After a long break, Vladimir Zolotorev has published another chapter of the translation of David Friedman’s book Legal Systems Very Different from Our Own. In total, four chapters have been translated out of order as of today. Today’s is dedicated to the legal system of the Amish, who are beloved by Mikhail Svetov.
From the text, it is evident that these downshifters are sympathetic not only to many Americans, but also to Friedman himself. I wonder if they are currently facing problems because of their support for Trump…
The English original was posted on my website around the end of August. The same fate awaits the translation as it is published on mises.in.ua. Usually, corrections of minor flaws are made to the translation, but overall there is not much difference whether to read it on my site or Vladimir’s.
At first glance, free capitalism, unrestricted by the state, has one fundamental characteristic — the inevitable concentration of all capital in a few hands. This leads to a situation that is no better than “state capitalism” in the USSR (roughly speaking, if 1% owns 99% of the capital now, it is clear that over time 0.1% will own 99.9%, and so on). In other words, the absence of state intervention in the market leads to the emergence of such an omnipotent monopoly capitalist that the state would seem like the lesser evil.
Where can I read, if available, 1) A refutation (preferably empirical) of the thesis on the concentration of capital. 2) What can stop concentration, other than non-economic (read: state) intervention?
The question is accompanied by a donation in the amount of 0.00080000 BTC
Unfortunately, any attempts at empirical confirmation or refutation of the thesis on the inevitable concentration of capital under capitalism run into the distorting influence of the state. One can provide examples of how capital concentrates because large capitalists successfully lobby for their interests, and as a result, regulations are adopted by the state that benefit large businesses and disadvantage small ones. Meanwhile, the market reasons for capital concentration remain behind the scenes. One can demonstrate how state antitrust services hinder the notorious concentration of capital, while the purely market mechanisms that also oppose it remain behind the scenes. Therefore, I would like to focus specifically on the market mechanisms working in one direction or another.
Concentration of Capital
The main market reason for the concentration of capital is the positive effect of scale. A large company can afford to use a greater amount of capital goods that increase labor productivity, which allows it to generate more profit and reinvest it, again, into increasingly capital-intensive factors of production.
It is also worth noting that consumer goods are becoming more complex, and the production of many of them inevitably requires the involvement of significant capital. For example, a small shipyard cannot build a cruise liner, and a small studio cannot film a blockbuster.
Diffusion of Capital
Now let’s look at the reasons that contribute to the decrease in the concentration of capital.
First, besides the positive effect of scale, there is also a negative one. The larger the structure, the more costs are attributed to parasitic processes. Orders move through the chain of command more slowly than they would in its absence. An order in a chain of command is more likely to be distorted than in conditions where an individual entrepreneur sets tasks for themselves or directly for the executors. Employees in large structures are no longer motivated by the company’s profit, which they influence only very indirectly, but by artificial KPIs. As a result, they are more focused on achieving KPIs rather than on the interests of the business. All this reduces margins. At a certain size of the structure, the negative effect of scale becomes stronger than the positive one. A business that has grown beyond its optimal size begins to eat away at its capital, yielding market share to smaller competitors.
Second, it is small businesses that implement the lion’s share of innovations. Even in a large company, pilot production is relatively small in size and relies on a small number of scarce specialists. Sensing excess profit as a result of implementing their idea, such a specialist can quite easily leave the company and open their own startup, which then skims the cream off the market. Successful startups grow, and the share of old capital decreases.
Third, for the sake of reducing risks, a large entrepreneur will prefer not to put all their eggs in one basket and will invest money in several companies. This dilutes the ownership structure of companies; the owner can no longer closely monitor the development of their business, responsibility is shifted to management, and it is the top managers who become the primary beneficiaries of the process, while the relative income of investors falls.
Finally, the factor of capital dilution upon inheritance does not disappear. The larger the company, the greater the chances that a bunch of people, as well as various funds, will be mentioned in the will, whereas a small enterprise is more likely to go to a single heir.
And what does this tell us?
Nothing. The optimal size of a business for each industry, and often for each region, is different and constantly changing; it is determined by the level of technological development, which can contribute both to increasing the returns from centralization (for example, auto repair shops were quickly displaced by auto plants after the introduction of the assembly line) and to increasing the returns from decentralization (for instance, broadband internet sharply increased the number of content producers and decreased the average size of a newsroom).
The concentration of capital in the hands of a few may increase or decrease; in essence, this is not important. What is important is that in a free market, the welfare of the poorest grows even when the welfare of the richest grows even faster. And there are indeed many empirical studies on this topic (although, of course, one must remember here as well that empirics will inevitably be distorted by state intervention). You can read more about this in one of the chapters of David Friedman’s *Machinery of Freedom*, which I am translating, titled “The Rich Get Richer, and the Poor Get Richer”. The desired empirics are also present there.
… when the impoverishment of the working class just doesn’t seem to happen…
I am posting the penultimate chapter of The Machinery of Freedom, Extracurricular Education: A Libertarian Approach to Children. Friedman describes in detail how he threw books at his children to see which ones would stick, and other antics dear to the heart of every ancap. While in the first chapters of the book, written before the author had children of his own, he campaigned for the quite vegetarian idea of implementing school vouchers, later he became a much greater extremist and began to challenge schools as such.
Chapter 64, Incorrect Use of Externality Arguments, is dedicated to the question of how the brain of even the most unbiased researcher tends to bend facts to fit a ready-made concept when it comes to searching for arguments for certain targeted actions. This is not to mention the difficulty of classifying various possible consequences as positive or negative, as well as the possibility of a consciously biased selection of facts. All of this completely undermines the utilitarian considerations used to justify a particular policy; therefore, in such matters, it is more appropriate to be guided by general theoretical, legal, and ethical criteria, leaving speculations that the world will end if one does not immediately march in the right direction to the demagogues.
Alright, I admit, the Fed messed up. Let’s assume the Federal Reserve really did inflate financial bubbles during the war and even after, which led to the depression of 1930-39. But what about the panics of 1873 (and subsequently the long depression of 1873-79), the devastating 1893 and the prolonged depression until 1896, and the short-term 1908. There wasn’t even a hint of a Fed back then.
Moreover, I am placing more emphasis on the depression of 1893, as it was the most terrifying in scale and damage (surpassed perhaps only by the Great one). The unemployment rate reached 17-19% at its peak! And all this happened during the administration of Grover Cleveland, who is considered the most libertarian US president. He was for: low taxes and non-interference in the economy. And against: high tariffs (which were simply enormous at the time!), business subsidies, pensions and material aid to victims (for example, he refused to allocate $100,000 to farmers in Texas affected by crop failure in 1887). And he gave a f… that is, he vetoed unconstitutional (as he believed) laws that Congress wanted to push through. By the way, what do you think of him?
And as the older brother who explains everything in much more detail, but whom few will read, this time we have the book by Milton Friedman and Anna Schwartz A Monetary History of the United States, 1867-1960. I will be taking illustrations from there.
The Crisis of 1873-1879
We see that during this time, the decline in business activity was accompanied by a decrease in the money supply, a drop in prices and — attention! — an increase in real income. In other words, production grew at a frantic pace — and this despite deflation (the reasons for deflation are well known: the US was returning to full convertibility of dollars into gold after issuing a huge number of unsecured greenbacks during the Civil War years). Thus, deflation does not necessarily lead to a slowdown in production. In general, calling this period a depression is somehow strange; rather, it was simply a structural reorganization of the economy under conditions of rapid economic growth and a decrease in the money supply. In the twenties of the 20th century, there was also frantic economic growth — but it was accompanied by the inflation of the money supply, which I wrote about when answering the question about the Great Depression.
The Crisis of 1893-1896
The crisis was preceded by a significant increase in the money supply, from 210 to 308 million dollars in Treasury accounts over the period from 1879 to 1888. This was due to the growing number of supporters of “soft money”: the return of greenbacks, i.e., unsecured treasury notes, or the unlimited issuance of silver dollars (it was precisely at this time that silver began to depreciate sharply because its mining rates increased). Meanwhile, the bimetallic standard assumed a fixed ratio between the price of gold and silver. Anyone interested can read about what arbitrage opportunities this hides in popular form in chapter four of the fanfiction Harry Potter and the Methods of Rationality. What happens when the state persists in maintaining the bimetallic standard can also be read in Saifedean Ammous’s The Bitcoin Standard, which summarizes the experience not only of the USA, but also, for example, the Chinese Empire.
Add to this that, although the USA did not yet have the Fed at that time, there was unregulated banknote emission by approximately 8,000 banks under conditions of fractional reserve. Therefore, once all these factors of monetary expansion had worked for long enough, any shift in market conditions was sufficient to trigger a banking panic. This happened in 1893. Under fractional reserve conditions, this inevitably meant the bankruptcy of many banks. The money supply shrank sharply, followed by a decrease in the volume of investments.
At the same time, although unemployment grew to significant levels and incomes fell at the peak of the crisis, the market adjusted very quickly to the new conditions, and soon it fell again. So here too, we see a trend: the crisis passes quickly if the state does not twitch and does not try to cure it with regulation. The illustration shows a classic V-shaped crisis structure: a rapid decline, a rapid recovery. Real income recovered to pre-crisis levels as early as 1895.
The Crisis of 1908
The same thing: credit expansion (the money supply grew from 261 million dollars in 1897 to 339 million dollars in 1906), a banking panic, the V-shaped nature of the crisis, and just over a year to recover to pre-crisis indicators.
Grover Cleveland (President in 1885-1889 and 1893-1897)
As is easy to see from the dates of the presidency, the crisis of 1893 could not possibly be Cleveland’s fault, because he had only just taken over from his Republican predecessor, Benjamin Harrison. Thus, he should rather be credited with the rapid exit from the crisis, and the record number of vetoes he placed on bills passed by Congress contributed exactly to this: he prevented the inflation of government spending (Warren Harding reacted to the crisis of 1921 in exactly the same way later — and with the same success), advocated for the reduction of tariffs, killed a bill on the emission of additional silver dollars, and solved the problem of the Treasury’s gold reserve by attracting private capital — a syndicate of several financiers simply bought up a sufficient number of bonds.
Cleveland turned out to be the only president in US history who managed to serve two non-consecutive terms — and this characterizes the intensity of the passions that prevailed at the time around the question of what is more beneficial: Laissez Faire or economic regulation. Unfortunately, Cleveland’s fight against the growth of statism ended up being lost: while under him the Democratic Party, in contrast to the Republican, remained practically libertarian, later the Democrats were consumed by the merging supporters of Mikhail Svetov the Populist party, and since then, instead of a choice between freedom and statism, US citizens choose between a giant enema and a shit sandwich.
Another, very tiny, chapter of Mechanics of Freedom is being published, The Conservative Error. In it, Friedman lumps together immigration, global warming, fracking, GMOs, and various other same-sex marriages, asserting that the rejection of human development in these respective directions is rooted in one simple cognitive bias. Moreover, this bias is characteristic of both those who call themselves conservatives and those who call themselves liberals (referring to the US coordinate system, of course). The bias consists of the assumption that one can stop a beautiful moment. No, you cannot.
The translation of Mechanics of Freedom is nearing completion. Parallel to this, I have finished organizing by chapters and posted on my website the English text of Friedman’s 2019 book about legal systems that are very different from ours. Vladimir Zolotorev has so far released translations of three chapters, all of which are duplicated on my site, and I intend to continue in the same vein. If you want to encourage the translation, send donations to Vladimir. But if he gets stuck for long, I will take the initiative.
In a short chapter with the strange title Capitalist Trucks, Friedman answers the question of how a state differs from a condominium, and also advises potential truck buyers on whether to buy a Kamaz.
On the one hand, Friedman’s arguments could encourage supporters of contractual jurisdictions. On the other hand, he also points out their limitations: such communities will inevitably be compact and small in number because the negative effect of scale is very pronounced in democracies. So enthusiasts of charter cities have something to think about. For example, whether their cities need a single system of law, or whether the development of most norms should be left to condominiums and other local organizations.
I’ve received another donation for the Friedman translation project, as well as a question: will the translated Mechanics of Freedom be available in fb2 format? Actually, I planned to stick with epub, but since that’s the case, there will be an fb2 as well. And since money has come in, it’s a great excuse to post a new chapter.
Chapter 61 has a grand title: A Bet I Lost: Where My Moral Philosophy Begins. Friedman shares memories from half a century ago about how he bet with philosopher Isaiah Berlin and failed to prove to him that moral judgments are more a matter of taste than objective facts.
The venerable philosopher explained to the student David, as simply as two plus two, that as long as we rely on the testimony of our sense organs, the objectivity of any facts is extremely conditional. He then developed the idea that mutually consistent impressions are perhaps useful enough to be considered facts, since they align well with each other and with the impressions of other people. In the same way, mutually consistent moral judgments can boldly be considered moral facts, and those incapable of perceiving them can be considered insane.
As a result, Friedman largely changed his position on morality and is now much more inclined to perceive basic moral statements as akin to facts of physical reality. However, he is aware that he lacks a decent argument against moral nihilism, and it is unlikely that one will emerge.
I published Chapter 59, regarding the problem of deriving the ought from the is in Ayn Rand, about a year ago. In it, Friedman examined the arguments for objectivist ethics in John Galt’s speech, found many logical holes, and stated that they cannot be closed by mere rhetoric.
In Chapter 60, The Economics of Vice and Virtue, the author analyzes moral qualities and actions from the perspective of economic analysis and game theory, thereby proposing his own approach to objectivism—that is, deriving the ought from the is. I have previously stated many times in discussions and answers to readers’ questions that a market society is more affluent and benevolent, and therefore less inclined toward the dominating desire to succeed at the expense of others than a society with strong state intervention. Friedman provided a more rigorous foundation for this empirical observation, for which he deserves thanks.
When I mentioned that the competition is not sleeping, and that an alternative translation of Friedman’s book is already undergoing pre-press preparation, I forgot to provide a link to the fundraiser for its printing. Those who would like to participate in the project, send a donation there.
At the time of this publication, 59,350 out of 80,000 rubles have been collected.
Also, as far as can be judged by David Friedman’s website, he wants to post Russian translations of his poems (most likely including mine), but the link does not work yet.
