1. Bottom up, not top down. Almost everything important that happens in both nature and in society happens from the bottom up, not the top down. Water is a bottom up, self-organized emergent property of hydrogen and oxygen. Life is a bottom up, self-organized emergent property of organic molecules that coalesced into protein chains through nothing more than the input of energy into the system of Earth’s early environment. Evolution is a bottom up process of organisms just trying to make a living and get their genes into the next generation, and out of that simple process emerges the diverse array of complex life we see today. An economy is a self-organized bottom up emergent process of people just trying to make a living and get their genes into the next generation, and out of that simple process emerges the diverse array of products and services available to us today. And democracy is a bottom up emergent political system specifically designed to displace top down chiefdoms, kingdoms, theocracies, and dictatorships.
2. Exponential growth, not linear change. Science and technology have changed our world more in the past century than it changed in the previous hundred centuries—it took 10,000 years to get from the cart to the airplane, but only 66 years to get from powered flight to a lunar landing. Moore’s Law of computer power doubling every eighteen months continues unabated and is now down to about a year. Computer scientists calculate that there have been thirty-two doublings since World War II, and that as early as 2030 we may encounter the Singularity—the point at which total computational power will rise to levels that are so far beyond anything that we can imagine that they will appear near infinite. And not just in raw number crunching power but in cognitive processing ability, as witnessed in the difference between IBM’s Deep Blue chess playing master and IBM’s Jeopardy champion.
3. Crowd sourcing, not elite commanding. Knowledge production has been one long trajectory of shifting not only from top down to bottom up, but from elite commanding to crowd sourcing. From ancient priests and medieval scholars, to academic professors and university publishers, to popular writers and trade publishing houses, to everyone their own writer and publisher online, the democratization of knowledge has struggled alongside the democratization of societies to free itself from the bondage of top down control. Compare the magisterial multi-volume encyclopedias of centuries past that held sway as the final authority for reliable knowledge, now displaced by individual encyclopedists employing wiki tools and making everyone their own expert.
4. Open access and transparency, not closed entrée and secrecy. The Internet is the ultimate bottom up self-organized emergent property of crowd sourcing millions of computer users in an open access and transparent exchange of language, knowledge, and data across servers; although there are some top-down controls involved—just as there are some in mostly bottom-up economic and political systems—the strength of digital freedom derives from the fact that no one is in charge.

For the past 10,000 years humanity has gradually but ineluctably transitioned from top down to bottom up, from linear change to exponential growth, from elite commanding to crowd sourcing, and from secrecy to transparency. Together these forces are driving us to Civilization 2.0 on a scale I derived for classifying the rich array of human societies throughout history:

Civilization 1.1: Fluid groups of hominids living in Africa. Technology consists of primitive stone tools. Intra-group conflicts are resolved through dominance hierarchy, and between-group violence is common.

Civilization 1.2: Bands of roaming hunter-gatherers that form kinship groups with a mostly horizontal political system and egalitarian economy and utilizing sophisticated tools to extract what they could from relatively resource poor environments.

Civilization 1.3: Tribes of individuals linked through kinship but with a more settled and agrarian lifestyle with the beginnings of a political hierarchy and a primitive economic division of labor and employing mostly animal and human labor.

Civilization 1.4: Chiefdoms consisting of a coalition of tribes into a single hierarchical political unit with a dominant leader at the top, and with the beginnings of significant economic inequalities and a division of labor in which lower-class members produce food and other products consumed by non-producing upper-class members.

Civilization 1.5: The state as a political coalition with jurisdiction over a well-defined geographical territory and its corresponding inhabitants, with a mercantile economy that seeks a favorable balance of trade in a win-lose game against other states.

Civilization 1.6: Empires that extend their control over peoples who are not culturally, ethnically or geographically within their normal jurisdiction, with a goal of economic dominance over rival empires.

Civilization 1.7: Democracies that divide power over several institutions, which are run by elected officials voted for by a limited number of citizens as defined by race, gender, and class, with the beginnings of a market economy.

Civilization 1.8: Liberal democracies that give the vote to all adult citizens regardless of race, class, or gender, and utilizing markets that begin to embrace a nonzero, win-win economic game through free trade with other states.

Civilization 1.9: Democratic capitalism, the blending of liberal democracy and free markets, now spreading across the globe through democratic movements in developing nations and broad trading blocs such as the European Union.

Civilization 2.0: Globalization that includes worldwide wireless Internet access, with all knowledge digitized and available to everyone, a completely global economy with free markets in which anyone can trade with anyone else without interference from states or governments. A planet where all states are democracies in which everyone has the franchise.

Reaching Civilization 2.0 is not inevitable. As we are witnessing in Arab countries this month, resistance by nondemocratic states to turning power over to the people is considerable, especially in theocracies whose leaders would prefer we all revert to Civilization 1.4 chiefdoms. But by spreading liberal democracy and free trade, science and technology and the open access to knowledge through computers via the Internet will, in the words on a plaque posted at the Suez Canal: Aperire Terram Gentibus—To Open the World to All People.

This is the third essay in a series on the relationship between rules, freedom, and prosperity.
Read part 1 on Skepticblog.org and part 2 over at True/Slant.

I believe that the following commentary on the necessity of law and order has some bearing on what is unfolding in Arizona—when the rules are not clearly written or consistently enforced, people will take the law into their own hands because society cannot run smoothly without law and order.

In Part 3 in my essay series on the relationship between rules, freedom, and prosperity, I want to turn to one of my favorite films, John Ford’s 1962 classic, The Man Who Shot Liberty Valance, in which a clash of moralities unfolds in the wild-west frontier town of Shinbone, Arizona. There in the dusty streets and ramshackle buildings two self-contained and self-consistent moral codes come into conflict. One moral code is the Cowboy Ethic, where trust is established through courage, loyalty, and personal allegiance to friends and family, and where disputes are settled and justice is served between individuals who have taken the law into their own hands. The other moral code is the Law Ethic, where trust is established through the transparent and mutually-agreed upon rule of law, and where disputes are settled and justice is served between all members of the society who, by virtue of living there, have tacitly agreed to obey the rules. Only one of these moral codes can prevail.

In The Man Who Shot Liberty Valance, the Cowboy Ethic is represented by two people, one good and the other evil. John Wayne’s character, Tom Doniphon, is a fiercely loyal and deeply honest gunslinger duty-bound to enforce justice on his own terms through the power of his presence backed by the gun on his hip. Lee Marvin’s title character, Liberty Valance, is a coarse and unkempt highwayman whose unruly behavior provokes fights with the locals, most of whom fear and loathe him.

The Law Ethic is represented by Jimmy Stewart’s character, Ransom Stoddard, an attorney hell bent on seeing his beloved Shinbone make the transition from cowboy justice to the rule of law. Employing the commonly-used flashback technique, John Ford opens his film at the end of the story with the funeral of Tom Doniphon, which is attended by an elderly Stoddard swamped by reporters inquiring why the now-distinguished U.S. Senator would bother returning to his native town just to be present at the memorial services of a down-and-out gunfighter.

When they were younger and coming of age in this western territory just slightly out of reach of the long arm of the law, Stoddard and Doniphon were of radically different minds when it came to how justice should be served, each believing that the other’s strategy is either outdated (Doniphon’s gun) or naïve (Stoddard’s law). Despite this difference, or perhaps because of it, they become faithful friends, both believing that in the end justice must prevail. When Liberty Valance arrives on the scene it is clear that he respects only one man, Tom Doniphon, because they share the Cowboy Ethic that men settle their disputes honorably between themselves. As Doniphon boasted, “Liberty Valance is the toughest man south of the Picketwire—next to me.” But Valance’s disdain for the milksop Stoddard and his naïve notions about the effectiveness of the law knows no bounds. Entering a restaurant where Stoddard is dining, for example, Valance berates him, taunts him, and finally trips the waiter, sending Stoddard’s dinner to the floor. As Stoddard meekly tries to avoid a confrontation, Doniphon enters and stares down Valance, who snaps back, “you lookin’ for trouble, Doniphon?” In his inimitable John Wayne drawl, Doniphon responds, “You aimin’ to help me find some?” Valance caves to Doniphon’s challenge and scurries out of the restaurant. “Well now; what do you supposed caused him to leave?” Doniphon wonders rhetorically. The sardonic response from a patron in reference to the impotency of Stoddard’s philosophy reveals which ethic is still dominant: “Why it was the specter of law and order rising from the gravy and the mashed potatoes.”

Despite Valance’s constant taunting, Stoddard holds to his belief that until Valance is caught doing something illegal there can be no justice. When Doniphon tells Stoddard “You better start pack’n a handgun,” Stoddard rejoins, “I don’t want to kill him. I just want to put him in jail.” At long last, however, Stoddard can take the derision no more, so he decides to take Doniphon’s advice that “out here a man settles his own problems,” and turns to him for gun-fighting lessons. When Valance challenges Stoddard to a dual, the overconfident naïf accepts and a late-night showdown ensues. In a darkened street, the two men square off. Stoddard is trembling in fear while Valance mocks and scorns him, shooting first too high and then too low. When Valance takes aim to kill, Stoddard shakily draws his weapon and discharges it. Valance collapses in a heap. Having felled one of the toughest guns in the west Stoddard goes on to become a local hero, building that image into political capital and working his way up from local politics to a distinguished career as a United States Senator. It appears that the Law Ethic prevailed over the Cowboy Ethic.

Not so fast. The man who shot Liberty Valance was Tom Doniphon. Knowing that Stoddard was no match for Valance, in a replay of the dual we see Doniphon lurking in the shadows and fingering a rifle, which he engaged to kill Valance at the crucially-timed moment when the two men drew their weapons. Holding to the cowboy ethic of loyalty and friendship, Doniphon takes the secret to his grave, where at the end of the story Stoddard is now paying his respect. When Stoddard finally reveals to a newspaper reporter the truth about who really shot Liberty Valance, the paper decides not to print the truth because, in what has become one of the most memorable lines in filmic history, “When the legend becomes fact, print the legend.”

Despite this being a typical shoot-em-up western film, The Man Who Shot Liberty Valance contains many moral subtleties. The philosopher Patrick Grim, who called my attention to the film as a tale of moral conflict, notes that both Stoddard and Doniphon violated their principles, but they did so because this was the only means by which one moral code could displace the other. By agreeing to a dual with Valance, Stoddard adopted a form of conflict resolution that he previously deemed illegal and immoral, and after discovering the truth about who really shot Liberty Valance, he chose to live a lie of omission then capitalized on his unearned heroism. For his part, Doniphon violated his moral code by ambushing Valance from the shadows instead of facing him man to man in the street, and then hiding the truth about what really happened, thereby tacitly endorsing Stoddard’s faux use of the Cowboy Ethic in order to help bring about the Law Ethic. In fact, both men violated both codes of morality, and with ample irony the only person who did not violate his moral code was the scurrilous Liberty Valance. But in the end, as Shinbone grew in size the transition from one moral code to the other had to happen, and in this moral homily it was friendship and loyalty that facilitated the change. It was the psychology of trust between individuals that enabled a society of trust among the collective to come to fruition.

The fictional Shinbone embodies any small community in transition from an informal to a formal moral code and system of justice. As long as population numbers are low and everyone in a community is either related to one another or knows one another through regular interactions, the code of the cowboy can work relatively well to keep the peace and ensure trust and social stability. But when communities expand and population numbers increase, the opportunities for unchecked violations of such informal codes expands exponentially, requiring the creation of such social technologies as codes, courts, and constitutions.

Continue reading part 4 over at True/Slant.

left to right: Jared Cohen, Dave Morin, John Cusack, Dean Kamen, Bill Gates, Arianna Huffington, Michael Shermer. (All photos in this post were taken by John Brockman.)

No, it wasn’t exactly My Dinner with Andre—the classic 1981 filmed conversation between Wallace Shaun and Andre Gregory (directed by Louis Malle) that ranged across a diversity of existential topics—but listening to Bill Gates hold forth on matters of business, economics, finance, world health, education, and nutrition and physical fitness in a dinner arranged by John Brockman’s Edge.org during last week’s TED gathering in Long Beach was a memorable experience nonetheless.

Richard Dawkins once said that John Brockman has the most stellar rolodex in all of science, and periodically Brockman organizes an Edge.org event that brings them all together for some serious dialogue about the great issues of our time. There were around 80 people in all, which soon broke up into small groups of schmoozing and social networking. Check out the roster and accompanying photos.

When it was time to sit down for dinner there was a spot open at the Gates table (we’ll call it), that included some heavyweights such as Facebook’s Dave Morin, the Segway inventor Dean Kamen, the actor John Cusack, Jared Cohen from the U.S. State Department, Michael Tchao, VP of Apple’s new iPad division, Arianna Huffington of HuffingtonPost, Bill Gates, and your humble servant.

This was unlike any dinner I’ve ever attended. Usually no matter how many heavyweight bigshot superstars are present there always seems to be a relatively fluid conversation around the table that unfolds organically as different people make different contributions. Not so here. Bill Gates was the star and we were tiny planets in orbit around him, sitting there like acolytes at the feet of the guru, asking him questions and listening to his lengthy and thoughtful answers. You can see it in the faces of the guests in the second photo, oriented toward Gates who is just off camera to the right, as Gates (in the third photo) offers his thoughts on the various queries put to him. (All photos by John Brockman. See the entire set.)

left to right: Jared Cohen, Dave Morin, John Cusack, Dean Kamen

Seriously, this was one weird dinner. After spending two hours at this table I can honestly say that I haven’t any idea what the other folks sitting there are like. The actor John Cusack, for example, strikes me as a thoughtful and intelligent man, but I never got to talk to him because there was next to no other conversations. Ditto the others, although Arianna did unlock her Gate-gaze long enough to give me one of her business cards, encouraging me to blog about the dinner at HuffPo (but I’m committed to True/Slant now even though I occasionally hop over to her mostly-liberal site to give them a dose of my libertarian bias).

I knew Bill Gates was smart, but in my estimation after listening to him for two hours is that he is really smart, off-the-charts smart, super bright, even brilliant. He is obviously well-read on those matters important to him, and he seems to have a steel-trap memory for regurgitating what he has read in great detail. Discussing world health and nutrition led me to ask him about diets and health and what he does personally, to which he answered that he runs 90 minutes a day on a treadmill. Since I do a fair amount of exercise myself (cycling is my poison) I asked him if he listens to audio books, which he said he does but is especially keen on listening to Teaching Company courses while working out, most especially the economics courses taught by Professor Timothy Taylor. Since I have taken all of these courses myself (you can download them into an iPhone and listen to them while driving, cycling, running, hiking, etc.), it was interesting to listen to Gates reiterate what was in them in the course of the evening as we asked him questions about the economy. I could tell that he could call forth from memory intricate details from those courses but in a completely different context in answer to a separate question.

Bill Gates and Arianna Huffington

I asked Gates “Isn’t it a myth that some companies are ‘too big to fail’? What would have happened if the government just let AIG and the others collapse.” Gates’ answer: “Apocalypse.” He then expanded on that, explaining that after talking to his “good friend Warren” (Buffet), he came to the conclusion that the consequences down the line of not bailing out these giant banks would have left the entire world economy in tatters.

Arianna Huffington asked Gates about Obama’s various jobs programs to stimulate the economy. Gates answered: “Let me tell you about what leads companies to create more jobs: demand for their products. My friend Warren owns the world’s largest carpet manufacturing company. Their business has dried up because the demand for carpets has declined dramatically due to the drop off in the construction of new homes and office buildings. If you want to create more jobs you need to create more demand for products that the jobs are created to fulfill. You can’t just make up jobs without a real demand for them.” I believe that was the last thing Arianna said for the evening.

This led me to ask Gates this: “If the market is so good at determining jobs and wages and prices, why not let the market determine the price of money? Why do we need the Fed?” Gates responded: “You sound like Ron Paul! We need the Fed to steer the economy away from extremes of inflation and deflation.” He then schooled us with a mini-lecture on the history of economics (again, probably gleaned from Timothy Taylor’s marvelous course for the Teaching Company on the economy history of the United States) to demonstrate what happens when fluctuations in the price of money (interest rates, etc) swing too wildly. I believe that was the last question I asked Gates for the evening! What do I know? I run a tiny nonprofit science education organization with six employees. I’m just hoping to be able to cover my daughter’s college tuition next year. Gates is the world’s richest man who founded a giant multi-national corporation and heads a powerful nonprofit organization that is trying to save the third world. He surely understands economics and business and finance better than I do, right? I sure hope so!

Anyway, thanks to Edge.org for a splendid evening that resulted in a handful of people getting schooled in finance by the smartest guy in the room. Let’s hope he’s right about the bailout and that the economic apocalypse is behind us.

The brain consists of about a hundred billion neurons, which is about the same as the number of stars in the Milky Way galaxy. A hundred billion is 10¹¹, or a 1 following by 11 zeros: 100,000,000,000. That’s about what Obama plans to spend on Veterans Affairs ($57 billion) and Homeland Security ($43 billion) combined. It’s a huge number. It is literally an astronomical number. But that’s nothing. A trillion is a thousand billion. How much is a trillion?

Start counting seconds as “one one-thousand, two one-thousand, three one-thousand…” and when you get to 86,400 that’s the number of seconds in a day. When you reach 31,546,000 that’s the number of seconds in a year. When you get to 315,460,000 you will have been counting for ten years, but you are still not even close. Add another 0 to get to 100 billion, and another 0 still to get to 1,000 billion, and you will have finally reached one trillion seconds. If you make it that long you will have been counting for about 30,000 years. Now, do that 3.8 times and you will have counted out the number of dollars that the Federal government plans to spend in just one year.

To count in seconds the number of dollars in the 2011 Federal budget, you will have to count “one one-thousand, two one-thousand, three one-thousand…” for 114,000 years, which if you were counting backward in time would thrust you back to the time when humans first migrated out of Africa and began to spread across the globe, still living as hunter-gatherers with fairly crude stone tools, competing with Neanderthals and other hominids for survival, and just beginning to show signs of symbolic communication.

If ever there was a symbol to communicate that has no corresponding link to a tangible asset in the real world (such as gold or other precious metals), it is money. That’s why it is called “fiat money.” The government just declares money to be legal tender, based on the good faith of the federal government itself.

If that doesn’t jolt us all back in our chairs, consider the fact that at this rate of spending, in ten years the country will be $8.5 trillion in debt more than it already is, which amounts to $34,018 for every man, woman, and child in the country.

All this almost makes me hope that the 2012 doomsday predictions come true.

Michael Moore is the Leni Riefenstahl of our time. Or, perhaps he would be better characterized as a Bizzaro World Leni Riefenstahl, because while she propped up with propaganda the political powers of her time, Moore uses the same techniques to bring down the powers of our time, be it GM (Roger and Me), the gun lobby (Bowling for Columbine), the government (Fahrenheit 911), the health care industry (Sicko), or free enterprise (Capitalism: A Love Story).

In this latest installment in his continuing series of what’s wrong with America, Michael Moore takes aim at his biggest target to date, and the result is a disaster. The documentary is not nearly as funny as his previous films, the music selections seem contrived and flat, and the edits and transitions are clumsy, wooden, and not nearly as effective as what we’ve come to expect from the premiere documentarian (Ken Burns notwithstanding) of our time. And, most importantly, the film’s central thesis is so bad that it’s not even wrong.

First, let me confess that even though I have disagreed with most of Michael Moore’s politics and economics throughout his career, I have thoroughly enjoyed his films as skilled and effective works of art and propaganda, never failing to laugh — or be emotionally distraught — at all the places audiences are cued to do so. My willing suspension of disbelief that enables me to take so much pleasure from works of fiction, does not always serve me well when pulled into the narrative arc of a documentary. Thus it is that with his past films I have exited the theater infuriated at the same things Moore is … until I rolled up my sleeves and did some fact checking of my own, at which point Moore’s theses unravel (with the possible exception of Bowling for Columbine, his finest work in my opinion). But with Capitalism: A Love Story, Moore’s propagandistic props are so transparent and contrived that I never was able to suspend disbelief.

What was especially infuriating about Capitalism: A Love Story was the treatment of the people at the bottom end of the economic spectrum. The film is anchored on two eviction stories contrived to pull at the heart strings. One family filmed the eviction process themselves and sent the footage to Moore in hopes he’d use it (many are called, few are chosen), and the other was filmed by Moore’s crew. The message of both is delivered with a sledge hammer: Greedy Evil Soul-Sucking Bankers (think Lionel Barrymore’s villainous Mr. Potter in It’s a Wonderful Life) are tossing out onto the streets of America poor innocent families who are victims of circumstances not of their making. Why? First, because this is what Greedy Evil Soul-Sucking Bankers do for fun on weekends. Two, because the economic crisis caused solely by said bankers has made it impossible for families to make the payments on those subprime loans they were tricked into taking by those same bankers, who themselves were suckered into a Ponzi-like scheme cooked up by Alan Greenspan and his Wall Street/Federal Reserve buddies to take back the homes fully owned by (first) the elderly and (then) the poor. In the fine print that the bankers carefully slipped past the elderly and the poor for these second mortgages and subprime loans, the contracts said that the rates on variable rate loans could go up, and that the house was collateral for the loan such that if the loan payments are not made the home is subject to foreclosure and repossession by the bank (which is what the bankers are hoping happens).

In Michael Moore’s worldview, a goodly portion of the American people are ignorant, uneducated, clueless pinheads too stupid to realize the fundamental principle of a loan: you have to have collateral to secure the loan! No collateral, no loan. You say to the banker “I would like to take out a loan.” The banker says to you “what do you have for collateral?” What happened in the housing boom was that bankers relaxed their standards for what they would require for collateral (and income, assets, etc.) because (1) the government told them to do so and promised to cover their losses if it didn’t work out, and (2) they wanted to make more money; and borrowers wanted in on the cash cow that everyone was milking, from individual house flippers looking for a quick buck, to ordinary families wanting extra cash for remodeling, tuition, or whatever, to mortgage giants wanting corporate expansion. And all were driven by the same motive: greed!

Yes, greed. Those evicted families knew perfectly well what they were doing when they freely chose to climb onto the housing bubble and take it for a ride. I have a much higher view of the American public than does Michael Moore. I don’t think the American people are so stupid or uneducated that they didn’t know what they were doing. This wasn’t rocket science. It was even on television, the ne plus ultra of pop culture! I well remember watching A & E’s television series Flip This House, and reading all those magazine articles and get-rich-quick books on how to make a fortune in the real estate market, and thinking “wow, everyone’s getting rich except me; how can I get in on the action?”

What I felt is, I’m sure, what lots of people felt. I looked into securing a second mortgage on my home in order to build a second home on an undeveloped portion of my hillside property, and then selling it to turn a tidy profit. Everyone was doing it. What could go wrong? Well, for starters I thought, what if it takes longer to build the home than I projected? We all know how slow construction projects can be. Could I make the payments on the second mortgage for an additional six months to a year? And what if I couldn’t sell that second home? Could I make the payments on the new loan indefinitely? What if my income decreased instead of increased, like it was at the time (and, subsequently, did … dramatically!). And what would happen if I couldn’t make the payments? The answer was obvious, and it wasn’t in the fine print: I could lose my primary home.

Forget that! Making a profit on a second home would be nice, but losing my first home would hurt well more than twice as much as making a profit on the second home would feel good. That’s a basic principle of risk aversion: losses hurt twice as much as gains feel good. Now, I’m not really a risk-averse guy (I gave up a secure career as a college professor for an insecure career as a writer and publisher), but even I could see the inherent risks involved when the home you live in could be taken away. My hillside remains sagebrush and wild grass.

What about the people on the other end of the economic spectrum — the bankers and Wall Street moguls? Why aren’t they being evicted. Now, given that I’m a libertarian, you might expect me to come to the defense of Corporate America. Not so. Here I am in complete agreement with Michael Moore that, as I’ve been saying since the day it was first pronounced, “too big to fail” is the great myth of our time. None of these giant corporations — GM, AIG, Bank of America, Goldman Sachs, et al. — should have been bailed out. In fact, they should have been allowed to fail, their stocks go into the toilet, their employees tossed out on to the gilded streets of lower Manhattan, and their CEOs dispersed to work as greeting clerks at Walmart. They gambled and lost on all those securities, bundled securities, derivatives, credit default swaps, and other “financial tools” that I’ll bet not one in a hundred Wall Street experts actually understands. If you really believe in free enterprise, you must accept the freedom to lose everything on such gambles. These CEOs and their corporate lackeys are nothing more than welfare queens who adhere to the motto “in profits we’re capitalists, in losses we’re socialists.” Sorry guys, you can’t have it both ways without corrupting your morals, which you have, along with the politicians you’ve bribed, cajoled and otherwise coerced to your bidding.

The solution? I have some suggestions of my own, but Michael Moore’s solution is beyond bizarre: replace capitalism with democracy. Uh? Replace an economic system with a political system? Even the über liberal Bill Maher was baffled by that one when he hosted Moore on his HBO show. How does a democracy produce automobiles and computers and search engines? It doesn’t. It can’t.

Capitalism: A Love Story, ends with a remarkable film clip that Moore discovered of President Franklin Roosevelt reading from his never proposed second Bill of Rights (he died shortly after and the document died with him). Included in the list are:

• The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;
• The right to earn enough to provide adequate food and clothing and recreation;
• The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
• The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
• The right of every family to a decent home;
• The right to adequate medical care and the opportunity to achieve and enjoy good health;
• The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
• The right to a good education.

That’s nice. To this list I would add a computer in every home with wireless Internet access. I’m sure we could all think of many more things “under which a new basis of security and prosperity can be established for all — regardless of station, race, or creed,” in Roosevelt’s words. But there is one question left unstated: Who is going to pay for it? If there is no capitalism, from where will the wealth be generated to pay for all these wonderful things? How much does a “decent” home costs these days, anyway?

Do you see the inherent contradiction? Of course you do. So does Michael Moore, who elsewhere in the film longs for the good old days when the “rich” were taxed 90% of their earnings. So did Willie Sutton, who answered a similar question after being nabbed by the FBI during the Great Depression and asked by a reporter why he robs banks: “Because that’s where the money is.”

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This concept allows me to expand to my blog readers here what I mean by “free trade.” Most of you have pounced on me for using terms like “libertarian” or “capitalism.” But what I mean by free trade is much broader and encompassing: the free exchange of products, services, and ideas between people anywhere in the world anytime they want. To show how broadly I go with this concept, when Chimp A grooms Chimp B, and subsequently when Chimp A is attacked by an alpha male, Chimp B is more likely to come to his aid because they have formed a bond, an attachment, a trading relationship. Grooming in this example is a form of free trade.

Why does this happen? In The Mind of the Market I introduced Bastiat’s Principle, based on an observation by the 19th-century French economist Frédéric Bastiat: “Where goods do not cross frontiers, armies will.” Its corollary elucidates one of the principle steps toward conflict reduction: where goods do cross frontiers, armies will not.

This is a principle, not a law, since there are exceptions both historically and today. Trade — the free exchange of products, services, and ideas between people — will not prevent war, but it attenuates its likelihood. Thinking in terms of probabilities instead of absolutes, trade between groups increases the probability that peaceful and stable relations will continue and decreases the probability that instabilities and conflicts will erupt.

As an example, Yanomamö hunter-gatherers are not only the “fierce people,” as Napoleon Chagnon characterized them, they are also willing traders. Following the political dictum “the enemy of my enemy is my friend,” Yanomamö inter-village trade and reciprocal food exchanges serves as a powerful social glue in the creation of political alliances. As in my Chimp example above, Yanomamö Village A cannot go to Village B and announce that they are worried about being conquered by the more powerful Village C, since this would reveal their own weakness. Instead, Village A forms an alliance with Village B through trade and reciprocal feasting, and as a result they not only gain military protection but also encourage inter-village peace. As a by-product of this politically-motivated economic exchange, even though each Yanomamö band could produce all the products it needs for survival, they often set up a division of labor and a system of trade. The unintended consequence is an increase in both wealth and products. The Yanomamö trade not because they are innate altruists or nascent capitalists, but because they want to form political alliances. “Without these frequent contacts with neighbors,” Chagnon explains, “alliances would be much slower in formation and would be even more unstable once formed. A prerequisite to stable alliance is repetitive visiting and feasting, and the trading mechanism serves to bring about these visits.” Where goods cross Yanomamö frontiers, Yanomamö armies do not.

Bastiat’s Principle holds not only for hunter-gatherers but for consumer-traders as well. Note, for example, that in the modern world of consumer-trading nation states, economic sanctions are among the first steps taken by a nation against another when diplomatic conflict resolution attempts break down. Often such sanctions are imposed for purely economic reasons in a mercantilist mode, as when the United States imposed import tariffs on steel purchased from China and Russia in 2002, which the World Trade Organization declared to be illegal. Economic sanctions are also imposed for political reasons, as when the United States enforced them on Japan after its invasion of China in the 1930s, and these became a prelude (among other factors) to Japan’s retaliatory bombing of Pearl Harbor in 1941 and our involvement in the greatest war in history. Or more recently, economic sanctions were imposed by the U.S. and Japan on India following its 1998 nuclear tests, by the U.S. on Iran because of the latter’s state sponsorship of terrorism, and by the United Nations on Iraq as a tool to force the Iraqi government to comply with U.N. weapons inspectors’ search for weapons of mass destruction.

Economic sanctions send this message: if you do not change your behavior we will no longer trade with you. And by Bastiat’s Principle, where our goods do not cross your frontiers, our armies will. Not inevitably, of course, but often enough in history that the principle retains its veracity. Economic sanctions are not a necessary or even sufficient cause of war, but they are almost always a prelude to war.

In The Mind of the Market I also introduce the Starbucks’ corollary to Bastiat’s Principle: Where Starbucks cross frontiers, armies will not. That is, the free trade of products between peoples, and open access to services across geographic borders, obsoletes the necessity of political borders and thereby decreases the probability that armies will cross them. To the Starbucks corollary I add the Google theory of peace: Where information and knowledge cross frontiers, armies will not. That is, the free trade of information between peoples, and open access to knowledge across geographic borders, obsoletes the necessity of political borders and thereby decreases the probability that armies will cross them.

A stirring example can be seen in Europe. Since the formation of the Treaty of Rome and the European Union — which integrated disparate and historically divided European nations under one economic umbrella — where once invasions and wars were commonplace throughout a thousand years of European history, they are now unthinkable. Try it. Imagine Germany invading France and waging war upon her, or picture France motoring its armies through the Chunnel and then marching them into London to declare the country French. What once made for dramatic literature now sounds like pulp fiction.

The Wikification of the economy adds to the Google theory of peace the entire world economy as practiced by and participated in by billions of people. Wikipedia is the right analogue for this emerging economic phenomenon. It is an open-sourced, peer-produced, mass-collaborated, bottom-up, self-organized, emergent property of millions of people choosing to build the modern equivalent of the Alexandrian library whose purpose it was to make the sum of the world’s knowledge available to everyone in one location. Granted, the ancient Alexandrian Greeks had far less knowledge to store than we do today — by many orders of magnitude — but we have the World Wide Web.

In the long run, no dictator, demagogue, priest, president, or any other pretender to power will be able to control the Googlefication, Wikification, eBayification, MapQuestification, YouTubeification, MySpaceification of information, knowledge, geography, personal relationships, markets, and the economy. Chinese bureaucrats can attempt to put all the firewalls and controls they want on a billion potential Chinese web surfers, but in the long run they will never be able to prevent knowledge, products, and people from finding their way to those who seek them. And to this list we can now add the Twitterfication of information. The revolution will be tweeted. And…

Freedom finds a way.

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First of all, why is it okay to mix science and religion (with atheists eagerly do in debunking religious claims) but not okay to mix science and politics/economics? Why is it okay for liberal atheists to stick it to religious believers and twist the knife slowly, but when it comes to getting your own (political/economic) beliefs challenged, that’s off limits — NOMA (nonoverlapping magisterial) for science and politics? I don’t see how they are different in principle. Skeptic is a science magazine, not an “atheist” magazine; nevertheless, we routinely deal with religious claims and no one ever complains about that. The closest we have come to political/economic issues is environmentalism (Vol. 9, No. 2 — sold out), overpopulation (Vol. 5, No. 1), and global warming Vol. 14, No. 1). For all three we published several articles; in Vol. 14, No. 1, for example, we published articles both skeptical of global warming and accepting of global warming. So I don’t see what would be wrong with publishing articles pro, con, and neutral on political and economic claims.

One person wrote me a private email that said he thought of me as the next Carl Sagan, but now that I’ve gone to the dark side (turning Right, although I’m as critical of the Right as I am the Left), because Carl was “apolitical.” Carl Sagan was many things, but apolitical was not one of them. Carl was a Liberal and proudly wore his politics on his sleeve, such as when he marched in protest at nuclear sites or testified before Congress about the dangers of nuclear winter. I admire him for having the courage of his convictions, which intimately blended his science and (Left) politics. If you think Sagan was apolitical it is because you happen to agree with his politics and so those ideas seem simply correct, not political. If you don’t share his politics (I share about half of them), then it’s obvious that Sagan was not apolitical.

The liberal bias in the skeptical community was identified by many people in the comments section of my blog, for example by “DR,” “James,” and “Devil’s Advocate”:

… Sadly, there is a lot of hatred toward libertarianism at JREF [he means TAM]. I can be an atheist, believe gay marriage is ok, think nothing of smoking pot, and I won’t get half as much grief from a conservative that I do from an American liberal who reels and squirms when I say that the welfare state is immoral or that free trade and voluntary transactions in capitalism promote fair and just outcomes. It’s like the only reason why I have rationalized this set of morality is because I’m a supremely evil person and must be wrong… —DR

… I’m disappointed, but not surprised by the large group of liberal skeptics. I’ve talked to too many Democrat-card-carrying skeptics that spout the same unoriginal, canned rhetoric and continual spewing hatred of Republicans. For a group that supposedly supports tolerance, they’re anything but tolerant …
—James

I’ve three times over twenty years joined local skeptic groups and all three times there was a presumption that if I was a skeptic, then of course I’m also liberal in my politics. Two times I tried to be what I am but was marginalized, treated like a Goldwater (or Reagan, or Bush) mole. The third time I tried to avoid political discussion, but it was not possible, so, unwilling to lie, I left. My refusal to come over to pure liberalism clearly wasn’t going to be tolerated. All I wanted to do was examine UFO claims and crop circles, but… —Devil’s Advocate

Another critic named John D. Draeger makes a good point that I wish to acknowledge: “He [me] does NOT believe that political persuasions and different economic models for how societies should be run are moral value judgements…. Social services can be paid for in different ways, and in a democratic society it’s up to the majority to define how that is done. Social services can be paid for in different ways, and in a democratic society it’s up to the majority to define how that is done.” That’s true, in a democracy the majority rules how to divvy up public funds for social services, and that tends to be more of a value judgment than a science. But as someone else wrote just below that, quite cleverly I think…

First of all, democratic societies can still be evil, as the famous saying goes: “democracy is two wolves and one lamb voting on what to have for lunch.” And then in another famous quote (attributed to several), “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. Thus our founding fathers gave us a republic … if we can keep it.

Even this is a value judgment, I agree, but surely we can apply some forms of social science to inform our value judgments. For example, we may as a society make the value judgment that it would be good if every child received a basic K–12 education. I agree with this value judgment, and would add to it the value judgment that it would be equally important for every child to have a computer and Internet access because that is the future of education. So we share that value judgment. However, the next question is a pragmatic one: who is going to pay for this education (and computers/Internet)? Parents? Churches? NGOs? Charities? Government? If the latter — the value judgment we have made — then do parents get to choose among the various government schools of where to send their children? (No.) Do parents who choose to send their children to private schools have to also pay for government schools? (Yes.) Is that fair? You make that value judgment. I don’t think that it is fair. To be consistent, if you are pro-choice on abortion you should also be pro-choice on education. The deeper value judgment here is being pro-choice about everything. Choice = freedom.

Some correspondents hated the political diagram because it seems to elevate libertarianism above the traditional left-right spectrum. Okay, then you come up with something other than the left-right linear spectrum to visualize where someone would fall on that line who is socially liberal and fiscally conservative. You draw it and I’ll publish it in a future blog.

Some people hate the word “libertarian.” I’m not crazy about it either, but haven’t thought of a better label. Labels are useful because they enable people to take cognitive shortcuts, but they also lead to shortcuts to nuanced thinking about what someone believes. “Oh, you’re one of those…” full stop. We all do this, of course, but I call myself a libertarian for the same reason I call myself a feminist, an atheist, and a pro-choicer — because it is the accepted language and we have to communicate ideas with language. But I much prefer to be assessed on specific issues.

Several of you said that I am a victim of one of my own central tenets of baloney detection: the confirmation bias, where we look for and find confirmatory evidence for what we already believe and ignore the disconfirmatory evidence. Yes, I will admit, I do this. Everyone does, and we must guard against it, especially when it comes to religion, politics, and economics. To combat this problem, I read the conservative Wall Street Journal and the liberal Los Angeles Times. I listen to such conservative talk radio hosts as Hugh Hewitt and Dennis Praeger as well as the very liberal Bill Maher. I have read Karl Marx’s books as deeply and carefully as I have read Adam Smith’s books. I have read a host of books from liberal and conservative and libertarian authors on the current economic meltdown. And although I have a few libertarian and conservative friends, because I work in the sciences and in publishing, the vast majority of my friends, acquaintances, staff, co-workers, and colleagues are liberals who I can assure you are never shy about letting me know where they think I’ve gone off the political or economic rails.

Finally, let me add that one of the appealing things to me about the libertarian worldview is that it is optimistic, uplifting, and most importantly (to me) anti-elitist. I’m in favor of doing whatever we can to allow the little guy to succeed and to break up power blocs that prevent the average Joe or Jane from reaching their full potential. The Constitutional divisions of power in our Democracy — emulated by many others around the world — are a huge improvement from centuries past that allowed or enabled some to succeed at the expense of others. That was a zero-sum world. Over the past 200 years the spread of democracy and capitalism has done more toward achieving a Nonzero world than anything else — more people in more places more of the time have more power and liberty and wealth than any time in the previous four millennium. Therefore, the more we can spread democracy and capitalism the better off more of us will be more of the time.

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On Thursday June 4, I attended the Cato Institute half-day conference in Century City, California, which started out with a lecture by U.C. Santa Barbara evolutionary psychologist Leda Cosmides, one of the founders of that science along with her husband John Tooby. Cosmides’ talk was on the evolution of cooperation, but for this audience she tailored her lecture toward politics and economics (Cato is a libertarian think tank in D.C.), by asking “Why do free societies arise so rarely and with such difficulty?”

Unfortunately, Leda tried to squeeze about two hours of material and powerpoint slides into a 35-minute talk, and so she was necessarily brief as she blasted through slide after slide, each up on the screen for only seconds, making note taking impossible. That’s too bad because there was a lot of data slides that I think the audience would have liked to absorb (I know I would have). Nevertheless, Leda’s central point was this: our brains evolved for solving specific problems in the EEA (the Environment of Evolutionary Adaptation — the Paleolithic), and so we have domain specific programs that help organize our experiences. The problem is that the modern world is so different from the EEA that it causes conflicts. For example, most hunter-gatherer societies are egalitarian because they live in relatively resource-poor environments and are often unsure about their safety and nourishment, and so we evolved many cognitive instincts for cooperation, food sharing, and group cohesiveness, because everyone in the group was either related to you or you know very well, so as the political saying goes, we must hang together so that we don’t hang separately. But the modern world is nothing like this.

I’ve written about this problem in my book The Mind of the Market, which focuses on evolutionary economics, whereby the world in which we evolved of small bands of egalitarian hunter-gatherers is radically different from today’s world that is resource rich and with vast disparities of wealth between the richest and the poorest. Thus, we have a natural tendency to resent wealthy people, distrust free markets, and misunderstand the bottom-up process of modern economies and try to control them from the top down, usually with disastrous consequences (e.g., Alan Greenspan and the Fed’s constant manipulation of interest rates sent false signals into the market for the price of money, leading to artificially large bubbles that then burst).

Leda noted the difference between hunting and gathering in terms of risk and uncertainty: Hunting meat is highly variable, success is as much due to luck as it is skill, and 4/10 times the hunter comes home empty-handed. Thus, hunter-gatherers must pool risk to deal with frequent reversals of fortune through food sharing. By contrast, gathering foods is a low risk process that depends on effort, not luck, and the results are mostly shared only within the family and trusted partners, but not to the group at large. Cosmides explained that this evolved psychology can be seen today in which we make distinctions between people in need of our help because they were unlucky (as with the hunters who return empty-handed) versus the gatherers who don’t bring home the vegetables because they were lazy and were loafing on the job. We are inclined psychologically to want to help the former but not the latter.

The political and economic consequences of this evolved psychology can be seen today in debates about healthcare, welfare, social security, etc., which are all attempts to pool risk among everyone in society, but without any distinction between those who suffer because of bad luck versus those who suffer because of laziness or lack of ambition. Modern political states are in the business of redistributing wealth from those who have it to those who do not, and since there is no attempt to discriminate between those who were unlucky from those who were just lazy, the people who earn that money through hard work and talent who then have it confiscated by the government and given to people they do not even know, naturally feel resentful, even though statistically the wealthy are extremely generous in giving to private charities that they voluntarily choose.

Cosmides also noted the psychological difference between working land that you own versus working land that the government owns: the agricultural policy of the USSR allowed 3% of land on collective farms to be private, and it turned out that between 45% and 75% of all food in the USSR was the product of that 3% of private farms.

So, in conclusion, Cosmides noted that there is a mismatch between the ancestral and modern worlds, our minds evolved to navigate family and friends and small groups, certain laws and institutions satisfy the moral intuitions these programs generate whereas other laws and institutions regularly fail in the modern world. Cosmides concluded: “Liberty provides the solution to most social problems, but few appreciate it because of our evolved minds.”

The second talk of the day was by Dan Mitchell, the Cato Institute expert on tax reform, supply-side tax policy, the flat tax, and tax competition. His talk was titled: “America’s Looming Fiscal Meltdown.” We are shifting to a European size welfare state, he noted, dolling out blame to both Democrats and Republicans, starting with George W. Bush, who Mitchell noted in his eight year term increased the Federal budget from $1.8 trillion to $3.5 trillion budget, and then noted Obama says he wants change to even more government, adding another trillion dollars to the budget in his first term, if not more. Mitchell also busted the myth that Bush increased the budget for natural security after 9/11. Not true, he said: most of it was for pork projects for his political cronies.

Mitchell then noted that Keynesianism is bad theory: borrow money and then give it to people so they will spend it — but moving money from the right pocket into the left pocket does not produce more wealth; it’s just redistribution. It does not increase wealth. Only free markets can do that. And in any case, where does the government get the money to redistribute? From us! But they take their cut as the middleman, and therein lies the problem. Bigger government did not work for Hoover or Roosevelt, and all that federal spending to get us out of the depression did not work: we did not get back to 1929 GDP levels until WWII. Neither did federal stimulus plans work for Presidents Ford or Bush I during their recessions, and Keynesianism failed utterly in Japan during the 1990s, when its national debt went from 60% of GDP to 150% of GDP. I.e., Keynesianism does not work, and yet politicians on both the right and the left insist that the only reason it doesn’t work is because: “government isn’t spending enough.” Wrong!

We are on the road to serfdom, says Mitchell, as our federal spending is projected to jump from 22% of GDP today to 45%–55% of GDP in the coming years (mostly because of Social Security, Medicare, and Medicaid). Unless our GDP doubles along with federal spending (it won’t) the collapse is coming. Well, not a collapse, per sey: America will not become Argentina or Zimbabwe. But we will become France: instead of growing 2.5–3% a year, we’ll grow 1–1.5%, a difference that has enormous long-run implications, lowering per capita GDP 30–40% below what it otherwise would be. More spending means more taxes: more income taxes, payroll taxes, death taxes, double taxation of dividends and capital gains. And this doesn’t work. In 1980 Ronald Reagan cut the top tax rate from 72% to 28%, and between 1980 and 1988 the number of rich people (millionaires) rose from 116,800 to 723,700, and their share of paying for the federal government rose from $19 billion in income taxes to $99.7 billion in income taxes. In other words, lowering taxes on the rich generates more revenue for the federal government, which is counterintuitive.

In the end, however, there are moral consequences to such economic decisions. Mitchell: “Today there are over 2 million people in America who completely depend on welfare: prisoners; well, the welfare state is a prison for the human soul.”

Let’s dispense with the “deregulation” myth right here. The list of new regulations called the Federal Register averaged 72,844 pages during the Carter administration, 54,335 pages during Reagan’s presidency, climbed to 59,527 pages for Bush the First, escalated during the Clinton years to 71,590 pages, and set an all-time record during Bush the Second at 75,526 pages, supposedly the era of deregulated markets run amok. So much for the Republicans as the party of government nonintervention.

It gets worse. The number of full-time U.S. government employees in regulatory agencies increased 63 percent between 1980 and 2007, from 146,139 to 238,351, while U.S. government spending on regulating the market tripled from $13.5 billion in 1980 to $40.8 billion in 2008 (in year-2000 dollars for the comparison). During that time the population of the United States rose from 226.5 million to 301 million, an increase of 33 percent (compared to the 63 percent increase in regulatory employees). One final comparison: spending on regulation increased from 0.26 percent of GDP in 1980 to 0.35 percent of GDP in 2007, an increase of 35 percent.

By now your Baloney Detection Devices should be going off. “Hey, wait a minute Shermer, you’re throwing out figures for general regulation and we’re talking about the regulation of the financial industry.” Okay, fair enough. In point of fact, the biggest growth in regulatory spending came in the form of national defense — so called “homeland security” — where spending quintupled from 1980’s $2.9 billion to 2007’s $16.6 billion (again, in year-2000 dollars for comparison).

But the second-largest rate of growth in regulation was in finance and banking, where regulatory spending increased from $725 million to $2.07 billion from 1980 to 2007 (in year-2000 dollars), nearly triple. And there is a cry for more regulation? Please!

If deregulation is not the problem, then what is? The current economic collapse is due to a concatenation of natural business cycles, black swan contingencies, and government intervention into the housing and financial markets — most notably the Clinton administration’s drive to achieve an “ownership society” that forced Freddie Mac and Fannie Mae to lower interest rates on high risk loans — which triggered the collapse of the housing and financial markets, and with them the rest of the economy.

The good news is this: In time the economy will recover. It always does. Don’t regulate. Be patient.

In the midst of our financial crisis it was inevitable that there would be references to the 1987 film Wall Street, in which Michael Douglas’s character Gordon Gekko explains what really drives market capitalism: “The point is, ladies and gentleman, that greed — for lack of a better word — is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind. And greed — you mark my words — will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”

Is greed good? Bad? Consider an analogy. Would sports’ writers say that Lance Armstrong, Michael Phelps, and Kobe Bryant are greedy in the same way that pundits describe financial officers, professional traders, and home flippers? Of course not. The whole point of competing in sports is to do the best you can and to win within the rules established by the governing sports organizations. In fact, if you are not greedy in the sense of wanting to succeed in your sport, you will likely be cut from the team. It is in the nature of sports for athletes to greedily desire to succeed and win.

The analogy holds for everyone in the marketplace — from you and I as shoppers and home-buyers looking for the best bargain we can find, to corporate CEOs and Wall Street traders looking for the largest profit they can attain. The whole point of shopping and investing, in fact, is to do your best to succeed and win — defined by finding better deals and making more money — within the rules established by the organizations governing the marketplace. We should no more blame greedy home buyers, loan officers, and stock traders for the current financial crisis than we should blame individual athletes for making so much money playing sports.

Who should we blame? The organization governing the marketplace — the government — for interfering with the normal signals of risk. Let me explain.

People and corporations are normally risk averse. Behavioral economists who study risk aversion have discovered that most people will reject the prospect of a 50/50 probability of gaining or losing money, unless the amount that can be gained is at least double the amount that can be lost. That is, people feel worse about the pain of a loss than they feel better about the pleasure of a gain. Twice as worse in fact.

Since corporations and financial institutions are run by people, they should show the normal risk aversion when investing money and granting loans. Why didn’t they? In short, the risks were removed or delayed by government intervention. Fannie Mae and Freddie Mac, for example, do not make loans directly to customers — they buy loans from banks who make those loans directly. The more removed the direct risk is from the brains of those granting the risk, the less risk averse they will be.

Well, a remarkably prescient September 30, 1999 article in the New York Times, entitled “Fannie Mae Eases Credit To Aid Mortgage Lending,” reported that the Fannie Mae Corporation began a program that spring to encourage banks “to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.” Why? According to the Times, “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.” In point of fact, in July of 1999 the Department of Housing and Urban Development insisted that Fannie and Freddie increase their portfolio of loans made to lower and moderate-income borrowers from 44 percent to 50 percent by 2001.

Now, there’s nothing wrong with corporations taking higher risks — whether under political or profit pressure — as long as they adjust for it by charging more. The higher price acts as a risk signal to keep the market in balance. This is what Fannie Mae was doing by only purchasing loans that banks made charging three to four percentage points higher than conventional loans. But under the new program implemented in 1999, higher-risk people with lower incomes, negligible savings, and poorer credit ratings could now qualify for a mortgage that was only one point above a conventional 30-year fixed rate mortgage (and that added point was dropped after two years of steady payments). In other words, the normal risk signal sent to high risk consumers — you can have the loan but it’s going to cost you a lot more — was removed. Lower the risk signal and you lower risk aversion.

When sports governing bodies either relax the rules or fail to enforce them (think of steroids in baseball or doping in cycling), it signals to the athletes that there is little risk in pushing the boundaries of the sport. Lowering the risk aversion encourages gaming the system, and once the top competitors do it, everyone else in the sport has to do it just to compete. The result is a catastrophic collapse in the integrity of the sport.

Analogously, when the government encourages corporations to relax the rules of financial transactions, and then signals to them that if the system fails it will bail them out (as the government did when it rescued the savings and loan industry in the 1980s), it signals to the players in the marketplace that there is little risk in pushing the boundaries of the market. Lowering financial risk aversion encourages gaming the system, and once the top corporations do it, everyone else has to do it just to compete. The result is what we have today.