Quote of the Day: Differentiating Law and Legislation

Law is emergent and undesigned.  Law isn’t created; it evolves.  Legislation is created and designed.  Legislation is not law and law is not legislation.  The distinction between legislation and law is one that deserves far greater emphasis than it gets.

The modern state has gotten enormous amounts of unjustified and dangerous power by convincing large numbers of people of the truth of three false propositions – namely, that (1) only the state can supply sound money; (2) only the state can supply and enforce law; and (3) rules promulgated by the state are necessarily or by definition law.

(italics original) 

This is from Café Hayek blogger and Professor Donald J. Boudreaux relating law and the informal arrangement contrived by professional comedians to enforce property rights.

IRS Investigations: Using Regulations to Persecute Political Foes

I recently pointed out that arbitrary regulations, like electoral liquor ban in the Philippines, can be used to harass the political opposition. 

In the US, the tax agency the IRS will reportedly be investigated for allegedly employing the said maneuver.

According to John Samples at the Cato Blog

Last Friday, a spokeswoman for the Internal Revenue Service (IRS) admitted the agency had targeted various Tea Party and related groups during the 2010 election cycle. Later in the week, an Inspector General’s report will offer an initial look at the facts of this matter. At least two congressional committees also plan investigations. 

Many people recall that the Nixon administration used the IRS to harass political opponents. Surely the IG’s report and subsequent investigations will show whether the IRS has gotten back into the business of protecting an incumbent administration from its critics.

It is not too soon, however, to recall the the campaign finance reform lobby has been calling for a crackdown on political groups since the Citizens United decision. One possibility would be that the IRS gave in pressure from the reform lobby and went after the Tea Party groups.

Was there an intention to chill speech? The timing provokes doubts: the targeting began in the spring of 2010 just as the mid-term campaign season started and ended after the election when the harassment no longer has any rationale. The long delays of approving tax status certainly slowed down the wave coming toward Congress in 2010. 66 House members lost their seats in that election. Do any sitting members owe their offices to the IRS?

Attaining social “equality” must mean equality before the law via the rule of law rather than from arbitrary edicts which picks winners and losers that engenders unintended consequences.

A timely reminder from the great Austrian economist F. A. Hayek once wrote, (bold mine)

It is the rule of law, in the sense of the rule of formal law, the absence of legal privileges of particular people designated by authority, which safeguards that equality before the law which is the opposite of arbitrary government.

A necessary, and only apparently paradoxical, result of this is that formal equality before the law is in conflict, and in fact incompatible, with any activity of the government deliberately aiming at material or substantive equality of different people, and that any policy aiming directly at a substantive ideal of distributive justice must lead to the destruction of the rule of law. To produce the same result for different people, it is necessary to treat them differently. It cannot be denied that the rule of law produces economic inequality - all that can be claimed for it is that this inequality is not designed to affect particular people in a particular way.

It may even be said that for the rule of law to be effective it is more important that there should be a rule applied always without exceptions than what this rule is.... It does not matter whether we all drive on the left- or on the right-hand side of the road so long as we all do the same. The important thing is that the rule enables us to predict other people’s behavior correctly, and this requires that it should apply to all cases - even if in a particular instance we feel it to be unjust.

Video: F. A. Hayek Distinguishes Rule of Law and Arbitrary Laws

In the following video the great F. A Hayek distinguishes between the rule of law (general rule) vis-a-vis arbitrary laws (source liberty pen, hat tip Prof Peter Boettke)

Hayek quotes from the video:

Any redistributive policy requires a discriminating treatment of different people. You cannot so long as you treat all the people according to the same formal rules—forcing them to act only to observe the same rules—bring about any distribution of incomes. Once you decide that government is entitled to take from some people in order to give it to others, this is automatically discrimination of a kind for which there can be no general rule. They are purely arbitrary.

After long discussion in jurisprudence, it has come out that the essential point about general rule is you cannot predict who will profit from it and who will suffer from it. Any rule where you know beforehand who will be gainers and who will be the suffers is, in that sense, not a general rule

Once you authorize government to act arbitrarily there is no limit to it.

Not acting to a general rule is arbitrary. It is the only way in which you can define arbitrary.

You distinguish between the people whom you want to have more and the people whom you want to have less

The distinction is between (I can only say) a general rule which applies equally to all and a rule which distinguishes between different groups

Essay of the Day: Tom Palmer: The Origins of State and Government

A profound essay on the origins of the state and government from Cato’s Tom G. Palmer

Some excerpts: 

People’s savings as the foundation of the state: 

What exactly is a state? The canonical definition was offered by MaxWeber,who defined the state as “that human community which (successfully) lays claim to the monopoly of legitimate physical violence within a certain territory.”

In fact, it cannot be the case that all wealth is attributable to the state.

Historically, the existence of a state apparatus required a pre-existing surplus to sustain it in the first place. The state,in other words, would not exist without wealth being produced before its emergence. Let’s explore that a bit further

Why do people have wealth? Charles Dunoyer, an early libertarian sociologist, explained that “there exist in the world only two great parties; that of those who prefer to live from the produce of their labor or of their property, and that of those who prefer to live on the labor or the property of others.” Simply put,makers produce wealth while takers appropriate it…

Predatory nature of the state:

State formation represents a transformation from “roving bandits” to “stationary bandits.” As the economist Mancur Olson wrote, “If the leader of a roving bandit gang who finds only slim pickings is strong enough to take hold of a given territory and to keep other bandits out, he can monopolize crime in that area—he can become a stationary bandit.”That is an important insight into the development of human political associations.

The state is, at its core, a predatory institution. Yet, in some ways, it also represents an advance, even for those being plundered. When the choice is between roving bandits—who rob,fight, burn what they can’t take, and then come back the following year—and stationary bandits—who settle down and plunder little by little throughout the year—the choice is clear. Stationary bandits are less likely to kill and destroy as they loot you and they fend off rival bandits. That is a kind of progress—even from the perspective of those being plundered..

 Incentives of the governing class and the roots of taxation:

What are the incentives of the rulers? Overly simplistic models posit that rulers seek to maximize wealth, or gross domestic product. Scott,however, argues that the ruler’s incentive is not to maximize the GDP,but to maximize the “SAP,” the state-accessible product,understood as that production that is easy to identify, monitor, enumerate, and confiscate through taxation: “The ruler. . .maximizes the state-accessible product, if necessary, at the expense of the overall wealth of the realm and its subjects.”

The inculcation of society for the need of the state

State systems of social control—from military conscription to compulsory schooling—have thoroughly permeated our consciousness.Consider,for example, the passport. You cannot travel around the world to day without a document issued by the state. In fact, you can no longer even travel around the United States without a state-issued document.Passports are very recent inventions. For thousands of years, people went where they wanted without permission from the state.

Laws originated from spontaneous order and not from the state;

Modern states also claim to be the sole source of law. But historically,states mainly replaced customary law with imposed law. There is a great deal of law all around us that is not a product of the state,for law is a byproduct of voluntary interaction. As the great jurist Bruno Leoni argued, “Individuals make the law insofar as they make successful claims.” Private persons making contracts are making law.

The need to educate people in order to free our captive minds from our dependence on the state

The evolution of freedom has involved a long process of bringing power under law. The imposition of force has none the less left a powerful imprint on our minds. Alexander Rüstow, a prominent sociologist and a father of the post war revival of liberty in Germany, meditated on the origins of the state in violence and predation and its lingering imprint: “All of us, without exception, carry this inherited poison within us, in the most varied and unexpected places and in the most diverse forms, often defying perception. All of us, collectively and individually, are accessories to this great sin of all time, this real original sin, a hereditary fault that can be excised and erased only with great difficulty and slowly, by an insight into pathology, by a will to recover, by the active remorse of all.” It takes work to free our minds from our dependence on the state

Read the complete essay here

Ron Paul: US is a Constitutional Republic and Not a Democracy

Congressman Ron Paul reminds Americans that they are supposedly a constitutional Republic and not a democracy (bold emphasis mine)

Democracy is majority rule at the expense of the minority. Our system has certain democratic elements, but the founders never mentioned democracy in the Constitution, the Bill of Rights, or the Declaration of Independence. In fact, our most important protections are decidedly undemocratic. For example, the First Amendment protects free speech. It doesn't – or shouldn't – matter if that speech is abhorrent to 51% or even 99% of the people. Speech is not subject to majority approval. Under our republican form of government, the individual, the smallest of minorities, is protected from the mob.

Sadly, the constitution and its protections are respected less and less as we have quietly allowed our constitutional republic to devolve into a militarist, corporatist social democracy. Laws are broken, quietly changed and ignored when inconvenient to those in power, while others in positions to check and balance do nothing. The protections the founders put in place are more and more just an illusion.

This is why increasing importance is placed on the beliefs and views of the president. The very narrow limitations on government power are clearly laid out in Article 1 Section 8 of the Constitution. Nowhere is there any reference to being able to force Americans to buy health insurance or face a tax/penalty, for example. Yet this power has been claimed by the executive and astonishingly affirmed by Congress and the Supreme Court. Because we are a constitutional republic, the mere popularity of a policy should not matter. If it is in clear violation of the limits of government and the people still want it, a Constitutional amendment is the only appropriate way to proceed. However, rather than going through this arduous process, the Constitution was in effect, ignored and the insurance mandate was allowed anyway.

This demonstrates how there is now a great deal of unhindered flexibility in the Oval Office to impose personal views and preferences on the country, so long as 51% of the people can be convinced to vote a certain way. The other 49% on the other hand have much to be angry about and protest under this system.

We should not tolerate the fact that we have become a nation ruled by men, their whims and the mood of the day, and not laws. It cannot be emphasized enough that we are a republic, not a democracy and, as such, we should insist that the framework of the Constitution be respected and boundaries set by law are not crossed by our leaders. These legal limitations on government assure that other men do not impose their will over the individual, rather, the individual is able to govern himself. When government is restrained, liberty thrives.

Unfortunately, the “increasing importance” that will be “placed on the beliefs and views of the president” or the coming US presidential elections will be determined mostly by the following dynamics:

The jarring charts signifying the “epidemic” of entitlements are from Nicolas Eberstadt of the American Enterprise Institute at the Wall Street Journal

The devolution to “militarist, corporatist, social democracy” is why US fiscal conditions will continue to deteriorate.

Democracy or the rule of men rather than the rule of law self-reinforces on its own destruction.

Quote of the Day: Rule of Law

The Rule of Law is a three-legged stool on which freedom sits. The first leg requires that all laws be enacted in advance of the behavior they seek to regulate and be crafted and promulgated in public by a legitimate authority. The goal of all laws must be the preservation of individual freedom. A law is not legitimate if it is written by an evil genius in secret or if it punishes behavior that was lawful when the behavior took place or if its goal is to solidify the strength of those in power. It also is not legitimate if it is written by the president instead of Congress.

The second leg is that no one is above the law and no one is beneath it. Thus, the law's restraints on force and fraud need to restrain everyone equally, and the law's protections against force and fraud must protect everyone equally. This leg removes from the discretion of those who enforce the law the ability to enforce it or to afford its protections selectively. This principle also requires that the law enforcers enforce the law against themselves. Of course, this was not always the case. In 1628, the British Parliament spent days debating the question "Is the king above the Rule of Law, or is the Rule of Law above the king?" Thankfully, the king lost – but only by 10 votes out of several hundred cast.

The third leg of the Rule of Law requires that the structures that promulgate, enforce and interpret law be so fundamental – Congress writes the laws, the president enforces the laws, the courts interpret the laws – that they cannot be changed retroactively or overnight by the folks who administer them. Stated differently, this leg mandates that only a broad consensus can change the goals or values or structures used to implement the laws; they cannot be changed by atrophy or neglect or crisis.

[bold emphasis added]

This is from Judge Andrew P. Napolitano at the LewRockwell.com

Quote of the Day: Ethical Defense of Liberty Knows NO Borders

an ethical defense of liberty, as well as an economic defense of liberty, applies equally to both sides of any national border. Anyone who claims to defend market liberty for his own people should be equally prepared to defend market liberty for the people on the other side of the national border. This is the doctrine of the rule of law. This widespread acceptance of this principle has made the West rich.

This is from Professor Gary North from his excellent article on the immorality of tariffs or why tariffs are undeclared acts of war against other nations.

Quote of the Day: Rules versus Discretion

We talk about "regulation," but the real issue is rules vs. discretion. Regulating by simple clear rules is much better than regulation by discretion, or by rules so complex they amount to discretion. When a zoning inspector can come in after the fact and always find something wrong, it's in invitation to corruption. We are increasingly a country in which "regulation" means that regulators can tell people what to do on a whim, not one in which clear objective rules are imposed.

That’s from University of Chicago Professor John H. Cochrane. It’s really rule of law versus arbitrary edicts, legislation or regulations. Again corruption is an offshoot to the latter.

Is the US Still the “Land of the Free”?

A law professor at the Washington Times enumerates incisively 10 reasons why the US has been losing its freedom. The law professor points out that despite such dynamics, paradoxically Americans still want to be seen as “the land of the free”.

Writes Jonathan Turley, which I quote in the entirety (bold emphasis mine; hat tip Bill Bonner)

Every year, the State Department issues reports on individual rights in other countries, monitoring the passage of restrictive laws and regulations around the world. Iran, for example, has been criticized for denying fair public trials and limiting privacy, while Russia has been taken to task for undermining due process. Other countries have been condemned for the use of secret evidence and torture.

Even as we pass judgment on countries we consider unfree, Americans remain confident that any definition of a free nation must include their own — the land of free. Yet, the laws and practices of the land should shake that confidence. In the decade since Sept. 11, 2001, this country has comprehensively reduced civil liberties in the name of an expanded security state. The most recent example of this was the National Defense Authorization Act, signed Dec. 31, which allows for the indefinite detention of citizens. At what point does the reduction of individual rights in our country change how we define ourselves?

While each new national security power Washington has embraced was controversial when enacted, they are often discussed in isolation. But they don’t operate in isolation. They form a mosaic of powers under which our country could be considered, at least in part, authoritarian. Americans often proclaim our nation as a symbol of freedom to the world while dismissing nations such as Cuba and China as categorically unfree. Yet, objectively, we may be only half right. Those countries do lack basic individual rights such as due process, placing them outside any reasonable definition of “free,” but the United States now has much more in common with such regimes than anyone may like to admit.

These countries also have constitutions that purport to guarantee freedoms and rights. But their governments have broad discretion in denying those rights and few real avenues for challenges by citizens — precisely the problem with the new laws in this country.

The list of powers acquired by the U.S. government since 9/11 puts us in rather troubling company.

1. Assassination of U.S. citizens

President Obama has claimed, as President George W. Bush did before him, the right to order the killing of any citizen considered a terrorist or an abettor of terrorism. Last year, he approved the killing of U.S. citizen Anwar al-Awlaqi and another citizen under this claimed inherent authority. Last month, administration officials affirmed that power, stating that the president can order the assassination of any citizen whom he considers allied with terrorists. (Nations such as Nigeria, Iran and Syria have been routinely criticized for extrajudicial killings of enemies of the state.)

2. Indefinite detention

Under the law signed last month, terrorism suspects are to be held by the military; the president also has the authority to indefinitely detain citizens accused of terrorism. While the administration claims that this provision only codified existing law, experts widely contest this view, and the administration has opposed efforts to challenge such authority in federal courts. The government continues to claim the right to strip citizens of legal protections based on its sole discretion. (China recently codified a more limited detention law for its citizens, while countries such as Cambodia have been singled out by the United States for “prolonged detention.”)

3. Arbitrary justice

The president now decides whether a person will receive a trial in the federal courts or in a military tribunal, a system that has been ridiculed around the world for lacking basic due process protections. Bush claimed this authority in 2001, and Obama has continued the practice. (Egypt and China have been denounced for maintaining separate military justice systems for selected defendants, including civilians.)

4. Warrantless searches

The president may now order warrantless surveillance, including a new capability to force companies and organizations to turn over information on citizens’ finances, communications and associations. Bush acquired this sweeping power under the Patriot Act in 2001, and in 2011, Obama extended the power, including searches of everything from business documents to library records. The government can use “national security letters” to demand, without probable cause, that organizations turn over information on citizens — and order them not to reveal the disclosure to the affected party. (Saudi Arabia and Pakistan operate under laws that allow the government to engage in widespread discretionary surveillance.)

5. Secret evidence

The government now routinely uses secret evidence to detain individuals and employs secret evidence in federal and military courts. It also forces the dismissal of cases against the United States by simply filing declarations that the cases would make the government reveal classified information that would harm national security — a claim made in a variety of privacy lawsuits and largely accepted by federal judges without question. Even legal opinions, cited as the basis for the government’s actions under the Bush and Obama administrations, have been classified. This allows the government to claim secret legal arguments to support secret proceedings using secret evidence. In addition, some cases never make it to court at all. The federal courts routinely deny constitutional challenges to policies and programs under a narrow definition of standing to bring a case.

6. War crimes

The world clamored for prosecutions of those responsible for waterboarding terrorism suspects during the Bush administration, but the Obama administration said in 2009 that it would not allow CIA employees to be investigated or prosecuted for such actions. This gutted not just treaty obligations but the Nuremberg principles of international law. When courts in countries such as Spain moved to investigate Bush officials for war crimes, the Obama administration reportedly urged foreign officials not to allow such cases to proceed, despite the fact that the United States has long claimed the same authority with regard to alleged war criminals in other countries. (Various nations have resisted investigations of officials accused of war crimes and torture. Some, such as Serbia and Chile, eventually relented to comply with international law; countries that have denied independent investigations include Iran, Syria and China.)

7. Secret court

The government has increased its use of the secret Foreign Intelligence Surveillance Court, which has expanded its secret warrants to include individuals deemed to be aiding or abetting hostile foreign governments or organizations. In 2011, Obama renewed these powers, including allowing secret searches of individuals who are not part of an identifiable terrorist group. The administration has asserted the right to ignore congressional limits on such surveillance. (Pakistan places national security surveillance under the unchecked powers of the military or intelligence services.)

8. Immunity from judicial review

Like the Bush administration, the Obama administration has successfully pushed for immunity for companies that assist in warrantless surveillance of citizens, blocking the ability of citizens to challenge the violation of privacy. (Similarly, China has maintained sweeping immunity claims both inside and outside the country and routinely blocks lawsuits against private companies.)

9. Continual monitoring of citizens

The Obama administration has successfully defended its claim that it can use GPS devices to monitor every move of targeted citizens without securing any court order or review. (Saudi Arabia has installed massive public surveillance systems, while Cuba is notorious for active monitoring of selected citizens.)

10. Extraordinary renditions

The government now has the ability to transfer both citizens and noncitizens to another country under a system known as extraordinary rendition, which has been denounced as using other countries, such as Syria, Saudi Arabia, Egypt and Pakistan, to torture suspects. The Obama administration says it is not continuing the abuses of this practice under Bush, but it insists on the unfettered right to order such transfers — including the possible transfer of U.S. citizens.

These new laws have come with an infusion of money into an expanded security system on the state and federal levels, including more public surveillance cameras, tens of thousands of security personnel and a massive expansion of a terrorist-chasing bureaucracy.

Some politicians shrug and say these increased powers are merely a response to the times we live in. Thus, Sen. Lindsey Graham (R-S.C.) could declare in an interview last spring without objection that “free speech is a great idea, but we’re in a war.” Of course, terrorism will never “surrender” and end this particular “war.”

Other politicians rationalize that, while such powers may exist, it really comes down to how they are used. This is a common response by liberals who cannot bring themselves to denounce Obama as they did Bush. Sen. Carl Levin (D-Mich.), for instance, has insisted that Congress is not making any decision on indefinite detention: “That is a decision which we leave where it belongs — in the executive branch.”

And in a signing statement with the defense authorization bill, Obama said he does not intend to use the latest power to indefinitely imprison citizens. Yet, he still accepted the power as a sort of regretful autocrat.

An authoritarian nation is defined not just by the use of authoritarian powers, but by the ability to use them. If a president can take away your freedom or your life on his own authority, all rights become little more than a discretionary grant subject to executive will.

The framers lived under autocratic rule and understood this danger better than we do. James Madison famously warned that we needed a system that did not depend on the good intentions or motivations of our rulers: “If men were angels, no government would be necessary.”

Benjamin Franklin was more direct. In 1787, a Mrs. Powel confronted Franklin after the signing of the Constitution and asked, “Well, Doctor, what have we got — a republic or a monarchy?” His response was a bit chilling: “A republic, Madam, if you can keep it.”

Since 9/11, we have created the very government the framers feared: a government with sweeping and largely unchecked powers resting on the hope that they will be used wisely.

The indefinite-detention provision in the defense authorization bill seemed to many civil libertarians like a betrayal by Obama. While the president had promised to veto the law over that provision, Levin, a sponsor of the bill, disclosed on the Senate floor that it was in fact the White House that approved the removal of any exception for citizens from indefinite detention.

Dishonesty from politicians is nothing new for Americans. The real question is whether we are lying to ourselves when we call this country the land of the free.

I would add that the increasing politicization of the lives of the average Americans and the curtailment of their civil liberties also covers much of commerce and the financial system where political concessions, bailouts, and inflationists policies seems to have become an imperative.

In short, the US has gradually been transitioning into a fascist state where repressive and arbitrary laws have been substituting the rule of law.

As the great Friedrich August von Hayek admonished in the classic "The Road to Serfdom"

It is one of the saddest spectacles of our time to see a great democratic movement support a policy which must lead to the destruction of democracy and which meanwhile can benefit only a minority of the masses who support it. Yet it is this support from the Left of the tendencies toward monopoly which make them so irresistible and the prospects of the future so dark.

Quote of the Day: Differentiating Law from Legislation

Legislators produce legislation, not law (although they do sometimes codify law). And the confusion of legislation with law – a confusion fueled daily in common talk – is one of the most pernicious occurrences that bestows upon the state more authority and respect than it has earned and that it deserves. This ‘man of system’ error reflects a widespread and profound failure of too many people – even many in the genuinely liberal camp – to reflect seriously upon the sources of order in society.

That’s from Professor Donald J. Boudreaux

Quote of the Day: Perversion of the Law

The law perverted! And the police powers of the state perverted along with it! The law, I say, not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed! Instead of checking crime, the law itself guilty of the evils it is supposed to punish! If this is true, it is a serious fact, and moral duty requires me to call the attention of my fellow-citizens to it.

A very time relevant quote from the great Frédéric Bastiat, The Law (hat tip Professor Art Carden)

Insider Trading: What is Legal isn’t Necessarily Moral

Cato’s Walter Olson has a splendid article on the recent controversy over alleged insider trading by some politicians

Mr. Olson writes, (italics original)

Washington has been buzzing for the past 48 hours over revelations that some of Capitol Hill’s best-known lawmakers have been making fortunes speculating in the stocks of companies affected by official actions, typically while in possession of market-moving inside information. Rep. John Boehner (R-OH), Senatorial wife Teresa Kerry and others made bundles trading in health companies’ stocks shortly before Congressional or executive-branch action affecting the companies’ fortunes. After closed-door 2008 meetings in which Fed chairman Ben Bernanke briefed Congress on the gravity of the financial collapse, some lawmakers dumped their own stockholdings or even placed bets that the market would fall. Rep. Nancy Pelosi (D-CA) got access to highly desirable IPO (initial public offering) stock placements, some in companies with business before Congress. And so on. Studies have found that lawmakers as a group reap far above-average returns on their investments—suggesting either that these politicians are among the world’s cleverest investors, or else that they are profiting from inside information. All this has been turned into a front-page issue thanks to Throw Them All Out, a book by Hoover fellow Peter Schweizer, whose findings were showcased the other night on 60 Minutes.

So the question is: is all this legal? While there’s some difference of opinion on the issue among law professors, the proper answer to that question is most likely going to be, “Yes, it’s legal.” As UCLA’s Stephen Bainbridge points out, existing insider trading law, developed by way of a long series of contested cases under the Securities and Exchange Commission’s Rule 10b-5, assigns liability to persons who are not corporate insiders if they are violating a recognized duty of loyalty to those for whom they work. As applied to the investment whizzes of the Hill, this implies that trading on inside information might be a violation if done by Congressional staffers (since they owe a duty of loyalty to higher-ups) but not when done by members of Congress themselves.

First of all, I am not certain about the validity of the alleged statistics. Unless the analysts, who uncovered the controversial wealth derived from supposed insider trading, have been privy to the personal accounts of the aforementioned politicians or entirely trust disclosures as being forthright, these figures should be seen with cynicism.

How do we ascertain if under the table deals (concessions, bribery and etc.) are being passed off or camouflaged as investment gains? In short, what distinguishes money laundering from insider trading?

Second, what is legal isn’t necessarily moral.

Are insider trading laws moral?

As Professor Philosopher Tibor Machan writes, (bold emphasis mine, italics original)

It is conventional wisdom to treat this version of insider trading as morally wrong because it supposed to adversely affect others by being unfair. As one critic has put it, “What causes injury or loss to outsiders is not what the insider knew or did, rather it is what they themselves [the outsiders] did not know. It is their own lack of knowledge which exposes them to risk of loss or denies them an opportunity to make a profit.” By the fact that these others do not know what the insider does know, they are harmed since they are not able to make use of opportunities that are in fact available, knowable to us.

But what kind of causation is it that fails to make a difference when it does not exist? If someone’s knowing a good deal has no impact on what another does, it cannot be said that any harm upon another had been caused by that someone. Certainly, had the other known what the insider knew, he or she could have acted differently. By not acting differently, he or she could easily have failed to reap advantages the insider did reap. But nothing here shows that the insider caused any harm, only that he or she had a better set of opportunities. Unless we assume that valuable information known by one person ought, morally—and perhaps legally—be distributed to all interested parties—something that would beg the most important question—there is no moral fault involved in insider trading nor any causation of harm.

In short, insider trading is fundamentally about asymmetric information or "a situation in which one party in a transaction has more or superior information compared to another" (investopedia.com) and its effect on the marketplace.

I might add that even if there have been symmetry of information, people’s interpretation of information have factually been nuanced or different such that diversity of thoughts leads to variable actions, and thus voluntary exchange. In reality, there will never be symmetry of information because of the variable factors people read or construe information.

So how does one establish “fairness” in information?

Again, Professor Machan, (bold added, italics original)

As this applies to insider trading, if I have a prior obligation to share my information with others, that is, a fiduciary duty to clients or associates, then it is not that the information is “from the inside” but that it is owed to others that makes my dealings morally and possibly legally objectionable. It is only in such cases that fairness is obligatory, as a matter of one’s professional relationship to others, one established by the promise made or contract one has entered into prior to the ensuing duty to be fair. It is only then that one cause injury by refusing to do what one has agreed to do, namely, divulge information prior to using it for oneself. Accordingly, Hetherington’s objection to insider trading is without moral force. What he should have objected to is the breaching of fiduciary duty, which may occur on occasion by means of failing to divulge information (possibly gained “from the inside”) that has been—perhaps even contractually— promised to a client.

Furthermore, if I have stolen the information—spied or bribed for or extorted it—again the moral deficiency comes not from its being inside information but from its having been ill gotten.

If there has been no established fiduciary duty then fairness or unfairness becomes another abstraction used by politicians as pretext to enforce control over the marketplace. Insider trading, thus, becomes subjective and arbitrarily determined by politicians and regulators

This leads us back to Mr. Olson’s conclusion (bold emphasis mine)

It is tempting to approach the new revelations the way an ambitious prosecutor might, trying to stitch together a test-case indictment from, say, the penumbra of the mail and wire fraud statutes bulked up with a bit of newly hypothesized fiduciary duty here and a little “honest services” there. But that’s not how criminal law is supposed to work: for the sake of all of our liberties, prohibited behavior needs to be clearly marked out as prohibited in advance, not afterward once we realize it doesn’t pass a smell test. But we are still free to deplore the hypocrisy of a Congress that has long been content to criminalize for the private sector—often with stiff jail sentences—behavior not much different from what lawmakers are happy to engage in themselves.

My conclusions

It is unclear whether politicians benefited from insider trading or from other shady deals which has been passed off as stock market investments, thus the alleged outpeformance.

Insider trading, as argued from a moral standpoint, without clear parameters of the how the inequitable distribution or the lack of knowledge affects other parties accounts for as an arbitrary law. Hence these can be used by politicians to harass some participants in the marketplace for political or personal goals, and thus can be construed as an immoral law.

Given that politicians have become above the law, this accentuates the unfairness or the unilateral nature of the ethically flawed insider trading law or regulations

Finally, politicization of the marketplace, bailouts, inflationism, green energy and other market manipulation which predominate today’s have been skewing gains in favor of political clients at the expense of society, so where has the prosecution on insider trading been?

Clearly, what is legal may not be moral as the insider trading law reveals.

P.S. The Philippines has seen its popular Insider trading Scandal via the BW Resources.

Don’t blame this on free markets but one of state corporatism or crony capitalism

As the PCIJ writes, (bold emphasis mine)

The machinations surrounding the operation of the BW Resources Corp. and its affiliated BW Gaming and Entertainment Co. were probably the height of presidential recklessness. To begin with, Estrada was Dante Tan's secret partner in BW, confirms Espiritu. That was why BW became the recipient of so many government favors: an online bingo license given in record time by the Philippine Amusement and Gaming Corporation (Pagcor), the state-owned gaming company; a P600-million loan from the Philippine National Bank that was approved even if the collateral was worthless land; and a contract from Pagcor that ensured the transfer of Pagcor operations to a building that BW was constructing in downtown Manila.

Moreover, as various officials attested during the impeachment hearing, Estrada intervened on behalf of Tan when he was being investigated by the Securities and Exchange Commission (SEC) for insider trading and stock price manipulation. The President also ordered Jimenez and ethnic Chinese businessmen Wilson Sy and Willy Ocier, whose speculative play in the market was believed to have caused BW prices to fall precipitously in late 1999, to return the money Tan had lost to shore up BW prices.

"That was the version of Dante Tan when I confronted him about it," says Espiritu. "That version was also confirmed by the brokers at the Philippine Stock Exchange." Face to face with an angry president, Sy and Ocier agreed to reimburse Tan's losses, according to prosecution lawyers in the Estrada impeachment trial. The payoff was supposedly made not in cash but in 650 million shares of Belle Corp. worth P1.5 billion. The shares were turned over not to Tan but to Estrada, who then supposedly sold them to SSS and GSIS at a profit of P800 million.

Such politically driven stock market manipulation has been fated to meet with divine justice.

President Estrada has been impeached (yes I know Mr. Estrada ran and placed second in the 2010 presidential elections), where the scandal had been part of the impeachment proceedings, and BW Resources crashed back to earth, where crony Dante Tan, reportedly lost lots of money and has fled country and reportedly is in Canada even if the courts eventually absolved him--which again reveals of the nebulousness of the law.

BW Resources (blue chart) [from my previous post]

Quote of the Day: Law Differs from Legislation

Today’s quote of the day comes from Professor Don Boudreaux

law is not at all the same thing as legislation. Law deserves far more respect (although, still, not respect given mindlessly) than does legislation; indeed, legislation, by its very nature, is frequently used to break the law. For example, Jim Crow legislation in the late 19th-century American south broke the law that effectively enforced racial desegregation on streetcars.

One of the greatest dangers unleashed by modern language is the treatment of “legislation” and “law” as synonyms for each other – and, hence, the bestowal on legislation of the genuine respect that is due to law.

Graphic: Rule Of Law

Again from the ever creative mind of Jessica Hagy, a wonderful graphic depiction of social cooperation based on the rule of law. (From Indexed Be Nice; Stop plundering and looting)

Do Central Banks Uphold Or Undermine Free Market Principles?

When I read Professor Art Carden’s statement from this article,

Far too often, people use terms like "capitalism" and "socialism" sloppily, either because they don't understand them or because the words make for cheap but effective (albeit inaccurate) political rhetoric. The Great Conversation suffers because of it.

It struck me that many arguments supposedly for the so-called advancement of the political philosophy of libertarianism, free markets and or classical liberalism have precisely been anchored on this—rhetoric misrepresented as principles.

And this is exactly the essence of my last article, The Middle Of The Road Policy Of A Local Free Market Group. Where I was earlier disappointed about the issue of principles, I was even more dismayed by the responses.

Given the benefit of the doubt that perhaps my article or my “spin” could have lacked clarity, or that specialization may have lead to the misunderstanding of my message, my argument against the positive relationship between central banking and the free market was certainly not about utility nor was it about market failure.

By utility, I mean it would seem misguided to compare what is essentially is a monopoly—operating on the power of coercion, funded by taxpayer resources and whose decision making process by the authorities are (externality) risk borne by the taxpayers—with private and semi-private enterprises operating mostly on a competitive environment.

By market failure, the standard statist ‘Paul Krugman’ tactic—throw up a strawman, assail or shoot it down with econometric gibberish or economic models, and declare “market failure”, thus justifying government intervention—eludes the question about this relationship between free markets and the central bank.

The fact that the local central bank began only in the Philippines in 1949, goes to show that even in our colonial past the nation has survived without it, thereby, disproving the presumed sine qua non nature of central banking to the local economy.

As my colleague Paul How writes in his 'as-yet unpublished manuscript', the “Philippine Banking And The Business Cycle” about how the domestic monetary system operated, (bold emphasis mine)

During the 19^th century, the monetary system had a gold standard in place, where each monetary note was presumed to redeem a fixed amount of gold...

Clearly, people, in their private capacity, preferred the use of a medium of exchange whose value was based not on government decree but on the amount of rare metals contained in the item. Even after the Spanish handed the Philippines over to the United States in December 1898, Filipinos continued using the Mexican coin, much to the chagrin of US officials keen on imposing their culture on the new colony’s inhabitants.

Where half of our transactions are settled for by money which is issued by an institution owned and controlled by the government, this extrapolates to half of our trading activities under the indirect purview of the government. Thus it is very important to put in question the role of such institution under the Free Market precept.

Ultimately, what for stands as the most important issue is through this question:

Do central banks promote or undermine the Free Market Principles?

This brings us back to definition. A free market, according to Wikipedia, is a market in which there is no economic intervention and regulation by the state, except to enforce private contracts and the ownership of property.

If freedom to contract and private property rights are the key pillars of free market principles as stated by such definition, do central bank activities promote these?

As a side note, under classical liberalism I would not say that free market is the absence of intervention or regulation, but instead a free market is self regulated by (mostly non-state) institutions operating under the rule of law.

Nevertheless the entire concept of freedom to contract and private property or even the rule of law are put into a test under the central bank’s operations: (bold highlights under below quotes are my emphasis)

1. Inflation of the monetary system

Thus, credit expansion unavoidably results in the economic crisis. In either of the two alternatives, the artificial boom is doomed. In the long run, it must collapse. The short-run effect, the period of prosperity, may last sometimes several years. While it lasts, the authorities, the expanding banks and their public relations agencies arrogantly defy the warnings of the economists and pride themselves on the manifest success of their policies. But when the bitter end comes, they wash their hands of it.

The artificial prosperity cannot last because the lowering of the rate of interest, purely technical as it was and not corresponding to the real state of the market data, has misled entrepreneurial calculations. It has created the illusion that certain projects offer the chances of profitability when, in fact, the available supply of factors of production was not sufficient for their execution. Deluded by false reckoning, businessmen have expanded their activities beyond the limits drawn by the state of society’s wealth. They have underrated the degree of the scarcity of factors of production and overtaxed their capacity to produce. In short: they have squandered scarce capital goods by malinvestment.

Ludwig von Mises, The Causes of Economic Crisis,

Does price signalling distortion, reduction of purchasing power of money and capital consumption from these forces represent as free market principle? The same question should all be applied on the following aspects shown below.

2. The nature of central bank’s fractional reserve system

As Huerta de Soto points out, the problem of the tragedy of the commons always appears when property rights are defined improperly. In the case of fractional reserve banking, bankers can infringe on property rights because it is not clearly defined who owns the deposit.

When customers make their deposits, the promise is that the deposit is always available for withdrawal. However, the deposits, by the very definition of fractional reserve banking, are never completely available to all customers at one time. This is because banks will take a part of these deposits and loan them out to other customers. In other words, they issue fiduciary media. By issuing more property titles than property entrusted to them, the banks violate the traditional property rights of their customers. (One of the most important contributions of Huerta de Soto's exhaustive book is to demonstrate how banking developed historically and that fractional reserve banking evolved as a perversion of deposit banking.)

Philipp Bagus, The Commons and the Tragedy of Banking

3. Externality costs from the knowledge problem

The odds that 19 men and women (a.k.a. the Federal Open Market Committee) will be able to select the overnight interest rate that keeps the U.S. economy growing at its potential in perpetuity are next to nil.

There would be a huge outcry if the Fed set the price of oil or copper or soybeans. Yet we accept the central bank as a price setter, a monopolist, when it comes to the interbank lending rate.

Caroline Baum Capitalism Still Has Legs That Are Long and Sexy

3. Operates from an environment of arbitrary rules

The concept of the rule of law in jurisprudence and political philosophy has several dimensions. At its core is the classical liberal principle of nondiscretionary governance that stands in contrast to the arbitrary or discretionary rule of those people currently in authority. In shorthand, either we have the rule of law or we have the rule of authorities. Under the rule of law, government agencies do nothing but faithfully enforce statutes already on the books. Under the rule of authorities, those in positions of executive authority have the discretion to make up substantive new decrees as they go along, and to forego enforcing the statutes on the books.

Dr. Lawrence H. White Rule of Law or the Rule of Central Bankers?

Think currency interventions in behalf of exporters and OFWs at the expense of importers and consumers via elevated prices of goods and services.

4. Operate on persistent political pressures

To put it into the hands of an institution which is protected against competition, which can force us to accept the money, which is subject to incessant political pressure, such an authority will not ever again give us good money

Friedrich August von Hayek A Free-Market Monetary System

5. Choosing winners and losers

The real reason for the adoption of the Federal Reserve, and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations.

Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition.

Murray N. Rothbard, The Case Against the Fed

6. Crony Capitalism

The answer was the same in both cases: the big businessmen and financiers had to form an alliance with the opinion molding classes in society, in order to engineer the consent of the public by means of crafty and persuasive propaganda.

Murray N. Rothbard, The Case Against the Fed

7. Promote Government Expansion

While, as we shall see presently, government's exclusive right to issue and regulate money has certainly not helped to give us a better money than we would otherwise have had, and probably a very much worse one, it has of course become a chief instrument for prevailing governmental policies and profoundly assisted the general growth of governmental power. Much of contemporary politics is based on the assumption that government has the power to create and make people accept any amount of additional money it wishes. Governments will for this reason strongly defend their traditional rights. But for the same reason it is also most important that they should be taken from them.

A government ought not, any more than a private person, to be able (at least in peace-time) to take whatever it wants, but be limited strictly to the use of the means placed at its disposal by the representatives of the people, and to be unable to extend its resources beyond what the people have agreed to let it have. The modern expansion of government was largely assisted by the possibility of covering deficits by issuing money-usually on the pretence that it was thereby creating employment. It is perhaps significant, however, that Adam Smith [54, p. 687] does not mention the control of the issue of money among the 'only three duties [which] according to the system of natural liberty, the sovereign has to attend to'.

Friedrich August von Hayek Denationalization of money

In my view, the fundamental case for free market capitalism begins with sound money and sound banking institutions (whether it is a 100% gold reserve or a free banking standard).

Philippine Justice System on the Vizconde Massacre Case: Letter of the Law Over Spirit of the Law

This from today’s Inquirer, (bold emphasis mine)

The decision of the Supreme Court clearing Hubert Webb and six others of criminal liability in the 1991 Vizconde massacre is not a vindication of them, the tribunal’s spokesperson said Wednesday.

Speaking at a news briefing, Midas Marquez said the acquittal of Webb et al. did not mean they were innocent of the charges. He said the high court voted 7-4 to acquit them because of the prosecution’s failure to prove their guilt beyond reasonable doubt and because of infirmities in the testimony of star witness Jessica Alfaro.

“The court said there was not enough basis to [affirm] the conviction of the accused. The court did not say they are not guilty,” Marquez stressed.

“The magistrates did not say that they were innocent and that they did not commit the crime,” he said.

In short, technical issues or legal loopholes prevailed.

Yet in looking at how laws should be complied with, we found this from wikipedia.org

The letter of the law versus the spirit of the law is an idiomatic antithesis. When one obeys the letter of the law but not the spirit, one is obeying the literal interpretation of the words (the "letter") of the law, but not the intent of those who wrote the law. Conversely, when one obeys the spirit of the law but not the letter, one is doing what the authors of the law intended, though not adhering to the literal wording.

"Law" originally referred to legislative statute, but in the idiom may refer to any kind of rule. Intentionally following the letter of the law but not the spirit may be accomplished through exploiting technicalities, loopholes, and ambiguous language. Following the letter of the law but not the spirit is also a tactic used by oppressive governments. (bold emphasis on this paragraph mine)

Bottom line: as we previously argued, arbitrary laws and regulations, as well as, arbitrary interpretation of laws signify as symptoms of a much deeper structural malaise known crony capitalism or legal protectionism of the political economic elite.

On India’s Lost Government Revenues From ‘Corruption’

Columnist Megha Bahree of Forbes reports that a huge amount ($213 billion) of tax revenues had been lost to bribes, tax evasion and mispricing in India during 1948-2008.

These estimates were supposedly conservative because it may have excluded different forms of smuggling and missing data, aside from foregone interest charges.

Ms. Bahree writes, (bold highlights mine)

The flight of capital from the legal system accelerated once the Indian government eased its tight control with economic reforms that started in 1991, the report says. Part of the problem was that Indian’s economic liberalization wasn’t accompanied by better governance or more accountability in the system. So while this period started liberalization of trade, lowering of trade barriers, less control and less oversight, it also led to an increase in bribes (to get your goods out of customs more quickly, for instance) and higher tax evasion.

India’s underground economy has been estimated at 50% of the GDP, making it about $650 billion at the end of 2008. Of this, 72% is held abroad, estimates Dev Kar, the author of the report and a former senior economist at the International Monetary Fund.

My comments:

1. Bribes occur only when there are legal proscriptions.

Bribes are symptoms or representative of societal response to the existing maze of arbitrary regulations.

Absent these restrictions or obstacles, then there won’t be any incentive to bribe, or much less, commit to an act that would circumvent any laws.

In short, the economic liberalization isn’t to blame for the institutional inefficiencies but on the partiality or the tepidness of liberalization reforms.

The strength of any social institutions emanate from the respect for the rule of law.

2. Tax evasions, like bribes, are symptoms of circumvention to onerous statutes.

They represent as cost saving measures resorted to by many enterprises in the face of the high costs of doing business largely due to obstructive taxes and the cumbersome compliance costs from the incumbent regulatory regime.

In other words, in most instances, a regime of high taxes is likely to incentivize tax evasion. Thus, it would be inaccurate to link economic liberalization with tax evasion because the cause and effect does not square. Economic liberalization should translate to lower taxes predicated on less dependence on the government.

3. The 50% share of India’s underground economy is emblematic, not of economic liberalization, but of the bureaucratic morass and the oppressive regulatory structures that discourages half of the economy to participate in the legal framework.

Again they are symptoms of people shunning government regulations, which is tantamount to government failure.

Like any process there always will be a transition. This means that the current reforms made by India hasn’t been enough (but should be on path), and that people and the existing institutions, coming from a long rule of statism, has yet to fully assimilate on the benefits of economic freedom premised on the respect for private property and the adherence to the rule of law.

4. Lost government revenues can be seen both ways.

If it is pocketed by government officials then it is likely to be devoted to consumption activities thereby would be considered unproductive and thus have negative implications.

Whereas if lost government revenues gives private enterprises room to expand production or services then it could be seen as having positive effects. Yes, this is the positive aspect of corruption.

Of course one could argue that lost revenues deprives the government to spend for social projects.

But most of social spending itself is questionable.

Aside from the issues of wastage and corruption, most of these so called public goods can be handled better and more efficiently by the private sector.

More importantly, high dependence on social spending is likely to foster a culture of entitlement or parasitism that is unlikely to prompt people to engage in productive activities but in acrimonious partisan politics between political insiders and the outsiders, promote patron-client relations (or crony capitalism) and even nurture criminal or underground activities.

India’s corruption problems isn’t one that hails from economic liberalization but from the vestiges of statism.

Profits And Social Responsibility

In a book review, the Economist hits the nail on the head.

``In poor countries the problem is not that businesses are unethical but that there are too few of them.”

More from the Economist, (bold highlights mine)

Ann Bernstein, the head of a South African think-tank called the Centre for Development and Enterprise, thinks that advocates of corporate social responsibility (CSR) tend to miss this point. In her new book, “The Case for Business in Developing Economies”, she stresses the ways companies benefit society simply by going about their normal business. In a free and competitive market, firms profit by selling goods or services to willing customers. To stay in business, they must offer lower prices or higher quality than their competitors. Those that fail disappear. Those that succeed spread prosperity. Shareholders receive dividends. Employees earn wages. Suppliers win contracts. Ordinary people gain access to luxuries that would have made Cecil Rhodes gasp, such as television, air-conditioning and antibiotics.

These are not new arguments, but Ms Bernstein makes them fresh by writing from an African perspective. Citizens of rich countries often fret about the occasional harm that corporations do, yet take for granted the prosperity they create. People in developing countries do not have that luxury.

If you pay heed to the mainstream, you’d have the impression that “labor costs” ultimately determines economic activities. Hence, the undeserved fixation towards currency values.

Of course in real life this is only fractionally true.

Economic activities are mainly about business enterprises seeking to serve consumers in return for the prospects of profits, where labor costs signify as one of the many factors or inputs necessary to produce a service or a good.

What ultimately determines profitability are respect for property rights and the rule of law which serves as the cornerstone for free trade to exist.

While the Economist article assails the issue of corporate social responsibility, the implied message is that poor countries have not sufficiently been exposed to competition for the anti-business environment reasons mostly out of the prevailing political or legal regime.

On the other hand, what needs to be understood is that profits are not necessarily “selfish”.

Since businesses are mostly established towards achieving long term relationships, profits have inherent social responsibility aspects such as maintaining or enhancing social relationships via charitable actions (donations and charities) or even addressing environmental concerns.

As Murray N. Rothbard wrote, (bold emphasis mine)

Whereas the opportunity for voluntary charity acts as a spur to production by the able, coerced charity acts as a drain and a burden upon production. In fact, in the long run, the greatest “charity” is precisely not what we know by that name, but rather simple, “selfish” capital investment and the search for technological innovations. Poverty has been tamed by the enterprise and the capital investment of our ancestors, most of which was undoubtedly done for “selfish” motives. This is a fundamental illustration of the truth enunciated by Adam Smith that we generally help others most in those very activities in which we help ourselves.

Hence, capitalism equates to mutually beneficial actions.