Isegoria

In 1967 Jared Diamond spent a sabbatical in Chile, at a time when everything there seemed peaceful, as he explains in Upheaval:

My Chilean hosts emphasized to me that Chile was very different from other Latin American countries. Chile had a long history of democratic government, they explained, punctuated by only a few relatively bloodless military coups. Chile didn’t have frequent military governments, as did Peru and Argentina and other South and Central American countries. It rated as the most politically stable country in all of Latin America.

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“We Chileans know how to govern ourselves.”

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In the course of a military coup on September 11, Chile’s democratically elected president committed suicide in the presidential palace. Not only did the Chilean junta kill Chileans in large numbers, torture them in larger numbers, devise vile new techniques of psychological and physical torture, and drive still more Chileans into exile.

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It also directed terrorist political killings outside Chile, including what was, until the World Trade Towers attack of September 11 of 2001 (coincidentally on the anniversary of Chile’s coup), the only terrorist political killing of an American citizen on American soil (in Washington, DC, in 1976).

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When you look at a map you’ll be struck by the fact that Chile is the longest and thinnest country in the world.

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Geographically, Chile is isolated from other countries by the high chain of the Andes in the east separating it from Argentina, and by the world’s most barren desert in the north separating it from Bolivia and Peru.

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Those advantages are the higher average agricultural productivity and the lower average disease burden of temperate-zone areas compared to the tropics.

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As for Chile’s history and people, before European arrival the area that is now Chile supported only a sparse Native American population, lacking the cultural and political achievements of the rich, populous, powerful Inca Empire to the north in what is now Bolivia, Peru, and Ecuador.

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Already in his student days he became a declared Marxist, and a founder of Chile’s Socialist Party, which was more extreme left-wing than Chile’s Communist Party. But Allende rated as moderate by Chilean socialist standards, because his aim was to bring Marxist government to Chile by democratic means, not by armed revolution.

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In the 1970 elections Allende received the largest share of the popular vote (36%), but only barely, because the much larger percentage (64%) of the electorate opposed to him was split between a right-wing coalition (35%, only 1.4% lower than Allende’s share!) and a center coalition (28%). Since Allende had obtained only a plurality rather than a majority of votes, his election required confirmation by Congress, which did confirm him in return for a series of constitutional amendments guaranteeing freedom of the press and other freedoms.

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Under President Frei, Chile had already expropriated (and paid for) a 51% interest in the companies; the U.S. feared (correctly, as it turned out) that Allende might expropriate the remaining 49% without paying.

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Even though he knew that his candidacy had been supported by only 36% of Chilean voters and had been opposed by the Chilean armed forces and the U.S. government, he rejected moderation, caution, and compromise, and instead pursued policies guaranteed to be anathema to those opposing forces. His first measure, with the unanimous support of Chile’s Congress, was to nationalize the U.S.-owned copper companies without paying compensation; that’s a recipe for making powerful international enemies.

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He nationalized other big international businesses. He horrified the Chilean armed forces by bringing large numbers of Cubans into Chile, by carrying a personal machine gun given to him by Fidel Castro, and by inviting Castro to Chile for a visit that stretched out to five weeks. He froze prices (even of small consumer items like shoe-laces), replaced free-market elements of Chile’s economy with socialist-style state planning, granted big wage increases, greatly increased government spending, and printed paper money to cover the resulting government deficits. He extended President Frei’s agrarian reform by expropriating large estates and turning them over to peasant cooperatives. While that agrarian reform and others of Allende’s goals were well-intentioned, they were carried out incompetently. For instance, one Chilean friend of mine, at that time still a 19-year-old not-yet-graduated student economist, was given major responsibility for setting Chilean prices of consumer goods.

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The outcome of all those developments was the 1973 coup that many of my Chilean friends characterize as inevitable, even though the form that the coup took was not inevitable.

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“Allende fell because his economic policies depended on populist measures that had failed again and again in other countries. They produced short-term benefits, at the cost of mortgaging Chile’s future and creating runaway inflation.”

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I keep asking myself: why on earth did Allende, an experienced politician and a moderate, pursue extremist policies that he knew were unacceptable to most Chileans, as well as to Chile’s armed forces?

T. Greer describes the central problems with China’s Belt and Road initiative:

There is also a gap between how BRI projects are supposed to be chosen and how they actually have been selected. Xi and other party leaders have characterized BRI investment in Eurasia as following along defined “economic corridors” that would directly connect China to markets and peoples in other parts of the continent. By these means the party hopes to channel capital into areas where it will have the largest long-term benefit and will make cumulative infrastructure improvements possible.

This has not happened: one analysis of 173 BRI projects concluded that with the exception of the China-Pakistan Economic Corridor (CPEC) “there appears to be no significant relationship between corridor participation and project activity… [suggesting that] interest groups within and outside China are skewing President Xi’s signature foreign policy vision.”

This skew is an inevitable result of China’s internal political system. BRI projects are not centrally directed. Instead, lower state bodies like provincial and regional governments have been tasked with developing their own BRI projects. The officials in charge of these projects have no incentive to approve financially sound investments: by the time any given project materializes, they will have been transferred elsewhere. BRI projects are shaped first and foremost by the political incentives their planners face in China: There is no better way to signal one’s loyalty to Xi than by laboring for his favored foreign-policy initiative. From this perspective, the most important criteria for a project is how easily the BRI label can be slapped on to it…..

The problems China has had with the BRI stem from contradictions inherent in the ends party leaders envision for the initiative and the means they have supplied to reach them. BRI projects are chosen through a decentralized project-management system and then funded through concessional loans offered primarily by PRC policy banks. This is a recipe for cost escalation and corruption. In countries like Cambodia, a one-party state ruled by autocrats, this state of affairs is viable, for there is little chance that leaders will be held accountable for lining their pockets (or, more rarely, the coffers of their local communities) at the entire nation’s expense. But most BRI countries are not Cambodia. In democracies this way of doing things is simply not sustainable, and in most BRI countries it is only so long before an angry opposition eager to pin their opponents with malfeasance comes to power, armed with the evidence of misplaced or exploitative projects.

He goes on to cite Andrew Batson’s explanation:

Local governments discovered they could borrow basically without limit to fund infrastructure projects, and despite many predictions of doom, those debts have not yet collapsed. The lesson China has learned is that debt is free and that Western criticisms of excessive infrastructure investment are nonsense, so there is never any downside to borrowing to build more infrastructure. China’s infrastructure-building complex, facing diminishing returns domestically, is now applying that lesson to the whole world.

In Belt and Road projects, foreign countries simply take the place of Chinese local governments in this model (those who detect a neo-imperial vibe around the Belt and Road are, in this sense, onto something). Even the players are the same. In the 1990s, China Development Bank helped invent the local-government financing vehicle structure that underpinned the massive domestic infrastructure boom. Now, China Development Bank is one of the biggest lenders for overseas construction projects.

Those who defend the Belt and Road against the charge of debt-trap diplomacy are technically correct. But those same defenders also tend to portray the lack of competitive tenders and over-reliance on Chinese construction companies in Belt and Road projects as “problems” that detract from the initiative’s promise. They miss the central role of the SOE infrastructure-complex interest group in driving the Belt and Road. Structures that funnel projects funded by state banks to Chinese SOEs aren’t “problems” from China’s perspective – they are the whole point.

Economists love property taxes, but no one else does:

When the value of land rises, it’s generally not because of something the landowner has done. The resulting rents and other monetary gains, Adam Smith wrote in 1776, “are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own.”

This made the landowner, Smith continued in The Wealth of Nations, an excellent target for taxation.

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Income taxes and Social Security contributions are withheld from paychecks before the recipients get their hands on the money. Sales taxes (and value-added taxes outside the U.S.) are remitted by merchants and other business. It’s only with property taxes that a regular person gets a bill and has to pay it.

There’s clearly something to that, although for many homeowners property taxes are bundled into mortgage payments and thus a bit less obviously visible. Still, I can think of at least two other reasons for property taxes’ unpopularity that are actually side effects of what economists like about them. To wit:

1. Property tax bills can rise without property owners doing anything, and
2. Rising tax bills can push property owners (homeowners in particular) to make economic decisions they might prefer to avoid.

People can adjust their spending, and often their income. But they can’t help it if, say, house prices go up 80 percent in just three years — as they did in California from 1975 to 1978. Well, actually, they could help it, by going to the polls in June 1978 and approving Proposition 13, a set of restrictions on property tax rates and assessments that have shaped the state’s economy and government ever since.

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Also, taxing property is in general more problematic politically than it was back when Henry George’s ideas were in vogue in the late 1800s and early 1900s — because homeowners have gone from a minority of the U.S. population to a majority with an especially high propensity to vote.

Tyler Cowen considers some arguments for a gold standard:

Historical data indicates that industrial production volatility was not higher before 1914, when the U.S. was on the gold standard, compared to after 1947, when it mostly wasn’t. And there are similar results for the volatility of unemployment. That’s not quite an argument for the gold standard, but it should cause opponents of the gold standard to think twice. Whatever the imperfections of a gold standard might be, monetary authorities make a lot of mistakes, too.

Furthermore, in the broader historical context, including the more distant past, the gold standard doesn’t look so bad. The age of the gold standard (and sometimes silver standard, and sometimes bimetallism) in the 19th century was largely one of peace and economic growth, running from 1815 until World War I. The fiat money era that followed was a disaster, as the 1920s brought monetary chaos, competitive devaluations, and even some hyperinflations and deflations, a few of which were driven by the desire to restore the old gold par at incorrect rates. It would have been better had the world managed to keep its gold-centered monetary order of 1913.

Even the Bretton Woods arrangement, which has a good record in terms of stability and growth, involved gold convertibility of a sort, albeit with no domestic convertibility and lots of pressures to discourage actual conversion from foreigners. Once the tie of the dollar to gold broke entirely in the early 1970s, inflation and interest rates were high and again monetary chaos followed. From the vantage point of, say, 1979, some form of gold standard really did seem better.

What was not obvious then was that monetary policy was going to be so good and so stable for the next four decades, albeit with a number of mistakes. Today’s case for the gold standard is based on the view that these recent decades of good fiat money management are a historical outlier and cannot be sustained. I don’t share that opinion, but neither do I think it is crazy or a sign of extreme ignorance.

So why don’t I favor a gold standard? First, governments have a long history of interfering with gold standards, for better or worse. So it doesn’t really remove politics from monetary policy. Second, central banks should respond with extreme countercyclical pressure when a financial crisis hits, such as in 2008. That is harder to do with a gold standard, and usually it requires the suspension of gold convertibility. Third, the price of gold is now greatly influenced by demand from China and India, and it seems unwise for that to partially drive what is in essence U.S. monetary policy. Most generally, I still think central bank governance can do a better job than a gold-based system that sometimes creates excess deflationary pressures.

Nonetheless, the contemporary world is always testing my belief in central banking.

We often think of “law” and “legislation” as synonyms, Mike Munger notes, but Hayek argued otherwise:

Habits that are shared might be called “customs,” informal rules that might be written down nowhere. These are agreements, in the sense that we all agree that is the way we do things, even though we never actually sat down and signed anything.

A while back I wrote about the Pittsburgh left turn as an example of such a custom. It is important that the habit of waiting for someone to turn left in front of you be “agreed” on, in the sense that the expectation is widely shared — and met — because otherwise it wouldn’t be effective in making traffic move faster. These customs can come to govern behavior, however, precisely because they shape expectations, and violating expectations may be expensive or dangerous.

Those customs, if they consistently lead to useful outcomes, are “laws.” They are discoverable by experience and emerge in the form of traditions. But it is useful to write them down so that they can be enforced more effectively and can be easily learned by new generations. Laws that are written down are rules, commands, and prohibitions we call “legislation.”

The problem is that legislation need not arise from law at all.

Hayek was rightly concerned about the conceit that experts know what is best for everyone else:

I often illustrate this with what I call the Hayek Sidewalk Plan. Imagine that a new university has been built, and you are on the committee charged with laying out the sidewalks. What would you do?

You might walk around, look at aerial maps of the campus, and draw lines to try to guess where people will want to walk. Or you might want to have a purely aesthetic conception of the problem, and put the sidewalks in places or in patterns that are pleasing to the eye as you look out the windows of the administration building.

But all of that is legislation. No individual, or small committee of individuals, could possibly have enough information or foresight to be able to know in advance where people are going to want to walk. After all, universities are peopled by broadly diverse groups, with heterogeneous plans and purposes. People are often willing to walk on the sidewalks, if that serves their purpose at that point. But you probably don’t want to build a sidewalk from every doorway to every other doorway on the campus.

What would a law look like, in this setting? No one person, after all, has any effect walking on the grass, and all the different plans and purposes, taken one at a time, contain no information that you can use. But there is a physical manifestation of the aggregation of all these plans and purposes working themselves out over time. I don’t intend to make a path, and neither do you. But if enough of us, over time, find it useful to walk in the same place to accomplish our own idiosyncratic purposes, a visible record of the shared pattern emerges: a muddy path.

So, the law for the Hayek Sidewalk Plan committee will be discoverable if we adjourn for six months or so and then have a drone take some overhead photographs. It is clear now where people, acting as individuals but observable together in the shared result called a muddy path, want the sidewalks to be placed. And the task of the committee is simply to “legislate” by paving the muddy paths.

If we think of the process of discovering law as “looking for the muddy paths,” and legislation as “paving the muddy paths,” we have a simple but quite powerful way of thinking about the rule of law.

As you travel the world, some of the local rules you can look up or read about, but often the rules are just assumed because “everyone” knows them:

I described an experience of mine in Erlangen, Germany, in an earlier column, where I didn’t know about the practice of collecting a deposit on shopping carts. No one told me about this, and I thought I recognized the context of “grocery store” as familiar, one where I knew the rules. But I didn’t.

I had another experience in Germany, one that made me think of the importance of what Hayek called “the particular circumstances of time and place.” Erlangen, where I taught at Friedrich Alexander University, is a city of bicycles. There are roads, but most are narrow and there are so many bikes that it can be frustrating to drive.

The bike riders, as is true in many American cities, paid little attention to the traffic lights. Often, there were so many bikes that it was not possible to cross the street without getting in the way. But I noticed that people did cross, just walking right out into the street.

I tried this, several times, in my first time in Erlangen. But being from the southern United States, I’m polite and deferential. So, I would start across the street, but then look up the street, and if a bike was close and coming fast I’d stop.

And get hit by a large, sturdy German on a large, sturdy German bicycle. And then I got yelled at, in German. What had I done wrong? Eventually, I figured it out: there had evolved a convention for crossing the street and for riding bicycles. The pedestrian simply walked at a constant speed, without even looking. The bicyclist would ride directly at the pedestrian, actually aiming at the spot where the pedestrian was at that point in time. Since the pedestrian kept moving in a predictable fashion, the cyclist would pass directly and safely behind the pedestrian.

If some idiot from the southern United States, in an effort to impose his own views of “polite” behavior on people whose evolved rules were different, tried to be polite and stop, the system broke down. Though that idiot (me) was stopping to avoid being hit, I was actually being rude by violating the rules. These rules were not written down and could not easily be changed.

In fact, a number of my German colleagues even denied that it was a rule, at first. But then they would say, “Well, right, you can’t stop. That would be dumb. So, okay, I guess it is a rule, after all.”

More precisely, this rule — like many other important rules you encounter in “foreign” settings — is really a convention. A convention, according to Lewis (1969), is a persistent (though not necessarily permanent) regularity in the resolution of recurring coordination problems, in situations characterized by recurrent interactions where outcomes are (inter)dependent.

Conventions, then, exist when people all agree on a rule of behavior, even if no one ever said the rule out loud or wrote it down. No one actor can choose an outcome, and no actor can challenge the regularity by unilaterally deviating from the conventional behavior. But deviation can result in substantial harm, as when someone tries to drive on the left in a country where “we” drive on the right, or social sanction, as when there is intentional punishment on behalf of other actors if deviation is observed and publicized.

According to David Hume, convention is

a general sense of common interest; which sense all the members of the society express to one another, and which induces them to regulate their conduct by certain rules. I observe that it will be to my interest [e.g.] to leave another in the possession of his goods, provided he will act in the same manner with regard to me. When this common sense of interest is mutually expressed and is known to both, it produces a suitable resolution and behavior. And this may properly enough be called a convention or agreement betwixt us, though without the interposition of a promise; since the actions of each of us have a reference to those of the other, and are performed upon the supposition that something is to be performed on the other part. (Hume, 1978; llI.ii.2)

Notice how different this is from the “gamer” conception of laws and rules. For the gamer, all the rules can be — in fact, must be — written down and can be examined and rearranged. For the world traveler, the experience of finding out the rules can involve trial and error, and even the natives likely do not fully understand that the rules and norms of their culture are unique.

One of my favorite examples is actually from the United States, the so-called Pittsburgh Left Turn. In an article in the Pittsburgh City Paper in 2006, Chris Potter wrote:

As longtime residents know, the Pittsburgh Left takes place when two or more cars — one planning to go straight, and the other to turn left — face off at a red light without a “left-turn only” lane or signal. The Pittsburgh Left occurs when the light turns green, and the driver turning left takes the turn without yielding to the oncoming car.

Pittsburgh is an old city, many of whose streets were designed before automobiles held sway. [That means] that street grids are constricted, with little room for amenities like left-turn-only lanes. The absence of such lanes means drivers have to solve traffic problems on their own. Instead of letting one car at the head of an intersection bottle up traffic behind it, the Pittsburgh Left gives the turning driver a chance to get out of everyone else’s way. In exchange for a few seconds of patience, the Pittsburgh Left allows traffic in both directions to move smoothly for the duration of the signal. Of course, the system only works if both drivers know about it. No doubt that’s why newcomers find it so vexing.

The Pittsburgh Left is a very efficient convention. On two-lane streets, turning left can block traffic as the turning car waits for an opening. And left-turn arrows are expensive and add time to each traffic light cycle. Far better to let the left turners — if there are any — go first. If there are no left turners, traffic just proceeds normally, not waiting on a left arrow.

Of course, if some idiot from the southern United States (yes, me again) is driving in Pittsburgh, that person expects to go when the light turns green. I blew my horn when two cars turned left in front of me. And people on the sidewalk yelled at me, as did the left-turning drivers. Once again, I didn’t know the rules, because I was a foreigner, at least in terms of the rules of the road in Pittsburgh.

Actually, it’s worse than that. The Pittsburgh Left is technically illegal, according to the Pennsylvania Driver’s Handbook (p. 47): “Drivers turning left must yield to oncoming vehicles going straight ahead.” The written rules, the gamer rules, appear to endorse one pattern of action. But the actual rules, the ones you have to travel around to learn, may be quite different. Real rules are not written down, and the people living in that rule system may not understand either the nature or effects of the rules. It is very difficult to change conventions, because they represent the expectations people have developed in dealing with each other over years or decades.

Hayek understood this clearly, and argued for what I have called the “world traveler” conception over what I have called the “gamer” conception of rules and laws. As Hayek said in 1988, in The Fatal Conceit:

To understand our civilisation, one must appreciate that the extended order resulted not from human design or intention but spontaneously: it arose from unintentionally conforming to certain traditional and largely moral practices, many of which men tend to dislike, whose significance they usually fail to understand, whose validity they cannot prove, and which have nonetheless fairly rapidly spread by means of an evolutionary selection — the comparative increase of population and wealth — of those groups that happened to follow them.… This process is perhaps the least appreciated facet of human evolution.