In her recent apologia for communism, Helen Andrews says that people in the Soviet bloc grew accustomed to being spied upon, rendering it a mere “annoyance at most for the average person,” albeit “excruciating for independent thinkers.” Even people who find the rest of her article anathema might concede that point, because Americans commonly shrug off government surveillance by claiming that they have done nothing illegal and hence have nothing to hide. 

Americans used to consider spying an invasion of privacy; the Framers tried to balance individual rights to privacy with the public’s security interest in the Fourth Amendment, the one about “probable cause” and “warrants.” So surveillance per se is not the issue, accountability for its (mis)use is. Unconstrained government surveillance injures the innocent at least as much as it protects them from the boogie man du jour. 

After all, no one is truly innocent of the law as everyone in modern America has broken one or another, typically unwittingly. Yes, there are that many laws. My favorite is misprision of felony, a federal law that states that anyone who knows about a felony who doesn’t report it to the authorities can go to prison for three years. Americans cannot practice law without a license, but everyone is supposed to know a felony when they see one. The point is, if the government wants to get someone, it can find something if it has access to enough personal information.

But even if somehow perfectly law-abiding, Americans can still suffer if government officials know too much about them. Government bureaucrats have considerable discretionary permission powers that they can use to thwart the goals of individuals they dislike. In some states, for example, people still need the explicit permission of authorities to lawfully carry firearms outside of their homes. Construction permits, even for trivial repair jobs, remain necessary in many jurisdictions and can be delayed or denied on any number of pretexts. To create a nonprofit, one must jump through hoops that the IRS can, and has, moved at will. A bureaucrat who knows you hunt (or donated to PETA), own an ICE vehicle (or an EV), registered as a Republican (or a Democrat, or, worse still, a third party!), or once spoke at a school board meeting (gasp!) can deny your permit outright or send it into paperwork hell. 

And by aggregating discrete pieces of information, a bureaucrat (or his or her AI assistant) can perceive a pattern indicating that you, Sir or Madam, are a dirty, stinking fill-in-the-blank who deserves to be audited, subjected to higher levels of surveillance, black or gray listed, and so forth. Like Josef K. in Kafka’s The Trial, individuals can be mercilessly destroyed by powerful, unaccountable bureaucrats for no objective reason at all. 

Once cognizant that the government is a political entity rather than a disinterested gatekeeper of civilization, a fact that people in communist countries learned early and often in life and that Americans appear to be slowly relearning, people self-censor out of self-preservation. Few become independent thinkers, and fewer still independent advocates of views that run contrary to the government party line because of the excruciating pain they suffer. Think Socrates, Paine, Garrett (Garet or Michael), Solzhenitsyn, Kennedy (pick one). Scientific and technological advances and economic growth grind to a halt as everyone learns to say what they think government officials want to hear, rather than what the real world tells them is the truth.

Not only does the surveillance state impoverish everyone, it does not even keep them safe, collectively or individually. Lacking independent thinkers and the best technology, their militaries lose ground to those of more open societies until they cannot even dispatch much smaller neighbors. More importantly and ironically, the surveillance state itself becomes the biggest enemy of individuals by forcing compliance with laws and mores that aid only a privileged few.

The asymmetry of the surveillance state belies its true purpose: to protect the government, not the people. If an American were to run an NSA-style surveillance op on any government agency and brush it off by saying that innocent officials have nothing to fear, they would be treated like, well, Julian Assange or Peter Snowden. 

But the government hampers even public records research that threatens to expose government wrongdoing. To research the Securities and Exchange Commission (SEC), for example, Americans have to fill out a FOIA request and wait, and wait, and then appeal, threaten to sue, and on and on. And that is just to obtain the number of a box that one must physically travel to Maryland to read!

Even electronically fulfilled FOIA requests can be redacted, and often are, to the point of being useless. Remember the black gems that came out of COVID related FOIA requests that were 80, 90, even 100 percent redacted? Send a lightly redacted W2 to the IRS or a redacted Form 4473 to the ATF and see what transpires.

Were that not bad enough, the U.S. federal government classifies over 50 million documents annually, thus putting them out of the reach of citizens. Yet government officials, including former President Obama, claim that they value “transparency.” Clearly, U.S. officials know full well the importance of their own privacy but remain unwilling to extend equal privacy protections to the people they purportedly serve.

So don’t be fooled by the “innocent people have nothing to hide” canard. State surveillance hurts everyone in proportion to its extent, which in the Communist bloc and other collectivized societies was quite a lot. Americans therefore should counter, not brush off, attempts to increase state surveillance while decreasing oversight. Utah has led the way over the past decade, including with a new law, unanimously passed in both its legislative houses, that limits warrantless geofencing (cell phone tracking) and mandates detailed reporting on geofence warrants. 

Eternal vigilance may be the price of liberty, but unconstrained surveillance will cost us our liberty as well as our security.

I like and admire James Lindsay’s talk. I write as a friendly critic whose exposure to Lindsay has only been some videos and podcasts. I’ve not delved into his books, but  I hope to.

James Lindsay presents varieties of leftism as expressions of Marxism. He calls Marxism the “genus” and all the varieties “species.” 

Lindsay seems to anchor his narrative in Marxism. His most recent book is The Marxification of Education (2022), and earlier in 2022 he released Race Marxism. 

If Lindsay is relating latter-day varieties of leftism to Marxism, what does he relate Marxism to? It’s fine to say that E flowed from D, but that does prompt the question: What did D flow from?

He says that he borrows the genus-species vocabulary from biology. If you look at the biological taxonomic rank, you see that genus has stuff above it:

Source: Wikipedia Taxonomic Rank page

Lindsay says that Marxism is the genus, and that the later varieties of leftism are the species. That prompts the question: If Marxism is a genus, what is above it?

The theorist here is called to explain why Marxism found the traction it did. There must have been things in the culture or in human nature that led people to take up Marxist verbalisms and ideas when they came along (or sometime later).

Let’s say you identify something above Marxism. Let’s call that higher-order thing X.

Now, why should the rank be?:

X  ⊃  Marxism ⊃  each of the various Marxist species

(The expression A ⊃ B means that B is a subset of A.)

Maybe it should be?:

X  ⊃  each of the various X species (including Marxism)

I could be wrong, but my impression is that the woke, the WEF, Stephen Colbert, Paul Krugman, Justin Trudeau, Janet Yellen, Rachel Maddow, and the rest do not tend to cite Marx. And I don’t think that is just concealment. I doubt whether many of them have read much Marx. They surely heard lectures on Marx in a few college classes and were assigned Marxist readings—among hundreds of other readings and hundreds of other lectures. My impression is that, by and large, they do not sustain any active interest in Marx’s writings. Marx is not someone they are serious about, and I don’t think that Marx and Marxism, in particular, are crucial to their outlook and selfhood. They could forget about Marx and carry on without missing a beat, I think.

Hannah Arendt said that with each generation, we face invasion by barbarians—we call them our children. Our children are born with certain tendencies towards ways of understanding the world and making meaning for themselves from the world. Unless they become civilized, they will become full-grown barbarians. It is only by properly acculturating our children to the modern world that they can avoid the biases and pitfalls of certain bents and mentalities they start off with.

The Hannah Arendt saying reminds us that collectivism may not depend in a serious way on theorizing or philosophizing. All that collectivism needs to thrive is the destruction of cultural traditions, including of philosophy and religion, that check it. If it can destroy civilization’s philosophies and religions, it wins. And we all lose.

Arendt also wrote: “The aim of totalitarian education has never been to instill convictions but to destroy the capacity to form any.”

What was it that a Frenchman writing in the 1830s warned us of? Wasn’t it X?

What was it that another Frenchman (or Genevan) writing between 1750 and 1778, thus beginning decades before Karl Marx’s parents were born, dangled before irresponsible minds? Wasn’t it X?

X goes way back. Presenting Marxism as a point of origin prevents us from seeing what we are really dealing with.

Again, I write as a friendly critic based on limited exposure to Lindsay’s work. Even if Lindsay accepted the points here, the presentation in the video would need mere tweaks. Perhaps Lindsay could make X the genus and introduce the concepts of subgenus or subspecies to sort out Marxism and various leftist strains. Or he could put Marxism on the same level, but first and foremost since sometime around the turn of the 20th century. He could say he’s focusing on patterns, similitudes, since Marx, to show that the leftist strains are alike, and indeed spell evils that are socialistic and hence despotic and inhumane.

The talk is really good, and I hope you watch it in full. I am grateful to Lindsay for his work, which seems to be consistently courageous, learned, and instructive.

But it didn’t begin with Marx. Marx should be seen as but one—historically salient, to be sure—irresponsible human indulging perennial mentalities and bents that deny modern realities.

Harwood Economic Review

Table of Contents

The New Deal Revolution Reconsidered: An Introduction
George H. Nash

The Nightmare Fairyland of the Green New Dealers
Richard M. Ebeling

FDR’s Forgotten Tax on the Poor
Phillip W. Magness

The Twitter Files and FDR’s Blue Eagle
Robert E. Wright

No, We Don’t Need A New Reconstruction Finance Corporation
Peter C. Earle

 

With seventy times more reserves in the banking system and just under twice the loan volume than when the financial crisis hit, traditional banks seem unable or unwilling to meet current credit demands. Borrowers’ increasing reliance on peer-to-peer (P2P) lending provides an indicator of those credit demands unmet by traditional banks. Online P2P lending networks, such as Lending Club, Prosper, and others, help close the credit gap by connecting lenders and borrowers that traditional banks do not. Americans’ growing reliance on P2P loans for business and personal needs is expected to exceed $700 billion by 2030, with the United States topping the total loan volume of global P2P lending activity.

Asymmetric information problems pervade the traditional banking system. Moral hazard problems occur when one party can exploit information asymmetries to the detriment of the other. Traditional banks know more about the loans they make than the depositors whose money they lend, and borrowers know more about their repayment abilities than do the banks they borrow from. Banks have an incentive to make sound loans, but depositors have little ability to assess their soundness. P2P lending mitigates some of these issues through more direct financing arrangements. Individual investors buy “a claim against” specific borrowers, who supply information about themselves, their credit, and their intended loan use. While asymmetric information problems persist in P2P relationships, investors moving at least one degree of separation closer to borrowers and actively engaging in the selection process partly contribute to P2P’s recent growth. 

The desire to promote confidence in traditional banking, given such asymmetric information problems, now means the FDIC insures deposits up to $250,000, although the aftermath of the SVB failure may have effectively removed any limit. Such generosity eases anxiety but exacerbates moral hazard problems when people or institutions take more risks than without such confidence. Other bank bailout and reform programs, such as the 2008 Troubled Asset Relief Program and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, provided similar incentives. P2P lending services reduce such moral hazard issues since they have no lender of last resort, government bail-out, or FDIC insurance programs to fall back on. 

While this feature puts lender-investors at greater risk should borrowers default, it also encourages prudence in investment decisions and, as an incentive to participate in P2P lending markets, offers higher returns than other savings vehicles.Beyond accommodating riskier borrowers and better satisfying some investors’ taste for risk, P2P arrangements often have a speedier approval and transfer process. In some ways, the circumvention of traditional banks in P2P markets embodies the spirit of free banking, in which the growth and stability of the banking system thrive on competition instead of heavy regulation. No institution issues its own currency, nor does it eliminate asymmetric information problems, but P2P lending services do invite greater competition and rely heavily on institutional reputation to bring credit-worthy customers through the website portal.

Historically, notable free banking successes occurred more accurately during “lightly regulated” banking periods. The growing demand for Fintech (financial technical) services points to a desire for more competition—and less regulation—in the banking industry. For many, competitiveness means speed, flexibility, and even lower interest rates for borrowers with good credit scores. Like banks in the free banking period, Fintech P2P lending services enjoy a great deal of flexibility in how they raise capital and are free to pursue profits through any legal, non-fraudulent means. Fintech services differ from traditional banks since they merely facilitate loans—the funds come from individual investors who review the proposals, decide whether and how much to lend, and define the terms of the loan, similar to the successful Scottish free banking era experiences. While flashbacks to wildcat banks sound alarms for some, the examples of successful competition in lightly regulated free banking environments suggest an avenue of mutual benefit for investors, small business owners, and other individuals who find themselves with no other options.

While the increasing prevalence of P2P lending has primarily affected rural banks in non-competitive areas, the projected growth of P2P lending introduces more competition into the wider banking industry. While questions regarding the effect of competition on moral hazard and insolvency risk during the free banking era may come up again, the rise of this alternative to traditional banking sends a very clear message: More American lenders/investors are demanding options beyond traditional banks and are making their preferences clear with their wallets.

Projections vary for what increased P2P lending means for risk in the traditional banking industry. On one hand, banks will face an elevated insolvency risk if they lose their better customers to this new competition and they find themselves forced to take on riskier clients to compensate. At the same time, this growing means of credit substitution may decrease illiquidity risks for traditional banks, as a greater fraction of the bank’s portfolio will be in cash holdings. The behavior of individual banks in response to the rise of P2P lending will cause the weight of these risk factors to fluctuate. However, there remains a real possibility that the rise of Fintech will decrease risk in the wider banking industry by shifting it to investors in Fintech who voluntarily put up the funds for loans by non-traditional borrowers.

In an increasingly connected world, Fintech and P2P lending represent the new frontier of one of the most important functions of traditional banks: making loans. The rise of P2P lending parallels that of P2P payment apps, such as Venmo and PayPal. For individuals and small businesses, this movement represents the desire for convenience and, likely, evading some regulation and tax laws. Just as the IRS is cracking down on Venmo transactions totaling over $600 for small businesses, the likelihood of more regulation for P2P lending services seems imminent.

With a bright future and perhaps no end in sight for P2P lending services, the existing traditional banking sector presents a real challenge to the growth of these Fintech services. As long ago as 2018, lobbyists representing established banking institutions pressured the Financial Conduct Authority and the Lending Standards Board to impose strict regulations on the young P2P lending industry. Seasoned public choice economists recognize this as more than a goodwill bid to protect individual lenders and borrowers from fraud and potential losses—this type of rent seeking and attempt at regulatory capture is not unique to the banking industry. The divergent forces of the traditional banking industry, regulators, infant Fintech services, and individual borrowers and lenders all have stakes in the future of P2P lending. Will the traditional banking industry quell the quickening spirit of free banking, or will the growing demands for P2P lending services win out? Only time—and regulators’ response to the incentives they face—will tell.

Are historians suffering from political bias? If one consults surveys of political affiliations in academia, one finds that history departments are largely (if not entirely) populated by people who report affiliations with the Democratic party. If one consults data about political labelling, one will find large proportions of scholars who self-identify as “left” or “far-left.” If one scours the conservative online punditry, one will find scores of mentions and anecdotes of history professors engaged in political activism or openly stating their political priors. This is used as sufficient condemnation of historians as being political activists.

But these are not strong answers to the question of whether historians allow their political priors to seep into their research. In fact, if their research is politically neutral despite strong political views, it is all the more commendable. Moreover, stating one’s political priors is even more commendable, as it invites transparency and allows students to weigh things mentioned in the classroom.

The question of whether historians allow their political views to colour their evaluations is far harder to answer. Fortunately, I believe that there is a simple way to glance at a possible answer by analysing the professional behaviour of historians.

In a recently accepted article in the Journal of Public Finance and Public Choice, Marcus Shera (graduate student at George Mason University) and I tested whether historians reward Presidents who ran larger budget deficits. To do so, we used the different surveys of “presidential greatness.”

The reason for looking at this variable is that views on fiscal policy tend to correlate quite well with ideological predispositions. If one is further to the left, budget deficits are more tolerable, and may even be desirable. If one is further to the right, budget deficits are damnable (even if there are some desirable exceptions). Thus, when historians “rank” presidents, we are observing their professional behavior and whether they are letting their priors speak strongly. If they act neutrally with regards to research, we should expect no strong association between the deficits observed under a given president and his position in the rankings. However, if there are strong signs of association between a President’s deficit spending and his rank, then we can speak more robustly as to whether historians are letting their political priors bleed into their research.

Using the famed C-SPAN survey of presidential performance and the less well-known survey of the American Political Science Association (APSA), we attempt to hold things constant for wars, economic growth and the personal features of the different Presidents (e.g., intellect, war hero status, length of stay in office). We found that historians do rank Presidents who ran bigger deficits higher than those who ran smaller ones. The effects are large enough to cause significant re-rankings of Presidents against more fiscally conservative Presidents. For example, if we assume that all Presidents had balanced budgets, the fiscal conservative Calvin Coolidge jumps 2 to 3 spots higher in the rankings while Ulysses S. Grant jumps 2 to 4 spots higher. Meanwhile, Presidents who engaged in larger deficit spending such as Frank Delano Roosevelt fell down 4 to 5 spots in the rankings.

Simply put, historians do seem like they lean to the left, and they reward Presidents who acted in conformity with their priors.

This, however, was not always the case. Since surveys of historians regarding presidential performance go back as far as 1948, we can assess whether historians have gradually changed how they reward deficits. In the surveys of 1948 and 1962, historian Arthur Schlesinger found that historians did not penalise or reward Presidents for their deficits. However, by the survey of 1982, they began to reward Presidents for running deficits. By 2000, that effect had grown larger still. From then until the last C-SPAN survey (that of 2021), the effect kept growing.

As such, it appears that there is some truth to the claim that historians are letting their political priors bleed into their research. 

In 2023, our politics and our entertainment have become so blurred that we can hardly distinguish one from the other. As a result, we are inundated by politics everywhere we turn. Late night television, the morning sports recap, Disney movies, even the beer aisle at the local supermarket. But as the volume of politics in our daily lives has increased in the twenty-first century, the quality of that content has drastically declined. And since our public education system does a dreadful job of teaching history and civics, often sacrificing the humanities on the altar of STEM (Science, Technology, Engineering, and Mathematics), Americans’ understanding of their own political system is the chief casualty.

We could point to many culprits in the decline of the popular American political culture, but I blame Kevin Spacey. The actor has plenty of personal problems to face these days, so I don’t mean to heap on. What I mean is that his tremendously successful 2013 Netflix show House of Cards was a real turning point in our culture. It was the first streaming show ever to receive Emmy nominations, ultimately winning 7 of them. 

The show was adapted from a BBC program of the same name, and it was these British roots that set the stage for the absolutely ridiculous plot points that enthralled the emergent binge-watching community for the next several years. In the parliamentary system, there can be early elections, surprising shifts in alliances, and unexpected shifts in leadership. In the American system, however, everything is locked into a regular election cycle and tempered by the two-party system, making outcomes relatively predictable (2016, perhaps, being the exception that proves the rule). Yet, House of Cards painted a picture of the United States where political outcomes could be turned by sheer force of will from a few key power players who could manipulate the entire federal system to their liking, while always getting the better part of luck in entirely improbable scenarios. 

House of Cards made for exciting television, but it made for a horrible civics education. This was a problem in the increasingly bizarre political climate of the late Obama years. By the time we reached the 2016 primaries, many media pundits were wondering whether House of Cards could stay relevant in the tidal wave of Trump-related news. Such critiques, though, revealed the extent to which even national elites were using pop culture as their frame of reference for interpreting uncertain events. 

While I’m blaming folks in Hollywood, I might as well give Aaron Sorkin his due. More than any other popular writer in this generation, he has encouraged Americans to see politics and the federal government as the vehicle for achieving our highest aspirations. The Newsroom and The West Wing (which, though a decade old, found new life in the 2010s thanks to streaming television and the advent of re-watch podcasts) sought not only to shape audience opinions about all sorts of present-day political issues, but it also aimed to educate them about how politics and government worked. The problem was that it often got it wrong, either by oversimplifying details or ignoring counterarguments. 

The end result was audiences of millions with faulty understandings about how things actually work. In no small part, Sorkin’s programs are responsible for the persistence of popular misunderstandings of how the Electoral College works and why it was created, and the purpose of the two-house legislature and why states get equal representation in the Senate.

It wasn’t just our drama shows that became more obsessed with politics despite the general ignorance of the details. Late night television became a political theater, thanks to the popularity among then-college-aged millenials of cable comedy programs The Daily Show and The Colbert Report, which posed as mock-political commentary. This shift reached maturity in 2015 when CBS elected to turn fiction into reality by selecting Stephen Colbert to replace longtime late night host David Letterman, thus giving the comedian a nightly platform to interview American officials and lecture viewers on the “proper” political viewpoints. This, perhaps, set the stage for the ultimate entertainer promotion to real-world political influencer: the election of The Apprentice star Donald Trump to the presidency. 

The equation has worked the other way around, too. The world of political partisanship has increasingly intruded into the world of entertainment. The New York Times’ deeply flawed “1619 Project” was made into a featured documentary aimed at educating a general audience. Conservative news organizations like Fox and the Daily Wire have launched entertainment branches to compete with Hollywood productions, infusing their programming with their preferred political narratives.

Social media, of course, has played a roll in this national miseducation. It became increasingly clear during the 2016 and 2020 election cycles, for example, that the incentives for companies like Facebook and Twitter to maximize user engagement and screen time led to algorithms that promoted the most sensational and polarizing content, not necessarily the most thoughtful or nuanced. Thus, Americans could rapidly invent and disperse their own House of Card-style plots of a Russian Manchurian candidate or stolen federal elections. And then they could rapidly mobilize their virtual communities into real-world action over imagined crises.

This all matters because in a democracy, our only protection against demagoguery of all sorts, is individual education. Popular culture shouldn’t bear the brunt of that task. Parents should educate their children about the American system. Local schools should have a vested interest in preparing their citizens to be informed voters. Political leaders at every level have a moral obligation to speak truthfully about the challenges we face and the realities and necessary constraints of the system within which we must work. But the entertainment world has a responsibility here, too. With massive audiences and considerable influence, these networks and productions are responsible for the misinformation they distribute. 

Perhaps we would all be better off if they focused more entertainment and much less on playing politics.

“The Soviet model has surely demonstrated that a command economy is capable of mobilizing resources for rapid growth and awesome power,” wrote Paul Samuelson in 1985 in his famous text, Economics, then written with William Nordhaus.  (He noted, however, that the human toll in political repression was high.)

Four years later the Berlin Wall fell and the Soviet Union began to break apart, largely due to its internal economic weakness. 

Perhaps faulty information from the CIA led Samuelson to miss what was actually going on in the Soviet Union. But, at the same time, Samuelson and other prominent economists did something equally sad. They failed to figure out what causes economic growth in underdeveloped “Third World” countries. 

Looking through a sampling of editions of Samuelson’s textbook (from 1951 to 1995 editions) you can see what he and leading economists were saying about how countries develop economically.

Samuelson’s first edition was published in 1948. The second, in 1951, did not address developing countries. 

In 1961, however, Samuelson was optimistic. He fancifully created a developing country, “Alertia,” and recommended that she follow some basic, mostly Keynesian, principles. Alertia’s government should improve the tax system, provide “social overhead capital” (infrastructure), make government loans to the private sector, and retire public debt.

Alertia “presents a fascinating spectacle,” he wrote. “No one knows quite where she is going; but to everyone this much is clear: She is on her way.” 

Not What Had Been Wished For

But no, she wasn’t on her way. In the next edition Alertia had disappeared. Economic growth turned out to be more difficult than it seemed.

On the bright side, however, numerous economists were on the job addressing the problem. “The key word in most economic discussions these days is growth,” Samuelson wrote in the 1964 edition. He shared with his readers the evolving growth theories. A few: 

Walter Rostow’s “take-off” theory: Leading industrial sectors lay the foundation for a broader “take-off” of economic growth.

Alexander Gerschenkron’s “backwardness” theory: The availability of already-invented technology should shorten the industrializing process.

“Balanced growth,” the idea that governments should invest in multiple industries at the same time: This was proposed by several economists (not named by Samuelson) but also approved by Simon Kuznets.

Other buzzwords cropped up, too, such as “infant industry” and “export promotion.” To be fair, Samuelson did not agree with all the theories and never wavered from the value of trade. 

But by the twelfth edition, published in 1985 (with Nordhaus), even Samuelson had become discouraged. The book discussed the “vicious cycle of poverty,” suggesting that prosperity might never arrive: 

Low incomes lead to low saving; low saving retards the growth of capital; inadequate capital prevents rapid growth in productivity; low productivity leads to low incomes.

He and Nordhaus conceded that getting the right formula isn’t easy: “[S]aying that successful countries must grow rapidly is like saying that an Olympic athlete must run like the wind.” It doesn’t take you very far. 

So in the end, the experts’ economic theories of growth didn’t pan out. But something else did: economic growth itself! 

Unbeknownst to nearly all of us, the underdeveloped countries were developing. Most of the experts didn’t see it, but it was happening: Innovation in transportation and communication were dramatically cutting the costs of trade, and ballooning trade was lifting people out of poverty. 

The prosperity of the developed world quietly began to seep into the rest of the world, starting in the 1950s. 

A Forgotten Source of Prosperity

One reason for the failure to see this was our seduction by the Industrial Revolution (1750–1820). We tend to think that such a period of magnificent innovation had done it all. By launching prosperity with its textile mills and factory production, it laid the foundation for the rest of the world to do the same. In fact, one of the theories—Alexander Gerschenkron’s “backwardness” theory—said this explicitly. It should have been easier for countries to develop after the Industrial Revolution, because the technology and the organizational methods were already there. 

But, in fact, the Industrial Revolution had missed most of the world. Only about 15 percent of the population —the United States, Europe, Japan, and a few other pockets of success—benefited directly, and that imbalance continued for more than a century.

We know this now because economists Joseph Connors, James Gwartney and Hugo Montesinos looked at the numbers in a 2020 article in the Cato Journal. Here are a few of the many numbers: 

Between 1820 and 1950, the GDP of the group of countries we now describe as developing (but outside sub-Saharan Africa) grew less than half percent a year, or 68 percent by 1950. 

In contrast, between 1960 and 2015, the per capita GDP of those countries increased by 549 percent.

Although sub-Saharan African countries grew more slowly, their economies grew by 65 percent in the short period between 2000 and 2015.

The elevation out of poverty did not come about because of “take-off” or “balanced growth” or any such thing. As Connors, Gwartney, and Montesinos make clear, cost-reducing innovations—from the container ship to the internet—created a transportation-communication revolution that boosted the volume and extent of trade around the world. 

Trade itself increases wealth, but more trade had other effects as well: It led to greater labor specialization, rewarded entrepreneurship and good business management, and pressured governments to adopt better policies. 

And it even led to a “virtuous cycle of economic development.” As wages increased, families had fewer children (the opportunity cost of bringing them up had risen). This meant that a higher proportion of the population was in the prime working ages and had greater interest in developing human capital through education and skills training. These improvements built upon themselves. 

So, while prominent economists were spinning their unsatisfying theories and lamenting the vicious cycle of poverty, the world got better—on its own. 

There is a big push to implement wealth taxes, partly as a way of raising revenue, but mostly as a punitive measure to reduce inequality. In fact, our politicians have been refreshingly candid: The goal is to punish the rich, even if it harms the overall economy. This is pure naked economic puritanism, of the moralistic sort.

But how can that be? Remember, we already tax income. If you want to tax income more, or less, then at least that is something that is an established activity of government, at the state and local levels.

After taxes are taken from your income, you spend some of it. And save the rest. Unsurprisingly, people with very high incomes spend a large amount, but save a large percentage, of their after-tax incomes. These savings are not isolated from the economy, buried in old mayonnaise jars in the garden, or stuffed under mattresses. This wealth, the accumulation of income not taxed or spent on consumption, is invested. Liquidity is the human growth hormone of the capitalist economy, directed toward potentially profitable opportunities to convert abstract purchasing power (money) into actual productive resources (factories, software, bricks and mortar stores, and online platforms).

Now, from that foundation, how should we think about a wealth tax? An income tax takes a part of the flow of income in a given year, so a wealth tax is targeting the stock of savings left over from income that has already been taxed once. It goes like this:

 “You have money left after your income is taxed, and you spend part of the money? Give us some of that.”

 Later: “Wait, you still have money? Give us some.”

 Forever. That’s a wealth tax.

I explained this recently to a friend of mine, a professor. She said, “Sure, it sounds bad when you say it that way!” Well, what other way is there, folks?

The answer is that there is very much another way to think about it. And it involves Tuh, the dog.

Tuh

The usual argument for a wealth tax is that wealth is created in partnership with society, and that the government, particularly the police, the courts, and the military, all make the protection and enjoyment of that wealth possible. Ipso facto, however much the wealthy have already paid in taxes, they owe more, because they still have wealth left. It is, according to my friends on the left, the “social contract,” which everyone—including the wealthy—agree to by living in society and creating things that society values.

I suggest we pursue that line of reasoning, as if a contract were in fact what’s going on. Imagine that I am building a new house, and I would like this house to contain a well-functioning toilet. I contact a plumber, and the plumber and I agree on a specific toilet, installed in a particular way, at a price we both agree. As I have argued before, every voluntary agreement on price requires (literally, requires) a disagreement about value. If I pay the plumber $1,500 for the parts, equipment, and labor to have the toilet installed, I must value it more than that, say $10,000 (a house without a toilet is not good). And the plumber is highly skilled, and can obtain the parts and equipment for $300, which means he makes a profit of $1,200 for the six hours of labor required, or $200 per hour, which is decent pay.

Of course, I’m benefitting $8,500 (I value the toilet at $10,000, but only have to pay $1,500), but that’s the nice thing about markets. The plumber would have liked to charge more, but there is a competitive market for expert plumbing services, and if he had charged more I would have contracted with someone else. The plumber does the work, the toilet works and looks good, and I pay him the $1,500.

The next day, the plumber knocks on my door. He says, “Look, I was thinking. Your house is worth much more with a toilet than without, and so I created a lot of value for you by doing my job. After thinking about it, I decided that you should pay me more, since the toilet is so useful.”

I point out that in a competitive market place the price of a service is generally based on how much it costs to produce, not how valuable the service is. This point was made famous in the way that people solved Adam Smith’s famous “diamond and water paradox,” which noted that water, while extremely valuable, could be obtained for a remarkably low price.

The plumber was unconvinced, of course. But we had a contract, which I showed him, and he reluctantly went on his way.

My house is now nearing completion, and I realize that having security protection will, like the toilet, make the house much more valuable. Being able to live in the house without fear of being attacked or robbed is something I am perfectly willing to pay for. How much should this service cost? If it were private security, it would be pretty expensive. But security services are a public good, meaning that providing security for the entire neighborhood is relatively cheap on a per-household basis.  I contract with the local security firm, “Tuh’s Security, Inc.” (Motto: “Our bite is worse than our bark!”)

Turns out Tuh is a big, strong, not-very-bright dog. But Tuh doesn’t need to be too bright, just bright enough to bite anyone who breaks the law, takes property, or threatens violence. I pay the first monthly installment for security services, and everything is going great. But then one day I come home, and there is Tuh, sitting on my coach, drinking my best Scotch, watching Fußball-Bundesliga on my big screen TV. This is especially disturbing since I don’t subscribe to Fußball-Bundesliga (it’s an expensive, separate cable package).

I yell, “Tuh!  Bad dog!  BAD! Get off my couch! And how dare you add channels to my cable package? I don’t want that!”

Tuh doesn’t move, but he looks at me. Then I notice that he is cleaning my Kalashnikov AK-47, after he pried open my gun cabinet. Things get quiet.

Tuh says, “Look, I was thinking. Your house is worth much more with security than without, and so I created a lot of value for you by doing my job. After thinking about it, I decided that you should pay me more, since protecting your wealth is so useful.”

I try to be patient (Tuh is not very bright), and explain that, just like the plumber, the fact that the contracted service provides me with a lot of value doesn’t mean that I owe more for security than it costs to provide. And since security is actually a public good, it’s actually cheaper than private goods such as toilets. So, no, I am not going to pay Tuh more, either, even though he’s right that I value his service more than I paid for it. As Don Draper said, “That’s what the money is for!”

And again I tell him to get off the couch. By this time, Tuh has reassembled the AK-47 (they are pretty simple, mechanically), and I notice that puts a loaded magazine into the gun, and chambers a round, “ka-chunk.”

I ask, “Tuh, what you are doing?”

Tuh says, in a quiet but firm voice, “Like I said, I’ve been thinking. The social contract is different from private contracts. I have the gun, and I make the law. The law says that you have to pay more, and you have to keep paying as long as you have any wealth left. I’m not providing protection, I’m deciding how much wealth is beneficial for the society to allow you to keep.”

Now I’m mad. I didn’t consent to this, so it’s not a contract. “Tuh! Stay! No, Tuh, Stay! Stay, Tuh! STAY, TUH!  STA…T!  STATE!”

Dang. Tuh has become the state.

Wealth Taxes

That’s a silly story, of course. (And I should note that it is derived from Anthony de Jasay’s remarkable essay, “Your Dog Owns Your House,” though Tony hated my more theatrical version). The point is that it is common to argue that the job of government is to protect wealth, and that wealth owners should have to pay for that service. Why would they get it for free?

So far, so good. But then the argument for wealth taxes goes off the rails. Security protection is a public good, so it’s not a “per person” sort of service. More importantly, there are economies of scale, so security protection is not a “per dollar” service, either.

But wealth taxes are premised on the idea that since security services make wealth more valuable, the wealthy have to pay a share of the value “created” by the state. But that’s ridiculous, because the value was created by the investor, entrepreneur, or performer who earned a huge income and paid taxes on it. The “social contract” goes no further than requiring that the state protect and secure the value that the private individual created.

When the plumber came back and said that the house is more valuable with a toilet, he was surely correct. But the plumber has no right to recontract after the fact and demand more of that value. Neither does Tuh, the provider of security. The difference is that Tuh has guns, because the provision of “security services” necessarily creates an organization with a comparative advantage in using violence.

But that’s just a repackaging of the argument by Thrasymachus, that “justice is nothing other than the interest of the stronger.”  The state is not entitled to take wealth just because it can. And we should all remember that wealth is created by private, voluntary action, not by some big dumb dog named Tuh.

As the GOP’s presidential hopefuls formulate their national economic agendas, one question looms large: What are they going to do about the Federal Reserve? 

America’s central bank has gone off the rails. Its monetary mischief in the wake of COVID-19 caused the largest inflationary surge in 40 years. Its regulators have systematically failed to keep the banking system stable, as exhibited by recent bank failures. And its agenda-setters have waded into policy areas totally irrelevant to its mandate, such as racial justice and climate change. Any serious Republican candidate must have a strategy for reining in the Fed.

Three contenders have weighed in on the Fed in a significant way: financier Vivek Ramaswamy, Senator Tim Scott, and Governor Ron DeSantis. Each of them has articulated, in word or deed, the beginnings of a Fed reform program. But none of them have devised a comprehensive plan to bring the rule of law to monetary policy. Voters need much more detail.

Ramaswamy came out swinging with a Wall Street Journal oped proposing considerable changes to Fed operating procedures. He wants the Fed to focus on stabilizing the dollar’s purchasing power by targeting a basket of commodities. There are several ways to do this, each with its costs and benefits. 

While Ramaswamy deserves credit for his ambition, there’s much in his opening salvo that’s unsatisfactory. Particularly worrying is his disavowal of economic stabilization policy by the Fed. In fact,smoothing out undesirable macroeconomic fluctuation is pretty much the only thing the Fed can do. That Ramaswamy doesn’t seem to understand the link between dollar stabilization and recession fighting is concerning.

Scott’s positions on the Fed must be inferred from his actions in the Senate. Promisingly, he has called out Fed Chairman Jerome Powell for presiding over skyrocketing inflation and demanded firings over the Fed’s failures to prevent Silicon Valley Bank’s collapse. These are valid positions, but they are tailored to specific issues. A skeptic could accuse Scott of Monday morning quarterbacking. It doesn’t take any great degree of political prescience or courage to condemn obvious blunders. To distinguish himself from the increasingly crowded Republican field, Scott needs to use his Senate record as a springboard for broader central bank reform plans.

Last but not least is DeSantis. The Governor has called out Fed mischief before, making the usual inflation-hawk points. In his Twitter Spaces announcement, he went a step further, explicitly condemning Fed experiments with a central bank digital currency (CBDC). This is an important issue. If the Fed ropes the economy into a government-monitored and enforced payments system, it would gain unprecedented power over families’ and businesses’ finances. DeSantis promised to quash the Fed’s nascent CBDC activities if elected. (To be fair, Ramaswamy has been good on this issue, too.)

Things get more complicated when we consider DeSantis’s views on how monetary and fiscal policy affect each other. In a Fox News interview, he said government spending rather than funny money is the cause of dollar depreciation. “Of course, the overspending is driving inflation,” he claimed. Usually, increased government spending changes the composition of total spending, but rarely affects the volume of total spending. To get economy-wide spending (and hence inflation) to rise, you need expansionary monetary policy. 

Uncle Sam’s profligacy since 2020 certainly pressured the Fed to go easier than otherwise, out of a misguided desire to prop up the market for government debt. Central bankers sometimes react to heavy political spending by trying to generate seigniorage—essentially raising revenue via the printing press. DeSantis’s remarks might make sense as part of a political economy story, but only if we remember the Fed—not the fiscal authority—is the main culprit.

It’s still a year and a half until the 2024 election. We’ve got a long campaign season ahead of us, during which positions will undoubtedly shift and solidify. Yet, when it comes to the Fed, GOP hopefuls can’t afford to wait. The central bank is, unfortunately, the single most important economic institution in the country. Its operatives will fiercely resist any effort to rein it in. Republicans have to form a game plan, engage policy consultants, and decide on a public message as soon as possible. 

Tax cuts and deregulation are all well and good. But without Fed reforms, monetary technocrats could stifle an American economic revival any time they want. There’s no time to lose. Aspiring Republicans must get serious about fixing the Fed.

From the late-1980s until the early 2000s, the Cypherpunks – a group of cryptographers, mathematicians, computer scientists and activists – worked to build what they referred to as a crypto-anarchist “Galt’s Gulch in cyberspace.” This virtual place would be one where individuals from around the world could communicate and engage in commerce, with property rights protected, with contracts enforced, and with its own native digital currency. These Cypherpunks are widely credited to having significant involvement in the development of (or influence on) projects such as Tor, anonymous remailers, PGP for email encryption, OTR for chat encryption, BitTorrent, Wikileaks, the Silk Road market, and, of course, Bitcoin, both during the group’s formal existence and thereafter.

As Bitcoin’s very existence derives from the set of ideas to which these Cypherpunks adhered, it is worth exploring its anarchic roots. 

According to Timothy C. May, one of the Cypherpunk founders and more influential members, crypto-anarchy was a concept deriving inspiration from the work of economist David D. Friedman, science fiction writer Vernor Vinge, and philosopher Ayn Rand. 

Friedman’s book The Machinery of Freedom, first published in 1973 and now in its third edition, makes the case for anarcho-capitalism, exploring how various societies throughout history, to varying degrees, protected property, resolved disputes, enforced contracts, and provided defense without the state. 

From Vinge’s work, May references the novella True Names. And, as it turns out, Friedman had an impact on Vinge’s thinking too. In an interview, Vinge cites Friedman’s The Machinery of Freedom as one of his own inspirations, stating that Friedman’s book instigated a profound “internal intellectual revolution.” 

Friedman’s inspirations for anarchy

Where did David Friedman’s own anarchy come from? His influential parents Milton and Rose Friedman were certainly no anarchists. 

In an email to me, he confirms that Robert Heinlein’s fictional novel The Moon is a Harsh Mistress was a primary influence. In an interview about the book Friedman states that it: 

…provided a fictional picture of a society in which law and law enforcement are endogenous… done within the system… As far as I could tell, it was an internally consistent picture… That is as far as I could tell [from] reading it, there is no particular reason why that shouldn’t have worked under those circumstances… Once I was convinced that it was possible to have a society in which law and law enforcement were internal to the market system rather than imposed from the outside, that got me interested into the question of how one could do the equivalent in something more like the world I actually lived in. 

Friedman is quick to point out that if he had more knowledge of history and anthropology at the time he may not have needed Heinlein’s fiction to arrive at these conclusions, as he later discovered there was no shortage of real world examples. 

F.A. Hayek was another influence. In a recorded conversation, Friedman highlights Hayek’s “distinction between an organization and a self-generated order.” He (Friedman) was intrigued by the idea that “a market economy does not have a purpose” in the way that clubs or corporations do. This is to say that many individuals, with their own different ends, could still coordinate their plans. In Friedman’s words, “a set of people that have different purposes nonetheless interact and coordinate their activities.” 

Notably, Friedman dedicated The Machinery of Freedom to both Heinlein and Hayek (among others). 

Friedman’s influence on May

Timothy May advocated for a crypto-anarchist society as far back as 1988 in his “Crypto Anarchist Manifesto” and later repeatedly mentioned Friedman and The Machinery of Freedom in the Cypherpunk mailing list as well as in other writings.

But beyond anarchy generally, May would have also had the opportunity to come across Friedman’s writings on money. The second edition of Friedman’s book The Machinery of Freedom, published in 1989 around the time that the Cypherpunks were just getting started, contains a chapter entitled “The Market for Money.” This chapter (which also cites economist Lawrence H. White’s work on private monies) argues that “instead of arguing about whether our government should return to the gold standard we should instead be thinking about whether the government should produce money at all,” and that private monies might be devised that would “not rely on the wisdom or benevolence of the people appointed to manage the money supply.” Here we see Hayek’s idea of competition in money integrated into Friedman’s broader anarchist ideas, which were quickly embraced by the Cypherpunks. 

May’s passion for crypto-anarchy was shared by Cypherpunk and computer engineer Wei Dai, whose 1998 essay ‘b-money’ described how a cryptocurrency might work (and, by the way, was listed in the references of Satoshi Nakamoto’s Bitcoin whitepaper). Dai wrote in his essay that “I am fascinated by Tim May’s crypto-anarchy.”

Note: Although May had come across Murray Rothbard’s ideas (yet another pioneer in anarcho-capitalist thought), I have found no mention of Rothbard in any of May’s Cypherpunk-era writings. So May’s writings on anarcho-capitalism, taking on a new face as ‘crypto-anarchy,’ make it clear that Friedman was the primary influence.

Timothy C. May’s (later) influence on Friedman

May noticed that Friedman was becoming interested in the mating of ideas between cryptography and anarchy. He wrote in the Cypherpunk mailing list how Friedman “became a convert” to crypto-anarchy and had given a talk on the matter in Los Angeles.

Friedman stated in a presentation to the Independent Institute in 2001 that “the basic history of these ideas is that I stole them from from a bunch of people called ‘Cypherpunks,’ of whom the leading light is Tim May, who stole some of them from me… and then I stole the ideas back from him.” Friedman even dedicated his book Future Imperfect to May (among others), and in fact, the book covers Friedman’s own contributions to many of the same technological ideas that Cypherpunks dealt with. 

Conclusion

Timothy May envisioned – and some key Cypherpunks worked to create – a (sometimes) hidden digital society (inspired by the fictional works of Ayn Rand and Vernor Vinge) that would essentially exist in a state of anarchy (inspired by David Friedman). In the context of cyberspace, this meant that individuals from around the world with very different ends could coordinate their plans, thanks to interconnectivity of computers around the world, open source software, and technological breakthroughs in cryptography.

Bitcoin itself is a currency that might best be considered existing in a state of anarchy. It was indeed designed, but its decentralized governance operates in such a way that no single party (neither the miners, nor the full node operators, nor the programmers, nor the users, nor the exchanges, nor the wallet providers, nor the payment processors) controls it. Thus, it has governance, objective rules by which each party must follow, but as a protocol, it is entirely stateless. 

Friedman’s reading of Heinlein’s science fiction allowed him to imagine a society “in which law and law enforcement were internal to the market system rather than imposed from the outside,” and when he began to dig, he found many real world examples of this in practice. 

Beyond fiction, he also took the idea of a “self-generated order” to its logical conclusions: to anarchy, further than Hayek was comfortable with taking it himself. His creative way of thinking about how individuals with very different ends could coordinate their plans was instrumental in the thinking of the Cypherpunks, whose ideas and work eventually led to what we now call Bitcoin.