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An Economy of Liars (wsj.com)
78 points by watchandwait on April 20, 2010 | hide | past | favorite | 98 comments



>Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot.

I happen to agree with this definition of the state's duties, but I have a more expansive notion of (3) than most libertarians. For example, universal health care and education are public goods that generate more market wealth in higher productivity than they cost in taxes collected to pay for them, but markets intrinsically cannot produce universal education or health care by themselves.

As for the article, crony capitalism is precisely what happens when capitalists control the levers of government.


You don't understand the definition of a public good. The key to a public good is that it is non-exclusionary, or at least partially non-exclusionary, and would suffer from the free rider problem if provided by the market, and so would be inefficiently under-produced.

You say that health care and education generate more wealth than they cost. That doesn't make them public goods. Education primarily produces the extra wealth for the person who gets the education. This doesn't make it a public good, it just makes it something worth investing for each individual.

Also, look to rural India if you think the market has trouble providing education.

There are bits of health care that fall into public good, like vaccinations, but public health and health care are mostly entirely separate things.


Those who advocate government intervention where markets have not performed optimally also miss one important consideration: what the profit motive is to commercial business, the power/influence motive is to government institutions.

Even where a true public good exists, automatically defaulting to a government solution still leaves us vulnerable to corruption and greed where the incentives for political influence do not exactly align with the true public interest, with the added problem that government solutions tend toward centralization and monopoly even more often than commercial markets.

I think that the "market vs. government" model is a false dichotomy - there is an entire spectrum of viable organizational models within civil society, which can deliver public and private goods without compromising pluralism, voluntary cooperation, or individual liberty.


I understand the definition of a public good. Take education: a significant part of the benefit that flows from education is externalized, that is society as a whole benefits as well as the individual. As a result, in a pure market people tend to under-invest in education.


Ryan, I completely disagree. I am surprised that you would think that the society benefits more from the education than the individual. According to me, if I have higher education, I get a better job, better salary, more respect in social circle. Compared to this, what does society get if I am educated?

And looking at how tuition fees are at all time high and people are still paying them, I would not say that people are under investing in education.

EDIT 1:

For some reason, I am not able to reply to some of the replies to my comment, so let me clarify.

What is society made of? Individuals. Obviously, if individuals are better off then society will automatically be better off. Isn't it?

So if you think by providing education to an individual, society becomes better, why don't we provide good healthy food for all the individuals and we will solve the obesity problem and end up with a really healthy society? How about providing free access to a high quality gym and personal instructor? I see that you are disagreeing and you would say, one has to draw line somewhere. And in my opinion, if you think that Government should be not be responsible for good healthy food (the most important thing for an individual, even more than education), I don't understand how you can say that Government should provide public education.

EDIT 2:

And here's why I am not in favor of government programs. A bureaucrat has no incentive what so ever to please their customers (i.e. taxpayers). [Quick, tell me, how many government agencies do a good job in your opinion?] By nature, government will try to find a one-size-fits-all solution to education, which does not work. As someone else said, I am all in favor of voucher system which gives control back to people who care about education and let market place offer variety of solutions for people's education needs.


Ryan didn't claim that society benefits more than the individual, he just said that society benefits "as well as the individual".

This is an important distinction, because I think a big part of the disagreement here is how big a gap you'd need to see to call something a "public good" and accept some degree of government regulation.

In my intro economics textbook, on the section about externalities, the authors used the typical example of pollution as a negative externality. For a positive one, they wrote (paraphrasing) "economists have long recognized that certain professions, such as science and engineering, produce benefits to society that greatly exceed the immediate rewards that the practitioners are able to recoup..."

So it really is a question of degree. The people who did the original research that led to the creation of the internet or decoding the genome have contributed vastly more to the general wealth than people who lobby for the extension of copyrights that were set to expire (who probably profit personally but destroy wealth), but I bet they earned a lot less. I'm not opposed to a government that provides incentives through grants to the researchers.

Unless you're an extremist, the principles are the same, it's just where you draw the line. I'd call myself a moderate fiscal conservative - in general, I'd prefer market solutions, but I'm not a small government zealot. P

One quick thing about public health care - I got an interesting perspective from a physician who worked in an emergency room. He said that people who are broke and have no health care still get their health care paid for by the taxpayer. They just wait until problems become so awful that they have to crowd the emergency room, where treatment is at its most expensive. They're on the hook for the money, but you can't get blood out of a turnip, so the hospital is never reimbursed, and private emergency rooms transfer the patient to the county (taxpayer supported) hospital asap. Unless you're prepared to deny people with extremely bad health conditions access to the emergency room, you, as the taxpayer, are going to pay for the "emergency room public health clinic". So would you rather pay early, when it's cheap, or later, when it's extremely expensive?


the hospital is never reimbursed, and private emergency rooms transfer the patient to the county

This is not the case. Hospitals (including private ones) get some reimbursement from Medicare for bad debt cases. My wife manages the department responsible for this reimbursement at a local hospital, and we've had endless discussions about this. And in a conversation with their CFO over a friendly ping-pong game, I was told that contrary to public wisdom, the ER is actually profitable -- and this is an urban hospital with a high "disproportionate share" of bad debt.


I should clarify this - I meant that the hospital is never reimbursed by the patient. Medicare generally pays only a fraction of the bill, though the bill is often inflated in anticipation of this fractional payment (from medicare or HMOs), so the numbers aren't straightforward.

Either way, the taxpayer is on the hook. If some ERs are profitable in spite of a high percentage of bad debt, this just means that the taxpayer is carrying an even higher debt burden.


That's mostly correct, except that there are three classes of payers: Medicare/Medicaid, cash patients, and insurance. They form three separate supports that must together cover the expense.

In practice, Medicare/Medicaid form a near monopsony -- they're the 800lb gorillas, and can demand capitulation to their reimbursement rates. On the opposite side, cash patients are few, and many of those are expected to be bad debts, and so contribute little. Thus, the pressure release must be through private insurance payments. And that's why your insurance rates are increasing.

This is also why many experts fear that Obamacare's plans will squeeze private insurance out of the business, despite the "public option" being putatively off the table. If regulations hold government reimbursement down to a fraction of real cost, private insurance is forced to take up the slack. That necessitates raising rates, and thus forces customers out of private plans. But they're required to be insured, so they must move into a government-controlled plan.

Edit: awkward phrasing in 1st para


A proper and accurate accounting is important. We should know how much of the cost of treating patients who don't pay is covered by the hospital, the private insurance companies, the taxpayer, etc.

In terms of the argument about the "public good", though, I think the original point is unaffected. You wrote that private insurance "is forced to" take up the slack. Who is forcing them to treat these patients? Medical ethics does to some extent, there is what is called an "imperative to rescue". But there's also the long arm of the law - an ER that refuses to treat a critically ill patient may face criminal charges and other sanctions. Private hospitals definitely do transfer these patients to county if they can possibly get away with it, but at times they must treat and receive medicare reimbursement that doesn't cover the cost.

So we actually have a public health care plan. Right now, our public health care plan is a patchwork of regulations that encourages people with no money and no insurance to use the ER for primary care, resulting in a burden on taxpayers, private insurance, and private hospitals. A lot of people, myself included, believe that this has resulted in an extremely expensive and ineffective system of quasi-public health care. This is why I would support some form of organized public health insurance, in spite of the fact that I tend to lean toward market solutions and small government as a general principle.


At this level I mostly agree with you.

In fact, a recurring discussion between my wife and I includes me asking her these same questions ("Who is forcing them to treat these patients?")

I'm generally unsatisfied with the answers. A legitimate part of it is that it's a Catholic hospital, and so feel a greater responsibility to help.

But there's also an aspect of just needing to play along with the regulatory game. It seems that they've got themselves so dependent (or is that "addicted"?) to governmental aid, that they can't see a way to continue without it -- and that means full participation in all the wasteful, inefficient stuff. I believe (without quantitative proof) that at the bottom line they lose more to the bureaucratic garbage than they gain in subsidy.


Ryan, I completely disagree. I am surprised that you would think that the society benefits more from the education than the individual. According to me, if I have higher education, I get a better job, better salary, more respect in social circle. Compared to this, what does society get if I am educated?

He never said more goes to society. He just said some of the benefit cannot be captured by the individual.

This is trivially true. Employers pay an individual somewhere between nothing and the value that individual contributes. If an educated individual contributes more than an uneducated one, then the educated individual is likely to get more salary than the uneducated one AND the employer has a larger gap between salary paid and value captured. (Incidentally there is typically a gap between the value provided by the employer and the revenue collected, which provides yet another layer of more broadly spread societal benefit that is not seen by the individual.)

That excess value is captured by private companies that may or may not even have existed at the time that the individual was being educated. That is value going to society that is not captured by the individual, and hence which can't be recouped through any kind of student loan program.


What you are describing are simply the gains from trade. They exist for any good or service which is voluntarily traded.

Therefore, if we favor subsidies for education, we should also favor subsidies for purchasing industrial machines, computers to automate labor, or any other investment.


Not any other investment, by a long shot. Because while there is a potential benefit to government assistance, there are also potential costs in terms of distorting markets, inefficient allocation, and creating oversupply. There is a trade-off, and finding the right one can be difficult.

That said, historically we've gotten surprisingly good returns from subsidies on research, transportation, and certain areas of telecom. (The early Internet is a shining example.) However a certain amount of caution needs to be maintained because once a precedent has been set then regulatory capture sets in and the long term result of those unintended consequences tends to be very bad.


Not any other investment, by a long shot. Because while there is a potential benefit to government assistance, there are also potential costs in terms of distorting markets, inefficient allocation, and creating oversupply.

The same possible harms also apply to education.


Absolutely that is possible. But when you look at historical data, and you compare the trajectories of countries with and without strong educational systems, publicly available education has proven to be a worthwhile investment.


You're misrepresenting Ryan's statement. His argument is not that public education benefits society more than the individual. His argument is that public education is a net benefit for society.


And my point is, anything which benefits an individual (as long as it's not illegal) automatically benefits the society, as society itself is made of individuals. Is there any case where individual is better off but society is not?


Not necessarily. If the government were to, say, buy big screen TVs for its citizens that wouldn't necessarily create a social benefit as it may promote TV watching and negatively impact health. Education, however, it likely to give people perspective and options that will lessen their chance of looking to the criminal sphere for income and becoming a social cost via the prison system.


Now you are mixing two things. I am stricly opposed to Government forcing anything on individuals as it doesn't lead to any good. So if Government forces everyone to buy TV (or for that matter anything else), obviously it's no good for society.

I was talking about any voluntary, legal action by an individual which benefits himself. Such an action always leads to improvement in society as society is made of individuals.


So what's bad for the individual doesn't benefit society either.


Yes, just take a look at the recent subprime mortgage crisis, or the massive short Paulson and Company made on those CDOs.


Not everything that benefits an individual benefits society. Reallocation from the general public to an individual can benefit an individual, but be detrimental to society. Also some things may benefit an individual, but only provide marginal benefits for society.


"Reallocation from the general public to an individual can benefit an individual, but be detrimental to society"

I am not sure if I am following the above example. Could you clarify?

"Also some things may benefit an individual, but only provide marginal benefits for society."

So you prefer society over individuals. Seems like it's 1922 again and USSR called!


"Reallocation from the general public to an individual can benefit an individual, but be detrimental to society"

Repressive copyright laws the take ideas and culture from the public domain and give them to individuals.

"Also some things may benefit an individual, but only provide marginal benefits for society."

>So you prefer society over individuals. Seems like it's >1922 again and USSR called!

Where did I say that? You said that everything that benefits an individual benefits society. I was pointing out that in some cases that the benefit to society is infinitesimal.


Diminishing returns. The USSR overeducated much of it's population to the point where society would have been better off if they had spent more time working and less time learning.

Diminished public good. Copywrite that never expires.

Graft. Often public resources are sold to individuals at less than market cost.


I would argue that public education doesn't even benefit society. At least when you compare it to the private alternatives, even considering the massive subsidies the public version receives.

Public education stifles innovation. It wastes a lot of resources. Its far more geared towards instilling an obedient population than an inquisitive one.

If government were to heavily tax all private learning (formal education is just one kind) to pay for the "public option", we'd have very few private magazines, websites or other vehicles that currently keep us learning our whole lives. Would we settle for one magazine or website for each town?


Are you kidding? An educated citizenry is one of the most important things a society can have. The "better job, better salay, more respect" to which you refer are all functions of the value that you provide to the community.


Excuse me, but why do you have the notion that Educated people are somehow better than uneducated people?


Better in a moral sense or some abstract notion of the word? They very well may not be, the connection is murky certainly.

Better in the sense of being more valuable to society? That is often obvious. While a brick layer may be a fine and noble man who truly contributes to society, I think it is safe to say that the doctor's contribution is more valuable.

Also, when talking about a democracy, the people are meant to play a role in the governance. An educated populus will play that role better and make better choice in who they elect for leadership and what ballot measures to support.

On average, an educated person will contribute more to the governance and more to the economy than a less educated person. This does not make them morally better or better in the eyes of God, but it does make them more valuable citizens.


Ryan, I completely disagree. I am surprised that you would think that the society benefits more from the education than the individual. According to me, if I have higher education, I get a better job, better salary, more respect in social circle. Compared to this, what does society get if I am educated?

I don't know if this outweighs what the individual gets, but society certainly benefits from educated individuals. Shiny new iphones, better health, more entrepreneurs, better research... I could make a huge list of things that people smarter than me have done to make my life better.

EDIT 1: <snip> why don't we provide good healthy food for all the individuals

Some countries are doing just that, in schools, or other places. Most countries monitor their citizens health and provides incentives to get healthier.


Society gets an educated worker, who can produce far more, over their lifespan, than an uneducated one.


Imagine you are an employer. Do you want to hire your employees from a pool of uneducated or educated prospects?


Perhaps. I guess you can have the government help with internalizing the cost and benefits without providing the service itself. Think school vouchers for example.


That might work, as long as the charter schools aren't allowed to risk-select.


Or perhaps if they are allowed to do so, but have to disclose it?


I have to strongly agree. The individual recieving the education will likely benefit more than society, but on the whole there is great benefit to society to having an educated populus. This is true of all societies, but it is much more true in a democracy(or republic) where the populus is meant to take some role (even if indirect) in the governance.


Adam Smith wrote an interesting section of The Wealth of Nations on the issue of education. It appears in Book V of the volume, which is the book where he begins to qualify his otherwise laissez faire position. The section "Education of Youth" is Chapter 1, Part III, Article II.

Most of the section is devoted to explaining why endowing public money for educational institutions has a negative effect on the quality of teaching. Most of the arguments should be familiar to anyone who follows debates about public education, teachers unions, etc. It's pretty clear that Smith thinks full public funding for education will produce a negative outcome.

However, he does then start to make a critique of a society lacking any education or virtues—one that's actually quite similar to the critiques Tocqueville and Nietzsche would make decades later. Talking about the effect of the functional division of labor on the populace he writes:

But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. ... His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the laboring poor, that is, the great body of people, must necessarily fall, unless the government takes some pains to prevent it.

He goes on to write a justification for the public funding of the education of the poor. The state should teach the Three R's by establishing parish schools, giving prizes for academic achievement, and requiring students to pass exams before entering a trade. In this way, he writes:

The more they are instructed, the less liable they are to the delusions of [religious] enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people besides, are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually more respectable, and more likely to obtain the respect of their lawful superiors, and they are therefore more disposed to respect those superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government.

You should keep in mind that Smith is justifying only public funding for the education of poor youth, not general funding for the education of all at all levels. Nevertheless, even Smith saw areas in which laissez faire needn't be strictly followed, and which could benefit society if the government were to intervene.


This is OT, but I am struck by how Smith takes the malleable mind as a given: He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.

Not that "some men are stupid, and unsuited for greater work", but "lesser work makes stupid men". Quite a contrast w/ contemporary discussion, so fixated on IQ and innate ability.


For anyone who's interested, one of the canonical statements of the free rider problem and exclusive/inclusive goods is Mancur Olson's The Logic of Collective Action. A short book and well worth the read.


And you can internalize the effects of vaccination by government sticks and carrots, without having government provide the vaccine.

Of course there's a risk of regulatory capture in that system, that might make it better to let government provide the vaccines in the first place.


You're right about the definition of public good, but public goods are not the only area in which it's rational for the government to intervene in the market. Both health care and education have strong positive externalities, and would be under provisioned if left purely to the private market. Particularly in the case of education where many of those who benefit from education are budget and credit constrained, the under provision will be particularly severe.

That's why it makes sense for the government to intervene.


Even without vaccinations having a heathy population reduces the spread of a wide range of dissease.


> For example, universal health care and education are public goods that generate more market wealth in higher productivity than they cost in taxes collected to pay for them,

Oh really? Always?

I ask because the French and German govts spend about 8% of their GDP on healthcare and cover a huge fraction of their population. The US govt spends about 8% of GDP on healthcare and covers a much smaller fraction of its population. Since the US GDP/person is larger, the US govt is spending over twice as much per covered person on healthcare.

Even if we assume that the French and German govt's spending generates more market wealth than the taxes collected, it's unclear that the US govt's healthcare spending does.

That's why I wanted a very different "health care reform".

I wanted to give Obama complete power over the money that the US govt is currently spending on healthcare wrt the folks it currently covers. Yes, employees (state and local too), Medicare, VA, Indian Health Service (which is a real horrorshow), and possibly even folks who work for companies that get >80% of their revenue from govt contracts.

That's a huge fraction of the population.

We then see what happens over 6 years.

And, since govt health care advocates insist that govt healthcare is 30% cheaper, we cut the per-person budget 5%/year in years 3-5. (That's just over 20% total.) He can either return that money to the general fund or use it to cover additional people - the only hard constraint is the per-person budget.


Why are you complaining about Universal healthcare when both your examples of low costs France and Germany include universal healthcare? All evidence I have seen suggests that the US government would save money by moving to a well regulated universal healthcare system.

PS: Much of the savings of a universal healthcare system only works as you cover everyone. EX: Massively reduced paper trails, subsidizing the cost of medical school etc. As long as the government only covers a subset of the population it can't realize a wide range of cost saving options.


> Why are you complaining about Universal healthcare when both your examples of low costs France and Germany include universal healthcare?

I'm pointing out that experience with US govt healthcare suggests that universal healthcare provided by the US govt is likely to be very different from what other countries have done.

Remember - we don't get France or Germany running US govt healthcare - we get the US govt doing it.

> PS: Much of the savings of a universal healthcare system only works as you cover everyone. EX: Massively reduced paper trails, subsidizing the cost of medical school etc.

Sorry, but the "paper trail" argument doesn't fly. You have to track medical histories, which contain far more.

And, we already subsidize medical schools. More to the point, that spending is in the noise. If Obama wants to spend more money there, he'll lose at most half to the remaining private sector and can easily reduce the losses to 0. (As a condition of receiving "extra aid", folks can be obligated to work for ObamaCare for n years, just like the military academies. And, if you find that folks are unwilling to take the deal, that's worth knowing.)

I find the lack of interest in the trial period interesting. Most folks jump at the chance to prove themselves. Few think that they should be given complete control without any previous experience, let alone negative experience.


I agree that the US government has shown a remarkable ability to mess things up but we have also been running a huge healthcare system for a while so extending Medicare to everyone would be far simpler than a totally new system.

As to savings on "paper trail" is really a savings on the billing with 5 different insurance companies the doctor needs to handle each one separately and have separate negotiations on cost etc. Also because the government is covering everyone doctors and hospitals spend less time trying to bill people who can’t pay etc. And becomes the government has such close ties with the doctors they don’t need to closely examine every single treatment just a random sample to avoid fraud.

PS: lack of interest in the trial period interesting I am pointing at the Medicare system as the trial period. The government already spends 50% of every healthcare dollar so it's not exactly a new player in the system. Medicare is actually run at lower cost than most private insurance companies. There is even a standard idea of supplemental coverage which private company’s already understand and are used to.


> I agree that the US government has shown a remarkable ability to mess things up but we have also been running a huge healthcare system for a while so extending Medicare to everyone would be far simpler than a totally new system.

Except that the goal isn't "simpler", it's better. My offer lets you do what you want. If you think that extending medicare to federal workers is best, great. (I predict that they'll revolt because I've never run into anyone with experience with both who would give up private for medicare.)

> As to savings on "paper trail" is really a savings on the billing with 5 different insurance companies the doctor needs to handle each one separately

Except that it doesn't actually work that way, and the cost isn't significant. (Big doesn't imply significant.)

> lack of interest in the trial period interesting I am pointing at the Medicare system as the trial period.

And medicare is widely regarded as a disaster. I offer a chance to fix it and single payer advocates run away.

However, if you think that medicare is fine, then my offer lets you extend it to federal workers, the VA, and so on. And we get to observe.

And you get to deliver on the promise of lower costs. Since medicare isn't cheaper (I'll deal with overhead below) and delivers worse care....

Of course, you also have the problem that doctors who have a choice tend to flee medicare. If the private insurers are so hard to deal with, what does that say about govt?

> Medicare is actually run at lower cost than most private insurance companies.

Actually, it isn't. Medicare spends less money on one specific category of "overhead", but it spends far more on others. (Govt's overall spending per covered person is basically the same as the private system's spending. Medicare is actually worse than average for delivery vs cost.)

For example, the credible total medicare fraud estimates range from $150B to $250B/year. (The low number is from AG Holder, who said "more than".)

This is despite the fact that folks who raise disputes with medicare are less likely to win than folks who have disputes with the private system. What a deal - more fraud and more denied coverage.

The total profit of the private system is >$10B/year. And no, adding "executive salaries" doesn't significantly change that number.

The medicare fraud number alone dwarfs the supposed overhead of the private system, and the private system is bigger than medicare.

I'm sure that you've seen the "free medical equipment" ads on TV. That equipment isn't free, it's paid by medicare/medicaid. Care to argue that it's mostly medically necessary?

Free rein lets you fix this, if it can be fixed. However, until you do....


universal health care and education are public goods that generate more market wealth in higher productivity than they cost in taxes collected to pay for them

That's not clearly the case, at least for medicine: http://www.overcomingbias.com/2009/07/meds-to-cut.html


That does not counter his argument. Demonstrating that highways are more expensive to build in some areas than others does not show that building highways is useless. Extreme Example: If the total cost of universal healthcare is less than the total benefit of universal vaccination then it can be a net gain even if every other dollar was wasted.


> For example, universal health care and education are public goods that generate more market wealth in higher productivity than they cost in taxes collected to pay for them, but markets intrinsically cannot produce universal education or health care by themselves.

I have quite a different point of view from you of how to go about getting to our goals, despite the fact that they overlap almost completely - we both believe in literacy, education, health, and general well being. I'll leave the universal healthcare thing alone, since it delves into an argument that has merits on both sides and I don't have any radically different arguments that people haven't heard, except that I think the artificially high licensing requirements for doctors and restrictions on supply via medical schools are driving up costs and that's a bad thing. But beyond that, you've probably heard all of my beliefs on universal healthcare elsewhere and I have nothing new to add, and will refrain from reposting them. Both sides have some merit.

But I have, I think, views that most people haven't heard or thought of about public education. I've been thinking on this lately since I read a submission here where a teacher of the year was complaining about what a mess the school system is and how it kills creativity and fosters obediance. (I searched for the post to link it, it was +120 or so and very well received, but I couldn't find it - if anyone has a link for people who missed it, it was a very good piece)

Me? It may seem somewhat radical at first, but I think top-down, streamlined public education is a mess, a disaster, and makes people less fit to be adults and citizens. It makes them reliant on following instructions and higher authority that provide clear and precise instructions and evaluate on clear and precise guidelines, and kills innovation and creativity. Like some other bright students, I'd often try to speak to my teacher and say - hey, I'm not really interested in this lesson, can I do this more difficult and more stimulating thing instead? Far more often than not, the teacher said no. In the real world, if you go to head of R&D or operations or logistics with credible specs that show you can make a lot more money for the company doing something better and ask to work on it on a trial basis, you'll get greenlighted. If not, you can throw your hat in at a startup or start a company yourself. That's real life. The educational system isn't for that though.

It grades from 0 to 100. But in real life, it's okay to be terrible at, say, "social studies" and score a 0 on it while scoring 1,000,000 in an applied science like engineering. If you're a failure of a historian and can't remember dates and places to save your life, but you can make a better engine, you're in line for quite a good life. But the potpourri-based education system, with its dabbing here and there on a curriculum set by other people - it'll have none of that. You'll get an "A" in math, an "A" in physics, and an "F" in social studies, and wind up with a 2.6 GPA and be in bad shape academically.

I dropped out of two high schools and one university, and I think it was the best thing in the world for me. But I love learning, and I love good education. I've self taught myself a number of things, and learned from smarter people. But never mind me, the education system stifles creativity and curiosity among high performers, but most land on their feet. What about the people who aren't succeeding?

And I'll tell you - I've met some people who failed out of school but were quite talented, and it's a function of how the school system is drawn up. There's lots of new cool things coming out of home schooling, and one of the biggest findings is that people really shouldn't be studying a subject based on how old they are; they should be studying based on where they're at in their development. It's okay if this particular 8 year old isn't interested in reading nonfiction but is already doing algebra, and this particular 8 year old is still a bit rudimentary in mathematics but is reading deeply into classical works. You meet the student where he or she is at and everyone develops at a bit of a different pace.

And this is why I'll go so far as to say that I think the school system is destructive to young minds. It's because it chokes out potential competition from different systems. When I was speaking on the phone to a friend of mine about how hard it is to build alternative schooling projects, he said, "Yeah, it's hard to compete with free." But you know what? It's not hard to compete with free. You just need to provide better features and support than the free option, and some people will choose it.

No, it's much worse than that. The school system isn't free. You're not competing with free. You're competing with, "You've already been forced to pay for this." Anyone who wants their kid to be educated differently has to pay for their kid's education twice - first through taxes, and second through tuition. This means that private education is largely for the wealthy, and low priced private education options can't compete. Poor people can't afford to turn down the already-paid-for-education. Knowing that poor people will be choosing the already-paid-for option, very few people are trying to make low cost options that would work well for the poor.

I got into university despite not finishing high school, I learned quite a bit in my law, technology, and business classes, but I didn't finish because I couldn't deal with how university math was taught. I was already working on important stuff in my life, actually using real math, and I couldn't get my mind around the piles of homework of mindless nonsense.

Statistics class killed me. I couldn't deal with it. But I'm now a lover of statistics, and you know how I learned? Baseball. Comparing on base percentage, slugging percentage, trying to figure out what the optimum mix and lineup balance is, looking for baseball skills undervalued by market, looking for weird park effects where a player strikes out a lot at their home park for god-knows-why and might do better at a park that for whatever reason has lower strikeouts. You can find all kinds of cool things out diving around in statistics. For the real baseball nut, you can look at what percentage of different pitches a player swings at, and his contact percentages on each pitch - really fun and interesting stuff.

But as far as I know, there's none or not many classes teaching math by using sports, which is something a lot of kids like and are stimulated by. I played poker with a guy who couldn't do school math at all, but had a loose grasp of poker odds and amazing knowledge about basketball. We used to debate whether Allen Iverson's low shooting percentage high volume scoring was good for his team or not.

A lot of kids could learn math that way. You see kids who can't handle memorizing names and dates, are bored, not stimulated - but they can quote all kinds of stats about their favorite sports players and debate whether the higher batting average/lower power player like Ichiro Suzuki is better, or the lower average/more power guy like Carlos Pena is better.

But the top down, government run school system chokes that out. And that's before we even start talking about topics like history, which might as well be called "Patriotic Indoctrination Courses". The wars that we spent the most time on in history class were The American Revolution, The War of 1812, The American Civil War, and World War II. And we can get the "we're the clear good guys" side of the story, nothing about supplying Stalin and what Stalin did to the captured Japanese prisoners in Manchuria after the war was basically already over. Nothing about the firebombing of Dresden, very little about the fire raids on Tokyo. Then we get a little bit of "well, we were sort of the bad guys in the Indian Wars and Vietnam", and then we get not much treatment at all of World War I (we're the neutral to slightly bad guys in that one - why were we even in the middle of a European colonial war?), the Spanish-American War (the Americans of the day were waaaaay the bad guys in that one), the Mexican American War (questionable - somewhat bad in that one), or all the little invasions and overthrows of little republics there and there.

And I see this everywhere. I'm in China right now - and at the risk of upsetting the internet censors here, they ain't get so much a fair view of recent history. But my girlfriend is Taiwanese and says Taiwanese history vis-a-vis the Kuomintang and corruption and recent history is totally unreliable and ridiculous too.

I think central education chokes out better options, stifles creativity, fosters obediance, and has no chance at providing anything like a fair view of history. I think it made sense during the Industrial Revolution, where centralizing education meant a base standard of literacy and mathematics ability among the population, and central education might make sense in a developing country. But I think once you hit a certain point of wealth, then private education and tutors can take over.

People talk about how private education doesn't serve the poor - but I think that ignores the historical record. People have shown as much or more willingness to volunteer to teach than to volunteer for almost any other cause in history. And options designed to meet the student where he is at, to meet him at a point of interest, to build a curriculum for him - those options aren't built for poorer people once already-been-paid-for education is offered. The wealthier do alright under public education by opting out of it except in the best districts, but I think the poor suffer quite a lot by centrally planned education not meeting them where they're really at. I think it's not good for anyone, not the poor, the middle class, or the wealthy, and I think if we can realize this and dismantle centralized education, we'll see huge gains in creativity, persistence, personal responsibility, and prosperity.


Thanks for sharing.

I think you're somewhat overgeneralizing from your own experience, but there's no question that experiences similar to yours are widespread. Some school boards (and some schools, and some teachers) are better than others, but there's certainly a strong case that schools overemphasize obedience and conformity and underemphasize creativity and innovation.

It's an open question whether this tendency is more related to indoctrination per se (kids are future patriots/employees/consumers who need to be conditioned for obedience) or merely to the default imperatives of a bureaucracy (kids are forms that need to be filled in properly).

My anecdotal experience seems to suggest more the latter, but I live in Canada, which has somewhat more freedom of thought than the US because it doesn't matter what Canadians think. :)

Sometimes it's possible for parents to address these issues from within the school system by advocating for a change in the school culture (even within a pilot program) that is more geared toward the dignity, autonomy and creativity of the children than on maximizing obedience.

Others deal with it by removing their children from the school system altogether. In the US, there seem to be two more or less unrelated groups of home-schoolers: those who home-school because they want to teach their kids the universe is a few thousand years old, and those who home-school because they want to teach their kids to be creative, resourceful autodidacts.

You'll find a lot of sympathy for your concerns among the latter.

>I searched for the post to link it, it was +120 or so and very well received, but I couldn't find it - if anyone has a link for people who missed it, it was a very good piece

You're very likely thinking of John Taylor Gatto:

http://en.wikipedia.org/wiki/John_Taylor_Gatto

Also, if you haven't already read Paul Goodman and Ivan Illich, you'll find some hefty philosophical undergirding for your skepticism about institutional schooling.

By the way, do you have a blog or website? This comment is clearly essay-grade and should be read more widely than as a reply on HN.


How is it relevant to this article ? You're criticizing the public education, and you may have some good points, but I still don't see any reason to stop paying taxes for it. Maybe some pay for two educations, but I'm sure the economic and social price will be much higher for everyone (more criminality, less innovation) if there were only private schools.

And almost nobody but the state has an incentive to create a low cost school.


almost nobody but the state has an incentive to create a low cost school.

What is the State's incentive to create a low cost school?

EDIT: this may have sounded trite, but I'm not (just) trying to be snarky. Seriously: what are the incentives that drive to a low-cost public school? And how do they weigh against the incentives for higher costs?


Higher-value workers, more tax dollars, more dynamic economy, better everything, basically.


You're citing benefits of education. But what is it that gives the State incentive to make that education low cost?


Is that a serious question?

Lower cost means more people get educated. (citation: economics 101). More educated people is better for the state (citation: common sense)


Market economics don't apply here. First, education is compulsory. Second, paying for public education via taxes is compulsory. Thus, everyone has to pay, regardless of how high it is; and if you don't like the quality, you have to pay again to go elsewhere.

Market behavior doesn't apply when the guys with the guns are forcing you to accept their dictates (citation: economics 101).

Now, look at the thing weighing against low cost:

* Teachers' union demanding high pay and benefits, and forming an extremely powerful voting bloc.

* Parents demanding that a 20th sport be added to educational program - they're an organized voting bloc, while the opponents are diffuse and affected less strongly (tragedy of the commons).

* Opaque budget data.

* and so on


Well, excuse me, I thought I was simply responding to the question about why more affordable education would be desirable.

Didn't mean to get pulled into your Ayn Rand reality distortion field. I'll just be moving along.

Btw, Opaque budget data? Get off your lazy butt and go to Town Hall or City Hall. It's all there. If you put in the mental effort to read it and ask some smart questions, you might learn details that complicate your simple world view.


You could have mandatory schooling with no state run schools. That is more or less what the new health care bill does with health insurance, mandates coverage but leaves the job of selling policies to private insurance companies.


2 and (especially) your version of 3 are incompatible. Something has to give way. Some of us don't want to give way on 2.


And some of us don't want to give way on 3. That means we need to learn to compromise. Ideology is neat and tidy; real life is not.


That opinion seems to come around a lot, but it steams from the faulty assumption that we need to reach an agreement: we don't.

You should only compromise when the utility you get from getting part of what you want is greater than the utility you lose by what you give away.

There is no utility in reaching an agreement in and of itself, so there is no reason to do it.


The utility to a compromise is that it actually gets implemented.


> As for the article, crony capitalism is precisely what happens when capitalists control the levers of government.

Actually no - it's when cronies use govt to control capitalism.


When something is regulated by the government, the nature of that regulation is subject to being influenced by the regulated.

If the regulator itself had competition and participation in the regulatory scheme was voluntary, there would be real pressure to honestly regulate.

The government could, instead of regulating companies itself, manage a system of competing regulatory regimes and let people decide which one they trust.

There could be a "Good Housekeeping Seal of Approval" for accounting competing with FASB, companies could pick one and then publish to investors which one they adhere to.

If investors find that they are consistently burned by companies governed by FASB, they would start to favor companies governed by the alternative.

There would be real pressure to perform honestly over the longterm that a monopoly is not subjected to.

In technology, we have all sorts of competing standards that live and die by how good the results are.

Competition is a good thing and we need more of it, especially in government.


Yes. That's also a good argument for pushing for power from the federal to the state level. (And for having a federal system, or really small countries in the first place.)


Amen.

Actual, the competitive situation I described is already in place to a degree. Companies can go public in a different country, which many are doing since the oppressive sarbanes oxley regulations went into effect.


Aren't the rating agencies a counter example of the success of this model? They have proved that private market "over-site" is just as susceptible to influence of the regulated.

A flavour of this idea already exists inside the government and it has lead to a race to the bottom not increased accountability. Large corps are free to choose whom their primary regulator is.

Interesting take on from This American Life on the effects of the Office of Thrift Supervision's efforts to market themselves to businesses as a regulator.

http://www.thisamericanlife.org/radio-archives/episode/382/T...


Thee's definitely some truth to that. And debt issuers are paying for their own ratings.

I think, though, that perception of risk is highly distorted by bubbles. Its the success of risk takers that's convincing everyone else to buy and join them in taking even greater, but misperceived risks.

But the rating agencies still give all different kinds of debt different ratings. Not every bond is getting rated AAA. Plenty get a junk rating as well.

And with government and quasi-government Fannie and Freddie encouraging unreasonable lending and hiding risk through repackaging, it doesn't surprise me risk was hidden even from these agencies.

But I don't know if misperception of risk is quite the same problem as regulators being influenced to ignore questionable practices.


How would this work? Ok, so the decision is announced and there are three big regulators on the government list, "Toughy Inc.", "FASB" and "Wimpy Co." Here's how your scenario would play out with the big tech companies: Microsoft announces that they've chosen Wimpy to preserves their ability to innovate. IBM announces they've chosen Wimpy so that they can continue to be responsive to their customers. Google implies they wanted to choose Toughy but were forced to choose Wimpy by the competitive environment. HP chooses Wimpy and mentions something about being founded in a garage in California. Apple chooses the iconoclastic boutique regulator WimpyTwo. (WimpyTwo prints their standards on much nicer paper.) Every other tech company chooses Wimpy since it's obvious the market has spoken. Toughy Inc. lays off most of their staff.

Five years later it's revealed that upper management at Microsoft were including their giant egos as depreciable assets. The executives of Microsoft and Wimpy Co. are hauled before Congress and claim that nobody could have forseen what would happen, besides everybody was doing it, it was legal at the time, and it was the work of a few bad apples. A few mid-level executives get fired. WimpyTwo grows considerably and some former employees of Wimpy Co start Softie, LLC. Toughy Inc is never seriously considered since it's a niche player.


This is pretty close to not having any regulation at all.

The problem is that investors don't get "consistently burned" by companies with bad practices, they get inconsistently burned. And people are so bad at appropriately estimating and valuing really rare events that, if the burns are infrequent enough, investors will choose options that don't maximize their expected outcome. Leading, in some cases, to disaster.

Note that this wouldn't happen in an ideal market where 1) everybody's perfectly rational and 2) everybody pursues strategies of maximizing their long-term expected finances. But it happens in real life. That's one of the major problems with the financial system as it stands, and (ostensibly) a powerful argument that regulation of some sort is a good idea.


There problem with government regulation is that people get inconsistently burned. And that seems a consistent problem with government regulation.

There were plenty of people pointing out the bad practices of Enron, Madoff, AIG, but nobody was listening.

Politically driven regulation is incented to not rock the boat. They have no brand to protect.

And when the shit hits the fan, they'll just keep pushing the ultimate consequences into the future, because they control the Fed and the Treasury and everything.

There is no accountability. No one ever gets fired.

No one's perfectly rational. But we are not perfectly irrational either.


Government has been defined as a group of people that claim the exclusive right to initiate force against others in a particular area. Government and competition don't go together.


Governments compete all the time. If you don't like the way California incorporation works, you can incorporate in Delaware.

Even better is the way the Swiss do it. If you don't like the canton you're in, you and your neighbors can join a different one or start your own. It rarely happens, but the fact that it can keeps government responsive.

Of course, decisions there are mostly done by referendum anyway, so its hard for government to get far from the people.


Yeah - look at how well that's turned out in banking where the FDIC, OTS, OCC, and Fed are competing to run things.

</sarcasm>


I know there has to be some great accountants, CFO's, finance people, etc on HN that can offer more detail about a Repo 105 and what the benefit is for an organization (maybe an individual?) to do this, not just in Lehman's case. WSJ explanation is straight forward, but I would like to hear a little more about this practice--hopefully I'm not the only one.

From the article: "We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105. The Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner, a former federal prosecutor, last month."


Repo's are essential to banking. At the end of the day, a bank must be in a certain financial state. Fluctuations in withdrawls and deposits can lead to a need or surplus of cash. Financial institutions balance their books daily with repos. (The market is HUGE.)

IB's have a need for repo's also, but they often push the limits of sanity. LTCM used repos for large leverage also. (When Genius Failed is an interesting book to read; essentially the crisis of 2007 was LTCM on a larger scale.)

The financial crisis of 2007 was actually a run on banks through the repo market. IB's used repos on a rolling basis with very little margin for error. Suddenly, the haircuts got large and blew them up.

For an excelent paper on the crisis and the repo markets huge (dominant) roll in the crisis, see Gary Gorton's paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882


Though this is tangential to the story, I would like to second the recommendation of this paper. On the way to arguing for his thesis, the author explains the function of the modern banking system and the "shadow" banking system in clear and cogent terms. He relates contemporary banking practices to older ones and explains shows how they are similar in the event of a banking panic. Very good (but long) article.


This article attacks the current attempt to create new regulations without actually providing any alternatives to fixing the problems in the financial system. The author states:

"If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets."

Yet the author provides no ideas or suggestions on how this is to be achieved. Even Alan Greenspan, former champion of the free market said this about the greediness of Wall St, "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief." The author wants to restore something that was never there.

Since people (especially bankers) have proven time and time again that they will act in their own, immediate, self interest, this simply comes off as a rant by someone who's quite satisfied with the current state of affairs (cronyism included) and doesn't want anyone messing up his (or his cronies') cash flow.


Oscar Wilde said "a cynic is a man who knows the price of everything but the value of nothing". In the same spirit I say "a classical liberal or an economist is a man that believes that societies are nothing more than markets". And libertarians think societies are just an individual multiplied by n, where n > 1; they ignore that people interact and depend on each other.

Besides the list provided, I'd add 4) the state must protect the values of a society, also. Universal health care, avoiding abortions, protecting the environment, controlling proliferation of drugs are ethical values. The state must do it because it is just wrong not to do it.

Think of it as a "social infrastructure" akin to strengthening the social fabric or the human ties, of a society. It makes it more resilient to crisis.


In the same spirit I say "a classical liberal or an economist is a man that believes that societies are nothing more than markets".

Ridiculous strawman. If anything, it's the left that acts as though society is a simple system that can be effectively steered by central planning. And of course, selfless regulators will only steer in the right direction...

I'd add 4) the state must protect the values of a society, also

Which values? Christianity? Defending the sanctity of marriage? Preventing mixing of the races?

Universal health care, avoiding abortions, protecting the environment, controlling proliferation of drugs are ethical values. The state must do it because it is just wrong not to do it.

Ah, the values that you personally like. And it's wrong to not ruin the lives of recreational pot smokers?


>Modern liberals have greatly expanded the list of government functions, but, aside from totalitarian regimes, I know of no modern political movement that has shortened it.

We hear conservative and libertarian voices constantly decrying the expansion of government power, but what about the expansion of corporate power? Government deregulation is totally meaningless when virtually all industries are controlled by a handful of super-corporations with more capital and internal legal structure than most countries. The only way deregulation can have a whisper of a chance of ushering in a better market is if we also insist on the abolition of the multinational corporation, and break up the behemoths into competing regional conglomerates.

Of course, without any regulation, a single victor will soon emerge to impose its own will.


This article is schizophrenic trash. In one breath the author complains that the failure of the market is due to lax regulation and corrupt officials, while in the next he calls for further deregulation and less government oversight. He completely ignores the actual issue brought to light by the financial crisis which is exactly that this same spirit of "deregulation" has squeezed regulatory agencies like the SEC of funding and allowed them to be infiltrated by industry insiders, to all our detriment. The SEC ignored Madoff because they didn't want to rock the boat and even if they did, investigations cost money they don't have.

The Wall Street Journal has been a real Newspaper of Liars since it was acquired by News Corp. Get this garbage off HN please.


"In one breath the author complains that the failure of the market is due to lax regulation and corrupt officials, while in the next he calls for further deregulation and less government oversight."

I think the point was that regulation and officials provide false comfort, as they will be captured by the interests they regulate. Removing those regulations and officials will at least remove the false security the "lax regulation and corrupt officials" provided.


The author isn't only talking about the regulators being corrupt or incompetent. He's also talking about market participants like Madoff and Lehman Brothers.

Removing regulation will not suddenly turn the bankers into honest people, as the author seems to think.

"Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately—not withstanding what any rule might otherwise allow."

He's suggesting that we take away the regulations and just ask the bankers to be honest. Maybe I'm just cynical, but I don't think that's going to work.


I referenced this in my post. This spirit of deregulation has aided the revolving door culture which has grown up over the past 30 years. At any rate, I wouldn't propose disbanding a police force because it was filled with corrupt cops.


You are confusing your political viewpoints with the actual points the article made.

EDIT: It's sad to see that political discussions even on HN are dominated by the usual misrepresentations of arguments and viewpoints and voting behaviour based on political viewpoints, as is common on e.g. reddit.


You could try adding to the discussion rather than spouting off witty one-liners. I think I addressed the actual points in the article well enough. If you don't agree then respond in kind or not at all, rather than just showing your contempt. In some cases, not saying anything at all can serve to elevate the discussion.


The burden is on you to show that you actually did not misrepresent the author's points. You say the author complains about lax regulation leading to market failure. On the contrary, the author complains about too much static regulation, as any static rule just leads to it being circumvented. He proposes e.g. financial accounting rules based on general principles and duties.

Also, where are your sources for the fact that the SEC is or was at any time supposedly devoid of material funding?


Oh and speaking of crony capitalism:

Mr. O'Driscoll is a senior fellow at the Cato Institute. He has been a vice president at Citigroup and a vice president at the Federal Reserve Bank of Dallas.

Perhaps Mr. O'Driscoll, a prime example of what he claims (to his credit) is wrong with the American economy, should take his own advice and quit the think tank.


I think his point was about bad incentives, not necessarily bad people. As Cato is neither a regulator, not a regulatee, I'm not sure why his employment there would make any difference.


The influence government policy and are part of the revolving door system he claims is the problem.


This is just not true. The "revolving door"-system generally refers to the problem that private firms (the regulated) employ people who formerly worked for the regulator, thereby incentivizing regulators to regulate in favor of private firms so as to maximize their job prospects after their government term has ended. While it is true that candidates for governmental positons get temp positions at think tanks, think tanks themselves are neither regulated nor get paid by regulated firms to lobby the regulators to propose beneficial (to the regulated) regulations. So neither Cato nor AEI nor Brookings are part of the revolving door system.


Anyone who cites the U.S. constitution and limited government, who does not in the same paragraph acknowledge that the reason government was limited was to protect the power of slaveholders, perpetuates the crime.


If you're going to make a claim like that, you ought to cite your sources.


The 3/5ths clause? The two-senators-each rule to assure that the slaveholding states would have disproportionate power, and the subsequent battles to prevent new slave-prohibitionist states upsetting the balance? Article 1, section 9 (The migration or importation of such persons as any of the states now existing shall think proper to admit, shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight, but a tax or duty may be imposed on such importation, not exceeding ten dollars for each person)? The necessity of the 13th Amendment? Sanford vs Scott (4. A free negro of the African race, whose ancestors were brought to this country and sold as slaves, is not a "citizen" within the meaning of the Constitution of the United States.

5. When the Constitution was adopted, they were not regarded in any of the States as members of the community which constituted the State, and were not numbered among its "people or citizens." Consequently, the special rights and immunities guarantied to citizens do not apply to them. And not being "citizens" within the meaning of the Constitution, they are not entitled to sue in that character in a court of the United States, and the Circuit Court has not jurisdiction in such a suit.

6. The only two clauses in the Constitution which point to this race treat them as persons whom it was morally lawfully to deal in as articles of property and to hold as slaves.) ?


How does any of this suggest that the purpose of limited government was to protect slaveholders? No one is going to say that allowances weren't made to protect them but the 3/5ths clause has nothing to do with the enumeration of powers or the scope of government. Limited government and slaverights are orthogonal issues and should be treated as such.




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