Resetting for Graduate School

I have formed several ideas about economics over the past handful of years. Through the classes I’ve taken and some books that I’ve read, I’ve developed notions about the reasonableness of economic conclusions and what constitutes “good” methodology. None of this is rigorously formulated – for example I don’t have a great metric that defines whether a methodology is good and I don’t have a great definition of what good means. Though, I think I have a general idea of what is helpful for making progress in the field.

A random subset of my notions – my priors – include:

-Labor demand curves slope down and so minimum wage increases unequivocally lead to increased unemployment holding other variables constant.

-Market regulations in general tend to hinder economic progress by making production more expensive. This leads to fewer jobs, investment, production, and wealth in the long run.

-Our Federal government’s national debt is unsustainable and will cause (or at least, facilitate) a massive dollar crisis. But as long as big foreign players (China, India, EU) avoid consistent and steady growth, this won’t be an immediate crisis.

-Rent control is bad

-“Price Gouging” is necessary to equilibrate markets and is not immoral or unjust. Moreover, attempts to introduce a price ceiling exacerbates problems of inequality as those with more resources initially will be those most able to take advantage of low prices and purchase more than they need, leaving the relatively poor without any options.

-Reliance on data, econometrics, and mathematical modeling has become too important in the field. I do not, do not, do not mean they are bad! I mean if your regression results lead you to conclude that demand slope upward, either your data is bad or your model is bad and theory would have been a better guide.

-Price controls (ceilings or floors) are inferior methods of regulation and welfare. Attempts to control prices are attempts to usurp a mechanism that conveys extremely important information to buyers and sellers. For example, instead of controlling the price of labor via minimum wages, having the government cut a check to everyone making minimum wage – with the amount equal to the benefit they would have otherwise received with a higher wage – is better.

I am a month out from starting the Ph.D. Economics program at UNC – Chapel Hill and, to the best of my ability, I want to “reset” and start with an open mind. I don’t want to miss out on having a good conversation with colleagues because I’m close-minded on minimum wages or rent control. I am pretty confident I will leave school still thinking along similar lines regarding many of my priors, but enjoying grad school is enjoying the open faucet of ideas from peers and faculty.

Taxes: Compulsory vs Voluntary

I had a discussion with a couple friends about several different economic ideas, one involving compulsory taxation.

I brought up that income could be generated by the State through consumption taxes (sales taxes) and that these would be preferable to income taxes as they were not compulsory.

My friend disagreed. His reasoning was that the transaction involving a sales tax still included a compulsory unit as the consumer had no choice but to pay the tax portion of the bill, in addition to the regular price.

So I felt I needed to formally lay out why I think any consumption tax is not compulsory, while taxes like the income tax are.

My rule of determining whether a tax is compulsory is whether I can avoid the tax in some manner without incurring a legal penalty. So if I did not pay my income taxes each year and the IRS knew that I did not pay them and took no punitive action, I would call that tax non-compulsory. Conversely, if I don’t pay my income taxes and I go to jail simply because I did not pay taxes, then it’s compulsory.

It’s clear that the income tax in America is compulsory. We have laws against tax evasion and tax fraud. Simple.

My argument for consumption taxes not being compulsory is that I can avoid those taxes simply by not engaging in the transactions they are tied to. If there is a 6% sales tax on Gatorade, I don’t have to pay that tax. I don’t pay it by not buying Gatorade.

By making the decision to purchase Gatorade, I am implicitly consenting, beforehand, to pay the additional 6% tax as part of the transaction. If I consent to pay the tax, it is not compulsory.

Now it can be argued that a sales tax on necessities is compulsory as I need to engage in some necessary transactions for sustenance. Agreed. If I need to buy bananas to live and there’s a sales tax, I am coerced into paying the tax. However, this is fundamentally different from the compulsory nature of the income tax because this specific instance of coercion does not condemn the entire idea of sales taxes – it merely condemns the instances that are tied to necessities*. So to remedy the situation, if all sales taxes were removed from bananas in this example but kept on other items, then the compulsory unit is gone.

For income taxes, the entire idea of taxing income is condemned. There’s no scenario where the compulsory unit can be removed.

*It would be nearly impossible to determine what constitutes “necessity” and it also calls into question who is making that decision. So while I did not bother with that complication above, it is a major component that muddies up the issue.

Good Quote

This is taken from a post at the Mises Institute regarding an analysis of Bernie Sanders’ policy proposals. The author starts out with a great note on action versus results:

 “Before looking at Sanders’s platform, however, I believe it is important to note that when socialists speak of “victories” in the economy, they are not talking about actual results, but rather political achievements in the forms of laws being passed that mandate certain policies. Whether or not these policies actually achieve what socialists claim will be accomplished is another story altogether, but results are irrelevant to socialists.” (Emphasis mine)

The quote is in regards to socialism, but the idea can easily be generalized. The conspicuous “victories” of government – authorizing new minimum wage rates, passing new regulations on high profile industries like finance, health care reform, etc. – all come with an asymmetric risk/reward structure. When the legislation is passed, those responsible look like heroes standing up for the common man. But when the laws have a chance to sink their teeth into the economy the legislators are quick to shift blame to other things like “market failure” or “greed”.

Even if politicians understand their efforts are to blame for economic malaise, it is in their best interest to avoid blame. Securing re-election would become increasingly difficult with an explicitly poor record of legislating. Instead, when unintended consequences materialize they start working diligently to create new legislation that will fix the new problems. That way, they are still seen as working for the public good and devoting resources to serving the public and solving economic problems.

I wish the main problem here was the general public having a forgiveness and grace problem. In other words, if constituencies were willing to avoid going torch-and-pitchfork each time a politician did something wrong, then perhaps there would be more openness about failures (probably too optimistic). If this were the case then a period of re-evaluation could help remedy economic problems. However, I think economic ignorance is actually the main problem. With the way that politicians speak, it seems like they really believe economic issues could not have possibly resulted from their legislation. Outside forces must have interfered with their work and derailed economic progress. In this case, the result of failure is more of the same policies that created the problems in the first place and those working to fix the problems continue to look like the heroes.

 

An Economist Goes Christmas Shopping

Christmas is an easy time for Economists. Especially for those that value efficiency over sentiment.

Vox put out an article written by Economist Joel Waldfogel that explained that cash gifts would be much more suitable for any recipient you do not know very well. The logic is simple enough: When we buy things for ourselves we have an innate, sometimes tacit, understanding of what we want and why we want it. We buy things for ourselves only if we value those things at least as much as the price. When we buy things for other people, it is close to impossible to obtain that kind of information to make an appropriate purchase.

When we give gifts that others don’t value as much as we paid for them, it creates economic waste or a deadweight loss; the result is inefficient. For example, if I spent $10 on a pair of pants for someone but they only value it at $6, then there’s $4 of waste. If given cash, the recipient would not have purchased the pants and would have spent it on something they value greater than $10.

The punchline of Waldfogel’s argument is that you should give gifts only to those people you are very close to because you stand the best chance of obtaining the appropriate information to make a good (efficient) purchase. For those outside this group, give cash.

Over at Econlog, Economist Scott Sumner wrote a quick article on his frustration with what he describes as a “lack of imagination” with economists who maintain the cash-only gift heuristic. I share in his frustration that utility functions are not always as Economists depict them. There are “exotic” utility functions that include things like sentimentality that cannot be easily described by a mathematical equation.

The assumption that Waldfogel makes in his analysis is that gift recipients will value efficiency over thoughtfulness or sentiment. While this might be true for some, it can’t be generalized to everyone. It is easy to imagine a sensitive relative who would rather receive a gift they would not have bought themselves than to receive an envelope of cash. The fact that we go out of our way to buy gifts for everyone is reflective of the fact that we think most people will have these preferences.

I still sympathize with Waldfogel’s approach and with the rise in popularity of gift cards I think it is easier to find an efficiency/sentiment balance. For example, it becomes simpler to find out where people like to shop than to find out what they are shopping for. So we can pretty easily find out where most of our family members (distant or close) shop and buy them a gift card for that store. It shows we took a little bit of effort to think about them individually and it saves the potential waste by purchasing an item they may or may not like.

P.S. Doesn’t this issue go away with gift receipts?

Democratic Debate #1

Disclaimer:  My day job is financial reporting, not political analysis.

I used to think that I do not enjoy the election season, but I actually think I do. I love policy, so naturally there is a lot to think about. The deluge of comments on minimum wages, income inequality, trade deficits and budget deficits keep me tuned in and my mind occupied.

I tried to catch up on the debates, but I was only able to watch the Democratic debate. The Republican debates have been pretty difficult to watch, mostly due to Trump derailing the discussions each chance he gets. In light of this, the Democratic debate was probably more substantive and worth more time thinking about.

These are a subset of some notes I took while watching the first Democratic debate:

1.It is nearly impossible to change your mind in politics without becoming a “flip-flopper”. The fact is, sometimes new information is important enough to alter prior beliefs. One of the first questions was addressed to Sec. Clinton concerning this issue and she had a great response:

Anderson Cooper: Secretary Clinton, I want to start with you. Plenty of politicians evolve on issues, but even some Democrats believe you change your positions based on political expediency…Will you say anything to get elected?

Clinton: Well, actually, I have been very consistent. Over the course of my entire life, I have always fought for the same values and principles, but, like most human beings — including those of us who run for office — I do absorb new information. I do look at what’s happening in the world. [emphasis added]

You know, take the trade deal. I did say, when I was secretary of state, three years ago, that I hoped it would be the gold standard. It was just finally negotiated last week, and in looking at it, it didn’t meet my standards. My standards for more new, good jobs for Americans, for raising wages for Americans.

It reminds me of John Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?”

2. There was a point when Jim Webb was asked to respond to a comment on gun control and his response was priceless:

Cooper: Let me bring in somebody who has a different viewpoint. Senator Webb, your rating from the NRA, you once had an A rating from the NRA. You’ve said gun violence goes down when more people are allowed to carry guns. Would encouraging more people to be armed be part of your response to a mass shooting?

Webb: Look, there are two fundamental issues that are involved in this discussion. We need to pay respect to both of them. The first is the issue of who should be kept from having guns and using firearms. And we have done not a good job on that…So we do need background checks. We need to keep the people who should not have guns away from them. But we have to respect the tradition in this country of people who want to defend themselves and their family from violence…There are people at high levels in this government who have bodyguards 24 hours a day, seven days a week. The average American does not have that, and deserves the right to be able to protect their family.

3. I do not have a great understanding of why wealth inequality exists to the extent that we see today. Bernie Sanders is often quoting the statistic that the top 0.1% hold the same amount of wealth as the bottom 90%. I am not sure to what extent we can blame capitalism and government, or even if this is a real problem. I am concerned though, that the right questions are not being asked. We should focus more on how the top 0.1% acquired their wealth. If they, through their ingenuity and resourcefulness, generated billions of dollars in wealth for the rest of us to enjoy – think iPhones, fun gaming systems, efficient computer software, etc – then why shouldn’t they deserve a massive returns? There’s a serious temptation to unconditionally demonize wealthy individuals simply for being wealthy. We too often do not understand that the luxuries that we enjoy on a day-to-day basis were created by someone who took a risk to create them and that the American people willingly traded their money in exchange for the good or service. We should instead focus on those who acquire their money will the help of government – stated differently, let’s focus in on those that had State-sponsored partiality working for them in the market. Occupational licensing and minimum wages are great ways that established producers can force competition out by making it more costly to do business. The established firms sitting on a good deal of cash can become even more effective in pursuing these policies by promising to make big political contributions in the future. Sanders mentioned this problem in the debate at least a few times, as well – he’s been outspoken about the power of lobbying and campaign finance reform which I think is laudable. (One idea that economist and hedge fund manager Warren Mosler surmised would work was forcing 40% of any political contribution to be allocated to the opposing party)

4. At one point Bernie Sanders mentioned that we should look to Scandinavia for our economic paradigm. There is a consensus among many that the social democratic model that exists to a greater degree in countries like Sweden, Norway, Finland and Denmark has been a great success. However, this claim is highly suspect. Johan Norberg has written about how capitalism allowed Sweden to acquire its great wealth and was the engine of its growth. The phasing in of a social democracy model lead to a time of slower growth and ate up much of that wealth. Sweden has since embraced the nostalgia of smaller government. Finland has also experienced a terribly slow recovery since 2008 and is moving to reduce the size of its welfare state in an attempt to spur growth.

In 2010, the Economist wrote about the growing frustration among Scandinavian voters, especially Swedes – with the social democratic model. To end this point, here’s a quote from that article:

“The third trend is a malaise in socialism, and not only in Scandinavia. Many had hoped that the financial crisis would lead to a renaissance of the left, because the perceived failure of free-market capitalism would pull voters back into supporting a bigger role for the state. And yet Sweden’s election will confirm that this is not happening. In Denmark and Finland (even, lately, in Norway) the left is falling back. Across much of Europe, with the exception of France, the crisis has so far seemed to help the right more than the left… British public-sector reformers now look to Sweden for examples of greater competition and more private provision. So the Swedish model still appeals—but to the right, not the left. That is a mark of how far the Swedish Social Democrats have fallen.”

A Consumer-Driven Solution to Health Care Costs

Yikes.

Healthcare costs are clearly an issue and there is no lack of attempts to try and offer the best solution to the problem. From a free market perspective, the answer is driven by less regulation and less barriers to entry into the health provider markets. This will make it easier to offer these services at declining prices as competitive forces push prices down. While this tackles supply-side issues, the demand side can be addressed by moving towards high-deductible “catastrophic” plans in conjunction with the use of Health Savings Accounts, or other tax-deductible vehicles for health-related-saving. This allows the consumer to have more skin in the game when utilizing health care services and thus be more careful about seeking out cost-effective services.

I like these ideas. I think ideas that approach the problem in this manner would have a much better effect in the long run than the market reforms we have seen so far.

However, while the set of possible solutions is replete with ideas pertaining to the health insurance market and the health provider market, I have not heard or read any ideas about tackling the issue with respect to the consumer.

The root of the health care problem is not insurers or even providers (even though a good argument can be made for why the lack of price transparency is a good potential candidate for the source of the problem). The root of the problem is sickness and injury – consumer-related phenomena. If there were no illnesses or injuries there would be no health care crisis.

Maybe it is due to the relative political infeasibility, but I am a little surprised that I have not heard any answers to this problem by tackling the problem at its core – individual health.

It doesn’t strike me as something that is impossible to implement. I imagine the solution looking like this: allow individuals to opt-into a program that requires them to visit a primary care physician (for free) periodically throughout the year (quarterly sounds like a good benchmark) and record their health status (change in weight, blood pressure, blood sugars, etc). The physician can send the results to HHS or the state equivalent for review. There would be some comparison of actual health results against what was considered “good” health results and if the results were deemed “good” then that individual would be financially compensated through some kind of tax break. If the results were poor, then there would not be a penalty.

This back-of-the-napkin idea is obviously rough, but it is a type of solution that I have not seen before. People respond remarkably well to financial incentives – why not try them out on individual health outcomes. If it is successful, the government would save money in the long run by paying for “preventative care” in the form of tax breaks and office visits.

The key to this type of a solution is the idea of opting-into it instead of having the whole system mandated for everyone. For some, health care provision is not a concern and there’s no need to burden them with extra requirements. Those that want the money, however, freely exchange the freedom to forgo seeing a doctor for the chance to receive a tax break.

Good health is hard for many reasons. One important reason is it is not always certain what causes bad health. For example, the debates surrounding wheat gluten and GMO’s can easily leave people without a good understanding of what they are putting into their bodies. Additionally, the American Heart Association’s ardent support of a whole grains is at odds with other research that show wheat having correlations to serious health issues including diabetes. When information is not an issue, the will power to simply forgo unhealthy food is many times absent.

Sometimes, people just need a good incentive to get them on the right track. There is a lot to gain from keeping people out of the ER and out of clinics as it frees up resources for those who desperately need them.

Maybe this has been tried before and I missed it. Maybe this has been discussed at length and has been deemed completely ridiculous and infeasible. If you have any idea where I can find resources on this idea, let me know! I’d like to learn more.

P.S. Another possible metric for evaluating “good” health outcomes: compare an individual’s health care expenses to the average expenses conditioned on similar characteristics as the individual. The reward could be equal to a fraction of the amount saved if the actual costs were lower than the average. Again, no penalty if the costs are above average.

In Defense of the Ideologue

There was a series of responses to the question, “Why is there no Milton Friedman today?” in the an issue of the Econ Watch Journal. Find it here. (I’m late, I know)

Robert Solow argued, like the other respondents, that it is very unlikely that there would be another Milton Friedman in the profession. His rise to prominence was a rare coincidence of exceeding intelligence, adept skill at debating and engaging the public, a favorable political climate for conservative ideas (due to the popularity of Reagan and Thatcher), and more. However, Solow argued an interesting point that the economics profession and society in general is better off without such a persistent ideologue.

Here’s Solow from the article:

“The second part of my response to the question is that I’m glad there is no Milton Friedman anywhere on the political-economy spectrum today. I think that Milton Friedmans are bad for economics and bad for society. Fruitless debates with talented (near-)extremists waste a lot of everyone’s time that could have been spent more constructively, either in research or in arguing about policy issues in a more pragmatic way. I suppose that such debates also help to clarify implicit assumptions and shady arguments, but I think that is a small benefit compared with the cost in sheer hassle.”

I’d like to propose an amendment of sorts to his statement. I think Solow is only half-right: ideologues can indeed be harmful for economics and society, but only those that are dogmatic about that which is actually detrimental to economics and society. This does not, by and large, include Friedman (while Austrians like Rothbard might look at Friedman’s views on the federal reserve or inflation as lacking or too interventionist, the common view is that Friedman was a pioneer and staunch defender of individualism and capitalism).

Friedman’s “extreme” positions helped protect the value of free markets and was a much needed counter-balance to an intelligentsia steeped in the ideals of socialism and progressivism. The fact that  Friedman’s novel ideas were labeled as “extreme” only proves that academics had fell captive to the notion of salvation through government action in markets.

His contribution to society cannot be understated. Peter Boettke has even proposed a theory that Milton Friedman played a considerable part in the downfall of the European communist system in the early 1990’s:

“…but I want to suggest an alternative [hypothesis] and provide evidence of its plausibility – namely, that the economic failures of the real-existing communist system in East and Central Europe made sense only in light of the ideas of economic liberalism. And in the 1980’s, no one had stated those ideas more plainly and concisely than Milton and Rose Friedman in Free to Choose.“

The world needs more (talented) free market ideologues. It is always going to be frustrating to hear a sub-par economist talk about free markets in an insufferably dogmatic manner. Many hope to achieve the same status as Friedman but never will because he was a rare breed. We should help foster more of that type of public intellectual, though – not dissuade them. Societies have a strong tendency towards collectivism and it is up to the staunch free market advocates to fight against this trend and convince the public and academics of the evils of shrinking economic freedom.

Public Ignorance about Economics

I was struck by two David Henderson posts this week. You can find them here and here.

From the first:

“This helps make the point I made in my recent post that we can’t expect low wage workers to be good economic theorists, just as we can’t expect most people to be good economic theorists. This minimum wage increase had to smack Devin Jeran in the face before he started thinking about it. And, truth be told, we still don’t know that he opposes the minimum wage increase.”

From the second:

“It’s quite conceivable that many people put out of work by the minimum wage would rather have jobs at a wage less than the minimum than at no wage at all. I would bet that few of them understand that the minimum wage is causing their problem. So, given the general economic ignorance of the public, the surprise would be for relatively uneducated teenagers to understand the harmful effects of minimum wage laws when even a large percent of wealthy people don’t understand.”

Maybe I’m reading too much into this, but this seems to be a growing problem, especially when viewed in the context of economic models that describe politicians as preying on this ignorance in order to secure electoral victory.

I’m reading the Road to Serfdom right now and in the introduction, Hayek seems optimistic that the authoritarian regimes he prophesied about were not inevitable. He seemed to think that with enough work, the ideas of individualism and liberalism would conquer the day and prevent a societal decent into totalitarianism. But if individuals like Devin Jeran have to directly sustain the consequences of poor economic policy in order to gain an increased probability of understanding the poor economic logic, then I doubt there’s much hope that the general public will understand the complexities associated with socialism’s subtle ties to totalitarianism.

Who can blame then, though? Economics is a technical field like physics or chemistry. Expecting everyone to be trained and adept in economics is the same as expecting them to be adept at any other arbitrary field. However, where ignorance of chemistry or physics produces idiosyncratic effects, ignorance of economics can easily exhibit systematic effects through the democratic mechanism. In other words, failing to understand gravity’s effect on you jumping off of a building will effect a very small number of people around you but failing to understand that high levels of taxation are detrimental to economic growth may effect a multitude of people around you as the majority vote rules for all.

Are we doomed? Growing access to quality educational material regarding free-market ideas leaves me more optimistic. Hopefully as more people are burned by the unintended consequences of today’s poor policies, we will avoid worse, more systemic policies in the future.

Undergraduate Economics

I’ve been doing a bunch of research into Economics PhD programs lately – a common theme sure to show up in many future posts.

One of the big questions students have who want to start this endeavor is what major they should study. Economics seems like the odd-ball in this respect. I don’t have data to support this, but most of my friends who go on to graduate school studied the same major as an undergraduate – engineering, math and physics most of the time. I imagine that’s normal in most situations. Economics is different, though. In order to stand a fighting chance at being admitted into a strong program, students need to be very comfortable with using and understanding math. It could be easily argued that there is a strong advantage to skipping the economics major in favor of obtaining a math, physics, or engineering major.

This bothered me at first, but I got used to it. I also thought back to the economics courses that I took and realized that a lot of them virtuously useless. The undergraduate economics degree is a strange beast. It neither teaches great economics nor prepares you well enough for most occupations (but works surprisingly well as a job market signal). The classes that came close to being useful were my two semesters of econometrics, but even after taking those, I felt like I was capable of more harm than good with the tools that I had learned.

The undergraduate curriculum for economics is inherently difficult because it has to pander to students with wide ranges of ability. Some students have taken advanced calculus by the time they are in intermediate micro and some have only a vague idea of what a derivative is. The professor’s hands are somewhat tied in situations like this – it’s unfortunate. Additionally, the curriculum is dense and offers little time for exposition outside of the mainstream neoclassical models. These are great models, but after completing a two semesters of intermediate micro, I could hardly say I had a real grasp on the fundamental economic principles that govern that field. I knew how to find indifference curves and Stackelburg equilibria –  but that’s about it.  There’s a great comment, here, that sums up why this inertia exists (in the comments section, 9th one down):

… in some cases the simplifying step of assuming cardinality is fine if, for example, you are teaching a sophomore the last econ class he’ll ever take and it’s an intermediate micro class. In that case I would personally rather he get marginal rate of substitution and the logic of optimizing behavior with an incorrect cardinal utility assumption than spend time on the ordinal/cardinal mapping and not have him grasp the optimization as strongly.

That justification is pervasive – but not without warrant.

My attempts to learn economics have thus taken place outside of the classroom. I have remained convinced that the real value my economics classes offered was exposure to topics that I found interesting. I never learned much about them in class, but I could go home and read more about them after I knew they existed.

So the economics major is funny because it offers only a small glimpse into a vast wealth of ideas and while doing so, tries to incorporate the little amount of math it is allowed without losing most of the students. The result is a lot of interesting classes that don’t translate into applicable skills, but magically signal educational quality in the job market. Not too bad.

I’m happy I chose to major in math. I was able to take a lot of economics courses, but the math I learned has helped prepare me more for my current job as an actuary, and for potential grad school applications. With the growing competitive nature of economics, I’m sure this trend will continue to grow as well.

Mises Goes Rogue

I recently read Ludwig von Mises Explains (and Solves) Market Failure on the Uneasy Money blog and it was very surprising. I haven’t read much by Mises, mostly quotes from other authors, but having read plenty of articles from Austrian economists, I’ve acquired a decent idea of his economic ideology. I was surprised when Glasner pointed to an excerpt from Human Action concerning conscription:

From this point of view one has to deal with the often-raised problem of whether conscription and the levy of taxes mean a restriction of freedom. If the principles of the market economy were acknowledged by all people all over the world, there would not be any reason to wage war and the individual states could live in undisturbed peace. But as conditions are in our age, a free nation is continually threatened by the aggressive schemes of totalitarian autocracies. If it wants to preserve its freedom, it must be prepared to defend its independence. If the government of a free country forces every citizen to cooperate fully in its designs to repel the aggressors and every able-bodied man to join the armed forces, it does not impose upon the individual a duty that would step beyond the tasks the praxeological law dictates. In a world full of unswerving aggressors and enslavers, integral unconditional pacifism is tantamount to unconditional surrender to the most ruthless oppressors. He who wants to remain free, must fight unto death those who are intent upon depriving him of his freedom. As isolated attempts on the part of each individual to resist are doomed to failure, the only workable way is to organize resistance by the government. The essential task of government is defense of the social system not only against domestic gangsters but also against external foes. He who in our age opposes armaments and conscription is, perhaps unbeknown to himself, an abettor of those aiming at the enslavement of all.

This is as shocking as it gets. The champion of laissez-faire, once writing staunchly against state-intervention and explicitly against conscription in Nation, State, and Economy  and Interventionism: An Economic Analysis advocated for a non-trivial form of state dominance. If this doesn’t make one a cynic, I don’t know what does.

As surprising as it is, I think there is a good lesson to draw from it. The prior argument Mises made against conscription goes like this: once the government starts to draft “able-bodied” men for war, it recognizes that the men who are excused from the draft because they are involved in the production of war-related items can be replaced by the least unfit for battle (the elderly, the young, unfit men and women). The government can then draft the whole collection of able-bodied men and women and stick those who were unfit for battle in charge of the production process back home. This leads to compulsory labor service, as Mises put it, for the old, young and physically unfit back home in order to maintain the same level of production. The government then exercises control over the whole economy: compulsory military service, compulsory labor service, what is produced, how it is produced, and how it gets used.

It is hard to believe that the writer of such a scathing critique would advocate for the same policy a number of years later. What changed?

Mises apparently switched his views during the Cold War and the great battle against Communism. In the face of the Nazis, Mises remained steadfast in his opposition to conscription, but the sweeping influence of Communism pushed him over the edge. Mises, being a man of serious thought and cherishing the power of ideas, perceived the threat of the ideas of Communism more than the threat of Hitler. It is my impression that the intellectual influence surrounding communism scared him more than the genocidal, imperial tendencies of the Nazis. Mises made a conscious decision to fight these ideas at all costs.

I think this is important because the Austrian school (notably Mises, Hayek, and Rothbard) has a strong tendency to remain philosophically rigid in the face of crisis. The Great Depression is one example in which Mises and Hayek were strong and persistent advocates for government inaction. I think there is merit to this thinking – after all, their philosophy pinned the blame for the depression on the Fed and government policies.

Howeve, Mises demonstrated that there is a limit to the philosophical rigidity. When destructive ideas start taking hold within the intellectual, political, and public spheres, it’s hard to recover. Mises cherished the ideas of liberty enough to ironically depart from them in an effort to preserve them. The trick here is basking in the irony.

The lesson we should take away is simple: departures from orthodoxy should be carefully considered during times of crisis. It’s an uncomfortable notion to consider when orthodoxy is cherished. But it is warranted when danger is imminent and ferocious. That is not to say departures should always hold – some will be acceptable and some will not. I would argue that most times, they are not. But there should be more than one option when deciding how to address great threats.