Streetwise Professor

Big Tech’s war on speech–or more precisely, on speech that they dislike–escalated wildly in the aftermath of the Capitol “insurrection.” Starting with the erasure of Trump (and others deemed in his orbit) from Twitter and Facebook–actions that drew rebukes even from France and Germany–it continued to expand over the weekend, most notably with Amazon’s abrupt termination of its hosting agreement with Twitter competitor (and nascent conservative platform) Parler, and Apple’s and Google’s extirpation of the Parler app from their app stores.

This is an escalation, yes. But in a war that has been raging for years. Amazon, Apple, Facebook, Google, and Twitter merely see an opportunity to gain a big victory in that war.

During that war, a standard response from many on the non-left has been: “They are private companies. They can do what they want. Constraining their ability to take these actions is anti-capitalistic, and anti-liberty.”

These arguments are simplistic, and as a result, it is easy to conclude that many of those making them are simpletons.

The simplistic presumption behind these arguments is that only governments can coerce, or exercise power to constrain liberty.

It is no doubt true that government power to coerce is typically greater than that of private individuals and enterprises, and that therefore government is most likely to be the enemy of freedom. But that does not imply that government is the only enemy thereof, and that therefore only governments should be constrained from limiting freedoms.

The presumption that private entities possess little coercive power is based on an implicit assumption. Namely, that competition between firms and individuals in markets sharply constrains coercive power, whereas government faces little competition and can therefore coerce more effectively.

The implicit assumption is reasonable in many contexts. I don’t have to worry about being coerced by my grocer or even auto manufacturers. Competition is robust, and if they try to coerce me, I can shop elsewhere. Absent collusion, I can rely on competition to discipline coercion.

The implicit assumption is definitely and wildly unreasonable in the case of the large tech companies. There network effects have sharply reduced competition, and greatly constrained choice. Further, as Amazon/Google/Apple v. Parler show, these companies are willing and able to utilize their control over certain assets to destroy those whom they oppose.

The standard arguments discounting the likelihood of predatory pricing or other predatory conduct don’t apply here. Those arguments presume profit maximization as the corporate goal. But the underlying motive for Amazon or Apple or Google to cut off Parler is almost certainly not to make higher profits later–Parler is not even a competitor of Amazon. Instead, their motive is nakedly political. Jeff Bezos is no doubt willing to take what for him (richest man in the world) is a small economic loss in order to advance his political and ideological objectives. (Do you think he bought the WaPo to make money? As if.)

It’s also essential to note that these “don’t interfere with private contracting decisions” arguments completely fail to recognize that the ship sailed decades ago, and that the current legal and regulatory environment represents almost a complete inversion of the appropriate spheres of which contracting decisions should be left alone, and which may justify some restrictions.

In the US, federal, state, and local governments have imposed extensive restrictions on the freedom to contract in competitive industries, while allowing firms in highly non-competitive industries (like the tech firms) to operate with impunity. Bakers and florists operate in high competitive markets–yet they cannot exclude some customers due to their religious convictions. Restaurants in highly competitive markets are highly constrained in their ability to choose whom to serve. The same goes for landlords in highly competitive rental markets, employers in highly competitive labor markets, and banks in highly competitive lending markets.

If you agree with–or even accept–such restrictions on private firms in competitive markets, you have no basis to demand that no constraints be imposed on firms in highly uncompetitive markets, just because they are “private.” Moreover, even if you disagree with the imposition of such restrictions in competitive markets, that does not necessarily entail disagreeing with restrictions imposed in uncompetitive ones. It is quite logical to oppose restrictions in competitive markets and oppose them in uncompetitive ones.

Indeed, as I noted when I first took on this issue some years ago, there were common law restrictions on firms with considerable market power even in what is arguably the most libertarian/classical liberal period and country in history–18th/19th century England/UK. Common carriers like inns and coaches were deemed to have market power, and the common law required such “common carriers” not to discriminate. That it an era of laissez faire that has not been equaled since.

Furthermore, and most importantly, it is simplistic–and actually idiotic–to presume that there is a bright line between public and private. The tech companies wield enormous political power, both through traditional means (lobbying, rent seeking, influence buying) but more importantly through their control over information flow, and their information about you, and their use of your information to control the information you get. The ability to manipulate politics, political outcomes, and government policy that this information dominance provides is arguably unparalleled in history. The two most powerful weapons in politics are money and information. Big tech has wild amounts of both.

What do you think that we are seeing right now, other than an attempt to utilize that dominance to manipulate political and policy outcomes? Saying that this is acceptable because these entities are formally private companies is to give them power that a US government with monopoly of violence is not permitted to wield. If you are fine with that, then you are my enemy, and the enemy of most Americans.

I also note that amidst all of the accusations that Trump is a fascist, and his supporters are fascists, a defining characteristic of classical fascism is collaboration between the state and large corporate enterprises. Who is the puppet and who is the puppeteer is not always easy to determine, and can change over time, but an alignment of interest between the state and large enterprise is characteristically fascist, and antithetical to liberty.

At the very least, these tech companies should be subjected to non-discrimination requirements–requirements that common carriers have been subject to for centuries, and which even non-common carriers (e.g., the baker and florist) are routinely subject to today. These platforms have market power, and those that control them use that power to discriminate, most notably on the basis of viewpoint and political belief/affiliation, and do so to influence how the government coerces you. They should be stripped of their right to do so.

With respect to Parler in particular, it has sued Amazon and Twitter, on three grounds. The most interesting is a Section 1 claim alleging a conspiracy between Amazon and Twitter to destroy a Twitter competitor. This is potentially the most dangerous claim, but also the one that is least likely to survive a motion to dismiss. Yes, such a claim of conspiracy is plausible, but evidence of a conspiracy must include more than parallel conduct or mutual interest. So far, what we know publicly does not provide evidence of an actual conspiracy.

The second claim is tortious interference. This could potentially have legs. Amazon has clearly interfered with Parler’s ability to provide services to its customers. It is very plausible that that interference is tortious.

I am thinking that Parler customers might have a tortious interference claim as well, that could be pursued via class action.

The third claim is breach of contract. Amazon gave Parler 30 hours notice of termination: Parler claims the contract requires 30 days notice. No doubt the contract is byzantine and complex and long, and that Amazon can point to some clause which permits termination with less than 30 days notice under certain conditions. Then it becomes a matter of fact whether those conditions were met. Parler will no doubt argue that they were not, and at the pleading stage the court has to accept plaintiffs’ version of the facts.

Truth be told though, Amazon may well be willing to accept a loss on the breach claim, and maybe even the interference claim. It will be all rather moot for Parler: it is likely dead even if it prevails on those claims. But Amazon will have achieved its true objective: killing an apostate.

Big tech is our enemy. It must be fought. It must be defeated. Posturing about their inviolability because they are private companies is simplistic, wrongheaded, downright stupid–and highly destructive to the point of being evil. They dominate the public space in ways no “private” entity has ever done, and thereby have directly and indirectly immense powers of coercion that must be controlled. They are currently wielding those powers ruthlessly. Only fools and knaves accept that based on some imagined principle that private entities are immune from any constraint.

For a perfect illustration of why the UN (and most NGOs and most of those talking about Great Resets and the like) represent a grave threat to the lives, health, and livelihoods of those whom they claim to want to help, consider this ignorant drivel on the introduction of water futures on the CME from  Pedro Arrojo-Agudo, the UN’s “special rapporteur on the human rights to safe drinking water and sanitation.” (Hey! He’s not just an everyday run of the mill rapporteur! He’s a special rapporteur!).

According to Bloomberg, water futures “risks a price run-up for a resource that ‘belongs to everyone’ and is a vital tool in combating the Covid-19 pandemic.” Further:

“The news that water is to be traded on Wall Street futures market shows that the value of water, as a basic human right, is now under threat,” Arrojo-Agudo said in a statement. “It is closely tied to all of our lives and livelihoods, and is an essential component to public health.”

Beyond the fact that the reference to “Wall Street futures market” is ignorant (and an offense to Chicagoans!), this short statement is packed with more substantive economic ignorance.

Oh, the blather sounds good: water is “a human right” that “belongs to everyone.” Yay! But it’s exactly this kind of crypto-socialist blather that wreaks great harm when put into actual policy.

For one thing, something that “belongs to everyone” ends up belonging to no one. Or more precisely winds up being grossly misallocated or misused or wasted. Those who don’t own have no incentive to utilize wisely. They have too little incentive to avoid polluting. They have little incentive to increase availability or quality. Indeed, I warrant that many–and arguably the lion’s share–of the problems that Mr. Arrojo-Agudo is rapporteuring about (or whatever it is that rapporteurs do) are directly attributable to the lack of property rights in water, or grossly suboptimal rights. Relatedly, they are directly attributable to the lack of market mechanisms built on property rights to allocate a scarce resource–clean water–and the reliance on political mechanisms plagued by rent seeking and corruption to do so.

It’s not easy to design and enforce property rights for water, for a variety of reasons. Some of these reasons inhere in the nature for water. For example, designing and enforcing rights to an aquifer are challenging. But many of the problems are political, and public choice in nature. Look at the conflicts over water in the American West for myriad illustrations.

But grasping the nettle of these challenges, and even doing it imperfectly, is distinctly preferable to the policies that arise from an “it belongs to everyone” attitude. That is a recipe for dissipation, waste, and pollution. Water socialism works just as badly as all the other kinds.

As for the “speculative bubble” fears, such creatures are far more common in the fevered imaginations of the likes of UN rapporteurs, NGO nudniks, etc., than in the wild. They hysteria over an oil price bubble in 2007-2008 is an example. This is something that even Paul Krugman and I agree on. Show me a commodity price bubble, and I have a high degree of confidence that it can be explained by fundamental factors. Indeed, interventions intended to combat these bubbles almost always lead to less efficient resource utilization than the alleged bubbles themselves. Price “bubbles” in commodities are usually simply the bearers of bad fundamental tidings.

That is, attempting to suppress “price run-ups” makes things worse, not better.

I’ve already opined that I consider it unlikely that the CME/Nasdaq water futures will register much trading volume, for relatively technical reasons. The same reasons apply to other possible water futures contracts. So Mr. Arrojo-Agudo should direct his nervous energy to other subjects.

But the anti-property, anti-market mindset that the UN rapporteur embodies is a grave threat to prosperity and health. This mindset makes people poorer and more miserable wherever it rules policy. Which is why the UN, NGOs, Great Resetters, and the like pose a far greater danger than all the speculative bubbles ever stacked one atop the other.

Martin Wolf has waddled into the lists again to take another tilt at Milton Friedman. Since Milton is alas not with us to accept the challenge (luckily for Martin) I will again try to serve as his trusty second and defend his honor.

I will start at the end:

There are many arguments to be had over how corporations should change. But the biggest issue by far is how to create good rules of the game on competition, labour, the environment, taxation and so forth. Friedman assumed either that none of this mattered or that a working democracy would survive prolonged attack by people who thought as he did. Neither assumption proved correct. The challenge is to create good rules of the game, via politics. Today, we cannot.

This is a lie and a slander–in particular the italicized part. To start with. Friedman’s social responsibility piece was an oped, not a weighty tome or even an academic journal article. (I snorted when some idiot in Bloomberg referred to it as Friedman’s magnus opus. Er, no, that would be A Monetary History of the United States or A Theory of the Consumption Function. But this illustrates the level of intellect of those challenging Friedman’s article.). As a result, it was not a comprehensive analysis. It focused on a basic premise and argued that premise within the constraints of the form, which are severe. So many of the criticisms are bashing straw men–issues that Friedman could not address except tersely, if at all.

With regards to the lie and the slander, this relates to my criticism of one of Wolf’s earlier sorties. Specifically, Friedman “assumed” nothing of the sort. If you look at his broader body of work–something that Wolf betrays absolutely no sign of doing–you will know that his main objection to government, big government in particular, and government regulation is that legislatures, the executive, and regulators would be influenced and corrupted by the regulated, and by corporations in particular. This is why he argued vociferously against big government and against most government regulation: the power thus accrued would be manipulated by private interests, most notably corporations.

Friedman’s solution was to reduce the stakes in the game by reducing the power of government and relying on competition in the marketplace. Again, Friedman was an advocate of free markets, not of corporations, and he opposed regulation primarily because it allowed corporations to undermine markets.

One particular illustration of this relates to an issue that Wolf raises: market power. Along with Stigler, Friedman argued that government regulation was frequently, and indeed overwhelmingly, antithetical to competition and supported market power.

With respect to creating “good rules of the game,” Friedman also argued that giving government more power was inimical to the creation of good rules.

That is, Wolf is arguing that we have a political problem–which was exactly Friedman’s point throughout the 1950s-1980s. You may disagree with Friedman on these issues. But you cannot–as Wolf slanderously states–say that he did not think about them seriously, or that he assumed them away. Might I suggest that Marty read, oh, Capitalism and Freedom? Or is an oped all he can handle? Maybe there’s a market for Milton Friedman for Dummies.

Now to the beginning. Wolf quotes Luigi Zingales, the Director of the Stigler Center. (George is probably spinning in his grave.)

In an excellent concluding article, Luigi Zingales, who promoted the debate, tries to give a balanced assessment. Yet, in my view, his analysis is devastating. He asks a simple question: “Under what conditions is it socially efficient for managers to focus only on maximising shareholder value?”

His answer is threefold: “First, companies should operate in a competitive environment, which I will define as firms being both price- and rule-takers. Second, there should not be externalities (or the government should be able to address perfectly these externalities through regulation and taxation). Third, contracts are complete, in the sense that we can specify in a contract all relevant contingencies at no cost.”

Needless to say, none of these conditions holds. Indeed, the existence of the corporation shows that they do not hold. 

This is nonsense on stilts, and represents a return of the hoary Nirvana Fallacy that another late, great economist, Harold Demsetz, pointed out over 50 years ago. Yes, the conditions of the First and Second Welfare Theorems don’t hold. Who knew? That says jack about what are the best arrangements for our fallen world. That requires a comprehensive comparative institutional analysis, an analysis that is conspicuously lacking in the debate over Friedman’s article.

So what does Wolf say corporations should do (or not do)? Here’s a list:

My contribution to the ebook emphasises this last point by asking what a good “game” would look like. “It is one,” I argue, “in which companies would not promote junk science on climate and the environment; it is one in which companies would not kill hundreds of thousands of people, by promoting addiction to opiates; it is one in which companies would not lobby for tax systems that let them park vast proportions of their profits in tax havens; it is one in which the financial sector would not lobby for the inadequate capitalisation that causes huge crises; it is one in which copyright would not be extended and extended and extended; it is one in which companies would not seek to neuter an effective competition policy; it is one in which companies would not lobby hard against efforts to limit the adverse social consequences of precarious work; and so on and so forth.”

Let me give a pithier version: “Be good.”

As public policy advice, this ranks right up there with Mr. Mackey:

Completely absent from Wolf’s articles on Friedman is any discussion of how to implement the incentives to “be good” (by Wolf’s lights), or how corporations will acquire the information to know how to be good.

Incentives and information are the foundational concepts of modern economics. It’s beyond bizarre that the FT’s “Chief Economics Commentator” couldn’t be bothered even to mention them.

Wolf’s article is a sermon, not an economic analysis, or even a pedestrian analysis of an economics issue. The world is fallen, and you sinners must repent, and promise never to sin again! Well, as a song I like (and no it’s not autobiographical!) says, “I used to pray every night for God to wash away my sins, but I just get up and do ’em all over again.”

You can have a serious discussion about Milton Friedman’s slender piece, especially within the context of his much broader work. But the jeremiads directed against it by Wolf and others are not serious. They are intellectually vapid, and devoid of any meaningful policy prescriptions.

Hell, maybe Stigler was wrong–at least about Martin Wolf. Maybe he can’t win an argument with Milton, even when Milton isn’t around.

The biggest intellectual defect of modern environmentalism–and there are many–is its monomania. The obsession with greenhouse gases has led it to advocate drastic changes in the production and consumption of energy without regard for the non-GHG-related consequences of these changes, including in particular the environmental consequences.

Fossil-fuels are carbon intensive, but the alternatives to fossil fuels and fossil-fueled vehicles, heaters, appliances, etc.–electricity generated by wind and solar, batteries, vastly expanded transmission networks, electric cars and appliances–are incredibly material intensive.

Many–most–of these materials need to be mined. Electric vehicles and batteries utilize massive amounts of metals and minerals, e.g., copper, nickel, cobalt, lithium. The mining of these things generates massive amounts of pollution of the air and water and the ground.

Just a few examples. Many of the largest Superfund sites in the US are defunct copper mines, like the Berkeley Pit in Montana, where decades after its retirement the country’s largest earthen dam holds back–hopefully!, as I’ll discuss in a moment–6.5 trillion gallons of toxic sludge. And the mine itself is now a 900 foot deep, mile long, toxic lake.

What did I mean about “hopefully!”? Well, there have recently been massive failures of containment dams at mines in Canada, Brazil (at least two) and Australia, which have cost hundreds of lives and massive ecological and economic damage.

Even when there are not such catastrophic failures, the accumulation of toxic tailings is hardly green.

And tailings are not the only issue. Let’s talk about air pollution, shall we? Specifically with a mineral that will be crucial to the production of massive batteries–nickel.

Riddle me this: what city has the worst air pollution in Russia, and among the 10 most polluted in the world? If you answer “Norilsk”, you’re a winner. Why? Nickel production. The world’s largest nickel mine and processing facility located there spews out “four million tons of cadmium, copper, lead, nickel, arsenic, selenium and zinc” per year. And the river runs a beautiful красный for good measure. Not very зеленый!

The “green” electrification of the entire world will require massive amounts of rare earths. The vast bulk of rare earths are produced in China. Not because it is uniquely endowed with them–they are actually quite common. Because only the Chinese are willing to accept the pernicious environmental impacts of rare earths mining.

And it’s not just environmental impact. It is historical impact as well. Rio Tinto obliterated a 40,000 year old archeological site to expand an iron ore mine. The “Sacred Valley” in Peru is also being mined extensively.

These things are happening at current scale, and they are an inevitable consequence of industrialization. But the question is whether the benefit of reducing GHG emissions justifies increasing commensurately these impacts. For you multiply these environmental consequences by many times when you consider the impact of multiplying electrical vehicles and appliances and batteries by many, many times.

Wind and solar generation facilities also consume massive amounts of material. Many of these are mined, or involve polluting production processes (including not immaterially–pun intended–concrete, which is a major GHG producer).

But there’s also the land. I’m so old that I can remember (though I was very young at the time–so I’m not THAT old!) Lady Bird Johnson campaigning against the visual blight of highway billboards. Quaint, really: they were a ribbon of eyesores, at most. In contrast, the amount of wind and solar facilities required to achieve the grandiose objectives of the Green New Deal or its proposed counterparts around the world (ya I’m looking at you Boris) would create square mile after square mile of eyesores.

Not to mention (a) displacing land from other productive uses, and (b) creating large risks for fauna, especially birds. Wind farms are collections of bird blenders, and solar farms bird fryers.

The lack of thought to environmental consequences behind grandiose “carbon neutral” visions is also apparent in the failure to consider the substantial diseconomies of scale in wind and solar. Meaning that costs will rise disproportionately to increases in renewables generation.

You can expand wind output on an intensive margin–siting windmills closer together. But this cannibalizes the wind, leading to output per turbine decline with density, and hence rising costs. You can expand wind output on an extensive margin–devoting more land to wind farms. But this also reduces average and marginal productivity because it requires expanding into progressively less windy places. Moreover, it results in higher average and marginal costs, because even holding windiness constant, the marginal value of the displaced land in alternative uses increases (because holding windiness constant, you’ll develop on the cheapest, least productive land first).

Solar is hard to expand on the intensive margin, but expansion on the extensive margin faces the same sources of rising cost as wind.

Meaning that these plans to substitute wind and solar for existing fossil fueled generation at the same time as dramatically substituting electricity for other forms of energy (e.g., electric cars instead of ICEs, electric appliances instead of gas) will inherently result in steeply rising costs.

Steeply.

If you look at countries (or states like California) that have even been able to get a mere ~20 percent of their electricity generation from renewables, you will see they are also the countries where electricity is most expensive. Usually by a factor of 2 or 3 or more than those that rely on conventional generation. Given the inherent increasing cost nature of renewable production, think of how much more expensive it will be to produce close to 100 percent of total energy consumption from renewables.

Rational people take into account trade-offs. Drastic reductions in GHGs involve massive costs. Many of these costs are environmental. The environmental pollution–real pollution, not the sort-of-pollution of say CO2–that will result from the massive production of materials necessary for electric vehicles, electric appliances, large scale storage batteries, transmission lines, wind turbines, and solar installations is staggering. Staggering. The consumption of natural resources–not just those buried in the earth, but the earth’s surface–will be prodigious. The cost of energy will rise, which will make people poorer: and the poorest will be hardest hit.

I often use Jefferson Davis’ proposed epitaph for the Confederacy–“Died of a Theory”–to illustrate the destructive tendencies of those wedded to a single principle, to the exclusion of other considerations. Unfortunately, it is too early to use it as an epitaph for modern environmentalism, because that is all too alive. But the idea fits. Monomaniacally wedded to theories of climate change and GHGs, modern environmentalists are pursuing a course that will, paradoxically and perversely, wreak massive environmental destruction.

How green is my valley? After the greens get done with it–not very green at all.

From 911 through the early days of the invasion of Iraq, there were some on the right who argued that the Anglosphere–the US, UK, Australia, Canada, and New Zealand–would save the world from a dark future. I was always skeptical, because it was evident that the Commonwealth countries in particular were already hurtling down the road to serfdom: from the earliest days of this blog, I referred to the UK as the “Ghost of Christmas Future,” because its embrace of collectivism and political correctness bode ill for the US.

Recent events have validated that skepticism–and how. I could cite many verses in many chapters, but two recent developments make the point.

The first is covid. The allegedly doughty Anglosphere has been as been as much of a collectivist collection of bedwetters and repressers as any country or group of countries in the world. The panic and consequent lockdown policies are largely attributable to the hysterical predictions of University College London’s crack–as in crackpot–epidemiological modelers. And the government’s panicked response thereto. The UK locked down once–to little effect. It is now locked down again, with progressively more draconian restrictions on normal life.

The evidentiary basis for this: zip, zilch, nada. There is no evidence that lockdowns improve public health outcomes, and there is considerable evidence that they don’t. There is evidence beyond counting that the economic and health consequences of lockdowns is severe. All pain. No gain.

Parts of Australia have also imposed draconian lockdowns, complete with police state enforcement methods and limitations on individual freedom. Ditto New Zealand. Canada has also been highly restrictive.

These efforts have been statist and collectivist in the extreme, with the smattering of protests about liberty being screeched down by the better thans who have proven themselves utterly impotent, not to mention incompetent. But we’re supposed to obey them. Because they give incantations to SCIENCE!

The other telling indicator of the intellectual and moral bankruptcy of the Anglosphere elites is climate policy. The UK, Australia, Canada, and New Zealand are all hard core worshippers in the Church of Climate Change (while the pews of the Church of England are empty, notably).

Australia has implemented policies intended to displace totally fossil fuels within a short time frame, substituting renewables in their place. This has had a too small to measure impact on global climate, but has blessed Australia with more expensive and less reliable electricity.

Not to be outdone, “Conservative” British PM Boris Johnson said “hold my ale,” and has just announced a grandiose “green industrial revolution.”

Note to Boris: the original industrial revolution was an endogenous, self-generated process that massively improved living standards; your proposed “industrial revolution” is a government-driven, centrally planned process that will produce penury in exchange for trivial environmental benefits (and indeed, may involve serious environmental harm, when the consequences of mining, distorted land usage, etc., are considered). To compare what happened in the 18th and 19th centuries to what you propose for the 21st is an abuse of language that staggers the imagination.

So what is Boris’ Big Plan? This:

“My ten point plan will create, support and protect hundreds of thousands of green jobs, whilst making strides towards net zero by 2050.

“Our green industrial revolution will be powered by the wind turbines of Scotland and the North East, propelled by the electric vehicles made in the Midlands and advanced by the latest technologies developed in Wales, so we can look ahead to a more prosperous, greener future.”

The push forms part of the UK’s pledge to go carbon neutral by 2050, and comes ahead of the COP26 climate summit in Glasgow next year.

The plans include producing enough offshore wind to power every home, quadrupling how much Britain produces to 40GW by 2030, which would support up to 60,000 jobs.

It also aims to generate 5GW of low carbon hydrogen production capacity by 2030, and develop the first town heated entirely by hydrogen by the end of the decade.

The UK Government also wants to advance nuclear as a clean energy source to help support 10,000 jobs.

Then there are wider plans for electric vehicles, public transport and well as an expansion of cycle and walk routes.

Mr Johnson will also discuss making homes more energy efficient, creating 50,000 jobs by 2030 and installing 600,000 heat pumps every year by 2028.

In other words, like California, except with crappy weather.

The key word is “plan.” It’s Boris’ 10 Year Plan. Maybe Boris can borrow from Lenin and promote it with a slogan: “Utopia is Tory government combined with green electrification of the entire country.”

It bears all of the intellectual defects of such grandiose schemes. The reliance on centralized decision making. The focus on dictating technological means for achieving an objective–and relying on technologies that are either unproven, or extremely unlikely to be scalable (wind energy in particular). Further, the monomaniacal agenda: reducing CO2 emissions, to the exclusion of any consideration. Putting aside that CO2 is what makes things green, there is apparently no consideration of the environmental consequences (e.g., from mining) of large scale wind power and battery usage (in autos and to make intermittent wind a reasonable power source). Nor is there consideration of other trade-offs: what are the costs, in terms of foregone output and opportunities, of pursuing this single goal? What are the benefits that will be achieved?

Further, the entire agenda is profoundly anti-freedom. The private automobile was the greatest liberating force of the 20th century–which is why the left hates it with such a passion. Boris’ (not so) green electric machines will be far more costly, and far more limiting, making them more expensive and less useful to the hoi polloi. The policy obviously aims to push the proles onto public transport. Yeah. I’m sure British train service will get so much better. And even if it does, it is inherently more regimented and limiting than autonomous personal transport.

I guarantee that this effort will be a bacchanal of rent seeking, incompetence, and failure. If you doubt this, contemplate the multiple failures of the UK government’s covid responses like testing and test-and-trace. But sure, they will totally nail a complete re-engineering of the entire energy system!

If Boris et al really believe that CO2 is a deadly menace, then tax it and get the hell out of the way. Let individuals figure out the most efficient way to trade-off carbon vs. other human wants. This centrally planned approach is doomed to failure. Which means that the green industrial revolution may spark a real revolution when Britain sinks into penury. While sitting in the dark and cold.

Again, climate policy is merely an example. I could go on. But it illustrates the Anglosphere’s descent into collectivism and statism and corporatism: and alas, the US–at least about half of it–want to follow them all the way down.

The beginning of this descent can be dated to the end of WWII. Churchill’s loss in 1945 is probably a good starting point. The pace of decline has varied over time: things were so dire by the late-1970s in the UK that Thatcher came to power and slowed, and in some cases reversed the decline. But it has resumed apace, and the adoption of green energy lunacy by an ostensibly conservative government suggests that the decline is now irreversible.

In some ways, Australia’s decline is the most depressing. Once upon a time Oz was more individualist, and disdainful of the pommy bastards. There was a kinship between Australia and the American west, a frontier kinship as it were. But that seems largely a thing of the past.

This came home to me when I re-watched the Mad Max trilogy last week. Watching those paeans to rugged individualism (personified by Mel Gibson’s Max), then reading about Australia today (especially the lockdowns in Victoria and the dysfunctional energy policies), I said to myself: “What the hell happened to you?”

Well, whatever happened to them has happened to the Anglosphere as a whole. (Don’t even get me started on Canada, ex Alberta.)

And it is happening to the US too. The recent election results, and many other political developments, suggest that at most half the country resists joining the UK et al on the road to serfdom. And that half is politically marginalized–perhaps by electoral manipulations engineered by the other half.

The very first substantive post on this blog, almost 15 years ago, was about a failure of the electronic trading system at the Tokyo Stock Exchange.

Whoops, they did it again!

Apparently believing that misery loves company, Euronext has also experienced failures.

Euronext’s problems seem quite more frightening, because they involve the out-trade from hell: reversing the polarity on transactions:

“It has been identified that some of the 19/10 trades sent yesterday to the CCPs (central counterparty clearing house) had the wrong buy/sell direction”, Euronext said.

Thought you were long? Hahahahahaha. You’re short, sucker!

I hate it when that happens! (Yes, Euronext reversed the trades after it realized the problem.)

The lessons of my “Value of Lost Trade” (“VOLT”) piece still hold. It is inefficiently costly to drive the probability of a failure to zero. Whether exchanges have the efficient probability of failure (or really, the efficient vector of failure probabilities, because there are multiply types of failure) depends on the value of foregone trades when a system is down (or the cost of other types of errors, such as reversing trade direction).

Meaning that system failures will continue to occur, and long after this blog fades away.

Raghuran Rajan is a smart guy who has done excellent and rigorus work, and is a gentleman to boot. But even such as he are capable of saying dodgy things, as in his comments to the FT on Friedman’s social responsibility article, in which he said the covid pandemic has exposed flaws in Friedman’s argument:

First, Covid-19 has threatened some companies with the extinction of shareholder value, subjecting businesses to a shock that, despite government intervention, has put their existence in question. “At this point,” Prof Rajan told me, “the best thing [a company with thin resources] could do is focus those resources on survival, because in surviving, it provides a decent job for its workers, it continues making that widget which people buy. It lives for the future.

Not all companies came into the crisis with thin resources. For the tech companies, nursing war chests replenished by tech-hungry consumers in lockdown, this should be a chance to go beyond bare Friedmanite requirements

Amazon, for instance, could “do more for its various suppliers, some of whom may be struggling small and medium business units”, said Prof Rajan. “It could find ways to provide them more credit to last through the pandemic that will get it more loyalty, because people will know it can be a source of insurance, rather than just a platform.”

. . .

This sort of action exposes the “missing part” of Friedman’s thesis, said Prof Rajan. He failed to recognise that “implicit equity stakes” — such as the commitment of a company to the partnership with its workers, suppliers or customers — are “as important, sometimes, as the explicit equity stake”

These things are missing how, exactly? Essentially Rajan is arguing that there are gains from trade to be realized to a corporation from adjusting explicit and implicit contractual terms with “stakeholders” such as workers, suppliers, and customers, in response to an economic shock like covid. But note: such adjustments would enhance the corporation’s profits, by allowing it to capture some of those gains from trade.

Indeed, according to the Friedman norm, such companies, acting as profit maximizers, would benefit not just themselves, but their workers, suppliers, and customers. Thus, rather than being some lacuna in Friedman’s framework, what Rajan emphasizes is precisely why profit maximization in the price system should be encouraged, as Friedman did. It provides an incentive for corporations to engage in mutually beneficial transactions, regardless of the underlying circumstances. That is, profit maximization guides optimal responses to circumstances, even crappy circumstances. Nay, especially crappy circumstances.

Or perhaps I should say “in the contractual system.” For what is involved here is negotiating contracts that maximize joint surplus. As Coase tells us, absent transactions costs, firms and their counterparties will do just that, and profit maximization (or utility maximization by workers, say) is exactly the engine that powers that result.

So the only way to make this critique coherent is to argue that transactions costs could somehow be reduced by reshuffling organizational forms or control rights. This Rajan does not do. Nor has anyone who burps up the term “stakeholders” and proclaims “QED!” Not that I have seen anyways.

As I said in my earlier post: if you are so smart, why aren’t you rich? Why haven’t you–or anyone else–come up with an alternative organizational form that allows the creation and capture of gains from trade that corporations leave on the table?

Indeed, the most coherent restatement of the “stakeholder” argument is that corporations have failed because they aren’t maximizing profits because they are failing to structure transactions with stakeholders that exhaust all gains from trade.

I’m tempted to cut Raghuran some slack because his remarks are impromptu statements made to reporter, rather than in an academic article–or even a blog post. But the fact that something in an FT article is far more likely to resonate than a weighty academic tome or even a not-so-weighty academic blog post arguably cuts the other way: one should be on particular guard against expressing flabby thoughts, when said thoughts may be read by millions–and hence mislead millions. And, to be honest, Raghuran’s thoughts about the errors of Friedman’s thought during times of pandemic are very flabby indeed.

In reading all these critiques of Friedman, 50 years on, I’m reminded of something George Stigler said. “It’s easy to win an argument against Milton when he isn’t there.”

I sent to a friend an article describing how WHO–yes, that WHO–is telling governments not to utilize lockdowns as their primary means of combatting Covid-19. I sent it via Facebook Messenger, because my friend lives in a rural area and that is often the only reliable way of transmitting messages: text and email often don’t work. The friend replied that the link didn’t work. I sent it via email, and it did work. Said friend then tried to post it to FB–but FB refused to post it.

So obviously, FB is censoring this information: it is a non-link as far as FB is concerned, consigned to the memory hole.

I’m so old that I remember when Facebook (and Twitter) censored articles that contradicted WHO. Now Facebook is censoring articles that contradict Facebook. Specifically, Facebook’s smelly pro-lockdown orthodoxy–even when that contradiction comes from WHO.

Facebook obviously loves lockdowns, and is going to do its damndest to prevent you from learning anything that might contradict that position.

This episode–and myriad others over the past couple of years–demonstrate that social media as it exists, and specifically as embodied by Facebook and Twitter, need to be subjected to common carrier non-discrimination regulations along the lines of what I advocated over 3.5 years ago.

There are the simplistic minded who claim that since these are private corporations, they should not be regulated. Thereby totally ignoring what I point out in my 2017 post: even in the halcyon days of classical liberalism, market power was understood to provide, under some circumstances, an exception to the general rule that private entities should be permitted to operate without restriction from government.

Some non-simplistic people–notably Richard Epstein, whose writings triggered my idea of applying common carrier regulation to social media–argue that the conditions for the exception do not hold. Even if Facebook and Twitter (and Google/YouTube, etc.) have dominant positions now, those positions are contestable. History suggests that market dominance is ephemeral, and a company that abuses its dominance will be displaced. More broadly, Schumpeterian creative destruction will, before long, consign current social media behemoths to the ash heap of history.

But how long “before long” is matters. It could be that in the long run, we are not just dead, but unfree. Or at least have suffered a grievous blow to our liberties, lost election by election.

In my opinion, Epstein underestimates the enduring impacts of network effects. I have studied exchanges–a classic beneficiary of network effects–for decades. I know how resilient they can be. Maybe Facebook (and Twitter, and Google/YouTube) will indeed be supplanted in 10 years. Hell, even 5. Hell, even 23 days.

What damage can they do in the meantime?

The suppression of information and opinion for days, let alone months or years, can have devastating effects. When the stakes in elections are so high, the distortion of the exchange of ideas and information that result from Facebook’s and Twitter’s and Google/YouTube’s censorship have very real consequences, even if someday, somehow, they will become historical curiosities.

Let’s just do some basic cost-benefit analysis. Lockdowns have caused the losses of trillions of dollars (and euros and yen and rubles and lira and what have you) of economic loss. Actions (such as Facebook’s censorship) that increase the likelihood of re-imposition of these lockdowns by even a small percentage can cause tens of billions, and perhaps trillions in economic harm. (I recall Ronald Coase’s statement that an economist can pay for his lifetime salary by delaying the imposition of a bad regulation by even a day.)

What is the cost of requiring social media platforms to operate on a principle of non-discrimination, and therefore allow supposedly sentient beings to sift through competing claims, rather than substituting their own judgments? Judgments, I might add, that are hardly disinterested. Do you think for a moment that Facebook and the other social media giants have not benefited from having people stuck at home, with little to do?

This issue also speaks to my post from a few hours ago. Yes, Zuckerberg (and other decision makers at Facebook) and Jack (Chase the Dragon) Dorsey and Sundar Pachai are arguably enhancing profits through their censorship policies (by creating a bored group of consumers with too much time on their hands), but they are also indulging their own personal preferences: to the extent that the latter is true, they are violating Friedman’s injunction. Moreover, since they have largely made the state their creatures, they can enhance their power (and wealth) by exercising huge influence over the transmission of information, and hence over public debate, and do so in a way that enhances their power, profits, and the achievement of their ideological goals. (Unpacking all these things is not easy.)

Meaning that actual policy and regulation are likely to deviate grotesquely from any “public interest” standard. Public interest would dictate, at the very least, subjecting Facebook et al to very limited restrictions, such as non-discrimination requirements. Requirements that they operate as open platforms (which could benefit from network effects, btw) and not discriminate or censor on the basis of viewpoint. But for myriad reasons, these social media entities view such restrictions as an anathema, and political economy therefore suggest that such restrictions will never be imposed.

Which makes it tragic, to say the least, that those who claim to advocate liberty shrink from constraining its most deadly enemies.

This year marks the 50th anniversary of Milton Friedman’s article on the “social responsibility of business,” in which he argued that business has one responsibility: to maximize profit. The anniversary has unleashed numerous retrospectives, most of them negative, and most of the negative treatments being given by people who have to crane their necks to see the soles of Friedman’s intellectual shoes.

The criticisms can be grouped into two basic categories: (a) the need for “stakeholder capitalism” as opposed to shareholder capitalism, and (b) the need for corporations to work to achieve social goals, such as environmental objectives or racial justice.

Both criticisms are unavailing and unpersuasive. The stakeholder capitalism critique founders on the is-ought fallacy. The social goals criticism founders on the Knowledge Problem.

Stakeholder capitalism advocates elide the “is” and jump right to “ought.” This is a fatal intellectual error, well described by Chesterton’s Fence.

Put differently, before advocating stakeholder capitalism as a superior substitute to shareholder capitalism, it is wise to ask: if stakeholder capitalism is so great, why doesn’t it already exist?

After all, there are numerous alternative ways of organizing and governing the cooperation between and coordination of suppliers of inputs (one subset of “the stakeholders”) to produce output that is sold to consumers (another subset of “the stakeholders”). There are many ways of allocating control rights and cash-flow rights. The corporate form, which makes the shareholders the residual claimants with residual control rights is just one. You can have sole proprieterships, partnerships, worker cooperatives, consumer cooperatives, mutual companies, and even anarcho-syndicalist worker communes:

Yet the corporate form that Friedman focuses on dominated then, and dominates today. It evidently conforms to the “survivorship principle” (a concept elucidated by Friedman’s partner in crime, George Stigler). That is, its dominance is consistent with its efficiency–its maximizing the size of the pie. (I recall a quote, which I thought was attributable to Bertrand Russell but which I cannot track down: “Efficiency is the highest form of altruism.”)

Moreover, this increasing the size of the pie effect must outweigh any distributive inequities “inherent in the system”: its survival means than no coalition of “stakeholders” (e.g., workers, or workers and customers, or workers and suppliers of capital) can make themselves better off by setting up an organization with different control and cash-flow rights than the shareholder corporation. Maybe the distribution of benefits within a corporation is inequitable, according to some theory of justice, but efficiency apparently trumps equity.

Henry Hansmann’s excellent book “The Organization of Enterprise” examines various alternative organizational forms, and finds that the efficiency of different forms of organization (e.g., producer cooperative, mutual) depends on the fine details of the nature of the production and marketing processes, and in particular the effects of these on the costs of contacting. My paper on the organization of financial exchanges provides a very interesting example. Exchanges organized as non-profit mutuals (pretty close to what Dennis advocated) were efficient under one set of technological conditions (floor trading) but not another (electronic trading): when technology changed, organization changed. Almost immediately. (Cf., the wave of exchange demutualizations in the early-2000s.)

Put differently, if “stakeholder capitalism” (or anarcho-syndicalist communes) were so great, either on efficiency or distributive grounds, we would see it in an even moderately competitive environment. Its absence makes it clear that it ain’t so great.

Sorry, Dennis. With the exception of the exchange thing. For a while, anyways.

So what about broader “social” goals? In this regard, it’s well to remember Hayek’s injunction that the addition of “social” as a prefix to any concept, e.g., social justice, usually renders the concept meaningless, or at best confuses rather than clarifies. Moreover, it’s imperative to remember another Hayekian concept: the Knowledge Problem.

The very existence of costs (e.g., pollution) that are not amenable to contract, and hence supposedly require unilateral corporate action to address, demonstrates the enduring legacy of one of Friedman’s colleagues, Coase. The transactions costs of some corporate activities are clearly too high to mitigate efficiently via contract. So, apparently, CEO’s are supposed to take an Olympian perspective and address these problems unilaterally.

That’s where the Knowledge Problem kicks in. Pray tell: where are CEOs supposed to get the information to lead them to make the appropriate trade-offs? The virtue of contract is that it provides a means of generating information about costs and benefits in order to make the altruistic–i.e., efficient–choice. But with “externalities,” contracting is a prohibitively expensive means of acquiring this information, and acting on it in an efficient eay. So where does this information come from?

CEOs–and heaven forfend, their HR departments–are usually sufficiently arrogant to believe they know.

They’re wrong: pride goeth before the fall.

Meaning that corporate decisions made pursuant to environmental or “social justice” goals are certain to be wrong. Very wrong.

Funny, isn’t it, that those who fault corporations for decisions that affect those with whom they have contractual privity blithely assert that they should make decisions with those with whom they do not? This is intellectual incoherence of the highest order.

There is another allegedly anti-Friedman argument, raised by the likes of the FT’s Martin Wolf: Friedman argued that corporations should maximize profits subject to the rules of the game, but since corporations make the rules of the game, this argument has no force and indeed cuts the other direction.

For one thing, Wolf’s argument is superficial and conclusory: “I also increasingly realize that I have changed my mind because I no longer believe in the contractarian view of the firm: that it is merely an aggregate of voluntary contracts which reflect the freedom of individuals to choose.” OK, Marty, I guess you are such an Olympian figure that your opinion, unsupported by argument or evidence, should suffice your disregarding the contractarian perspective and proceeding to other considerations.

But more importantly, one of Wolf’s more substantive arguments has, well, more substance: corporations have undue influence over the the political system, and therefore exert influence that results in the adoption of inefficient, and arguable inequitable, policies.

Well, yes. And Friedman would agree. Wolf’s criticism (and those of others making a similar point) of one Friedman article focused on one particular issue overlooks altogether other major–and indeed primary–streams of Friedman’s thought.

The precise reason that Friedman (and Stigler) opposed regulation and advocated small government was precisely because governments almost always advance special interests at the expense of efficiency and equity. Friedman always–always–asserted (justifiably) that he was NOT pro-big business. He was pro-market (which makes it particularly perverse that the Pro Market blog–which clearly steals from Friedman–repeatedly distributes garbage that traduces Friedman and others of his ilk, such as Aaron Director).

In this, Friedman was merely echoing Adam Smith–who never had a kind word to say about businessmen (a point that Stigler, the eminent Smith scholar of his era, made repeatedly).

Meaning that if your problem (and yeah, I’m looking at you Marty) is with undue corporate influence, rather than reshaping corporations in some way, maybe you should see that they are just responding rationally to the incentives inherent in a political system that gives the government almost unlimited authority to create rules that distribute rents.

That is, don’t limit corporations, limit governments. Corporations are just maze-bright rats. If you don’t want them gaming the maze, take away the cheese.

So to tar Friedman (and by extension other old-school Chicago types) with the brush of enabling corporations to write the rules of the game in their favor, is to ignore a major element of Friedman’s (and other old-school Chicago types’) worldview.

I’m also at a loss to figure out what particular changes to corporate organization and governance will miraculously transform them into more broad-minded entities that eschew exploiting the political system for their benefit. Look at Germany, or Japan, which have more “inclusive” models of governance, and which include other “stakeholders” in the formal governance process. Do you think they don’t influence the government to advance their interests? As. Fucking. If.

And if your response is: “give governments more power,” you are totally hopeless. Due to their comparative advantage in exercising influence over government–something that Wolf et al, in agreement with Friedman believe–that will just give corporations more power to do harm, not less.

In sum, Friedman’s latter-day critics, conveniently arguing when he is in the grave, and therefore unable to demolish them (as he surely would), totally fail to come to grips with his arguments, and in particular the arguments of his entire body of work, not just one article. “Stakeholder capitalism” is a vapid, vaporous concept that fails to address Deirdre McCloskey’s pithy phrase: “if you’re so smart, why aren’t you rich?” Claims that corporations should adopt a new objective function that encompasses “social” objectives, and not just profit, founder on the Knowledge Problem. Defensible criticisms that corporations exploit the political system are not arguing against Friedman–they are agreeing with him, yet arriving at wrongheaded conclusions.

We should all wish that our current thoughts, when evaluated from the perspective of 50 years, hold up so well as Milton Friedman’s. I guarantee that that will not be said of anyone carping on him today.

Friedman was small in stature, but a giant Gulliver in thought. His Lilliputian critics today prove the point.

The WSJ reports that the CME Group is launching a cash-settled futures contract on California water, with Nasdaq providing the cash price index. I predict, with a high degree of confidence, that this will not be a commercial success. That is, it will not generate substantial trading volume.

Why not? For the same reason that listed weather derivatives hardly ever trade. Information flow is a necessary (but not sufficient) condition to make people want to trade. For weather derivatives, there is very little information flow until shortly prior to the pricing month. For example, what information arrives between today and tomorrow that leads to updates in forecasts about what the weather in Chicago will be in December 2020, let alone December 2021? Virtually none. Given the nature of weather dynamics, information flow occurs almost exclusively quite close to the contract date (e.g., in late-November 2020 or 2021, if not in December itself). There is little information that arrives today that would motivate people to trade today contracts with payoffs contingent on future weather, even for a future only months away.

So they don’t.

I predict a similar phenomenon for water derivatives. Most of the fundamental shocks are weather-driven, and those will be concentrated close to the pricing month, leading to little demand to trade prior thereto.

Moreover, successful futures contracts rest on functional physical markets. As this recent article from The American Spectator summarizes, it is a travesty to characterize the means of allocating water in California as “a market.” Instead, it is an intensely politicized process.

If you don’t consider the AmSpec reliable, do a little digging into the scholarly literature about water allocation in the West, notably things written by my friend Gary Libecap. The conclusions are depressingly similar.

The politicization of water allocation is not new. It has existed since the beginning not just in California, but the West generally. Control of water confers enormous political power. You think politicians are going to give that up?

Again, this is not a new thing. Read up on the “California Water Wars.” Or, for a more entertaining take, watch Chinatown, which is a fictionalization/mythologization of the conflict of visions between William Mulholland and Frederick Eaton over water in Los Angeles. Spoiler: the romantic vision died (literally drowned), and the corrupt vision prevailed.

California politicians will become charismatic Catholics before they give up control over water. In a way, it reminds me of the effect of sanctions in say Saddam’s Iraq. Restrictions on supply resulting from sanctions empowered the regime. It could use its power to grant access to a vital resource in order to obtain obeisance. Similarly, California politicians can use their power to grant access to the vital resource of water to obtain political support, and exercise political power.

In a way, this is the quintessence of something I used to write about in regards to Russia: “the natural state.” Here, the analogy is even more trenchant, given that it relates to a natural resource.

The natural state operates by creating artificial scarcity, which in turn creates rents. The natural state allocates those rents in exchange for political patronage.

To do things that would undermine the rents–that is, to alleviate the scarcity–would undermine political power. That will NOT happen voluntarily. Markets for water would be a good thing–which is precisely why they don’t exist, and are unlikely to exist, especially in places like California where water is scarce and hence real markets would be most beneficial.

So CME/Nasdaq California water futures face two huge obstacles. First, even if even a simulacrum of a cash market for water existed, the nature of information flows is not conducive to active trading of water futures. Second, there is not even a simulacrum of a water market in California. What exists in place of a market is a political, and highly politicized, mechanism. That is also inimical to building a successful futures contract on top of it.

PS. Riffing of the Rime of the Ancient Mariner in the title provides an opportunity for another Python reference!

Albatross!