Yesterday at the HES meetings I was part of a panel discussing The Constitution of Liberty that was organized by Bruce Caldwell. The other panelists were Roberta Herzberg and Ted Burczak, as well as Bruce who discussed the context of Hayek's book and the new edition of the book that will appear in The Collected Works.
For my part I emphasized how I thought one can see Hayek's work as part of his project in robust political economy. Pointing to "Individualism: True and False", I stressed Hayek's discussion of how the project of Smith and his contemporaries was to craft a set of rules where bad men can do least harm, and how Hayek saw the fundamental flaws in mankind as exemplified either through our opportunism or our hubristic ambition. Not only can the statesman not direct individuals in their economic life because they lack the local knowledge, Smith pointed out in the Wealth of Nations, but the power required for such a task at command and control can not be trusted to no council or senate, and would nowhere be as dangerous as in a man who fancied himself fit for such a task. The Smithian wisdom was one which warned about opportunism and hubris and the 'man of systems'.
Hume argued that in designing rules of governance, that it would be best to assume that all men are knaves. As I stressed, our knavishness comes in the form of opportunism, and hubris. One of the central intellectual projects in The Constitution of Liberty is the Humean one to use reason to whittle down the claims of Reason. Pointing to passages on pp. 29-31; 68; 154; 184; and 192, I suggested that the work in constitutional political economy can be most fruitfully seen as Buchanan's focus to curb opportunistic ambition in man through rules and institutional mechanisms, and Hayek's focus to curb hubristic ambitions through rules and institutional mechanisms. In both, we see not only the quest for binding rules to limit state power, but also the use of competitive pressures (e.g., federalism) to limit power.
I ended my remarks by stressing how live this research program was in the modern world, and pointed to Hayek's chapter on monetary policy and the quest for rules to bind the monetary authority and the difficulties we face today and how thinking along the lines that I had laid out in terms of opportunism and hubris would produce a different set of policy recommendations than we have in fact followed.
Bottom line: The Constitution of Liberty is a great work in the field of constitutional political economy and as relevant today as it was in 1960 when it was first published.
A college fraternity brother sent this link of the former Ukrainian first lady Katernya Yushchenko discussing her role in the attempt to build democracy, freedom, rule of law and free market economy. She argued that there is no alternative to a free market economy for generating prosperity. She also argues that a variety of forces in Ukraine conspired to resist the free market reforms that were needed. Her last paragraph quotes my Michael Phelps analogy that I used in my Independent Review article on whatever happened to efficient markets.
Robert Carroll of the Tax Foundation has written a new piece entitled "Income Mobility and the Persistence Of Millionaires, 1999 to 2007" that uses a set of household tax returns from those years to look at income mobility with a particular emphasis on the mobility of millionaires. I'll bullet some key findings then add a few comments below.
Of those taxpayer households in the lowest quintile of income in 1999, 57.5% had moved up at least one quintile by 2007 and over 30% jumped two quintiles or more.
Of those taxpayer households in the highest quintile in 1999, 37.7% fell at least one quintile, with 14.4% falling two quintiles or more.
Of those in the top 1% in 1999, only 44.6% were still there in 2007.
Looking at households with earnings (in a very inclusive measure that includes things like capital gains) of $1,000,000 or more in any year over that period, Carroll finds:
"In all, over the 1999 through 2007 period, about 675,000 taxpayers earned over a $1 million for at least one year. Of these taxpayers, about 338,000 (50 percent) were a millionaire in only one year, while just 38,000 (6 percent) remained a millionaire in all nine years. Based on these results, it is clear that taxpayers move in and out of millionaire status with great frequency."
"What we want to find out is whether the fraction of transitory millionaires fell by more than the total number of millionaires once capital gains is excluded. What Figure 2 and 3 tell us is that while the total number of millionaires fell by about 36 percent, the number of one-year millionaires fell much more, by nearly 50 percent to 175,000. This tells us that realizing capital gains income helps explain why many taxpayers move up to millionaire status for just one year."
Carroll's results on overall mobility are right in line with the typical results found in the literature in recent years. (The results found by Cox and Alm and in a prior US Treasury data set, both covering the 1980s, show dramatically more mobility but have also been highly criticized on methodological grounds.) So despite the increase in "static inequality" shown by the increased percentage of income earned by the top earners over the last decade, there appears to be no effect on income mobility.
Carroll uses a nice analogy from Schumpeter that I'd never heard before: the distribution of income is like a hotel with some really fancy rooms on the top floors and some very basic ones on the bottom. All the rooms are always full, but who occupies which rooms changes from year to year.
If one wants to stretch the analogy a bit more, it's also the case that each year brings a new upgrade to every room. What constitutes a "basic" room gets slightly more luxurious each year as standards of living rise, and the same is true on other floors. It might be the case that the upgrades to the top floor rooms are proportionally greater than those to the basic and middle floor rooms, but given that the occupants of the rooms switch around from year to year, those greater improvements at the top are still consistent with improvements in the absolute standard of living for many.
And to take the analogy even further: if we account for immigration and other new entrants to the labor force, it's as if the hotel keeps adding rooms/floors on each year at the lower/basic level, enabling everyone else to potentially keep moving up (assuming that some occupants die or leave the country!).
The bottom line is that income mobility is alive and well and seems pretty consistent regardless of who is president or who controls Congress. The underlying market processes appear to be doing well at enabling a majority of those who start out poor to move up the income ladder within a decade or less. And when one combines Carroll's research with the "Good Old Days are Now" work on the dramatic declines in the real cost of most goods, the increased ability of those in the lower quintile to have them in their homes and the ongoing increase in quality of most goods, it is clear that despite a government that is way too big, the standard of living and the opportunities for poor Americans continue to improve.
As good as these results are, allow me to steal from a favorite source of mine and say "just think what we might do" if those market processes were even freer to work their magic.
Over at the Enterprise blog at AEI, Mark Perry continues his excellent work demonstrating how much better off the average American is today than in the past. This time he uses some old Radio Shack catalogs that have been put online to show how much more the labor time it took to buy a $379.95 crappy stereo system in 1964 would buy today (about $3000 worth of electronics that did not even exist in 1964).
My own previous posts on this topic can be found here, here, and here.
That is Ed Glaeser writing in the NYT last week about Jeff Miron's new book. He finishes that sentence, however, with the statement that he prefers to operate intellectually at the murky edges of libertarian thought. Glaeser raises two muddy (rather than clean water) points --- first since libertarians are rarely anarchists, the need for positive state action is admitted, the difficult question is where actually you can draw the line on what is required to define and enforce private property rights and contracts; second, since libertarians have admitted that positive public action is required, they implicitly entrust the public sector to work effectively on that particular issue.
What do you think of both Miron's presentation of libertarian ideas and Glaeser's discussion of the murky waters at the edge of libertarianism?
At the recent IHS conference there was a student presentation challenging the work that Pete Leeson and I have done on "Robust Political Economy". During my lecture at Comparative Historical research as well as my discussion group on anarchism as a progressive research program, there were questions about case selection and comparative assessment.
Today's Freeman Online column combines two of my passions: my professional work and my outside-of-work obsession/hobby. I try to distill some lessons for intellectuals with a "calling" from the history of three men with a calling from a very different part of the culture.
(Props to any of our geeky commenters who know the source for this post's title.)