5. Property, Freedom, and the Essential Job of Government

Prof: Okay,
today’s discussion relies on three books,
and one of them is Hayek’s Constitution of Liberty,
which you’ve seen two chapters of online.
Another is Hernando de Soto’s
Mystery of Capital and the third, and by far most
entertaining, is Aravind Adiga’s,
The White Tiger. In today’s class we’re talking
about something really foundational,
and it is basically a pragmatic or practical theory of freedom.
It’s: Why is freedom a good
thing? This is a much less high-flown
theory than many philosophers would give.
Hayek after all was an
economist. But it is a powerful one,
and for me it corresponds more or less to my convictions.
The most powerful aspect of it
is that I can profit from your freedom, and you can profit from
my mine. Freedom is a common good.
Individual freedom is a common
good in a way that makes a great deal of practical common sense
to a lot of people, including me.
We’ll do it in four chunks;
we’ll begin by looking at Hayek’s framework.
We will then take up briefly
the question of government and how government relates to this.
Then we will look at de Soto’s
analysis of live and dead capital and his explanation of
why undeveloped countries remain undeveloped in many cases.
Then finally we’ll rub our idea
of freedom up against the lives of the central players in The
White Tiger. Throughout this I’m going to
advert from time to time to a Yale story.
Not the tragic one that is on
the front page of today’s paper but an equally–
well no I won’t say equally– another troubling story,
which is the decision of Yale University Press when it agreed
to publish a book about the Danish cartoons which poked fun
at the prophet Mohammed. When that book was ready for
printing three months ago the director of Yale University
Press called me, I’m on his–I’m on the
committee that decides what books they publish–
and the question was: Can we pull the cartoons out of
the book? These are cartoons which make
devout Muslims very mad. And the answer we arrived at,
very reluctantly, was: Yes pull the cartoons.
And that–think of that
problem, and think of what possible explanation could there
be why a great university feels itself unwilling to stand up for
freedom of expression in the case of these admittedly
blasphemous cartoons. It turns out the answer is very
practical and I’ll give you my position on it by the end of
class. Okay, Hayek was a charming guy
and a very practical thinker; less practical perhaps then
economists who work for banks, but as Nobel laureates go,
very practical. He was given to thinking about
hard cases; about why things were done as
they were. And he was most of all an
intellectual skeptic. He was most of all inclined to
doubt human knowledge, to lean on fallibility and
ignorance, to look at Marxist historicism,
which we discussed last time, as horse feathers.
He was contemptuous of not Marx
alone, but of whomsoever imagines that
there is a deterministic course for world history (a),
and that they know what is (b); neither (a) nor (b) washes with
Hayek. The reason it doesn’t wash is
that he believes in freedom. And in free societies,
outcomes are unpredictable. We’re going to–read this for a
second for yourselves. It’s the worst sin in the use
of PowerPoint is to put a lot of words on the screen and than
read them to people. It makes me furious when I’m in
the audience and people do it. So can you read it for
yourselves in the back there? We’ll parse it a little bit.

“Civilization which no
brain has designed but which has grown from the free effort of
millions of individuals.” The idea here is this is a very
powerful idea. It is, if you say,
“Who designed the world in which we live here at
Yale?” How long would the list be?
Or let’s try this,
let’s take the highest ranking officials of Yale University.
Let’s say Roland Betts who is
the chairman of the Yale Corporation,
and Rick Levin who is the President of the University,
and let’s throw in Linda Lorimer, who is the secretary
and Mary Miller who is the Dean of the College,
and think of four or five others that might be important.
What percentage of what goes on
around here did they think up? Take a guess.
Do we have a mic out there?
Hand it to the woman right
behind you, let’s get her guess. What percentage of the way we
do things at Yale is attributable to the five highest
ranking officers at the university?
Student: Five.
Prof: Five percent?
You think that much?
Let’s pass the mic around to
the–I can tell you’ve got something to say,
go with it. Student:
>Prof: Yeah,
it doesn’t seem to be on. Student: Can you repeat
the question? Prof: Okay,
third repetition. The question is:
Take the five highest ranking officers of the university;
take everything that goes on around Yale;
what percentage of it can we attribute to them thinking it
out? Student: I’d say less
than one. Prof: I’d say way less
than one, and I think they would say way less than one.
It’s because the university has
been invented a piece at a time over the centuries.
It’s reinvented every day.
What you do in the classroom is
part of reinventing Yale, what you do elsewhere is part
of it. And the notion of a free
society that Hayek wants to put in front of us is one where
agency, the right to make decisions, is widely disbursed.
You can imagine societies in
which that isn’t true. In fact, many exist.
One would be an authoritarian
society, an autocracy, where a ruling elite pretty
much says what happens. Another would be traditional
society or a theocratic society where there are standing rules,
they are more or less followed, and they restrict agency in a
sharp way. A New Haven colony in the years
1637 to 1665 was a strict theocracy,
and the rules were laid down in the Bible,
solum scripturem [correction: sola scriptura]
was the idea. They made no laws.
All they did was interpret the
Bible, and enforce it harshly. Hayek has in mind something
very different from that, and the idea that society is in
some sense a great learning machine,
or that a free society is a great learning machine,
is the powerful idea in Hayek’s work.
If we think of–you know,
I’m given to these extravagant charts–
historical time on this dimension measured,
let’s say in centuries, or in human generations if you
prefer, and on the vertical axis the
total shared store of knowledge that that society accumulates,
knowledge as trivial as how to manufacture a toothbrush or as
complex as how to operate a great university.
The accumulation of that
knowledge is, Hayek says, accelerated
exponentially by disbursed agency, by freedom.
The rate of accumulation grows
in an exponential curve with a free society.
He doesn’t talk about
demography, but I would say that a free society which has passed
through the world demographic transition so that people live
long lives, lives in which a great deal of
learning can go decade after decade,
that such a society, embedded in the institutions of
a free society, would have the sharpest upward
curve in the accumulation of shared knowledge.
The other side of that story,
and here I’ve added a second axis on the right,
which represents the percentage of a society’s knowledge which
one very competent person can capture.
Who’s the most competent?
Rick Levin is very competent.
Never brilliant;
always thoroughly competent. It’s really true.
I mean, it really is true.
I mean, part of why he’s so
good is he never tries to be brilliant.
He never–have you ever heard
him anything that was even vaguely edgy?
I’ve known him forty years;
we used to ride home together at night.
He’s never anywhere near the
edge but he’s never, never, never crazy.
He’s just–he’s the most
thorough–it’s the personality profile for an airline pilot,
a heart surgeon, and maybe the president of a
university. It’s a very steady,
very competent persona. And Hayek’s big point is that
no individual, however competent,
can know any major fraction of what–
of the knowledge accumulated in a free society over time.
And that, first of all that’s
humbling. It’s terrifically humbling.
And part of what the sort of
education all of you are getting is about learning what you don’t
know, and learning where to find out
the things you don’t know which through time you need to know.
It is not imagined that this or
any other college can create graduates who master any large
fraction of what is known in the United States or the western
world, much less the world at large.
As knowledge accelerates the
individual fraction of that knowledge becomes smaller and
smaller, and individuals become more and
more dependent on things discovered and known by others.
Take the toothbrush.
Who’s got a mic here?
Let’s go to the gentleman in
the red t-shirt. If it were your assigned task
in your first job to set up a manufacturing plant for ordinary
plastic toothbrushes with nylon bristles,
how would you go about it? Student: I wouldn’t
really have a good idea. Probably start looking on
Wikipedia. Prof: Okay,
that incidentally is where this photograph came from.
Okay, so you go to Wikipedia.
Do you think Wikipedia’s got a
design for a toothbrush factory? Student: No,
maybe Wikihow, or–
Prof: Okay, what you would begin doing is
reaching out to others. You would probably have to
reach out to several others, and those others–the others
who actually make these toothbrushes are–
do you suppose those plants are located in New Jersey?
Student: I’m not really
sure. Prof: I’m pretty sure.
I don’t even know this,
but I’d be willing to offer a substantial bet that the vast
majority of toothbrushes are manufactured somewhere in Asia
or the southern hemisphere; probably Asia.
I would also bet that no one in
this–does anyone in this room have a clue how you’d go
actually about it? Injection molded plastic–right?
No one knows,
and yet each of us profits in a small way from tens and hundreds
of thousands of bits of knowledge like that.
Let’s examine this chart.
Now I think maybe if we work
cooperatively in the room we could learn what it’s about.
I have no idea–I certainly
can’t read these labels. Anyone here who can read them?
Go for it–let’s get her a mic
so we don’t this. Student: The first one
is wool product, the second one is non-wool
product, and the third one is original
material, the fourth one means food
material, and then the last one means
products that are being exported again.
Prof: Okay, re-export.
This is a history of British
exports in a complex bar chart, and the fact that–are there
other people who knew how to do it and didn’t raise their hands?
What we see here,
this is kind of a division of labor story.
It’s a little like Adam Smith
and the pin factory; that we rely on others as
storehouses of knowledge useful to us, or at least imaginably so
in my example. This is the Model T Ford,
and it was produced for the first time in numbers between
1910 and 1917, and it was a revolutionary
machine. By 1917 it was–when it began
it was selling for about $1,000, which would be a lot more than
$1,000 today. By 1917 the Ford Motor Company
had figured out how to make this car and make money on it by
retailing it for $360, and they had done that by
combining many small pieces of engineering from other fields,
and by using a moving conveyor belt,
which carried the car along, and workers who stayed in
position, each with an assigned task,
each coordinated in a very efficient way.
And the larger implication of
that for the American and world economy, the knowledge embodied
in it, was enormous. It was wholly unoriginal.
Ford was not a brilliant
engineer. Some of the people he hired
were damn good engineers. By and large though,
they were just regular smart people who worked in a
cooperative team way, a division of labor about
ideas. There was an older idea called
the American system, and the American system was
interchangeable parts. It was parts made so precisely
identical that you could take the left front wheel drum off
one Model T and put it on any other Model T and expect it to
fit. And that idea–and that’s
actually one of the revolutionary ideas that’s
involved in the vertical spike of world affluence,
and which has been disbursed everywhere in the globe.
You can’t manufacture anything
in a competitive way if you don’t understand and execute on
interchangeable parts. The earliest alleged case was
actually New Haven. It was the Eli Whitney gun
factory, the waterfall on Whitney
Avenue, the little building there,
Eli Whitney had a contract with the federal government to make
10,000 muskets. He set out to do it with
interchangeable parts, and what’s fascinating is if
you go out there, they’ve got a couple hundred of
these things in the drawers. He got most of them just a
little wrong, so he would file them,
or his workers would file them and chivy them,
to make them interchangeable. But from the point of view of
the military, the idea of interchangeability
was huge, because when one part of a
weapon jammed, you could take another one and
interchange it, and the efficiency of the
logistics were enormously improved.
The military is not mainly what
that idea is about. Anybody have a clue who this is?
Fair enough;
there’s no reason you should. This is the guy,
Norman Borlaug, correct,
who did the critical work on developing high growth,
high productivity, and disease resistant seeds–
most of the work done fifty or sixty years ago,
he died last week–which increased agricultural yields on
a world basis. There is still hunger in the
world but it’s all manmade. That is, there are no cases in
the world now where there isn’t enough food to feed everybody.
There’s always enough food.
If it doesn’t get to the right
places that’s something to do with human agency or
institutions. And all of us benefit from that
work, and that work in turn benefitted from generation after
generation of botany and husbandry.
All this process of building
the social store of knowledge is what Hayek’s idea of freedom is
about. This is Dean Mary Miller,
and by now I’ve beaten this horse to death–she’s wonderful,
she’s absolutely terrific. What fraction of the curriculum
she supervises would she need to have direct knowledge of?
Do you think she knows what we
do in here? She would only know if I were
in a lot of trouble, or you were.
There are hundreds of courses,
even thousands, and the dispersion of agency,
the–last summer I sat at my summer house in Northern Vermont
with a stack of books about that high,
picking the books for this course.
She didn’t supervise that;
neither would I have been pleased if she had.
But the effect,
if she has the right people doing it and trusts them,
is very like Adam Smith’s pin factory and the division of
labor and the power it produces. So we’re back to Smith;
Smith had the idea that by dividing labor so that one
person doesn’t undertake the whole complex task of
manufacturing a pin, if you divide the labor among
many who get good at specific aspects of the task,
you can make it cheaper and more efficient then otherwise it
would have been. Hayek’s idea is more loosely
jointed than that. Hayek’s idea is that you don’t
even assign roles to people; you let them find their own
roles. That if you want to go out and
start a toothbrush factory using a novel technology,
invented late at night over beer with your roommate,
what’s the likely outcome? The likely outcome is that you
will fail. Your toothbrush will be too
expensive and not very good. Right?
Isn’t that the likely thing?
If you think about a market
economy as literally hundreds of thousands of people who make
decisions like that– go/ no go–with a new model
toothbrush, the accumulated knowledge from
that is enormously powerful. If you begin to make money with
your new model toothbrush, then a couple of things will
happen. One, capital will flow toward
you. People will say,
we would like to own part of this.
And our subject next Monday is
the joint stock corporation, which is all about that.
And capital will flow toward
you, and so will competition. As soon as you begin to succeed
people will attempt to get as close to your product as the
patent and copyright laws permit,
and to compete with you on the basis of quality or price.
And that process,
you can think of it is as enormous diversified portfolio;
the whole economy. No one directs the whole
economy or says where the capital goes,
though sometimes it feels as if Goldman Sachs comes close to
that. The decision process is highly
decentralized and un-programmed. Indeed, Hayek,
if you’ll look closely, says that what we’re trying to
do is create the opportunity for the unexpected to happen.
“Liberty is essential in
order to leave room for the unforeseeable and unpredicted.
We want it because we have
learned to expect from it the opportunity of realizing many of
our aims.” The core idea is disbursed
power of action. Now Hayek is entirely dependent
on the idea that we are of limited intellect.
If we were, as this quote says,
omniscient, page 29, the green quote here,
there would not be so strong a case for freedom.
I think there would be other
cases, but the core case that Hayek is
making is that freedom is a way of overcoming our own
fallibility, and of allowing others to fill
the holes in our individual stores of knowledge.
Now Hayek, early in the section
you read, focuses on the question of a rock climber.
It’s kind of a jarring
reference when you see it, it’s around page twelve.
I read, “Most people will
still have enough feeling for the original meaning of the word
free to see that if”– no, sorry–“In this sense
freedom refers solely to the relation of men to other
men,”– or persons to other persons,
“The only infringement of it is coercion by men.
This means, in particular that
the range of physical possibilities from which a
person can choose at a given moment has no direct relevance
to freedom. The rock climber on a difficult
pitch who sees only one way out to save his life is
unquestionably free. Most people will still have
enough feeling for the original meaning of the word free to see
that if the same rock climber were to fall into a crevasse and
were unable to get out he would only figuratively be called
unfree.” Now that’s a big–a lot rides
on that claim. Hayek defends it unevenly.
If you look closely at the way
he defines coercion, you’ll find that the rock
climber story is the clear and easy case,
and by the end of our slides today,
we’ll begin to look at some harder cases and some of those
hard cases are raised by The White Tiger book.
Now this is more my kind of
rock climber, hanging on barely.
I’m terrified of any height
greater than five feet. What’s behind this story?
What–Hayek isn’t sneaky here.
Anybody want to tell us why he
makes this argument? Because he is arguing in an
environment where Communism is a very live option,
and the Marxist position about freedom is that it’s a Bourgeois
delusion, and that only by giving
everyone the same access to material rewards,
to money, wealth, and the like; only by downward redistribution
of money, wealth, and the like can real freedom
be shared by everyone. Hayek wants desperately to head
off that argument. Now, whether that argument is
right or wrong is actually more semantic than anything else,
and we’ll actually close with a slide about this.
That is to say,
can you be free and at the bottom of society,
unable to do many things? Unable to effectively exercise
your freedom; one view is that the two
dimensions, freedom and wealth or power are entirely
independent. Another view is that without
some degree of market power, some degree of ability to
interest others in your needs through exchanging your skills
and your labor for what it is that you need,
or for the money which will buy what it is that you need or
want; only with some degree of market
power can freedom be fully realized.
And I’m of that second view.
I am of the view that the wide
dispersion of relative affluence is part of making freedom real.
The way I would argue that with
Hayek is that, conceptually,
the concept of coercion is extraordinarily slippery.
Let’s consider the guy in the
crevasse. He’s stuck, but you and I are
walking by on our way to a picnic, and he calls to us,
and we say sorry we’re late to the picnic.
It would be not–you wouldn’t
have too much twist the language to say that that was an implicit
act of coercion on our part. Then the slope gets dangerous
and complex. If he had diabetes,
and we withheld from him the treatment for diabetes,
would that violate his freedom? All I want you to do–what I
really want you to do is get the power of Hayek’s idea in your
heads and get the complexity of applying it in your heads.
Now the reason I think some
degree of affluence, or some degree of market power
is part of the deal, is that Hayek’s examples all
depend on it. The things which he tells us
about in the second chapter are all ones where people have
enough education, enough physical health,
and enough skills, that they can be real players.
Now the Adiga questions–and
this is Adiga’s social class we’re seeing in this slide–are
different. We’re going to go to Adiga in a
few minutes, but let’s pause and talk about the Danish cartoons,
which I’m not going to show you.
You can see them,
all you have to do is Google them.
And they are,
from an Islamic point of view, blasphemous,
and they are, from a western secular point of
view, they are in some ways funny.
This cartoon,
which is a cartoon about cartoons,
captures the idea that the scriptural blasphemy seen by the
Muslim here is on the same plain with the secular blasphemy seen
by the advocate of free speech. John Bolton,
he’s a Yale alum, I even know him a little,
he was Bush’s representative to the UN and he’s a radical
libertarian, and he’s on the warpath against
Yale over our not publishing the cartoons.
Let’s stop and talk practice
for a minute. Have we got–pick somebody
out–can you imagine any circumstance–the few,
the proud, the moose. I like it!–can you imagine any
circumstance under which you would say that we should tell
the University Press not to publish the cartoons in the
book? The book will be out in about a
week but without the cartoons. Student: I can imagine
this is a pretty strong case for doing that,
given that there were good reason to believe that
publishing the cartoons would– there was some specific threat
that publishing the cartoons would result in harm to the
university or to people here. Prof: Okay,
you cut straight to the chase, very well done.
The point just made is that the
university consulted experts, and the question to the experts
was: “What’s the probability of a terrorist
attack launched against Yale in response to the publication of
the cartoons?” The answer came back that it
was not insubstantial. Now why would that be?
Would you–you got to grab it
and talk to it– would you be inclined to take
the libertarian position and say,
“Yale is the kind of place which stands up for freedom of
expression?” Student: I think you
could make the case Yale stands up for freedom of expression in
a lot of cases, but not all.
Prof: Okay let’s
see–have we got a true gospel libertarian in the room?
We got somebody who wants to
say, “Dammit! You should have published
them.” I don’t mind being criticized.
Yeah–yes we need to–if you’ll
come forward a little it’s going to make it easier.
Student: I would say
yes, I see the cartoons no differently than I see all of
those Darwin cartoons that were around for Darwin day or the
pictures of the Christian fish with feet on it walking on to
land. I mean, if you can criticize
one religion then you have to be able to criticize all.
I think that the best approach
would have been probably to try to create an academic exchange
whereby every University displayed the cartoons in some
public place because I believe that freedom of speech is
absolutely sacred. Prof: You’re the kind of
guy Rick Levin’s scared of. Thanks that was good.
Student: I don’t need the microphone.
If the argument is that the
right to life is going to outweigh the right to freedom of
expression, a cartoon like this would in
fact raise the probable chance of a terrorism attack.
Bolton’s counterargument would
be that it’s a slippery slope. The minute you give into this
sort of appeasement towards that potential threat,
down the road the potential that you’re giving up a multiple
or a societal amount of freedoms to appease an aggressor,
you only gradually bring an even greater existentialist
right to free speech. Prof: I agree that that
would be one of the counters, and it is a persuasive one,
it’s important. The issue here gets to be–it
comes down in my view, to the effective ability to
defend the institution. When I say defend,
it I mean defend it. The next topic for us,
if I’ve got the slides organized right,
is the nation’s state system, and what we have here is a
question of narrow gauge state failure.
The guy pictured is Thomas
Hobbes, his great book The
Leviathan, came out at the same time as
the settlement to the Thirty Years War,
more or less and they were two faces of the same thing.
Hobbes’ central idea of the
leviathan was a power so great, and so well disciplined,
that it could monopolize force and violence in society,
and keep people from attacking one another,
and put down a general set of rules of law which allowed
people to know what was coming next.
If the leviathan were fully
effective, I would favor publishing the cartoons.
My reasoning would be similar
to the reasoning back left, that freedom is freedom,
and freedom includes bad taste. I think blasphemy is very bad
taste toward any religion. It’s bad taste,
but the fact that I deem it bad taste doesn’t make it
inappropriate, and inappropriate exercise of
freedom for those who take a different view.
That’s the whole idea of
freedom. Now what’s missing here is that
in some fundamental way the Al Qaeda events worked.
They did in some degree work.
We all pay rent on them every
time we fly. I mean, think about the person
hours consumed taking shoes on and off, and the perfectly good
bottles of water or shaving cream which are confiscated.
The critical aspects of state
performance: The rule of law reliably enforced,
zones of freedom, for example,
within our property here at the university,
corruption minimized, and the monopoly on force and
violence effective. Now what 9/11 was about was an
attack on our culture and a demonstration that even the
mightiest nation in the world, nay the mightiest nation in the
history of the world, was open to violent attack,
especially if you were willing to die in the process.
And we have been convinced by
that. If you actually think about
defending the Yale campus against–
just imagine a single person willing to die or spend his life
in prison for attacking Yale in the most spectacular possible
way, what would we have to do to the
campus to rule that out? Call the New Haven police
department? You must be kidding.
I mean, they don’t have
anything like the resources to do it, and our own police force
doesn’t come close to being able to do it.
The campus is built on the
premise that the monopoly on force and violence works.
It is built to deal with petty
criminals, the locking gates and that kind of thing,
but the locking of gates is entirely useless against a
terrorist. I soberly thought about this
and I thought I would much rather take the ringing first
amendment point of view, and I was only one of many
people involved in this judgment,
but ultimately I couldn’t bring myself to undertake that risk on
behalf of all of you. Richard Pestelli is correct
that that represents a loss of something and a step on a
slippery slope. I think that’s really true,
but it’s real. The virtue of Hayek’s way of
thinking is that it’s not all or nothing.
It is a pragmatic judgment
about how best to organize society.
Now Hernando de Soto,
third topic, The Mystery of Capital,
it’s a middle difficulty book. It’s not very difficult,
and it’s all built on one point.
The one point is the
distinction between formal and informal property.
The photo I showed you before
is a favela, near Rio in Brazil,
and it’s all informal property. The people who built those
houses don’t really own them. They own them according to a
set of informal rules that operate among the people in the
favela. They don’t have formal
documentation for them, so it is informal property.
Every building in New Haven is
formal property, even community gardens are
formal property. There is a deed written down,
you can trace it, and you can show it to a bank.
de Soto’s major idea is that
informal property is dead capital,
and formal property where the power of the state stands behind
your ownership is live capital. His claim is that poor people
in developing societies own a vast amount of capital in
informal forms, and that, just as capital is
formed in advanced market societies by combining many
small assets into a smaller number of big assets,
so too can capital be formed in poor countries by formalizing
property and allowing people to make investments by taking on
debt which is secured by formal property.
His further claim is that many
of the worst economies in the world are the worst economies in
the world because the number of hurdles to form–
that stand in front of you when you want to formalize your
property– are wildly excessive.
I’m going to do The White
Tiger at the beginning of class next time.
I urge you–one of you came up
to me at lunch today and said, “Wow this is fun!”
It is one of the great novels
of this era, and I promise you, if you’ll just give it an hour,
you’re going to love it. We’ll start with The White
Tiger on Monday and then we’ll go to the joint stock
corporation. The reading for Monday is on
the web now in Classes V2. It’s the Alfred Chandler piece
about railroads. You will need to go to RIS when
we get to the Harvard cases, there are three Harvard cases,
we’re going to give you all the Yale cases because we’re nice
people but Harvard is going to insist on selling them to you so
you’ve got to go to RIS and buy a little packet of Harvard

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