Stephen Hicks, Ph.D.

Friday talk in Houston, Texas

I’ll be giving a talk on Friday, March 12 to the Houston Property Rights Association on the topic of “Entrepreneurship, Politics, and Ayn Rand”:

“Why are business success and free markets so unpopular in some quarters? There are lots of reasons. One is that business is seen as immoral or boring or both. For the political left, business is money-grubbing and free markets merely let the strong exploit the weak. Even for many conservatives who reject the leftist account, business is what sober, responsible people do to pay the bills.

“Both sides miss the excitement, the nobility, and the romance of business. Ayn Rand’s vision of the entrepreneur — and of those who operate entrepreneurially within existing businesses — is of potentially heroic value creation. At our best, each person in business and in life is akin to the artist creating what was not there before.

“How does Rand’s vision of life and work fit into the current mainstream view of academia and party-in-power politics? Hollywood movies and humanities professors focus on rapacious CEOs and burned-out cubicle workers. Rand focuses on Howard Roark, Dagny Taggart, and the free market system that has empowered and enriched billions.”

Thanks to Rob Bradley of the Institute for Energy Research for the invitation.

Timothy Sandefur on law and economic liberty

The Center for Ethics and Entrepreneurship has produced a monograph version of Timothy Sandefur’s To Pursue and Obtain Happiness and Safety, now available at cost at Amazon. In the monograph, Sandefur discusses economic liberty’s up-and-down legal fortunes, as the American founders’ original protections of productive freedom, property and contract rights came under attack during the Progressive era and the New Deal, leading up to our own era of mixed premises and politicized business.

Sandefur spoke last semester at Rockford College on the topic of “Market Entrepreneurs and Political Entrepreneurs: Some Legal and Constitutional Issues.” He is a Senior Staff Attorney at the Pacific Legal Foundation, a public interest law firm based in Sacramento, California, and the author of Cornerstone of Liberty: Property Rights in 21st Century America.

My two-part video interview with Sandefur after his talk is viewable at the Center for Ethics and Entrepreneurship’s site.

Marx’s three failed predictions [EP]

[This excerpt is from Chapter 5 of Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault]

Marxism and waiting for Godot

First formulated in the mid-nineteenth century, classical Marxist socialism made two related pairs of claims, one pair economic and one pair moral. Economically, it argued that capitalism was driven by a logic of competitive exploitation that would cause its eventual collapse; socialism’s communal form of production, by contrast, would prove to be economically superior. Morally, it argued, capitalism was evil both because of the self-interested motives of those engaged in capitalist competition and because of the exploitation and alienation that competition caused; socialism, by contrast, would be based on selfless sacrifice and communal sharing.

The initial hopes of Marxist socialists centered on capitalism’s internal economic contradictions. The contradictions, they thought, would manifest themselves in increasing class conflict. As the competition for resources heated up, the capitalists’ exploitation of the proletariat would necessarily increase. As the exploitation increased, the proletariat would come to realize its alienation and oppression. At some point, the exploited proletariat would decide that it was not going to take it any more and revolution would ensue. So the strategy of the Marxist intellectuals was to wait and mount a lookout for signs that capitalism’s contradictions were leading logically and inexorably to revolution.

They waited a long time. By the early part of the twentieth century, after several failed predictions of imminent revolution, not only was it becoming embarrassing to make further predictions, it was beginning to seem that capitalism was developing in a direction opposite to the way that Marxism said it should be developing.

Three failed predictions

Marxism was and is a class analysis, pitting economic classes against each other in a zero-sum competition. In that competition, the stronger parties would win each successive round of competition, forcing the weaker parties into more desperate straits. Successive rounds of capitalist competition would also pit the stronger parties against each other, yielding more winners and losers, until capitalism generated an economic social structure characterized by a few capitalists at the top and in control of the society’s economic resources while the rest of society was pushed into poverty. Even capitalism’s nascent middle class would not remain stable, for the logic of zero-sum competition would squeeze a few of the middle class into the top capitalist class and the rest into the proletariat.

This class analysis yielded three definite predictions. First, it predicted that the proletariat would both increase as a percentage of the population and become poorer: as capitalist competition progressed, more and more people would be forced to sell their labor; and as the supply of those selling their labor increased, the wages they could demand would necessarily decrease. Second, it predicted that the middle class would decrease to a very small percentage of the population: zero-sum competition means there are winners and losers, and while a few would consistently be winners and thus become rich capitalists, most would lose at some point and be forced into the proletariat. Third, it predicted that the capitalists would also decrease as a percentage of the population: zero-sum competition also applies to competition among the capitalists, generating a few consistent winners in control of everything while the rest would be forced down the economic ladder.

Yet that was not how it worked out. By the early twentieth century it seemed that all three of the predictions failed to characterize the development of the capitalist countries. The class of manual laborers had both declined as a percentage of the population and become relatively better off. And the middle class had grown substantially both as a percentage of the population and in wealth, as had the upper class.

Marxist socialism thus faced a set of theoretical problems: Why had the predictions not come to pass? Even more pressing was the practical problem of impatience: If the proletarian masses were the material of revolution, why were they not revolting? The exploitation and alienation had to be there—despite surface appearances—and it had to be being felt by capitalism’s victims, the proletariat. So what was to be done about the decidedly non-revolutionary working class? After decades of waiting hopefully and pouncing on any sign of worker dissatisfaction and unrest, the plain fact was that the proletariat was not going to revolt any time soon.

Consequently, the waiting strategy needed to be rethought.[1]

Chart 5.1: Marxism on the Logic of Capitalism

References

[1] Werner Sombart, a Marxist early in his career, was among the first to rethink: “It had to be admitted in the end that Marx had made mistakes on many points of importance” (1896, 87).

Bibliography [pdf] [html]

[The chapter from which this section of Stephen Hicks's Explaining Postmodernism (Scholargy Publishing, 2004) is excerpted can be downloaded as a PDF at the Explaining Postmodernism page. The full book is also available at Amazon.com.]

Empires of conquest and empires of commerce

In this post-colonial era, what explains the dramatically different levels of prosperity in nations after they become independent of their colonizing powers?

Why, for example, has the prosperity of North America been consistently higher than that of Central and South America? Both are rich in natural resources, both involve nations started from scratch, both imported (or had imported) lots of culture from Europe, both have a large ocean buffer between them and the Old World, and so on.

One major factor is colonial legacies. Colonizing powers bring with them differing economic, political, legal, and cultural institutions. When they leave, the now-independent nations inherit institutional frameworks. For example, they inherit policies, practices, and attitudes in these areas:

* Economics: property rights, contract rights, trade policies, attitudes towards manual work
* Politics: constitutions, democratic and republican practices, degrees of centralization or decentralization of power
* Law: codes of law, jury systems, independent (or not) judges
* Religion: freedom, tolerance, separation (or not) from politics
* Demography: treatment of indigenous populations, policies with respect to slavery, the status of women, openness (or not) to immigration

I’ve started reading J. H. Elliott’s 2006 Empires of the Atlantic World: Britain and Spain in America 1492-1830 (Yale University Press, 2006). Elliott is vastly read on the subject and he writes with his academic colleagues in mind, and I was struck by this formulation of a big-picture explanatory hypothesis:

Spain’s empire in America was an “empire of conquest” while Britain’s was an “empire of commerce” (p. xv).

Thoughts?

Greek money and philosophy

I’ve been reading Richard Seaford’s 2004 Money and the Early Greek Mind: Homer, Philosophy, Tragedy.

Seaford’s theme: “the monetisation of the Greek polis in the sixth and fifth centuries BC contributed to a radical transformation in thought that is, in a sense, still with us. Academics—perhaps because they are more interested in texts than in money—have emphasized rather the role of alphabetic literacy in the radical intellectual changes of this period.” (p. xi)

He then notes a striking coincidence: “The earliest surviving texts in the Greek alphabet were written shortly before and concurrently with the monetization of the city-states.” (p. 10)

Both alphabetic literacy and money involve a leap of abstraction.

Written texts are abstract representations of knowledge that are portable, easily transmittable among many people, and good for long-term storage.

Money is an abstract representation of wealth that is portable, easily transmittable among many people, and good for long-term storage.

Money is to the economic realm what texts are to the intellectual realm: empowering tools. Cultures that develop literacy become smarter and more knowledgeable. Cultures that develop money become more productive and wealthier.

So I wonder if there is a deep, common connection in the ancient Greek culture that led to both great innovations’ developing at almost the same time.

[Images: The text is a very early Greek alphabet. Source: The Schoyen Collection. The coin is an Athenian "owl" from around 450 BCE. Source: Money Museum.]

Hayek and Rand on reason — APEE panelists

In addition to the session on Ethics and the Financial Crisis, I am chairing a session on the theme of “Reason in Hayek and Rand” for the Association for Private Enterprise Education conference to be held April 11-13, 2010 in Las Vegas, Nevada.

The rationale for the session: Two giants of twentieth-century thought — but few comparative studies have been done. The following panelists will discuss how Friedrich Hayek’s account of reason compares to Ayn Rand’s.

Reason in Hayek and Rand
Chair: Stephen Hicks, Rockford College

Jennifer Baker, College of Charleston
Title: “Buying and Value”
Abstract: F. A. Hayek and Ayn Rand have very distinct descriptions of consumer behavior. Rand describes consumers purchasing what they do as an acknowledgement of the value of the product. Hayek reprimands economists who make a similar description, as it is a clear “mistake.” What causes one account to differ from another on this matter? What is at stake when it comes to the rationality ascribed to consumer choice? In this paper I lay out the Randian and Hayekian alternatives and assess them against each other.

David Kelley, Atlas Society
Title: “Rand vs. Hayek on Abstraction”
Abstract: Both Ayn Rand and Friedrich Hayek understood that the political institutions of freedom rest on cultural foundations. Both thinkers held that individuals are influenced by the beliefs, values, and practice of their culture. Both believed that civilization has progressed from the tribalism of primitive societies toward the greater individualism of modern liberal society. At a deeper level, however, Rand and Hayek differ profoundly about the nature of culture and cultural change. Rand holds that cultural practices rest on ideas that are the product of reason and open to rational assessment. Hayek offers an evolutionary account in which ideas as well as practices are acquired by imitation and spread by a kind of natural selection.
This difference is in large part the result of more fundamental differences in their respective epistemological views. In this paper, I will discuss one central issue that I believe underlies many of the others. That issue concerns the nature of abstractions—our concepts for general kinds of their and their common attributes, and the abstract principles and rules that we form with our concepts. Rand held that we form abstractions from the observation of particular, concrete things. Hayek held the opposite view that abstractions are primary; some are innate, some acquired from our cultural environment, but neither can be independently supported by observation of concretes. Though Hayek’s view is in some ways more in tune with current theories of cognition, I will argue that it is both false and inconsistent with a fully individualist moral and political theory.

Tibor Machan, Chapman University
Title: “Hayek and Rand on Constructive Rationalism”
Abstract: F. A. Hayek was suspicious of constructive rationalism and this has sometimes been taken to amount to a diminution of human reason in Hayek’s eyes. Ayn Rand, in contrast, has embraced human reason as the primary means for people to grasp reality and to guide themselves as they conduct their lives.
Do Hayek and Rand disagree? Yes, Ayn Rand has been very harshly critical of Hayek, judging by her marginalia of The Road to Serfdom (see Robert Mayhew, ed., Ayn Rand’s Marginalia). But her focus in these comments was Hayek’s allegedly infelicitous writing and thus sloppy thinking, not so much his positions on various issues and even less his ideas concerning human reason. In other contexts Rand has been identified as a critic of rationalism, which could be taken as paralleling Hayek’s objection to constructive rationalism. I plan to explore these matters.

Alexei Marcoux, Loyola University Chicago
Title: “Hayek’s Epistemic Case for Entrepreneurial Capitalism”
Abstract: One case for entrepreneurial capitalism is straightforwardly philosophical. A handful of fundamental principles are announced and argued for. Then it is shown that an entrepreneurial capitalist social order follows from the principles announced and defended. Roughly, this is the approach of libertarian defenders of the market like Murray Rothbard, Robert Nozick, and Ayn Rand. Another case for entrepreneurial capitalism proceeds differently. It is based on an account of the epistemic limitations of human beings and what works to their advantage given those limitations. This is the approach of F. A. Hayek. In a long and prolific career that saw him make significant contributions to economics, psychology, and social and political philosophy, the common thread in Hayek’s thought is the limits of human cognition. Those limits undermine the prospects of socialist calculation and of the technocratic, managerial capitalism taught in university-based business schools and championed by thinkers like Alfred Chandler and J. K. Galbraith. The case based on epistemic limitations is contingent rather than necessary. For that reason (among others), it draws fire from other defenders of entrepreneurial capitalism for being insufficiently definite. Parallels in the thought of Michael Oakeshott will also be discussed.

APEE panel on the ethics of the financial crisis

At this year’s APEE conference, I am chairing a session on “Ethics and the Financial Crisis.” The rationale for the session: Many conferences and debates are focusing on the economics and politics of the crisis, but much less attention is being focused on the core ethics issues involved.

Here are the participants and the titles and abstracts of their talks.

Ethics and the Financial Crisis
Chair: Stephen Hicks, Rockford College

Alexei Marcoux, Loyola University Chicago
Title: “The Financial Crisis and the University-Based Business School”
Abstract: The current financial crisis is foremost a failure of public policy. Federally chartered corporations like Fannie Mae and Freddie Mac, legislation like the Community Reinvestment Act, aggressive and short-sighted enforcement of the latter by the United States Department of Justice, and protection of the former by key legislators worked together to create and burst the housing bubble lying at the heart of the current crisis. However, I argue that these public policy failures were exacerbated by some of the worst tendencies of private sector actors, many of whom are products of university-based business school education. It is popular to lament the moral education business students receive. However, it isn’t (only) the moral education business schools provide that set the stage for a stunning economic collapse. Instead, a widespread failure of prudence is to blame. Although human imprudence informs virtually all financial calamity throughout human history (think, for example, of the Tulip Mania), business schools are usually understood to be academies for inculcating prudent business judgment. To the contrary, I will argue that business schools are informed by and teach a form of rationalism that is, in fact, incompatible with prudent business judgment. This is an ethical failing, but it isn’t what most prominent business school critics have in mind when they say business schools should be reformed.

Shawn Klein, Rockford College
Title: “Home, Sweet Home? The Paternalism of Expanding Homeownership”
Abstract: One of the main sources of the recent financial crisis was the government created institutions, such as Fannie Mae, and legislation, such Community Reinvestment Act. Part of the way these contributed to and brought about the crisis was in twisting incentives in order to expand homeownership. This paper will analyze one of the main justifications for these institutions: paternalism. Paternalism is the view that it is justifiable to interfere in the actions of individuals, against their will, for the well-being of those individuals. Most agree that it is appropriate for political authority to be exercised against those who interfere with the liberty of individuals, as in the case of theft or rape. Paternalism, however, seeks to justify the use of political authority to curtail an individual’s liberty in the absence of a harm being done to anyone else if this will make that individual better off. The two main questions this paper will address: (1) are these homeownership expanding institutions and legislation paternalistic? And (2) if they are paternalistic, and if paternalism itself is not justified, does this undermine the moral authority of these institutions and legislation?

Jeff Scott, Cognilytics
Title: “Kleptosclerosis: Banking Crises and Corruption”
Abstract: The U.S. mortgage market once again features prominently in the latest financial crisis. From Right to Left, blame is directed at the unintended consequences of welfare policies in housing. From Left to Right, blame is directed toward crony capitalists. Both accusations hold a grain of truth but both are fundamentally mistaken since they don’t identify the hierarchy of causation. Public policies geared toward fueling the housing market for the marginal class of borrowers intensified the boom. That in turn, focused the debate on forms of constituency service (CRA) to traditionally Democratic voters. Alternately, politically-connected bankers benefited mightily during both the boom and the bailout, claiming events were beyond their control, and have prompted Milken-esque searches for retrospective criminality and financial chicanery among the most elite institutions.
However, the cause that made all of these other contributing causes possible is the system of banking itself, of consumer deposits made available for lending, which holds a fraction of consumer deposits in reserve against potential future losses. Leveraged deposits are the essential element of the boom, the crack cocaine of the financial industry. The central bank effectively lowers the perceived risk of lending and investment strategies by protecting deposits and by artificially reducing the cost and variability of funding. By maintaining an expectation of plentiful, indiscriminate and unvarying funding, combined with political favoritism, the central banking system induced an investment monoculture. The dominant portfolio strategy consisted of a one-way bet on the continued rise of housing prices. The subsequent rush to the exits was a reminder of how layers of moral hazard can explode. Financial gatekeeper functions eroded at every possible level, from borrowers and their representatives all the way to the chairmen of the world’s largest banks. The reaction to the bust has intensified all of the wrong trends: more indiscriminate liquidity, more policies to drive up house prices, more political control over mortgage contracts, more risk assets held by the central bank, more danger to the currency, more regulatory forbearance for the zombie institutions, more executive discretion over the flow of capital. Instead of wringing the failure out of the system and punishing financial mismanagement and accelerating bankruptcy and reorganization, U.S. policies pursue the opposite and will entrench “Captain Renault” corruption in the banking system. As long as gatekeepers continue to look the other way, in unison, and benefit collectively from willful negligence, the financial markets will be increasingly managed with regard to constituency service. I call this economic condition “kleptosclerosis,” the redirection of financial capital to the corrupt.

Will Thomas, Director of Programs, The Atlas Society
Title: “Greed, Reason, and Risky Business”
Abstract: Is greed is to blame for bad and risky behavior, and for the 2008 credit crisis in particular? A distinction needs to be drawn between rational greed and irrational greed. Greed, in its basic sense is the desire for more self-centered benefit. Plainly, this can be morally right: a hunger for life, for living well, for happiness, and for the means to these ends. What is thought of as morally wrong is short-sightedness, a grasping moral solipsism, or a miser’s quest for riches detached from non-monetary ends. A rational approach is the opposite of short-sightedness, social indifference, or blind obsession. Means and risks must be rationally assessed. It is here that many capitalists failed.

The conference will be held from April 11-13, 2010 at Caesars Palace, Las Vegas, Nevada. (Aside from the stimulating intellectual discussions, wonder if there’s anything else to do there.)

Defending Shylock

A formal publication of my “Defending Shylock: Productive Work in Financial Markets” is forthcoming this spring. For now, here is a draft version [pdf] of the sixteen-page essay.

From the Introduction:

“Ambivalent attitudes about financial markets are as old as financial markets themselves. Plato, in The Republic (555e), condemns moneylenders. Jesus threw the money lenders out of the temple, on the grounds that they were defiling a holy place. Roman emperor Augustus, according to Suetonius’ racy biography, was always especially displeased if he discovered any of his knights engaged in interest rate arbitrage (Suetonius, p. 76). Shakespeare, in Hamlet, has Polonius counsel his son ‘neither a lender nor a borrower be,’ and in The Merchant of Venice presents us with the image of the lender as a cunning Shylock hoping to extract his pound of flesh.
“We are, in the twenty-first century, heir to all these views.
“At same time we are committed to financial markets. … ”

From the Conclusion:

“… Judged by these criteria, financial markets are highly virtuous institutions. Obviously this is not to say that everyone who works in financial markets is a moral hero or that mistakes and abuses never happen. But it is to say that injustices are aberrations in the system and that the system is designed to help us be that best we can be. Financial markets do create value, and they do so by encouraging in us the core of moral excellence. We cannot ask more of any institution.”

Comments or corrections very welcome before the formal publication.