Origins of cooperation and de-facto natural rights in the Hobbesian jungle – Part 1

I love the microfoundations of economics. I love seeing emergent, productive orders arise among individuals who are self-interested and maybe not even fundamentally “good.” That’s one of the reasons why I enjoyed reading David Friedman’s “A Positive Account of Property Rights” [1], which puts forth a theory on how property rights can arise out of the interactions of individuals. I intend to read more of the literature as I have more time.

For now, I’m interested in doing some basic exploration of how it could be possible for cooperation to arise in what I will call the “simple Hobbesian Jungle” – after Hobbes’s understanding of human life as short, brutish, and warlike without the existence of a government.

I wrote most of this post as I was traveling by bus to New York last summer. It began as an attempt to provide microfoundations to fight back against the general belief that humans, left to themselves, could not establish some semblance of peace and stability. As is suggested by the name, the model is very much simplified – meaning it doesn’t encompass the totality of human choices made in the Hobbesian jungle. However, I made the model very harsh to the individual on purpose, so that there would be as little reason to cooperate as possible without outright having everyone destroy everyone else.

As I continued to write, I realized that in its harshness, the world I had created could very well result in stability. Not only this, but this mental experiment led to a realization that it’s possible to explain not only why cooperation arises, but also possibly how the ideas behind morality (don’t kill, don’t steal) get created in the first place. The model also held out some explanatory power for why war could possibly exist and why cooperation fails to arise sometimes. Surprisingly, there are even implications for the question of whether animals have rights.

Let’s dive in.

The simple Hobbesian jungle

Let’s attempt to see how human cooperation could emerge under certain restrictive assumptions that would make it even more difficult than normal for it to emerge. Specifically, why doesn’t everyone suddenly go kill everyone else?

I will model the emergent order through iterated games.

The setup

Imagine a state of existence comprised of atomic, separate, primitive, rational, self-interested men. That is, imagine that we go back in time 20,000 years, and let’s assume away tribes and family relations.

We have a “society” of 50 individuals in a large, closed-off geographical area. These individuals have similar mental capacities, though their physical powers differ in magnitude. At time t=0 they begin by being separated from each other, each owning a certain good or tool that is useful to each of them in varying degrees of magnitude. The items are randomly distributed across the various individuals.

The individuals, by assumption, cannot settle down to create agriculture or establish a division of labor except for in the field of protection services (that’s later). These people, each by himself, roam the countryside at t=0.

There is another assumption – the individuals have omniscience on a limited time horizon. That is, when two people encounter each other, each knows what the outcome of a battle between them would be with 100% certainty. When a battle is concluded, the winner is immediately fully healed and takes the property of the loser. Each possession on the map is valued by all individuals.

At t=0, the individuals may be given an ordinal rank of their fighting capabilities from 1 to 50, with 1 being the weakest, and 50 being the strongest. Each individual is aware that there are 49 other people on the map, and each individual is aware of his ordinal ranking and that of everyone else. The individuals know the rules of the scenario, and go through the following thought process ahead of time: Each person considers every other person and thinks about what would happen in an encounter between them. Let each individual be named as his ordinal rank. In that situation, if 12 were to encounter 17, 12 knows that he would lose in a fight and 17 would win. 17 knows the same information.

Assume away any feelings of morality in these people or any feelings of kinhood. Each individual desires to obtain as many of the goods as possible and also desires to stay alive so that he may make use of the goods. The goods are infinitely durable, and provide a constant level of satisfaction when used in each time step.

Assume that when individuals wander the map they cannot see beyond a limited space around them, and hence may not avoid their peers. People also cannot scout out opponents and cannot escape a battle (although it is theoretically possible that a battle never begins because both parties decide not to fight for whatever reason). In essence, there is a fog of war.

Ready, set, go! First guess

A shallow, first-level analysis of the situation would suggest the following thought process: 50 knows that he can beat any other individual and take his property. 49 knows that he can beat all individuals besides 50. 48 knows he can beat all but two individuals – 50 and 49. This continues until the analysis reaches 1, who knows that he cannot beat any other person on the map and will lose all battles with other people.

Say that 25 meets with 33. What should each actor do in his self-interest? The first instinct might be for 33 to kill 25. After all, it is 100% certain that 33 will gain in the short term without permanent bodily injuries. 25 doesn’t have an option to run, and cannot win a fight in this scenario. It appears that this map is doomed for players to successively kill each other until only 50 is left with all the goods and the highest utility level achievable. Remember that after a given battle is over, the winner is healed immediately by assumption, and hence has no temporary weakness after the battle is over.

Is this what will happen on this map? Remember that individuals by assumption had their omniscience limited to a short time horizon. What is meant is that a person knows the outcome of the coming fight, but does not have perfect information about future social conditions – individuals work under the limited information that we have today in that regard. We may only guess what will happen in the future and support it with evidence. Same goes for them.

A second look

With that in mind, return to the scenario at t=0 between 25 and 33. One obvious outcome is for 33 to win and take 25’s possessions. Are there any alternatives, however? There are. 25 knows that he will lose to 33 in a battle, yet he also knows that 33 would lose to anyone above him. Therefore, it is beneficial for 25 to remind 33 of this fact and to propose an agreement – that they form an alliance for protection. Thus, 25 and 33 agree to not kill each other and to fight together in battle. Why is this beneficial? It is beneficial for 33 because with the help of 25 he can likely take on individuals with a much higher fighting power – say, 37, 42 or even possibly 50. Say that the highest level person they can take on together in battle is 39. Hence, their combined rank is above person 39, but below person 40.

Assume, furthermore, that no person can beat a combination of all of the people below his rank – except for 2, of course (who can always beat 1 in a one-on-one fight).

What social patterns can we predict to emerge?

Let’s look at the lower end of the scale. Individuals below, say, 18, if they encounter each other, know that they stand to gain in the short term by fighting and killing each other off. However, they also know that they might very well be killed soon thereafter by upper-level players. Hence, they have an incentive to band together. If they happen to meet, 12 and 5 might group together, and so would 17 and 16, for example. Players in the middle range, say 18-34, know that they could easily (and with certainty) take on the weaker players and steal their property. However, they also know that people above their rank could kill them and take their property. Hence, it is useful for those players to band together as well. Players in the upper strata of fighting abilities, 35-50, know that at t=0 they are the strongest on the map and that they could take on any individual below them. The lower section of the 35-50 range might fear the upper section, however, so it might decide to group together to protect itself from the very best fighters.

Whenever a person allies himself with someone else, it is less useful for him to ally himself with a weaker person than with a stronger one. However, note that if every player has a personal rule where he decides to only ally himself with a stronger person, then there would be no alliances ever made. In every encounter there is necessarily a stronger player and a weaker player. Hence, while the weaker player may want to ally himself with the stronger one, the stronger one would never want the weaker one under this rule.

We see that for some sort of alliance to come into existence, stronger individuals must ally themselves with weaker ones at some point.

Multiple levels of logic and strategy

Now, two points:

1) It is also clear a person in the 1-17 range, for example, is better off allying himself with a person above his range than a person within the range.

2) A person in the 18-34 range is better off being allied with a person in the 35-50 range than a person in the 18-34 range. Yet even the 18-34 range is better for him than the 1-17 range.

While it might initially appear that people in the 1-17 range will have little use for each other (because they are all relatively weak), these players may also realize that the 18-34 range people have even less use for them. Therefore, 1-17 have a higher chance of an opponent in the 1-17 range allying himself with them than in the 18-34 range. Therefore, it would be useful for people in the 1-17 range to offer each other alliances if they happen to meet. The same goes for 18-34.

Yet what if the initial meetings are from people vastly different in strength from different ranges? For example, what if 12 meets 36? It appears that 36 would not gain very much from allying with 12. However, as was said before, future societal structure is uncertain. 12 might very well employ the following reasoning:

“Sure, 36, you could kill me, because I do not contribute all that much to our joint defense. Yet consider this: Some number of pairs of people, each below 25, have met or are meeting at this very moment. Say that number is X. These people are likely to ally with each other [by the analysis presented previously for people in the same range.] The expected meeting of people in this group is a meeting of players 12.5 and 12.5 (using statistical expectation). Once these people join up, they might be able to take on a player who is ranked 13, 17, or even 20. Therefore, this meeting of the lower ranks increases their power, which shortens the range of variability of power. At time t=1, then, we will have people in lower ranks allying together and bullying people at the lower end of the upper ranks. This lower end, if it meets the growing group of underdogs at t=1, has a chance of joining them, and making an even more powerful group at t=2. As this process slowly wears on, the stronger and stronger players are recruited, and it’s very possible that at t=3 you, 36, will be meeting strong groups of underdogs. Not only this, but you could be meeting people above your rank as well. Therefore, even though I only improve your ranking so that you can beat maybe person ranked 39 or 40, if you do not ally with me, you stand a much higher chance of dying at t=3. We should ally with each other and with any other players that we might happen to meet.” Let this be named argument *.

If 36 buys this reasoning, he will join in. If not, he will kill 12 and take his good. I propose that it is likely for 36 to ally himself with 12.

The tough case

But what if 50 encounters 1 at t=0? The chances of an alliance are much lower. It may even be that 1 offers very little of value to 50, and that 50 decides to kill 1. Remember that fighting has no costs for the group that is predestined to win a given fight (besides the lack of a future alliance).

Hence, the worst-case scenario that we can imagine is that at t=0, 50 meets 1, 49 meets 2, 48 meets 3, and so on with 26 meeting 25. Suppose the cutoff for argument * working is 36 meeting 14. Hence, when players above 37 meet players below 14, * doesn’t work.

What could 1 say to 50 to not have him kill him? Well, note that if 50 kills 1 and 37-49 kill their respective weaklings, that means that in the next round the players left will be 14-50. Furthermore, 14-36 will all have allies (by argument *). Hence, 38-50 are in a very much weakened position at t=1 relative to t=0. Hence, it might be advantageous for 50 to get any help it can at t=0 to protect itself at t=1. [2][3]

Throughout this whole explanation, we must remember that although there are a lot of factors that are constant by assumption (such as knowledge about who would win a battle), the exact social outcome will vary according to the explanatory power of the individuals who bargain with the superiors for inclusion in the “tribes.”

I do not purport to prove that one social arrangement will in fact turn out – it all depends on the powers of the players to convince each other. What I am merely pointing out is various plausible tendencies in the situation. Of course, all of this relies on the individuals realizing that they can call future uncertainty to help them in the first place.

Conclusions for Part 1

In this conclusion section, I will cheat a little bit and point out some of the ideas on which I stumbled after the end of the simple Hobbesian jungle.

The first thing to note is that even in a winner-takes-all, no division of labor or trade, amoral world with no attachments or regret you can have cooperation arise. I have not by any means proved that it will result in sunshine and utopia for everyone. Yet I have shown that uncertainty about future social order could be a driver of social cooperation for the provision of protection.

In future posts, when we strip away some of the assumptions, we will see that different complications introduced in the model will decrease and increase incentives for cooperation – what the net direction will be, we will see (though I expect it will be in the positive direction).

An important note to make is that cooperation was allowed to arise in the model because the players shared a language. If they had no capability to convince each other, they would not have been able to develop this system of mutual protection, but instead would have most likely ended up killing each other, and 50 indeed would have won (although, perhaps, slavery might have arisen instead… That’s another interesting dynamic for another time).

This puts forth a possible explanation for early warring tribes. Without communications, even if they had good intentions, they might not have been able to get them across. Assuming away good intentions and focusing only on self-interest, they still might have been able to develop some mutual protection relationship, yet the language barrier prevented this from happening.

So we see that defense is one of the possible drivers of cooperation. Looking ahead, another driver is tasks that can be completed together more easily than separately (separate from the division of labor). I’m thinking of things like, say, rolling large logs. A man might not be able to do it by himself, yet can achieve the goal with 3 other men. Upon further consideration, defense is in fact a subset of this “cooperative strength.”

The other possible driver of cooperation, we see, will be the division of labor. In our Hobbesian jungle, this was assumed away to simplify the model. Yet upon a first glance, there appears to be a strong case for why the division of labor would be conductive to peace instead of war. Varying levels of talent mean that people have comparative advantages in the production of different goods. Not only this, but specialization allows for an increase in productivity of the laborer. As such, if they can communicate, Hobbesian strangers might prefer to trade instead of to fight.

Taking cooperative strength and the division of labor together, we begin seeing how property rights, at least the concept of self-ownership, might have emerged.

Going back to the importance of a shared language, we can see why cooperation among 1) animals and other animals, and 2) humans and animals is difficult. They have no way to make the case to each other for why they shouldn’t kill each other. Animals cannot make pacts for mutual protection unless it is genetically instilled in them. Humans also cannot face a bear reared on its hind legs and argue for why no, Mr. Bear, you shouldn’t kill me because then you will lose the benefits I can offer you.

The language barrier hinders both the possibilities for cooperative strength and the division of labor. If animals were to wake up tomorrow and be able to communicate completely fluently with each other, we would see more cooperation. If they could also engage in the division of labor, they would start off on the path to creating human-like societies. However, they do not possess these capabilities (beyond their simple abilities to communicate). As such, avoiding conflict and protecting one’s self from animals make having a meaningful society with them impossible. The stronger has always dominated the weaker. Yes, we can keep pets, and even live peacefully and happily with them, but this is only after having “enslaved” them and forced them to fit into our society after extensive “brainwashing” (training) – to put the affair in human terms. The question of animals’ rights extends beyond understanding “don’t hit or kill,” but also to recognizing property boundaries (which will be discussed in future posts). As such, until animals can properly understand these concepts, they remain subordinate to humans and their property (I suppose some select animals, such as some primates, could be excepted).

In future posts, I look forward to making the Hobbesian jungle a little more realistic.

Notes and References:

[1] http://www.daviddfriedman.com/Academic/Property/Property.html

[2] Another reason 50 might choose to team up with a very weak player is to serve as signaling. While players might choose to team up, they could in theory, at any time, turn on each other. 50 choosing to ally himself with 1 sends a signal that he will restrain himself from killing weaker players and will cooperate well with others. Not a perfect signal – true – but 50 could find a way to make it appear legitimate.

[3] At some point in the discussion, someone might bring up the possibility of everyone teaming up into the same team and being one big happy group. But then, the hypothetical continues, why wouldn’t the best 49 players decide that 1 is useless and take him out? (Another version is that they decide 50 is too powerful by himself and decide to off him). This certainly may happen, yet it’s also possible that 2 will realize that if 1 is killed off, 2 is the remaining weakest player – and the next person on the chopping board. And so he might be agreeing to a slippery slope. So might 49 in the case of killing 50. By backwards induction, more and more players might get killed over time. This would create a disincentive to implement such a “kill the worst (or best) player” policy as long as the players have enough foresight to realize the consequences of their actions.

Concealed Carry License Fees: The Case for Abolition

Currently, all states in the US offer some type of public license to carry concealed weapons (although, in practice, some states rarely grant such licenses). Licenses generally come with fees in the $50-$100 range; for exact details, see this list of state laws on the matter.

However, are concealed carry license (CCL) fees actually an efficient policy? It doesn’t seem so. The marginal cost to the issuing authority of granting a permit is essentially just the cost of paperwork, and is very close to zero. Training costs, in states with training requirements, are imposed upon the applicant, and so are not part of the marginal cost of the issuing authority.

Of course, the next concern would be the social costs and benefits of issuing concealed carry permits. The primary social costs and benefits in this case are the impacts of concealed carry laws on crime rates. There is substantial debate on this issue, sparked in large part by the Journal of Legal Studies paper “Crime, Deterrence and the Right-to-Carry Concealed Handguns” by John Lott and David Mustard, and by the various editions of Lott’s book, More Guns, Less Crime.

However, the debate over effects on crime rates is almost completely between those claiming that concealed carry reduces crime, and those who claim it has little or no effect. As noted in the paper “Trust But Verify: Lessons for the Empirical Evaluation of Law and Policy” (page 3):

There have been a total of 29 peer reviewed studies by economists and criminologists, 18 supporting the hypothesis that shall-issue laws reduce crime, 10 not finding any significant effect on crime, including the NRC report, and [Aneja, Donohue, and Zhang]’s paper, using a different model and different data, finding that right-to-carry laws temporarily increase one type of violent crime, aggravated assaults.

Note: There was a footnote marker at the end of the phrase “including the NRC report”, which corresponded with a footnote reading: “Although one member of the Council concluded that the NRC’s own results indicated that shall-issue laws reduced murder.” This refers to James Q. Wilson’s dissent in a National Research Council report on the matter; the latter did not find discernible effects on crime rates.

In fact, John Donohue, a major opponent of the Lott-Mustard hypothesis on concealed carry, said in the Chronicle of Higher Education that, “No scholars now claim that legalizing concealed weapons causes a major increase in crime”. (The link here is paywalled, but the quotation has been cited in numerous other places.)

Given all this, it appears that the social cost of issuing CCLs is either negative (if concealed carry reduces the costs of crime) or zero (if it has no effect). Furthermore, the private marginal cost of issuance is nearly zero.

And the private benefits of CCL issuance are also substantial. There are roughly 8 million active permits as of recent, and revealed preference tells us that concealed carriers value having licenses. Political lobbying for expanded carrying rights is another sign that many people value the right to carry guns.

In summary: The relatively high fees imposed on concealed carry licenses are a case of inefficient monopoly pricing, and, under a traditional welfare analysis, should be abolished or possibly even made negative to account for social benefits of concealed carrying. This also tells us that the current number of people licensed to carry guns is below the optimal level.

A Bad Argument Against Secession

In the United States, there have been recent calls for secession of various states, including some in the South. A common response to proposals for Southern secession is that most Southern states receive more in federal spending than their inhabitants pay in federal taxes. (For examples, see the Google search results for the phrases “secession” and “more than they pay”, “The Sanctimony of the South” by Gram Slattery, and “What seceding from the U.S. will cost you”, among many others).

The argument is that, since these states are fiscally dependent upon the federal government, they would be foolish to secede, and, according to Mr. Slattery, engaged in “sanctimonious whining” to even argue for doing so.
The problem with the argument as stated, and a significant problem at that, is that there exist other benefits and costs to secession besides those related to fiscal transfers to and from the central government. Fiscal transfers are only one issue among many, and there is good reason to think that, despite losing fiscal support from the federal government, seceding states could benefit heavily from secession. Some reasons are as follows:

  1. Tax haven status: Free from the United States federal tax system, states could choose to become tax havens for wealthy individuals and corporations. Such could offer substantial benefits to the local populations from revenues on the relatively low taxes imposed on foreigners moving in, increased local investment, and other benefits of immigration (see the item on “immigration policy”).
  2. Regulatory policy: Various businesses might wish to incorporate in the United States due to familiarity with its legal system, language, and business culture, but wish to avoid onerous regulations. States which seceded and proposed more friendly regulatory systems could benefit substanitally from foreign investment. For some, this invokes the image of smog-spewing factories located just outside the US border, but if the secession were on amicable terms, the seceding state could agree to impose some kind of Pigovian tax on pollution and remit funds to the US government as compensation for cross-border emissions.
  3. Immigration policy: Many right-leaning Southern states might impose restrictive immigration laws upon seceding. Indeed, I would not support such policies. However, seceding states could instead decide to expand legal immigration, possibly as part of a strategy to ease their fiscal burdens and repopulate dying cities. Former New York City Mayor Michael Bloomberg actually suggested that the federal government allow increased legal immigration to Detroit to encourage economic development. Seceding states could pursue such policies freely. A variety of benefits to immigrant-receiving areas exist, including windfalls in the value of developed land, increased division of labor, revenues from immigration taxes, and numerous others.
  4. Other economic and non-economic benefits of increased autonomy: The freedom to conduct “policy experiments” is quite valuable. States with residents opposed to the War on Drugs could decriminalize or legalize drugs without the fear of federal intervention. Liberal states in the Northeast could secede and impose all kinds of policies that would otherwise stand no chance against Republican opposition in Congress. Residents of seceding states might appreciate their greater individual influence over issues previously handled by a central government.
It is also worth noting that one of the states with a prominent secession movement is Vermont, which pays a fair amount more in federal taxes than it receives in spending. It would be amusing to see the anti-secessionists accuse Vermonters of greed instead of foolishness for wanting to leave!
Certainly, a host of other issues would arise, such as how to handle federal infrastructure and land, how immigration and trade between seceding states and their mother countries would work, and the possibility of mutual defense agreements, among others. But such issues have been resolved in previous secessions, including the one which created the modern United States. To merely bring up the “fiscal transfers” argument as though it ends all debate on the matter does gross injustice to an important issue.

Things that Make Us Cry

Steve Horwitz had an interesting post over at the Bleeding Heart Libertarians back in October that I just noticed now, where he addresses once again research that came up some time ago that purported to show that libertarians tend to be focused on logic at the expense of emotion.

Horwitz challenges this conclusion, pointing to a video male libertarian friends of his have told him drives them to tears. I watched it and I had the same reaction. I suggest you check it out:

To Horwitz’s observation, I will add my own about media that drives me to tears: Google’s yearly “zeitgeist” videos (“spirit of the times” – see 2013, 2012, 2011, for example), the “I, Pencil” video (explanation of spontaneous order), images of Christians joining hands to protect praying Muslims in Egypt, and Niemöller’s “First they came …” poem, off the top of my head.

For the zeitgeist videos, the moments that set me off most were the shots of the artificial hand, artificial leg, kid with cerebral palsy walking to greet his father returning from the war, various brief shots of amputees achieving their goals, the Red Bull space jump landing with the man holding up his fists, the US soldier coming home early to his mother, Steve Jobs’s advice to stay hungry, stay foolish, the 29-year-old hearing for first time, and the solider high-fiving a local kid.

From these experiences I can extract what I believe are the moments which affect me most:

Overcoming conflict with other humans – rejecting war and accepting cooperation

Spontaneous, unplanned order – voluntary cooperation that builds magnificent things we do not expect but we’re all part of

Overcoming conflicts with nature – fighting back the scarcity constraints of the world, fighting against the cold, uncaring universe and carving out a place for ourselves

and, maybe most importantly,

Unchaining of the individual to achieve his or her potential

I say that the last one is perhaps the most important one specifically because of my reaction to the 29-year-old hearing for the first time in her life. I felt that the moment represented the opening of an entire new door for an individual that she thought would be closed forever. The sheer intensity of the feeling of overcoming what you thought would be a handicap for your entire life – and the overwhelming emotions when tasting this entirely new sense – hearing- for the first time in your life is simply astonishing.

Can the bolded points above somehow be connected to libertarianism?

– Overcoming conflict with other humans – replacing coercion with voluntary cooperation (see self-ownership)

– Spontaneous, unplanned order – emergent properties of market systems – in the tradition of Hayek

– Overcoming conflicts with nature – pushing back the limits of scarcity – see the libertarian emphasis on capital accumulation and innovation

– Unchaining of the individual to achieve his or her potential – libertarianism places a strong emphasis on the individual as the centerpiece of society. This point is also a little strange, since libertarianism doesn’t specifically say that individuals must be required to achieve their potential, but could very well choose to do nothing with their life if they so wish. However, it’s possible that people tend to be drawn to libertarianism because they value the individual so much already, and also happen to understand that all rights are individual rights.

I would even argue that the above points can be folded up into two main points. The overcoming of conflict with other humans and nature are both an unshackling of the individual – free from both human coercion and the limits of nature. We are then left with a free individual and the result of this free individual – the spontaneous order of social cooperation through the market.

If I may make the unfounded assumption that I am a decent representative of libertarians, I can see that the elements that set us off most are indeed ones libertarian emphasize – on the moral side, emphasis on the voluntary and on the individual. On the pragmatic side, emphasis on innovation, capital buildup, and emergent order. If we examine the condensed case I made in the previous paragraph, then we have the moral side, the free individual, and the pragmatic side, the result of the free individual.

Perhaps it’s not the case that libertarians aren’t very empathetic, but instead that they can openly make emotional connections when they are presented with situations aligned with the spirit of libertarianism. It is then that the libertarian can place himself in the shoes of the character in the story and appreciate the beauty of the situation as if it were his own. If, on the other hand, we see situations that emerge out of coercive action, we do not emote as easily, because there is something at the back of our minds that reminds us that there’s a zero sum game being played, with hidden losers in the background we’re not being shown.

I also want to point out what I consider to be a fantastic quote from Horwitz’s article – one that I believe is strong competitor for being one of the best that combine practical and moral arguments:

Critics of markets sometimes say “you can’t eat GDP.” What they miss is that you can’t eat, or learn to read, or go to school, or leave a bad marriage, or do pretty much any of the basics that we might see as required for a flourishing life without the wealth and time created by the market economy.

This relates to the washing machine, as the invention and its adoption opened up time for women to both gain more education and educate their children more easily, and education unchains people and allows them to do anything up to… well, we don’t know the limits of our imagination and our creativity yet. Hopefully, we won’t ever know them.

Good job to the BHL for a solid post. Now I need to get some water – I’ve somehow gotten very dehydrated after those videos.

A note on Walras’/Say’s Law, monetary equilibrium, and aggregate demand

Very often, people seem to confuse Say’s Law (or the closely related Walras’ Law) for the proposition that nominal spending doesn’t matter, or that aggregate demand shortfalls and excesses cannot occur. As I shall demonstrate, however, its clear implication is the opposite when one considers the case of money as a tradable good.

Imagine an economy in which money and goods are exchanged for each other. (Multiple different types of money can exist, although this does not change the outcome.) Many of the trades made involve money being traded for other goods. However, money is still “supplied” and “demanded” in the same sense that any other good is, and has a “price” in terms of other goods. Thus, there exist states of monetary equilibrium and disequilibrium.

Monetary disequilibrium exists when, at a given real value of the monetary unit, the the real quantity of money the public demands to hold (and is willing to purchase by selling other goods to obtain money) is not equal to the real quantity of money actually provided. As Walras’ Law implies, a shortage or surplus of money is matched by a surplus or shortage (respectively) in all other goods collectively, as measured by the market value of said surpluses and shortages.

So what, then, does monetary disequilibrium imply in terms of nominal spending? When a surplus of money is held (in real terms), there exists a shortage of other goods to be bought with money, and the public seeks to reduce its real holdings of money by increasing nominal spending of held money on goods. Such a situation is that of an excess of aggregate demand.

Conversely, when a shortage of money is held (in real terms), there exists a surplus of other goods to be bought with money, and the public seeks to increase its real holdings of money by decreasing nominal spending of held money on goods. Such a situation is that of an aggregate demand shortfall.

Walras’ and Say’s Laws concern themselves with markets in equilibrium and disequilibrium, and the fact that a shortage of good A in terms of some other good B it is traded for implies that there also exists a surplus of the good B in terms of good A. One need not reject this insight to accommodate the empirical existence of shortfalls and excesses of nominal spending. One must only consider what it is that is actually being spent.

A Note on Russell’s Fascinating Renegade History of the US

I recently watched a video of historian Thaddeus Russell giving a lecture based on his book A Renegade History of the United States. The historical aspects of the lecture were quite fascinating – history that I had never been taught in school.

A few main takeaways:

– Many aspects of our culture we take for granted today in fact originated from the “lowlife” of society – prostitutes, slackers, drunkards, and criminals.

– These cultural phenomena were wrested from a society committed to the Puritanical work ethic.

– The way to change law is to change culture – and that’s what the shameless of the past have done.

I recommend watching it if you have 45 minutes (1h 25 mins total with the questions at the end) – they will be minutes well spent:

Besides making a pitch for watching the speech (note: I do not necessarily support the normative suggestions he has for society), I wanted to share an email that I wrote to him (mainly) on his point about labor regulations and hours of labor supplied by workers in Europe:

———————————————

Hi,

My name is Michael (I’m an Econ and Comp Sci undergraduate) and I just finished watching the lecture that you gave to NHLF based on your book. I found the lecture to be quite fascinating (and did shed a tear or two at a point), but I wanted to make a quick note of disagreement (about which I could be wrong, of course). You mention in the lecture that one of the reasons why people work less in Europe might be due to labor regulation, but you wave off that reasoning. From what I understand, however, government policy can have a significant effect on labor supplied by workers. A quick overview of the ideas can be seen here:

Glossing over the details, changes in the relative tax rates between the US and European nations over the last decades can do a good job of explaining changes in labor supplied (that is, both the theory predicts the outcome we see and the empirics fit well in the theory).

So I wouldn’t brush aside government policy and labor regulation so easily. (More on this later).

There is another point that I wanted to make on the same topic: I’m European, though I was in elementary school when I left to come to the US. My parents, however, have told me much about their experiences, and I generally believe their observations, which are that Europe has a much more rigid social structure that does allow for as much class mobility. To get ahead, you have to know someone or cheat in some way. As such, the work workers put in simply wouldn’t be worth it, and so they work less. They have no “American Dream” to keep them going (so to speak). They’ve settled into a crappy state of affairs.

Moreover, this might have weird interaction with the tax policy effects mentioned earlier. That is, it might be that Europe has long had a history of lack of social mobility, which has given them fewer incentives to work. But also, it could be that their labor policy has been so bad for so long that their previous Puritanical morals could have been worn down, since they saw that work didn’t yield anything. So it’s not that they’re enlightened – just worn down by a long history of bad policy.

What are your thoughts?

Another question: The way I explain things to myself, morality and the Puritanical work ethic might have been necessary in pre-industrial society in order to have your children survive, no? Life was grueling work at a farm with uncertain crop yields due to unpredictable weather – if your children slacked off, they (and you in your old age) could die. Hence, when society was agrarian and with no capital structure (that is, stuck in the world of Malthus), they needed to teach kids that work was an end in itself – because that’s the only way they could survive.

And lastly: Are the thoughts presented in your lecture consistent with the evolution of the same social phenomena in places outside the US? That is, did the weekend, acceptance of bright clothes, etc. arise in places that are not in the US in the same way – by being introduced by “lowlifes?” Or were these ideas exported from the US?

In any case – I found the historical content of your lecture quite good (even if I haven’t had enough time to ponder over your normative suggestions for society).

Cheers,
-Michael

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The speech/lecture has a lot of other gold nuggets and is well worth a watch.

P.S. Teaching material along these lines got him kicked out of the profession: Why I Got Fired From Teaching American History