Of Pirate's Penance

   
     A black market is a kind of shadow free market. It's a shadow free market that persists in spite of the best efforts of law enforcement to eradicate it.
     Whatever you may think of it, there's a black market for recreational drugs in the United States. In fact, it's the world's largest such market, and its existence exerts a strong influence on the political economies of many nations.
     However, aside from the risks of drug abuse per se, deals concluded in a black market can be dangerous. It was the bright idea of a bright young thing named Ross William Ulbricht to create a website which he called "Silk Road" whose purpose would be to bring together sellers and buyers of contraband goods of all kinds in a safe and trustworthy environment using such recent innovations as untraceable digital currency, anonymous access to internet sites, email encryption, etc. Silk Road was a great success.
     Ulbricht operated clandestinely under a pseudonym; "Dread Pirate Roberts." Nevertheless, in October, 2014, he was arrested by an alphabet soup of government agents who caught him while he was logged into an administrative page of Silk Road at a public library.
     Since Ulbricht was operating pseudonymously, how had the g-men gotten on to him?

     Basically, what happened is he gave himself away. When he was astroturfing (a well-known online technique he used to drum up business for Silk Road), he used the same alias as when he requested technical help with a "venture-backed bitcoin startup company" and gave his gmail address as the contact. Or at least, that was the prosecution's explanation of how they found him.
     So, to summarize, one could say that, though the g-men did exhibit a certain level of familiarity with internet conventions and usages and were able to put two and two together in a moderately clever way, the crucial giveaway was provided by Ulbricht himself.
     Furthermore, although g-men were able to infiltrate Silk Road itself and even attain trusted positions in the administrative hierarchy, that wasn't how they were able to catch Ulbricht. He was indiscreet!

     In any case, the evidence on Ulbricht's logged-in laptop provided enough material for numerous trumped-up charges (all victimless crimes), and he was evidently concerned about his future prospects. The maximum sentence would be life. Accordingly, he wrote an abject letter to the judge prior to sentencing in which he stated (in part):

“Silk Road was supposed to be about giving people the freedom to make their own choices, to pursue their own happiness,” he said. “I learned from Silk Road that when you give people freedom, you don’t know what they’ll do with it . . . If I do make it out of prison, decades from now, I won’t be the same man, and the world won’t be the same place. I certainly won’t be the rebellious risk taker I was when I created Silk Road. In fact, I’ll be an old man, at least 50, with the additional wear and tear prison life brings. I will know firsthand the heavy price of breaking the law and will know better than anyone that it is not worth it. Even now I understand what a terrible mistake I made. I’ve had my youth, and I know you must take away my middle years, but please leave me my old age."

     Later, at his sentencing, he said "I wish I could go back and convince myself to take a different path. If given the chance, I would never break the law again."
     Some commenters have compared his remarks to the following passage:

"He gazed up at the enormous face. Forty years it had taken him to learn what kind of smile was hidden beneath the dark moustache. O cruel, needless misunderstanding! O stubborn, self-willed exile from the loving breast! Two gin-scented tears trickled down the sides of his nose. But it was all right, everything was all right, the struggle was finished. He had won the victory over himself. He loved Big Brother."

     Ross Ulbricht was sentenced to life in prison. But never fear, he'll undoubtedly come to understand that it was all for the best.

Will Uber Go Under?

     The idea occurred when one of its founders was unsuccessfully trying to find a cab in Paris. The result was Uber, one of the first companies to experiment with peer-to-peer ridesharing. The way it works is a person who wants a ride downloads the Uber app onto his or her smartphone (or laptop). When that person wants a ride, he or she taps the Uber app on the smartphone. Uber detects the rider's location by GPS and dispatches a car. The car is driven by its owner, who is willing to give people rides for compensation. The person who requests a ride is informed how long it will be before pickup. Car and driver details are also available. Estimated fare can be obtained by inputting the pickup and drop-off locations. Payment is via pre-recorded credit card---neither the driver nor the rider need to carry cash. Both drivers and passengers rate each other after the ride. If more than one person rides at the same time, they can split the fare and each credit card will be charged equally.
     Uber has encountered resistance from various quarters.
     1) Most jurisdictions in which Uber has attempted to operate have declared Uber illegal on the grounds that Uber drivers aren't licensed to perform ridesharing. The counter-argument is that there are no regulations with regards to ridesharing.
     2) Taxi cab associations have protested that Uber is competing unfairly, since Uber is not subject to registration fees and other regulatory hurdles. The counter-argument is that the taxi cab concept and modus operandi is outdated by software and smartphone technology.
     Recently, a new challenge to the Uber concept arose in California. Uber considers its drivers to be independent contractors. But what if they aren't?

     "Historically, the line between employee and independent contractor has been easier to draw. In California, independent contractors are generally treated as workers who serve multiple clients, have a high level of control over their work, and complete specific jobs over a limited period of time that fall outside the usual scope of their current employer’s business. Employees, by contrast, tend to be employed, supervised, and paid for a long period of time by the same one or two employers; their hours are more regular, and the way they do their work is more regimented. The legal problem for Uber and Lyft is that, by these standards, their drivers seem to fall squarely in the middle. Their hours are flexible—but only to a point. Uber, for example, has threatened to suspend the accounts of drivers who accept less than 90 percent of rides. The same is true of drivers’ control over their work. Uber and Lyft might not make drivers wear uniforms, but the companies do instruct them on other points—how to interact with passengers, what kind of music to play during rides—and threaten to deactivate drivers who don’t meet standards."

     Uber is actually being sued by drivers who claim that Uber is responsible for paying such expenses as gas and vehicle maintenance. And, if the jury decides that they are employees, Uber is on the hook for FICA, etc. That could be a big hit.
     Regardless of how Uber fares, ridesharing technology is too popular and rational to ban completely. It's been interesting to note that Uber can still operate its business in areas where it has a quasi-legal (or even illegal) status. Now that's what I call a characteristic of the shadow free market!

Competing Currencies

     Money is supposed to have three functions: medium of exchange, store of value, and unit of account. The efficacy with which a good performs these functions is generally deemed to be related to the following characteristics: portability (ease of transport from one location to another), universality (can be used in as wide a geographic area as possible), divisibility (can be used for purchases in any amounts), stability (doesn't fluctuate in value), verifiability (easy to identify counterfeit money), durability, and fungibility (one unit of the money is identical to any other equivalent unit).
     While money and currency used to be synonymous, that is no longer true. Currency is now merely the tip of the money iceberg.

     It's generally regarded as part of the function of government to produce and regulate a nation's money supply, including the currency (mentioned in the U.S. constitution).    
     Enter the Liberty Dollar. Reference.

     The Liberty Dollar was created in 1998 by entrepreneur Bernard van Nothaus. It was a private currency that took the form of certificates, digital currency, and coins. The currency was backed by specified amounts of precious metals.
     However, beginning in 2007, Nothaus's operation came under attack by the federal government. In 2011, Nothaus was convicted by a jury of violating sections 485 and 486 of Chapter 25 of the U.S. Code. .
   
Title 18 of the United States Code, Pt. I, Ch. 25, Section 485:

     "Whoever falsely makes, forges, or counterfeits any coin or bar in resemblance or similitude of any coin of a denomination higher than 5 cents or any gold or silver bar coined or stamped at any mint or assay office of the United States, or in resemblance or similitude of any foreign gold or silver coin current in the United States or in actual use and circulation as money within the United States; or Whoever passes, utters, publishes, sells, possesses, or brings into the United States any false, forged, or counterfeit coin or bar, knowing the same to be false, forged, or counterfeit, with intent to defraud any body politic or corporate, or any person, or attempts the commission of any offense described in this paragraph - Shall be fined under this title or imprisoned not more than fifteen years, or both."

Section 486, Uttering Coins of Gold, Silver, or Other Metal:

     "Whoever, except as authorized by law, makes or utters or passes, or attempts to utter or pass, any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design, shall be fined under this title or imprisoned not more than five years, or both."

     Apparently, a dollar sign had been stamped on the coins, as well as the word "dollar" and "Trust in God." Furthermore, the prosecution argued that the Liberty Dollar was intended to compete with the U.S. Dollar. The rebuttal was that the Liberty Dollar had never claimed to be legal tender. Furthermore, it was argued that the Liberty Dollar was a medallion that could potentially be used as a "barter currency." 
     Note that when it comes to gold coins, even coins of original design are illegal if they're meant to serve as currency. This is in contrast to the issuance of paper bills/certificates which isn't illegal as long as the bills aren't "similar in size and shape" to U.S. government currency (Sec.491, Tokens or Paper Used as Money). And in fact, there have been numerous examples of private or non-federal currencies (some still in existence, such as BerkShares, Detroit Community Scrip, Ithaca Hours, etc.) that weren't prosecuted by the federal government,
     Why are metal coins treated differently in law from paper bills? Could it be that unintelligent or indifferent lawmakers created the inequity out of arbitrariness or inconsistent thinking? Or is there a reason why the government would want to ban competing currency in the form of precious metals? Hmm.
     Whatever else one may say about the Liberty Dollar, it certainly does provide an example of how easy it would be for the free market to provide a currency product.

Railroads

Reference reading

Reference reading

Transcontinental railroads of the 19th century were characteristic boondoggles of the hampered economy:

"While none would argue that transcontinentals would not become economically feasible in the private market at some point, during the 1860s, as the first transcontinentals took shape, there was no economic justification. This is why the first transcontinentals were all creatures, not of capitalism or the private markets, but of government. There simply were not enough people, capital, manufactured goods, or crops between Missouri and the West coast to support a private-sector railroad.

"As creatures of government and of taxpayer-funded schemes to subsidize the railroads and their wealthy owners through cheap loans and outright subsidies, the railroads quickly became scandal-ridden, wasteful, and contemptuous of the public they were supposed to serve. 

"This tale is told in grim detail in historian Richard White’s 2011 tome on the transcontinental railroads, Railroaded: The Transcontinentals and the Making of Modern America, which exposes the near-utter disconnect between the railroads and the true geography of the markets in the mid-nineteenth century."

      There was one important exception: the Great Northern Railway, constructed under the auspices of James J. Hill. In contrast to other railroad tycoons, Hill was a businessman, not a lobbyist. Through thorough knowledge of the detailed technical and financial underpinnings of the business, he gradually brought into existence the "only privately funded — and successfully built — transcontinental railroad in U.S. history."
      Given the greatness of Hill's achievement, one wonders what kept him from even greater accomplishments in the railroad industry. Actually, Hill did try to create a super-railroad stretching from Chicago to the West Coast: 

"Hill ... acquired control of NP with the intent of merging GN, NP, CB&Q and SP&S into a single railroad. As a start, he formed Northern Securities as a holding company, but the Interstate Commerce Commission (ICC) quickly ruled against such a merger. In 1927 the Great Northern Pacific Railway was incorporated to merge GN and NP and lease SP&S and CB&Q. The ICC approved the merger upon the condition that GN and NP divest themselves of the CB&Q — a condition the two Northerns were unwilling to meet.
"More than four decades passed before the merger went through on March 2, 1970 — with the CB&Q included and indeed half the name of the merged company, the Burlington Northern Railroad (BN)."

     In other words, the rationality of the merger finally triumphed over meaningless anti-trust legalism.
     However, with Hill's death in 1916 and the takeover and corporatization of all railroads in 1917, the Great Northern gradually became unremarkable in its operation or business results compared with other railroads.
     Now, for the counter-analyses and my rebuttals.
1. Hill received "valuable" land grants when he acquired the SP&P (forerunner of the GNR) in 1878 and the Minneapolis and St. Cloud in 1880. His success was built on the pioneering efforts of railroads that had tried and failed.
     But the land grants associated with the SP&P and the Minneapolis and St. Cloud were small compared to what other transcontinental railroads were given. Therefore, land grants can't reasonably be considered a factor determining success or failure of a transcontinental railroad.
2. Hill benefited from government negotiations with Indians for right-of-way permission.
     Except for the need to satisfy the requirements of unnecessary legalism, there's no reason why the GNR couldn't have negotiated directly with the Indians.
     The Great Northern Railway came into existence in a hampered market, with all of the baggage that entails. It was not and could never have been a completely untainted example of the workings of the theoretical free market. However, for a while, it was pretty close. Eventually, as one would expect, the GNR was absorbed into the corporatist system, but not before it had given us a glimpse into what a free market railroad might have looked like.

Shrimp Fishing, Property Rights, and the Tragedy of the Commons

     This post is off the topic of exchanges per se, but does continue the project of searching for manifestations of the free market that weren't allowed to manifest. For, as is well known, a free market entails the concept of property.

     The tragedy of the commons is the observation that ceteris paribus, no one has an incentive to preserve an unowned resource, and, on the contrary, everyone has an incentive to get as much of an unowned resource as quickly as possible (before others do), even if this has long-term detrimental effects on the existence of the resource. The remedy for the tragedy of the commons is property.

     Property is matter subject to human ownership. In order to own property, a human being must have the rights to use and determine who may use the property, earn income from the property, transfer the property, destroy the property, and enforce property rights. The right to enforce property rights, together with the incentive to preserve one's own property, is sufficient to ward off the depletion of a resource that occurs in the tragedy of the commons.

     In the corporatist system that we live in, fishing rights have traditionally, but illogically been excluded from being property and have instead been considered to be a res nullius---something that's free for all takers.

Read reference article #1
Read reference article #2

     In the aftermath of the Vietnam War, a large number of Vietnamese refugees were re-settled in the U.S.

"In the United States, immigration agents asked Congress to scatter the incoming refugees across the country in order to prevent 'ghettoism.' This resettlement policy led to the creation of Vietnamese communities in states such as Texas that had relatively little previous experience with Asian Americans. In Texas, many of the new arrivals, facing language barriers and having little capital, found opportunity in the Gulf Coast shrimping industry. 'We like the weather, we like the shrimping, we like a chance to start our own businesses...'"

     Conflicts arose between the American and Vietnamese fishermen. American fishermen

"... considered the Vietnamese fishermen's aggressive practices, such as following their competitors' boats to a catch, and unloading their boats across other boats' decks, to be unethical and unfair."

     The financial success of the hardworking Vietnamese fishermen was seen by white American fishermen to be

"... at the expense of the American Tax payer and a delicate fishing industry we used to take care of that they have wiped smooth out."

     General cultural differences and the fact that the Vietnamese fishermen spoke little if any English were factors that played no small role in the conflict.

     One interesting thing that I noticed while reading about this was that there was a de facto system of fishing rights in effect prior to the arrival of the Vietnamese fishermen.

"The families there had, for generations, set up their family areas."

     In other words, a process of Lockean homesteading had resulted in a locally-recognized system of ownership of fishing rights. Unfortunately for these owners, governments, state and federal, didn't recognize fishing rights as a thing that could possibly be owned, and Vietnamese fishermen were deemed by the legal system to have the right to fish in the res nullius fishing grounds of the Gulf Coast.

     Subsequent decline in shrimp, crab and other fisheries can be explained by the tragedy of the commons, though competition from foreign shrimp allowed Gulf shrimp a respite.

     To sum up, the free market is based on the idea of property. Without property there can be no such thing as exchange. To the extent that a hampered market functions at all, it too must entail property, though not necessarily in a consistent or just way.

     The actually-existing hampered seafood markets are a res nullius kept from collapse at taxpayer expense by poorly-functioning government regulations.

     The organic development of property in fishing rights that occurred in the Gulf prior to government intervention was a brief glimpse into the workings of a theoretical free market.

Direct Car Sales

Ever wonder why cars are sold through "car dealerships?" Maybe in the imaginary Bastiatian free market, they wouldn't be.

Read reference article

This example of a collision between the free market and the hampered market was found on Mish Shedlock's excellent website. Tesla’s direct sales strategy represents the Bastiatian free market (that's not allowed to exist) and car dealership lobbyists represent the hampered market that we actually live with.

Mish comments:

"Why should anyone need a franchise to sell anything? If Tesla, Ford, GM, or any car maker wants to sell cars on Ebay, through Amazon, or their own online site, why should anyone care?

And

If the buyer and seller think it's OK, of what business is it to the state of New Jersey, Texas, or Arizona?" 

Mish answers his own question:

Tesla doesn’t use car dealerships.  They sell directly to the consumer. No haggling, no upselling, no commission for employees, and uniform prices at every store.  You just point to the car, say “I want that,” and you buy it. It makes a lot of sense for Tesla.  Customers don’t like car dealers, and car dealers don’t like electric cars, so why would you try to sell an electric car to a customer through a car dealership?  It is capitalism – a producer of a good is responding to the incentives of the market.

But the car dealerships feared, perhaps correctly, that if Tesla Motors could sell cars directly to consumers, there would be no way to stop other car companies from selling directly to consumers.  And they got their way because they bought the laws they wanted, laws which prop up their outdated business model at the expense of Texas consumers and innovative entrepreneurs. 

Why? Well, the Texas Automobile Dealers Association lobbied hard against letting Tesla sell cars in Texas, spending $278,750 on Texas political campaigns – about 75% to Republicans.

In addition to the $278,750 from the TX Auto Dealers Assoc. Pac, the Texans for Public Justice website, shows $453,324 from Thomas Dan Friedkin of Gulf State Toyota, the $331,310 from Gulf States Toyota PAC, and $306,500 from B.J. 'Red' McCombs, of the Red McCombs Auto Group.

Read more at http://globaleconomicanalysis.blogspot.com/2014/03/corrupt-politicians-on-take-another.html#9IVlTtHumotAr5aW.99

My conclusion: in the imaginary Bastiatian economy that we don't live in, cars would be sold (at a lower price) on Amazon.

Introduction

Blog Purpose
     To interpret historical events using the paradigm of the "shadow free market."

Markets
     A market is an economic phenomenon characterized by a price system established via consensual exchanges between buyers and sellers. A "free market" is such a system not subject to political or hegemonic forms of non-consensual behavior (e.g. conquest, confiscation, legislation, etc.).
     A "hampered market" is one where political factors impose non-consensual exchanges or forcibly interfere with consensual exchanges. A further complication of the hampered market is that seemingly consensual, actually-occurring exchanges may not have occurred in the absence of imposed exchanges or in the presence of prevented exchanges. If a free market is a market where there is no institutional interference with consensual exchanges, it seems safe to say that most if not all markets have probably been of the hampered variety.

The Shadow Free Market
     I analyze historical phenomena from the point of view of what I call the "shadow free market." I define the shadow free market as manifestations of consensual exchanges of property that are eradicated, hampered, or driven underground by the state. The events that I choose to examine will also somehow be interpreted as highlighting the conflict between consensual and non-consensual modes of action characteristic respectively of the free and (to a greater or lesser extent) hampered markets.
     Furthermore, although one can't know for certain, I'll suggest that certain events in the actually-existing hampered market could have been manifested in a Bastiatian free market as well, and that the shadow free market paradigm is useful in understanding how consensual behavior functions in the actually-existing world.

Comments Policy
     Comments are welcome, but I publish only those comments whose content is potentially interesting to the blog reader (as judged by myself), or failing that, allow me to make a response whose content is interesting.