Diagram: Political Objective, Economic Calculation, and Political Order

An awful lot of talk, debate, argument, and out-and-out violence over methods of governance tends to occur because people talk past each other, and it’s usually because they are each making assumptions about the properties of government that aren’t true. We often confuse the capabilities of different methods of governance, and it’s usually by combining two or three individual properties into one assumption or another within our evaluations.

It is this combination of properties that embeds different forms of government within the METHOD of decision-making, the ABILITY to make economic decisions, the MEANS of maintaining order, and the economic OBJECTIVE or goal of those decisions.

Furthermore the discussions tend to use moral arguments, simply because people can’t make clearer distinctions. We often assume republican democracy or mixed economies are the best answer, but we also imbue the people in those governments with goals that they cannot have, for cultural reasons or because, for practical and political reasons, you cannot hold that office without abandoning those goals.

If we are going to talk with each other, rather than past each other, we need to separate the properties of government so that we can discuss methods and objectives in a way that makes rational dialog possible. Of course, we are all cursed with different ideas about what it’s possible for human beings to do, to believe, to have as incentives, and even to comprehend. I think, in practice, the problem I have seen most is that we fail to understand the complexity of the world we live in, and the extent to which people in government can actually understand anything substantive except at a very abstract level.

Most political orders simply provide a means for conflict resolution between groups, if best. At worst, they exploit the citizenry for the benefit of a small group.

This diagram does not make those assumptions. It simply separates the objective from the method of order (preserving the institutions) and from the method of economic calculation.

It is perhaps interesting to note that LARGE areas of this diagram describe a connection between different properties that is IMPOSSIBLE, even though we try to connect them.

Most importantly, it separates the desire to socialize wins from the methods of economic decision-making and maintaining order.

We are too much concerned with making good government, when in fact it appears that we cannot do much of a good job of making it. We over-associate government with prosperity when it’s the other way around. We can afford more government when we’re prosperous, but prosperity comes from order (defense of property, trade routes, banking institutions, and other things) as well as individual economic calculation.

What we attribute to government is actually religious in nature: the general direction by which we can coordinate (or not) our activities. Those are the people who inspire us to move in a common direction, toward common ends, with common respect. Merging religion and government was a bigger mistake than we thought. We secularized religion, and put it into government. Government is just order and institutions. Religion, mythology, and ambition are what provides direction. Leadership and order are two different things.


ORDER AXIS: How is order maintained? From individuals (by religious or moral conviction) to dictatorship. (“Cooperation” [order and enforcement] Axis: From dictatorship to individual anarchy.)
DECISION AXIS: How are economic decisions made? From decisions by individuals to authoritarian decision making (by one person or hundreds). (Decision Axis: From market calculation to political management.)
OBJECTIVE AXIS: Is the goal of the decision maker to individualize or socialize rewards?

Most people only use two of these axes, at most, without separating them. In particular, they don’t understand that each axis is largely determined by a cultural bias. Most of the world is tribal or familial. Northern European cultural values are an exception, not the rule.

Group Decision Making

Order must be preserved somehow. People will not pay the “opportunity cost” of social order without it, and property rights cannot be preserved without that order. Without property rights, we cannot perform economic calculation. Or rather, economic calculation is limited to those with property.

Decision-making must be preserved somehow. Economic calculation must be possible for individuals or we cannot survive. There are a number of “tipping points” in governance, the first having to do with what an individual can understand, the second with the number of individuals who can agree on anything, the third the inherent conflicts that come from governing people who have dissimilar economic interests, and the necessity of oppressing some group instead of letting the market do its job in deciding.

I am pretty sure that the monarchic capitalism “orange slice” is best in the top diagram, and the universalism best in the bottom. We are currently trying to make the midpoint work, with republicanism, but this controls wins politically rather than with a market.

I usually put my support behind Hoppian insurance schemes and more general libertarian social service schemes. These permit economic calculation to occur.

Now, there will still be economic problems, in any economy, because of the human “stickiness” or “habit” problem, whereby people throw capital and effort into an area of the economy until it breaks. I tend to think of this as friction, like a body at rest in the physical world. It takes more effort to break its friction than to put it in motion. People are like this simply because it is far easier to calculate a future or an opportunity in anything of which you have knowledge than that of which you don’t. (The constant-entrepreneur error is the opposite error, whereby someone has a lot of ideas but never completes any of them.) Likewise, it is very hard to choose an area of potential reward. For these two reasons, we tend to imitate others who have identified an opportunity, and we tend to milk opportunities to the point of failure and exhaustion. When enough people in an economy do this at the same time (usually because capital is erroneously speculative, or too much easy credit is available and people are profiting from fashion rather than need) then the economy goes into a recession, productivity drops, and capital stops moving until new opportunities are identified, people take risks that are rewarded, at which point they will be copied. The way to prevent this exhaustion is not to put too much capital into the system.

This is a basic property of human understanding and is actually good economic behavior, believe it or not. So, there is no way to really fix it, other than we must not flood the economy with unpurposed money which simply exacerbates the behavior of sending capital and effort off to chase something beyond your needs.

The counter-argument is that we need to put capital into the system to encourage risk-taking. My response is that you should put capital into the system as long as it’s for a purpose, i.e. you’re borrowing for a known purpose against an anticipated reward. So, it doesn’t matter if you’re building airports, power grids, houses, or pyramids, as long as you borrow a fixed amount of money for a fixed purpose. This does not shock the economy. You can do ten of these things at once. But simple liquidity provisioning encourages massive erroneous investment. It encourages us to create failures.

I have to take this back to the calculative method again: property. If you don’t know about it, it isn’t property any longer. If you provide general liquidity, you’re destroying economic calculation on a massive scale. If you provide targeted liquidity, you’re not. If I give a homeowner a second mortgage to improve his house, that’s different from giving him a line of credit. If, on top of this loan, I socialize the potential losses by permitting him to live off others in his retirement, I have destroyed the ability of people to calculate.

In this light, spending programs are not a problem as long as they are literally given for contract purposes rather than general purposes.

We can still use lending and fiat money to provide incentive, as long as the borrowing is for a specific purpose, rather than to provide general liquidity.
And we must implement my recommendation for restructuring the banking industry so that lenders must have human knowledge of what they’re lending against (like in Switzerland).

It is not that what we want from government is bad. It is that the means we use destroy our ability literally to THINK and to reason.

The point I’m making is that as the size of the economy, division of labor, division of knowledge and specialization, and population increase, the MORE and MORE we must rely on market processes for economic calculation, and the more and more we must invest in the INSTITUTIONS that facilitate calculation, rather than government, and the less government we need, because there is less and less that the people in government can comprehend in order to make decisions. These institutions provide what we expect laws to provide, and provide rewards and punishment through market means. This process is ENTIRELY SEPARATE from the process of redistribution of the rewards created by this expanding economy. And again, the larger the economy, the more we must rely on institutions for redistribution rather than political methods, which increase rather than decrease group friction. So the purpose of a government is to be very small, and to simply tune the institutions as the economy expands, and to have all the institutions be private (market-driven) as well.

Property is a very simple concept, but it is the most important concept. Calculation is needed once property becomes complex. Institutions are necessary to maintain calculation. But whether large or small, someone must maintain order: the incentive for people to respect property and its institutions. Furthermore, there is a minimum amount of redistribution necessary in order to prevent violence. It also appears that we must in some way regulate population, and redistribution simply rewards people for “cheating” by breeding and causing others to fund their behavior.

If we do not redistribute, the violence that the common man pays into the social order by the restraint of his violence through his respect for property is being stolen from him. There is no value to him to restrain himself if he controls his breeding and forgoes opportunities to steal but gets nothing in return. Punishment and death are of course a means of enforcement, but it is expensive for the enforcer, wastes the victim’s productivity and value as a consumer, and requires that this malcontent be a very minor segment of the population. Too many of them and they cannot be oppressed by any practical means.

Furthermore, complex areas of the economy, like nationalism and trade, can be managed as institutions. The view I’m proposing does not require free trade. It does not require laissez faire anarchy. It requires that we understand the limits of human ability, and the tendencies of humans to act in a way that is rational for them, yet which leads to ill consequences over time.

This is the only intelligent way of looking at the social, economic, and political experience that is rational. Most other arguments are moral. We must remember that when we say something is moral it is simply because we don’t understand the end, but the end is probably bad. Something stops being moral when we understand its mechanics. This topic, politics, is not a moral question. It is a scientific one, or at least a logical one, using this method of discussion.



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