, theway Ford undervalued eachlife was laid bare to the public.Eventually, it cost Ford $3.1million in compensatorydamages for one victim, inaddition to $3.5 million in punitive dam-ages. Despite the automaker’s attempt tomeasure and monetize risk properly, Fordmade the wrong decision, from whichfuture businesses would learn. Viscusiargues this is to the detriment of bothcost–benefit analysis and public health.

Transparency / Imagine if the U.S. Envi-ronmental Protection Agency instituteda $20 billion regulation but, instead ofreleasing a detailed explanation of itscost–benefit analysis of the rule, it justsaid that Congress and the public shouldtrust its decision. Assuming the regula-tion survived Office of Information andRegulatory Affairs (OIRA) scrutiny, whichis unlikely, a court would probably strikeit down in short order. During the regula-tory process, industry expects high stan-dards from agencies, at least for regulatorsin executive branch agencies whose workis subject to OIRA review. However, afterthe Pinto fiasco, corporations have been

more secretive in their risk analysis thangovernment is.

With regulators, the public generallyknows the estimate on potential lives savedand how government monetizes thisfigurefor an apples-to-apples comparison withmonetized costs. Contrary to progressivecritics, VSL does not directly place a dol-

lar value on a human life.Instead, VSL is, in the wordsof Viscusi, “a reflection of themonetary risk preferences ofa particular population andthe tradeoffs exhibited dur-ing an economic era.”

For example, supposeyou’re a 45-year-old skier andyou buy a $200 helmet thatcan reduce your risk of deathby 1:50,000. You have implic-itly valued your life at $10million (i.e., $200 × 50,000).In contrast, a young skierfresh out of college, workinginternships to get by, may buya $100 helmet that reducesher risk of death by 1:25,000.This equates to a VSL of $2.5

million. This doesn’t mean her life is worthless than yours, but it does illustrate thatthe willingness to pay for risk reduction ismeasurable and quantifiable.

This begs the question about inequalityand varying VSLs for different countries.For instance, the U.S. VSL, according toViscusi, is roughly $10 million; in Australiait’s $7.1 million. India and Pakistan reportVSLs of $4.9 million and $12.3 million,respectively. Given what we know aboutwillingness to pay, Viscusi notes these fig-ures are “implausibly high.”

It is fear over implausibly high or lowVSLfigures that has driven much of corpo-rate risk analysis into the ground, or at leastinto the shadows. Public backlash againstFord’s shoddy math has made corporationsfearful of these calculations and weary ofever presenting them to a judge or jury.

Viscusi argues this is a grave mistake;both corporations and the governmentshould be rigorous in their risk analysis.Speaking directly to progressives weary of

VSL, he notes that a properly vetted cost–benefit analysis can produce more stringentregulatory outcomes. A good analysis cangenerate more protective regulatory stan-dards even if there is a dollar value placedon each life at the outset. This may soundlike music to the ears of some trial lawyersand progressive regulatory activists, even ifthey detest cost–benefit analysis.

Moving the regulatory levers / For libertar-ians, there are several notes of caution.As many have noted, the VSL has beencrawling upward for several years. Now atroughly $9–$10 million across the federalgovernment (although not uniform acrossall agencies), it was just $3 million in 2005according to a Department of Transporta-tion final rule. Moreover, since 1995 therehave been only 105 final rules that havecited a VSL, including 33 from the DOTand 21 from the EPA. This raises a seriesof questions: For regulators suddenly will-ing to embrace statistics and economics,can they manipulate the VSL to producefavorable regulatory outcomes? Why hasthe VSL tripled in roughly 10 years whenU.S. household income has not madenearly the same gains?

Viscusi doesn’t answer these questionsdirectly and they are not the focus of thebook. However, just as juries want to knowhow the sauce is made for corporate cost–benefit analysis, the public has every rightto know if the VSL is used as a backdoortool to justify additional regulatory stan-dards. Rarely is the VSL challenged in courtwhen confronting landmark regulations,and perhaps that should change. For cor-porations, the Ford Pinto disaster gavebirth to a practice libertarians and progres-sives should both detest: fear of rigorousand transparent risk analysis.

GM’s ignition switch controversy isan example of a company running fromcost–benefit analysis. Mindful of the Pintoexperience, GM apparently decided not toundertake a quantitative analysis of therisk it faced versus the cost of recalling theaffected cars. The automaker even avoidedthe use of qualitative terms that describedthe real safety risk. The result was 124 lives

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Pricing Lives:Guideposts for aSafer Society

By W. Kip Viscusi



lost, resulting in part from a corporateculture fearful of quantifying the value ofsaving lives. Instead of showing the govern-ment and potential juries their work on anappropriate VSL and the risk of fatalities,the public learned of “judgment words”banned from corporate communications.These included: “you’re toast,” “powderkeg,” “potentially disfiguring,” and “rollingsarcophagus.”

There should be general agreementacross the ideological spectrum that GM’stime would have been better spent hir-ing economists and mathematicians toevaluate the tradeoffs of a potential recall.Courts, the public, and regulators rightlysavaged the automaker for its decisions.Perhaps the silver lining to the catastro-phe is that corporate America will beginto embrace cost–benefit analysis as a toolfor better decision making and to guardagainst such brand-damaging episodes.

Viscusi does offer one idea that mayprovide a path for corporations interestedin risk analysis but weary of formally pub-lishing a VSL. He suggests the governmentgrant “safe harbor” in legislation for VSLcalculations. In other words, plaintiffswould not be permitted to introduce evi-dence on corporate risk analysis. Compa-nies would, however, be allowed to intro-duce evidence of reasonable estimates ofVSL and VSLY. This may be a practicalsolution for the wider adoption of cost–benefit analysis, but the trial bar wouldlikely stand in the way of such a provision.

In conclusion, most rational followersof the regulatory state will cheer for morewidespread use of risk analysis. If greatercorporate adoption of the practice leadsto fewer lives lost—and somehow, fewerlawsuits—all the better. However, there isa real fear that regulators and trial lawyerscould wield an expanding VSL to pushfor their preferred regulatory standards,higher tort damages, and the aim ofreducing inequality through regulation.American ingenuity has produced a greatdeal in the last 150 years, including one ofthe highest VSLs on the planet. Let’s hoperegulators don’t wield the VSL to impedefurther progress.

Shaping Markets✒ REVIEW BY PHIL R. MURRAY

Alvin Roth is the Craig and Susan McCaw Professor of Econom-ics at Stanford University and co-winner of the 2012 NobelPrize in Economics. In January of this year, at the close of his

term as president of the American Economic Association, he offeredhis presidential address, “Marketplaces, Markets, and Market Design,”

PHIL R . MUR R AY is a professor of economics at WebberInternational University.

which followed up on his 2016 book, WhoGets What—And Why. His address inter-ested me enough to pick up the book andwrite this review.

In it, he proclaims, “The new economicsof market design brings science to match-making, and to markets generally. That’swhat this book is about” (Roth’s emphasis).“My hope,” he tells readers, “is that thisbook will help you see markets in new ways.”

If there is a shortage in the market fora commodity, economists predict thatbuyers will bid higher prices and sellerswill accept the higher prices in return forincreasing the quantity supplied. In thiscase, it doesn’t matter what commodityis being traded. “The price does all thework,” he explains, “bringing [buyer andseller] together at the price at which supplyequals demand.”

However, in some cases, what is beingtraded does matter. For instance, considera “matching market” such as a marketfor donor organs. In such a market, buy-ers must choose sellers and sellers mustchoose buyers in order for the exchangeto be mutually beneficial. Roth puts itthis way: “A market involves matchingwhenever price isn’t the only determinantof who gets what.” Or who gets whom, forthat matter.

Market necessities / Some economists tryto make the world a better place by recom-mending better public policy. Roth makesthe world better by designing markets sothat they work better. “Market design” isthe set of rules according to which buyers

and sellers interact; it is also the makingof those rules.

A market works well, in the jargon ofmarket design, when it is “thick,” “uncon-gested,” and “safe.” A market is thick ifthere are many buyers and sellers. It isuncongested if buyers and sellers haveenough time to evaluate offers. In gen-eral, if buyers and sellers feel comfortableparticipating, a market is safe. A match-ing market in particular is safe if buyersand sellers honestly share who they wantto deal with. For example, school choicerequires that parents “list their true prefer-ences” for schools, which may differ fromwhat they think they might get based onthe school board’s assignment criteria.

A market “fails” or “unravels” when itbecomes thin, congested, or unsafe. Rothstrives to repair those problems.

Thickening markets / Kidney exchangeillustrates the features of a matchingmarket as well as the benefits of mar-ket design. Roth first pondered kidneyexchange in the early 1980s. He reportsthat in 2014, the shortage of kidneysexceeded 100,000. Given that shortageand the National Organ Transplant Act of1984, which bans the sale of kidneys, mar-ket designers aimed to thicken the marketby increasing the number of donors. Afterthat, the author says, “making the marketthick involved assembling databases ofpatient–donor pairs.” These pairs mustmatch based on blood type and immunesystem. Roth and his colleagues devisedan algorithm to determine matches.

To shed light on the possibilities, con-sider how a database enables “trading


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cycles.” Suppose Mr. Jones needs a kidneyand Mrs. Jones is willing to donate one ofhers, but they are incompatible. Likewise,Mrs. Smith needs a kidney and Mr. Smithis willing to donate one of his, but theytoo are incompatible. Roth’s algorithmdetermines that Mr. Jones and Mr. Smithare compatible, and Mrs. Jones and Mrs.Smith are compatible. Doctors performone transplant from Mr. Smith to Mr.Jones and another from Mrs. Jones to Mrs.Smith. This “two-way cycle”saves two lives. Likewise, a“three-way cycle” saves threelives. Last year, doctors atYale–New Haven Hospitalperformed a nine-way cycle.

Trading “chains” make themarket thicker yet. In contrastto a trading cycle in which adonor expects a loved oneto receive a kidney, a “non-directed donor” initiates achain that will include “somepatient–donor pairs, and endwith a donation to someoneon the waiting list.” Anothersignificant benefit of a chainis that transplants may occurnon-simultaneously. Notethat Mr. Smith would hesi-tate to donate his kidney toMr. Jones if he could not expect Mrs. Jonesto give up hers at the same time and placeto Mrs. Smith. Doctors perform the trans-plants in a kidney trading cycle simultane-ously in order to prevent the possibilitythat a directed donor cannot or will notgive up a kidney after his or her loved onehas already received one.

The problem with simultaneous opera-tions is that they bump into resource con-straints because of the limited availabilityof doctors, nurses, and facilities. A non-directed donor relaxes those constraints;he or she donates to Mr. Jones, and even ifMrs. Jones fails for some reason to recipro-cate, no one has donated without a lovedone receiving a kidney. To paraphraseRoth, Mr. Smith may remain in the kidneyexchange as a donor to benefit his wife atsome point in time. The author shares the

story of a non-directed donor who initi-ated a chain that involved 16 operationsover a period of years. More recently, sincepublication of this book, Roth described achain involving 60 donors and recipients.

The aforementioned resource con-straints that hindered simultaneous trans-plant operations congested the market forkidneys. Trading chains not only thickenthe market; the non-simultaneous opera-tions they make possible also decongest

the market by relieving thoseresource constraints.

D e c o n g e s t i n g m a r ke t s /Another factor impedestrading. “Keep in mind,”Roth writes, “that hospitalsearn revenue on their trans-plants; they’re commercialenterprises as well as care-givers.” Thus hospitals havean incentive to keep their“easy-to-match” pairs offthe market and refer the“hard-to-match” pairs tothe market. The problem isthat “when transplant cen-ters withhold easy-to-matchpairs and transplant theminternally, it reduces thenumber of people who can

be matched nationwide, because it’s easierto find matches for hard-to-match pairs ifthey don’t always have to be matched withother hard-to-match pairs.”

Roth and a colleague imagine that theproblem can be fixed by rewarding hos-pitals with more matches based on thenumber of easy matches they refer to themarket. Their idea is unlikely to be imple-mented, Roth laments, because health careproviders refuse to admit that “hospitalsare strategic players in competition withone another.” More lives are likely to besaved by integrating regional markets forkidneys into a national market and relyingon trading chains.

At the time he was writing, Roth antici-pated kidney exchange would go global.Since publication, that has become areality. Transplants cost less than dialy-

sis; the cost savings finance travel, trans-plant operations, and other health care forpatients and donors from poor countriesto rich countries in what one of Roth’smedical colleagues calls “reverse-trans-plant tourism.”

Recall that the National Organ Trans-plant Act prohibits the buying and sell-ing of organs. Why? Roth’s term for it isrepugnance. “Let’s call a transaction repug-nant,” he suggests, “if some people want toengage in it and other people don’t wantthem to.”

He begins his chapter on repugnanceby noting that even though there wouldbe willing producers and consumers ofhorsemeat, a majority of voters in Califor-nia banned the market. What offends thirdparties, as they observe other people buy-ing and selling, varies over time and fromplace to place. Roth gives several examples.Money lending used to be repugnant inthe West; it remains so in Islamic society.On the other hand, indentured servitudewas not repugnant in early America, buteventually became so. The French and theGermans continue to dine on horsemeat.

If anyone can think of a way to enablethe buying and selling of kidneys with-out arousing repugnance, the gains fromtrade—in terms of lives saved—would belarge. Roth presents a few ideas. Some peo-ple object to buyers compensating sellersbecause they expect the former to havehigh incomes and the latter to have lowincomes. The objection fails to see that byallowing donors to be paid, the increasein the quantity supplied of kidneys willbenefit low-income patients by reducingthe time they spend on waiting lists. Thereis nevertheless a way to avoid this objectionbased on income inequality. Roth pointsout that the government could raise taxesand buy kidneys, which would then beassigned to patients on waiting lists basedon criteria other than income.

Another objection is that allowingdonor compensation could lead to undueinfluence. For example, creditors mightpressure debtors into paying off their obli-gations by selling a kidney. To counter thisobjection, the author recommends donors

Who Gets What—andWhy: The NewEconomics ofMatchmaking andMarket Design

By Alvin E. Roth

261 pp.; Mariner, 2016


undergo a “cooling-offperiod” so that theyare sure they are making the right decision.

At the time he was writing, Roth admit-ted that he was pessimistic about overturn-ing repugnance in the buying and selling ofkidneys. He refuses to give up, however. Hislatest tack advances a question put forthby Philip Cook and Kimberly Krawiec ofDuke University: If society finds it accept-able for professional football players toput their health at risk for compensation,why not kidney donors? (“If We Pay Foot-ball Players, Why Not Kidney Donors?”Spring 2018.)

Although kidney exchange teachesmany lessons about a matching marketand market design, the book offers muchmore. Roth explains the intricacies ofmatching law students with judges, medi-cal students with residencies, and studentswith schools. He describes the latest ideasof market designers who are trying to solveproblems that arise when stock traderscompete down to a fraction of a millisec-ond, or Federal Communication Com-mission officials auction “a package oflicenses” to businesses that use a portionof the radio spectrum.

The book has an offbeat element remi-niscent of Freakonomics, the 2005 bestsellerfrom economist Steven Levitt and journal-ist Stephen Dubner. For example, Rothwrites of his and colleague Xiaolin Xing’sdiscussion of an amazing case of earlytrading in which a polygynous AboriginalAustralian tribe matched newborn boyswith the future daughters of newborn girls.Other colleagues discovered that delivering“virtual ‘roses’” on a dating website was aseffective in generating mutual interest asgood looks and a good job. The reader willencounter market maladies such as “snip-ing” (offering to buy just before the mar-ket closes) and “exploding offers” (thosethat expire rapidly). Sometimes marketdesigners solve or attenuate these prob-lems, sometimes not.

Readers of Regulation may be interestedin how Roth handles this question: “Howdo we square market design with the notionof the ‘free market’ that so many peoplehold dear?” To him, a free market is “a mar-

ket with well-designed rules that make itwork well.” Those who design the rules maybe buyers and sellers in the market as well asgovernment officials imposing mandatoryregulations. Both the private actors and thegovernment regulators, he lets us know, arecapable of making mistakes.

He thinks of “economists as engineers.”Readers might balk at that because itsounds like dreaded social engineering. But

Corruption and Government✒ REVIEW BY GEORGE LEEF

What motivated the American colonists to rebel against theBritish crown? The reasons that immediately come to mindinclude unwanted taxes, trade interference, and disrespect

for the colonists’ property rights. In his latest book, George MasonUniversity law professor F.H. Buckley argues that we should addcorruption to this list. The patriots sawthe monarchy and its officials as wallow-ing in corruption as they lived high ongraft and doled out favors to friends andcronies at public expense.

While tensions grew in the 1770s, fewBrits understood the fuss. “But what theymissed,” Buckley writes, “was the colonists’ire over corruption in the British govern-ment—the King’s Friends in Parliament,the showering of gifts on royal favorites,the patronage machines of prime ministersand of royal governors in the colonies.”

The patriots did not just want to throwoff the yoke of King George III; they wantedto create a government that would be vir-tuous. They wanted a government run forthe good of the people at large rather thanfor a few with money and influence. Theywanted to prevent corrupt bargains andself-dealing.

Constitution vs. corruption / Once inde-pendence was won and the new nation’sleaders got together in Philadelphia todeal with the evident flaws of the Articlesof Confederation, the need to keep cor-

ruption out of government was one oftheir paramount concerns. The govern-ment they envisioned, Buckley writes,

would accept the reality of our ordinaryvices, but would make it harder for themto infect the body politic. By dividingpowers and asking one branch to checkanother, the Framers sought to restrainthose who would use the means of gov-ernment to serve wasteful private ends.

From that goal sprang many of theConstitution’s features. The presidentwould not be popularly elected but ratherchosen by the Electoral College, whichwould presumably consist mostly of wiseand virtuous men. Furthermore, the Elec-toral College would meet in the separatestates rather than the nation’s capital, aprovision meant to prevent unsavory dealsamong the electors.

The president would be subject toimpeachment and it was originally pro-posed that only a majority vote in the Sen-ate was needed to remove him. (Buckleynotes that the change to a two-thirds votewas made late in the convention by a com-mittee and never debated.) To keep thepresident from squandering money on his

GEORGE LEEF is director of research for the James G.Martin Center for Academic Renewal.

Roth points out that markets are “humanartifacts” just like agriculture and the medi-cal profession. Just as farmers tweak seedsand doctors prescribe medicine, economistsmay recommend modifications that helpmarkets work better. Let’s hope that econo-mists who think of themselves as engineersuse persuasion in the marketplace of ideasand refrain from advocating coercive gov-ernment intervention.


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friends as English kings were wont to do,the Appropriations Clause stated that nomoney could be withdrawn from the Trea-sury except upon a vote of Congress. Norcould the president confer any title of nobil-ity or accept any foreign emoluments. Hecould make appointments, but only withthe advice and consent of the Senate. Thoseand other provisions were intended as bar-riers against corruption.

Buckley, who has studied the Constitu-tional Convention carefully, notes that BenFranklin even suggested making the presi-dency an unpaid office to further reduce itsattractiveness to grasping men. That idea,however, was too much for the rest of theassembly and his suggestion died quietly.

Turning to the legislative branch, eachstate’s senators would be chosen by thestate legislature rather than elected directly.(The 17th Amendment would change that.)Members of Congress were forbidden tohold any other federal office at the sametime. The powers of Congress were care-fully enumerated and did not include anyauthority to engage in what James Madi-son called “factionalism,” meaning the pro-motion of legislation intended to benefitindividuals or interest groups rather thanadvance the general good.

Slipping the constraints / The Framers puta great deal of effort into devising a gov-ernmental structure that would ward offcorruption. Alas, it has failed. The govern-ment today is riddled with the kind ofinfluence peddling and hidden deals thatdrove the patriots to take up arms in 1775.Buckley writes,

From TARP, to the Export–ImportBank, to the tariff protections offeredto favored industries, there is a growingconcern that the federal government hasbecome a necessary business partner,and that the (imagined but not neces-sarily imaginary) free market capitalismof the past has been transformed intoa wasteful crony capitalism that favorswell-connected special interests.He provides a convincing analysis of

the Constitution’s inability to maintain

the envisioned “republic of virtue.” Theseparation of powers proved no match forpresidents who were determined to act asthey wanted. He observes:

The president has slipped off manyof the constraints thatwere meant to curb hisauthority. He makeslaws by regulatory fiatand executive order, andunmakes them by refus-ing to enforce properlyenacted legislation. He canreward friends and pun-ish enemies in ways theFramers would not haveimagined.

That ’s per fect ly true,although Buckley doesn’tmention that the presidentswho were eager to slip thoseconstitutional restraintswere able to do so only withthe complicity of Congressand the Supreme Court. TheFramers’ design worked fora while, but their words onpaper could not prevent corruption oncethe ruling elite decided that limited gov-ernment was too old-fashioned.

And so we live with a level of corrup-tion that makes that of King George’s timeseem quaint. Much of today’s policymak-ing appears to have nothing to do withthe merits of the proposed legislation, thepolitical appointee, or the legal arguments,but instead is driven by money and con-nections.

Judicial corruption / Consider, for instance,the way justice often depends on wherea case is tried. Trial lawyers have workedout brazenly corrupt methods of shak-ing down out-of-state litigants in venueswhere they pretty much own the judges.

Buckley recounts an infamous Mis-sissippi case involving a contract dis-pute between a Mississippi firm and onefrom Canada. The proceedings reeked offavoritism toward the former and hatreddirected at the latter, even playing the

“race card” with the black jury. The judge,elected with plenty of support from thetrial bar, allowed the plaintiff ’s legal teamto get away with outrageous conduct (hewas later given an appointment to theFifth Circuit by President Barack Obama)

and the resulting damageaward against the Canadianfirm was staggering: $100million in compensatorydamages (including $75 mil-lion for “emotional distress”)and $400 million in puni-tive damages. Moreover, thedefendant was not allowedto appeal under Mississippirules unless it first posted abond of $625 million. Theunfortunate Canadiansfinally settled the case, pay-ing $130 million over a dubi-ous breach of contract.

There is a clear solution tothe problem of state judicialcorruption. Congress needonly adopt the proposedFairness in Interstate Litiga-tion Act, amending the law

providing that in cases involving diversityof citizenship, federal and not state courtshave jurisdiction. That is apparently whatthe First Congress had in mind when law-makers passed the Judiciary Act of 1789,which provides for removal of “diversity”cases to federal court.

The problem is that in an 1806 case,Chief Justice John Marshall read the stat-ute to mean complete diversity, so that ifthe plaintiff and at least one defendantwere from the same state, the case mustremain in state court. Ever since, lawyershave taken advantage of that decision,which Marshall later admitted was a mis-take. They find some in-state company toplead in as co-defendant, which is why onesmall drugstore in Mississippi has beensued hundreds of times, to provide thein-state connection that defeats federaljurisdiction. If Congress would pass theproposed amendment, that would wipeout a great deal of judicial corruption.That’s the book’s most efficacious idea.

The Republic of Virtue:How We Tried to BanCorruption, Failed,and What We Can Doabout It

By F.H. Buckley

246 pp.; EncounterBooks, 2017


Campaigns and corruption / But whatabout the big “money in politics” prob-lem? Going back to the 1970s, Americahas had a fixation on trying to “clean up”politics through contribution limits anddisclosure requirements. Buckley arguesthat it has all been futile. Such constraintsdo nothing to keep people and groupswith money from finding ways to influ-ence who gets elected and appointed, andwhat bills and regulations are adopted ordefeated. All they accomplish is to createtraps for the unwary that can be exploitedby partisans who want to use the law as asword to harm their opponents.

Buckley gives several jarring exam-ples of that, including the prosecution,imprisonment, and mandatory psychi-atric evaluation of conservative writerDinesh D’Souza and the SWAT raid ofthe homes of Wisconsin Club for Growthmembers for having supposedly violatedcampaignfinance laws in supporting Gov.Scott Walker. Zealots can and will hunt forpetty violations of these complicated lawsto take down people on the other side.Instead of making politics cleaner, theymake it dirtier and more vicious.

We would be better off, Buckley argues,if we repealed the current campaignfinancelaws and put in their place three rules:that all political contributions be madeanonymously, that we legislate specificallyagainst “pay for play” operations, and thatwe stop the revolving door between govern-ment jobs and lobbying firms.

Regarding the first, Buckley argues,“There’s bound to be less corruptionattached to the money when the gift isanonymous.” Moreover, a rule of anonym-ity would prevent the “outing” of donorslike former Mozilla president BrendanEich, who was forced to resign after left-wing political forces discovered his con-tribution to the campaign in Californiaagainst same-sex marriage. (See “ShouldCampaign Donors Be Identified?” Summer2001; “Answering Ayres,” Winter 2001.)

Regarding the second rule, what Buck-ley has in mind is a ban on political con-tributions from government contractorsand municipal bond dealers. Both groups

have a strong temptation to engage in rent-extraction by supporting candidates whowill channel business their way.

Concerning the third rule, he pointsout that “on leaving elective office, manycongressmen and senior staffers becomelobbyists and cash in on the contacts theyhave made. The Center for ResponsivePolitics reported in 2011 that at least 285of an estimated 1,000 former members ofCongress were registered as lobbyists, andanother 85 provided ‘strategic advice’ forclients.” Because of this well-lubricatedrevolving door between legislating and lob-bying, we probably have a lot of laws andregulations that wouldn’t otherwise comeinto existence.

In my view, those reforms have merit,but they would only make a small dent in

America’s political corruption problem.We have corruption because, like the Brit-ish monarchy, today’s government has toomuch power to tax, spend, and regulate—powers that inevitably attract the dishonestand seduce the once-honest. So long as thatpower remains, we will have corruption.

Buckley knows there’s no silver bulletto kill corruption, but he hopes to offer abit of relief. He concludes:

Rather than rely upon people’s intrinsicgoodness, we should look more modestlyfor feasible ways to guard against par-ticular kinds of corruption where we findthem. That’s what the Framers did in aim-ing to design an anticorruption covenant,and the best we can do is keep tinkeringwith the machinery they gave us.

A Radical Restructuring andRedistribution of Wealth✒ REVIEW BY DAVID R. HENDERSON

In Radical Markets, University of Chicago law professor Eric Pos-ner and Microsoft senior researcher Glen Weyl propose a radicalrestructuring of property rights, immigration policy, and voting,

as well as a substantial change in corporate law. Their most radicalproposal is to completely overturn property rights so that peoplewould need to continuously “bid” forproperty they already own. They want toalter immigration policy to allow about100 million more immigrants into theUnited States, but change who decideswhether or not to allow particular pro-spective immigrants to enter. They want toswitch to “quadratic” voting as opposed tothe current one citizen–one vote method.They also want a major change in howinvestors can hold shares in corporations.

For all of these positions, they makeclever and sometimes compelling argu-

ments. The most compelling one is onvoting. The least compelling, and alsoabsolutely horrific, one is on property.

Worse off? / Posner and Weyl begin bymaking the case that the current politi-cal and economic situation in the UnitedStates is well short of ideal. Who coulddisagree? But in making their case, theyclaim that the U.S. economy has beenstagnating for many years for most of itsresidents. They base this strong conclu-sion on thin evidence.

The closest they come to making theircase is to cite a study by Stanford Univer-sity economist Raj Chetty and co-authors,who found that only 50% of Americanchildren born in 1980 had a higher liv-

DAV ID R . HENDER SON is a research fellow with theHoover Institution and emeritus professor of economicsat the Graduate School of Business and Public Policy at theNaval Postgraduate School in Monterey, CA. He was a senioreconomist with President Ronald Reagan’s Council of Eco-nomic Advisers. He is the editor of The Concise Encyclopedia ofEconomics (Liberty Fund, 2008).

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ing standard at age 30 than their parentshad at the same age. They don’t mentionthree huge problems with the study, allof which, if corrected for, would undercutthat result.

First, as Chetty admits, the study mea-sured income not for the individual, butfor the household. Are 30-year-olds’ house-holds systematically different today thanthey were in 1980? Yes. Today, 30-year-oldsare less likely to be married and living witha spouse who earns income.

Second and related, today’s 30-year-oldsare typically not quite as far along in theircareers as their parents were in 1980. Onereason for this is that many of them werein school longer than their parents were,getting undergraduate and even graduatedegrees.

Third, to adjust for inflation so thatthey could compare incomes over time,Chetty and his co-authors used the U.S.Consumer Price Index. The CPI systemati-cally overstates inflation by about 0.8 per-centage points per year. Over a generationof 25 years, that’s an overstatement of 22%.Had they taken that into account, theywould have found that well over half—Iwould wager over 60%—of today’s 30-year-olds earn more than their parents earnedwhen they were 30.

Undercutting property rights / Posner andWeyl’s argument for overturning propertyrights is that private property inherentlyconfers market power. Indeed, the titlethey choose for their chapter on this topicis “Property Is Monopoly.”

They are right in some instances. Myhome, for example, is the only house on thepiece of property that I also own. Becausethere is no perfect substitute for that pieceof property or that house, I have a smallamount of market power. But there areclose substitutes for my home. And thereare even closer substitutes for my stocks,bonds, and car. So “Property Is Monopoly”is a highly exaggerated title.

They go from that idea—I’m skippingtheir fairly good exposition of 19th cen-tury economist Henry George’s idea fortaxing land—to their proposal for a com-

mon ownership self-assessed tax (COST)on wealth. They would have the federalgovernment impose a stiff 7% annual taxon people’s wealth. People would assesstheir own wealth, estimating, say, the valueof their house.

What would prevent people fromunderestimating the value of their assets?This is where Posner andWeyl’s proposal is horrific.Once a homeowner, say, hasstated the estimated valuepublicly, he would have tosell his house to anyone whooffers more than that value.So, for example, supposemy aforementioned houseis worth about $900,000 onthe open market. If I esti-mated the value at $900,000,my annual tax under theirproposal would be a whop-ping $63,000. If I estimatethe value below that, I wouldrisk losing the house to any-one who bids more than myestimate. To be safe, I wouldprobably estimate the valueat $1 million because I likeliving there. But then Iwould pay $70,000 in taxes on my homeannually. (Notice that a 7% annual tax onan asset would amount to an implicit taxof over 100% on the income from manyassets.)

In short, Posner and Weyl would fun-damentally undercut property rights, mak-ing them conditional. If you’ve lived inyour home for 32 years, as my wife and Ihave, and put a lot of sentimental value onthe place where you raised your children,then you would have to put a number onthat value. And in case you think you canhandle that, you must remember that theywant to do the same with virtually all ofyour net worth.

Toward the end of the book, they eventoy with having people pay taxes on theirhuman capital. They give an example of asurgeon who announces that she wouldperform gallbladder surgery for $2,000and pay a tax accordingly. She would be

obligated to provide that surgery to anyonewilling to pay $2,000. So if the surgeonwas thinking of retiring, forget it. The onlysatisfactory solution for her would be toestimate the value of her services at a num-ber that really would make her indifferentbetween working and retiring.

The authors are aware that they’re tread-ing on sensitive ground here,writing, “A COST on humancapital might be perceived asa kind of slavery.” Might be?They claim that such a per-ception is incorrect, but thereasoning behind their claimis weak.

They implicitly admitthat their proposal is coer-cive when they write that itwould be a mistake “to thinkthat the current system is notcoercive.” How is the currentsystem coercive? Here’s how:“Those with fewer marketableskills are given a stark choice:undergo harsh labor condi-tions for low pay, starve, orsubmit to the many indig-nities of life on welfare.” Inshort, to Posner and Weyl,

being relatively poor is akin to beingcoerced. I would bet that a newly freed slavein 1865, though almost certainly poor,would understand the difference betweenpoverty and coercion better than Posnerand Weyl seem to.

And let’s not forget the huge trans-fer of wealth that COST would imply,a transfer that they claim is a virtue oftheir proposal. A family with a net worthof, say, $2 million would pay $140,000 ayear. They estimate that a COST wouldraise 20% of GDP annually, half of whichwould replace “all existing taxes on capi-tal, corporations, property, and inheri-tance” and wipe out the deficit. The otherhalf would be given to each U.S. resident,which would mean a per capita annualpayment of about $5,300. Elsewhere (“APhilosophical Economist’s Case Against aGovernment-Guaranteed Basic Income,”Independent Review, Spring 2015), I have

Radical Markets:Uprooting Capitalismand Democracy for aJust Society

By Eric A. Posner andE. Glen Weyl



described the huge problems with such auniversal basic income. In short, Posnerand Weyl advocate a huge wealth transfer.

Notice, also, that the biggest revenuesources for the feds—the individual incometax and the payroll tax—would be left inplace. This means that Posner and Weyl arecalling for a gigantic increase in the size ofthe federal government.

Making immigration benefit natives / Theirother major economic proposal is onimmigration. They would take away U.S.corporations’ power to hire immigrantsand would instead give each of 250 mil-lion American adults the power to hireone immigrant. Then, the American doingthe hiring could employ the immigrant orhire the immigrant out to someone else.

What’s the American’s incentive? Eachwould make an offer to an immigrant—they use the number $12,000 per year forillustrative purposes—that would be attrac-tive to someone from a low-income coun-try, and each native would then pocketthe difference between that $12,000 andthe value of what the immigrant produces.

Posner and Weyl estimate that only 100million Americans would take advantageof this opportunity, but it’s hard to imag-ine 150 million other American adults allleaving thousands of dollars of annualvalue untapped. Although myfirst instinctwas to find their proposal wacky, after Ithought about it I found it more reason-able than I had thought at first.

Their immigration idea does, though,sound politically undoable. It’s hard toimagine Americans going along with atleast 100 million new immigrants enteringthe country in a short time. I hasten to addthat I would love it, even if I didn’t takeadvantage of the system (which I probablywould). Posner and Weyl claim that theirsystem is better than the late economistGary Becker’s proposal to auction immi-gration slots, but it’s hard to see why.

An important argument for their pro-posal is that it would offer the averageAmerican a benefit that’s much greaterthan he receives from immigration today.That’s true, but Becker’s proposal would

also do so if the proceeds from the auc-tion were used to fund an equal grant toeach American. They also claim that a pureBecker-type auction would ignore impor-tant factors such as the immigrant’s cul-tural fit to local communities or people’swillingness to welcome migrants. But amigrant bidding tens of thousands of dol-lars for the right to immigrate would surelytake such factors into account in decidinghow much to bid and where to settle.

Voting and corporate control / One of Pos-ner and Weyl’s most promising ideas isfor quadratic voting. The idea is that eachvoter could save up votes in order to castmore than one vote on a given issue thathe or she feels strongly about. But underthis proposal a voter who has accumu-lated, say, 64 votes would, by using up allthose votes on one issue, be able to castonly the square root of 64, which is eightvotes. They have a fairly good explana-tion for why they advocate the squareroot rather than the straight number, butit’s too complicated to explain in a shortspace. Suffice it to say that their proposalwould do what the current system doesn’t:allow voters to back the intensity of theirpreferences and constrain voters to maketradeoffs among issues.

The other main issue that the authorsdiscuss is the ownership of corporations.They point to the tension between theinterests of stockholders and the interestsof high-level corporate managers. Econo-mists who have addressed this issue, theynote, believe that a market for takeovers“where another firm or group of inves-tors buys an underperforming firm andfires the CEO” will discipline the man-agement. It’s true that many economistsbelieve that; the pioneering scholar inthis area was the late law and economicsscholar Henry Manne. But Posner andWeyl say nothing about one of the mainimpediments to a well-functioning marketfor corporate control: Section 13D of the1968 Williams Act.

Under Section 13D, when someoneacquires more than 5% of the voting sharesof a corporation, he must report it within

10 days of the acquisition. The problemis that all the relevant players will suspectthat the acquirer wants to purchase evenmore shares in order to have more control.Many shareholders will hold out for thehigher expected price, making the takeoverless likely and making it less attractive forfirms to attempt to get control of otherfirms in the first place.

Here’s how Duke finance professorMichael Bradley put it to me years ago.Imagine that you make a living huntingfor and reselling rare books. In a used-bookstore, youfind an autographedfirst editionof a rare book, priced at $2. You know thatyou can sell it for $1,000. But what if awell-enforced federal law requires that youinform the seller of the book’s value. Thenthe seller will hold out for much more than$2. The consequence to you is that you areless able to make a living; the consequenceto the rest of society is that fewer peoplewill be out there moving books to higher-valued uses. Similarly, the statement thata firm has newly acquired more than 5%of the voting shares of a corporation is asignal to potential future sellers of sharesthat their shares are worth more than theyhad thought, and they will be less likely tosell. The result: a substantially hamperedmarket for corporate control and morerunning room for top managers to ignorethe wishes of shareholders.

Posner and Weyl do make a somewhatpersuasive argument on cross-ownershipof shares. They argue that when largemutual fund companies such as Vanguard,Fidelity, and BlackRock own a substantialamount of stock in multiplefirms in a con-centrated industry, the mutual fund com-panies have an incentive to motivate thefirms not to compete against each otheras aggressively as they otherwise would.The authors offer evidence that this hap-pens. They propose changing the law toprohibit a given mutual fund from owninga large percentage of shares in more thanone company. That way, there would beless incentive for the funds to discouragecompetition.

Posner and Weyl point out that thefunds could still get the advantages of


I N R E V I E W

A Captivating, Frustrating‘Grand Bargain’?✒ REVIEW BY ART CARDEN

Bucknell University economist Marcellus Andrews has written aself-consciously pugnacious book proposing a radical change tothe structure of American welfare funded by a radical change to

the structure of American capitalism. No matter your ideological per-suasion, you willfind something in his Vision of a Real Free Market Societyto inspire you and something in the bookto infuriate you. That’s quite an achieve-ment for 106 sparsely footnoted pages.Andrews explores the kindsof issues that readers of Regu-lation and its sister publica-tions in the broader classicalliberal academic and thinktank universe should takevery seriously.

Andrews’s venture isinspired by Milton Fried-man’s 1962 book Capital-ism and Freedom, thoughAndrews proposes “a betterform of capitalism.” It reallyis a re-imagining of capital-ism, thinking not in termsof piecemeal reforms but interms of a new structure—and this makes the book atonce fascinating, stimulating,and frustrating. As a matterof pure policy, I can’t help butwonder if it offers a grand political bargainthat would be acceptable to both the right,which would get freer markets, and the left,which would get something akin to a BasicIncome Guarantee. Theoretically, everyonewould get richer faster in the long run. AsI tell my students, I would be a very happyeconomist if I woke up one morning andthis change had been made.

Better than a dog’s breakfast / Andrews’slanguage is strident in places, but to getlost in this is to misinterpret the kind of

book it is. The Vision of a Real Free MarketSociety isn’t the discussion that happens inthe seminar room. It’s the (usually better

and more insightful) discus-sion during the post-seminarvisit to the bar. That makes ita lot more fun to read thanmost academic books.

Brevity requires him toeconomize on nuance, butI was still surprised to readhis claim that capitalism obvi-ously tends toward monopoly,inequality, and crushed hopesand dreams for the poor.He tells us that markets aresources of “unemployment,unnecessary suffering, andenvironmental degradation.”But I think the preponder-ance of the evidence suggeststhat unemployment and“unnecessary suffering” arenot market phenomena per

se. I think these claims are empirically falseand I would suggest that the problem withmodern “capitalism” is that there’s notenough of it—or, rather, too much of themarket is captured by special intereststhat are able to profit not from innova-tion, lower prices, and greater output, butfrom higher prices and lower output madepossible by barriers to entry.

The novelty comes from Andrews’srealistic approach to policy. While I don’tshare his skepticism about untrammeledmarkets, he acknowledges the problemsof a lot of government policies on poverty,noting that they come with a whole host of

diversification because they would havemany concentrated industries in whichthey could own substantial shares of onecompany. I couldn’t find any holes in thatargument.

Interestingly, one of the concentratedindustries that the authors worry aboutis U.S. domestic air travel, but they don’tmention an obvious solution to counter-act monopolistic behavior: changing thelaw to allow foreign airlines to competeon routes between U.S. cities. Laws keep-ing out foreign airlines, which are called“cabotage” laws, are the main impedimentto foreign competition in the U.S. airlinemarket.

In their chapter on corporations, theauthors blame “monopolistic conspira-cies” for an industry practice, resale pricemaintenance (RPM), that has a far morecogent pro-competitive explanation. Sup-pliers engage in RPM when they requireretailers to charge a minimum price oncertain items. In a classic article morethan 50 years ago, University of Chicagoeconomist Lester Telser pointed out theproblem with the monopoly explanationfor RPM: suppliers would be facilitatingretail monopoly, which would result infewer items sold, hurting the supplier. Asupplier with monopoly power would bebetter advised to simply charge a high priceto retailers. So the monopoly explanationdoesn’t make sense. Telser proposed analternate explanation for RPM: encourag-ing retailers to compete not on price, buton demonstrating and exhibiting the prod-uct. This explanation seems to have stoodthe test of time, and I’m surprised thatPosner, a law professor at Telser’s school,does not discuss this explanation.

Conclusion / I hope that policymakers andothers will outright reject—with prejudice,as the lawyers say—Posner and Weyl’s dras-tic proposal for undercutting propertyrights and substantially redistributingwealth. On the other hand, I hope theyimplement the quadratic voting proposaland increase individual Americans’ abil-ity—while not taking away corporations’ability—to hire immigrants.

A RT CA R DEN is a professor of economics at SamfordUniversity.

The Vision of a RealFree Market Society:Re-ImaginingAmerican Freedom

By Marcellus Andrews

106 pp.; Routledge,2017


TIAA-CREF to divest from oil companiesand gun manufacturers. The pressure todirect funds away from politically unpopu-lar and toward politically popular causeswould be enormous.

That said, there are examples of at leastminimally competent government man-agement of resources. Oil in Alaska andNorway comes to mind, and Andrews’sproposal is especially interesting in lightof economists Damon Jones and IoanaMarinescu’s recent finding that distribu-

tions from Alaskan oil revenues appar-ently didn’t reduce Alaskan labor forceparticipation, but also in light of Finland’srecent decision to cancel its Universal BasicIncome experiment. As returns on invest-ment in the social trust fund improve,Andrews argues, we can begin phasing outwelfare as we know it. I’m less optimisticof this policy change given the enormousstakes some people have in the continuedexpansion of programs like the Children’sHealth Insurance Program, and we need totake very seriously the possibility that thiswould simply become another add-on fora very inefficient system.

Misfortunes, deserved and undeserved /Andrews makes an interesting point inhis discussion of the ways in which one’schoices have downstream consequences,but I think he goes too far. He writes, “Amiddle-aged adult who is poor, or evendestitute, because of bad choices madewhen they were young is, in a very realsense, a prisoner to another person: theirformer, frivolous, reckless self.” Yes, andI’ve said before that if I could punch oneperson in history it would be my teenageself. But I don’t think this is a sound jus-tification for redistribution at all. Why, Iwonder, should my children and I be held

“prisoner” by your “former, frivolous,reckless self”? Andrews doesn’t provide agood answer to this question or acknowl-edge the ways in which this creates an ulti-mate problem of concentrated benefitsand dispersed costs. Here, the right’s criti-cisms about virtue and incentives and soon need to be taken more seriously.

Andrews does confront two of the knot-tiest problems facing the left and right inthinking about the structure of the welfarestate. For the left, there’s the inconvenient

problem that peoplerespond to incentives,and badly structuredwelfare infrastructurepunishes labor and capi-tal accumulation, sub-sidizes dissipation, andleaves us all worse off inthe long run. We’re worse

off financially in that we can’t produce asmany goods and services, but we’re alsoworse off morally in that we make pooruse of our gifts.

The problem for the right is that peo-ple’s endowments are largely arbitrary. Ihave worked hard to get where I am in life,certainly, but I also had the good fortuneto be born into a two-parent householdwhere my parents loved my sisters and me,stuck together through thick and thin,and made (mostly) good choices. Less for-tunate people experience struggles that Isimply cannot identify with or empathize.To pretend that what I have is purely theresult of my own merit when a lot of it isthe result of my hitting the genetic andgeographic lottery is unseemly. Justiceseems to demand that others’ undeservedmisfortunes somehow be corrected.

Interventions or markets? / Here’s a point,though, on which Deirdre McCloskey, thephilosopher David Schmidtz, and I wouldagree: other people are not poor because Iam rich. I am not rich because they are poor.Only inazero-sumworld ismygoodfortunecausing another’s misery. Here, Andrews’sclaim that the free market obviously leadsto crushed dreams rings hollow. Moreover,even if we grant his claim about “the free

pathologies, inefficiencies, and failures. Ishis proposal what most libertarians wouldsee as an ideal social policy for an anarcho-capitalist paradise? Clearly not. Is it betterthan the dog’s breakfast of “welfare” as itis currently structured? Probably so.

Andrews proposes a novel twist onwhat we would normally think of as aBasic Income Guarantee or Universal BasicIncome. It is, as he puts it, a shot at “explor-ing how to combine markets with publicownership—but not management—of alarge share of the nation’s private capitalstock, which is the antithesis of social-ism as usually understood.” He proposesmoderate social ownership of some of themeans of production but not ownershipwith control. Instead, he proposes that thegovernment own shares in mutual fundsthat would be privately managed with,presumably, the income from these fundsbeing distributed to the people.

This would have the virtue, I think, of amore equitable distribution of the returnsto capital without the distortionary effectsof taxes on capital. The requirement thatgovernment own shares in privately man-aged mutual funds also means that theprofit-and-loss system is minimally com-promised. Given how much money thegovernment spends every year on war, farmsubsidies, and so on, it’s difficult to claim“We can’t afford this!” with a straight face.

But I’m not sure how “minimal” thisdistortion would remain in the long run.I’m not terribly optimistic about our abilityto insulate such funds from political con-trol. First, there is the rent-seeking bonanzathat will accompany the struggle to becomeone of the chosen few firms managing thestate’s multitrillion-dollar portfolio. Sec-ond, I agree with Milton Friedman’s cri-tique of “Social Security Socialism,” namelythat government stock purchases would“threaten our freedom” by encouraginglarge-scale government ownership of privateenterprise, even via shares in mutual funds.I doubt that the current Congress—or anyCongress—could be trusted to design rulesthat would insulate the system from over-whelming political pressure. Consider callsfor college endowments, state pensions, and

It offers a grand political bargain wherethe right would get freer markets andthe left would get something akin to aBasic Income Guarantee.


I N R E V I E W

market’s tendency to lock poor and work-ing people into society’s basement,” eco-nomic growth means that from year to yearit becomes a much nicer, well-appointedbasement with carpeting, a big screen TV,air conditioning, and other amenities.

It’shardlythecase, furthermore, that freemarkets are guilty of “denying [the unfortu-nate] access to the keys to survival, mobil-ity, and development: adequate schooling,health care, housing, safety, nutrition,and other vital goods and services.” Last Ichecked, schooling was dominated by gov-ernment ownership and provision, munici-palities are served by government-ownedsecurity monopolies (police departments),and government intervention in marketsfor health care, food, housing, and all sortsof other “keys to survival” is extensive. Per-haps the free market would do a poor job ofproviding those goods, but it can certainlybe argued in many cases that governmentdoesn’t do a particularly good job.

I’m also less sanguine about the ideathat redistribution will lead to meaningfulchanges in the dynamics of class and status.Gregory Clark’s 2014 book The Son Also Risesshows how we see similar patterns of socialmobility across institutional types and timeperiods. (See “Do Good Names Bring GreatRiches?”Spring2015.)There’sanotherprob-lem that F.A. Hayek pointed out: dynasticwealthmightbetheleast-badwayforparentstotransfer totheirheirs. Ifweget ridof trans-mitted privilege via financial inheritance,people will look for other ways to securepower and influence for their kids, perhapsby over-investing in or competing wastefullyto get into influential social networks.

In this respect, Andrews’s rhetoric some-times gets the best of him. For instance, hewrites, “The sin of the Right, from a left-libertarian point of view, is that the pov-erty and underdevelopment of some is seenas the necessary price for the wealth andfreedom of others.” I don’t know anyonewho actually believes that. “Trickle-down”economics is a caricature. He criticizestextbook models of competitive marketsby invoking textbook models of incompleteinformation, monopoly, and monopsony,and he doesn’t grapple with the fact that

in all sorts of markets (like health insur-ance) people are rebelling against efficiencyenhancements on the grounds that insur-ance companies know too much about us.

He writes of the “unavoidable brutalityand unfairness of private enterprise econo-mies,” but I think there’s a lot of evidenceto suggest that private enterprise econo-mies are the best solution we’ve found tothe “unavoidable brutality and unfairness”of a fallen world constrained by limitedknowledge and bound by scarcity. And yetI say “Amen!” when he writes, “A capitalistroad to economic justice is readily availableto the Left once we get over our aversion tomarkets in general, and find a way aroundthe problems with the labor market,” and“Private property is … an essential precon-dition for the existence of substantive lib-erty because it provides each person withthe means to carry out their plans.”

Conclusion / This is a captivating and attimes frustrating book, hence the embar-rassingly long gap between its release andwhen I submitted this review. It is captivat-ing because it sets aside too-simple ideo-logical narratives. It is frustrating in someof the ways Andrews gets carried away rhe-torically. (I’ve been guilty of that myself andas a result of reading Andrews I’ve beenlooking for the planks in my own eyes.)

In broad outline, I’m onboard with aproject like this, but I think the constitu-tional details are crucial. However, the pointof the Routledge Focus series, of which thisbook is a volume, is not to present exhaus-tive accounts of every nuanced detail, butto summarize and provoke. The Vision of aReal Free Market Society does exactly that.As welfare reform proposals go, Andrews’svision of a real free market society deservesa place at the public policy table.

Government FixationIs the Problem✒ REVIEW BY PIERRE LEMIEUX

It is easy to attack quantitative analysis in general and statisticalmethods in particular. It is also easy to call “tyranny” anythingthat appears to have an exaggerated and unfavorable influence.

Such hyperbole is part of Jerry Muller’s The Tyranny of Metrics. Speak-ing of finance, the Catholic University of America historian criticizes

PIER R E LEMIEUX is an economist affiliated with theDepartment of Management Sciences of the Université duQuébec en Outaouais. His latest book is What’s Wrong withProtectionism? Answering Common Objections to Free Trade(Mercatus Center, 2018).

the idea that “numerical acumen (pre-mised upon probability formulas ratherthan empirical research) can substitute forpractical knowledge about the underlyingassets.” But how can “probability formu-las” be excluded from empirical research?How can portfolios of complex, diversi-fied, and abstract assets be evaluated with-out numbers and statistical analysis?

Muller’s case is not boosted by Oxfordhistorian Niall Ferguson’s line that “thosewhom the gods want to destroy they first

teach math.” Mathematics and probabil-ity theory are certainly among the tastierfruits of the Tree of Knowledge.

Yet The Tyranny of Metrics is not an attackon quantitative methods. Altogether, it is amoderate book. It only criticizes inappro-priate use of metrics, metrics being definedas “numerical indicators of comparativeperformance based upon standardizeddata.” They become problematic onlywhen “the marginal costs of assemblingand analyzing the metrics exceed the mar-ginal benefits.” Muller reminds us of thecontinuous importance of local knowledgeà la Hayek and individual judgment.

Muller’s main argument is that inap-


propriate metrics corrupt the goals of pub-lic policy and incite individuals to gamethe system. He documents many examplesof “metric fixation.” For instance, policedepartments classify serious crimes asminor ones in order to show better num-bers on the reports they must submit tofederal officials. Schools “teach to thetest” in order to increase thestudent scores on which gov-ernment largesse depends.Under then–secretary ofdefense Robert McNamaraduring the Vietnam War,body count proved largelyuseless as a metric of per-formance. Another perverseincentive is “creaming,” anexample of which is surgeonsdeclining to operate on dif-ficult cases for fear of reduc-ing their performance scores.And so forth.

An important aspect ofMuller’s criticism relates topay-for-performance systemsin schools, hospitals, andeven private companies. These systemsoften do not succeed in improving per-formance, he argues. Another aspect ofmetric fixation lies in the publication ofsuch metrics in the name of transparency.The measurement of performance failswhen its costs—including the opportunitycost of collecting and tabulating data—aregreater than its benefits. Individuals workto increase their scores, not to do the jobsthey have been hired to do.

The market and government / Muller usestheoretical insights and evidence fromseveral fields, including economics. Hiscommand of economics is often surpris-ing for a non-economist.

For example, he shows how the fixa-tion on metrics can be seen as an instanceof the principal–agent problem. In caseof a listed corporation, the principal—theshareholders—need to make sure that theagents— the executives—maximize profits.One way to align incentives is to tie theexecutives’ remuneration to the metric of

stock prices. The danger is that the execu-tives will take maximizing short-run stockprices as their goal instead of the firm’slong-run discounted profits. But note howthe stock market still tends to reflect thelong-term value of thefirm, because it is ineach investor’s interest to buy a stock onlyif its price is lower than its expected dis-

counted return. Market pricesare not arbitrary metrics.

The problem is very differ-ent in the public sector, a dif-ference that Muller tends tooverlook. Consider a simplemarket—say, the market forhaircuts. The barber wantsto earn as much as he can inorder to buy the consumptiongoods and services he likes.He does this by satisfying hiscustomers. The happier theyare, the more he can chargethem if he offers a differenti-ated service, or the more cus-tomers he will get. He may—especially if he employs manypeople or owns a haircut

chain—use metrics to measure his perfor-mance, but the real and ultimate measurelies in his profit. Moreover, he may be moreentrepreneurial and rely on his intuition.At any rate, his metrics are likely to be ofthe sort that Muller wouldfind reasonable.

Now consider government. If it suppliesonly what the market cannot efficiently sup-ply—what economists call “public goods”—then the link between profits and consumersatisfaction is broken. People may be veryhappy with the national defense they get,but a large number of consumers will notvoluntarily pay for it, by the very natureof a public good. Once national defense isprovided, everybody can consume it equally.In this case, some metrics are required to(imperfectly) measure if taxpayers get morevalue than what they are forced to pay intaxes. Moreover, the process through whichdefense expenditures are determined andallocated must be transparent for the veryreason that taxpayers are forced to financethem. Muller’s arguments against metricsand transparency become moot. As far as

public goods are concerned, governmentinputs and outputs must be measured andtransparent.

Perhaps one underlying problem inMuller’s economics is that he does notseem to believe in, or understand, consumersovereignty. He blames “the ideology ofconsumer choice,” stating that “in somedomains choice is particularly fraught.” Buthow can we assume that politicians andbureaucrats choose better? Will they haveto use imperfect metrics to do this?

Government metrics / The problem is thatgovernment supplies or subsidizes a lotof services that are not public goods or, atleast, not pure public goods. Instead, gov-ernments spend on education and healthcare, not to mention electricity, publictransportation, and garbage collection. Infact, the largest part of government expen-ditures goes to redistribution. But the tax-payers are still forced to pay for all of this.

It is easy to understand that those tax-payers want at least to know what is spentand what the spending achieves. In theseconditions, the proliferation of metrics isnot surprising because it is a direct func-tion of the extent of government interven-tion. This, and not metrics per se, is theproblem. Shouldn’t these considerationsinfluence Muller’s conclusions?

A related problem involves governmentagents, who—as James Madison noted inFederalist 51—are not angels. They willbe tempted to loot the public treasury,legally or not. Even virtuous motivationsare dangerous in the case of governmentagents because they may impose on peopletheir own conception of the good. Govern-ment bureaucrats and politicians are paidwith, and redistribute, taxpayers’ money, sothey should indeed be submitted to perfor-mance metrics. Their activities should beas transparent as feasible, and they shouldbe held accountable for what they do.

In brief, it can be argued that govern-ments should be subject to metrics, trans-parency constraints, and accountabilitystandards—and the more of them, thebetter—while people should be free to runtheir private activities as they want. It is

The Tyranny of Metrics

By Jerry Z. Muller



I N R E V I E W

Working Papers ✒ BY PETER VAN DOREN AND IKE BRANNONA SUMMARY OF RECENT PAPERS THAT MAY BE OF INTEREST TO REGULATION’S READERS.

PETER VA N DOR EN is editor of Regulation and a senior fellow at the Cato Institute.IKE BR A NNON is president of Capitol Policy Analytics, a consulting firm in Washington, DC.

true, as Muller conclusively demonstrates,that government-devised metrics tend tobe especially inefficient, but this is in directproportion to what the government shouldnot be doing. He provides us with somekeys to these conclusions.

Mounting regulation and metrics / Thereis yet another problem of governmentactivities outside the field of public goods:mounting regulations carry benefits forsome individuals and impose costs onothers. One can argue that an attempt tomeasure these costs and benefits must bemade, however difficult it is both in theoryand practice. (See “The War on ConsumerSurplus,” Spring 2017.) Voters must haveat least the possibility of evaluating whattheir agents are doing. To the extent thata tyranny of metrics does exist, it is mainlycaused by government interventionism,which brings us back to the real meaningof “tyranny.”

Last decade’s recession provides a goodexample of regulation and metrics gonewild, but Muller does not see this clearly.He blames the financial crisis on thequantification and abstraction of finance,strangely ignoring the role of government.

Mortgage-based securities were pioneeredin 1970 by Ginnie Mae, a federal govern-ment agency, in order to encourage the saleof residential mortgages. The CommunityReinvestment Act of 1977, reinforced in the1990s, established ratings to force banksinto offering more loans and mortgagesto the poor. Before the recession, financialinstitutions were probably the most metric-regulated businesses in America. The reces-sion was in large part, if not ultimately, aconsequence of these government-imposedrequirements and metrics. (See my bookSomebody in Charge: A Solution to Recessions?Palgrave Macmillan, 2011.)

Muller criticizes “short-termism” in busi-nessmanagement, suggestingthat it ispartlythe result of the use of performance mea-sures in quarterly reports. But the SecuritiesExchangeActof1934forces listedcompaniesto produce those reports. The criminaliza-tion of insider trading (using one’s privateinformation to trade on exchanges) furtherencourages the use of public and transpar-ent metrics. Government promotes short-termism in business decisions.

Nothing’s perfect, but… / Nothing is per-fect of course, but government dirigisme

is certainly not the least imperfect phe-nomenon under the sun. Muller’s casestudies include the production of cultureand the transmission of knowledge, fromK–12 schools to colleges and universities.He rightly notes that “it is an impover-ished conception of college education thatregards it purely in terms of its ability toenhance earnings.”

He observes how government-imposedperformance metrics damage education:“Among the stronghold of metrics in theUnited States has been the Departmentof Education, under a succession of presi-dents, Republican and Democratic.” Suchobservations should raise alerts about gov-ernment’s subsidization and regulation ofeducation.

The Tyranny of Metrics could have betteranalyzed the role of unbridled governmentin what the author calls “metricsfixation.”The problem is not metrics per se, but thefact that they are imposed by governmentsthat should not be doing what they aredoing. Governmentfixation is the problem.Yet Muller’s book remains an interestingone: short, unpretentious, scholarly, andfull of insights. And it provokes the readerinto asking further questions.

Conservation Easements“Charitable Contributions of Conservation Easements,” by Adam

Looney. Economic Studies at Brookings, May 2017.

In Michael Lewis’s 1998 book Losers about the 1996 Repub-lican presidential primary, he remarks that upon hearingcandidate and orator par excellence Alan Keyes speak for the

first time, he was torn between being outraged by Keyes’ messageand feeling compelled by Keyes’ arguments to quit his job andwork for Keyes’ campaign.

Likewise, the treatise on conservation tax easements by AdamLooney—a fellow at the Brookings Institution and a former econo-mist for the Council of Economic Advisers—filled me in equal mea-sures with anger over the existence of a costly and unproductive

tax break and visions of exploiting the break to bilk the Treasuryand make millions for my family.

A conservation tax easement essentially awards property own-ers a tax benefit in exchange for the owners permanently extin-guishing the right to develop a property. The intent of the deduc-tion is to provide an incentive for landholders to preserve pristineland that they might acquire. For instance, the hills surroundingthe childhood home and presidential library of Calvin Coolidge inrural Vermont all have conservation easements applied to them,precluding future development and maintaining the area just asit was in the late 19th century.

However, an easement can also be granted to a golf courseor a backyard, which illustrates the rub with this tax provision:most of the time it is used to stop development in places wheredevelopment was unlikely to ever occur.

For instance, many homes in Georgetown have been granted a


type of conservation easement that precludes owners from alteringor removing the façades of their houses. The easement affords theowner a charitable deduction—ostensibly worth the reduced value ofthe home that results from the easement—of as much as $100,000,which represents a substantial savings for the homeowner.

Of course, the notion that someone who owns a statelytownhome in this wealthy enclave could ever get the local AreaNeighborhood Council, city government, housing commission,and pitchfork mobs to allow any sort of change to its façadeis laughable. It’s unlikely that asingle façade was “preserved” bythis conservation easement. Isuppose it can be argued that theeasement is just compensation forall these political bodies usurpingthe development right, but mostif not all affected property ownerswere aware that the developmentright was lost long before they purchased their properties.

In the case of the conservation easement Looney describes, theproperty owner must donate the right to develop the land to anonprofit. Many of these properties are small: backyards insteadof open land.

The conservation easement is not terribly common: only about2,000 taxpayers claimed it in 2016, Looney determined. But it isbecoming increasingly costly: the Treasury lost $5–$7 billion toit in 2016.

Looney reached the latter estimate by going through InternalRevenue Service forms 8283 and 990, although the latter docu-ments—a standard for all nonprofits—were not terribly useful forthis purpose. Of the top 21 organizations in terms of the amountof easements received, only six actually bothered to report them ontheir 990s. He suggests that this omission may obscure the fact thatsome of these charities are not, in fact, charities in any real sense ofthe word but instead act more or less as private foundations, andthat closer scrutiny by the IRS would force them to conclude asmuch. This is now among the IRS’s most litigated tax issues, despitethe low number of taxpayers who claim the deduction.

This lack of transparency may persist indefinitely, Looneylaments. An entity called Partners for Conservation lobbies toprevent any sort of mandated disclosure of such transactions. Aprovision that would prevent such reporting was included in adraft of an appropriations bill in 2016.

Greater transparency on such transactions is importantbecause the tax revenue losses from conservation easementshave been accelerating over the last few years. What’s more, sucheasements occur most often in a few select geographic areas, mostnotably Georgia. Looney attributes this mainly to the fact that asmall legal community there has figured out how to game thesystem, rather than any surfeit of land in need of conservation inthe Peach State. In contrast, the states we commonly think of asbeing leaders in acres conserved—Wyoming, New Mexico, Maine,

Montana, New Hampshire, Washington, and Arizona—have virtu-ally no conservation tax easements.

These benefits from the easement are also highly concentrated.The top 2% of all transactions amounted to 43% of the cost ofall easement tax breaks, and the top 10% amounted to fully 70%of the cost. The valuation of the land in these easements rangedfrom $10,000 an acre to over $100,000. Prospectuses published bylawyers hoping to earn fees for creating new easements suggest aninvestor can obtain $6–$9 of tax deductions for every $1 invested

in an easement.Our tax code has many such

dubious tax breaks ostensiblydesigned to promote conserva-tion of some sort that accom-plishes little in this regard. Forinstance, a great number of sum-mer lake homes in Wisconsincome attached to relatively large

lots, the preponderance of which are just over 17 acres. This isbecause 17 acres once was the minimum size for a property tobe considered a tree farm in the state. Being a “tree farmer” wasa great tax dodge because tree farmers had to show a profit fromthe activity only once every 17 years, instead of every three yearsfor other businesses. The thousands of “tree farmers” in the statecould deduct a variety of expenses related to the upkeep of theircabins, and every so often they would have someone harvest a fewtrees that paid them enough to show a profit for the year.

Wisconsin now has a Managed Forest Law that was crafted toavoid the abuses of the tree farm law. The new law greatly reducesthe property tax on land that’s at least 40 acres, available forrecreation, and undeveloped. But, unsurprisingly, there are easyways to still put a house on the land, deny access to hunters andhikers, and get the low tax rate just the same.

Many people still have a perception that giving a tax break toinduce behavior is somehow inherently different and less expen-sive than a government expenditure. However, the distinctionis meaningless, and when most of a tax break fails to affect anysalutary behavior at all while costing the publicfisc billions a year,it is an abomination. We should all be outraged by the results ofLooney’s research. —Ike Brannon

Investment Advice“The Misguided Beliefs of Financial Advisors,” by Juhani T. Linnain-

maa, Brian T. Melzer, and Allessandro Previtero. December 2017.

SSRN #3101426.

In 1934 Congress created the Securities and Exchange Commis-sion, which regulated brokers who bought and sold stocks andbonds for investors. In 1940 Congress enacted the Investment

Advisers Act, which implemented different legal standards forthose who provided financial advice for a fee but do not sell finan-

It can be argued the easements arejust compensation for lost developmentrights, but the property owners knowthose rights were lost long ago.


I N R E V I E W

cial products. Interestingly, the 1940 law holds financial advisersto a stricter fiduciary standard, requiring them to recommend the“best” financial product to clients, while brokers under the 1934law are only required to recommend “suitable” financial productsif their advice is “solely incidental” to their service as a broker.

This has produced a legal and political wrestling match over thedifferent regulatory treatment of brokers and financial advisers.The perception is that brokers operating under the looser standardhave incentives to steer clients to purchase investments that yieldfees and commissions for the brokers rather than investmentswhose net returns to the brokers’ customers would be higher, andthat regulation is required to eliminate those incentives and theresulting financial malpractice.

After the 2008 financial crisis, the original Senate version offinancial reform legislation authored by Sen. Chris Dodd wouldhave eliminated the broker exemption from the fiduciary stan-dard. But as enacted, the Dodd–Frank Wall Street Reform andConsumer Protection Act of 2010 only requires the SEC to studythe issue and report to Congress on the problems created by thedifferential regulatory treatment offinancial advisers and brokers.

Given congressional inaction, President Barack Obama

instructed the Department of Labor to impose the stricter fidu-ciary rule on Individual Retirement Account advisers using theDOL’s regulatory authority over company-provided retirementplans under the Employee Retirement Income Security Act of1974 (better known as ERISA). The DOL did so in 2016, butadvisers have not had to comply with this requirement thanks inpart to the Trump administration pushing back the compliancedeadline to July 1, 2019. This past March, the Fifth Circuit Courtof Appeals vacated the Fiduciary Rule, stating that the DOL hadoverstepped its statutory authority.

The authors of this paper argue that the “conflict-of-interest”view of financial advice that is the rationale for the fiduciary ruleis not consistent with the data studied in the paper. The authorshad access to trading and portfolio information on more than4,000 advisers and almost 500,000 clients between 1999 and2013 provided by two large Canadianfinancial institutions. Theseadvisers were not subject tofiduciary duty under Canadian law. Acomparison of advisers’ trades for their own accounts and theirclients would reveal any systematic differences. If the conflict-of-interest theory is right, advisers’ personal accounts would holdlower-cost, more diversified investments.

The authors conclude that misguided beliefs are the problem

rather than conflicts of interest. The advisers trade more, have lessdiversified portfolios, and pay more in fees for their own accountsrelative to their clients’ accounts. And both have net returns thatare about 3% less than the market.

The authors present four additional types of evidence to sup-port their argument. First, advisers continue to trade similarlyafter they quit the industry. Second, the correlation betweentheir behavior and their clients’ increases with the size of theadvisers’ personal portfolios. Third, advisers would have beenbetter off had they held exact copies of their clients’ portfolios.Finally, advisers’ trading behavior is stable over their career.

—Peter Van Doren

Environmental Regulation“Is Pollution Value-Maximizing? The DuPont Case,” by Roy Shapira

and Luigi Zingales. September 2017. NBER #23866.

Gary Becker introduced the economic conception of crimedeterrence in 1968. According to Becker, prospectivecriminals compare the expected costs and benefits of

crime. That is, they compare the benefits of the criminal conductto the probability of being caught multiplied by the monetizedcost of conviction. If the expected costs of the crime are greaterthan the benefits, then the crime is deterred. If the expected costsare less than the expected benefits, then the crime occurs.

This paper explores rational deterrence in the context of envi-ronmental law. DuPont emitted C8, a precursor to Teflon, intothe environment even though it knew as early as 1984 that thesubstance is toxic. DuPont had the option to incinerate the C8and thus avoid the emissions, but the firm chose not to. In fact,production doubled after 1984.

The option of abating C8 was relatively cheap and could haveprevented the health damages as well as the legal ($617 millionin 2017) and reputational damages paid by DuPont. Why did thecompany choose the option that seems worse for the companyand certainly worse for society?

By comparing the present value of DuPont’s actual legal liabili-ties with the present value of the abatement costs, the authorsestimate that it was value-maximizing to pollute if the probabilityof getting caught was less than 19%. According to the authors:

For decades only DuPont and other chemical companies knewthe adverse effects of C8 emissions. Yet, DuPont had powerfulincentives to hide that information, or selectively release partsof it to the outside world. By controlling information, DuPontwas able to co-opt regulators, delay enforcement, and limit theability of academics or journalists to chime in.

Because DuPont controlled the information that would haveincreased the expected costs of pollution, it was reasonable forDuPont’s executives to take the risk. In other words, the decisionto pollute was ex-ante optimal for DuPont’s shareholders. —P.V.D.

The investment advisers traded more,had less diversified portfolios, and paidmore in fees for their own accountsrelative to their clients’ accounts.


Market Power“Is Aggregate Market Power Increasing? Production Trends Using

Financial Statements,” by James Traina. February 2018. SSRN

#3120849.

Concerns about corporate power and antitrust policy rem-edies are once again in the news and the pages of Regula-tion. (See “Debunking the ‘Network Effects’ Bogeyman,”

Winter 2017–2018, “The Return of Antitrust?” Spring 2018.)This paper examines the specific question of whether businessmarkups above the marginal costs of production are also increas-ing over time.

Traina argues that in 1950 markups were about 15% overmarginal cost. Over the next 30 years, they decreased approxi-mately linearly, falling to just under 10% over marginal cost atthe beginning of the 1980s. From then until today, however,they have increased approximately linearly, returning to the1950 level.

His estimates of this markup differ from others becauseof two methodological differences. First, public firms makeup only about a third of U.S. sales and employment. Becausethese firms are often larger than private firms, markup esti-mates using only public-firm data bias an aggregate estimateupward. Second, neglecting indirect costs of production suchas marketing and management, which are an increasing shareof variable costs for firms, overstates both the level and growthin markups. As a share of variable costs for firms, these com-ponents have increased from roughly 12% in 1950 to 22%today. A significant part of the incorrect markup estimation ismisattribution of selling and general administrative expensesto markups rather than variable costs, and this omission hasincreased over time. —P.V.D.

Employer Credit Checks“The Unintended Consequences of Employer Credit Check Bans on

Labor and Credit Markets,” by Kristle Cortes, Andrew Glover, and

Murat Tasci. January 2018. SSRN #3103294.

Regulations are often enacted with the best of intentions,but they sometimes produce counterintuitive results.

In my Fall 2016 Working Papers column, I describedlaws that “ban the box,” prohibiting employers from askingabout criminal history on initial job applications. The intentof such policies is to increase employment among black males,who have disproportionately more criminal convictions thanother applicant groups. Most black men, however, do not havecriminal convictions. Under ban-the-box policies, they are notallowed to signal that fact to employers. As a result, they losework opportunities because employers, deprived of the crimi-

nal history information, become less likely to hire black men.Something similar appears to be happening with credit his-

tory information. In the aftermath of the Great Recession, manypeople lost their jobs and fell behind on their debts. When thesepeople subsequently applied for jobs, some were denied employ-ment when prospective employers became aware of the applicants’low credit scores. Legislators responded by describing this situa-tion as a “poverty trap” because the applicants need employmentin order to repair their credit scores, but they need better creditscores in order to gain employment. In response, 11 states bannedemployer credit checks as of January 2018.

This paper compares employment vacancy creation in statesthat enacted bans relative to states that did not and relative toexempt occupations in which credit score checks were still allowed(e.g., jobs involving handling cash or access to payroll and SocialSecurity information). When a state bans employer credit checks,the average county experiences a 12% reduction in vacancy creationrelative to trend. This decline in job creation is likely caused bythe bans because vacancies are unaffected in occupations in whichcredit checks are still allowed. —P.V.D.

Disability Insurance“Intergenerational Spillovers in Disability Insurance,” by Gordon B.

Dahl and Anne C. Gielen. February 2018. NBER #24296.

University of California, San Diego economist GordonDahl has devoted much of his career to examining theefficiency and distributional effects of social welfare

policies. In my Summer 2014 Working Papers column, I sum-marized his analysis of expansion of maternal leave benefits inNorway. Dahl and his co-authors concluded that the programhad no effect on a wide variety of desired outcomes and insteadredistributed income to the affluent.

This paper evaluates the long-term effects of reductions in dis-ability benefits in the Netherlands between 1993 and 1996. Thereductions applied to younger cohorts, while older cohorts wereexempted from the new rules. Younger workers who were pushedout of disability insurance or had their benefits reduced are now,a generation later, 11% less likely to receive disability benefitsthan their parents’ generation (with no increased use of othergovernment safety net programs). Further, they earn 2% more inthe labor market as adults.

The combination of reduced government transfers andincreased tax revenue from lower use of disability benefits resultedin a fiscal gain of €5,900 per treated parent from child spilloversby 2014. Moreover, children of treated parents complete an extra0.12 years of schooling on average, an investment consistent withan anticipated future with less reliance on disability insurance.Ignoring the beneficial parent-to-child spillovers understates thelong-run benefits of the Dutch reform by 21%–40% in presentdiscounted value terms. —P.V.D.

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