WEBVTT NOTE The State as an Organization 1 00:00:00.000 --> 00:00:03.000 I'm really grateful and honored to be here. 2 00:00:03.000 --> 00:00:05.000 I'm not Austrian. 3 00:00:05.000 --> 00:00:08.000 I may be an Austrian, but I'm not Austrian. 4 00:00:08.000 --> 00:00:10.000 And I'm not an economist. 5 00:00:10.000 --> 00:00:12.000 I'm in finance. 6 00:00:12.000 --> 00:00:15.000 So some of what I have to say will probably be, 7 00:00:15.000 --> 00:00:19.000 undoubtedly will be old wine to many of you, 8 00:00:19.000 --> 00:00:24.000 but it may come in new bottles with a finance slant to it. 9 00:00:24.000 --> 00:00:27.000 And I find it helps me understand things, 10 00:00:27.000 --> 00:00:35.000 I hope it will help you understand things, put the concepts into a different framework. 11 00:00:35.000 --> 00:00:42.000 Franz Oppenheimer called the state the organization of the political means. 12 00:00:42.000 --> 00:00:53.000 Murray Rothbard defined the state as that organization in society which attempts to maintain a monopoly of the use of force and violence in a given territorial area. 13 00:00:53.000 --> 00:00:58.000 What they have in common is they both call the state an organization. 14 00:00:58.000 --> 00:01:01.000 And that's where I begin. 15 00:01:01.000 --> 00:01:06.000 I think since it's an organization, we should analyze it as an organization. 16 00:01:06.000 --> 00:01:13.000 There is theory of organizations, so why not apply theory of organizations to the state? 17 00:01:13.000 --> 00:01:16.000 It might help clarify how we think about it. 18 00:01:16.000 --> 00:01:20.000 First off, it's somewhat difficult to define an organization. 19 00:01:20.000 --> 00:01:25.000 By the way, what I'm going to say is work in progress. 20 00:01:25.000 --> 00:01:28.000 Some of it is off the top of my head. 21 00:01:28.000 --> 00:01:31.000 All the errors in here, all the omissions are solely mine. 22 00:01:31.000 --> 00:01:36.000 The only person who read this doesn't want to have any culpability at all. 23 00:01:36.000 --> 00:01:47.000 Anyway, so I define an organization as simply a group of individuals who order their acts together. 24 00:01:47.000 --> 00:01:55.000 They do that through understandings, agreements, sometimes contracts. They are either explicit or implicit. 25 00:01:55.000 --> 00:02:05.000 They may come into the organization with personal aims, but somehow in the organization they constrain their aims and they act jointly. 26 00:02:05.000 --> 00:02:12.000 They agree to act jointly. So therefore, all organizations have a few things in common. 27 00:02:12.000 --> 00:02:25.000 First of all, every organization has aims, even though sometimes we say well society doesn't exist or this organization doesn't literally exist, yet the organization has aims. 28 00:02:25.000 --> 00:02:36.000 The Ludwig von Mises Institute has aims and the people working for it have somehow gotten together and agreed to work in certain ways such that it has aims. 29 00:02:36.000 --> 00:02:46.000 There will be goals. They may not be stated. They may be unstated. They may not be understood. They may be dimly known, but nevertheless they're coordinated. 30 00:02:46.000 --> 00:02:57.000 Secondly, all organizations will have boundaries. Some people are in it, some people are not in it. So some people are in the state and some people are not in the state. 31 00:02:57.000 --> 00:03:06.000 Third, often times there will be capital in the organization and then there will be ownership of the capital. 32 00:03:06.000 --> 00:03:08.000 There will be people who own the capital. 33 00:03:08.000 --> 00:03:11.000 I will call those people the principles. 34 00:03:11.000 --> 00:03:14.000 They bear the risks of owning the capital. 35 00:03:14.000 --> 00:03:19.000 They often contract with other people who work with the capital. 36 00:03:19.000 --> 00:03:21.000 Those we will call agents. 37 00:03:21.000 --> 00:03:29.000 I'm going to be using, I'm going to bring in principal agent theory here and try to apply it to the state. 38 00:03:29.000 --> 00:03:38.000 Now fourth, in organizations there is always some kind of contracting going on. 39 00:03:38.000 --> 00:03:47.000 These will be the agreements or understandings, explicit or implicit, such that people will order their behavior. 40 00:03:47.000 --> 00:03:52.000 So the contracts will have principles and agents involved in them. 41 00:03:52.000 --> 00:03:55.000 And then there will be incentives. 42 00:03:55.000 --> 00:03:57.000 Every organization will have an incentive structure. 43 00:03:57.000 --> 00:04:00.000 It arises from the contracting. 44 00:04:00.000 --> 00:04:03.000 Now, most of that you've probably all heard of. 45 00:04:03.000 --> 00:04:14.000 The new element that came in 1976 was due to Michael C. Jensen and William Meckley. 46 00:04:14.000 --> 00:04:18.000 They pioneered the theory of agency costs. 47 00:04:18.000 --> 00:04:26.000 The way they describe agency costs are a composition of three elements. 48 00:04:26.000 --> 00:04:35.000 In order to reach understandings, there are costs of getting people together to reach agreements and contracts. 49 00:04:35.000 --> 00:04:37.000 So that's one agency cost. 50 00:04:37.000 --> 00:04:43.000 Secondly, inside an organization, people agree to do different things. 51 00:04:43.000 --> 00:04:50.000 That means that you have to monitor what they're doing and make sure they live up to their contract. 52 00:04:50.000 --> 00:04:53.000 So there are costs of monitoring them. 53 00:04:53.000 --> 00:05:05.000 Third, and most important of all, in organizations, human beings acting as agents, they do not fully live up to what they agree to do. 54 00:05:05.000 --> 00:05:12.000 Therefore, the failure to live up to their obligations leads to some more costs. 55 00:05:12.000 --> 00:05:15.000 and those are very important costs. 56 00:05:15.000 --> 00:05:20.000 I'll give some examples of these as we go along to make it clear. 57 00:05:20.000 --> 00:05:27.000 Now, it is impossible if there's a principal and the principal says to an agent, 58 00:05:27.000 --> 00:05:33.000 I want you to do something for me and the agent agrees and they have some sort of understanding or agreement. 59 00:05:33.000 --> 00:05:40.000 It's impossible to get the agent to work fully and to do what the principal wants them to do. 60 00:05:40.000 --> 00:05:48.000 There's always some slippage in there, some shirking or some inability of the agent to fully carry out what the principal wants. 61 00:05:48.000 --> 00:06:02.000 For example, in a firm owned by stockholders and managed by managers, we could say the managers are agents and the stockholders are the principals. 62 00:06:02.000 --> 00:06:07.000 We will see that the same person can be both a principal and an agent. 63 00:06:07.000 --> 00:06:13.880 So, for example, in a corporation, the stockholders are the principals, they supply the capital. 64 00:06:13.880 --> 00:06:18.260 The managers are supposed to do what for the stockholders, they're supposed to maximize 65 00:06:18.260 --> 00:06:22.680 the value of the firm, invest in good things and so on and so on. 66 00:06:22.680 --> 00:06:29.880 The managers also allocate capital to employees and in that role, the managers are the principals 67 00:06:29.880 --> 00:06:32.340 and the employees are the agents. 68 00:06:32.340 --> 00:06:41.340 So there are always levels of this principal agent problem where the agents do not live up to the expectations of the principles. 69 00:06:41.340 --> 00:06:52.340 So right now I'm saying the stockholders will experience perhaps some agency cost because they can't monitor the managers perfectly. 70 00:06:52.340 --> 00:06:56.340 The managers will waste resources inside a corporation. 71 00:06:56.340 --> 00:07:07.340 The reasons for this are that if they waste a dollar of assets, which is a one dollar loss to the shareholders, the managers personally lose less than a dollar. 72 00:07:07.340 --> 00:07:25.340 So to them it's not as important. The managers may get some gratification or utility basically from wasting that dollar, from having a fancy office, from having nice carpets, from having nice automobiles, jets and so on. 73 00:07:25.340 --> 00:07:30.340 and so on. So this is where your agency cost partly comes in. 74 00:07:30.340 --> 00:07:37.340 But the worst part of the agency cost there is that the managers will fail to make good investments. 75 00:07:37.340 --> 00:07:41.340 They may, why should they always risk their jobs? 76 00:07:41.340 --> 00:07:46.340 There may be some really good thing that comes along, but they decide not to do it. 77 00:07:46.340 --> 00:07:52.340 And that will also lower shareholder wealth. So there will be costs there. 78 00:07:52.340 --> 00:08:04.340 So, you have all these losses. The shareholders try to monitor the managers, try to get them to behave, but the managers don't act perfectly in the shareholder interest, and you have agency costs. 79 00:08:04.340 --> 00:08:15.340 Now, who bears those costs? This is the interesting thing. The shareholders actually do not bear these agency costs, if they have any brains in their head. 80 00:08:15.340 --> 00:08:19.840 Because this economics says people are rational. 81 00:08:19.840 --> 00:08:25.840 So if you're going to supply capital to somebody and if you think they're going to waste a certain amount of it, 82 00:08:25.840 --> 00:08:28.840 you exact a price at the outset. 83 00:08:28.840 --> 00:08:36.840 You want a higher return on your money before you give them the capital to compensate you for your prospective losses. 84 00:08:36.840 --> 00:08:41.840 But maybe the easiest way to see this is just think of bondholders, 85 00:08:41.840 --> 00:08:46.840 bondholders who lend money to corporations that are at risk. 86 00:08:46.840 --> 00:08:49.840 Say there's a higher risk of bankruptcy. 87 00:08:49.840 --> 00:08:53.840 You'll find that the bonds of that firm will pay a higher yield. 88 00:08:53.840 --> 00:08:58.840 That's to compensate the bondholders for the chance of bankruptcy. 89 00:08:58.840 --> 00:09:03.840 They price it in to begin with, knowing that there is a higher risk. 90 00:09:03.840 --> 00:09:14.340 So the reason people can sell bonds for firms that are very risky and micro-bankrupt is because they pay a higher rate of interest. 91 00:09:14.340 --> 00:09:21.340 So the bondholders do not bear the cost of bankruptcy. The borrower bears the cost of bankruptcy. 92 00:09:21.340 --> 00:09:31.340 And in the same way, the shareholders do not bear the agency cost. It's the entrepreneurs who want the money and who might waste it once they get it. 93 00:09:31.340 --> 00:09:40.340 or the managers who might want it, they bear the agency cost, the company basically bears the agency cost, not the capital, suppliers. 94 00:09:40.340 --> 00:09:48.340 Now, coming to the state, there are people who think about the state in the same terms as a corporation. 95 00:09:48.340 --> 00:09:55.340 I'll talk about a spectrum of possible states here. 96 00:09:55.340 --> 00:10:03.240 And at one end will be anarchy, and at the other end will be totalitarianism. 97 00:10:03.240 --> 00:10:08.640 And for those who are interested in these things, anarchy will be on the left, okay? 98 00:10:08.640 --> 00:10:13.240 Totalitarianism will be on the right. 99 00:10:13.240 --> 00:10:21.340 And somewhere as we go in from the left, we have the contractual state. 100 00:10:21.340 --> 00:10:25.380 and then we go further we have the predatory state 101 00:10:25.380 --> 00:10:30.340 and then more and more predatory we get to totalitarianism 102 00:10:30.340 --> 00:10:33.840 so the contractual state, it's a model 103 00:10:33.840 --> 00:10:37.100 conceptually it's like a publicly owned corporation 104 00:10:37.100 --> 00:10:40.380 the taxpayers are supposed to own the state 105 00:10:40.380 --> 00:10:44.720 they are in the state so to speak, they are members 106 00:10:44.720 --> 00:10:48.800 what they do is they engage the government to produce security 107 00:10:48.800 --> 00:10:55.320 and the state specializes in law, justice, and the taxpayers supply the capital. 108 00:10:55.320 --> 00:10:58.240 So the taxpayers are the principals, you see. 109 00:10:58.240 --> 00:11:02.680 The government employees and the officials, they're the agents. 110 00:11:02.680 --> 00:11:07.000 There will be agency costs now, the minute you set up anything like this, because the 111 00:11:07.000 --> 00:11:12.000 agents will not necessarily act on behalf of the principals. 112 00:11:12.000 --> 00:11:16.200 The principals are going to have to monitor them to make sure they behave, so there will 113 00:11:16.200 --> 00:11:26.200 Now, remember, the corporation, what happens is, the people who supply the capital, they don't bear the agency costs, the stockholders. 114 00:11:26.200 --> 00:11:30.200 It falls upon the entrepreneur who gets hands on the capital. 115 00:11:30.200 --> 00:11:38.200 But I say, when you have a state, what happens is, the state should be bearing the agency costs, but it doesn't. 116 00:11:38.200 --> 00:11:42.200 It's the taxpayers who bear the agency costs. 117 00:11:42.200 --> 00:12:00.200 And the reason is the state is able to impose taxes, so whatever costs happen within the state, whatever the state does that's bad, whatever bad investments it makes, the costs all fall back on the taxpayer. 118 00:12:00.200 --> 00:12:06.200 If a company makes bad investments, eventually the company is going to go broke. 119 00:12:06.200 --> 00:12:14.200 It's cost of capital will go up, the managers will get thrown out of their jobs, various things will happen. 120 00:12:14.200 --> 00:12:18.200 They can't simply push the cost back onto the shareholders. 121 00:12:18.200 --> 00:12:25.200 But in this case, the state will impose taxes, which makes up for all this misuse of capital. 122 00:12:25.200 --> 00:12:28.200 So it's perverse. 123 00:12:28.200 --> 00:12:34.200 Now, I mentioned you have also internal agency costs. 124 00:12:34.200 --> 00:12:48.200 This happens inside a company. The managers delegate decisions, the workers will shirk perhaps, you have to monitor them and so on and so forth. 125 00:12:48.200 --> 00:13:02.200 And for the same reason that the top managers don't behave perfectly, their employees don't behave perfectly either, the reasons are they don't receive fully the benefit of doing a good job. 126 00:13:02.200 --> 00:13:08.200 You get a salary, let's say. No matter whether you have a good idea or a bad idea, you get a salary. 127 00:13:08.200 --> 00:13:13.200 So, therefore, you don't necessarily come up with a lot of good ideas. 128 00:13:13.200 --> 00:13:21.200 The bosses can't constantly monitor their employees, so they will tend to goof off, do various things. 129 00:13:21.200 --> 00:13:27.200 You try to align their incentives, you see, with the shareholders, but it's not always possible. 130 00:13:27.200 --> 00:13:37.200 Now there are methods to reduce these agency costs. Human beings are not dumb. We know what's going on. So we try to reduce these costs. 131 00:13:37.200 --> 00:13:52.200 Inside companies what happens is you have budgeting, auditing, procedures, work procedures, orders, incentive plans and so on and so on that reduce the costs. 132 00:13:52.200 --> 00:14:07.200 And that way, actually, the employees can get paid a higher wage, because if it were known that they were going to steal stuff, walk off with stuff, shirk and so on, the managers would end up paying them a lower wage. 133 00:14:07.200 --> 00:14:17.200 In other words, the managers, knowing, we're going to have some agency costs from these employees, what they would then do would be pay a lower wage. 134 00:14:17.200 --> 00:14:26.200 and the cost of stealing and theft and shirking and inactivity and laziness and so on would fall upon the employees. 135 00:14:26.200 --> 00:14:35.200 Just as in the case where the managers were the agents, the cost fell on them too if they did badly. 136 00:14:35.200 --> 00:14:41.200 Now within the state, what I'm saying here is that the same things go on. 137 00:14:41.200 --> 00:15:11.200 and so on, you've got hierarchies of various kinds, legislators, they delegate funds to the executive branch, the top officials there, they delegate to the FEMA's and the HUD's, they delegate to lower level employees, so you've got layers and layers and layers of agency costs, all inside government, you have bureaus there, they're not profit seeking, they don't have the proper incentives, 138 00:15:11.200 --> 00:15:34.200 The tax payers don't control their agents. I often tell with my classes, just think about the situation here. I'm providing, I'm supposed to give you a good lecture. Supposing I don't. What are you going to do about it? 139 00:15:34.200 --> 00:15:38.200 What are you going to do about it? 140 00:15:38.200 --> 00:15:41.200 Look at the layers that are involved. 141 00:15:41.200 --> 00:15:44.200 They have my chairman or the chairman of the department. 142 00:15:44.200 --> 00:15:45.200 Then there's the dean. 143 00:15:45.200 --> 00:15:48.200 Then it goes to the provost and the president. 144 00:15:48.200 --> 00:15:53.200 Then it goes back to the legislatures, the legislator, 145 00:15:53.200 --> 00:15:57.200 SUNY system, and eventually the taxpayer. 146 00:15:57.200 --> 00:15:59.200 See, the taxpayer is footing the bill, 147 00:15:59.200 --> 00:16:03.200 but they have no control over what I do, basically. 148 00:16:03.200 --> 00:16:14.200 It's because I'm an agent, there are very high possible agency costs, only if I, you know, because of Mother Rosef, so I'm conscientious, right? 149 00:16:14.200 --> 00:16:22.200 But how about all the other people who are not so, but this temptation, you know, after a while maybe you're not so conscientious as you'd like to be. 150 00:16:22.200 --> 00:16:26.200 So you get lax and slack. 151 00:16:26.200 --> 00:16:40.200 In government I'm saying it's even worse because I'm saying the taxpayers don't control their agents, but what's worse is the state is able to shovel all the cost back on the taxpayer. 152 00:16:40.200 --> 00:16:55.200 So the fact that the taxpayers bear the agency cost of actually supplying the capital to the government, as far as I can see, is absolutely a fatal flaw in the taxpayer state arrangement. 153 00:16:55.200 --> 00:17:18.200 In other words, no taxpayer would rationally agree to fork over money in this situation unless they thought these costs would be either low or controllable or they thought the state would produce benefits for them that would offset the massive costs that they actually experience. 154 00:17:18.200 --> 00:17:38.200 Now, I don't know what taxpayers are thinking, but I do know this. We can go through and compare the state's institutions with the corporation and see that these agency costs are not well controlled. 155 00:17:38.200 --> 00:17:50.200 Now, so I'm going to do this one by one. For corporations, we know there are sometimes bad situations that arise even there. 156 00:17:50.200 --> 00:17:56.200 This morning there was a seminar on General Motors and very high agency costs inside a company like that. 157 00:17:56.200 --> 00:18:03.200 A lot of waste and bad decision making was made. Or we have Enron as another example of what can happen. 158 00:18:03.200 --> 00:18:15.200 But there are institutions that have been devised to lower these costs and control the behavior of the managers so that they do act in the interest of the capital suppliers. 159 00:18:15.200 --> 00:18:32.200 The first one is there's a product market, okay, product market. If the firm's prices are too high, if the quality of the product is too low, consumers simply quit, they exit their interaction with the firm. 160 00:18:32.200 --> 00:18:34.200 They lower their purchases. 161 00:18:34.200 --> 00:18:38.200 There is no comparable sanction against the state. 162 00:18:38.200 --> 00:18:48.200 If the state's product is lousy, I say voters cannot routinely or at low cost simply exit the state. 163 00:18:48.200 --> 00:18:57.200 You can do a lot of things, which may help some of these other things that will go on, but you can't exit at low cost. 164 00:18:57.200 --> 00:19:04.200 It's impossible for you and me to exit the Social Security program or Medicare program. 165 00:19:04.200 --> 00:19:07.200 What are we going to do? We're going to leave the country? 166 00:19:07.200 --> 00:19:11.200 That's not a low-cost method of controlling the product market. 167 00:19:11.200 --> 00:19:14.200 So if you don't like the product, there's nothing you can do about it. 168 00:19:14.200 --> 00:19:16.200 You take it or leave it, basically. 169 00:19:16.200 --> 00:19:21.200 So there's a doctrine called tacit consent, right? 170 00:19:21.200 --> 00:19:24.200 I think it's a totally false doctrine. 171 00:19:24.200 --> 00:19:40.200 It just tries to cover up this fault in the contractual state, it says basically, you all know what it says, it says basically if you don't like the product and you still stay in the country, that you are tacitly consenting to the product. 172 00:19:40.200 --> 00:19:48.200 Well you're not, the costs of exiting are very, very high, so it really isn't consent. 173 00:19:48.200 --> 00:19:53.200 The second thing in firms is there's a takeover market. 174 00:19:53.200 --> 00:19:58.200 If the company does badly, the stock goes down. 175 00:19:58.200 --> 00:20:04.200 Then entrepreneurs can come in and take over that company and put it right. 176 00:20:04.200 --> 00:20:09.200 This doesn't happen with states. 177 00:20:09.200 --> 00:20:12.200 When states are badly run, what happens? 178 00:20:12.200 --> 00:20:17.200 The only takeovers I can think of are invasions by other states 179 00:20:17.200 --> 00:20:29.200 Rebellions within the country, revolutions within the country, in other words, very high costs and difficult maneuvers comparable to a takeover. 180 00:20:29.200 --> 00:20:38.200 The third thing is, if companies do badly, have high agency costs, the financial markets provide sanctions. 181 00:20:38.200 --> 00:20:43.200 Investors raise the capital cost for firms that have high agency costs. 182 00:20:43.200 --> 00:20:49.200 Cost. Now, states, they have that sanction too. They borrow money and they could find 183 00:20:49.200 --> 00:20:56.200 their cost of borrowing going up. But they circumvent it. They have taxation and they 184 00:20:56.360 --> 00:21:03.360 have inflation. So they have ways of getting around this financial market constraint. 185 00:21:04.480 --> 00:21:11.480 The next thing is decision control. What stockholders and bondholders do is directly try to control 186 00:21:11.480 --> 00:21:15.480 Managers cannot simply try to control the manager's menu of decisions. 187 00:21:15.480 --> 00:21:19.480 Managers cannot simply say, we're going to take over some big firm, 188 00:21:19.480 --> 00:21:23.480 we're going to have a major investment some place. 189 00:21:23.480 --> 00:21:27.480 They have to meet certain covenants that are in the bonds. 190 00:21:27.480 --> 00:21:31.480 Bond covenants run hundreds of pages. 191 00:21:31.480 --> 00:21:35.480 So they are controlled. Bank lending agreements have many, many 192 00:21:35.480 --> 00:21:39.480 controls in them about what the managers can invest in, 193 00:21:39.480 --> 00:21:55.480 How much they can invest in, so things are very much controlled, even the corporate charter, which calls for votes on certain important matters such as mergers and require proxy statements and voting and so on and so on, 194 00:21:55.480 --> 00:21:59.480 There are ways of controlling the behavior of the management. 195 00:21:59.480 --> 00:22:03.480 Now, what do we have in the case of the state? 196 00:22:03.480 --> 00:22:09.480 Enumerated powers in the Constitution, at least in the United States. 197 00:22:09.480 --> 00:22:11.480 This is a superb idea. 198 00:22:11.480 --> 00:22:17.480 You see, it's exactly analogous to controlling the behavior of the corporate managers. 199 00:22:17.480 --> 00:22:21.480 We'll enumerate the powers, and that way we control their decisions. 200 00:22:21.480 --> 00:22:28.980 The problem is, the Supreme Court is part of the state, it interprets the Constitution. 201 00:22:28.980 --> 00:22:35.480 The Constitution has loopholes big enough to drive a truck through, such as the welfare clause. 202 00:22:35.480 --> 00:22:42.480 So the state is able to circumvent the enumerated powers by interpreting the powers itself. 203 00:22:42.480 --> 00:22:50.980 So therefore I'm saying that method of control over the years has proven to be not very good. 204 00:22:50.980 --> 00:23:02.980 All right, I can go on with more of these. Another one is companies actually bond themselves, bonding. 205 00:23:02.980 --> 00:23:09.980 What I mean by bonding is they pay dividends and they pay out interest on debt. 206 00:23:09.980 --> 00:23:14.980 And by doing that, they show they actually are generating the cash flows. 207 00:23:14.980 --> 00:23:19.980 And they're showing we're not just saying we have earnings, but we actually have money in the bank. 208 00:23:19.980 --> 00:23:25.300 in the Bank, we can afford to pay you dividends, we can pay off interest on our debt, this 209 00:23:25.300 --> 00:23:30.540 is a bonding mechanism which shows that we're doing something for real. 210 00:23:30.540 --> 00:23:39.840 States, well, states don't pay dividends, right, unless, well, they pay negative dividends, 211 00:23:39.840 --> 00:23:46.020 they pay interest, but I say they avoid the discipline because they can float debt and 212 00:23:46.020 --> 00:23:52.300 and the Federal Reserve will buy the debt, and they can just raise money by taxation. 213 00:23:52.300 --> 00:23:55.620 So the discipline is much lower. 214 00:23:55.620 --> 00:24:01.380 It's not that they're completely free to do anything, but it's lower than in a company. 215 00:24:01.380 --> 00:24:04.540 Monitoring. 216 00:24:04.540 --> 00:24:11.260 You have noticed that there are auditors who audit financial statements of corporations. 217 00:24:11.260 --> 00:24:15.460 There are security analysts who write about the corporations. 218 00:24:15.460 --> 00:24:26.460 There are credit rating agencies who talk about the debts of the corporations, they're all monitoring them and finding out what the characteristics are and how risky they are and so on. 219 00:24:26.460 --> 00:24:39.460 What do we have with regard to the state? We have citizen watchdog groups, we have the press, heaven help us, that's our equivalent of security analysts. 220 00:24:39.460 --> 00:25:09.460 The Federal Government audits itself. The GAO sometimes does some good stuff. But really they audit themselves. They hide as much information as they can. They understate costs. They overstate benefits. They don't have an incentive to monitor themselves. Why should they? If they do something bad, they just shift the cost to the taxpayer. They actually have an incentive to have a new program. 221 00:25:09.460 --> 00:25:13.460 We'll make it better now and cover up whatever mess occurred. 222 00:25:13.460 --> 00:25:17.460 So the monitoring process, that doesn't work well. 223 00:25:17.460 --> 00:25:23.460 Stock prices. Well, stock prices are a way to monitor companies 224 00:25:23.460 --> 00:25:27.460 because information gets reflected in the price. 225 00:25:27.460 --> 00:25:34.460 So a shareholder can look at the stock price and know something about how well the company is doing. 226 00:25:34.460 --> 00:25:38.460 They can compare it to other stock prices and see if they're doing better or worse. 227 00:25:38.460 --> 00:25:42.460 Taxpayers, what do they have? 228 00:25:42.460 --> 00:25:47.460 Well, they can sort of, some idea of how well am I doing? 229 00:25:47.460 --> 00:25:52.460 Am I standard of living going up or is it going down and so on? 230 00:25:52.460 --> 00:25:56.460 It's not quite as sharp. 231 00:25:56.460 --> 00:26:01.460 And furthermore, when that happens, they don't know whether the state is responsible or not. 232 00:26:01.460 --> 00:26:08.460 They can't discern whether the state is doing something that's affecting their welfare or not. 233 00:26:08.460 --> 00:26:15.460 Where the stockholder knows, if the stock goes down, chances are, sure, there's noise in the stock price. 234 00:26:15.460 --> 00:26:21.460 But you can compare it to some other stock prices and see, is my stock doing better or worse than somebody else? 235 00:26:21.460 --> 00:26:28.460 But when you're looking at the federal government, you have tremendous amount of noise in knowing what's going on. 236 00:26:28.460 --> 00:26:58.460 So, that's a monitoring mechanism that's absent. Now notice, when there is the ability to compare, when you can compare Texas to New York State, and you see, well, prices are cheaper in Texas, and work conditions are better, or whatever the case may be, that taxpayers will move from one area to another when they are capable of monitoring, or they'll move from one country to another. 237 00:26:58.460 --> 00:26:59.960 to the United States. 238 00:26:59.960 --> 00:27:02.280 So they do make these comparisons, 239 00:27:02.280 --> 00:27:04.880 but I'm saying it's not as good as it could be. 240 00:27:08.220 --> 00:27:12.820 All right, last I might mention the labor market. 241 00:27:13.780 --> 00:27:16.940 In a company, if the managers perform badly, 242 00:27:16.940 --> 00:27:19.900 the board of directors can fire the top managers. 243 00:27:20.740 --> 00:27:23.260 So there's a labor market sanction. 244 00:27:23.260 --> 00:27:25.940 And there's research showing that if you lose your job 245 00:27:25.940 --> 00:27:31.940 As a top manager, you have a hard time getting another comparable job. It's not so easy. 246 00:27:31.940 --> 00:27:38.940 What do we have with respect to the state? The voters can remove the politicians from office. 247 00:27:38.940 --> 00:27:48.940 That's basically what we have. And so that's supposed to be the ultimate controller of their bad behavior or the agency costs. 248 00:27:48.940 --> 00:28:01.940 However, the effectiveness of voting is really quite limited, that's my opinion, and it's been brought out of a number of presentations here, 249 00:28:01.940 --> 00:28:09.940 so I'm going to skip one large section where we can go through all the arguments why voting really doesn't work. 250 00:28:09.940 --> 00:28:14.940 It's not what it's cracked up to be. 251 00:28:14.940 --> 00:28:17.940 If you want to see a complete treatment, eventually I'll publish this. 252 00:28:17.940 --> 00:28:23.940 Maybe I'll break it up into sections and put it on LRC, if Lew will accept it. 253 00:28:23.940 --> 00:28:33.940 Anyway, to sum up so far, the contractual state, the voters are supposed to control their agents and control these agency costs, 254 00:28:33.940 --> 00:28:38.940 but they don't, for four reasons, and I have discussed two so far. 255 00:28:38.940 --> 00:28:50.940 The state can extract capital by force from the taxpayer, and secondly, there are institutional deficiencies in the methods to control the agency costs. 256 00:28:50.940 --> 00:28:57.940 We the taxpayer really have a lot of problems controlling our agents in government. 257 00:28:57.940 --> 00:29:04.940 Now, there are more than this. There are more problems here that I'll discuss further on. 258 00:29:04.940 --> 00:29:15.940 One is that there's an incentive for the state to destroy whatever institutions exist to control its behavior and agency costs. 259 00:29:15.940 --> 00:29:24.940 And fourth, there are weaknesses in the people and their incentives to prevent the state from gaining strength. 260 00:29:24.940 --> 00:29:37.940 Okay, now to get a broad perspective we should talk about society also and distinguish society from the state. 261 00:29:37.940 --> 00:29:44.940 I'll do that extremely briefly, just mention that basically society is not the state. 262 00:29:44.940 --> 00:29:48.940 Society, in my view, precedes the state. 263 00:29:48.940 --> 00:29:56.940 It's the society that creates the governance, not vice versa. 264 00:29:56.940 --> 00:30:02.940 And then, so society is really the principle, the governance organization is its agent. 265 00:30:02.940 --> 00:30:08.940 That's the idea in this contractual state. 266 00:30:08.940 --> 00:30:14.940 For those of you who might think maybe it would be nice to have a contractual state 267 00:30:14.940 --> 00:30:22.940 In a natural state where we firmly control our agents, it might be possible, for example, 268 00:30:22.940 --> 00:30:29.940 although I don't really think so, but a couple of things occur to me. 269 00:30:29.940 --> 00:30:33.940 You might have a state that has a monopoly on legal coercion, 270 00:30:33.940 --> 00:30:41.940 and then have a two-year sunset provision on all laws. 271 00:30:41.940 --> 00:30:43.940 So, you might build that into the Constitution. 272 00:30:43.940 --> 00:30:48.940 We'll have a sunset provision on every law you pass, it stops after a year or two. 273 00:30:48.940 --> 00:30:55.940 Or you might have it stop unless a super majority of the people approve of it, like three quarters, something like that. 274 00:30:55.940 --> 00:31:02.940 Something large, so that only if it really were in the public interest could it ever get passed again. 275 00:31:02.940 --> 00:31:09.940 Anyway, that's at one end of the spectrum, that's the watchman state, let us say. 276 00:31:09.940 --> 00:31:16.940 But, if the controls over your agents get weak enough, you then get the predatory state. 277 00:31:16.940 --> 00:31:22.940 The predatory state is a little different. Here, the citizens are no longer in the state. 278 00:31:22.940 --> 00:31:28.940 The predatory state, that's an autonomous organization. You think of it just as an autonomous group of people. 279 00:31:28.940 --> 00:31:36.940 It's like an owner-managed firm. There are no stockholders, okay? The owners own it and manage it. 280 00:31:36.940 --> 00:31:48.940 and the citizens don't own it. The citizens are the prey. So the state is a gang and it just preys on those under its control. That's the predatory state. 281 00:31:48.940 --> 00:32:02.940 And the totalitarian state is simply an extreme predatory state. The other end of the spectrum, anarchy or an anarchic society, there's no single governance organization. 282 00:32:02.940 --> 00:32:12.940 There's decentralized governance organizations, private justice, private enforcement of judgments, in other words, the defense agencies. 283 00:32:12.940 --> 00:32:18.940 Once you have that, companies that are supplying defense and they're competing with one another, 284 00:32:18.940 --> 00:32:27.940 then what happens is the agency costs shifts back onto those companies, 285 00:32:27.940 --> 00:32:35.940 Because if they misbehave, you can immediately move your business to some other company, some other defense agency. 286 00:32:35.940 --> 00:32:41.940 If somebody develops a bad reputation, some defense agency does something really horrendous, 287 00:32:41.940 --> 00:32:50.940 so starts passing bad judgments or itself becoming predatory, people will move their business elsewhere. 288 00:32:50.940 --> 00:32:55.940 So that's the product market sanction that's acting on those companies. 289 00:32:55.940 --> 00:33:09.940 I'm saying all the sanctions that act to lower agency costs for corporations, they will all work when you have multiple suppliers of law and order. 290 00:33:09.940 --> 00:33:17.940 That's why that will work, why you can't have an anarchic society. 291 00:33:17.940 --> 00:33:31.940 But once you move off that extreme, you start to get more and more agency costs and more and more inability of the agents to control their, their principles, the principles to control the agents. 292 00:33:31.940 --> 00:33:39.940 All right, I'll do some examples now. The third thing I said that goes wrong with the state is this. 293 00:33:39.940 --> 00:33:45.940 It has the incentive to destroy any institutions that are controlling the agency costs. 294 00:33:45.940 --> 00:33:48.940 It would like to shift them elsewhere. 295 00:33:48.940 --> 00:33:50.940 That's a destructive process. 296 00:33:50.940 --> 00:33:53.940 It's happened in America and it's still happening in America. 297 00:33:53.940 --> 00:33:55.940 It's happening right now in America. 298 00:33:55.940 --> 00:33:59.940 If a company tries to do that, it will fail. 299 00:33:59.940 --> 00:34:01.940 It can't do it. 300 00:34:01.940 --> 00:34:06.940 The competition will prevent it from doing it and all these other checks and balances. 301 00:34:06.940 --> 00:34:08.940 But states can do this. 302 00:34:08.940 --> 00:34:13.940 They can destroy the institutions that are put in place to control them. 303 00:34:13.940 --> 00:34:18.940 They can do it because they have the monopoly on making laws. 304 00:34:18.940 --> 00:34:21.940 So it gives them a one-sided advantage. 305 00:34:21.940 --> 00:34:23.940 They're the apex of society. 306 00:34:23.940 --> 00:34:24.940 They make the laws. 307 00:34:24.940 --> 00:34:27.940 Therefore, you'll see. 308 00:34:27.940 --> 00:34:30.940 So here's how I'm going to go through this. 309 00:34:30.940 --> 00:34:37.940 I'll just say that our founding fathers were well aware of agency costs. 310 00:34:37.940 --> 00:34:44.940 You could read the Federalist papers and reinterpret everything in terms of principal agent problems. 311 00:34:44.940 --> 00:34:48.940 They knew that there were these problems there. They tried to prevent these problems. 312 00:34:48.940 --> 00:34:56.940 That's why we have the checks and balances, or have them, excuse me. 313 00:34:56.940 --> 00:35:03.940 We could review U.S. history, and at each instance we'll see there was some institution there 314 00:35:03.940 --> 00:35:13.940 The first one, I would say for the first 85 years of its existence, the U.S. was more a contractual state and less of a predatory state. 315 00:35:13.940 --> 00:35:23.940 I would say it could not avoid being predatory, even at the outset it was predatory, by the structure and nature of the Constitution. 316 00:35:23.940 --> 00:35:32.940 I would say it could not avoid being predatory, even at the outset it was predatory, by the structure and nature of the Constitution. 317 00:35:32.940 --> 00:35:40.940 Shay's Rebellion showed you the predatory nature immediately, or the Alien and Sedition Acts. 318 00:35:40.940 --> 00:35:46.940 However, that predation was rather low compared to later on. 319 00:35:46.940 --> 00:35:57.580 Later on, and the reason it was low, maybe it was partly ideology, Professor Higgs, but 320 00:35:57.580 --> 00:35:59.740 also it was because of institution. 321 00:35:59.740 --> 00:36:08.660 It was partly ideology because the people understood what was going on and they agreed 322 00:36:08.660 --> 00:36:15.060 with the constitution and the people in government at first interpreted it according to a certain 323 00:36:15.060 --> 00:36:16.060 and Philosophy. 324 00:36:16.060 --> 00:36:21.740 Anyway, now the war between the states, what did that do? 325 00:36:21.740 --> 00:36:26.980 There was one important agency control device that the principals thought was available 326 00:36:26.980 --> 00:36:29.740 to them and that was secession. 327 00:36:29.740 --> 00:36:35.500 The U.S. was set up as, in theory, the sovereignty was in the people, then you have the states, 328 00:36:35.500 --> 00:36:38.620 the individual states set up the United States. 329 00:36:38.620 --> 00:36:45.620 Now, just like a stockholder can exit a publicly held corporation by selling his stock, the 330 00:36:45.780 --> 00:36:52.000 state could considerably have exited the union by secession. That could have been a device 331 00:36:52.000 --> 00:36:58.760 to control agency costs. If the central state made decisions that imposed excessive costs 332 00:36:58.760 --> 00:37:03.380 on its member states or on the public, they might have exited the union. You know, if 333 00:37:03.380 --> 00:37:08.280 the tariffs were too high, exit the union. Therefore, you control the misbehavior of 334 00:37:08.280 --> 00:37:10.520 of Your Agents. 335 00:37:10.520 --> 00:37:14.280 So that threat restrained the actions of the central state. 336 00:37:14.280 --> 00:37:20.720 However, the Civil War, I don't want to insult anybody, but whatever you want to call it, 337 00:37:20.720 --> 00:37:32.200 the War of Northern Aggression, it wasn't actually a civil war, I understand. 338 00:37:32.200 --> 00:37:34.520 That became null and void. 339 00:37:34.520 --> 00:37:40.320 So within a generation, it only took a generation, the US accreted a lot more power and became 340 00:37:40.320 --> 00:37:43.200 more and more predatory. 341 00:37:43.200 --> 00:37:49.340 Lincoln did not save the Union, he destroyed the contract and the contractual state. 342 00:37:49.340 --> 00:37:53.160 What he did was save and augment the predatory state. 343 00:37:53.160 --> 00:37:58.800 Another control device was the election of senators by the state legislatures. 344 00:37:58.800 --> 00:38:03.480 That ended in 1913, replaced by direct election by the people. 345 00:38:03.480 --> 00:38:14.480 Now, just imagine that the stockholders of a company, suppose the managers of a company had various proposals they put in front of the stockholders, 346 00:38:14.480 --> 00:38:22.480 and then the stockholders directly elected those managers, okay? That's what direct election corresponds to. 347 00:38:22.480 --> 00:38:28.480 I say the companies would actually be worse off than the system we have now. 348 00:38:28.480 --> 00:38:32.480 What they do now is we elect the board of directors. 349 00:38:32.480 --> 00:38:41.480 The board of directors hires and fires the managers and says yes or no to the important managerial decisions. 350 00:38:41.480 --> 00:38:43.480 Why does that work? 351 00:38:43.480 --> 00:38:50.480 It's because the board of directors has special knowledge, a lot more knowledge than the stockholders do, 352 00:38:50.480 --> 00:38:53.480 about the affairs of that company. 353 00:38:53.480 --> 00:38:58.920 Furthermore, the board of directors often own large blocks of stock themselves, so they 354 00:38:58.920 --> 00:39:04.360 have an incentive to monitor these managers. 355 00:39:04.360 --> 00:39:05.360 That works. 356 00:39:05.360 --> 00:39:08.880 That's how the corporations actually work. 357 00:39:08.880 --> 00:39:15.080 So in an analogous way, citizens elected the state legislatures. 358 00:39:15.080 --> 00:39:17.060 That's like electing the board of directors. 359 00:39:17.060 --> 00:39:21.160 They elected the senators or selected the senators. 360 00:39:21.160 --> 00:39:33.160 The senators were beholden to the state legislatures, so there was a degree of control over their voting from the state legislatures who are somewhat specialized. 361 00:39:33.160 --> 00:39:38.160 They understand the politics, what's going on, better than the people do. 362 00:39:38.160 --> 00:39:45.160 Let's face it, the voters are rationally ignorant and they don't know half of what's going on, 363 00:39:45.160 --> 00:40:15.160 So, the minute you get rid of this procedure, it may direct election, you now have a diffuse electorate, very diffuse, all kinds of people, the control and the monitoring actually go down, what now happens is an interest group can get to the senator, the interest group can also try to sway the public, propagandize the public, so the system does not work as well 364 00:40:15.160 --> 00:40:21.160 Because when you have state legislatures electing the senators, the agency costs actually go up. 365 00:40:21.160 --> 00:40:26.160 What happens then is the senators become part of the central state. 366 00:40:26.160 --> 00:40:34.160 Instead of the senators being beholden to the state legislatures, they become more identified with the federal state. 367 00:40:34.160 --> 00:40:41.160 Alright, so that has been perverted, that mechanism has been lost. 368 00:40:41.160 --> 00:40:56.160 What else? Well, the civil service system, we used to have a sporial system and that's gone. 369 00:40:56.160 --> 00:41:04.160 What now happens is you have the important arms of the state, the bureaucracies have tenure basically. 370 00:41:04.160 --> 00:41:34.160 So, you used to be able to turn the employees over at an election, that's a device to control costs too, the misbehavior of the agents, the people could elect somebody, they would then get rid of all these underlings and put in a new crop, this no longer happens, so you lost another device to control your agents, they're ensconced right there, the bureaucracy, and whether it's Republican or Democrat, they're still there, and after a while they begin to 371 00:41:34.160 --> 00:41:48.160 Limited Taxation is actually a significant method of controlling agents behavior. 372 00:41:48.160 --> 00:41:53.160 If you only give them so much money, there's only so much they can waste. 373 00:41:53.160 --> 00:41:56.160 So, hey, that's good. 374 00:41:56.160 --> 00:42:10.160 The income tax undermined that, because now the revenues exploded, so the agency costs rose dramatically, and again, they're paid for by the public. 375 00:42:10.160 --> 00:42:26.160 So, we can continue onividely. The notion I'm putting forward here is that basically the mechanisms to control the agency costs have been systematically ravaged. 376 00:42:26.160 --> 00:42:33.160 Another one I would say would be the war-making power. It was lodged in Congress. 377 00:42:33.160 --> 00:42:39.840 That's like having the board of directors decide on an important investment. 378 00:42:39.840 --> 00:42:43.320 Shall we go ahead with it or should we not go ahead with it? 379 00:42:43.320 --> 00:42:49.320 The managers say, well, we'd like to build a new plan in Pakistan and put it right on 380 00:42:49.320 --> 00:42:51.720 the Afghanistan border, okay? 381 00:42:51.720 --> 00:42:56.240 And the board of directors say, no, I don't think this is really a good idea right now. 382 00:42:56.240 --> 00:43:02.080 Okay, now, Congress was given this job to do, decide whether war should be undertaken 383 00:43:02.080 --> 00:43:03.080 or not. 384 00:43:03.080 --> 00:43:08.080 It's like an important investment project, whether you have a war. 385 00:43:08.080 --> 00:43:13.080 But it apparently has abandoned that in the last 40, 50 years. 386 00:43:13.080 --> 00:43:15.080 Basically, why? 387 00:43:15.080 --> 00:43:21.080 Congress seems to actually want to consolidate power with the executive branch. 388 00:43:21.080 --> 00:43:24.080 That removes a check and a balance, you see? 389 00:43:24.080 --> 00:43:29.080 That consolidation, now we're facing one team against us. 390 00:43:29.080 --> 00:43:38.080 The Congress is no longer acting on behalf of we the people, or us the people, but now it's more consolidated with the President. 391 00:43:38.080 --> 00:43:41.080 This is not good. We lose that. 392 00:43:41.080 --> 00:43:51.080 Or if the President says that he wants plenary power, he wants to be beyond the judicial reach, what is he saying? 393 00:43:51.080 --> 00:43:57.080 Basically, he wants to overcome the check and balance and consolidate the separate branches. 394 00:43:57.080 --> 00:44:02.680 The more you see the consolidation of the separate branches, the worse things obviously get, 395 00:44:02.680 --> 00:44:09.080 because the agents, you have less and less control over your agents in government. 396 00:44:13.080 --> 00:44:19.080 So the outcome of all this is predictable, if you destroy the institutions that control agency costs, 397 00:44:19.080 --> 00:44:24.680 which is what we have done in America, then you move toward totalitarianism, 398 00:44:24.680 --> 00:44:28.920 You move more to a predatory behavior on the part of the state. 399 00:44:28.920 --> 00:44:36.360 So we, the people, we were supposed to control the behavior of our agents, we didn't do it. 400 00:44:36.360 --> 00:44:39.240 For various reasons, a lot of different reasons for this. 401 00:44:39.240 --> 00:44:43.280 But one reason is we had a blame, the American people had a blame. 402 00:44:43.280 --> 00:44:51.120 Each generation has come along, more ignorant, more weak, more suggestible, 403 00:44:51.120 --> 00:44:57.520 more drift from philosophic foundations, sound philosophic foundations, and they've blessed 404 00:44:57.520 --> 00:44:59.920 these changes actually. 405 00:44:59.920 --> 00:45:07.820 On the other hand, the state has outflanked and outmaneuvered the population because it 406 00:45:07.820 --> 00:45:12.360 has that lawmaking power at the apex of society. 407 00:45:12.360 --> 00:45:20.280 So that process actually is institutionalized now and it's so deep and it's affected the 408 00:45:20.280 --> 00:45:26.800 The ideology of so many Americans that I don't think it can be reversed by anything less. 409 00:45:26.800 --> 00:45:32.520 We would have to have revolutions in thought and deed in order to overcome that. 410 00:45:32.520 --> 00:45:38.240 There's no simple way to overcome this at the moment. 411 00:45:38.240 --> 00:45:44.940 So the predominance of the state, it seems to me, follows logically from its relationship 412 00:45:44.940 --> 00:45:45.940 with society. 413 00:45:45.940 --> 00:45:48.800 This is why I'm an anarchist for many, many reasons. 414 00:45:48.800 --> 00:45:56.800 The logic of it shows me that the state will win in most of these battles. 415 00:45:56.800 --> 00:46:01.800 So why is it that the state will overcome society? 416 00:46:01.800 --> 00:46:05.800 First of all, it has a monopoly over law and justice. 417 00:46:05.800 --> 00:46:08.800 Okay, fine. What does that do? 418 00:46:08.800 --> 00:46:12.800 That immediately, critically weakens society 419 00:46:12.800 --> 00:46:15.800 because what happens when injustice is done? 420 00:46:15.800 --> 00:46:17.800 What do you do? 421 00:46:17.800 --> 00:46:30.800 You don't have recourse to each other through private institutions, so the horizontal communication or ability to organize yourself and rectify some injustice is lessened. 422 00:46:30.800 --> 00:46:38.800 You have to go along with the rule of law, because that's the law-making organ and that's what you've made it. 423 00:46:38.800 --> 00:46:44.800 So therefore society no longer can overcome these issues easily. 424 00:46:44.800 --> 00:46:53.800 The state is strong, united and focused. Individuals, we're rather weak as individuals and isolated. 425 00:46:53.800 --> 00:47:02.800 In order to fight the state, hey, Hans spent a year just trying to fight University of Nevada, Las Vegas. 426 00:47:02.800 --> 00:47:08.800 It's very, very difficult to do this. And most of us, most people give in. 427 00:47:08.800 --> 00:47:23.800 Secondly, obviously, law is a very, very fundamental thing, and if it is so fundamental that if you're able to make law, you can twist society in a direction, move it in a direction you want to. 428 00:47:23.800 --> 00:47:31.800 And then if you control one part of society, then it gives you a wedge to control another part of society. 429 00:47:31.800 --> 00:47:41.800 So, third, I would say, once there is any state at all, then there are opportunities for gain. 430 00:47:41.800 --> 00:47:50.800 The members of the state will see that they can gain in various ways by making law or not making law. 431 00:47:50.800 --> 00:47:58.800 So they have an incentive to increase their domination over society because they can personally gain from it. 432 00:47:58.800 --> 00:48:08.800 Therefore, over time, economics will tell you they will exploit these gains, and therefore the state's power will grow. 433 00:48:08.800 --> 00:48:22.800 Fourth, in order to increase their domination, the states have an incentive to encourage society to deviate from the paths of righteousness. 434 00:48:22.800 --> 00:48:33.800 And society deviates on its own to begin with. So it's not that difficult to incentivize society to deviate. 435 00:48:33.800 --> 00:48:41.800 What do I mean by that? Failing to take responsibility for one's own life. 436 00:48:41.800 --> 00:48:46.800 Shifting burdens to other people. Extracting benefits you don't deserve. 437 00:48:46.800 --> 00:49:16.800 If people in society are excessively fearful, or if they're greedy, if they're ignorant, if they have any incapacity, if they want revenge, if they want to dominate other peoples, if they have prejudices, all the human weaknesses are just lying there on the table, and you've given the state all this power, what are they going to do? They're going to try to exploit these weaknesses that are inherent in all of us, because they gain from it, the members of the state will gain from it. 438 00:49:16.800 --> 00:49:46.800 I see this as a two-way street, a simultaneous process, the weakness of the people is always there, but if the state is powerful, it will try to exploit it, but then also once you get tyranny, it fosters societal weakness, once you have a social security program, or Medicare program, all kinds of programs where people become dependent, then the people become dependent. 439 00:49:46.800 --> 00:49:52.640 Some weak and they lose their ability, you know, the whole philosophy changes. 440 00:49:52.640 --> 00:49:55.640 So the tyranny fosters societal weakness. 441 00:49:55.640 --> 00:50:01.880 On the other hand, freedom fosters societal strength because you have to take responsibility 442 00:50:01.880 --> 00:50:06.840 for your acts. 443 00:50:06.840 --> 00:50:13.000 So the aims of the state are subject unto themselves. 444 00:50:13.000 --> 00:50:23.000 When you do have a state, what is it like when it's a predatory organization, for example, what happens within that organization? 445 00:50:23.000 --> 00:50:29.000 And running short of time, so let me skip. 446 00:50:29.000 --> 00:50:35.000 Another interesting topic is how the state maintains its power. 447 00:50:35.000 --> 00:50:40.000 And as I said, one way is to remove a lot of checks and balances. 448 00:50:40.000 --> 00:50:48.000 In doing that, the state is very clever, the members of the state are very clever. 449 00:50:48.000 --> 00:50:57.000 They are always enacting laws or undertaking projects that must harm society economically. 450 00:50:57.000 --> 00:51:01.000 They are not things that we would choose if we were free to choose them. 451 00:51:01.000 --> 00:51:04.000 They are not products, they are imposed on us. 452 00:51:04.000 --> 00:51:11.000 So, we only get to vote on them and that's not an efficient or effective way to say we like them or not. 453 00:51:11.000 --> 00:51:15.000 So, laws generally harm society. 454 00:51:15.000 --> 00:51:18.000 In other words, the state is always aggressing on us. 455 00:51:18.000 --> 00:51:25.000 And that means that it's lowering our standard of living, basically. 456 00:51:25.000 --> 00:51:31.000 So, people more or less realize this in one way or another. 457 00:51:31.000 --> 00:51:39.000 So the state has to therefore control, or tries to control, the population's resistance to these laws. 458 00:51:39.000 --> 00:51:44.000 In order to do that, they basically have to fool the people. 459 00:51:44.000 --> 00:51:49.000 That's the one method. Or use fear, another method. 460 00:51:49.000 --> 00:52:00.000 But the state will use many, many, many means in order to reduce the rebelliousness or the resistance of society to what it's doing. 461 00:52:00.000 --> 00:52:15.000 What are you doing? Violence? It'll stress them. Be law-abiding. Make examples out of law-breakers with long sentences. Imprison people. Imprison innocent people so that people will know you're powerful. 462 00:52:15.000 --> 00:52:29.000 Don't rehabilitate people. Spread propaganda, lies, sentience. Conceal your true aims. Conceal even what you're doing, what your actions are. Conceal the effects of your actions. 463 00:52:29.000 --> 00:52:39.080 blame others, blame businessmen, blame the rich, control education, break up families, 464 00:52:39.080 --> 00:52:48.720 spy on dissidents, inculcate values like obedience, raise fears, appeal to popular values like 465 00:52:48.720 --> 00:52:58.160 equality, I think that in my opinion one of the major things that has happened in America 466 00:52:58.160 --> 00:53:08.000 is that the doctrine of equality has firmly taken hold and that people identify equality 467 00:53:08.000 --> 00:53:10.760 as being a just thing. 468 00:53:10.760 --> 00:53:17.120 And obviously, if they believe that's just, then they want the state to enforce equality 469 00:53:17.120 --> 00:53:22.880 and therefore the state will do this, which is really unjust. 470 00:53:22.880 --> 00:53:26.500 So this is right in line with what the state wants, I believe. 471 00:53:26.500 --> 00:53:33.580 So, I could go on and on. The state has many, many, many tools. Disarming the population, 472 00:53:33.580 --> 00:53:43.260 portraying itself as crucial to law and order, society and order. They'll say things like 473 00:53:43.260 --> 00:53:49.640 this. Majority rule, voting, look, you've got to go along with what happens. Sometimes 474 00:53:49.640 --> 00:53:54.780 you get your way, sometimes the other gets his way, but we're all Americans, we're all 475 00:53:54.780 --> 00:54:09.780 I think it's worthwhile to look at the totalitarian state, because it's an extreme predatory state, and everything is very clear in a totalitarian state. 476 00:54:09.780 --> 00:54:22.780 I think it's worthwhile to look at the totalitarian state because it's an extreme predatory state and everything is very clear in a totalitarian state. 477 00:54:22.780 --> 00:54:33.780 The owners of the state, the clique who run it, they value control over the personal lives of their prey, not just their wealth but control, power per se. 478 00:54:33.780 --> 00:54:41.780 If they can educate them, feed them, give them welfare, they can turn them into compliant subjects. 479 00:54:41.780 --> 00:54:51.780 As time goes on, if you can control health education and welfare, that's a big foot in the door. 480 00:54:51.780 --> 00:54:59.780 After that, the totalitarian state likes to control employment, entertainment, art, expression and speech. 481 00:54:59.780 --> 00:55:07.780 But, the state does have some kind of natural limitations. 482 00:55:07.780 --> 00:55:10.780 I don't want to leave the impression that states are all powerful. 483 00:55:10.780 --> 00:55:17.780 Because, the more they control society, there are two things that happens. 484 00:55:17.780 --> 00:55:22.780 One is, there are more and more inefficiencies introduced into the system. 485 00:55:22.780 --> 00:55:28.780 So the population then will tend to go more and more resistance to what's happening. 486 00:55:28.780 --> 00:55:34.780 At the same time, the state has to control the population. 487 00:55:34.780 --> 00:55:40.780 The more things it tries to control, the higher its cost of control go. 488 00:55:40.780 --> 00:55:49.780 So what I'm saying is there's basically a demand curve for control and a cost curve for control. 489 00:55:49.780 --> 00:55:58.780 If the cost of control was zero, we would see totalitarian states everywhere, but we don't see them. 490 00:55:58.780 --> 00:56:05.780 So the cost at some point is substantial enough that the states cannot go any further. 491 00:56:05.780 --> 00:56:14.780 States make mistakes. Hitler went too far and that was the end of the Third Reich. 492 00:56:14.780 --> 00:56:26.780 Mao went too far, his successors couldn't continue what he did, Mussolini went too far, Stalin went too far, his successors couldn't continue controlling what he did. 493 00:56:26.780 --> 00:56:34.780 They do make mistakes. The more you try to control, the more you're raising your own costs of control. 494 00:56:34.780 --> 00:56:40.780 And then you're also providing incentives to your subjects to find ways around your regulations and rebel. 495 00:56:40.780 --> 00:57:01.780 The totalitarian state, in my view, helps us understand all states, because it's extreme. 496 00:57:01.780 --> 00:57:07.780 It's an organization in the state that always competes with society. 497 00:57:07.780 --> 00:57:12.780 It's always either the choices of the subjects versus the choices of the rulers. 498 00:57:12.780 --> 00:57:15.780 The state always seeks to suppress freedom. 499 00:57:15.780 --> 00:57:18.780 It always seeks control and domination. 500 00:57:18.780 --> 00:57:22.780 The rulers always try to impose their values, fulfill their values. 501 00:57:22.780 --> 00:57:26.780 The state is always opposed to society. 502 00:57:26.780 --> 00:57:35.780 Meanwhile, the characterization of the states, it depends on the institutions that society has in place 503 00:57:35.780 --> 00:57:49.780 to control their agents. There are large agency costs here. The power to tax is the exact opposite of an institution that will help control agency costs. 504 00:57:49.780 --> 00:58:00.780 It just plays right into the hands of the controllers. In other words, that's why I cannot see you can have a state and at the same time allow taxation. 505 00:58:00.780 --> 00:58:09.780 People end up not being able to control the level of taxation effectively and the state ends up being the master. 506 00:58:09.780 --> 00:58:23.780 So, in finance, what we would say is that totalitarian states are obviously negative net present value projects. 507 00:58:23.780 --> 00:58:32.780 A negative net present value project is an investment that destroys wealth or it destroys utility. 508 00:58:32.780 --> 00:58:37.780 But I would say all states are negative net present value projects. 509 00:58:37.780 --> 00:58:48.780 What that implies is that the difference between the current level of where we are and where we could be, 510 00:58:48.780 --> 00:58:51.780 there is unexploited gain to be made. 511 00:58:51.780 --> 00:59:00.780 If we could simply stop the state's policies, we would suddenly see a big gain in welfare and utility of the population. 512 00:59:00.780 --> 00:59:11.780 So that provides a pervasive, long-run incentive for states to be shrunk and eliminated. 513 00:59:11.780 --> 00:59:17.780 I'm actually a long-run optimist because I see, look, this is an arbitrage opportunity here. 514 00:59:17.780 --> 00:59:23.780 If we get rid of the states, if states were business firms, 515 00:59:23.780 --> 00:59:34.780 supposing they were corporations, they'd long ago have been taken over, sold off, spun off, restructured, cut back, merged, liquidated or dismantled. 516 00:59:34.780 --> 00:59:42.780 But we haven't done that. We the people haven't done that to our states for a variety of reasons mentioned earlier. 517 00:59:42.780 --> 00:59:46.780 I'll mention another one. There are cost barriers. 518 00:59:46.780 --> 00:59:58.780 One of the costs of getting rid of a state is the renegotiation of the contracts that have been made already. 519 00:59:58.780 --> 01:00:03.780 And that arises also when you have bankrupt companies. 520 01:00:03.780 --> 01:00:11.780 To redo the company, somebody has to decide how to renegotiate, change the contracts and pay off the debt holders and stockholders. 521 01:00:11.780 --> 01:00:41.780 Stockholders. Here's what I mean. Right now we have one third of all seniors receive all their income from Social Security. One third. Two thirds of all seniors receive 50 to 100 percent of their income from Social Security. They are going to resist shrinking the state until their income is secured. In other words, that's a big barrier. Now there are many other programs like that. So you see the state's programs have inherently 522 01:00:41.780 --> 01:00:46.780 There are certainly erected obstacles that discourage the restructuring. 523 01:00:46.780 --> 01:00:54.780 We'd like to restructure this situation, cut it back, get rid of it all together if we could, 524 01:00:54.780 --> 01:00:58.780 but that's not going to happen very quickly. 525 01:00:58.780 --> 01:01:04.780 But there are some clear obstacles here in that the population is going to resist this, 526 01:01:04.780 --> 01:01:13.180 If they like the idea, even if they think all the anarcho-capitalists are the New Kansians, 527 01:01:13.180 --> 01:01:16.980 so these guys really know what they're doing, let's do what they say, you're still going 528 01:01:16.980 --> 01:01:24.980 to have to figure out a way to compensate people or get them to go along, basically. 529 01:01:24.980 --> 01:01:48.980 All right, I'll conclude by briefly a section called The Fault, Dear Brutus, by saying that the contest, in my opinion, state is always in a contest with society, against society, but the outcome depends on society. 530 01:01:48.980 --> 01:01:56.980 If we show weakness, it presents an opportunity for the state to exploit, and they will try to exploit weaknesses. 531 01:01:56.980 --> 01:02:05.980 What is preferred to that is that we cooperate to ensure each other against violations of rights. 532 01:02:05.980 --> 01:02:13.980 That is our best chance of holding on to freedom, not to rely on the state to do this, but to do it for ourselves. 533 01:02:13.980 --> 01:02:18.980 In order to do that, we have to know what rights and justice actually are. 534 01:02:18.980 --> 01:02:23.980 So we need ethical codes as a bulwark against tyranny. 535 01:02:23.980 --> 01:02:31.980 Going beyond having multiple defense agencies, beyond vigilance or beyond an armed public, we need more than that. 536 01:02:31.980 --> 01:02:33.980 We need the right philosophy. 537 01:02:33.980 --> 01:02:37.980 The philosophy of relativism has spread too far. 538 01:02:37.980 --> 01:02:46.980 The American people no longer have the ability or the will to support natural right against natural wrong. 539 01:02:46.980 --> 01:02:50.980 I don't think they even know the difference between right and wrong, 540 01:02:50.980 --> 01:02:53.980 never mind natural right and natural wrong. 541 01:02:53.980 --> 01:02:59.980 Relativism, that gives a rationale for unethical and immoral behavior. 542 01:02:59.980 --> 01:03:04.980 And the doctrine of equality covers it up. 543 01:03:04.980 --> 01:03:12.620 up. If justice is defined as equality and if the state dispenses justice, then the state's 544 01:03:12.620 --> 01:03:19.020 aggressions become valid. So unlawfulness and furtherance of equality, that becomes 545 01:03:19.020 --> 01:03:25.460 right and praiseworthy. In other words, wrong becomes right. And people get very confused 546 01:03:25.460 --> 01:03:31.380 then about, they don't know the difference between right and wrong anymore. So in order 547 01:03:31.380 --> 01:03:36.880 In order to rescue society from tyranny, we need a lot of things. 548 01:03:36.880 --> 01:03:43.060 One revolution we need, we need to recover the ability simply to understand and distinguish 549 01:03:43.060 --> 01:03:45.940 right from wrong. 550 01:03:45.940 --> 01:03:54.940 Then we also need an understanding that it's the right behavior that brings peace and happiness. 551 01:03:54.940 --> 01:04:00.940 So, sooner or later, the American state will fail, just as the Soviet Empire failed. 552 01:04:00.940 --> 01:04:06.940 And I don't think we're prepared for it. We need a lot of preparation. 553 01:04:06.940 --> 01:04:12.940 When it happens, we will need to know the right remedies so we don't repeat the mistakes of the past. 554 01:04:12.940 --> 01:04:17.940 I think we will need a very strong understanding of why the state is defective. 555 01:04:17.940 --> 01:04:23.940 We will need to know exactly what went wrong so we don't make the same mistakes again. 556 01:04:23.940 --> 01:04:28.940 Society as the principle cannot control the state as the agent. 557 01:04:28.940 --> 01:04:35.940 If it grants the state irrevocable law-making power, including taxing power, 558 01:04:35.940 --> 01:04:38.940 we will bear the cost rather than the state. 559 01:04:38.940 --> 01:04:43.940 And no matter what institutions we devise to control the cost, 560 01:04:43.940 --> 01:04:48.940 the state will have the incentive to tear them down and tear society down. 561 01:04:48.940 --> 01:04:53.940 The state, very simply, is the enemy of society. 562 01:05:09.940 --> 01:05:10.940 Sure, questions? 563 01:05:10.940 --> 01:05:11.940 Take a few questions. 564 01:05:11.940 --> 01:05:12.940 Anybody wants to hang around? 565 01:05:12.940 --> 01:05:13.940 Right here. 566 01:05:13.940 --> 01:05:36.940 I would add one more institutional change to the list that you gave that included the income tax and the social security administration that was an extremely important empowerment of the state, and that was the Federal Reserve Act of 1930, which made it possible to tax without actually people knowing it. 567 01:05:36.940 --> 01:05:38.940 I totally agree. 568 01:05:38.940 --> 01:05:40.940 Yes. 569 01:05:40.940 --> 01:05:56.940 I would like for you to consider an alternative to your sub-setting idea of legislation dying after two years, because I can see that becoming standard practice in what you've done before. 570 01:05:56.940 --> 01:06:08.940 I think we'd be better off to say that new legislation requires a supermajority of two-thirds, 75%, but could be repealed with a simple majority. 571 01:06:08.940 --> 01:06:15.940 That one meant a small majority from enacting a great hardship on a sizeable majority. 572 01:06:15.940 --> 01:06:17.940 A good idea. 573 01:06:17.940 --> 01:06:20.940 Yes, it's further back behind. 574 01:06:20.940 --> 01:06:24.940 Michael, I think the first half of your speech was great. 575 01:06:24.940 --> 01:06:28.940 I love the theme of examining government as an organization, 576 01:06:28.940 --> 01:06:32.940 but you seem to veer into what I mean, maybe it's the optimism of youth, 577 01:06:32.940 --> 01:06:37.940 but little sentimentality, I think, saying that each generation is excessively ignorant. 578 01:06:37.940 --> 01:07:02.940 If you're at a starting point and each generation takes one successive step, I mean you can get to a pretty terrible spot and each generation is equally fault, but I tend to think that what we're really seeing is both the state and the people are actually getting more sophisticated over time. 579 01:07:02.940 --> 01:07:16.940 The State is doing some things now that it hadn't thought of a hundred years ago, but there's some things the State used to try to get away with a hundred years ago when it did, and now it doesn't get away with them. 580 01:07:16.940 --> 01:07:28.940 I think some of the foreign aggression might take a look at the Philippines, then take a look at Vietnam, then take a look at Iraq, and I think the public response to those has been a lot sharper and a lot sooner than the more recent ones. 581 01:07:32.940 --> 01:08:01.940 Why can't we go back to more contractual issues and contract with states who only provide a service and voluntarily join that service, or you don't, such as water, electric, gas, roads? 582 01:08:01.940 --> 01:08:09.940 Well, a more localized situation would be better. It would be much, much better. 583 01:08:09.940 --> 01:08:24.940 I just like the extreme left viewpoint because it's clear and it gives a good benchmark for thinking about all the problems and analyzing what's going on. 584 01:08:24.940 --> 01:08:35.940 Look, if we started even moving in that direction, I'd be happy, and if we got down to what you're saying, I'd be quite happy. 585 01:08:35.940 --> 01:08:36.940 Harry? 586 01:08:36.940 --> 01:08:37.940 Yeah. 587 01:08:37.940 --> 01:08:42.940 Professor, I think one other thing you could add is the establishment of the Federal Reserve. 588 01:08:42.940 --> 01:08:44.940 We don't really print money without gold. 589 01:08:44.940 --> 01:08:45.940 Yes. 590 01:08:45.940 --> 01:08:51.940 It's just one extra breaking the curve of the state of politics. 591 01:08:51.940 --> 01:08:53.940 I totally agree with that, sure. 592 01:08:53.940 --> 01:09:23.940 It seems like you presented us with two different models of the state, where at the end of your talk you had a monolithic state that you personified, sometimes with actual names like Stalin and Hitler and so forth, that's trying to do all this stuff to us, but at the beginning, when you talk about agency costs, you suggest that these agency problems are worse in the state than they are in the private sector, which would sort of lead you to believe that the state really couldn't accomplish these ends. 593 01:09:23.940 --> 01:09:52.940 I have one model of the state in my mind, which is, you can think of it as being, we're the principals, they're the agents, but the mechanisms to control their behavior varies significantly from state to state. 594 01:09:52.940 --> 01:10:15.940 So, if you have very good mechanisms to control what they are doing, then you'll have what I call a contractual state, but at some point, the members of the state begin to act on their own behalf, impose strictures and measures upon the public, and then I call that a predatory state. 595 01:10:15.940 --> 01:10:20.740 Any given state will have a kind of a mixture of these things in practice. 596 01:10:20.740 --> 01:10:27.740 So it's going to be, once you turn predatory, it will depend on how badly they are behaving. 597 01:10:27.740 --> 01:10:33.240 And as you continue on, you eventually come to a totalitarian state, 598 01:10:33.240 --> 01:10:36.940 which has extreme control over the population. 599 01:10:36.940 --> 01:10:41.440 They are no longer, the population is no longer the principles at all. 600 01:10:41.440 --> 01:10:43.140 They've basically lost control. 601 01:10:43.140 --> 01:10:51.140 But let me rephrase that. Because of these agency problems, if Stalin is the state, how can he accomplish anything? 602 01:10:51.140 --> 01:10:57.140 How can he get the people under him to accomplish his head, given the agency problems you cited at the beginning? 603 01:10:57.140 --> 01:11:03.140 The agency problem is that the principals cannot control their agents. 604 01:11:03.140 --> 01:11:09.140 So that meant the Russian population couldn't control Stalin. Stalin controlled them. 605 01:11:09.140 --> 01:11:13.140 And then he imposed costs on them. 606 01:11:13.140 --> 01:11:21.140 In the United States what happens is the costs are imposed on us through taxation, the draft, and various other things. 607 01:11:21.140 --> 01:11:31.140 He had his ways of imposing costs, which were the gulag and withholding food from peasants and so on. 608 01:11:31.140 --> 01:11:35.140 There's no agency problem in getting Stalin to control the gulag. 609 01:11:35.140 --> 01:11:48.140 No, he has agency problems too. Absolutely right. He did. There are many documentation where he didn't know what was going on during World War II and so on. 610 01:11:48.140 --> 01:11:52.140 Or even in the gulag sometimes. He didn't know. 611 01:11:52.140 --> 01:11:57.140 One last question. 612 01:11:57.140 --> 01:12:13.140 You mentioned that when the American state collapses, we have to be prepared in our next step, assuming for our vocabulary or something that doesn't repeat 1776. 613 01:12:13.140 --> 01:12:27.140 Would you mind elaborating on that because I feel that people who have this traditional mindset of going back to what we were have learned from the failures of the past. 614 01:12:43.140 --> 01:12:51.140 We shouldn't be cutting-edge. We are the scholars. We're focusing on these problems full-time or with a lot of brain power. 615 01:12:51.140 --> 01:13:03.140 We shouldn't be engaged in peripheral matters too much or get diverted, but we should try to focus on really building up a body of knowledge 616 01:13:03.140 --> 01:13:09.140 about what has happened, why it's happened, and then what to do about it. 617 01:13:09.140 --> 01:13:17.140 That alone is extremely challenging, you know, if you like, my prescription, I can't give you one really, how can I give you one? 618 01:13:17.140 --> 01:13:29.140 But I think the more widespread the understanding is of what has happened, why it has happened, what went wrong, the better off we are. 619 01:13:29.140 --> 01:13:38.140 And I'm just trying to contribute my little part to it, simply to understand, for example, the destruction of checks and balances. 620 01:13:38.140 --> 01:13:47.140 or the inherent problems in controlling layers and layers and layers of agents in government 621 01:13:47.140 --> 01:13:54.140 or the fact that they measure up poorly compared to controlling corporations. 622 01:13:54.140 --> 01:14:02.140 So maybe it will make an easier pathway for people to say, let's try... 623 01:14:02.140 --> 01:14:05.140 My own favorite thing is what we should do. 624 01:14:05.140 --> 01:14:11.740 My own prescription basically is privatize as many things as possible. 625 01:14:11.740 --> 01:14:19.220 We already have a big private police contingent, and we have some private courts, just keep 626 01:14:19.220 --> 01:14:28.200 pushing that more and more and more so that it goes into the fabric of society basically. 627 01:14:28.200 --> 01:14:34.000 But you know, it's very difficult because we're fighting against the expansion. 628 01:14:34.000 --> 01:14:44.000 The groups constantly try to expand the powers of government and so it's really an uphill battle as far as I can see.