Don't Trust Cuban Health Care Statistics

Don't Trust Cuban Health Care Statistics

06/20/2018Ryan McMaken

We've long been told that Cuba's health care system is one of the greatest in the world. In spite of the fact that health usually correlates with wealth in national statistics, we're assured that Cuba's obvious poverty is offset, at least in part, by amazingly low infant mortality rates and life expectancy.

But in a new short article for the journal Health Policy and Planning, Gilbert Berdine, Vincent Geloso, and Benjamin Powell examine some of the ways that the data is being manipulated in Cuba to ensure better-looking health statistics.

For example, on the matter of infant mortality, doctors have been known to redefine dead infants as dead fetuses:

[There is] evidence that physicians likely reclassified early neonatal deaths as late fetal deaths, thus deflating the infant mortality statistics and propping up life expectancy. Cuban doctors were re-categorizing neonatal deaths as late fetal deaths in order for doctors to meet government targets for infant mortality.

Abortions of babies in utero who might die soon after birth is a tactic as well:

Physicians often perform abortions without clear consent of the mother, raising serious issues of medical ethics, when ultrasound reveals fetal abnormalities because ‘otherwise it might raise the infant mortality rate.’ ... At 72.8 abortions per 100 births, Cuba has one of the highest abortion rates in the world.

The focus on infant mortality may have led to increases in other types of mortality:

[T]hese outcomes come at cost to other population segments. The maternal mortality ratio of Cuba in 2015 was higher than in Latin American countries like Barbados, Belize, Chile, Costa Rica, Mexico and Uruguay ( Trends in Maternal Mortality 1990 to 2015, 2015). In terms of healthy life expectancy, Cuba ranked behind Costa Rica, Chile, Peru and Bermuda and marginally surpassed Uruguay, Puerto Rica, Panama, Nicaragua and Colombia

Some factors that have led to a more fit population have nothing at all to do with health care delivery:

[C]ar ownership is heavily restricted in Cuba and as a result the country’s car ownership rate is far below the Latin American average (55.8 per 1000 persons as opposed to 267 per 1000) (Road Safety, 2016). A low rate of automobile ownership results in little traffic congestion and few auto fatalities. In Brazil, where the car ownership rate is 7.3 times above that of Cuba, road fatalities reduce male and female life expectancy at birth by 0.8 and 0.2 years

Forced exercise helps:

[Another factor includes] forcing the population to increase their reliance on more physically demanding forms of transportation (e.g. cycling and walking) (Borowy, 2013). In fact, local physicians attribute a strong role to the massive introduction of bicycles in order to explain the decrease in traffic accidents mortality

So does making the population go hungry:

During the ‘Special Period’ (the prolonged economic crisis caused by the collapse of the Soviet Union), there were ‘sustained shortages in the food-rationing system’ that led to reductions in per capita daily energy intake (Franco et al. 2007). Combined with the increase in the levels of energy expenditures due to the reliance on physically demanding forms of transportation, this led to a reduction in net nutrition...this crisis led to the halving of obesity rates and, although one has to be careful in causal terms, this likely contributed to important reductions of deaths attributed to diabetes, coronary heart diseases and strokes (there were also increases in the number of cases of neuropathy).

As Berdine, et al point out, a key factor here is the unseen opportunity cost of mandating that more and more resrouces be directed toward health care at the expense of other sectors of the economy. Cuban central planners have decided that large amounts of national income be devoted to health care so as to improve (some) national indicators on health. But, given the choice, would Cubans choose to devote so much to health care?

Many advocates for government-directed health spending like to claim that health and longevity are the most important factors. But ordinary human behavior makes it clear this is not actually true. People routinely spend money on non-essentials like non-basic automobiles, large houses, and costly vacations when they could save that money for medical emergencies. Even in countries with so-called socialized medicine often have options for private supplemental health insurance — which would expand and improve quality of care for the purchaser. And yet few elect to use this option. Clearly, living as long as possible is only one value balanced against many others.

In light of this, can we conclude the Cuban government is hitting the "correct" amount of health care spending? Since each person's value ranking differs, this is obviously impossible.

Nevertheless, the Cuban healthcare system is clearly geared toward hitting certain goals arbitrarily set by government officials. This can lead to abuse, of course, and also to unreliable data.

RELATED: "Life Expectancy: If Denmark Were a US State, It Would Rank Equal To or Worse Than Sixteen US States

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Spooner: There Is No Treason in Self-Ownership

01/19/2019Gary Galles

For decades, Americans have been burdened with historic expansions in government control, including in areas earlier generations could not even imagine as possible. Such dictates violate Americans’ inalienable self-ownership.

That is why Lysander Spooner, born January 19, deserves renewed attention. Spooner laid out why our natural right of self-ownership, combined with its implied right to enter voluntary arrangements, made government coercion of peaceful people illegitimate. Since we have moved far away from that moral standard, we need to rediscover Spooner’s vision. In particular, his 1870 No Treason illuminates our situation:

  • That men may rightfully be compelled to submit to, and support, a government that they do not want…[is] self-evidently false…a man, thus subjected to a government that he does not want, is a slave. And there is no difference, in principle…between political and chattel slavery. [Each] denies a man’s ownership of himself and the products of his labor; and asserts that other men may own him, and dispose of him and his property, for their uses, and at their pleasure.
  • A man’s natural rights are his own…any infringement of them is equally a crime…whether committed by one man, calling himself a robber or by millions, calling themselves a government.
  • To say that majorities, as such, have a right to rule minorities, is equivalent to saying that minorities have, and ought to have, no rights, except such as majorities please to allow them.
  • The principle that the majority have a right to rule the minority, practically resolves all government into a mere contest between two bodies of men, as to which of them shall be masters, and which of them slaves.
  • How does [a man] become subjected to the control of men like himself, who, by nature, had no authority over him…as if their wills and their interests were the only standards of his duties and his rights…force, or fraud, or both.
  • A man finds himself environed by a government that…forces him to pay money, render service, and forego the exercise of many of his natural rights, under peril of weighty punishments.
  • Governments…[are] tyrannies to that portion of the people…compelled to support them against their will.
  • Getting the actual consent of only so many as may be necessary to keep the rest in subjection by force…is a mere conspiracy of the strong against the weak...a presumption that the weaker party consent to be slaves.
  • Government, like a highwayman, says to a man: “Your money, or your life.” [But] The highwayman...does not pretend that he has any rightful claim to your money, or that he intends to use it for your own benefit.
  • No government…can reasonably be trusted for a moment, or reasonably be supposed to have honest purposes in view, any longer than it depends wholly upon voluntary support.
  • If [governments] own us as property, they are our masters, and their will is our law. If they do not own us as property, they are not our masters, and their will, as such, is of no authority over us.
  • On what ground can those who pretend to administer [The Constitution] claim the right to seize men’s property, to restrain them of their natural liberty of action, industry, and trade…at their pleasure or discretion?
  • A tacit understanding between A, B, and C, that they will, by ballot, depute D as their agent, to deprive me of my property, liberty, or life, cannot at all authorize D to do so. He is…a robber.

In an era where what remains of our self-ownership is under continuous threat of further evisceration, Spooner’s clear-eyed understanding of it and its consequences provides an invaluable premise for our thinking. Being allowed to make our own choices and live our lives is no treason to any defensible idea of a government intended to advance the well-being of its citizens.

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Peter Klein and Nicolai Foss on Managers in Flat Business Structures

01/18/2019Mises Institute

The online magazine Aeon currently features an outstanding article from our scholars Peter Klein and Nicolai Foss on the trend toward "bossless" business structures. Far from being redundant middlemen, they argue, good managers are needed more than ever even in firms that aspire to flat, decentralized, and democratic organization. 

Klein and Foss challenge the idea that managers will become obsolete, replaced by self-directed and super connected knowledge workers:

This movement is gaining steam for a couple of reasons. First, the bossless-company model arguably captures some tendencies, however inaccurately. Second, it is very much part of the 21st-century Zeitgeist in its emphasis on personal development, resilience and fulfilment through empowering employees, and decentralised and democratic decision processes. There is also a strong moralistic and political undertone to the narrative; in Private Government (2017), the philosopher Elizabeth Anderson argues that firms are effectively totalitarian states, enjoying rights and privileges that would be unconstitutional for ordinary states to impose on their citizens. The historian Caitlin Rosenthal has argued that the factory system, hierarchy and managerial authority are partly derived from the slave system. What can be more morally defensible than getting rid of the remnants of slavery?

Unfortunately, the bossless-company narrative is dead wrong. It misunderstands the nature of management, which isn’t going away, and it is based on questionable evidence. Given these fundamental defects, this narrative is potentially harmful to managers, students and policymakers.

Are the benefits of technology in assembling and organizing modern firms oversold?

While technological miracles such as the internet, cheap and reliable wireless communication, Moore’s law, miniaturisation and information markets have induced sweeping changes in manufacturing, retail, transportation and communication, the laws of economics are still the laws of economics. And human nature hasn’t changed. The basic problem of management and business – how to assemble, organise and motivate groups of people and resources to produce goods and services that consumers want – is still the same. Since the industrial revolution, entrepreneurs have been organising extremely complex activities in firms that are neither completely centralised nor completely flat. Imagine the complexity involved in operating a national railroad, a steel mill or an automobile assembly plant in the 19th and early 20th centuries. These were all ‘knowledge-based activities’ and were conducted in teams organised in various structures. Are things so different today?

Their conclusion:

In short, today’s business landscape features exciting developments in information technology, networking and collaboration that have led to new forms of organisation, production and distribution. Far from making management obsolete, however, these changes make good management more important than ever. The shift from management as direction to management as making and enforcing the rules is slowly entering the management literature and the business-school curriculum. That’s a paradigm shift worth embracing.

 This is a must-read article for anyone interested in the very hot topic of business management in the 21st century.

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March and Simon: Early Socialist Calculation Revisionists

01/17/2019Nicolai J. Foss

It is now commonly recognized that the majority of the economics profession for about four decades held an erroneous view of the nature of the “socialist calculation debate.” In particular, the nature of the arguments put forward by Mises and Hayek were misconstrued.

Revisionism took off in the mid 1980s with the work of Peter Murrell (e.g., here) and Don Lavoie (e.g., here). From a mainstream perspective, Murrell argued that the Austrians had developed sophisticated insights in property rights economics and the agency problem and had applied these insights to the problem of socialist calculation. Lavoie highlighted the distintive Austrian knowledge argument in the calculation debate, in particular emphasizing Hayek’s contribution. A bit later, Salerno and others emphasized the distinctiveness of Mises’ contribution. Thus, whereas Mises stressed the need for a distributed process of entrepreneurial judgment in the context of a private ownership economy characterized by uncertainty, Hayek put more of an emphasis on the impossibility under socialism of harnessing and processing massive amounts of knowledge, particularly under dynamic conditions.

Between the 2nd Wold War and these works, there are four decades in which the dominant opinion held that the Austrians had been thoroughly defeated by the formal demonstration, particularly in Oskar Lange’s work, of the possibility of combining socialism and efficient allocation. A pertinent question is whether there were (non-Austrian) dissenters from this dominant view. To those well steeped in libertarian social theory, names such as Trygve Hoff and G. Warren Nutter come to mind. But apart from these, it would appear that it is not until the mid 1980s that the distinctiveness of the Austrian arguments in the calculation debate concerning knowledge becomes recognized.

However, an early contribution, unknown to most economists, that fully recognized the distinctiveness of the Austrian arguments, is the 1958 book Organizations by James G. March and Herbert A Simon, a book that many would regard as the seminal contribution to organizational theory and a milestone in the evolution of organizational theory (I have heard organization theory scholars remark that all org theory in the last five decades is just variations over March & Simon themes).

The discussion of the socialist calculation debate takes place in the final chapter, “Planning and Innovation in Organizations,” the main purpose of which is to “… contrast the concept of rationality that has been employed in economics and statistics with a theory of rationality that takes account of the limits on the power, speed, and capacity of human cognitive faculties” (1958: 172) — in other words, bounded rationality.

This theme is taken through a number of variations, one of which is the theory of planning, understood as both “national planning and intrafirm planning” (p. 200). March and Simon (1958: 201) argue that even if motivational problems can be solved, there are still planning (coordination) problems remaining. They note, echoing Hayek (1945), that if one person or group of persons possessed “… all the relevant information connecting possible courses of action with the utilities resulting therefrom, he or they could discover which course of action was best for the organization” (p. 201). An alternative is to make use of the price mechanism, for example, through the Barone/Lange idea of consistent marginal cost pricing throughout the organization. March and Simon note a number of difficulties with this proposal, such as the requirement that externalities be absent. More seriously, perhaps, they note that it is not clear how to make a choice between the alternatives of central planning and pricing, since modern welfare economics, including the Lange/Barone proposal, does not give any positive reason for preferring the one to the other.

This is where the Austrian arguments in the socialist calculation debate enter the scene. These are placed under the heading “The principle of bounded rationality” (p. 203), and, accordingly, March and Simon note that the “… argument of von Mises and Hayek (we will use the latter’s version) depends crucially on the limits of information available to humans and their abilities to use information in their computations.” In other words, Hayek argues that “given realistic limits on human planning capacity” (italics removed) a decentralized system will work better than a centralized one.

Thus, March and Simon present a sympathetic reading of the Austrian — mainly Hayekian — positions in the socialist calculation debate. In the context of Organizations, March and Simon also criticize the “Robbinsian” characterization of decision-making in mainstream economics (to use Kirzner’s terms) – that is, the given’ness of means and ends — and they stress that the understanding of behavior should be broadened to include the process of discovering choice alternatives. These two observations are related, for it is arguably exactly because March and Simon are critical of the conceptualization of behavior in mainstream theory that they are so appreciative of the Austrian positions in the calculation debate.

[Reprinted from Organization and Markets.]

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The Austrian School at the European Parliament

01/16/2019Max Rangeley

Last year we at the European branch of the Ludwig von Mises Institute (Europe) organised the first ever Austrian school event in the European Parliament. Member of the European Parliament Amjad Bashir — a great supporter of free enterprise within the Parliament — kindly sponsored the event, which was set up to coincide with the release of one of the best books on the Austrian school in recent years, Banking and Monetary Policy from the Perspective of Austrian Economics.

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As well as me, the other two speakers were Member of the European Parliament Professor Joachim Starbatty MEP, and Brendan Brown, Chief Economist of Mitsubishi Bank, arguably the largest bank in the world by assets other than China’s state banks. While there have been other pro-enterprise and free market events in the European Parliament, they have all neglected the “money issue” so far, at least as those within the Austrian school would see it. Professor Starbatty MEP gave an eloquent outline of the Austrian business cycle theory, while Brendan Brown brought Austrian principles to bear on current issues in the banking sector. I decided to speak about the current bubble and how this can be explained with Austrian concepts. This event also reinforces the place of the Ludwig von Mises Institute (Europe) as one of the premier think tanks in Europe; within a few months we have published a defining textbook and introduced the Austrian school within the European Parliament itself.

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In my experience, more and more free market thinkers are tending towards the Austrian School, and it is the farce of years of zero percent interest rates that has achieved this. When the current Super Bubble bursts, we must be prepared to provide answers to how this bubble was created as many will blame the “free market” and demand the government “take action”.

Below you can see my speech in which I outlined how central banks’ policies of zero percent interest rates and quantitative easing have created the largest bubble in all of human history. The West has had a Faustian Pact with the central banking system for an entire generation, with each recession being responded to by creating an even larger debt bubble with ever lower interest rates -- and of course ever worse debt dependency.

Max Rangeley Speech in the European Parliament on the Coming Economic Collapse

The book “Banking and Monetary Policy from the Perspective of Austrian Economics” is published by Springer, one of the best academic publishers. The Ludwig von Mises Institute (Europe) did the excellent work of gathering contributors for the book, which includes Jesus Huerta de Soto, Walter Block, Guido Hulsmann and Gunther Schnabl as well as other great contemporary Austrian School thinkers. Annette Godart-van der Kroon, President of LvMI-Europe, edited the book. If you are a student or lecturer see if you can persuade your institution to get a copy.

Let’s hope the trend can continue with policy-makers taking an interest in the Austrian School. We have to be patient in explaining some of these issues, but more and more minds are open to explanations for how central banks distort the economy.

Incidentally, two days later I also gave a speech at the “Future of Money Conference” at the Frankfurt School of Finance and Management. People from the Bank of England, European Central Bank and Swedish Riksbank among others were discussing how money will develop over the next generation, including so-called Central Bank Digital Currencies (CBDCs, of which you will no doubt hear more over the coming years). I had the pleasure of hearing William White, former chief monetary economist at the Bank for International Settlements and Chief Economist at the OECD, give a terrific speech about the bubble created by radical monetary policy. Bill has had distinct Austrian tendencies during his time at the top of the global monetary establishment, citing Hayek and others in his work.

The intellectual tectonic plates within economics are shifting, and the Austrian School is well placed to provide explanations for the coming bursting of the Super Bubble.

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Ryan McMaken on National Parks on the Lions of Liberty Podcast

01/16/2019Mises Institute

On the Lions of Liberty podcast, Marc Clair and Ryan McMaken discuss the government shutdown and the need to decentralize the national parks:

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Joe Salerno on "The Truth About F.A. Hayek"

01/16/2019Mises Institute

Joe Salerno recently joined Tom Woods to discuss the legacy of F.A. Hayek.  From the site:

F.A. Hayek, illustrious member of the Austrian School of economics, won the Nobel Prize in 1974, and wrote prolifically on both economic and non-economic topics. He has been a source of controversy within libertarian circles because of some aspects of his work. Joe Salerno helps us sort everything out about this central figure. Read the original article at TomWoods.com.

The Truth About F.A. Hayek

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Are There Libertarians in Slovakia?

01/16/2019Atilla Sulker

Last summer, I had the pleasure of meeting Dr. Jozef Martiniak at the 2018 Mises University. Dr. Martiniak came to Auburn all the way from Slovakia and he had many great stories to tell about his experience growing up in a Cold War era Czechoslovakia. My conversations with Dr. Martiniak not only revealed an interesting story from the perspective of someone who experienced socialism firsthand, but it also sparked my interest in the politics of Slovakia. He mentioned that there was a libertarian oriented party in Slovakia, and so in this article, I endeavor to examine the movement in Slovakia, analyzing its scope, significance, and authenticity.

The main vessel of Slovak libertarianism nowadays is the political party “Freedom and Solidarity” (SaS). Economist Richard Sulík founded the party in 2009, himself being the mastermind of the Slovakian flat tax. In February of that year, the 10,000 required signatures for the establishment of the party were collected. Sulík was elected chairman.

According to their website, the party claims to run on a platform free of the typical populist propaganda loaded with catchy slogans. It also claims to be run by experts from various different fields, rather than “ideologists”.

The party is also centered around offering specific solutions in which the amount of money required to fund proposed programs is laid out, rather than putting out “unrealistic promises”. It also asserts that the armed forces must have clearly defined objectives. This sort of reform effort in pursuit of creating a government that has clearly defined objectives puts too much trust in the state, something that is inherently very tough to reform.

Though SaS never explicitly claims to be anchored in the chief tenets of libertarianism, the non-aggression principle and property rights, it puts heavy emphasis on the free will and individualism. The party draws a connection between individual freedom and the individual’s happiness. From this, the party asserts that it is against economic intervention.

The party emphasizes a more consequentialist argument regarding the effects of freedom on the collective population.

One interesting thing I learned through my conversations with Dr. Martiniak was that the “passion” that is present in many libertarians in America was not present in Slovakia. Rather the form of libertarianism in SaS is more so “contra the state” instead of a true moral, Rothbardian form.

SaS lists the promotion of “basic solidarity” as one of its keys tenets in Article II of its charter. This sort of concept is manifested in the “euro-realist” stance of the party. The party sees the European Union as an idea with great potential, but also one that demands significant reform as of now. The party also asserts however, that is seeks to curb the bureaucracy and regulations enforced by the EU. Its perception of the EU however, is one that is flawed. SaS believes that the EU should be kept for its promotion of the ideas of free trade and free movement of people, but in regards to this, a classic Bob Murphy argument comes into play.

In his article “But Wouldn't Warlords Take Over?”, Murphy comes to the conclusion that if a society based on small government can be set up and maintained peacefully, these same peace seeking individuals should be able to live together peacefully without a government. In the same way, if member countries of the EU really want free trade and movement, why would there be the need for a political union such as the EU? Even if the EU were to be reformed, it would gradually centralize power over time due to its inherent nature to do so.

In an article published by The Telegraph, Louise Armitstead describes the sentiment of party founded Richard Sulík. Sulík is often criticized by others for being a nationalist, but Armitstead articulates that he is rather “the hero of all discontented Europeans”. This certainly demonstrates the growing resentment in Europe for government. It underscores the borderless nature of freedom, its universal application. It is not something that remains contained within a single country, but spreads. It is not tied to nationalism.

In my humble opinion, the efforts of SaS do not effectively line up with libertarianism in the way that I see it. Sure, the party is pro-market, anti-centralization, pro-civil liberties, etc., but at the same time, due to the fact that it is not grounded in property rights and the NAP, its attempts become blurred. This is why it is so important that any attempt at libertarianism be grounded in these axioms, otherwise the message strays from being genuine. SaS embodies the more “pragmatic libertarianism” present in those such as Gary Johnson, rather than genuine Misesian or Rothbardian aesthetic.

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Media Accuses Rand Paul of Hypocrisy for Visiting Canadian Hospital: Turns Out It's a Private Hospital

01/14/2019Tho Bishop

Kentucky Senator Rand Paul recently announced he was receiving hernia surgery as a result of being blindsided in an attack from his neighbor. While a senator undergoing common surgery is of questionable newsworthiness, one may expect that the reminder that the Senator is still suffering from the 2017 incident as cause for sympathy. Instead, major media outlets decided to try to use the news as an example of hypocrisy on the part of Paul due to the fact he is receiving treatment at a Canadian hospital.

As published in USA Today:

Kentucky Sen. Rand Paul, one of the fiercest political critics of socialized medicine, will travel to Canada later this month to get hernia surgery....

He is scheduled to have the outpatient operation at the Shouldice Hernia Hospital in Thornhill, Ontario during the week of Jan. 21, according to documents from Paul's civil lawsuit against Boucher filed in Warren Circuit Court....

Paul, a Republican, often argues for private market solutions to American's health care woes.

In Canada, medical care is publicly funded and universally provided through the country's Provincial Ministry of Health, and everyone receives the same level of care.

Paul has called universal health care and nationalized options "slavery."

Of course, if the author had decided to do a two second internet search for “Shouldice Hernia Hospital,” they would have found that it is one of few private hospitals that were grandfathered in prior to the government’s takeover of Canadian healthcare.

Oops.

Of course, the same media outlets that jumped to cry "hypocrisy" at Senator Paul are also guilty of ignoring the very real consequences of Canada’s socialist healthcare system. For example, patients dying due to a lack of access to basic medical supplies such as hospital beds

For more on the disaster of Canada's socialized healthcare system, check out this series by (Canadian author) Lee Friday:

1. The Myth They Used to Pass Canada's Universal Healthcare

2. Universal Health Care in Canada: A Colossal Government Failure

3. The Solution to Canada’s Failed Universal Health Care System: Consumer and Physician Freedom

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Discussion: Austrian Economics in America

This month’s Liberty Matters forum is a discussion of the American economist Frank Fetter. Though he is neglected today, Fetter made vital contributions to Austrian economics and was a major force in spreading the ideas of the early Austrians in the United States (see here and here). In my contributions to the discussion, I explain why Fetter’ work is important and how it can continue to provide fresh insights to contemporary economists. So far, the focus of the essays has been on key elements of economics, especially foundational concepts like price, market, equilibrium, capital, and rent. I’m joined in the conversation by Joseph Salerno, Peter Lewin, and Geoffrey Hodgson.

The first essays and responses in the discussion have now been published, and the forum will remain open for the rest of the month for short rejoinders by all the participants. I hope you’ll take a few minutes to read through some of the contributions. Here is the abstract for the discussion:

Matthew McCaffrey, assistant professor of enterprise at the University of Manchester, explores the economic and political work of the “forgotten giant” of economics, the Indiana-born Frank Fetter. At the height of his career in the early 20th century, Fetter was one of the most respected, cited, and debated economists in the United States. He taught for over 40 years at prestigious universities, including Stanford, Cornell, and Princeton, and his research appeared in practically every major publication in economics and political science. Yet today he is virtually forgotten outside a small group of Austrian economists. In his opening essay, McCaffrey explores two aspects of his thought in particular: his contributions to theoretical economics and their relationship to Austrian ideas, and his political views as they relate to the philosophy of classical liberalism. He is joined in the discussion by Geoffrey M. Hodgson, Research Professor of Business Studies in the University of Hertfordshire, Peter Lewin is Clinical Professor in the Jindal School of Management, University of Texas, Dallas, and Joseph T. Salerno, professor of economics in the Finance and Graduate Economics Department in the Lubin School of Business of Pace University in New York.

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Trump's "Gut Feeling"

01/12/2019Doug French

Speaking to the Washington Post, President Trump said, “My gut tells me more sometimes, than anybody else’s brain can ever tell me.” This comment generated scoffs aplenty, as people imagine the receptacle of a daily intake of gallons of Diet Coke and multiple Big Macs somehow provides anything intelligent. However, this classic Trump quip has some merit after reading John Coates’s The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind.

Part II of the book is titled “Gut Thinking,” and the book’s thesis is that our minds and bodies are connected in our actions. Coates focuses his story on treasury bond traders who successfully act by instinct gained from experience. He writes, “Thinking, one could say, is something we do only when we are no good at an activity.”

“There are few phenomena in finance more remarkable, even mysterious,” Coates writes, “than this close linkage between market and body.”

The fact is, our bodies react to news and risks quicker than our brains do. Conscious thought is left in the dust when we react and especially when we take risks. Of course neoclassical economists would poo-poo the notion of our bodies reacting to threats and risks, after all, we’re all rational beings, doing what’s rational at all times. Yeah, right.

While the above is essentially Coates’s contention, he later writes,

Lifting the hood of our brain does not reveal the netherworld of Kant’s unsayable, nor the volcanic will of Nietzsche’s superman, nor yet the hellish subterranean den of Freud’s subconscious. It reveals something that is a lot closer to the inner workings of a BMW.

Not everyone’s brain is of BMW quality, not to mention the various levels of body quality. Traders, Coates contends, must have IQs that are “high enough,” but more important is “a hearty appetite for risk and a driving ambition.” Also important is physical stamina. He points out that many traders are ex-athletes.

Certainly, the president, has the ambition and risk appetite. His gut feelings, as Coates describes gut feelings generally, “act powerfully,” and “are not only real; they are essential to rational choice.”

The author contends the gut “has its own ‘brain.’ The vagus nerve, the main nerve in the rest-and-digest nervous system, links the brain stem, voice box, lings, heart, pancreas and gut. In total, 80 percent of its fibers carry information back to the brain, mostly from the heart and gut.”

As the book progresses, the focus turns to dopamine, testosterone, and cortisol. Dopamine modulates levels of motivation, how eagerly humans (or animals) want things. Dopamine drives humans to try new things and solve F.A. Hayek’s knowledge problem. “The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form,” explained Hayek, “but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

Trying new things involves taking risks and that’s where testosterone comes in. Traders and entrepreneurs are driven by testosterone. Coates worries that testosterone lowering obesity, “may be dimming the gut feelings and entrepreneurial drive upon which our prosperity and happiness depend.”

Winning trades increase testosterone while market crashes deplete the hormone, sometimes for years. Testosterone feedback, unfortunately, can lead to traders and entrepreneurs to believe themselves invincible. And thus, rallies turn into bubbles. Coates mentions ill-conceived takeovers and record-breaking skyscrapers, providing biological support to Mark Thornton’s work on The Skyscraper Curse.

Cortisol is testosterone’s opposite. As markets crash, cortisol is released “causing [the] body and brain to hunker down for a long term.” Cortisol essentially immunizes the body against trauma, suppressing testosterone production, while being a powerful anti-inflammatory.

Cortisol levels rise with volatility. Coates speculates that this hormone forms “the physiological foundation of the derivatives market.”

Cortisol and CRH (a chemical produced during stress) lead traders (and everyone else one can assume) to be vulnerable “to rumor and suspected conspiracy.” Coates writes, “Each rumored catastrophe is now given as much credence, and has as much effect on markets, as hard economic data.”

“Cortisol is the molecule of irrational pessimism,” explains Coates. Older folks are especially susceptible because they stop producing testosterone and produce high levels of cortisol.

While professional traders and investors have high amounts of testosterone flowing through them, amateurs have “chronically raised cortisol levels.” The constant anxiety forces them to bail out of what could be winning trades.

The November 30th edition of the Elliott Wave Financial Forecast cited examples of the financial press attempting to keep individual investor spirits high. This was before the December downdraft in stock prices. For example, “Ignore the Gloom,” USA Today said.

Trump’s gut has it right. The stock market is in trouble and he knows he needs to blame someone — Fed Chair Jerome Powell — early and often.

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