I am thinking about doing a vlog aimed towards philosophy, econ, etc. which obviously will contain a lot of libertarian things. I am thinking about showing some arguments that are not popular (even if libertarians think they may be valid arguments), showing arguments that are convincing, and a lot more. It sounds like I am going to be pretty critical of libertarians, which I am (how else do we better ourselves?), but I want to really try to have people understand libertarianism better (even if they don’t agree). What are some really good topics that you think I should cover?
It’s not surprising, but I contributed to this a little. It’s not organized terribly well, but I encourage you guys to get to know him (I often feel like I am his own personal PR propaganda guy, but I really do believe in what he says most the time). He is a notable libertarian anarchist who is getting much more popular since his book The Problem of Political Authority which is, by far, the best book on libertarianism and anarchy.
Actually, it’s irrational to vote even if you are an altruist. If you’re an altruist, you should be spending that time working to make money to send to charities that alleviate world poverty. An altruist does what produces the *most* benefit for society, of all the actions available. That is almost certainly not voting.
— Michael Huemer
In politics, Americans have a penchant for domestic cynicism and foreign naivete. Conservatives write, earnestly and unironically, that Barack Obama wants to destroy America, and liberals warn that…
Libertarians often argue over really small and stupid things (voluntary slavery comes to mind), but this is a healthy criticism from Tony.
This is an excellent comeback to Walter Block’s controversial statement “It is not that Putin doesn’t deserve a Peace Prize. It is that the Nobel Peace Prize is unworthy of Putin.”
This is, of course, by no means an endorsement of Vladimir Putin, but defending Putin is more than just defending the “undefendable” .
Tony notes the hypocrisy, as well.
The more corrupt the state, the more it legislates.
Wow, that’s a hard one. From an emotional standpoint (and yes, we get emotional about our cases even though we’re lawyers), probably my toughest case was Meadows v. Odom, where we challenged the constitutionality of a Louisiana law that requires florists to have a government-issues license in order to work, just like doctors or lawyers.
Our lead client, Sandy Meadows, was a widow in Baton Rouge who never finished high school and whose only vocational skill was making flower arrangements. But the florist licensing exam was so outdated and so subjective that she couldn’t pass it. (Nor could most other people—the pass rate on the florist exam was 33%, compared with 61.5% for the Louisiana Bar exam.)
Long story short, I was unable to convince the judge to strike down the law, and when the Louisiana Flower Police found out Sandy was managing the floral department of an Albertsons grocery store without a license, they threatened to shut it down. The store had no choice but to let Sandy go, leaving her unemployed and destitute. She died about two months later, alone and in poverty because the state of Louisiana wouldn’t let her work as a florist without a rinky-dink license and a federal judge wouldn’t do anything about it. That was a very tough case for me.
He is currently doing an AmA. I encourage anyone who doesn’t know who the Institute for Justice is to do some research on them. Anytime someone says libertarians don’t care about the poor, refer them to the institute for Justice. They are purely non-profit, they don’t charge their clients, and they sue governments on behalf of people whom cannot afford to in order to knock down legislation that holds the client back from being business owners. They are highly influential and have been involved with many different Supreme Court cases (and won 80%).
This is titled: Questions About Law Enforcement in a Free Society and Huemer has to respond to some really tough questions. He premises all the questions with his belief that there would not be any criminal law in an anarcho-capitalist region, only civil law. There are some tough questions in here regarding to how there is would be a tendency for warring defense agencies, but the two in particular that are the most difficult are:
1. What if a rich person could afford to kill someone?
2. What if somebody cannot afford to pay another person back if they committed a violent crime?
Those two in particular are questions that I’ve had myself. It’s a pretty good discussion and well worth a listen. As I’ve said before, Professor Huemer is by far the best libertarian philosopher, and absolutely one of the best libertarian thinkers of all time. It is good to see him getting more recognition.
Development economics is a very peculiar branch of economics. It is peculiar for at least two reasons; One, this particular branch of economics deals with an extremely delicate and fragile issue. It is extremely delicate in the sense that one wrong policy can ruin the lives of many, many people. This leads to the second reason development economics is peculiar: it is very blatantly normative. Where many economists try to stay objective (or at least try to appear as though they are) by using cost-benefit analysis, development economists are concerned with one thing only: make the poorest of the poor richer. The point is that people matter. Everyone in development economics cares about the people in the poor countries, whether it is Jeffrey Sachs or William Easterly. Compassion is great, but policy is more effective. This is why this essay is titled “3rd World Roulette”. An economist pushing an ineffective policy could mean the death of millions. Something like this cannot be left to chance, and the debates of development economics must be taken serious if we care about the poor. The purpose of this essay is to identify actions (or lack thereof) that must be taken in order to help third world countries. This essay endorses opening up markets, but also to take a very serious look at the institutions of third world countries. The structure of this essay is to first examine some poor thinking among influential economists namely restricting trade, and restricting capital mobility. From there I will build a positive case for free markets which is heavily based on sound institutions.
Recently there has been debate about whether or not trade liberalization is an effective way to reduce poverty. This may be surprising to many people why this would be an issue. That surprise is well warranted. Nonetheless, there are still some saying that trade liberalization is simply ineffective. These opponents to trade liberalization are not market socialists or hold any radical views, rather they appear to come off as softer interventionists than anything. Robert H. Wade, an economist at the London School of Economics, and opponent of trade liberalization writes, “No one argues that a strongly inward-oriented trade regime-with high, uniform and unconditional import protection plus export taxes-is better than liberal trade regime. The point is that trade liberalization has been oversold, and does not deserve the priority it receives in the international development community” (Wade 34). Wade concludes, “Policy is a powerful policy instrument, which-like any powerful policy instrument-can be used well or badly” (Wade 37). To make his argument more powerful he cites two big examples of how protectionism brought about extreme economic growth: the United States and Britain. He makes the point that the United States had industrial tariffs around 50 percent, the same time per capita income was about the same as developed countries today in the late 19th century. All the while the United States was the fastest growing economy (Wade 33). Furthermore, he continues with an example of 3 countries: Haiti, Vietnam, and Iraq. He mentions that Haiti took steps in 1993-1994 to cut tariffs, undergoing free market reforms like privatization, repatriation of profits, and foreign ownership of national companies. He then compares that with Vietnam which had tariffs from about 30-35 percent, was not a member of the WTO (like Haiti), and had a lot of industries that were state controlled. He writes, “Orthodox thinking would identify A [Haiti] would as the likely success story. In fact, A is Haiti, which has had dismal economic performance, while B is Vietnam which has grown at more than 8 percent a year since the mid-1980’s, with sharply reduced poverty, and which has rapidly but strategically integrated with the world economy, its high trade barriers notwithstanding” (Wade 34-35). Wade does not explicitly state any particular policies in which a developing nation should take, but the implication does seem to be that poorer nations ought to protect their industries, while not saying that it should be extremely protectionist. This thinking that is similarly shared by other economists like Robert Reich of the University of California, Berkeley (Reich), should be properly called “weak mercantilism”.
How To Conclude From Presenting One Side of Data
The evidence presented by Wade sounds very convincing on the face of it. He produces a lot of information that could make somebody think differently on trade liberalization. Analysis of his argument should be closely inspected, though. Starting with the United States claim of protectionism. I find no reason to believe Wade is incorrect with the statistic he gave of industrial tariffs being almost as high as 50 percent; however, there are a few things that should be looked at. First, what was the economy and tariffs like before the 1870’s (when tariffs were at their peak average)? Secondly, what was the economy and tariffs like after the high tariffs? The United States took a very strong protectionist approach from the mid-1800’s on. It is very true that in the 1800’s tariffs were high. It is also very true that growth was exponential. What about after the 1870’s? The average tariff significantly declined. This leaves Wade’s argument at a stalemate. With economic growth occurring before and after the high tariffs, how can Wade make the conclusion that tariffs can help economic growth? Douglas Irwin of Dartmouth acknowledges this and writes, “The U.S. experience in the late nineteenth century is often appealed to as evidence that high tariffs can prove beneficial to economic growth and development. Upon closer scrutiny, it is difficult to establish this claim. That tariffs coincided with rapid growth in the late nineteenth century does not imply a causal relationship. To provide compelling evidence of a causal relationship requires the identification of the particular channel or mechanism through which the beneficial effect of the tariff purportedly operates” (Irwin). To go a step further, if Wade is correct, we should find the lack of tariffs to be devastating. What we actually find is that the lack of tariffs are in some of the most productive places on earth like Hong Kong or Singapore. The latter was released from Malaysia in the 60’s. Far from being a completely capitalist city-state, Singapore took initiative to be a more capitalistic country. Singapore, while it was developing, became very liberal with its trade policy. This is not to say that there was no government intervention in domestic markets, but as far as trade goes, Singapore had very liberal trade policies. It now ranks very well in everything from mortality rates to unemployment. Hong Kong is another example. If low tariffs have a direct negative impact on development, we should see Hong Kong’s economy shrinking, but it is actually rising (Trading Economics).
Lessons In False Analogies & Premature Celebrations
This should be sufficient evidence to, at the very least, put some skepticism on the idea that relatively high tariffs are good for the economy of a developing country. Wade’s next step is to make an incredibly erroneous comparison of Vietnam, Haiti, and Iraq. First, lets start by addressing the elephant in the room: no one advocates warfare to promote economic growth in an already hostile area (without naming any names, some may, however, recommend an alien invasion). It is incredibly inappropriate to mention Iraq in this analogy. Wade would most likely retort that his analogy had nothing to do with war itself, but everything to do with economic reform after. Fair enough, but in the analysis of the comparison between Haiti and Vietnam, we will see why he is still wrong.
Wade focuses on only one aspect: trade. It is true that Haiti has a better trade ranking; however, Wade does not look beyond trade barriers. Wade did not focus on the importance that institutions play in developing countries. Far from being paradises, these two countries suffer from similar problems, but the similar problems are very different in degree. Two large problems for both are corruption in government and the enforcement of property rights. The Heritage Foundation ranks Haiti 175 in corruption and 167 in property rights. Vietnam is not much better, but is still further ahead being ranked 111 in corruption and 160 in property rights (The Heritage Foundation). This is a difference in institutions. Clearly both are not great, but providing a stable institution is crucial to development. According to UN data, Haiti’s homicide rate in 2008 was 6.1 per 100,000 people. That same year Vietnam’s homicide rate was 1.6 per 100,000 people (United Nations). These statistics should be very concerning for people that make the comparison between Haiti and Vietnam, then point towards Haiti’s policies being more liberal and come to the conclusion that it was because of protectionist economic policies. What if, however,
Furthermore, Wade’s celebration is premature. Initially it may be true that Vietnam had less trade barriers and developed into a more developed country. However, the statistics are different now. According to the same Heritage statistics, Haiti’s policies rank either the same or are gradually decreased, while Vietnam’s policies have gradually become more liberalized. Vietnam is far from a developed nation, but it has become more developed as time has gone by. All the while it has become more open for trade freedom, it has attempted to crack down on corruption, and still boasts better property protection than does Haiti. There will be more talk on institutions later as they play a crucial part in developing nations.
A Befuddled Brad
Brad Delong, an extremely influential economist from the University of California Berkeley, used to be a support of unfettered capital mobility. He believed that capital mobility would have helped developing nations to become more developed and rich. This belief he now doubts. He writes, “I am no longer as sure that capital flows are efficient. Too many external costs associated with financial crises and the fact that capital seems to want to flow not from but to where it is already abundant make me fear that my standard economist’s model is simply not working” (Delong 63). In his essay, “Should We Still Support Untrammeled International Capital Mobility? Or Are Capital Controls Less Evil Than We Once Believed?”, he gives a few reasons as to why the free movement of capital were damaging, but seems mostly concerned with the inflow of capital from poorer countries to richer countries. (Delong 63).
Delong cites the situation with Mexico and the United States as proof that capital flows from poor countries to rich countries. He very humbly admits that he predicted the inflow of capital from the United States to Mexico would be about $10 billion to $20 billion; however, what really happened is that Mexican entrepreneurs and workers are exporting enough to the United States to get a trade surplus, all the while capital outflow is going straight to the United States. He ends with the question, “Should capital-poor Mexico really be financing a further jump in the capital intensity of the U.S. economy?”. He goes on to explain, “The United States has run current-account deficits of averaging 2.5 percent of gross domestic product (GDP) over the past two decades-that’s $270 billion a year at today’s level of GDP” (Delong 65). He then admits only $90 billion can be attributed to capital inflow of developing nations, but rightly points out that $90 billion is a lot to third world countries. He ends pessimistically, “At this point, we must concede that the hope for a repetition of the late nineteenth-century experience-in which core investor’s money gave peripheral economies the priceless gift of quick economic development-has so far proved vain” (Delong 66). Delong is not alone in this thinking. Jagdish N.Bhagwati, a very prominent development economist at MIT, and Richard A. Brecher, an economist at Carleton University, also share this view. In fact, their view is actually much stronger than Delong’s. They write, “Drawing on some of our recent work, the first section below briefly considers why a move to free capital mobility between agents that are already in free trade may harm an agent, and must indeed do so under certain conditions if the other agent benefits” (Bhagwati and Brecher 115).This is a very extreme claim that will be examined closer in the following paragraphs.
The Results of Assuming Away Problems
Delong, Bhagwati, and Brecher are very respected economists, so it’s hard to imagine where they could have gone. All three, however, are guilty of the same problem: assuming away problems. There doesn’t seem to be any wrong with the premises that these three hold. That is to say, they all have solid data that is true, such as long as there are no other variables. Unfortunately, Bhagwati and Brecher completely ignore the possibility of other variables. They stick straight to their model. Delong, on the other hand, unbeknowingly solves his own problem. Delong asks the question why the capital was flowing into rich countries and not poor countries. He answers, “First, there were first-world investors who feared investing in developing countries. They worried about sending their money down the income and productivity gap after the crises of Mexico in 1995, East Asia in 1997, and Russia in 1998. U.S. investments, although potentially less lucrative, seemed much more stable” (Delong 66). This is incredibly good insight. He goes on to list two other reasons, but sums everything up with, “stability in investment-as opposed to potential future returns-was they key” (Delong 67). Here Delong identifies the most important aspect of development economics: institutions matter. Mexico and the United States are very far apart when it comes to institutions. The same Heritage Foundation statistics reveal that Mexico is a haven of crime and corrupt government, while the United States is far less. Mexico ranks very poor in property rights, while the United States ranks pretty high (The Heritage Foundation). For Bhagwati and Becher, there is no mention of institutions anywhere. This is to be expected as they were not analyzing any particular country, rather they were just building and concluding upon models. In ignoring institutions, though, they do not recognize that their conclusions are flawed. This also applies to Delong. It is true to that the data is on their side. It is, however, false to come to the conclusion that capital mobility should be restricted. These economists would prefer to focus on the short term, that is, to restrict capital mobility, as opposed to focus on the long term development which is to create more stable institutions, which would in turn increase capital mobility. While I have shown that they are ignoring institutions, I have not shown that creating good institutions will lead to a more prosperous and capital heavy nation. This is what I intend to do in the subsequent part of the essay.
Before delving into the details of why institutions matter, it is important to define what an institution is. In Institutions, Institutional Change and Economic Performance Douglass North defines institutions as, “the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction: (North 3). He continues to differentiate between two types of institutions: formal and informal. A formal institution is one that is created. North gives an example of the United States Constitution. An informal institution is one that can evolve over time, like common law (North 4).
It is a widely held belief that developed countries typically rate much, much higher than developing countries when it comes to the efficiency of institutions. On the issue of capital mobility that Delong was concerned with, a study by Laura Alfaro, Sebnem Kalemli-Ozcan, and Vadym Volosovych showed that much of the reason for capital flowing out of poor countries is because of poor institutional performance. They conclude, “Our results suggest that policies aimed at strengthening the protection of property rights, reducing corruption, increasing government stability, bureaucratic quality and law and order should be at the top of the list of policy makers seeking to increase capital inflows to poor countries” (Alfaro, Kalemli-Ozcan, and Volosovych 22). North writes, “I wish to assert a much more fundamental role for institutions in societies; they are the underlying determinant of the long run performance of economies” (North 107). In 1995, Sachs wrote (along with Andrew Warner), “This paper presents evidence that a sufficient condition for higher-than-average growth of poorer countries, and therefore convergence, is that poorer countries follow reasonably efficient economic policies, mainly that of open trade and protection of private property rights” (Sachs and Warner 2). It should be clear now that economists believe that institutions are very important. In the subsequent sections of this essay I will examine the impact of having property rights and enforcing those property rights through institutions, and an important section on central banking’s impact on developing countries.
Good P.R. - Property Rights to Help Developing Nations
Many economists stress the importance of capital investment like Delong. Other economists stress the importance of foreign aid (Sachs 72). The most important key to economic growth is private property and its enforcement. They are key because it is the foundation in which a country can grow. It provides stability. Even with trade liberalization in Haiti, the lack of stability causes many entrepreneurs to avoid investing capital in that country. Here I will look at how private property and its enforcement is effective, while providing evidence of it.
Private property and its enforcement is not something independent of other factors. Political stability is also very important. The late economist Armen Alchian wrote on the issue of rights in general:
Nowhere, perhaps, is the problem of instability of rights more serious than in the so-called developing countries. Indeed, that is the reason for their lack of development. Neither inhabitants nor outsiders are disposed to invest in long-lived productive assets for domestic use. Instead, there is a pronounced disposition to hold wealth in the form of portable, easily concealed objects and in claims on foreign assets of foreign countries (Switzerland) where rights are more stable. Investors weigh both political history and political current affairs in forming their expectations (Alchian 122).
He then goes on to give examples of where this can be seen taking place. He mentions Latin America and Africa are places that have upheavals. He mentions the Socialists in France and China taking over Hong Kong as two examples of possible new regimes that would affect the productivity of investment (Alchian 122). Studies confirm Alchian’s suggestions. Political instability does adversely affect, not just obviously civil rights, but property rights as well, which in turn affects growth. Janine Aron, an economist at the University of Oxford, writes in a study:
The performance or quality measures for formal and informal institutions include respect for contracts, property rights, trust, and civil freedom. Evidence suggests that the quality of institutions has a robust and significant indirect relationship to growth via its effect on the volume of investment. There also is evidence, although it is weak, for a direct relationship between institutions and growth.
Thus better-performing institutions may improve growth by increasing the
volume of investment—for example, by eliminating bureaucratic red tape and
rentseeking costs—and (more weakly) by improving the efficiency of investment, say, by enforcing well-defined property rights. Similarly, the promotion of social capital strengthening informal institutions may positively influence growth both directly and indirectly (Aron 30).
Here we understand that political stability is crucial to property rights and its enforcement, which in turn is crucial for economic development. It is a precondition to well-defined property rights, which is a precondition for economic development. When political stability is found, and well-defined property rights and enforcement exist, development typically takes place. Theoretically well-defined property rights and enforcement help developing countries by providing stability thus creating opportunity for profits. Views used to be that countries with abundant natural resources were the ones that grow, but the paradox here is that there are many countries abundant in natural resources that do not grow. Yet, there are countries that do not have abundance in natural resources that are the wealthiest in the world like Singapore or Hong Kong (city-states in these particular cases). To show how this is true, there are many examples of neighboring countries, similar in geography, but very different in institutional structure. Daron Acemoglu, Simon Johnson, both economists at the Massachusetts Institute of Technology (MIT), and James Robinson of Harvard University, provide a very extensive paper regarding the issue of institutions, well-defined property rights, and their enforcement. In this paper they compare North Korea & South Korea, highlighting that both are extremely similar in geographic regions. Noting, also, that North Korea is much more abundant in natural resources. Furthermore they note that even man-made economic conditions were similar. Lastly, they note that per capita income was about the same prior to the separation of countries. They say that these factors set the stage for a fair comparison. They show that the divergence in per capita income, South Korea averaging $16,000 while North Korea averaged $1,000 by the year 2000, is convincing on its own terms (Acemoglu, Johnson, Robinson 22). However, they are not finished. To emphasize their point, they look at colonization from Europeans and the Reversal of Fortune. They explain, that before European colonization of civilizations like Moghuls, Aztecs, and Incas were among the richest in the world. However, Using proxies of urbanization rate and population density, they show, after colonization began occurring in the richer and poorer civilizations, much less developed countries began prospering ,and the areas that were formerly the richest became the some of the worst economically performing countries in the world (Acemoglu, Johnson, Robinson 23-24). For instance, the Moghuls were in India, the Aztecs in Mexico, and Incas in South America. The reason for this, they say, is that in the highly urbanized and densely populated areas, Europeans had an incentive to create extractive institutions which did not respect property rights for the sake of taking more. However, in the more rural, and less developed areas, there was an influx of European migrants who had the incentives to have institutions that protected private property (Acemoglu, Johnson, Robinson 32). If the quality of institutions matter, and the protection of property rights also matter, the institution hypothesis should predict exactly what did happen.
Acemoglu, Johnson, and Robinson do not stop there. They published studies showing the incentives for European settlers to set up long term institutions in places they believed they were going to stay in the long term. Peter Leeson, an economist at George Mason University, sums up their findings very nicely:
They [Acemoglu, Johnson, and Robinson] argue that the property rights
institutions these countries inherited from their colonizers determined the variation in their incomes we observe today. In places like the United States, New Zealand, and Australia, the prevalence of diseases, such as malaria, was relatively low at the time of colonization. Thus, colonizers could settle in these places for long periods of time. Since as inhabitants of these countries colonizers would be subject to the long-run effects of the property rights institutions they created, it was in their interest to
establish institutions of long-run economic growth — namely, wellprotected private property rights (Leeson 18-19).
The work by Acemoglu, Johnson, and Robinson is incredibly important, and especially interesting. The evidence is very compelling. A country with well-defined property rights, and its enforcement is efficient, is a country with the potential of being a fully developed nation.
The Cost of Central Banking
The reason why this deserves a separate section is because at times central banks are not actual government entities (like the United States), while in other countries, they are an integral part of the government. The distinction, though, is a very thin line because central banks generally are cower to political pressure. A major hurdle for developing countries is inflation. Public choice theory states that political powers have an incentive to create money to pay off debts (Mafi 6). Inflation is an incentive inherently built into a central bank that cowers to political pressures. Economist Vera Smith, in her book The Rationale of Central Banking and the Free Banking Alternative, examined the history of central banks in the United States, England, France, and Prussia. Before central banks were officially established, governments gave monopolies on “note-issuers”. Smith focuses on these monopolies saying, “Looking at the circumstances in which most of them [monopolies of note-issuers] were established, we find that the early ones were established for political reasons connected with the exigencies of State finance, and no economic reason for allowing or disallowing free entry into note-issuing trade was, or could have been given at the time, but once established, monopolies persisted right up to and beyond the time when their economic justification did at last come to be questioned” (Smith 167). Inflation is controversial in developed economies, but is unequivocally dangerous to developing economies. According to a study by economists at the National Bureau of Economic Research, “Inflation not only reduces the level of investment but also the efficiency with which productive factors are used. It has a negative temporary impact upon long term growth rates, which, in turn, generates a permanent fall in income per capita” (Andres and Hernando 28). So, rather than even help developing countries, it actually hurts them. Central banks are, however, not the only option for developing countries.
The poor record of central banks have sparked interest in finding alternatives. Economist Kurt Schuler has endorsed both free banking, and currency boards. The former is what I will be focusing on. There are a two questions that must be answered about free banking in order for it to be a better alternative than a central bank: Is it effective at keeping inflation low? And is it a viable long term option?
First, what is free banking? Free banking is not the misnomer some have said it to be. Paul Krugman for instance implies that the era in the United States before the Fed was an era of banking with little to no regulations (Krugman). Economist Lawrence White defines free banking as “the unrestricted competitive issue of currency and deposit money by private banks on a convertible basis, not the so-called free banking systems adopted by a number of American state governments between the late 1830’s and the Civil War” (White 13). This sounds sounds very unconventional to most, but this has been done before, and it has been very effective. Economist Elham Mafi examined nine countries that had relatively free banking: Australia, Canada, France, Italy, New Zealand, Spain, Sweden, Switzerland, and the United States. She took the annual average inflation rate before and after a central bank was created (Mafi 8). She found that, “in each country for which data are available average inflation during the free banking period was significantly lower than inflation under central banking” (Mafi 10). This was the first study of its kind.
The second question is whether or not this is a viable long term solution. Clarification may be needed on what I mean by “long term” solution. I take it that many skeptics will think that banks would try to undermine other banks with bad practices. There is a real example of banks trying that. Scotland has experienced competition in banking after the charter that the Bank of Scotland ran out in 1716. A second charter was granted to the Royal Bank of Scotland in 1727. Immediately the Royal Bank of Scotland accepted the notes of the Bank of Scotland, holding them until they had more notes than they knew the Bank of Scotland could redeem. This put the particular branches of the Bank of Scotland temporarily on specie redemption hold. Meaning they were not able to give customers specie in return for the notes because the Royal Bank of Scotland drained their reserves. The Bank of Scotland retaliated doing the same thing. In the end, they both began accepting each other’s notes and stopped the “note-duelling” (White 228-229). The banks realized that this tactic was very inefficient and hurt them both. It became in their best interest to work together while still competing. One could try and devise some theoretical framework in which banks use tactics to shut each other down, but the experience directly contradicts it.
Development economics is crucial because it is literally a life and death matter. Poor economics, even with great intentions, can literally be a matter of life and death if a developing nation takes it as gospel. It is imperative to avoid bad economics in development economics. There are an incredible amounts of debate on different issues in development economics from foreign aid to the precautionary principle. All of these issues are interesting, and hotly debated. Unfortunately I’ve had to keep it limited to two: trade liberalization and capital mobility. The opponents to trade liberalization and capital mobility are guilty of the same problem. The opponents forget the important role that institutions play in developing nations. Rather than working on short term fixes like regulating capital investment or implementing high tariffs, in a volatile situation as developing countries are, these economists ought to be focusing on long term solutions rather than short term solutions. As I mentioned before, these policy suggestions are a matter of life and death for people in third world countries, and any study that does not account for institutional differences and efficiency is a study that should be proceeded with caution.
There is an abundant amount of evidence that has been presented on the importance of institutions. Most specifically on well-defined property rights and their enforcement. This implies limited government. An overreaching government does not provide enough stability to incentivize a capital inflow. The evidence is abundantly clear of this fact. If a country is going to have economic development, it is crucial to have well-defined property rights and enforcement.
The section on free banking also a crucial critique of poor institutions. Inflation is a serious problem for development in economies. Public choice theory tells us that governments have an incentive to push for higher inflation to finance their expenditures. The work by Mafi confirms what public choice theorist predicted. If developing countries want to defeat inflation, free banking may be the best alternative.
Economic development should not be considered a logical corollary to free banking or good institutions. There is no blanket solution for developing economies. However, good institutions and free banking provide a very strong precondition for economic development. They also provide a very strong incentive to bring about things like capital investment. And what is one of the fundamental rules of economics? People respond to incentives.
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I entered the Carl Menger essay contest for FEE, but unfortunately didn’t win (admittedly, the people that won definitely had more interesting sounding essays), so I will be posting my essay here. It is on the importance of sound development economics and the importance of institutions.
Does anyone know any studies on the effects of the policies central banks typically have in third world countries?