via Time, Senator Paul's op-ed about the battle to end Obamacare. He explains the "arcane" processes of the Senate to clarify that it will require much more than an up-or-down vote. He then goes on to opine:
Congressional leaders are now engaged in a misguided attempt to attach Obamacare repeal to a budget that increases spending, increases debt and does little to nothing to fix our fiscal mess.
There is no reason for this. Often up here we are told, “We need the White House to cut spending and debt.” Well, we have that now, along with total control of Congress.
Then the next excuse often is “we need 60 votes to get anything past a Democrat Senate.” Well, this is the one case that is not true. All budgets require only a simple majority of 51 to pass. Not a single Democrat vote is needed in either the House or the Senate to pass a budget that cuts spending and taxes.
He clarifies his position:
"I am taking this stand — I will not vote for any budget that doesn’t have a plan to balance, regardless of what is attached to it and I’m calling on other conservatives in the Senate to take the same stand. Let’s repeal Obamacare, and let’s do it with a budget that leads us to balance in the near term."
The late Sir George Martin [producer and arranger of The Beatles] created substantial British exports. Had the import of his music to America been banned to save the jobs of US musicians, Britain would have missed out on some revenue but the American consumer would have been the biggest loser, missing out on the music. Trade benefits the importing country: that’s why it happens.
Frankly, we might as well be living in the 17th century, so antiquated are our current debates over trade, both here over Brexit and in America over the presidential nominations. Many current assumptions about trade were debunked more than two hundred years ago and then tested to destruction in the mid-19th century.
In the 17th and 18th centuries European governments were in thrall to “mercantilism”, the belief that the purpose of trade was (roughly) to push exports on to other countries in exchange for cash and so build up a surplus of treasure with which to pay armies to fight wars. So they sought to restrain imports with tariffs and bans, while encouraging exports with monopolies and gunboats. Britain’s Navigation Acts after 1651, and the chartering of companies such as the East India Company, were part of this policy.
Along came Adam Smith and made a different argument, that mercantilism punished consumers and the poor, while rewarding producers and the rich; that imports were a good thing because they raised people’s standard of living by giving them what they wanted at lower prices. With money to spare, consumers bought more things from producers, creating jobs and generating prosperity. If bread was cheaper, people could afford more textiles. Gradually, with the help of David Ricardo and John Stuart Mill, Britain was persuaded of this and by the time Robert Peel, William Ewart Gladstone and Richard Cobden were in charge, Britain had declared unilateral free trade and dared the world to follow.
[...]
It is true that unilateral declarations of free trade, while benefiting everyone as consumers, can hurt those producers who have previously been protected from competition by tariffs and other barriers. Because the pain is more concentrated than the gain, their voice is louder, and Donald Trump and Bernie Sanders have been amplifying it. (America has never been as convinced by the free trade case as Britain: its infamous Smoot-Hawley tariffs of the 1930s worsened the depression and hastened war.)
Yet the effect of trade on jobs is no different from the effect of innovation. Just as imported Chinese goods have destroyed the jobs of British manufacturers, so threshing machines destroyed the jobs of farm labourers, washing machines destroyed jobs in laundries and Uber will destroy the jobs of taxi drivers, yet everybody was net better off.
[...]
Governments should certainly compensate people for locally destructive effects of changing trade or technology, but not by raising barriers against imports. That just punishes consumers and stifles economic growth.
Ridley denies that the
... European single market is a free trade area. It’s not: it’s a customs union — a fortress protected by an external tariff. And it’s shrinking as a share of world trade.
Ridley thinks, the UK would be better off after a Brexit:
Professor Patrick Minford of Cardiff Business School argues in a recent study that the single market distorts Britain’s economy, making us “produce more of what we are worst at and less of what we are best at, while our consumers have to pay excessive prices”. If Britain left the EU it would gain about 4 per cent of GDP as a result, he calculates.
While the affordability of immigration may be waning in the recipient countries, it is increasing precipitously among the people prone to emigrate.
When a poor country starts to become richer, its emigration rate soars – until it’s a middle-income country, like Albania. Only then does extra wealth mean less migration. [...]
‘As the benefits of economic growth are spread in Mexico,’ Bill Clinton once assured Americans, ‘there will be less illegal immigration because more Mexicans will be able to support their children by staying home.’ When José Manuel Barroso led the European Commission, he made the same argument, saying that third world development would tackle the ‘root causes’ of migration. In fact, the reverse is true ... [...]
[G]lobal poverty has halved over 25 years. The poor world is becoming richer, so people are on the move. War acts as a catalyst; far more of those affected by violence have the means and inclination to flee. But globally, there is less war and less poverty than at any time in our history. The Great Migration should be understood as the flip side of the greatest triumph of our age: the collapse in global poverty.
Study after study shows this to be the case. When aid was given to poor rural Mexican villages in exchange for occupants attending school and health clinics, it led to them leaving rather than staying.
Theresa May is right in saying that when middle-income countries become richer, the migration rate falls. But even the politicians who make this caveat talk as if this process a short-term thing. In fact, it takes generations.
[...]
In 1948, the UK government passed the British Nationality Act allowing all 600 million of Commonwealth subjects to live and work in Britain. Here’s Andrew Marr, in his superb History of Modern Britain:-
“It was generally assumed that the Black and Asian subjects of the King would have no means or desire to travel to live in uncomfortable, crowded Britain. Until the fifties, so few black of Asian people had settle in Britain that they were often treated as local celebrities. Officially, it was not even considered worth while trying to count their number.”
Indeed, hardly anyone took up this offer; even during the partition of India, which claimed a million souls and displaced ten times as many, there was no clamour to seek refuge here. The Indians and Pakistanis were far, far poorer than they are today – but that’s the point. They were so poor that not many could afford to come to Britain, not many had means of finding out that a better life was available. Why go to this cold, wind-battered island – which itself was losing people to the New World?
In 1951, the UK signed the UN Refugee Covention saying that we’d shelter anyone–anyone!—with a well-founded fear of persecution. Such offers were easy to make, then, because no one really had been showing up [...]
Official policy in Europe is based on a misdiagnosis. The migrants are treated as refugees, [they hail] from countries that we never bombed — except with aid money.
Vast as the numbers are, this is just the start. More than a million settlers — some estimates say a million-and-a-half — entered Germany in 2015. [...]
The European Commission says that 60 percent of those entering the EU illegally are economic migrants rather than refugees; but it has no idea how to return hundreds of thousands of sans-papiers — or where to return them to. Sweden admitted 163,000 entrants last year. Its interior ministry now says that more than half of them are not genuine refugees.
Paul Solman: But how are negative interest rates supposed to work?
Mohamed El-Erian: Let me tell you the theory, and let me tell you what happened in reality. The theory is that if you take interest rates negative, people like you and me are going to say, “That’s a silly game! I’m not going to lend my money to governments who want me to pay them. I am going to go into the stock market where I can get positive returns!”
Paul Solman: Or if I’m a company, “I’m going to invest in some new technology or factory or something.”
Mohamed El-Erian: Correct. The idea is to push households and push companies to take on more risk. In one case, financial risk — the stock market — in the other case, economic risk. Economic risk is investing in, say, plants and equipment. So let’s look at the first one. You take financial risk, you push up the price of stocks.
Paul Solman: Of which has certainly happened.
Mohamed El-Erian: Which has happened. You and I then open a 401(k), and we say, “Wow, we’re richer!” In theory, we trigger what economics call the wealth effect. Because we feel we’re wealthier, we go out and spend more.
As we spend more, and as companies are pushed to invest, they say, “Hey wait a minute! There’s more demand in the system. Let’s invest more.”
And then the third element is that if you happen to be the only one with negative interest rates, you also weaken your currency, which means you make your exports more competitive.
Quite a useful survey. Continue to read at the source. For another Q&A on negative interest rates see here.
I've divided this graph up into "net tax payer states," "break-even states" and "net tax receiver" states. The lightest shade of blue are states that, by far, pay in more than they receive back, such as New Jersey and Minnesota. The next lightest shade of blue are states that are more or less "break even" in the sense that spending and tax collections hover somewhat around a 1-for-1 relationship. The darker blue states are states that receive considerably more in federal spending than they pay in taxes.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” – Ben Graham
Optimism always struck me as the quintessential American quality. To be sure, I have in mind an optimism that is accompanied by many other welcome qualities, such as open-mindedness, industry, a knack for uncomplicated handling and cooperativeness, non-nonsense vigour and so on. Of course, these are idealisations, but they are not figments, as an optimist from Nebraska reminds us:
Berkshire as a corporation, and we as individuals, have prospered in America as we would have in no other country. Indeed, if we lived in some other part of the world and completely escaped taxes, I’m sure we would be worse off financially (and in many other ways as well). Overall, we feel extraordinarily lucky to have been dealt a hand in life that enables us to write large checks to the government rather than one requiring the government to regularly write checks to us — say, because we are disabled or unemployed.
1998 Shareholder Letter
Our country’s dynamism and resiliency have repeatedly made fools of naysayers.
2003 Shareholder Letter
In no way does our thinking about currencies rest on doubts about America. We live in an extraordinarily rich country, the product of a system that values market economics, the rule of law and equality of opportunity. Our economy is far and away the strongest in the world and will continue to be. We are lucky to live here.
2004 Shareholder Letter
The U.S., it should be emphasized, is extraordinarily rich and will get richer.
2005 Shareholder Letter
I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase.
2006 Shareholder Letter
Without fail, however, we’ve overcome [challenges to our country’s future]. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.
2008 Shareholder Letter
Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.
Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective. We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.
2010 Shareholder Letter
Wise monetary and fiscal policies play an important role in tempering recessions, but these tools don’t create households nor eliminate excess housing units. Fortunately, demographics and our market system will restore the needed balance – probably before long. When that day comes, we will again build one million or more residential units annually. I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America’s best days lie ahead.
2011 Shareholder Letter
A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).
American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor.
2012 Shareholder Letter
Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.
2013 Shareholder Letter
Indeed, who has ever benefited during the past 238 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real per-capita U.S. output has sextupled. My parents could not have dreamed in 1930 of the world their son would see. Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to emigrate (though I can think of a few for whom I would happily buy a one-way ticket). The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.
2014 Shareholder Letter
It's an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.
That view is dead wrong: The babies being born in America today are the luckiest crop in history.
American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.
Some commentators bemoan our current 2% per year growth in real GDP – and, yes, we would all like to see a higher rate. But let’s do some simple math using the much-lamented 2% figure. That rate, we will see, delivers astounding gains.
America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children.
Indeed, most of today’s children are doing well. All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do.
Although the current low oil price is bankrupting many producers and explorers in North Dakota and elsewhere, and many rigs are now standing idle with jobs being lost, there has only been a very modest fall in production.
That is because the technology for getting oil out is improving rapidly and the cost is falling fast, so some producers can break even at $30 or even $20 a barrel and it takes fewer rigs to generate more oil. It is one of the cruel features of innovation that it usually benefits the consumers more than the inventors.
This means the shale industry can now put a lid on oil prices in future. Aguilera and Radetzki argue that not only is the US shale industry still in its infancy, but that there is another revolution on the way: when the price is right, conventional oil fields can now be redrilled with the new techniques developed for shale, producing another surge of supply from fields once thought depleted. They also expect that other countries — beginning with Australia, Argentina, China and Mexico — are ripe to join the technology revolution begun in American shale.
Discovery through political competition is not without risks, and it cannot guarantee the absence of severe error, but it is still the best way (1) to incorporate knowledge generated in civil society, (2) to keep politically dominant views exposed to ongoing corroboration, and (3) to include the largest possible number of interest groups in the permanent sequel of repeated games that produce effective trust in society, thus bringing about the dynamic equilibrium of dissension and pacification which defines feasible freedom.
Monadic Rights versus the Constant Rewriting of the Social Contract
Classical liberalism tends to misunderstand or ignore the political logic of freedom, owing to a monadic conception of the rights underlying personal freedom. In theory, these rights are absolute, immutable, and monadic, i.e. attached to and owned by the individual in inalienable form. Under feasible freedom, however, people, in exercising their liberty, negotiate and renegotiate these rights, both in politics and in private transactions. Free citizens constantly renegotiate new permutations of feasible freedom, thereby constantly rewriting the social contract.
Open Discovery Processes Underlying Economic and Political Freedom
We detect an unexpected and rather incongruous similarity of deficiency in socialist ambitions for central planning and liberal calls for a depoliticised society. Both desiderata are based on incomprehension of a vital spontaneous order which concerns politics and the state in the case of liberalism and also the economy in the case of socialism. Both political camps underrate or misconstrue the need and the logic of the indispensable discovery procedures required for strong economic performance (socialism's defect) and the feasibility of civil society at large (classical liberalism's defect).
Search by Free Persons versus Automatisms
As there is no single person or group of persons capable of registering all inputs needed to calculate an efficient allocative distribution, Hayek suggests inclusion of all citizens in a free economy to approximate far better the needed range and quality of information. Analogously, no single person or group of persons is capable of registering the inputs needed to take better political decisions than are available from a regime that guarantees the possibility for all citizens to make their contribution to political decision making. Incongruously, liberalisms akin to Hayek’s insinuate the equivalent of an impersonal central planer by suggesting that observance of certain rules activates automatisms in a free society, notably the market mechanism and the rule of law, that reduce the need of politics to such an extent as to render freedom a state of affairs distinguished by the absence of significant levels of politicisation - a visionary predilection that amounts to the disenfranchisement of the public.
Decentralisation versus Disenfranchisement
A free society, I contend, is akin to a free economy, in so far as only the mobilisation of dispersed knowledge lodged in decentralised units (citizens and their organisations) can bring about a discovery process capable of sustaining human relations that make freedom feasible.
Freedom's Boundaries of Contingencies
Liberalism cannot fulfil its role in a free society unless it acknowledges that its leadership in matters of constitutional integrity does not carry over into the area of legitimate political discretion. And liberalism must recognise that within the boundaries of constitutional integrity there is substantial leeway for political discretion by players of quite distinct emphases of vision. Freedom remains an open-ended project.
Feasible Freedom - A Dynamic Equilibrium Balancing Dissension and Peaceableness
In order to establish her meaning and detailed shape, liberty depends on a political infrastructure that engages contestants in a competitive discovery process that is likely to result in eclectic policy outcomes deviating from puristic ideological positions. Adaptability is a survival requirement for any agent participating in the political discovery process. Puristic ideologies fail to stay in touch with the diversity of interests and views that push toward concrete policies. Feasible freedom may be conceived of as a dynamic equilibrium balancing dissension and peaceableness. Approximating the balance requires that the competing agents continuously search for new information about the prospects of their agendas, swiftly adjusting the latter to sustain support and the power to exercise influence. Precise and consistent accounts of freedom such as endeavoured by classical liberalism play an important role in clarifying the rules of the discovery game and the inalienable contours of freedom, but they are too abstract and too general to be able to prejudge the differing aims that people ought to be free to pursue within the competitive political framework of an open access society. Ideologies lend impetus to freedom’s sine qua non: discovery by political competition, but they do so fruitfully only when being capable of changing and renewing themselves in response to the findings elicited by the search.
The success of politics under feasible freedom is to be judged by the ability to balance dissension and peaceableness under the auxiliary conditions of high levels of personal autonomy, productivity, and wealth. We may register good performance and even progress along these lines in the very presence of states of affairs that appear insufferable from a classical liberal point of view. But it should not be forgotten that classical liberalism is just a set of hypotheses, some of which are rejected by freedom. Freedom is not identical with liberalism. Freedom is not identical with liberalism‘s account or expectations of her.
In an unpublished paper entitled "The Paradox of Freedom - Austrian Thought and the Crisis of Liberalism," I argue as follows below. In this preface-comment, I refer to the quote by Armen Alchian, in the second paragraph below.
Political Overload versus Irreducible Politics
In arguing that markets need politics to be viable, I recommend that we differentiate between
illicit or inefficient political blockages to the market order such as rent control, let us call it "political overload,"
and
the fact that economic activities are always embedded in and permeated by outcomes from political action, which circumstance one might call "irreducible politics,"
as when, say, a new market (in securities or fish) is established, requiring innumerable political decisions: who is to be admitted to it - as supplier, as consumer, as arbiter etc - which rules are to be adhered to, by whom, who is entitled to ratify any such rules and so on.
The distinction between "political overload" and "irreducible politics" is important. Unlike Armen Alchian seems to insinuate below, it is not true that there is a unilateral, ongoing, and irreversible displacement of economics by politics - political errors such as rent controls do get revoked, and large areas of economic activity are constantly kept free from political blockage.
Markets Depend on Outcomes of Political Contestation
At the same time, the very feasibility of markets depends on the outcomes of political contestation, which is not only true for the detailed structure of, say, a stock exchange (which may be favoured by securities firm A more than by securities firm B) but also for the return of a rent-controlled housing sector to a situation where market forces have more room to operate (a situation which may have become possible only because ways have been found to negotiate new legislation concerning the obligations and duties of landlords and tenants.)
So, we had better discern
market roll-back via dysfunctional "political overload"
from
inevitable and seminal constitution of markets by acts of "irreducible politics."
Good markets depend on "irreducible politics," and they are damaged by "political overload."
7.1 Why Markets Are No Substitute for Politics
A market transaction presupposes not only that two parties have recognised a mutually advantageous trading opportunity, but also that there is no internal or externally imposed conflict between them that inhibits exchange. A market transaction does not create concordance between the trading parties; rather it presupposes the compatibility of their respective interests and the possibility of peaceful exchange. Market transactions are not a means to overcoming conflict, instead they are being engaged in to take advantage of mutually complementary benefits already present, when no conflictive circumstances prevent them from transacting with one another. By contrast, elections, for instance, though in principle they may register (not create) unanimity, i.e. complete concordance, are preponderantly a procedure resorted to in the face of conflict and disagreement, and are intended to serve as a means of mitigating rivalry. Political scarcity occurs when concordance is scarce. Elections are one of the means tried to attenuate the inconvenience, nuisance, or blatant danger of unresolved disagreement in a group of people. In a large class of cases, when we are faced with political scarcity, we cannot help but apply non-market procedures. These may be rather imperfect, but comparing them to a spurious ideal is not helpful. Politics is about managing rivalry and compromise. Markets are about bringing together perfectly fitting interests. Politics and the state are more fundamental than economics in that they are instrumental in controlling more factors vital to individuals and humankind than can be achieved by “well-behaved” market transactions. The options for economic behaviour are set by politics and the state.
Writes Armen Alchian:
“I know of no way to reduce the prospective enhancement from greater political power-seeking, but I do know ways to reduce the rewards to market-oriented capitalist competition. Political power is dominant in being able to set the rules of the game to reduce the rewards to capitalist-type successful competitors. It is rule maker, umpire, and player … But I have been unable to discern equivalently powerful ways for economic power to reduce the rewards to competitors for political power!”
Economic Reason versus Political Reason
I am no longer sure I can accept the apodictic tone of Alchian's conclusion. As if there had never been an election dominated and decided by the electorate's economic preferences (in favour of greater market orientation). Moreover, while e.g. the advantages of short-term populism may provide a strong incentive for politicians to disregard economic rationality, government has also strong motives to foster or preserve its economic base.
The political infrastructure of a free society is intended to and capable of resisting encroachment through "political overload." Thus, I know of cases, where firms were able to get politics to revoke legislation that would have killed a market or made its inception impossible.
And, of course, not every market that gets established is a good thing or free from unseen repression (of competitors and better market arrangements etc). In areas where private firms negotiate the political framework of a market (say, by defining a worldwide standard for certain electronic gadgets), there is no intrinsic advantage in being a non-public entity as far as political conflict is concerned. There are plenty of "private" reasons to wish for a standard different from that favoured by one's competitors. Also, as Adam Smith would readily confirm, privately established "markets," are subject to insalubrious temptations to collude or harm outsiders or the public in other ways.
And then, there is the wide field of pluralistic indeterminacy, the fact that we must come to final policy outcomes in the face of irreconcilable differences among the many concepts defining economic desiderata. "Keynesians" argue that "Neo-Liberals" seriously harm the public by non-intervention in markets, adhering thereby to a wider definition of markets that incorporates hallmarks which the "Neo-Liberals" disapprove of, and vice versa, with "Neo-Liberals perceiving Keynesian "Public Goods" as "Public Bads" and Keynesian "markets" as "non-markets."
Under any circumstances, we will be confronted with diverging visions of "the right economy," no matter how free a society is - in fact, the freer a society, the more likely is widespread dissension.
In that sense, dealing with economic disagreement, so as to establish and sustain a common base for tolerance and legitimacy, is prior to economic insight, which is subjective and partisan. We cannot establish a total consensus on the right economic policy, but we can make us all coexist reasonably well in the absence of such a consensus, which is an important precondition for a society with reasonably free markets, and by itself represents a political achievement that is required before any variant of more or less free markets can be enforced.
8. SO1 Subset of SO2
The spontaneous order of free markets (SO1) does not cover all evolutionary adaptations serving to deal with challenges arising from human interaction in large communities. It is a different sphere of spontaneous order (SO2), precisely the area ignored by Hayek as an object of research into self-generating order that provides the substratum in which SO1 is embedded. Markets are a derivative of SO2, the spontaneous order of politics and the state, in which conditions may or may not evolve that are sufficiently peaceful and tolerant of the individual to allow for voluntary and mutually beneficial transactions of the type constituting free markets.
It is an illusion to think that markets create peaceful reciprocity; functioning markets always presuppose a political order that does well at managing political scarcity.
Within SO2 competitive processes develop to deal with contentious issues that can not be settled through the means of market exchange, especially regarding
• the cultural validity and political prevalence of rival values, objectives, and interests, as well as • the manner in which diversity and divergence of these fundamental convictions are to be managed so as to minimise violence and strengthen trust in a community in sufficient measure to make free markets and a civil society possible.
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