Bootleggers & Baptists: LXI- SBF and the Fall of FTX

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Sam Bankman-Fried, the founder of the cryptocurrency exchange FTX, once masqueraded as the regulation-friendly face of the crypto markets. SBF was known for his openness to regulation and willingness to work with lawmakers; he not only wanted to graciously assist our elected officials in Washington with guiding policy but was also “socially conscious”. Sam was a vocal proponent of effective altruism and possessed a Benthamite concern for maximizing social benefits to help the most people. This wunderkind 30-year-old was too good to be true

Whether it was Bankman-Fried donating large sums of money to the Democratic party (the purported political advocate for the economically disadvantaged) or his views on veganism and charity, it was all a façade, a thin veneer masking his actual conduct. Per Reuters:

“… The turmoil at FTX has seen at least $1 billion of customer funds vanish from the platform, sources told Reuters on Friday. Bankman-Fried had transferred $10 billion of customer funds to his trading company, Alameda Research, the sources said.

New problems emerged on Saturday when FTX’s U.S. general counsel Ryne Miller said in a Twitter post that the firm’s digital assets were being moved into so-called cold storage “to mitigate damage upon observing unauthorized transactions.”

Cold storage refers to crypto wallets that are not connected to the internet to guard against hackers…”

As investors fled the platform and Binance pulled the plug on bailing out FTX, it is clear that SBF misrepresented the financial health of the exchange and its business practices. All of these developments are reminiscent of the Enron scandal. A corporation rubbing elbows with congress to engage in regulatory capture and foster a positive public image. While concurrently; creating a smoke screen obscuring the company’s off-color conduct.

The economist Bruce Yandle’s theory of Bootleggers and Baptist (1983) coalitions perfectly describes the Machiavellian tactics utilized by Mr. Bankman-Fried. After all, perception is what matters. If investors were not distracted by his social advocacy and success, they might have spotted the red flags. As observed by Yandle, there is often a demand for regulation. Often from parties that prima facie would oppose such measures (p.13). Why? This gives industry elites the to help shape rules that will benefit their bottom line and yield good publicity. Frequently, these scenarios are win-win for the firms involved. SBF proposed a licensing system for Defi (decentralized financial technology); per Erik Vorhees

“..self-enforced rules and blacklists would only serve established exchanges that could afford to pay for compliance…”

SBF simultaneously worked to craft regulation that FTX would benefit from while appearing to share some of the concerns of crypto-phobic politicians like Elizabeth Warren. Progressive politicians are the Baptists in this scenario. SBF’s arrogance ended up being his own Achilles Heel, ultimately revealing his true colors, those of a covert Bootlegger (p.190). 

Contra-Populism: Part III

Do not let the hollow promises of populist ideology fool you! Populism of the right or left is antithetical to the individual liberty cherished in Classical Liberalism and Libertarian philosophy. For one, populism frames policy in collectivistic terms rather than individualism. Populism tends to advocate for policies that support Positive rights (a right to an economic good, e.g. Social Security) over Negative rights to protect the individual from interference with exercising their rights (free speech). Much of what populists advocate for is the retribution of wealth and market privilege instead of individual freedom. Policies such as Single-Payer Healthcare and tariffs impose costs on all voters. This is because populism holds the interests of the group; without unanimous consent. Sure, by choosing to live within a certain jurisdiction you may be tacitly consenting to the laws. However, the rise in populism has spurred an increased demand for state intervention to provide more economic privileges. The problem is that the preferences of the “average voter” cannot be known, as every voter has their own opinions and preferences (p.20). Ordinary voters are not unitary actor, but many individuals with different political proclivities; populism assumes too much about what is best for all of society (p.16).

It is not just the threat of majoritarian tyranny that makes populism perilous to liberty, but populism also requires conferring more authority to the state. This may seem ironic with all the “drain the swamp” rhetoric of the Trump presidency. Even in applying rudimentary logic, more collectivism requires a more centralized authority to be enforced and implemented. The unified will of the people is not recognizable; it takes the personified form of a “strongman” leader embodying the general will (p.20). They generally shift towards autocratic regimes (p.20) since implementing and justifying factually flawed and illiberal policies necessitates large sums of political authority. Beyond the threats of authoritarianism, the elites still benefit from waves of populism. The elites can hide behind the fluid nature of populism and allow majoritarian sentiment to shape crony policies that benefit narrow interests (p.171-172). For example, the supervillain of retail Walmart’s (not the author’s opinion, but a commonly held belief)CEO publicly stated the minimum wage was too low. Raising the minimum wage has been a longstanding talking point of the populist left. In true Bootlegger and Baptist (1983) fashion, Walmart stands to gain. Why? Because a higher minimum wage means more automation and fewer salaries. The bonus is that not only will the firm gain monetary from saving money while maintaining the veneer of having concern for those in the lower income brackets. 

Government Law Evolved From Extortion?

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Why did humans make the transition from customary law to formal statutory law? There is an exhaustive body of literature examining this issue, but in his paper Economic Freedom and the Evolution of Law (1998)Bruce L. Benson provides some intriguing insights. Benson tackles this question from a Hayekian perspective, asserting that modern legal institutions are the byproduct of social evolution.

The paper presents the gradual shift as the byproduct of “entrepreneurship”; individuals with leadership qualities were able to persuade a group of people to adhere to their governance. What makes this persuasion credible, especially in the absence of a state? Benson suggests that such a leader or political faction would have a comparative advantage in violence (p.219). Audaciously, detailing how the development of formal law has its roots in extortion. In these primordial legal regimes, those who acted as law enforcement officers were those who lacked entrepreneurial/leadership skills but had an advantage when it came to violence (p.220). In effect, operating as a legal application of the division of labor.

Any astute observer will also recognize there is a stark difference between voluntary acceptance of such leadership and when imposed by force. One problem with having a high concentration of authority monopolizing the capacity for violence is that such an institution is hard to disrupt. Even more concerning are the perverse incentives that arise due to the desire to retain this authority. The contribution of tributes or taxes from those seeking protection may create reasons for the leader and their law enforcement officials to engage in rent-seeking behavior to keep their monopoly in place. (p.222). Bring a great degree of clarity to why Benson categorizes this arrangement as a form of extortion.

The Economics of Protesting

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Michael Huemer’s substack post Political Activism: What’s the Point, raises some intriguing inquiries regarding the actual utility of participating in political demonstrations. Much like other forms of collective action, the contributions of individual actors will have virtually no impact on the outcome. This parallels the dynamics of another notable form of collective action in politics, voting. If you divided your individual by the sum of all other votes, the aptitude of your single vote altering the results is exceedingly minuscule (p. Bohanon & Cott, 2002, p.592). But it is far more cumbersome to measure the influence of individual activists in comparison to single voters. Professor Huemer goes beyond the pure futility of the efforts of a single protester; and suggests that effectual change could not be the main force driving participation as people value their “..own welfare hundreds or thousands of times more than the welfare of strangers..”. It is more likely that people gain more from networking, personal ideological motives, and rights to virtue signal more than their concern for others being equal to their welfare.

However, he lists Dr. Martin Luther King and Rosa Parks as being exceptions to the drop-in-the-pan theory of effective activism. Both individuals are far different from the average protestor holding a sign at a demonstration. King and Parks undertook the costs of distributing communication and organizing activistic events. In theory, we could perceive them as being political entrepreneurs. A political entrepreneur per Public Choice scholar Randall G. Holcombe defines as:

“…Political entrepreneurship occurs when an individual observes and acts on a political profit opportunity. As with market entrepreneurship, entrepreneurial actions require, first, that a profit opportunity exists, second, that someone is alert enough to spot the opportunity and recognize the opportunity for profit, and third, that the individual is willing to act on the opportunity once it is spotted…” (p.143).

While civil rights advocacy did benefit people beyond King and Parks, they were still able to garner reputations as civil rights leaders. In effect, establish careers. Neither activistic leader would be able to have gained a following if there was not a demand for equality under the law. Mimicking the demand for a product or service in private markets. Regardless of our normative perception of civil rights, they both capitalized on the opportunity for social change. Analogous to how an economic entrepreneur fulfills a need in the consumer market. It is not necessarily morally objectionable that King and Parks benefitted from acting as political leaders since the changes they advocated for did achieve betterment from these societal advances. It would be wrong to classify these efforts as rent-seeking.

A high-profile activist such as Dr. King may act entrepreneurially in protest efforts, what about the rest of the demonstrators supporting King’s activist events? There is a certain amount of free-riding transpiring as this individual did not have to incur the coordination costs of planning the protest. Sure the costs of time and effort are present for even the lower-effort protestors, but King has already reduced the transaction costs of communication and coordination. Because these other demonstrators forfeited these enormous planning costs and the institutional risk, it only stands to reason that these other protestors are not even a footnote in history. Big risk equals big rewards. Dr. King paid the ultimate risk-cost for his political advocacy when he was assassinated. Few of King’s followers had to take on the costs of marching by side him. If anything his penchant for drawing like-minded followers exemplifies how he operated like a corporation for political activism. His ability to dimmish transaction costs for many protestors mirrors what corporate employers do for their employees. Corporations lower the transaction costs of employees finding clients needing service, typically on a large scale. A juggernaut; in the sphere of political protests like King effectively connects members of the same political movement in a superior manner to lesser community organizers. It is evident that without a strong unifying force, the collective action process fails and imposes costs on those less talented organizers that still opt to protest.

Bootleggers & Baptists-XLVI- Chinese Humanitarian Aid to Ukraine

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China has become a focal point in public discourse in recent years. In the years of the Trump administration, tensions escalated (during the tariff wars), as president forty-five took China to task for economic policies that undermined American interests. Internationally, China has garnered negative press for a laundry list of human rights violations, one particularly egregious example being the genocidal policies targeting the Chinese Uyghur. On the world stage, China’s reputation, sullied by ghastly optics. What can the manufacturing giant and Asian Tiger do about the mounting number of public relations quagmires?

Despite the superficial impression of a Sino-Russian alliance; officials in Beijing refuted that the nations were allies in the wake of Putin invading Ukraine. China even opts to provide humanitarian aid to Ukraine; it would be spurious to claim that this diplomatic gesture is purely altruistic reasons. When Chinese Foreign Minister Wang YI repudiates prior claims of a broken alliance by stating that Sino-Russian relations were “rock solid”. What variety of four-dimensional chess are Chinese officials attempting to play regarding the Ukraine situation? Certainly, some form of non-monetary rent-seeking on the part of China. It is reasonable to examine whether Bootleggers and Baptists (1983) coalition dynamics are applicable.

The prospect of China concurrently acting as a moralizing agent and a beneficiary (Dual-Role Actor) is mildly tenable but unlikely. It is more probable that China does not have any genuine compassion for the Ukrainian people and sees them as a strategic pawn for fostering a positive public image. If this is the case, China would not be a Dual-Role Actor, but a Covert Baptist (p.190). The nation acts in a moral capacity purely for its own ends. Potentially, doing so to smooth over the bad press engendered by their extensive list of human rights violations. This possibility seems unlikely. For years the international perception has carried much weight with Chinese officials. It is more likely that China is attempting to distance itself from Russia for the sake of self-preservation. China is trying to navigate the murky waters of retaining its diplomatic relationship with Russia without being placed in the cross-hairs. This is a precarious position to be in, especially when your prominent trading partners are the western nations placing sanctions against one of your strategic allies.

Editorial Graveyard- Part III: The Bootlegger and Baptists of Woke Capitalism

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Op-Ed submission was rejected by the Foundation For Economic Education for being too “abstract” and “academic”. The corresponding paper proposal for George Mason was also rejected. I am currently working on another proposal for GMU focused on intellectual property.

Introduction:

Bruce Yandle’s Bootlegger and Baptist (1983)  theory of regulation presents a practical explanation for why such unorthodox coalitions are effective vehicles for camouflaging rent-seeking behavior by a firm. In brief, armed with the public appeal of the moral arguments posited by the Baptists, the Bootleggers can quietly lurk in the shadows, funding initiatives that will advance their self-interest. In other words, the ethical advocates create a smokescreen that provides cover for the business interests, superficially obscuring the stigma of corporate advocacy, since few examples of political action invoke the ire of the average citizen than policy campaigns that line the pockets of big business.

           The trend of “woke capitalism”, however, is bringing the Bootleggers out of shadows and into plain sight. CEOs are now openly standing in unison with political activists, speaking out against topics ranging from police brutality to environmental issues. The Bootleggers can work openly with the Baptists to promote a positive image while still silently providing monetary support in the background. Moreover, the social justice messaging of “Woke Capitalism” extends beyond corporate activism and is observable in the product market and advertising. Some companies, for example, adopt marketing that emphasizes social consciousness to secure the business of Gen-Z. A clear example is Gillette’s 2019 advertising campaign addressing “toxic masculinity”. Typically, companies use this tactic to target younger consumers with higher preferences for ethical products and brand authenticity, requiring companies to go beyond philanthropy and mandating community services hours for their employees; their woke ethics are thereby conveyed in their branding.

The Four Main Categories of Woke Capitalistic Coalitions:

           The most recent alliances forged between business interests and political activists take the form of four main taxonomical categories. Some of the various types of Bootlegger and Baptist coalitions feature collaboration between firms and activists. Other coalition types  form within the technocratic structure of the corporation or emerge between different departments within the organization. Woke coalitions thus have several notable classifications of “woke” corporate alliances. Two further subcategories include proactive and reactive forms of rent-seeking.

Reactive Coalition Models:

           The reactive models for “woke” coalitions include two subtypes of collective action organization, the interaction between external actors and collaboration between internal employees. The first variety of reactive coalitions are rent-seeking alliances formed to restore the company from a sullied reputation caused by criticism, the objective being to mitigate the loss of sales and reputation amid public controversy. Some firms thus attempt to distance themselves from the controversy through their activistic partnerships. By way of example, Bank of America in the past was accused of engaging in “discriminatory” lending practices. To counteract this negative publicity, last year BOA pledged to donate $1 Billion over the next four years to community programs to address economic and racial inequality. Such an act of philanthropy can easily make the general public forget about the firm’s past indiscretions.

The second type of reactive “woke” coalitions are the intracompany factions designed to divert attention from potentially costly internal controversies. In instances of hostile work environment ligation, the legal team, the human resources department, and executive management band together to deescalate the publicity nightmare. Human Resources and management work together to legally distance the company from a harassment incident and shield executive management from more scrutiny and accountability. Legal navigates the statutory and tort concerns and works internally to establish an anti-harassment campaign intracompany. A prime example of an internal diversionary coalition was Vice media’s response to sexual harassment claims. After settling several cases, the company decided to form an advisory board to educate employees on diversity and proper workplace deportment. Even if such an initiative on the part of the human resources department failed to soften the bad publicity, at least it may decrease the probability of another incident.

Reactive Coalition Models:

Finally, the last two variants of “woke” coalitions aligning business interests with moral advocates to facilitate proactive forms of rent-seeking. Similarly, these proactive coalitions can be delineated into examples of internal and external collaboration models. Proactive partnerships form to capture potential gains and avert the costs of prospective controversies. The most salient example of such external cooperation would be firms standing behind a woke cause, anticipating that such an alliance will obscure the firm attempting to shape current regulation (regulatory capture).  A notable example was detailed in the Fall 2021 issue of Regulation magazine, which showed how providers of cloud computing services IBM and Oracle joined forces in 2017 to advocate for the passage of  the Stop Enabling Sex Traffickers Act (SESTA) and the Fight Online Sex Trafficking Act (FOSTA); effectively becoming bedfellows with various factions of human rights activists. Both laws intended to attribute liability to digit platforms for any user content that promotes sex trafficking. The article’s author Thomas A. Lambert speculates that IBM and Oracle could have done this with the hopes crafting potential exceptions to the platform liability portions of SESTA and FOSTA.

Additionally, we cannot forget the proactive inter-department coalitions that are emerging within corporations. For example, several companies are hiring diversity and inclusion “coaches” as a peripheral subset of human resources. The demand for this job role has become so prevalent that a number of colleges offer programs to become a certified “diversity practitioner”. The human resources department defends the existence of these staff members by emphasizing the need to educate employees to avoid instances of harassment and discrimination. The diversity coaches preach the virtues of cultural sensitivity and other tenants of the “woke” philosophy, thus producing a self-reinforcing spiral justifying further diversity initiatives.

Conclusion:

 Superficially, these alliances between big business and “woke” activists seem relatively benign, but in reality, these coalitions have profound consequences for the integrity of capitalism and the rule of law. The four types of woke B&B coalitions described above undermine capitalism and the rule of law because woke capitalism has made it easier than ever for business interests to create the façade of morality but are unjustly bending the rules-of-the game in their favor. Wokeism provides the veil obscuring corporate America’s hand in the legislative till. Generating more anti-competitive laws that undermine both the rule of law and free trade. 

The emphasis on firms getting involved with “woke” causes not only disguises crony capitalism and rent-seeking behavior, but also distracts companies from their primary custodial duty to their shareholders. As Nobel laureate Milton Friedman expresses in his own Friedman Doctrine , a firm has a duty to maximize its profits for its shareholders. After all, these individuals have invested in the company expecting a higher return. Without this financial support the firm could not achieve its current level of success. Diverting funds that could be used for investment in capital to increase productive efficiency for political activism is tantamount to theft.

Bootleggers & Baptists: XXXVII: Salmon in Alaska (The Fight Against GMO Food)

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Genetically modified food is a flashpoint in the public debate over the wholesomeness of the modern diet. Many speculate that consuming GMOs has been linked to several various health problems. Few people question whether there are any benefits to producing genetically modified food products. There is a bit of irony here since most anti-GMO activists also happen to be exponents of environmentalism. In certain situations, GMO food could feasibly be sustainable alternatives to dwindling supplies of natural food sources. One salient example is in the market for edible fish. 

The Fall 2021 issue of Regulation magazine details the struggle of AquAdvantage to obtain approval from the FDA for their edible genetically modified salmon. However, even after nearly 13 years of pending FDA approval, AquAdvantage still has other legal hurdles to clear, obstructing their entry into the market of consumable fish. This threat is coming from the political and business interests in the state of Alaska. Sen. Lisa Murkowski (R–AK) assuming the veneer of consumer production advocate; argues that consumers need to know what they are consuming. Murkowski:

“… attached a rider to the FY 2019 appropriations bill that required genetically engineered salmon approved before the labeling standards created by the U.S. Department of Agriculture’s National Bioengineered Food Disclosure Standard regulation to include the words “genetically engineered” in its market name — a requirement seemingly intended to spook consumers…” (P.3).

The “moral” concern expressed by Murkowski; creates a dynamic conducive to Bootlegger and Baptist’s (1983) coalitions. Murkowski can be considered a Baptist for articulating consumer protection concerns for the stringent labeling requirements. She also could arguably fall into the category of Duel-Role Actor if her consumer protection advocacy is sincere. After all, Murkowski is a politician and has an incentive to appease her constituency. Consumer protection advocacy is a win-win strategy. Since the average voter may superficially perceive this initiative as being in their best interest, of their health and safety, continue to vote for Murkowski. But arguably, the most more powerful voter-bloc she will need to win would be the salmon fisherman and hatcheries. The industry surrounding food-grade salmon production is estimated to generate $600 million annually in economic output. Making it quite evident who the Bootleggers are! However, placing restrictions on genetically modified salmon creates a bit of a Prisoners Dilemmaas the U.S. producers cannot meet domestic demand for salmon, 90 % of all salmon sold in America is imported.  

Bootleggers & Baptists: XXXVI- Woke Capitalism and Coalitions of Opportunity

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            The Bootlegger and Baptist (1983) theory of regulation present a practical explanation for why these such coalitions are effective vehicles for camouflaging rent-seeking behavior by a firm. Armed with the public appeal of the moral arguments posited by the Baptists, the Bootleggers can quietly lurk in the shadows, funding initiatives that will advance their self-interest. The ethical advocates create a smokescreen that provides cover for the business interests, superficially obscuring the stigma of corporate advocacy. Since few examples of political action invoke the ire of the average citizen than policy campaigns that line the pockets of big business.

           The trend of “woke capitalism” is bringing the Bootleggers out of shadows and into plain sight. CEOs are now openly standing in unison with political activists speaking out against topics ranging from police brutality to environmental issues. The Bootleggers can work openly with the Baptists to promote a positive image while still silently providing monetary support in the background. The social justice messaging of “Woke Capitalism” extends beyond corporate activism and is observable in the product market and advertising. Some companies adopt marketing that emphasizes social consciousness to secure the business of Gen-Z. Typically, companies use this tactic to target younger consumers with higher preferences for ethical products and brand authenticity, requiring companies to go beyond philanthropy and mandating community services hours for their employees; their ethics almost be conveyed in their branding.

           The most recent alliances forged between business interests and political activists take the form of four main taxonomical categories. Some of the various types of Bootlegger and Baptist coalitions feature collaboration between firms and activists. Other coalition types that form within the technocratic structure of the corporation; are between different departments within the organization. Woke coalitions have several notable classifications of “woke” corporate alliances. The main subcategories include proactive and reactive forms of rent-seeking.

           The reactive models for “woke” coalitions include two subtypes of collective action organization, the interaction between external actors and collaboration between internal employees. The first variety of reactive coalitions are rent-seeking alliances formed to restore the company from a sullied reputation caused by criticism. The objective being to mitigate the loss of sales and social currency amid public controversy. Some firms directly attempt to distance themselves from the controversy through their activistic partnerships. The second type of reactive “woke” coalitions are the intracompany factions designed to divert attention from potentially costly internal controversies. In instances of hostile work environment ligation, the legal team, the human resources department, and executive management band together to avoid a publicity nightmare. Human Resources and legal work together to legally distance the company from a harassment incident. Legal working on navigating the statutory and tort concerns while HR works internally to establish an anti-harassment campaign intracompany. All the while shielding executive management from more scrutiny and accountability.

           Finally, the last two variants of “woke” coalitions aligning business interests with moral advocates to facilitate proactive forms of rent-seeking. Similarly, the proactive coalitions can be delineated into examples of internal and external collaboration. Proactive partnerships form to capture potential gains and avert the costs of prospective controversies. The most salient example of such external cooperation would be firms standing behind a woke cause, anticipating that such an alliance will obscure the firm attempting to shape current regulation (regulatory capture). However, we cannot forget the proactive inter-department coalitions that are emerging within corporations. For example, several companies are hiring diversity and inclusion “coaches” as a peripheral subset of human resources. The human resources department defends the existence of these staff members by emphasizing the need to educate employees to avoid instances of harassment and discrimination. The diversity coaches preach the virtues of cultural sensitivity and other tenants of the “woke” philosophy.

           Superficially these alliances between big business and “woke” activists seem relatively benign. However, there are profound consequences for the integrity of capitalism and the rule of law. This paper will demonstrate how the four types of woke B&B coalitions undermine capitalism and the rule of law. Woke capitalism has made it easier than ever for business interests to create the façade of morality but are unjustly bending the rules-of-the game in their favor. Wokeism provides the veil obscuring corporate America’s hand in the legislative till. In effect, generating more anti-competitive laws that undermine both the rule of law and free trade. 

Bootleggers & Baptists-XXXV: Multiple Listing Services & Real Estate

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It is well known that trade associations and related organizations have an anticompetitive effect on the market. One salient example of such consequences is American Real estate. Per Vol. 44, Issue 2 of Regulation Magazine, the rules favored trade association, National Association of Realtors (NAR), has created an implicit tying-agreement. The NAR established the networks known as Multiple Listing Services which home listing with a NAR-affiliated realty agent are posted (p.28). Frequently potential homebuyers are persuaded to avoid purchasing homes listed outside of the MLS network, referred to as For-Sale-By-Owner (FSBO), in a practice known as steering (p.28, 30). In such a system, the commission for the broker is not only predetermined but also “… the listening agent must make a blanket-unilateral offer in advance to pay the buyer’s broker’s fee… despite not having information on the services provided…” (p.30). It should be noted that tying agreements are often scrutinized by the U.S government (see the USA v. Microsoft Corp, No. 97-5343 (D.C. Cir. 1998)).

As another variant of anticompetitive market behavior, there are generally moral arguments for supporting the measure. This means that advocacy for maintaining this system is subject to Bootlegger and Baptist’s (1983) dynamics. Concurrently, while some argue that the MLS system from a consumer interest standpoint inevitably NAR realtors are the ones that benefit. Our Bootleggers realtors profit handsomely. Not only does this practice allow the buying brokers from having to negotiate fees, but American realtors are paid “… two to three times higher than in other developed nations..” (p.30). Effectively operating as a transfer of wealth from the consumer to the service provider (p.30). However, some realty companies such as Clever Real Estate assume as a Dual-Role Actor. Such a firm is a beneficiary of the current trade practices; they also argue that the MLS system is more convenient for sellers to expediently sell their homes

Bootleggers and Baptists XVI:Delta-8- Addendum

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Some additional thoughts regarding the Marijuana industry’s response to the emergence of Delta-8. It is irksome to hear invested interests claiming that a competing product is unsafe. Sure, it is well within their right to free expression to do so. Doing so in the context of political advocacy takes on a completely different tone. Any concerns expressed by Cannabis trade associations regarding public health can only be seen at best suspicious, if not outright spurious. If a similar rate of taxation and the same regulatory requirements that Marijuana sales are subjected to were applied to Delta-8 it would provide Cannabis sellers and producers with an anti-competitive advantage. Because the overall psychoactive effects of the compound are less intense than Marijuana. Subjecting it to similar regulations could effectively put many Delta-8 producers out of business. There may be some individual that prefers this neutered variant of Cannabis, however, this would be a very shallow niche market.

The true travesty of the thinly veiled advocacy of the Marijuana industry is perplexing. It is mirroring the same public health campaigns championed by alcohol producers when states were initiating legalizing recreation pot. Back in 2016, the Beer Distributors PAC of Massachusetts funded and advocated for an anti-legalization initiative. It wasn’t that the beer industry was really concerned about public health, rather they were concern about their bottom line. From a shortsighted perspective is a rational response to competition. This approach is morally and economically flawed. You beat the competition by producing a better product not using political channels to erect more barriers to market entry. If you can’t beat them, join them. Many beer producers have started producing “beers” infused with Cannabis. Some notable examples include Hi-Fi Hops from Lagunitas and Ceria (from the creators of Blue moon). Why can’t Marijuana producers just jump on the Delta-8 train and ride it out until the DEA invariably crackdown on it? If producers are able to manufacture a wide array of edibles and extracts they can figure out how to synthesize Delta-8. No need to engage in false posturing under the guise of “public health”.

Bootleggers and Baptists: XVI- Marijuana Industry and Delta-8

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Background: What is Delta-8 THC

The federal prohibition of Marijuana much like most laws and regulations is subject to loopholes. One of the previous attempts to circumvent federal cannabis laws came in the form of designer drugs. Manifested in the development of novel molecular compounds that mimic the pharmacological effects of cannabis intoxication. Many of these manufactured chemicals resulted in adverse psychological and physical consequences. Due to the fact that these various THC derivatives were not directly restricted, for a time science was outpacing the law. Since the development of the first synthetic cannabinoid molecule in 1995 (JWH-018), there has been a vast proliferation of new molecules to replace the ones prohibited under federal, state, and local law. Essentially making this cat-and-mouse game of the late-2000’s-the the 2010s an all-out arms race. This is understandable considering the profits that can be made on the designer drug market. The synthetic cannabinoid epidemic from a few years back was a monster created by the “good intentions” of state intervention. If recreational Marijuana had never been illegal, there arguably would not be a market for such unstable chemicals.

The story of Delta-8 THC is nevertheless a byproduct of a blind spot federal regulation. However, so far the results have not been as detrimental as the development of synthetic Marijuana in clandestine laboratories. There are two different THC structures that exist that can be derived from cannabis. The Delta-9 THC  subtype of Tetrahydrocannabinol is commonly found in recreation, medical, and black-market Marijuana products. Whereas Delta-8 is isolated from “hemp-derived CBD” and provides the user with a reduced state of inebriation. Not to mention it is not subject to the same degree of taxation, regulations, and restrictions as legal recreational and medical Marijuana. One glaring difference between how the two compounds are regulated is it is illegal to ship marijuana even in states where retail purchases are illegal (it is still illegal at the federal level). In stark contrast, Delta-8 products can be effortlessly purchased from online vendors. (At one point the author found a vendor on Amazon selling Delta-8 products). The discrepancy between how Delta-9 and Delta-8 variants of THC are treated under the law is due to a loophole in the Hemp Farming Act of 2018 (H.R.5485). The law permits the sale of plant byproducts below 0.3 % Delta-9 THC and does not exclude the sales of hemp goods with high concentrations of Delta-8.

Bootleggers and Baptists: We Must Regulate Delta-8!

Naturally, a loosely regulated alternative to Marijuana is going to incite the ire of the cannabis industry. It is certainly a lot less hassle to buy a serviceable substitute online than have to go to a dispensary. Meaning there is a potential loss of business for the storefronts and the vendors manufacturing/cultivating the materials for pot-related goods. The purveyors of Delta-8 have another adversary lurking in the background that would serve as an unlikely ally to the Marijuana industry. That would be the very regulators that place legal restrictions on cannabis. Setting the stage for another classic example of Bruce Yandle’s concept of Bootleggers and Baptists. A coalition formed by two unlikely factions sharing the same political goal. Per Yandle’s account of this phenomenon the “Baptists” provide the moral justification for the policy goal and the Bootleggers are the ones that benefit from the outcome. In regard to the regulations governing the sale and production of Marijuana, the regulators are something of a nuisance to the cannabis industry. The cultivation and sale of Marijuana require compliance with a multitude of state laws and licensing requirements. The overlap in common interests is peculiar at first glance. One only needs to remember that those selling and cultivating Marijuana are hoping that the regulators will level the playing field with equitable restrictions. Preventing business from being diverted to companies producing and selling this pot alternative.

The Advocacy of the Baptists:

 The first rumblings of the need for clear regulations pertaining to the production of Delta-8 came from the Oregon Liquor Control Commission. One of the state’s compliance specialists claims that “15 to 30 %” of the constituents used to convert CBD to Delta-8 are unknown. From a “safety” standpoint testing for impurities and standardization of production could ensure product quality. There is always the lingering concern of producers that will take shortcuts that will lead to the Delta-8 being less safe. Providing insight into why regulators in Oregon have recently begun the process of formulating regulations for Delta-8.

The Misgivings of the Bootleggers:

As can be expected cannabis producers are not pleased with the prospect of competing against an unregulated product. It appears as if the Bootleggers are attaching themselves to the public safety argument posited by regulators. The Michigan Cannabis Manufacturers Association has expressed concern over the safety of Delta-8 products. Categorizing this product as an “immediate health risk” to consumers. Any credulous observer would perceive this statement as a concern for public health. Marijuana producers and sellers stand the benefit through reducing competition in the hemp/pot market. Looking to impose regulations and taxes on Delta-8 is merely asking for anti-competitive measures to compensate for business lost to firms selling this new product. This is nothing more than a form of rent-seeking. Publicly advocating for specific policies that you benefit from can only be viewed as a form of rent-seeking. Suggesting that competitors should be regulated is tantamount to asking the government for a subsidy.

Success By Default is Not Truly Success

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In terms of formulating effective rules, one needs to have a panoramic understanding of the potential consequences. Even the downstream outcomes are not easily foreseen. Providing some validation of F.A. Hayek’s notion of the Pretense of Knowledge. No one person, organization, or collection of governing institutions has all of the information required to plan for every scenario. Making it foolhardy to enact inflexible rules that operate as if the definite outcomes can be methodically calculated. Treading down the path of the socialist calculation debate is fruitless as the refutations on both sides of the aisle have already been exhausted. The fall of the Soviet Union alone should serve as a historical anecdote of the fallacy of planned economies.

It should be noted that information asymmetries and unforeseeable outcomes are a natural consequence of having limited information. Explaining phenomena such as cobra effects, because certain repercussions cannot be known until it is too late. These distorted outcomes as the result of flawed rules can happen on a much smaller scale than that of the national economy or a country’s legal system. Something as mundane as a birthdate cutoff to participate in youth hockey can spur some surprise inequities in the trajectory of young hockey players. This example springing from the pages of Malcolm Gladwell’s 2008 book Outliers gives us some keen insights into the potential for implicit flaws in rule formulation. Gladwell details the observations of psychologist Roger Barnsley (p.22-23) upon perusing the program of the Canadian national youth hockey championship. Barnsley noticed that the majority of the players had birthdays ranging between January and March. Is it possible that there is a certain qualitative factor distinguishing children with birthdays earlier on in the year? If we examine the zodiac symbols of those born in January and February there are characteristics that are conducive to success. However, there is little scientific merit to astrology anyhow. Barnsley had another explanation for this discrepancy between Canadian Hockey players born in January versus July. 

Barnsley astutely directs us towards the factor of birthday cutoffs for eligibility to play youth hockey in Canada. This fact was substantiated when Barnsley discovered that roughly 40 percent of all elite hockey players were born between January-March, 30 percent between April-June (p.23) Demonstrating the role of the individual player’s birthday in determining success. Having a January first cutoff, privileged prospective players born in the earlier months of the year (p.24). The main difference being that the boys born in earlier months were more physically mature. In turn, received more attention from the coaches lending this dynamic to an early delineation between talented and untalented players (p.25). Due to the difference in age eligibility cutoffs in American youth football and basketball leagues, they did not exhibit the same distortions in the distribution of talent (p.26). Engendering a Matthew Effect or what is otherwise known as an accumulative advantage. Adam Smith even points to the concept of accumulative advantage in The Wealth of NationsExplaining how in a sense the poor pay the price for the poor decisions of their forefathers. 

Many proponents of meritocratic social arrangements may scoff at the idea of making rules that are fair. However, if the rules are providing a lopsided advantage to one group, are the results truly the result of superior performance or the distortion created by the rules? Few would ever view the occurrence of instances of regulatory capture or rent-seeking as a triumph of free-market competition. Rather just the opposite, it is an example of interest groups bending the rules to suit their own needs. Careful consideration needs to be made in how we set and enforce rules to avoid distorted effects that handsomely benefit a few and harm a great many. Gladwell succinctly sums up this point very eloquently: 

“Because we cling to the idea that success is a simple function of individual merit and that the world in which we all group up and then we choose to write society don’t matter at all.” (p.33)

While variables such as luck, talent, ingenuity, and hard work can all have a role in success, we cannot forget that how the rules are written can also have an inseparable impact on outcomes. Even rules that are inadvertently written in a manner to favor one group over another without consideration of merit is a flawed rule. Marred by an unforeseeable blind spot that nevertheless has generated distorted outcomes. These outcomes are not truly the byproduct of talent or work ethic but by technicalities that create illusory perceptions of actual skill. 

Workplace Subsidies

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One form of rent-seeking that is prevalent in the political sphere is interest groups lobbying for subsidies. A subsidy is a sum of money or a  tax-deduction provided to a specific industry as a form of financial support. The agricultural sector is well known for having subsidies to incentive the production of specific varieties of produce. One common example is subsidies to corn producers.

One form of rent-seeking that everyone has witnessed is workplace rent-seeking. This is where an employee attempts to avoid work or embellish their value to the company. On a team meeting yesterday, it dawned on me the subsidy phenomenon happens at work as well.  I overheard a co-work with ten-years’ worth of experience complaining about their workload. This individual effectively reduced their workload through this publicly kvetching about how they were overwhelmed.

It came to me as clear as day, the Workplace Subsidy, the newest edition to the theory of workplace rent-seeking. It can be best defined as an employee seeking unjustified bonuses or unjustified relief from their workload.

Bootleggers and Baptists XIII: The Dawes Act of 1887

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Frequently in public policy regulations that have nefarious intentions are obscured in a cloak of beneficence. Generally, the deeper you explore the history and the context behind the regulation or law its true purpose is eventually exposed. This is particularly true of many of the laws passed by the federal government intended to “help” Native Americans. Many of these paternal laws have done nothing more than subordinate the voluntary associate of tribal members to the authority of the federal government. I am not necessarily a proponent of the lofty, wide-eyed, and quixotic brand of social justice espoused by the contemporary left. But many of these laws impose notable restrictions on the natural rights of tribal members. Such as violating property rights, free association, contract enforcement, and even the right to self-determination. Regardless of the ethnicity of an individual, these rights should be upheld to all people. This isn’t so much a plea for equality of outcome, but rather a firmly held moral concern.  When the law is weaponized to legalize crimes against persons and property, the law has failed to achieve its ends.

One such act that codified a gross injustice against the native people of the United States was the Dawes Act of 1887. Colloquially known as the General Allotment Act. The legislation was sponsored by Massachusetts Senator Henry L. Dawes and was enacted in February 1887. The act provided the authority to the executive branch to allocate “.. portions of Reservation land to individual Indians..” for agricultural purposes. (p. 19-20) 160 acres would be provided to head-of-household and 80 acres to other individual tribe members.  The acreage was doubled if the land was only suitable for grazing (p.20). The aloof Baptists in this scenario justified this act on the moral grounds that this would help the native tribes in the long run. Alleviating the poverty tribal members experienced. Through providing land for cultivation the natives could be elevated to being a middle-class farmer and better assimilate to American society (p.19). If history is any indicator, good intentions and legislation have the propensity to result in tragic consequences for American Indians. Unwittingly, the good intentions of these nineteenth-century social justice warriors provided a moral smokescreen that allowed less sympathetic individuals to utilize the law for their callous benefit.

Land disputes between Natives and European settlers are nothing new. These disagreements date back to the early colonial period of America. Typically, the Native tribes received protection from the aggressive advances on tribal land by colonists from Britain. This is why during the revolution most tribes aligned themselves with the crown (p.10).  Then after the new republic was formed, the Articles of Confederation delegated the power of addressing Indian affairs with the federal government. This was done to preemptively avoid military conflicts with the tribes over land. Due to the financial stresses of the Revolutionary War (p.10). Under U.S. Const. Art I, Sec 8, Cl 3.  and Art II, Sec 2, Cl 2  congress was provided with the power to regulate tribal commerce and the President with the ability to make treaties with the tribes (p.11). All done in the name of stability. Placing the federal government in the precarious situation of balancing the interests of the Natives and settlers. Otherwise, the demise of the young republic may have been inevitable.

Fast-forwarding approximately a century, it clear there has been a long-established that many Caucasian Americans perceived tribal people as more of an obstacle than their indigenous neighbors. Making these individuals the proverbial bootleggers of the Dawes Act. Why?  What do the Americans vying with the Natives for land have to gain from this law?  The act was enacted in the absence of any consent requirements (p.21). Making it easy for the federal government to divide up the land without any tribal input.  To get the legislation to pass the law was amended to allow whites to purchase any remaining land. The result of the law being a drastic decrease in land ownership among tribal people. (p.21). Even worst, the land was not distributed in a manner that was logical to the needs of farming and grazing. Creating a  “checkerboard” pattern of “alternating white and tribal-owned land”. Making it impossible to utilize the land for grazing or farming (p.22).

 In the end, putting aside any good intentions, this policy only made matters worse. The policy not only was poorly implemented but was manipulated to benefit non-tribal members. Legislative rent-seeking at its finest!  Only provides further evidence that quite often all the downstream repercussions of regulations can rarely be considered. For a policy originally intended to lift Native Americans out of poverty did the exact opposite! Making this abject policy failure a shining example of what is referred to in the public policy as a cobra-effect. The Dawes Act only further deteriorated the economic quality of life of America’s Native people.  

Workplace Rent- Seeking Honorable Mention

 

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In my previous blog entry, I discussed the topic of rent-seeking in the office. I detailed three common forms of workplace rent-seeking. However, there are several other notable forms that I feel are worth mentioning.

 

Withholding Information:

 

This is more so applicable in the training process.  The specifics of internal procedures are often colloquially referred to in an office setting as “tribal knowledge“.  Individuals who are either paranoid or not confident in their position with the company will withhold information in the training process. They may refuse outright to properly train new hires. They may only provide a portion of the correct information. They may monopolize specific train materials. Through creating artificial information asymmetry they make themselves look more valuable and decrease their chances of being terminated. Making themselves the default team subject matter expert.

 

Candy Bowl: 

 

As the old saying goes you attract more flies with honey than vinegar. There is some validity to this statement. The candy bowl can be seen as either a trap or a peace-offering. Either way, it detracts from the true nature of the individual who maintains it. Typically, they are a very disagreeable and temperamental person. To soften their image they attempt to appear charitable by proving communal bowl filled with sweets.  If your peers like you, you can get away with a lot. More accurately if you can bribe your peers after being nasty to them you can continue to get away with a lot. If your co-workers don’t have any lingering issues with your boss will keep you around. Why? If you aren’t disturbing the group dynamics there isn’t any reason to deliver punitive actions.

 

Plastering Your Cubicle With Positive Quotes: 

 

Anyone plastering their cubicle walls with quotes from Dr. Martin Luther King Jr. or Gandhi is someone to avoid like the plague. If you make your workspace a billboard for inspiration quotes you most likely have a few skeletons in your closet. To be so extreme with advertising one’s proclivity towards positivity should be a red flag. An indicator of someone attempting to manipulate human psychology for their gain. It is meant to distract from their overt from their negative behavior. It falls into a similar behavioral category as self-promotion. The objective is to have others focus on what is most salient and not what is factually true.

Workplace Rent-Seeking

 

 

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Introduction:

One of the core principles of Public Choice Theory is the concept of behavioral symmetry.  Behavior symmetry can be best defined as

“… the same behavioral model of human action must apply to all decision-makers regardless of institutional setting (public or private).” (Shughart II & Wardle, 2020, P.594)

This conceptualization firmly reflected in James M. Buchanan’s proclamation of  Public Choice Theory being ” politics without romance“. Meaning whether you work in for the government or a private corporation your incentives generally don’t change. Working as a bureaucrat doesn’t dampen the allure of a high salary or generous benefits. Many people tend to view politicians and government employees as working towards the common good. Ignoring the fact that their decisions are not immune to self-interest. Demonstrating that this faulty assumption about civil servants is nothing more than a halo effect. The belief that government employees are striving towards a higher moral good than individuals employed by a corporation is illusory. People respond to incentives regardless of their occupation.

 

Considering the previously described application of behavioral symmetry, it wouldn’t be outlandish for a phenomenon that transpires in the public sphere to occur within a private institution. To take it a step further, to even claim that it takes place on an individual level. As in actions taken by a single person versus a solitary institution.  Could the principles of Public Choice even be applied to the individualized interactions of workers in an office environment? Certainly! After all, incentives do not change. We are merely changing the environment and the scale of transactions.

 

The concept of rent-seeking tends to be commonly reflected in the behavior of office workers. What is rent-seeking? It can be described as a person or organization attempting to secure wealth without creating generating any productive output. Generally, this is done so by seeking an institutional advantage. Gordon Tullock, the theorist who developed this theory, utilized the example of tariffs to demonstrate a practical application for this concept. Governments typically do not impose tariffs on their own, but rather due to lobbying pressure from interest groups. Tullock referred to this variety of behavior as “wasteful” (Tullock, 1967, P.5). As a side note, Tullock may have been the architect rent-seeking, however, it was economist Anne O. Krueger who coined its name’s sake back in 1974.

 

Based on my observations of working in a corporate office there are three prevalent forms of workplace rent-seeking. This list includes: self-praise/  verbal demolition of co-workers, brown-nosing, and creating busywork. Any action or omission of action in the workplace is overtly economic. No one works for free. The only difference is scale. Many of these behaviors are anti-competitive. At work, your co-workers are your competition. All of these behaviors are attempts to secure gains without creating any additional wealth. Through damaging the image of co-workers or the individual improving their image, they are gaining potential job security which protects their paycheck. Typically, at the expense of the employer because this behavior does not distract from employees doing their jobs.

 

Self-Praise and Verbal Demolition of Co-Workers:

As the saying goes talk is cheap. Unfortunately, empty words have carried more clout than they should out on the sales floor. Anyone can pat themselves on the back and expound upon the “superior” customer service they provide. Especially when the boss is present. Much of this bluster, whether it is factual or not, skew popular perception. It is easier to take things for face-value than to look below the surface. If someone is persistently selling their skills and value to the company, it is easier to believe them than to validate their claims. Even when faced with contrary metrics many managers still fall into the folly of accepting the shameless self-promotion of these under-performing employees. This acquiescence is generally also reflected in the perceptions of this subpar employee’s peers. Despite all of the opposing evidence they will express a favorable opinion of this individual. Making the manager less inclined to terminate this individual. The manager would not want to jeopardize group dynamics. However, baseless self-promotion does is nothing but counter-productive and a waste of company resources.

 

The devious foil of Self-praise is the verbal demolition of co-workers. Portraying co-workers in a bad light to distract from an individual’s performance deficits. One common example is proliferating gossip and rumors. Even to be so brazen to fabricate formal complaints regarding interactions with individuals. For example, a false sexual harassment complaint filed with human resources.  Gossip being on the lower end of the scale and fraudulent human resource reports being a more extreme form. Going to great lengths to assassinate the character of your co-workers requires a great deal of time and effort. It could be suggested that it would even be easier to just do your job. Versus wasting everyone’s time and resources with such puerile and sophomoric attempts at subterfuge.

 

Brown-Nosing:

 

Complimenting the boss, attending all of the social functions you are invited to, pretending to be his friend, laughing at all of his lame jokes. Brown-nosing, sucking-up… this behavior goes by many terms. No one every engages in brown-nosing without having a specific set of ends. Whether it would be the boss overlooking poor performance or giving other forms of preferential treatment. Such as being picked over more qualified candidates for a promotion. Why work harder when you could just work smarter? It is easier to go get drunk with your boss at a happy hour and pretend to be his best friend than to do your job. It is astonishing how many people in management fall for these naked attempts to curry favor with them. Then again an entire encyclopedia could be written about the psychology behind this mystifying phenomenon.

 

Creating Busywork:

 

The image of busy workers is synonymous with productivity.  Is this always the case? Not always. Sometimes workers will generate work or purposely utilize inefficient methods to complete tasks to create the perception of productivity. Some employees will go so far to create arbitrary tasks they will intentionally do their jobs incorrectly. Their pointless busywork would be correcting their own mistake. As perverse as that sounds, I have seen it with my own two eyes! Unfortunately, perception tends to carry more weight than substance.  Even if that perception is illusory.

 

A more traditional example of this rent-seeking tactic is to intentionally procrastinate and then do all your work at the end of the day. To create the illusion that you are busy and working hard.  Versus addressing action items as they come in throughout the day. Generating the image of having a mountain of work to do makes it look like you have a heavier workload. Making you less susceptible to being ousted out in the next round of layoffs. While counter-productive these methods aim to mask the fact that their position is nothing more than a redundancy.