The second coming of Karl Marx

By D. Pontoppidan, Summer Fellow at the Mackinac Center

Here is a letter I sent to the editor of the Financial Times a couple of days ago.

The second coming of Marx

Sir, on June 30 Ben Funnell engaged in editorial divination, channeling Karl Marx’s financial beliefs from the grave. In the pink pages of Financial Times, no less. Claiming that the benefits of economic growth go into the pockets of plutocrats and increases inequality, Funnell warned of impending revolution.

But what the rising Gini coefficients don’t explain, however, is that while the rich naturally gain most, everyone benefits from capitalism. A study from the U.S. Census Bureau published in 2003 examined various income groups in the years 1996-99. In this period, 38 percent of the people who were in the poorest fifth of the population climbed the social ladder. A similar study undertaken by the Sphere Institute in California, America’s largest economy, showed that out of 187,000 employees who were examined between 1988 and 2000, 80 percent who started in the poorest fifth had advanced socially.

Funnell mentions Société Générale’s study of the inflation-adjusted income of the highest-paid fifth of American earners in 1970, and that it has risen by 60 percent since then, while it has fallen by more than 10 percent for the rest. Actually, it islikely that the inflation-adjusted income of the highest-paid fifth of earners in 1970 is zero today. One earns the most money as one retires, and in the long run after, we all die as Keynes famously predicted.

While we are dead in the long run, we benefit in the short run. Take the mass distribution today of products that only a few years ago were luxury item: ipods, mobile phones, laptops, high speed internet connections and comfortable cars. All the result of financial innovation that is unique to the free market, and even in a financial crisis have not succumbed to a falling rate of profit as Marx would have had us believe.

Capture is part of regulation itself

Here’s a letter I sent to the WSJ about a week ago

by D. Pontoppidan, Summer Fellow at the Mackinac Center

Thomas Frank [“Obama and Regulatory Capture, June 24] calls the present moment a time “for a ringing reclamation of the regulatory project.” To protect consumers, he argues, we need regulation, and better people in charge, lest we suffer from “regulatory capture,” a concept developed by the Chicago economist George Stigler.

I am reminded of another Chicago economist, Milton Friedman, who once recounted the history of the Federal Register, which records all matters concerned with regulatory agencies in the United States. From its inception in 1936, the Federal Register grew from 2,599 pages and six inches of shelf space to 36,487 pages in 1978, the year before Friedman’s book ‘Free to Choose’ was published, taking up 127 inches of shelf space – a veritable 10-foot shelf. Though the Federal Register was not even able to tell me the number of pages they publish today, they did inform me that they now published on a daily basis.

There are two myths at play in Frank’s article. One is that a lack of regulation was to blame for the financial crash. The second myth is that the answer to regulatory capture is to get better people into regulatory agencies. The whole point, however, of regulatory capture is that it is an inherent flaw in the system. To quote Stigler himself, “The state—the machinery and power of the state—is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries.” Leaving consumers free to choose on an open market seems a better way of punishing those who deal in bad products.

Financial innovation comes from trial and error

By D. Pontoppidan*, Summer Fellow at the Mackinac Center

Here’s a letter I sent to the WSJ a couple of weeks ago:

We’ve recently heard of a new federal financial consumer agency which will have the power to scrutinize complex financial products, fit them with warning labels much like cigarettes or toys digestible by small children, and even ban them if they are deemed overly risky. Have we completely abandoned the belief in responsible consumers participating in the financial markets?

My primary concern is how financial innovation will come about in a situation like this, especially if the consumer agency becomes too strong. We all know innovation will not come from those monitoring the market, nor are innovative and bold new products likely to be viewed as safe or conventional when they emerge. I am reminded of the Japanese samurai who were paid in rice, and because of a series of bad harvests needed a stable method of converting their goods into coins. This in 1730 led to the establishment of the Dojima Rice Exchange, the world’s first futures exchange market. As it turned out, the system worked fairly well, and has since been implemented around the world. Other systems were flawed and failed. This process is known as creative destruction, and is how financial innovation is brought forth. Through trial and error. A market that includes everyone at all times and in all places, is better at testing and deciding on the value of financial products than a board of bureaucrats.

Robert Shiller, the Yale economist who predicted the financial meltdown, also suggested the expansion of a growing futures market based on the Case-Schiller indices that would measure house prices in large American cities. Such a market would be able to guide the direction of house prices much better than other systems, because it involves those who look for a rise as well as those who expect a fall. Similarly, we can imagine hedging against other macroeconomic factors such as inflation, interest rates and unemployment – the limits are endless. The question is, will financial innovation make it past the consumer protection agency?

*The author took a class on behavioral and institutional economics with Robert Shiller.

Freedom in Iran

By D. Pontoppidan, Summer Fellow at the Mackinac Center

We’ve all seen what has been described as the “biggest unrest in Iran since 1979” unfold on television for the past week. What we haven’t seen, however, is the United States of America or President Barack Obama take an active stance in the conflict. So far, the world has heard very little from the leader of the free world in the matter of Iran.
This provides grounds for some thoughts over the foreign policy of the current party in power – the Democratic Party.

Historically, the Democratic Party was an interventionist party that believed in spreading freedom around the world. It would seem, however, that it has changed its principles radically since the failure of the Iraq war, and taken a more isolationist stance on foreign issues, which is a shame. As a European, and in particular as a Dane, I have always seen America as a historical liberator of oppressed peoples around the world. FDR to me was never the president of the Great Depression or the president of Social Security, but the president who gave the famous Garden Hose speech to persuade Congress to pass the Lend-Lease Act. FDR’s phenomenal leadership made it possible to persuade a largely isolationist country to lend military equipment, and later manpower, to European countries that defended themselves against the Axis powers. If not for the Democratic Party, I would have been speaking German today – not Danish. That counts for something in my book.

A few weeks ago, President Obama spoke at the 65th anniversary of D-Day and stated: “Friends and veterans, what we cannot forget — what we must not forget — is that D-Day was a time and a place where the bravery and selflessness of a few was able to change the course of an entire century”. This bravery was apparent in the men who died at the front fighting for freedom and democracy – but it was also part of the political leadership and the Democratic Party at the time. And just as it was then, it should be today.

Should we declare war on Iran? No. The price would clearly be too high to pay. But what about taking a stance for democracy? For the past week, the Iranian government has violently and brutally cracked down upon any dissent from peaceful protesters that have protested the disputed results of the Iranian Presidential Elections from June 12 2009. Protesters have been killed and assassinated, political prisoners have been taken, cell phones and internet connections have been shut down, and the Iranian people’s desire for free assembly and free speech is being grossly set aside. What we are seeing unfold is a victory for totalitarianism – not democracy. According to Der Spiegel, as many as 5.000 Lebanese Hezbollah militiamen have been recruited to fight the protesters, happily traveling the distance from Lebanon to Iran to destroy the spirit of democracy and keep an Islamic extremist in power.

Recognizing the right of the Iranian people to have open, democratic elections as well as the right to protest peacefully against blatant electoral fraud would not be a hard thing for the United States to do, but it would be significant in providing a united stand against the corrupt Iranian regime. Echoing French President Nicolas Sarkozy, the United States could demand that the Iranian election results must be subject to immediate nullification, and that no international country should recognize the results until an international probe into the Presidential election’s process has been conducted. The United States could refuse to speak to President Mahmoud Ahmadinejad and thereby refuse to recognize him as leader of his country. Through the United Nations’ Security Council, a resolution could be passed imposing sanctions on Iran, or at least it could be attempted. And as a president widely seen by the world community as a symbol of hope and change, Barack Obama could attempt to unite the world just as he united his own country. The statement “Yes we can” did not go around the world because it was a smart campaign slogan. It went global because of its universality and belief in certain basic truths, as fundamental as those described in the Declaration of Independence. The belief that change can be achieved.

To recognize Mahmoud Ahmadinejad as President is to recognize violence and fraud as valid measures in a country that proclaims itself to be democratic but clearly is not. The Iranian election process, having been manipulated from the beginning, did not intend for Mr. Hossein Mousavi or any other possible reform candidate to win. We now have the chance, however, to help the Iranian people in ensuring a more prosperous future, and rise up against a totalitarian system. I recall the words of former U.S. President John F. Kennedy, who in his Inaugural Address stated: “Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty”.

Words of wisdom for the leadership of today.

The human factor in justice

By D. Pontoppidan, Summer Fellow at the Mackinac Center*

Over at Cafe Hayek I stumbled on a letter to the editor in the Baltimore Sun from one Diane Schaub. She argues correctly that judges should not let their emotions cloud their judgment (“Why empathy is the enemy of justice,” June 14), but she is incorrect in asserting that impartiality and empathy are mutually exclusive in a court of law. On the contrary, in my own cases, I find there’s an important human factor in justice that we mustn’t forget. Empathy has a central role to play in measuring out the sentence, just as a judge who has knowledge of what it means to be disenfranchised or marginalized from society, or has experienced being the victim of a crime, can better understand testimony relating to such experiences (of which there is plenty in the criminal courts systems!). Applying such experience to one’s assessment of a case is only a strength.

Of course, judges should always be impartial, a process they undergo through applying culturally coded, ideological standards to manage their feelings and produce acceptable displays, e.g. by wearing robes and adhering to certain rules and practices. But should we really run away from that which makes us human in a court of law? The question is interesting and would certainly be excellent for a Philip K. Dick novel . Imagine we could calculate the optimum penalty for a crime through an econometric model. Would we then rather have computers presiding over cases in the future? I certainly wouldn’t.

* The author is a politically appointed lay judge to the District Court of Copenhagen, Denmark, and finishing an MA in Sociology.

Legalize drugs? How about alcohol!

D. Pontoppidan, Summer Fellow at the Mackinac Center for Public Policy

Nicholas D. Kristof and others have argued that since war on drugs has been lost, drugs should be legalized. I cannot help but wonder where the debate over America’s absurdly high drinking-age has gone? In many ways it bears resemblance to the debate over marijuana.

In spite of a legal drinking age of 21, I know not one young person in America who has not broken this law more than once. Yet they are seen by the system as criminals. Similar to marijuana. In my home country of Denmark, where the legal drinking age was 15 while growing up, parents were able to take care of young people who got too drunk, and alcohol was tolerated. In America, it seems they just send them off the college and hope for the best. Again, alcohol in America is similar to marijuana, which young people hide from their parents who are left in the dark. And finally, it has struck me how much more widespread the drug culture is in America; perhaps because it is easier to get to than plain alcohol? Or perhaps because anyone who can get you alcohol illegally can get you other things as well!

It seems to me that if America wants to understand its failure at combating drugs, it must begin with its desire to regulate the most basic form of consumption: drinking.

Put that in your pipe and smoke it!

D. Pontoppidan, Summer Fellow at the Mackinac Center for Public Policy

Oscar Wilde once said that he’d rather have an interesting vice than a boring virtue. Yet to Bill Apple, [letters, NY Times, June 13] the only viable solution to this country’s smoking problem is a “Prohibition-style tobacco ban”. People cannot be trusted to make decisions in their own interest. Smoking, he argues, is the best example of this, since the dangers of smoking are widely-known, and people still choose to smoke.

However, there is much to suggest that Bill Apple himself is merely blowing out smoke. In fact, smoking in itself is not at all proven dangerous , just as eating fast food with moderation or drinking on occasion does not make one obese or an alcoholic. The fact that some choose to smoke excessively, on the other hand, is a result of different time preferences, not of poor choice.

If we approach the problem from an economic point of view, and borrow a famous example from Eugen von Böhm-Bawerk we can imagine a farmer with five sacks of grain, and no way of selling them or buying more. There are five possible uses: as basic feed for himself, food to build strength, food for his chickens, an ingredient for making whiskey, and feed for his parrots to amuse him. If the farmer loses one sack of grain, he will simply starve the parrots, rather than reducing every activity by a fifth, since they are of less utility to him than the other four uses. His decision is not made with a view of the big picture, but considering the marginal utility of each sack of grain.

His high time preference thus values present consumption more than the long-term goal of keeping the parrots. Similarly, disenfranchised groups in particular see an affordable pleasure in smoking cigarettes, in spite of living a toilsome life. Prohibiting tobacco would only serve to further marginalize them from society.