Friday, October 28, 2016

Liberal society depends on the presumption of rights.

The core liberal ideal at the heart of the American experiment is the presumption of rights.  It was imperfectly instituted at the founding, and has, miraculously really, expanded and become more universal since then.  But, in the past century or so, that presumption seems to have waned with regard to our rights in the realm of commerce.

I wonder if this has something to do with the persistent influence of Marx.  In a way, the fundamental challenge to the sustainability of liberal, civil society is our natural tendency toward tribalism.  The endurance and success of market economies is certainly related to the way in which markets undermine tribalism by building on impersonal exchange.  Every day we transact, directly and indirectly, with thousands, or millions, of others, who, in other contexts, would naturally greet us with vitriol.  The political season is a window into what human nature looks like in contexts where it isn't moderated by the utilitarian temperance of markets.

When those Trump and Clinton supporters put down their placards and shut off their Facebook pages, they all go out into the world and buy hamburgers, sell Halloween candy, repair plumbing, and hail taxi rides with each other without much thought about their moral differences.

It's actually kind of funny that such a big commotion is made about the occasional situation that arises where, say, a baker refuses service for a gay wedding, because in commercial settings, the interaction tends to have to be pretty peculiar in order to create controversy, as with the cake, where the baker is forced by the transaction to directly consider and affiliate with some moral sentiment.  Those bakers generally happily take the cash from, not only gay customers, but even from genuinely bad people, for the cakes they bake.

In practically every other context, we take for granted that people make moral judgments about each other in important and even unreasonable ways.  Even supporters of LGBT rights basically have a consensus that, as sad as it is, those cake buyers will have to deal with reactions from families, friends, and acquaintances.  In those contexts, we look to change hearts.  We pass laws to force the baker to provide a cake for the wedding, yet we wouldn't think for a moment to pass a law forcing the couple's parents to support the wedding.  And, yet, gay couples have surely faced much more despair about how their parents would react to their sexuality than they have about how their bakers would react.

The sharp difference in our reactions is due to the fact that we have lost the presumption of rights in commercial settings.  Liberalism is not the natural resting place of human nature - tribalism is.  Liberalism is sort of tribalism's opposite.  And it has to be learned and practiced.

Where Marx comes in is that, at its base, Marxism is popular because it manages to sneak tribalism into markets and undermine markets' natural tendency to reduce tribalism.  The way this happens is that the division between owner and laborer creates a dichotomy of in-group and out-group that provides us with a satisfying and unbreaking David vs. Goliath mental framework.  As with all forms of divisive community building, whether in traditional ethnic or racial relations or in lighter forms like team sports, we are provided with a template where we can persistently identify with the "David" team with little need for compromise.

This intuition is so strong that it even generally defines academic work.  How often do papers simply treat rising labor share of income as a positive outcome, a priori.  Surely there is some level of capital income that would be too low.  Surely there are contexts where falling labor share of income would be reasonably favored.  It seems obvious that there are distinct periods in the business cycle where that is clearly the case, in fact, since equity owners take nearly all of the shock of nominal contractions.  (Here is an old post about labor share of income.*)

For better and for worse, modern market economies undermine our sense of belonging.  Fewer outlets for divisiveness and moral control also means fewer sources for belonging.  I am afraid these two sides of the coin of human community are inseparable.

But, the Marxist framework allows us to divide this big, unmanageable, unknowable stew of human interaction into teams.  We know who to root for.  We can usually assume that our team got the bad calls, America is on the right side of the war, and workers (or customers) deserve better.**

This leads to a switch turning off in the part of our minds where we consider public postures about capital.  The American legacy of the presumption of rights, which informs our moral intuitions in so many other contexts, is disarmed.  Note, it is that American (or maybe more broadly, the British) legacy that is odd in the history of human interaction.  The strong tendency of tolerance instead of control is what makes us strange.  This is what always makes the lack of a presumption of rights seem so easy and natural, and why it has been such a miracle that the breadth of this presumption has grown over time.

Judged against the natural lack of a presumption, the liberal ideal is strange, and vice versa.  If the switch is turned off, our behaviors can change drastically.  How many political arguments revolve around the difference between people about where the switch is turned off and where it is turned on?  We can think of the sharp differences about race, sex, gender, etc. in this way, obviously.  But, it seems that where this happens with increasing frequency and universality these days is in this divide between capital and labor/consumer.

Much of my effort recently has been toward an empirical and conceptual reimagining of the housing bubble and bust, where I think there is a strong argument that the bust was the problem, and that it was certainly not necessary or inevitable.  Now, as I read memoirs about the early bust period, it is striking how explicit, universal, and ubiquitous the calls for ruin were - even among the bankers and homeowners themselves.  The country and its policymakers were basically in agreement in 2007 that, while price stability would have been very helpful for everyone, it was unacceptable because it would also help capitalists.  Every policymaker from the period bemoans the problem that they couldn't find a way to avoid crisis that would simultaneously maintain a crisis for lenders.  They clearly avoided obvious sources of stability.  And, their most vocal critics complain that they did too much.  One of the most vocal critics for not imposing enough pain on Wall Street has been the Wall Street Journal, which has pretty consistently been liquidationist.

For two years, we avoided the obvious solutions to the problem as we desperately tried to find some way to manage the economy that would hurt capitalists while it helped everyone else.  We never found it, because there is no out-group.  The enemy is us.  It's easy to scoff at this as apologetics for the powerful, because we have managed to create an out-group that seems comfortable and powerful.  But, accepting that caveat, is the mistake we have been making really that different than the mistake a culture makes that insists on preventing a gender or an ethnic group from becoming educated or legally whole at the expense of remaining poor and backward?  Forsaking a global optimum in order to capture an inferior local optimum is the more common human behavior.  Of course we aren't immune to it.

Many will be skeptical of my story regarding the housing bust and the recession.  But, considering the stark shift in moral form that comes from pivoting away from a presumption of rights, how certain do you need to be of your version of the story in order to take responsibility for demanding the imposition of "discipline" over stability for some specific segment of your community?  How certain do we need to be about our macro-understanding in order to risk the moral monstrosity of insisting on ruin?  In every instance where Ben Bernanke or Hank Paulson relented and decided that support was necessary, they were peppered with one demand.  The way this is set up, the capitalists will be ruined, right?  The shareholders will be wiped out, right?  The executives will be pushed out, right?  And, yet, even with that, time after time, when what amounted to bankruptcy proceedings were implemented, they were referred to as "bail outs".***

Consider the idea of corporate inversions and attempts to stop them.  Basically, some corporations are being acquired by foreign firms or are moving their headquarters to other countries to avoid onerous US corporate taxes.  One response, shared by both President Obama and Hillary Clinton is to try to prevent them from leaving and to impose punitive exit taxes on them.

Now, imagine any other groups or associations of Americans.  Imagine that they have decided that conditions are bad enough in the United States that they have to leave.  And, imagine that the government issued a proclamation that they would be stopped at the border so that the government could appropriate some of their valuables.  Has there ever been an instance where a government that did that sort of thing met your approval?

When we remove the presumption of rights, we are capable of a wholesale change in our public behavior.  When we act on that lack of a presumption of rights, our actions tend to be illiberal.  And our solutions tend to require coercion and an imposition of control.  This can end up affecting both the targets of our coercion and the targets of our protection.

Consider the impending expansion of overtime rights, which I previously discussed here.  This, like rising minimum wages, seems to be popular with the public.  But, it seems that the main effect here will be to switch a bunch of salaried workers to hourly, which will not only create a less steady income for them, but will also remove a sense of status and control over their working lives.  I suspect the popularity in the polls for this sort of thing comes from the idea that this is a free lunch for workers - that everything else will remain the same, but with a 50% bonus extracted from the firm at those times when hours go over 40 hours.  In the aggregate, this simply cannot be the case, as I argued in the previous post.  Clearly, these are generally jobs that have terms above any legal minimums.  These terms are the product of market forces, and on the margin, new demands on the employers will be balanced by new concessions from the workers.  Nothing here is changing the market forces that led to existing contract terms.  Even if you think the terms are abusive, time demands are hardly the only way that abusive terms can be imposed.

Clearly this will not be a winning change for some portion of the labor force.  But, whatever the outcome, consider the illiberal imposition that is being made here.  This is not a choice.  A worker who values the status and income stability of being salaried will lose it.  A policy that is premised on the idea that its beneficiary lacks agency will require, in the end, that its presumed beneficiaries give up any agency they had actually maintained.

This leads to awkwardness, again, when viewed from a presumption of rights.  This is similar to how rules from the 19th or early 20th century, that seemed perfectly reasonable to their supporters strike us a obviously sexist, racist, etc.

Imagine, for instance, if, in response to a problem of husbands being demanding or abusive of their wives, demanding that dinner be ready right at 5pm, we made a rule that, if a wife has had to do more than 2 loads of laundry during the day, she has a right to delay dinner until 6:30.  This is kind of what we are doing to salaried workers.  It looks, on the surface, like we are supporting them, but we are actually reinforcing and locking them in a lower status.  If you were against my dinner rule, I might respond, "Oh, well, I guess you don't understand that we have a problem with dictatorial husbands." just as someone might respond that opposing the overtime rule means that you don't appreciate the problem of abusive employers.  But, the rule itself is demeaning.  And, not only would it be demeaning to some of the wives.  It would be demeaning in a more persistent, stultifying way than the status quo was.

But, the illiberal approach tends to presume that everyone has their place and needs to remain there.  And my dinner rule, as a first order effect, is, after all, imposing a control on the husbands.  It is addressing a place where they might be asserting asymmetric power in a way that I might find inappropriate, and coercing them to give up that power, just like we are doing with these employers.  The presumption of rights is replaced with a whole set of other presumptions that end up demeaning everyone.  When we don't have a presumption of rights, it sure feels like we have the power to solve problems, though, like kibitzers over a chess board.

The rule on overtime imposes a lot of insults on workers who will be affected:
  • You aren't the kind of worker than can be trusted to set your schedule.  Your employer needs to have a record of your arrivals and departures.
  • You aren't the kind of worker who can be paid according to your general value to the firm.  You need to be paid like a machine, by time.  The work you do only has value as a rote task measured in time.
  • When there is excess work to be done or an unusual problem to be solved, you are not the kind of worker who represents dormant value the firm will look to.  You are a burden that must be minimized until the schedule can return to normal.
Clinton also frequently mentions programs to encourage profit sharing.  Here is an article where profit sharing and inversions are both mentioned:
Host Mark Halperin asked Fallon, "She would support economic policies which would take money from the people who are currently well off and doing well and move it to people who are lower down the economic ladder?" "That's what the profit -- the tax proposal to incentiv(ize) profit-sharing by corporations is all about," Fallon said. "It's a carrot, not a stick, but it's -- we think it would be a significant inducement toward more responsible -- we think it's smart corporate behavior."
Notice that Marxian underpinning.  Workers deserve more.  In a way, these two policies are similar in that they purport to force firms to share temporary gains with employees.  In a way, they are contradictory - one making workers more like the risk-taking owners and the other insulating them from the status and stresses of ownership.  What both policies have in common is the false notion that they can sustainably create a transfer of value from the out-group to the in-group.

Probably most successful political players have to utilize this sort of setup.  It isn't realistic to win an election among 300 million people by appealing to reason.  In this election, Trump seems to use foreigners as the out group and the Democrats seem to use capitalists in various forms as the out group (bankers, employers, etc.).  What the millions of workers who have been forced away from opportunity, or locked out of it, because of illiberal housing policies, need is a liberal party.


* Today, I would attribute much of the decline in labor share of income, and the related trade deficit and wage variance issues, to urban housing constrictions that raise wages of skilled information workers and block the natural, ancient migration responses of distressed working class households.  But, that is a very complicated story.

** An example of the excessive nature of this bias, both to support labor or consumers over capital and to underestimate the power that lightly regulated markets have to actually provide that support, is the airline industry after Carter administration deregulation, of which Richard Branson has quipped, "If you want to be a millionaire, start with a billion dollars and launch a new airline."  Deregulated airlines have found it difficult to maintain sustainable profits as an industry, with many famous failures.  Our presumption should be that a higher level of profitability would probably be a step toward a more healthy equilibrium.  Has any article in a general periodical about labor relations, mergers and acquisitions, or product innovations ever taken that position?  When the FTC reviews airline mergers, do they ever decide to approve one because it will raise prices?  Isn't it possible that higher prices are beneficial if the industry has consistently had difficulty earning profits?

It isn't the case that we have considered the peculiarities of the airline industry and decided collectively that profits are still too high, in general, I don't think.  We simply haven't thought about it.  That's the point of community consensus.  It eliminates the need to think about important things when we present our public faces.  As social animals with language, we necessarily evolved the ability to intuit these automated conclusions.  This is the Deirdre McCloskey story, as I understand it.  Some set of circumstances led to the rhetorical acceptance of merchants and traders, which set in motion an era of abundance.  It seems as though this rhetorical acceptance is not a natural resting place for human nature.  There is something about our intuitions against powerful "others", and the place of capital within that web of impersonal exchange that seems to represent both "power" and "other".  Thus, a priori, it must be better for airlines to earn lower profits.

*** Please do not interpret my discussion of this particular lack of the presumption of rights as a denial of the numerous other areas where it is a problem.  There can be more than one problem at a time.  I am not picking a team.  This just happens to be a question that has grown out of the work I have been doing.  There are people doing work on war-weary refugees and marginalized ethnic groups.  They are important.  You should pay attention.  But, if there is a chance that we have created the largest economic upheaval in our country of a generation, and it was because of these out-group pressures, then it seems reasonable to talk about this too, even if it challenges our posture toward the out-group that we all love to hate.  No less so because our inter-connectedness probably means the most vulnerable citizens are hurt the worst in either case.


  1. Fascinating post, and yes commercial transactions and speech are regulated in ways we do not regulate political or other transactions.

    You are onto something big with property zoning.

    Thought: 80% of commercial bank lending in on property. Zoned property, the value of which is often preserved through zoning.

    So who likes property zoning?

    Vulgar Marxism has limitations, and as medicine is economic poison, but as an explanation of politico-economic posturing, it does have its insights.

  2. Every day we transact, directly and indirectly, with thousands, or millions, of others, who, in other contexts, would naturally greet us with vitriol. The political season is a window into what human nature looks like in contexts where it isn't moderated by the utilitarian temperance of markets.

    This echoes something in a recent email thread with a friend about Facebook and Y Combinator's refusal to sever business ties with Peter Thiel. I suggested American progressives' rage at this outcome is partly displaced rage at a society that won't let them avoid putting money in the hands of potential Trump donors as they go about their lives. Money may be speech, but the vast interconnectedness of markets ties everyone's tongue. So when a group with enough market power to make a clear statement refrains from doing so, a switch turns off, as you say. Standards of liberalism that would figure heavily in other calculations fall out of this one. (Not to say the left considers this case a total non dilemma. Mikael Rogers's tweetstorm shows otherwise.)

    So when executives from the two companies offered some pablum about fostering intellectual diversity it struck most observers as a BS reason to keep giving aid and comfort to an ideologically disgusting person. I wish they'd offered something more blunt: we want our firms to be full market participants, and it's a good thing markets induce unlike people to cooperate. Markets provide millions of discrete contexts where we can separate the things that might disgust us about other people from the things they might bring to our collective efforts. Market-induced cooperation tends to make societies more tolerant. This is one of those patterns I think progressives are least comfortable with if you press them. They'll vacillate between accepting and rejecting the pattern, both as a description of reality and as an ideal.

    1. Looking back on this, I should admit something: there are issues that trip my circuit breaker too. I don't remember raising any norm-based objections to the North Carolina boycott. At some margin I was happy to let the global marketplace shrink if it meant louder support for transgender dignity. If non-boycotting companies were singled out as scabs, maybe then I'd have been less reflexive in my support of the boycott.

      In truth the global economy is full of immoral things over which money-as-speech and market-induced cooperation will cross swords, and there's no reason the latter should be the only liberal norm to govern the behaviour of the powerful. It's when deference to public pressure gives rise to things like trade cartels and badly specified certification programs and ever creeping guilt by association that heads need to be swatted with rolled up copies of Bastiat.

      So I guess I'd stress that a moral global economy requires openness to striker and scab alike.

    2. Great comments, Jason. I think we have to think about this holistically, though. If imposing morals through commerce was the norm, the morals that would be enforced would overwhelmingly be status quo morals, like Jim Crow. Amoral commerce has been the most powerful agent of change because of this - which is why it seems Jim Crow laws were imposed. What support for one form of moral enforcement over another comes down to is thinking one opinion being enforced is right and the other is wrong. At bottom, it's just sectarianism.

      Here's a related post I did a while back.

    3. Yeah, I'm probably making a leap somewhere between the moral status quo moving towards increased liberty and dignity, which I'm convinced of, and selective interference with markets having helped advance that frontier, which I'm unsure of. The first-principles case you've been building for freedom of entry and amoral commerce now permeates my thinking.

  3. TravisV here from TheMoneyIllusion.

    Awesome post! I'm not sure how related this is but I think it's interesting:

  4. Great comments everyone.
    Travis: the Haidt post is good, as usual. Don't you think he would do well to consider the urban housing problem, though. I think some of what we are seeing is the natural irony of human reactions. Cosmopolitan can be globalist because they have insulated themselves from the ramifications. Let's fill Manhattan with tenements for aspirational third world immigrants like it used to be and see what happens to the globalist world view. There is a hypocrisy that is central to these divisions. I think opening up the cities would actually make most of these divisions go away. More than the suggestions Haidt makes, globalists just need to practice what they preach.

  5. Regarding: "And, imagine that the government issued a proclamation that they would be stopped at the border so that the government could appropriate some of their valuables."

    I don't have to imagine:

  6. Re the corporate inversions - it's kind of weird that people aren't talking about the underlying condition. That our tax system taxes an American company more than it taxes a foreign company. That's weird, right? I'd think almost every American would fall into one of two camps: tax them the same or tax the foreign company more. Yet our tax law chose option 3 - tax the American company more.

    Re profit sharing. I'm a small business owner. We share a very small piece of the profits with a group of our workers. We explored sharing a more sizable chunk with them but they didn't want it. What I mean is that if my partner and I thought an X share was worth $50,000 per year, the employees preferred a $25,000 salary over the X share because the X share had risk. So we kept the X and the risk. The funny thing is that the employees kinda kept more of the risk than they thought. In the tail events, when X was worth zero, we would probably be pushed to do a layoff or two.

    1. Yeah. It's interesting how that works. Intuitively, we should think that small continuous changes in income would be preferable to certainty interspersed with extreme dislocation. But clearly the value of certainty, even when it is known to be temporary, is very high. It allows a rationality in household expenditures that just isn't possible without it. It's much easier to save for a rainy day than it is to constantly deal with intermittent showers.