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Bookblogging: Implications of trickle down

December 13th, 2009

Another section of my book-in-progress, this time on the implications of trickle-down. I’m getting lots out of the comments, even if I don’t respond to everything, so please keep them coming.

One thing that would be really useful to me is references to publications (probably popular, rather than journal articles) by prominent academic economists that clearly espouse some of the implications of trickle-down discussed here. More than most of the ideas I’m criticising, trickle-down economics tends to be a background assumption rather than something which comes out into the open, and I want to avoid the suggestion that I’m attacking a straw zombie here.

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Implications

Defenders of the trickle-down hypothesis frequently employ what my Crooked Tmber co-blogger John Holbo calls the

‘the two-step of terrific triviality’. Say something that is ambiguous between something so strong it is absurd and so weak that it would be absurd even to mention it. When attacked, hop from foot to foot as necessary, keeping a serious expression on your face.

The self-evidently weak version of the trickle-down theory starts with the observation that we all benefit, in all kinds of ways, from living in an advanced industrial society, with access to modern medical care, consumer goods, the Internet and so on. Stretched widely enough, the term ‘capitalism’ includes all advanced industrial societies, from Scandinavian social democracies to the Hong Kong version of laissez-faire. So, in this sense, the benefits of capitalism have trickled down to everyone.

The strong version of the claim is obtained by shifting the meaning of ‘capitalism’ to mean ‘the free-market version of capitalism favored by market liberals’. Relatively few of the benefits mentioned above can be traced directly to this form of capitalism. Advances in medical care have come mostly from publicly-funded research, and from innovations developed in the public health sector. The contributions of for-profit pharmaceutical companies have been modest by comparison. SImilarly, the Internet was developed by the publicly-funded university sector, and even now the most exciting developments are non-profit innovations like Wikipedia.

The crucial question is not whether technological progress and economic development yields benefits to everyone (clearly it does, at least in material terms), but whether market liberal policies generate more such progress than more egalitarian alternatives, so much more that everyone is better off in the end. It is this strong claim that was made repeatedly during the era of market triumphalism in the 1990s, and repeated, though with somewhat less conviction, through the 2000s.

The growth in US inequality during the Great Moderation was undeniable (though that didn’t stop some commentators and thinktanks trying to deny it). So, optimistic assessments of economic performance during the Great Moderation appeared to support the claim that rising inequality must be good for, or at least consistent with, economic growth that would ultimately benefit everybody.

Now, in the wake of the global financial crisis, this claim can be seen to be unambiguously false.

#

Income, inequality and taxation

The most obvious implication of the trickle-down hypothesis is that inequality in market incomes is not only harmless, but positively desirable, producing benefits for everyone in the long run. The general idea is that, the more highly owners of capital and highly-skilled managers are rewarded, the more productive they will be. This will lead both to the provision of goods and services at lower cost and to higher demand for the services of less-skilled workers who will therefore earn higher wages.

In the abstract language of welfare economics, the central implication of the trickle down hypothesis is that policy should be aimed at promoting efficiency, rather than equity since, in the long run, equity will take care of itself. Put in terms of a more homely metaphor, we should focus on making the pie bigger, rather than sharing it out more equally.

In reality, things are not that simple. It is easy to suggest that tax and other policies should apply neutrally to all sectors of the economy, but harder to define how this should actually work. It might seem that a ‘flat’ tax system in which all forms of income are taxed at a low, uniform rate would satisfy the efficiency criterion. But advocates of ‘trickle down’ have arguments to suggest that income from capital should not be taxed at all.

Going further, market liberals have claimed that, since everyone benefits from many of the services provided by government, the most efficient and equitable form of taxation is a poll tax [1]. Such a policy was in fact introduced by the Thatcher government in the UK to finance local government services, but was abandoned in the face of massive protests and widespread rioting.

Once we turn from theoretical policy debate o the details of design, implementation and enforcement, the well-off invariably do better than the poor, while the rich do best of all. This was true during the postwar Great Compression – although the system appeared steeply progressive, the use of deductions, loopholes and tax minimisation schemes mean that it was, at best, only moderately progressive. Under the systems in force since the 1980s, which are only marginally progressive in their design, the actual outcome has been that upper income earners probably pay a smaller proportion of their income in tax than the population as a whole.

The absence of substantial progressivity in the tax system is obscured by the focus, in the US and elsewhere on the fact that high income earners (almost by definition) pay the bulk of income tax. A good deal of the material appearing on this topic in the Wall Street Journal and elsewhere gives the impression that income tax is the only tax in the system. In reality, income tax is not even the sole tax imposed on income – most countries, including the US, levy payroll taxes which fall on labour income. Unlike the progressive income tax, which does indeed fall most heavily on high income earners, payroll taxes are regressive, falling primarily on wage employees.

In most taxation systems, capital gains are accorded concessional treatment or not taxed at all. Unsurprisingly, a large share of capital income is taken in the form of capital gains, moving the tax system closer to the ‘trickle-down’ ideal where all taxes fall directly, or indirectly, on wage-earners.

Moreover, taxes on income and wealth only account for about half of government revenue in most tax systems. Consumption taxes typically make up about half of all government revenue, and these taxes are regressive. That is, those on low incomes typically pay a higher proportion of those incomes in consumption taxes than do those on high incomes. There are a number of reasons for this. Low income earners don’t generally save very much, so the ratio of consumption to income is higher for these groups. Taxes on items such as tobacco, alcohol, and gambling are levied at very high rates, and these items tend to make up a larger share of the expenditure of the poor (though absolute expenditure is higher only for tobacco).

Finally, there is tax avoidance and minimisation. A vast industry of lawyers, accountants, money-launderers and other agents exists solely to ensure that no one with sufficient means should pay any more tax than the minimum they are obliged to pay under the most creative possible interpretation of the law, and that those who don’t wish to pay even this much should be free to make this choice without any adverse consequences.

In summary, no matter how favorably the well-off are treated, there will always be arguments to suggest that they should receive even better treatment. Trickle-down theory offers no limit to the extent to which the burdens of taxation and economic risk can or should be shifted from the rich to the poor. In the end, according to the trickle-down story, that which is given to the rich will always come back to the rest of us, while that which is given to the poor is gone forever.

#

The role of the financial sector

The financial sector is the crucial test case for trickle-down theory. During the era of market liberalism, incomes in the financial sector rose more rapidly than in any other part of the economy, and played a major role in bidding up the incomes of senior managers as well as those of professionals in related fields such as law and accounting. According to the trickle-down theory, the growth in income accruing to the financial sector benefitted the US population as a whole in three main ways.

First, the facilitation of takeovers, mergers and private buyouts offered the opportunity to increase the efficiency with which capital was used, and the productivity of the economy as a whole.

Second, expanded provision of credit to households allowed higher standards of living to be enjoyed, as households could ride out <a href=”http://johnquiggin.com/index.php/archives/2005/03/24/bankruptcy-again/”>fluctuations in income</a>, bring forward the benefits of future income growth, and draw on the capital gains associated with rising prices for stocks, real estate and other assets.

Finally, there is the classic ‘trickle-down’ effect in which the wealth of the financial sector generates demands for luxury goods and services of all kinds, thereby benefitting workers in general, or at least those in cities with <a href=”http://americancity.org/magazine/article/cities-and-cronyism-quiggin/”>high concentrations of financial centre activity such as London and New York</a>.

The bubble years from the early 1990s to 2007 gave some support to all of these claims. Measured US productivity grew strongly in the 1990s, and moderately in the years after 2000. Household consumption also grew strongly, and inequality in consumption was much less than inequality in income or wealth. And, although income growth was weak for most households, rates of unemployment were low, at least by post-1970 standards for most of this period.

Very little of this is likely to survive the financial crisis. At its peak, the financial sector (finance, insurance and real estate) accounted for around 18 per cent of GDP and a much larger share of GDP growth. With professional and business services included, the total share was over 30 per cent.[1] The finance and business services sector is now contracting, and it is clear that a significant part of the output measured in the bubble years was illusory. Many investments and financial transactions made during this period have already proved disastrous, and many more seem likely to do so in coming years.In the process, the apparent productivity gains generated through the expansion of the financial sector will be lost.

fn1. Here I’m measuring the <a href=”http://www.bea.gov/industry/gpotables/gpo_action.cfm?anon=87680&table_id=23981&format_type=0″>ratio of gross FBS output to gross domestic product</a>, which is the figure most relevant to the argument. The value-added in FRB (which nets out inputs purchased by the FRB sector) is smaller, around 20 per cent, but still indicates a highly financialised economy.

#

Equality of outcome and equality of opportunity

The trickle down hypothesis is closely related to the distinction between equality of outcomes (like life expectancy) and equality of opportunity. This distinction has long been a staple of debates between market liberals and social democrats. Many market liberals argue that, as long as society equalises opportunity, for example by providing good-quality schools for all, it’s not a problem if outcomes are highly unequal. Even though some people may do badly, their children will, it’s claimed, benefit from growing up in a dynamic society where everyone has a chance at the glittering prizes.

Writing in the Wall Street Journal, Wisconsin Republican Paul Ryan attacked President Obama’s first budget saying

In a nutshell, the president’s budget seemingly seeks to replace the American political idea of equalizing opportunity with the European notion of equalizing results.

A year earlier, following his victory in the Republican primary in South Carolina, John McCain said

We can overcome any challenge as long as we keep our courage, and stand by our defense of free markets, low taxes, and small government that have made America the greatest land of opportunity in the world.

As these quotations suggest, the trickle-down hypothesis relies on the claim that equality of opportunity and equality of outcome are not only distinct concepts, but stand in active opposition to each other. By removing disincentives to work such as high tax rates and elaborate social welfare systems, it is claimed, an economic system that tolerates highly unequal outcomes will also provide those at the bottom of the income distribution with the incentives and opportunities to haul themselves up into the middle class and beyond.

The idea that the United States is a ‘land of opportunity’ and ‘the most socially mobile society the world has ever known’ (Scott Norvell, in a piece calling for patriotic consumer spending in the wake of 9/11 http://www.foxnews.com/story/0,2933,34378,00.html) is central to the American national self-image, and the belief that this high social mobility derives from free markets is widely shared.

As we will see, empirical studies of social mobility do not support such beliefs. But most economists are not engaged in studies of social mobility and many of them share these popular assumptions. This is true not only of self-satisfied American economists, promoting the merits of the status quo and calling for more of the same, but also of European critics of the welfare state, who accept the characterization of their own societies as rigid and sclerotic by comparison with the dynamic and flexible United States.

[1] The word ‘poll’ means ‘head’, but is closely associated with voting. Poll taxes are typically levied using electoral registers to define the tax base and can therefore be used to disenfranchise the poor or, as in the US South in the Jim Crow era, blacks

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  1. gerard
    December 13th, 2009 at 16:46 | #1

    “…to the Hong Kong version of laissez-faire”

    whew! hold it right there!

    The Hong Kong version of laissez-faire involves extremely tight regulation of:

    LAND (all land in Hong Kong is owned by the government and leased to private owners at rates that differ greatly depending on whether or not you are a ‘citizen’ – half of the people in HK live in public housing!)

    LABOUR (it is extremely difficult for Chinese mainlanders to even visit the place, let alone try and work there – what other city in the world has a labour market so tightly protected from the rest of the country that it is in?).

    CURRENCY (tied to the American dollar, not freely floating)

    INSTITUTIONS (extensive – and excellent – public works, public health system, transportation, welfare, education, and of course the Port of Hong Kong and Hong Kong Stock Exchange, without which HK would be nothing)

    the idea that it represents the minimum of state intervention is a Friedmanite myth designed to counter the FACT that all of the East Asian “tigers” developed thanks to even stronger government intervention!

    http://psweb.sbs.ohio-state.edu/faculty/mcooper/ps536readings/cheung_interventionism.pdf

    And of course, where did HK get its prosperity in the first place? Because of British policy which gave it in effect a monopoly on imperial trade with China – and let’s never forget that it started as the principal base for the largest State-operated international drug-trafficking operation that the world has ever seen – they didn’t call it the Opium Wars for nothing.

    Don’t regurgitate the myth, even in passing.

  2. gerard
    December 13th, 2009 at 16:53 | #2

    The strong version of the claim is obtained by shifting the meaning of ‘capitalism’ to mean ‘the free-market version of capitalism favored by market liberals’. Relatively few of the benefits mentioned above can be traced directly to this form of capitalism. Advances in medical care have come mostly from publicly-funded research, and from innovations developed in the public health sector. The contributions of for-profit pharmaceutical companies have been modest by comparison. SImilarly, the Internet was developed by the publicly-funded university sector, and even now the most exciting developments are non-profit innovations like Wikipedia.

    this point is so important, and so often overlooked, it probably deserves more than a single paragraph. to use the most obvious example… try and imagine a world economy without aircraft!

  3. gerard
    December 13th, 2009 at 17:04 | #3

    Second, expanded provision of credit to households allowed higher standards of living to be enjoyed, as households could ride out fluctuations in income, bring forward the benefits of future income growth, and draw on the capital gains associated with rising prices for stocks, real estate and other assets.

    the only reason why “inequality in consumption was much less than inequality in income or wealth” during this period was the explosion in private debt – debt for consumption, and debt for housing… and this fed back into housing prices, making them shoot (in Australia) from around 3 times annual income in the 50s to the 80s to around 8 times annual income by the end of Howard’s tenure. this is the real “road to serfdom” – Housing-Debt serfdom.

  4. Alice
    December 13th, 2009 at 17:55 | #4

    @gerard
    Couldnt agree more Gerard – particularly in our major cities “this is the real “road to serfdom” – Housing-Debt serfdom.” backed up by a huge mortgage. Im inclined to agree with Keen. We have not seen the correction yet and its not too difficult to see where the private sector debt is: in the home mortgage.

  5. Philomena
    December 13th, 2009 at 18:35 | #5

    And then the unofficial death duties kick in. A family relative on the NSW Central Coast had to mortgage her parents’ home to cough up $500,000 for her pensioner seriously ill aged parents to be accepted in two separate nursing homes, approximately 200 kms away from each other and younger family members.

  6. iain
    December 13th, 2009 at 20:13 | #6

    “inequality in market incomes is not only harmless, but positively desirable, producing benefits for everyone in the long run”

    Some obvious rebuttals of this ideology are:

    Boyce, J. 1994, Inequality as a cause of environmental degradation, Ecological Economics vol. 11 pp. 169-178.

    Pickett, K., Wlkinson, R. 2009, The Spirit Level: why more equal societies almost always do better, Allen Lane, London, U.K.

    Wilkinson, R. 2005, The Impact of Inequality: how to make sick societies healthier, New Press, New York, U.S.A.

  7. iain
    December 13th, 2009 at 20:25 | #7

    re: housing debt.

    but surely this is no surprise?

    Someone once commented that the “”sufficient price for the land” is nothing but a euphemistic circumlocution for the ransom which the worker must pay to the capitalist in return for permission to retire from the wage-labour market to the land”.

    To have low land prices would defeat the whole purpose.

  8. SimonJM
    December 13th, 2009 at 20:50 | #8

    John have you considered the implications of trickle-down within a finite natural resources context?

  9. December 13th, 2009 at 20:53 | #9

    “The most obvious implication of the trickle-down hypothesis is that inequality in market incomes is not only harmless, but positively desirable, producing benefits for everyone in the long run. ”

    I would characterise it differently – that it’s not inequality itself that produces Good Things, but the absence of certain policies to reduce it allows Good Things to be produced more easily. Advocates of greater equality rarely examine the mechanisms by which this can be done to see if they are effective, viable, or have greater benefits than costs. Pointing to situations of 50 or 70 years ago and saying they should be emulated ignore the vast changes in culture, technology, knowledge, organisation and composition that have ensued, and thus are not convincing.

    On inequality (i.) itself, it’s important to talk about what kinds. Income i. and wealth i. are the obvious ones, but access i. and institutional i. are important too. The first two are completely irrelevant if they are contained in those terms, it’s the knock-on effects that are definite problems. These effects can include inequality before the law (because only the rich can afford justice) or inequality of human rights (because only the rich or well-connected can prevent their rights being abused). These are the proper subject of discussions of inequality, not the return to investors or the wages of financial sector senior managers.

  10. iain
    December 13th, 2009 at 21:24 | #10

    “I want to avoid the suggestion that I’m attacking a straw zombie here”

    Trickle down as advocacy:

    “It’s kind of hard to sell ‘trickle down,’…so the supply-side formula was the only way to get a tax policy that was really ‘trickle down.’ Supply-side is ‘trickle-down’ theory.”

    http://www.theatlantic.com/politics/budget/stockman.htm

    Trickle down as a straw man:

    http://www.capmag.com/article.asp?ID=1115

  11. iain
    December 13th, 2009 at 23:14 | #11

    @Jarrah

    “Advocates of greater equality rarely examine the mechanisms by which this can be done to see if they are effective, viable, or have greater benefits than costs.”

    See refs above.

    “These are the proper subject of discussions of inequality”

    Discussions of inequality include all the above. Surplus profit is a source of injustice and a restriction of rights.

  12. Martin
    December 14th, 2009 at 00:37 | #12

    @gerard
    Basically right, though Hong Kong has no minimum wage or import duties. It does have much the same set of laws and regulations as anywhere else, though, and social security and health care systems (you need to pay to see a GP, but hospital care is about $10/day). Hong Kong has a lot of small shops so that it is easy to set up as a small business; it is not all Westfieldized. There were major riots in the 1950s-70s, so the British made sure that the people were kept happy and productive, either as small business owners or as employees, while also looking after the Run-Run Shaws and Li Ka-Shings.

    Hong Kong has no citizens as such (only China has citizens; Hong Kong has permanent residents), and the opium trade ended when more-efficient Chinese opium farmers undercut the British (who promptly decided opium was evil). Also, what with the economic downturn, mainlanders can now visit Hong Kong, as long as they visit Disneyland and buy lots of souvenirs.

  13. gerard
    December 14th, 2009 at 08:11 | #13

    HK government is not interventionist in all respects, just the most important ones. I wish that the Australian government had the same Georgist attitude toward land as the HK government, then I might actually be able to afford a house one day, and not just a lifetime of mortgage serfdom.

  14. Jarvo
    December 14th, 2009 at 08:22 | #14

    some thoughts for a sub-title, JQ.

    How about:
    Tall Tales Told to Enrich the Already Rich
    or
    How We Were Conned to Enrich the Rich but NOT the Poor

  15. James
    December 14th, 2009 at 09:05 | #15

    Prof Q, have you seen the recent paper on trickle-down by Andrew Leigh, Do rising top incomes lift all boats? (short answer: not enough to prevent them from being flooded).
    One area in which the benefits of trickle-down are commonly espoused is opposition to Tobin taxes. We are told that a Tobin tax would lead to a reduction in the efficiency of financial markets, the freewheeling operation of which by rentseeking gamblers benefits us all by efficiently allocating investment (nb: for some reason, this argument against transaction taxes does not apply to taxes on food).

    Amazingly, some people are still making this argument even after the GFC: for example, last month, Sam Wylie on Core economics claimed that advocating a Tobin Tax reveals you don’t understand risk (given that he teaches what he describes as ‘financial engineering’, this is a pretty clear case of Upton Sinclair’s Law). This case is also made in “Exasperating Calculators“, which is my go-to popular book on what conservative mainstream economists think about things, from the horse’s mouth.

  16. TerjeP (say tay-a)
    December 14th, 2009 at 09:47 | #16

    CURRENCY (tied to the American dollar, not freely floating)

    A methodology of currency management much better aligned to the free market than the crawling interest rate peg used in most of the world (including Australia and the USA). The ideal free market situation would be for all currencies in the world to be hard fixed to a common commodity index. The gold standard having being one notable and worthy variation of such a scheme.

    The notion that floating currencies are more “free markets” is a fallacy. Zimbabwe has a floating currency but it does not help to ensure a free market.

  17. gerard
    December 14th, 2009 at 10:10 | #17

    there may exist a good argument for a gold standard, but since it still involves the government setting the standard by fiat, it’s not much of a “free-market” argument.

  18. TerjeP (say tay-a)
    December 14th, 2009 at 10:15 | #18

    The essence of trickle down economics is that financial capital must be put at risk to create a new enterprise and it is only through the creation of new enterprises that wages will rise. This is something of a simplification but it captures the nub of it.

    If you tax those that risk their wealth higher than those that don’t, then you will get less investment. If you want to tax the rich then a wealth tax will distort investment decisions far less than an income tax. However a wealth tax will at times cause existing enterprises to be broken up and as such it isn’t always so flash either. And the really rich can shop for favourable regimes so wealth taxes encourage wealth to move off shore.

    It isn’t likely that Social Democrats will abandon their fetish for redistributive taxation. However I wish they would be a little bit more clever in plucking the goose. The revenue pie grows each year almost without fail. Why not focus your progressive instincts on tax cuts for the poor. Our tax free threshold should be much higher than $6000pa. Lets try for $30,000pa.

  19. TerjeP (say tay-a)
    December 14th, 2009 at 10:40 | #19

    gerard :there may exist a good argument for a gold standard, but since it still involves the government setting the standard by fiat, it’s not much of a “free-market” argument.

    A gold standard could involve a fiat currency fixed to gold but it does not have to. Australia had a gold standard prior to 1910 and most currency in circulation was not government issued. The national unit of account was however largely fixed by the government and I would argue that this is inevitable even in the most laissez-faire of nations. Government essentially dictate the national unit of account the moment they write a tax code.

    In general I would agree with your latest assertion that for a fiat currency a fixed exchange rate is no more a free market solution than a floating exchange rate. However it is no less of a free market solution either. As such your earlier assertion in regard to Hong Kong is incorrect.

  20. Alice
    December 14th, 2009 at 10:42 | #20

    @TerjeP (say tay-a)
    says “Why not focus your progressive instincts on tax cuts for the poor. Our tax free threshold should be much higher than $6000pa. Lets try for $30,000pa”

    Terje…. At last a point of agreement.. <3.

    But with the rich offloading their redistribution responsibilities over quite some time, as in decades, as they have been doing by pushing the burden for redistribution downwards to 9th and 8th deciles and trickling their rewards from reagonomics sideways clean out of the ATOs jurisdiction, can you really see governments wanting to give up this take from lower income earners?

  21. Alice
    December 14th, 2009 at 10:44 | #21

    <3 not working?

  22. December 14th, 2009 at 11:19 | #22

    @iain
    “Surplus profit is a source of injustice and a restriction of rights.”

    How so?

  23. December 14th, 2009 at 11:21 | #23

    @Alice
    “their redistribution responsibilities”

    This says so much about your worldview, I hardly know where to start. So I won’t bother.

  24. gerard
    December 14th, 2009 at 11:40 | #24

    In general I would agree with your latest assertion that for a fiat currency a fixed exchange rate is no more a free market solution than a floating exchange rate. However it is no less of a free market solution either. As such your earlier assertion in regard to Hong Kong is incorrect.

    Incorrect? Yeah, well, you know, that’s just, like, your opinion, man. Even if governments are able to influence interest rates by buying and selling bonds, the fact that people are free to buy and sell currencies (and currency derivatives) internationally at rates determined by market demand and supply is obviously more “free market” than having them forbidden from doing so by a government that sets exchange rates by dictat.

  25. iain
    December 14th, 2009 at 11:44 | #25

    @Jarrah

    For the problems associated with surplus profit unequally distributed refer:

    Boyce, J. 1994, Inequality as a cause of environmental degradation, Ecological Economics vol. 11 pp. 169-178.

    Pickett, K., Wlkinson, R. 2009, The Spirit Level: why more equal societies almost always do better, Allen Lane, London, U.K.

    Wilkinson, R. 2005, The Impact of Inequality: how to make sick societies healthier, New Press, New York, U.S.A.

    For the problem of surplus profit associated with injustice and restriction of freedom refer to Capital.

    If you don’t accept this argument (and view surplus profit as having sources outside labour issues) refer to Howard Odum for the underlying implications of surplus profit coming from other inputs to the production processes.

  26. TerjeP (say tay-a)
    December 14th, 2009 at 12:01 | #26

    Gerard – Those nations that try and fix their exchange rate by dictate invariable fail and merely create a black market. Hong Kong does not fix it’s exchange rate by dictate.

    The Hong Kong government does not forbid anybody from buying or selling the Hong Kong dollar. They fix the market price via adjustment in supply (open market operations). This is no different in essence to what the RBA in Australia does to fix the market price of credit (interest rates). Modifying the supply of a fiat currency to adapt to market demand is not less “free market” than fixing the interest rate or simply fixing the supply. It is merely a different approach.

    I readily argue that a fixed exchange rate is often more sympathetic to open markets. However this is not a claim that exchange rate fixing is a free market solution. Exchange rate fixing is just as much a government solution as inflation targeting or any number of other monetary policy approaches. However it isn’t more a government solution. All fiat currencies are fiat currencies irrespective of monetary policy.

  27. TerjeP (say tay-a)
    December 14th, 2009 at 12:14 | #27

    Gerard – this isn’t merely my personal opinion. Here is Steve Hanke writing at CATO (a free market institute) on the topic:-

    http://www.cato.org/pub_display.php?pub_id=9625

    In the 1960s, Friedman turned his attention toward monetary problems in developing countries, where inflation and exchange controls were pervasive. For many of these countries, Friedman was skeptical about floating exchange rates because he mistrusted their central banks and doubted their ability to adopt a rule-based internal anchor (such as a money-supply growth rule). To rid developing countries of exchange controls, his free-market elixir was the fixed exchange rate (an external anchor).

    The surest way to avoid using inflation as a deliberate method of taxation is to unify the country’s currency [via a fixed exchange rate] with the currency of some other country or countries. In this case, the country would not have any monetary policy of its own. It would, as it were, tie its monetary policy to the kite of the monetary policy of another country—preferably a more developed, larger, and relatively stable country.9

    In many cases, he advocated fixed exchange rates rather than floating. For example, in response to a question during his Horowitz lecture of 1972 in Israel, Friedman concluded:

    The great advantage of a unified currency [fixed exchange rate] is that it limits the possibility of governmental intervention. The reason why I regard a floating rate as second best for such a country is because it leaves a much larger scope for governmental intervention … I would say you should have a unified currency as the best solution, with a floating rate as a second-best solution and a pegged rate as very much worse than either.

    Friedman was clear and unwavering in his prescription for developing countries:

    For most such countries, I believe the best policy would be to eschew the revenue from money creation, to unify its currency with the currency of a large, relatively stable developed country with which it has close economic relations, and to impose no barriers to the movement of money or prices, wages, or interest rates. Such a policy requires not having a central bank.”10

    Friedman clearly favored both floating and fixed exchange-rate regimes in principle. However, as a matter of practice, for most developing countries he favored fixed over floating rates.11 Yet most economists and financial journalists believe that he espoused floating rates as the sole solution. Friedman’s real position was that an exchange rate driven by a free market was best, and that both fixed and floating exchange rates had equal claims to be considered market-determined.

  28. December 14th, 2009 at 12:43 | #28

    Pr Q said:

    the Internet was developed by the publicly-funded university sector,

    No, the development of the internet was sponsored by the US Department of Defence, outsourcing the technics to academic and commercial nerds. Ike was no babe in the woods when it came to the Military Industrial complex. But he recognized it had its uses.

    In the late fifties, after Sputnik, Ike wanted the US to be ahead in sci-tech, especially with a military applications. In the early sixties the Air Force commissioned DARPA to reseach into decentralised communication system that would not be vulnerable to a first strike. It was in the late sixties that the Internet was finally hooked up by Stanford.

    The academies got on quite a bit later, in the eighties and nineties, though grants from the NSF.

    Next time an academic pacifist bitches about the evils of military spending it would do well to remind him of that.

  29. Freelander
    December 14th, 2009 at 13:06 | #29

    @Jack Strocchi

    Not quite sure how you get to “No” when you immediately acknowledge that the internet was developed by the university sector (although initially sponsored by someone else).
    I also imagine that the US DoD sponsorship was primarily within their own borders as it was for the purpose of ensuring a dependable backbone for their systems not the rest of the world. Further, as you also acknowledge, most of development activity in the eighties and nineties was in academia (as well as research institutes) and this is what became the internet rather than the rudimentary activities in the years before. One more point, if the DoD had done nothing it is still reasonable to believe universities would have done more or less the same for their own purposes in the eighties and nineties.

  30. TerjeP (say tay-a)
    December 14th, 2009 at 13:12 | #30

    One more point, if the DoD had done nothing it is still reasonable to believe universities would have done more or less the same for their own purposes in the eighties and nineties.

    And if universities had done nothing it is still reasonable to believe that the private sector would have done more or less the same for their own purposes. Privately run dialin bulletin boards were prevalent even before somebody got clever about linking them all together.

  31. Alice
    December 14th, 2009 at 13:14 | #31

    @Jarrah
    Yes it does Jarrah – some adequate (note the word “some” Jarrah) redistribution from the rich to the poor is appropriate, not policies that have increasingly rewarded the rich over the past three decades, leaving inadequate redistribution in its wake and rising inequality, and rising burdens on governments and charities.

    It does say a lot about my economic policy views. Your snark also says a lot about your views which I find disagreeable. Very.

  32. Freelander
    December 14th, 2009 at 13:19 | #32

    @TerjeP (say tay-a)

    I think I have to agree with you on that. Eventually the private sector certainly would have gotten around to it. The DoD was simply first in sponsorship because they had the money and a need that made it worthwhile back then despite the costs back then being considerably higher than they were later on.

  33. Freelander
    December 14th, 2009 at 13:30 | #33

    TerjeP (say tay-a) :
    The ideal free market situation would be for all currencies in the world to be hard fixed to a common commodity index.

    The ‘ideal’ free market solution (favored by Hayek) would be free banking. That way there would be no currencies imposed and supported by naughty governments. Currencies would be supplied by whomever wished to with whatever exchange-ability policies they determined.
    Then all would be wonderful and there would be peace on earth and beyond, forever and ever, without end, Amen.

  34. iain
    December 14th, 2009 at 13:32 | #34

    Obviously there are privately run computing networks.

    Linking these with open and public access networks just creates a better network.

    re: references to wikipedia, I’d be inclined to clarify with the phrase “wiki encyclopedias”, so that it includes things like the EoE, and won’t seem dated if wikipedia stalls.

    http://www.eoearth.org/

  35. gerard
    December 14th, 2009 at 14:22 | #35

    OK Terje HK fixes its currency to the US dollar with open market operations – I guess that’s the only way of reconciling a peg with open financial markets. China fixes its currency by simply disallowing the free movement of money, South Korea used to do the same. I think rates should be fixed under a Bretton Woods type system, however the resistance to that comes from a financial industry that makes bucketloads of money off unproductive speculation. Considering how resistant they are to a Tobin Tax I very much doubt they’d be very happy with a system of fixed exchange rates. As for Gold, since the rate at which it is set to gold is by fiat anyway, what’s the difference between that and regular old gold-less fiat?

  36. gerard
    December 14th, 2009 at 14:28 | #36

    And if universities had done nothing it is still reasonable to believe that the private sector would have done more or less the same for their own purposes.

    not really, since high-tech research and development is also high-risk – there’s no guarantee you’ll actually end up inventing something useful after all your investment. large corporations are very supportive of government R&D, they don’t want to take on the risk themselves.

  37. James
    December 14th, 2009 at 14:56 | #37

    iain :
    If you don’t accept this argument (and view surplus profit as having sources outside labour issues) refer to Howard Odum for the underlying implications of surplus profit coming from other inputs to the production processes.

    I don’t understand your argument here. What did Odum (who I understand is an ecologist interested in ecological economics) write about this issue?

  38. iain
    December 14th, 2009 at 15:41 | #38

    Odum had an alternative surplus value theory to Marx.

    The argument I am making is that inequality is associated with (both) environmental and social degradation.

  39. Kevin Cox
    December 14th, 2009 at 15:43 | #39

    @TerjeP (say tay-a)

    The rich are the only ones able to invest as they are the only ones with access to capital. However, the evidence is that if you give the poor capital to invest then they are much better at investing and do a better job than the rich. They do it because they have more to gain from a successful investment. The proof is in the success of the Grameen bank where the repayment rates on loans are 99+% and the income generated from investments is much much greater than the capital invested.

    The rich who can afford to make risky investments do a worse job than the poor who need the investments to succeed. This is confirmed by the stories of many rich families. The first generation makes it, the second consolidates and the third spend it.

    So the best strategy for society to get wealthier is what we might call trickle up economics. Give capital that must be invested to the less well off and they will get the best value for money.

    Giving tax breaks to the rich means they are likely to consume more.

    It is even worse than I describe because for the poor to get access to capital they have to pay more for as they have to give equity as loans are not available. Equity finance is at least 3 times as costly as loan finance and so the rich get cheap money while the poor pay more for the same thing. This should not surprise us as the rich pay less for the same goods than the poor. If you do not believe me look at the cost of groceries in different suburbs, the cost per sq meter of housing and land, the cost of the same car. The rich always have ways of getting cheaper money than the poor or of ways to get discounts.

  40. December 14th, 2009 at 15:47 | #40

    Freelander@#29 December 14th, 2009 at 13:06 said:

    Not quite sure how you get to “No” when you immediately acknowledge that the internet was developed by the university sector (although initially sponsored by someone else).

    I do NOT “immediately acknowledge that the internet was developed by the university sector”. I said that the internet was developed by the military with “outsourcing…technics to academic and commercial nerds”. The idea, initial funding and organization of proto-internet technology was administered by the US Department of Defence agency called DARPA.

    So the internet was originally the Defence Department’s baby, in much the same way that the US phone system was the the Bell Corporations baby, even though many academics and technicians were used in its construction and development. But no one says the US phone system was developed by, say, CIT & MIT.

    Later on university organizations took up and developed the civil use of the internet to promote the dissemination of knowledge. This was a good couple of decades AFTER the military go the thing started.

    The difference is between academics as individual employees of DARPA and academics as institutional employers through the NSF.

    Why is this difficult for you to understand.

  41. TerjeP (say tay-a)
    December 14th, 2009 at 15:50 | #41

    I think rates should be fixed under a Bretton Woods type system, however the resistance to that comes from a financial industry that makes bucketloads of money off unproductive speculation.

    I agree on both counts.

  42. TerjeP (say tay-a)
    December 14th, 2009 at 15:56 | #42

    However, the evidence is that if you give the poor capital to invest then they are much better at investing and do a better job than the rich.

    Which is probably why it is that where clear property rights and good contract laws exist, the wealthy routinely lend their financial capital to the non-wealthy.

  43. Freelander
    December 14th, 2009 at 15:59 | #43

    @TerjeP (say tay-a)

    The wealthy only lend their capital to the non-wealthy as a last resort and then they charge a premium.

  44. Freelander
    December 14th, 2009 at 16:02 | #44

    Jack Strocchi :
    Freelander@#29 December 14th, 2009 at 13:06 said:

    Not quite sure how you get to “No” when you immediately acknowledge that the internet was developed by the university sector (although initially sponsored by someone else).

    I do NOT … blah blah blah …

    Why is this difficult for you to understand.

    Not difficult to understand, just, in essence, wrong and, therefore, difficult to agree with.

  45. Freelander
    December 14th, 2009 at 16:05 | #45

    Jack Strocchi :

    No, the development of the internet was sponsored by the US Department of Defence, outsourcing the technics to academic and commercial nerds.

    As you seem to have forgotten was you said…

  46. Freelander
    December 14th, 2009 at 16:07 | #46

    @Jack Strocchi

    Following your logic, next time when I buy a meal at a restaurant I will tell everyone that I cooked it.

  47. iain
    December 14th, 2009 at 16:42 | #47

    @TerjeP (say tay-a)

    “the wealthy routinely lend their financial capital”

    The wealthy never lend capital. Sometimes they give some of it away in a fit of commonsense. Mostly they exchange money for more money, and in so doing exploit the environment and anyone who doesn’t correctly assist with their scheme.

    Of course, in creating more money for themselves they also impact on their own mental and social health. I’ll get flack for this, but Tiger Woods is possibly the latest example of this.

  48. Alice
    December 14th, 2009 at 17:08 | #48

    @iain
    Iain – agree
    The wealthy lend their financial capital – not enough of it – and the poor and middle class dont have enough savings now – see private sector debt. If the rich had lent or invested enough of their capital why are private sector debt levels through the stratosphere in this country

    …..because mortgages are conuming the wherewithall for anyone else but the rich to lend or invest their spare capital meaning no-one else but the rich and pwerful get the high risk returns from that capital and it keeps a nice big store of wage slaves for the rich to use to generate further surpluses.

    Terje
    You can only keep people down so long until they start to smell a rat in these inane ideas of yours (that the rich are worth feeding more than everyone elsse) – and there is a big dead rat out there called neoliberalism and if I may be so blunt – it is starting to stink.

  49. TerjeP (say tay-a)
    December 14th, 2009 at 17:14 | #49

    If the rich had lent or invested enough of their capital why are private sector debt levels through the stratosphere in this country

    Not sure what this is saying. How can debt levels be high without high levels of lending?

  50. Alice
    December 14th, 2009 at 17:29 | #50

    @TerjeP (say tay-a)
    You cannot distingusih between productive surpluses and speculative surpluses Terje. The financial sector sits on the speculative surpluses of the wealthy – surpluses too often turned to real estate speculation. When not gambling on shares – its gambling on real estate. After all – why do they need to produce real stuff here.. when because of slavish adherence to globalisation and dereulgation they can import cheap crap from China instead?

  51. Alice
    December 14th, 2009 at 17:33 | #51

    @TerjeP (say tay-a)
    Plus Terje – the original savings that created the debt is likely sourced offshore anyway. Im non longer interested in the global economy..you make sure your own backyard is tidy first. Thats the best favour any economy can do for the global economy. You dont open the door, allow yourself to be stripped until you have nothing to offer the global economy.
    You can call be anti liberal or protectionist if you like…I dont care what you call me. All I see in excessive liberalisation and deregulation is the pursuit of utter stupidity.

  52. Alice
    December 14th, 2009 at 17:52 | #52

    @TerjeP (say tay-a)

    As well Terje – you totally ignore the fact that these days a large part of the wholesale funds are likely offshore sourced anyway by banks. The “savings” you so proudly speak of may not even be saved here at all. You can call me anti globalisation or you can call me protectionist and I dont care either way but the one thing I do care about is that you clean up and produce in your own backyard first – and thats the best contribution an economy can make to the global economy. There is no point in prematurely globalisaing and letting resources be stripped such that the domestic economy becomes totally reliant on importers for all its basic needs. Recall C + I + G + X – M. Note minus sign.

    Just to remind people whoe wear rose coloured glasses about globalisation like yourself -

    Australia’s trade deficit tripled to $1.56 billion in July (2009), as imports rose and non-mining exports fell.
    Our net foreign debt has doubled in millions of $ since 2000 and then doubled again since 1990. We now owe more than we own and the only reason it isnt worse is because we had some regulation over our banking system (and more capital controls desperately needed on a global scale).

  53. Alice
    December 14th, 2009 at 18:13 | #53

    @TerjeP (say tay-a)
    Debt levels can be high because of the wholesale insufficiently regulated global credit market Terje. It says nothing whatsoever about what is being produced, earning profits or saved here in Australia. The best we can do for the global economy is to make sure we are producing something here and that our own economy is healthy and it spills over, not to turn the majority of our population into indebted risk averse wage slaves to pay off a mortgage made high by the speculative investments of the rich in houses. I said something similar in my previous post but it was moderated. You need to distinguish between productive and speculative capital Terje.

  54. December 14th, 2009 at 18:51 | #54

    Freelander@#44 December 14th, 2009 at 16:02

    Not difficult to understand, just, in essence, wrong and, therefore, difficult to agree with.

    It is not “in essence, wrong” to state that DARPA is a part of the US Department of Defence and was the agency which invented and sponsored the development of the internet. It is the plain truth. (You can verify this fact by using the self-same internet.) The “difficulty” you have “agree[ing] with” this fact is entirely self-inflicted.

    To make the matter as clear as possible [shakes head with exasperation] I am saying that DARPA was to the Internet as NASA was to space transport. Both organizations were essentially part of the US military-industrial complex which frequently hiredand university academics for research and private contractors for technical operations.

    But no one except the ignorant or willfully obtuse would deny that NASA was the first agency that got man to the moon or that DARPA was the first agency that organized internet infrastructure. Or give internet priority to the several academic and commercial organizations that then hopped onto the bandwagon.

    I hope that clears things up for you.

  55. Freelander
    December 14th, 2009 at 18:58 | #55

    No need to clear things up, as you recognise but seem unwilling to vocalise, it has been clear all along, in essence, wrong.
    ‘Cooked’ any good meals, lately?

  56. December 14th, 2009 at 19:07 | #56

    Freelander@#46 December 14th, 2009 at 16:07 said:

    Following your logic, next time when I buy a meal at a restaurant I will tell everyone that I cooked it.

    Your logic is as bad as yiur general knowledge. The analogy of DARPA to university researchers is not that of a customer (patron) to a commercial vendor (restaurant). It is that of a contractor to several sub-contractors.

    Thus the minister orders the Dept of a government contractor (Dept of Main Roads) to build a road which then hires various sub-contractors (Jim the Plumber) to do the specialist work. Undoubtedly the job could not be done, or done as well, without the private sub-contractors.

    But equally undoubtedly the credit for the road’s construction and ownership of same goes to the DMR. That is simply how our system of accountability works.

    If the internet had been a dud after all that money had been spent on it then DARPA would have carried the can. Just as NASA has now carried the can for the space shuttle fiasco, despite the fact that MIT, Hewlett Packard etc all co-operated on making it.

    QED

  57. TerjeP (say tay-a)
    December 14th, 2009 at 19:09 | #57

    Alice – are you still trying to say that the rich don’t lend enough? Or have you moved on?

  58. December 14th, 2009 at 19:17 | #58

    Freelander@#4 December 14th, 2009 at 18:5 said:

    No need to clear things up, as you recognise but seem unwilling to vocalise, it has been clear all along, in essence, wrong.

    You keep insisting that I have conceded the point without going through the formality of actually quoting me chapter or even verse in proof. A bit of a contrast to my own, perhaps overly meticulous, habits in this respect.

    This automatically raises the suspicion that your argument is without substance. One that has lurked in my mind from the beginning of this futile exchange.

  59. Alice
    December 14th, 2009 at 19:25 | #59

    @TerjeP (say tay-a)
    Judging by the brevity of your snark Terje Id say its you who have moved on (^^^)

  60. Alice
    December 14th, 2009 at 19:37 | #60

    @TerjeP (say tay-a)
    Just for you Terje(^^^) – if it doesnt work Im going to bed early. I have a lot of sulking to do.

  61. nanks
    December 14th, 2009 at 19:51 | #61

    @Jack Strocchi
    I think you are being simplistic Jack – not that darpa wasn’t involved, of course it was the primary funding agency under the original arpa designation, but movement between academia and (d)arpa make any simple claim that darpa invented the internet misleading. And of course packet switching was independently invented by a number of researchers without any military involvement. Here is a good history
    http://www.isoc.org/internet/history/brief.shtml
    You also have to take into account the level of militarisation of research funding in the USA – it is difficult to do any research at a hghtech level without some linkage to the military – even neuroscience is often heavily linked. In practice academics manipulate the system to fund interesting projects despite the funding source – as is the case here in Australia post the ‘public servicisation’ of academia.

  62. Freelander
    December 14th, 2009 at 21:03 | #62

    @Jack Strocchi

    As well as getting credit for the store bought meal, your attributing development to some initial sponsorship of a distant precursor is like attributing development of the integrated circuit to Volta simply because he fiddled around with some frogs legs. (And before you say it, yes I know that Volta wasn’t the first to fiddle with frogs legs.)

    Otherwise, QED to you too. And why don’t you just admit what you’ve know all along, essential wrong?

  63. Freelander
    December 14th, 2009 at 21:10 | #63

    @Jack Strocchi

    By the way, if I order a meal, giving the cook a general idea of what I want, and the cook cooks it properly, I might still be responsible for asking for something I ultimately didn’t want (“carr[y] the can”), but I still can’t claim that “I cooked the meal”.

    Hope that clarifies things for you? …not that they haven’t been clear all along.

  64. SJ
    December 14th, 2009 at 22:01 | #64

    Jack’s whole argument is just a ridiculous time-waster.

    In an argument about the relative merits of public vs private, John says “Similarly, the Internet was developed by the publicly-funded university sector”. Jack’s retort is that it wasn’t the publicly funded university sector, it was actually the publicly funded defense sector.

    Even if Jack was correct, his argument is futile, because it was publicly funded no matter which particular part of the budget it happened to fall under.

    In any case, Jack is completely wrong. The US Defense Department’s involvement ended in about 1975. Was there an internet in 1975 Jack? No, there wasn’t.

    Let’s do some very simple research, using as Jack suggested, that internet thingy.

    Following on from the demonstration that packet switching worked on the ARPANET, the British Post Office, Telenet, DATAPAC and TRANSPAC collaborated to create the first international packet-switched network service. In the UK, this was referred to as the International Packet Switched Service (IPSS), in 1978. The collection of X.25-based networks grew from Europe and the US to cover Canada, Hong Kong and Australia by 1981. The X.25 packet switching standard was developed in the CCITT (now called ITU-T) around 1976.

    X.25 was independent of the TCP/IP protocols that arose from the experimental work of DARPA on the ARPANET, Packet Radio Net and Packet Satellite Net during the same time period. Vinton Cerf and Robert Kahn developed the first description of the TCP protocols during 1973 and published a paper on the subject in May 1974. Use of the term “Internet” to describe a single global TCP/IP network originated in December 1974 with the publication of RFC 675, the first full specification of TCP that was written by Vinton Cerf, Yogen Dalal and Carl Sunshine, then at Stanford University. During the next nine years, work proceeded to refine the protocols and to implement them on a wide range of operating systems. The first TCP/IP-based wide-area network was operational by January 1, 1983 when all hosts on the ARPANET were switched over from the older NCP protocols. In 1985, the United States’ National Science Foundation (NSF) commissioned the construction of the NSFNET, a university 56 kilobit/second network backbone using computers called “fuzzballs” by their inventor, David L. Mills. The following year, NSF sponsored the conversion to a higher-speed 1.5 megabit/second network. A key decision to use the DARPA TCP/IP protocols was made by Dennis Jennings, then in charge of the Supercomputer program at NSF.

    Ten years after the end of the Defense Department’s involvement, in 1985, there still wasn’t anything that we’d recognise as the internet. But Jennings decided to re-use a particular protocol that the Defense Department had previously come up with.

    To say that the Defense Department is responsible for the internet is akin to saying that Edison is responsible for the internet, because at some point, a decision was made to power the servers using standard mains electricity.

  65. TerjeP (say tay-a)
    December 14th, 2009 at 22:43 | #65

    I think it is a bit futile claiming any one entity was “responsible” for the Internet. It is a collaborative outgrowth of many initiatives. The Internet that we know today owes a lot to universities, defence initiatives, private bulletin boards, pornographers, venture capitalists and on the list goes. Ultimately it is a product of the times.

    Obviously TCP/IP is fundamental to the Internet that we know. TCP/IP showed an ability to evolve and soon entailed some innovative ideas (eg dynamic window sizing) and has proved very adaptable (eg NAT). However it probably still owes a lot of it’s success to first mover advantage, even though it wasn’t technically the first such protocol.

    It isn’t that hard to imagine an alternate reality in which some other layer 3 protocol became dominate. If todays Internet was based on IPX we would be lauding the pioneering work of a private company called Novell and the ideas they borrowed from another private company called Xerox PARC. However success is a fickle thing.

  66. iain
    December 14th, 2009 at 23:08 | #66

    @TerjeP (say tay-a)

    “It is a collaborative outgrowth of many initiatives.”

    Most of which were public initiatives, which allowed for open and participatory access to (and development of) an important array of decentralised information (much of which is free from intellectual property right claims).

    Of course, the private sector is well known for wanting to create and facilitate such outcomes.

  67. SJ
    December 14th, 2009 at 23:11 | #67

    I think it is a bit futile claiming any one entity was “responsible” for the Internet.

    I didn’t notice anyone apart from Jack and you actually making this claim.

    In your case, you’re trying to set up a strawman argument, that John was wrong to attribute it to the “publicly-funded university sector” as an entity, on the grounds that, without any evidence at all, pornographers and bulletin boards would have done it themselves eventually anyway.

    It isn’t that hard to imagine an alternate reality…

    No, it isn’t. Any idiot can imagine alternate realities. It’s better, though, when you’re trying to make claims about the existing reality, that you stick to the existing reality.

  68. Freelander
    December 14th, 2009 at 23:22 | #68

    Yes, I have to agree with these recent comments. Looks like Jack has gone back to the ‘strocchiverse’, where the rules of logic, and I imagine other things as well, probably don’t work the same way they do in this universe. Always interesting to meet visitors from other worlds. I think we probably didn’t catch him at his best. No doubt disorientated by his trans-dimensional shift.

  69. TerjeP (say tay-a)
    December 14th, 2009 at 23:47 | #69

    The first claim was made by John Quiggin in the article.

    … the Internet was developed by the publicly-funded university sector

    Jack made a counter claim that credits the US defense department.

    My comment applies to the futility of both such claims.

    without any evidence at all, pornographers and bulletin boards would have done it themselves eventually anyway.

    I didn’t say they would have done it themselves. However lots of parties were pulling in the same general direction. Both AOL and MSN were trying to create a large scale network of users before the Internet took off and became dominant in the mid 1990s. Likewise bulletin boards had been around for a long time and there were even movies based on the communities they supported. Ozemail was started to interconnect propriatory email systems and only became an ISP later on. The french had MiniTel. There were private WANs based on IPX. It is speculative to envisage that an alternative would have emerged regardless of TCP/IP however it isn’t without evidence.

  70. jquiggin
    December 15th, 2009 at 04:53 | #70

    Jack, my understanding is that the US Defense Dept is part of the US government and that the seed money given to the universiites for ARPANet therefore constitutes public funding.

    Terje, these networks existed but weren’t very good, precisely because the owners tried to make money out of them. The Internet wiped them out or absorbed them.

  71. TerjeP (say tay-a)
    December 15th, 2009 at 06:49 | #71

    John – The early Internet also wasn’t very good. Although clearly it’s mass and superior functionality were enough to set it apart.

    Ozemail and it’s ilk were making bugg3r all in money until the Internet took off in the early 1990s. The Internet made the likes of Ozemail and AOL huge financial successes. They did not have to join the Internet but it made commercial sense to do so. It was this business prospect than lead them to abandon propriatory models, not the involvement of the government or academia. And the flip side is that the likes of Ozemail and AOL helped turn the Internet into a success. It was a perfect storm with the benefit of network effects drawing all toward the epicentre.

    I agree without hesitation that the closed propriatory network business model was a limiting paradigm. However such a paradigm had been shattered previously (without government assistance) in the PC market with the IBM compatible (a standard PC anybody could build). It was mostly just a matter of time before the critical concentration was reached and some spark lit the wick. Perhaps we got there sooner because of government funded infastructure and research but perhaps we missed out or deferred on some other innovation due to the appropriation of private resources and the dead weight of taxes. The benefits of taxation are always more visible than the deficits.

  72. December 15th, 2009 at 07:08 | #72

    Freelander@#11 December 14th, 2009 at 21:03

    your attributing development to some initial sponsorship of a distant precursor is like attributing development of the integrated circuit to Volta simply because he fiddled around with some frogs legs.

    The notion that Volta’s electrifying frog experiments are to integrated circuits as APRANET decentralised packet-switching network is to the internet shows Freelander’s usual abysmal understanding of sci-tech, not to mention basic logic. I am not going to bother quoting Freelander and SJ any further as their responses are fact-free and consist of repeated assertions of false or misleading claims.

    This exchange could serve as a case study on the pathology of intellectual denial and disingenuity. But I am not a clinical psychologist, merely an amateur historian. I am not qualified to prescribe a treatment for those, such as Freelander and SJ, afflicted by this apparently incurable malady.

    I merely present the following brief history of the internet as independent and conclusive proof of my point that the initial development of the internet was indeed conceived, sponsored and administered by US military-industrial agencies, specifically (D)ARPA. The “publicly-funded” and private university sector were employed as sub-contractors to the DoD for almost the entire developmental phase, from 1957 right up until 1973. The key DoD related aspects are bolded to assist the learning-impaired:

    1957: The USSR launches Sputnik, the first artificial earth satellite. In response,the United States forms the Advanced Research Projects Agency (ARPA) within the Department of Defense (DoD) to establish US lead in science and technology applicable to the military.

    1962: RAND Paul Baran, of the RAND Corporation (a government agency), was commissioned by the U.S. Air Force to do a study on how it could maintain its command and control over its missiles and bombers, after a nuclear attack. This was to be a military research network that could survive a nuclear strike, decentralized so that if any locations (cities) in the U.S. were attacked, the military could still have control of nuclear arms for a counter-attack.

    Baran’s finished document described several ways to accomplish this. His final proposal was a packet switched network.

    “Packet switching is the breaking down of data into datagrams or packets that are labeled to indicate the origin and the destination of the information and the forwarding of these packets from one computer to another computer until the information arrives at its final destination computer. This was crucial to the realization of a computer network. If packets are lost at any given point, the message can be resent by the originator.”

    1968: ARPA awarded the ARPANET contract to BBN. BBN had selected a Honeywell minicomputer as the base on which they would build the switch. The physical network was constructed in 1969, linking four nodes: University of California at Los Angeles, SRI (in Stanford), University of California at Santa Barbara, and University of Utah. The network was wired together via 50 Kbps circuits.

    1972: The first e-mail program was created by Ray Tomlinson of BBN. The Advanced Research Projects Agency (ARPA) was renamed The Defense Advanced Research Projects Agency (or DARPA). ARPANET was currently using the Network Control Protocol or NCP to transfer data. This allowed communications between hosts running on the same network.

    1973: Development began on the protocol later to be called TCP/IP, it was developed by a group headed by Vinton Cerf from Stanford and Bob Kahn from DARPA. This new protocol was to allow diverse computer networks to interconnect and communicate with each other.

    Freelander and SJ are ignorant not only specific facts but also of the general trend: massive military threats which “concentrate the mind wonderfully” made many of the key mid 20th C sci-tech breakthroughs. DARPA was to communications and NASA was to transportation: both were part of the US military’s organized attempt to get to the leading edge of sci-tech in moving “bits and its”, to use Wheelers felicitous formulation. The same kind of military sponsorship of high sci-tech was evident in the Second World War, when Bletchley Park cryptographers developed the first computer in order to win the Battle for the Atlantic. And of course the US Army ran the Manhattan Project which developed nuclear energy. Recognize a pattern?

    I certainly don’t deny or belittle the great contribution that sub-contracted university academics made to the internet project in its developmental phase. They also did alot of theoretical work independent of military contracting. And from the mid-seventies onwards the individual universities picked up the ball and ran with it on their own. It was only in mid-eighties when the publicly-funded NSF provided central direction and organization. I think that is when Al Gore stepped in.

    But if it had not been for the initial military orders, funding and organization the academy on its own would have taken maybe another 10-20 years to get the thing up and running. And today we might still be five years off Netscape. The next time a “pacifist academic” (I’m thinking of Chomsky here) “bitches about military spending” it would do well to keep that in mind.

  73. msH
    December 15th, 2009 at 07:21 | #73

    Why is wikipedia chosen as an example? It jarred a little because to me, it’s mostly famous for its unreliability and interesting internal politics, and I was puzzled for a moment. Unless you feel strongly about Wikipedia specifically, something more general might be better.

  74. December 15th, 2009 at 07:33 | #74

    jquiggin@#19 December 15th, 2009 at 04:53 said:

    Jack, my understanding is that the US Defense Dept is part of the US government and that the seed money given to the universiites for ARPANet therefore constitutes public funding.

    Your understanding is broadly correct but tax-payer sources are not at issue here. No one disputes that “public-funding” provided the finance for the internet’s development. Of course ARPA provided much more than “seed money” – it provided the political impetus, technical specifications, access to existing military communications infrastructure, personnel, administration etc.

    What is at issue here is the institutional domicile of the agenc(ies) that initially conceived, contracted and administered the project: specifically whether it was the military or the academy.

    I am stating as fact that it was the DoD, through DARPA, which provided the basic organization and direction for the initial development of the internet, from the late fifties till the mid-seventies. This followed from the original function of the internet which was to provide the military with a decentralised communications network robust to a Soviet nuclear first strike.

    Others insist that it was the university sector which on its own initiative that was responsible for getting the project up and running. In fact the university-driven phase of the internet did not really begin until the mid-eighties through the NSF.

    More generally, military necessity is so often the mother of invention. But in the case of the US technology its also true that success has a thousand fathers. In that sense the development of the internet broadly supports a social-democratic “mixed economy” philosophy of government.

  75. iain
    December 15th, 2009 at 08:07 | #75

    @msH

    Had the same feeling msH. “wiki development” in general may be better. When it comes to internet wiki encyclopedias, other initiatives (such as the EoE), have (arguably) important and divergent aspects to them.

    All these initiatives add up to a breeding ground for development of useful guides on how egalitarian, participatory and democratic frameworks may effectively operate without the profit motive being present. As John notes, they succeed precisely because there is no profit motive. The motivation comes from elsewhere. These “breeding grounds” are, of course, stifled (to a degree) elsewhere.

    The politics of wiki encyclopedia development is actually quite a radical and revolutionary departure to predominate political paradigms (in some ways).

    The simple and naive idea that the capitalist makes good hardware and the socialist makes good software makes this point more crudely. No doubt, this should give cause for profit motive legislation to be more forcibly applied to the internet. It shouldn’t, of course, give rise to consideration of alternative conclusions.

  76. nanks
    December 15th, 2009 at 08:24 | #76

    Licklider is the person most recognised for the initial idea of networked computers – even by the offical darpa history. Clearly DoD goals were important, but as I pointed out before, the dominance of DoD research finding and the fluid movement across academia (and industry) and defence research institutes makes Jack’s position simplistic and misleading. The idea that Licklider at, say BBN, was some sort of bespoke scientist of the puppet masters in the military is ridiculous.
    Here is yet another history,
    http://www.darpa.mil/Docs/Internet_Development_200807180909255.pdf

    but for a nice novel size read try Waldrop’s book on Licklider “The Dream Machine: J.C.R. Licklider and the Revolution That Made Computing Personal”

  77. iain
    December 15th, 2009 at 08:44 | #77
  78. TerjeP (say tay-a)
    December 15th, 2009 at 08:44 | #78

    In my view initatives such as Wikipedia are perfectly compatible with claims that capitalism has given us a lot. The fact that it is non-profit is irrelevant because it is also without government financial support. Wikipedia costs taxpayers nothing. If anything it is a case in point of what can be achieved via civil society without government coercion. It is also notable that Jimmy Wales (founder) is a libertarian. Wikipedia does not support the argument that John is making and he should find an alternate example. If he feels otherwise I’d love to hear the reasoning. And I’d say any such reasoning ought to be in the book if the example is kept.

  79. TerjeP (say tay-a)
    December 15th, 2009 at 08:47 | #79

    Jack – I don’t buy your suggestion that the NASA and US defense budget can be justified in terms of spin offs.

  80. Freelander
    December 17th, 2009 at 03:30 | #80

    @Jack Strocchi

    Glad to see you going to such great lengths to acknowledge your errors and the essential correctness of what I and others have been saying. Really, it wasn’t necessary. Have a nice trip back to the Strocchiverse.

  81. December 17th, 2009 at 08:12 | #81

    nanks@#25 December 15th, 2009 at 08:24

    Licklider is the person most recognised for the initial idea of networked computers – even by the offical darpa history. Clearly DoD goals were important, but as I pointed out before, the dominance of DoD research finding and the fluid movement across academia (and industry) and defence research institutes makes Jack’s position simplistic and misleading. The idea that Licklider at, say BBN, was some sort of bespoke scientist of the puppet masters in the military is ridiculous.

    nanks at least is prepared to concede “the dominance of DoD research funding” which is a start. And miles beyond Freelander et al position of “no military research agencies developing the internet to see here, just keep movin’ folks”.

    If “Jack’s position” was that “Licklider at, say BBN, was some sort of bespoke scientist of the puppet masters in the military” then this would indeed be “ridiculous”. Unfortunately for nanks “Jack” has never held this position. Absence of evidence is indeed evidence of absence, at least when blog quoting is concerned.

    More particularly. Licklider, Cerf and Kahn – the three men who are always mentioned as having priority in the development of netware architecture – all worked directly for (D)ARPA from the early seventies onwards.

    It is “misleading” to deny this military agency the foundational role in the development of the internet. As yet another brief history summarizes its pivotal role in both the ARPANET military precursor to the internet and the civilian internet:

    The single most influential agency in the history of computer development in the United States is the Advanced Research Projects Agency (ARPA). ARPA is the central research and development organization for the U.S. Department of Defense. Established in February 1958 by President Eisenhower, and subsequently backed by the Kennedy Administration, ARPA’s institution was in direct response to the launching of “Sputnik” by the former U.S.S.R.

    In 1973 a research program was initiated to investigate the possibility of interlinking separate packet networks. This program was driven by the U.S. Defense Advanced Research Projects Agency (DARPA) and the objective was to create a communications technology that would allow computers to interact transparently across multiple linked packet networks. This communication over separate networks was referred to as Internetting, and the system of networks used became called the Internet.

    The ideological conclusion I draw from all this is non-ideological. Good things can come by top-down or bottom-up methods. From political -> professional -> personal or vice-versa.

    Thus the internet initially developed through top-down political direction (can’t get any more command and control than the Pentagon). It then evolved into a more professional operation with universities and private firms getting in on the act, driven by concern for prestige and profit, such as the NSF and Xerox-PARC. Finally it has been driven at a more personal level, driven by bottom-up organizations, such as wikis, blogs and social networking sites.
    With the whole thing now tied together by Google which is both top-down AND bottom-up.

    This is why I am impatient with ideologues who want insist on a one-size fits all method of social organization. A social-democrat is an ideological tart who has no in-principle objection to any form of social institution so long as it serves worthy human purposes.

  82. December 17th, 2009 at 08:18 | #82

    Freelander@#29 December 17th, 2009 at 03:30 said:

    @Jack Strocchi
    Glad to see you going to such great lengths to acknowledge your errors and the essential correctness of what I and others have been saying. Really, it wasn’t necessary. Have a nice trip back to the Strocchiverse.

    Freelander seems to subscribe to some kind of Oracular epistemology whereby the mere utterance of some obscure point is sufficient to establish truth. Sybill he ain’t.

  83. nanks
    December 17th, 2009 at 08:53 | #83

    @Jack Strocchi
    I’m not conceding anything Jack – I used to teach some of this history at UQ and have forgotten most but still maintain a little interest. I’ve known the DoD research linkage for ages. I think you underplay the extent to which early ideas were developed and put forward outside of the military. And I think you overplay the detail of the military input via SAGE etc. Did the military say – we want a system of connected computers or did they say we want a system robust to attack? I think more the latter than the former, but could change my mind if presented with solid evidence.

  84. Freelander
    December 17th, 2009 at 12:39 | #84

    @Jack Strocchi
    No need to apologise and prostrate yourself to me, John, Nanks and others, further. You have humiliated yourself enough. More than enough. Yes, we know you were talking nonsense all along, but we were not greatly offended. Your strings of non sequiturs really have not offended. You are not the first to have deluded themselves that such strings constitute reasoned argument. No offense taken.
    When travelling back to the Strocchiverse, remember: “Don’t drink and drive, and stay off the hard drugs”. Bye…

  85. Freelander
    December 17th, 2009 at 12:51 | #85

    @nanks
    Yes. Agreed. The DoD link is common knowledge, and, I imagine, something JQ was also perfectly aware of, which made the strocchilight contribution (and ‘correction’) all the more bizzare. Never mind.

  86. gerard
    December 17th, 2009 at 13:41 | #86

    The next time a “pacifist academic” (I’m thinking of Chomsky here) “bitches about military spending” it would do well to keep that in mind.

    This is ironic Jack. I suggest you try again with the name of another “pacificst academic” you don’t know anything about.

    In many books, articles and interviews, Chomsky has often pointed out that US military spending has consistuted the bulk of R&D funding that makes the US technologically competitive. In fact he’s made the same point you are arguing here – that the Internet (and many other advanced technologies) came out of DARPA!

    He has also said that his own linguistics work was in an MIT department sponsored by the Pentagon.

    Maybe you should actually read Chomsky before making comments like this.

  87. jquiggin
    December 17th, 2009 at 13:48 | #87

    Just to confirm that I was, of course, fully aware of the DARPAnet story but didn’t spend any time on it since it had (as I pointed about) no relevance to the point I was making about public funding.

  88. sdfc
    December 17th, 2009 at 14:14 | #88

    Speaking of “defence” why does the US $787B fiscal stimulus draw so much ire from the small government crowd yet the estimated $1.3 trillion spent on the Iraq war largely passes without comment?

  89. Freelander
    December 17th, 2009 at 16:17 | #89

    @sdfc
    Because the $1.3 trillion was spent without even a whiff of an intention to do good. As they say “Its the thought that counts.”

  90. December 17th, 2009 at 20:00 | #90

    @sdfc
    “yet the estimated $1.3 trillion spent on the Iraq war largely passes without comment?”

    You haven’t been paying attention for the last 6 years then.

    A pity Sukrit Sabhlok’s antiwarlibertarian blog is no longer up, because he never shut up about it. Apart from him, there’s Jason Soon, who thinks it’s a white elephant. John Humphreys, who went to the trouble of formulating a cost-benefit analysis in an effort to convince warmongers that it (and the ‘war on terror’) was a tremendous waste of money. There’s plenty of negative comment about the Iraq war’s cost and rationale at the Australian Libertarian Society’s blog. Before the titanic waste of money that was the US bailout and stimulus, the Iraq war was my go-to example of prodigious waste by government.

    And that’s just locals off the top of my head, from just a few of the “small government crowd” outposts.

  91. Alicia
    December 17th, 2009 at 20:10 | #91

    @Jarrah

    That’s complete self-serving crap. The libertarian blog Catallaxy is totally dominated by supporters of the Iraq and Afghanistan war and US militaristic objectives. past and current, indeed these people are urgers of extension of US invasion in the Middle East, Pakistan, North Korea, Latin America, etc.

  92. Alice
    December 17th, 2009 at 20:13 | #92

    @Jarrah
    Well for once Jarrah your small government argument, in the hideous waste that was Iraq may have some credence…but the trouble is people like yourself apply small government to all areas of expenditure, even useful productive positive peace time industries such as health, education and the arts. Thats why the small government argument based of wasteful war expenditures or wasteful bailouts is hard to swallow. You see no good even when government expenditures are devoted to productive useful endeavours.

  93. Alice
    December 17th, 2009 at 20:15 | #93

    @Alicia
    Im inclined to agree Alicia.

  94. Alicia
    December 17th, 2009 at 20:17 | #94

    Jason Soon repeatedly states that he thinks the state needs to exist precisely for armies and the police, the only things he deems essential at a governmental level.

    Creepy.

  95. Alice
    December 17th, 2009 at 20:22 | #95

    @Alicia
    Agree – creepy – who manages and oversees the Police? the Army? Ewwww. Another idiot libertarian eeking to impose martial autocracy on us all, Alicia.

  96. Alice
    December 17th, 2009 at 20:22 | #96

    seeking

  97. Alicia
    December 17th, 2009 at 20:29 | #97

    @Alice

    We need to strip the faux “libertarian” cover from these sinister at best ideologically captured and tamed robots at every opportunity, Alice.

    Genuine libertarians do not support bodies of armed men lording it over the populace and the poorest people in the world. Such people are mercenaries bought and paid for by an oppressive, exploitative state ruling in the interests of the rich and powerful.

  98. December 17th, 2009 at 23:20 | #98

    @Alicia
    “these people are urgers of extension of US invasion in the Middle East, Pakistan, North Korea, Latin America, etc.”

    These people? What people? Catallaxy attracts all types, so perhaps you confused aggressive types with the libertarians?

    “Jason Soon repeatedly states that he thinks the state needs to exist precisely for armies and the police, the only things he deems essential at a governmental level.”

    I don’t want to put too many words in Jason’s mouth, but… that’s what minarchists do – they seek the smallest government possible, which is one that provides the public goods that are worth the cost and no-one else can or will provide. National defence is the classic example, and a justice system is not far behind. What’s creepy about it? Of course, there are many people who believe neither need a government to provide them, but Jason isn’t hardcore like that.

    “Genuine libertarians do not support bodies of armed men lording it over the populace and the poorest people in the world. ”

    Of course not. And to suggest any kind of libertarians do is a pathetic strawman.

  99. December 17th, 2009 at 23:23 | #99

    @Alice
    “creepy – who manages and oversees the Police? the Army? Ewwww.”

    Utterly bizarre. Any libertarian (who stops short of being an anarchist) would have democratic civilian control of the armed forces and police.

    “Another idiot libertarian eeking to impose martial autocracy on us all”

    You really are a simpleton, aren’t you?

  100. John H
    December 17th, 2009 at 23:32 | #100

    One very important reason why libertarians argue against big government is because concentrated power is an intrinsic problem, be it government or economic. I don’t agree with libertarians on many issues and have had many fights with them but I have made a sincere effort to see their point of view. There is value in the things they say, there is danger is believing that a libertarian philosophy is the way to go. Why? Because their thinking is too often based on faulty assumptions about human behavior and society. Libertarians could do themselves a big favour by refusing to endorse the right and stop ridiculing the left. That is not going to happen.

    As for the idea that libertarians will impost a martial autocracy on us all, anyone who believes that simply does not understand the libertarian position which is completely contrary to autocracy.

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