If someone external to your group wants to invest in a certain territory encompassing you, your group’s permission should be required. The argument seems obvious. It is nearly by definition that when we make a decision collectively, the individual must submit. The individual is just one but the collective is more than one. Or so goes the argument.
Controlling foreign capital inflows would be coherent with the collectivist and mercantilist approach to human affairs (Gillian Tett, “Tariffs on Goods May Be a Prelude to Tariffs on Money,” Financial Times, March 14, 2025):
Could Trump’s assault on free trade lead to attacks on free capital flows too? …
Might tariffs on goods be a prelude to tariffs on money? …
Until recently, the notion would have seemed crazy. After all, most western economists have long seen capital inflows as a good thing for America. …
And six years ago, Democratic senator Tammy Baldwin and Josh Hawley, her Republican counterpart, issued a congressional bill, the Competitive Dollar for Jobs and Prosperity Act, which called for taxes on capital inflows and a Federal Reserve weak-dollar policy.
Says McNair [a financial analyst,] “the strategy itself is more coherent and far-reaching than most observers recognise.”
I am not implying that Tett herself embraces collectivist thinking. She explicitly says that she is “not endorsing” a tax on capital inflows.
There are good reasons for generally rejecting the primacy of collective choices that is ingrained in the minds of politicians on both sides of the aisle, and thus for opposing collective control of capital inflows. Circumscribing the group and the territory where collective choices can crush minority individual choices is broadly arbitrary, as is the collectivist we of my introductory paragraph. Even setting aside the issue of who constitutes the group and where the territory lies, the political we itself remains highly problematic. Is it represented by the 49.8% of the voters, which means the third of the electorate, who supported Donald Trump in the last election? What about the Condorcet paradox and its extensions that prove the frequent logical incoherence of a democratic majority?
Any policy and political decision requires a moral judgment about distribution, as welfare economics famously demonstrated. Any collective choice that is not unanimous means that some individuals will be exploited by others, so the required moral judgment can only be arbitrary. It is to circumvent this conclusion that the public choice school of economics, notably James Buchanan and Gordon Tullock, developed a theory of unanimous but limited social contract.
Not surprisingly, then, capital controls—whether on inflows or outflows—raise many problems. Government allocation, that is, allocation by politicians and bureaucrats, at least partly replaces market signals and incentives. Those who can tax can also control and ban if only with prohibitive tax rates or the threat thereof. A tax on capital inflows would prevent American businesses from freely appealing to foreign lenders or investors. It would limit the purchase of American dollars by foreign tourists. Perhaps, after a few decades of autarkic controls, remittance flows would be reversed and Americans would need to pay a tax to receive foreign remittances from exiled family members. Remember that, at the turn of the 20th century, Argentina stood among rich countries. And if capital inflows can be collectively managed, so can outflows, such as investment or travel abroad.
The collective is made up of individuals while the individual is not made up of collectives. There is no a priori reason why the collective is superior to the individual. If there is any axiomatic foundation to politics, it seems to be the primacy of the individual, recognizing all individuals are to be formally equal. Otherwise, it is accepting that some individuals will rule over others. And we know from the theory of autoregulated social order developed since the 18th century that spontaneous coordination in society is possible and efficient, at least under certain conditions.
In short, the superiority of the collective and its choices is not obvious at all.
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Are individuals made up of countries? A complicated question for DALL-E
READER COMMENTS
Student
Mar 16 2025 at 12:28pm
No other comment that to note that this might be DALL-E’s most beautiful “painting” like image yet. I really like this one lol. It even got the neck lines right lol.
Pierre Lemieux
Mar 16 2025 at 2:08pm
Student: I must disagree with you, but let’s keep our disagreement academic. I think the position of her breasts is a bit low or that they are missing a certain je ne sais quoi. Still, I agree with you that she has a very attractive face. She is a Renaissance woman, the only way DALL-E would do some nudity. From this viewpoint, our silicon friend has surpassed Leonardo da Vinci’s Mona Lisa.
Warren Platts
Mar 17 2025 at 2:47am
Oh brother. You guys are still going on about the Mona Lisa. 🙂 She’s alright. I wouldn’t kick her out of bed for eating crackers if she wasn’t 500 years old I guess. But you all are missing the point of the painting: it is not to titillate: it’s the geology that’s going on in the background…
Monte
Mar 16 2025 at 4:59pm
I would like to cast my vote for Princess Mathilde.
Student
Mar 16 2025 at 12:30pm
It still hasn’t mastered human hands yet tho… unless she has RA setting in lol.
Craig
Mar 16 2025 at 12:51pm
I think capital controls will come to help government inflate out of debt problem. IMF has a paper suggesting inflating way out of debt is best done with capital controls to prevent capital from fleeing. Bitcoin?
Pierre Lemieux
Mar 16 2025 at 2:17pm
Craig: You are probably right. But the capital controls you mention would be against outflows of capital. The tax or controls on capital inflows would reduce the value of the dollar and thus the importation of goods and services. Yet, the current administration seems to have found a good way to achieve the last goal: clownish policies, undermining the reputation of America, and widespread uncertainty.
Warren Platts
Mar 17 2025 at 3:10am
Pierre, that if very unfair. We are at the point now where the body politic has decided to end this trade deficit. (There is no need to get into the metaphysics of “body politics”). You economists can debate amongst yourselves about how trade deficits don’t matter. But your debates are what don’t matter now. Now we need to just get this done, come hell or high water. Your job now, as an experienced economist, is to tell us how to get this done.
Obviously, there are two sides to this coin. Tariffs alone cannot accomplish this task. And might even be counterproductive: the tariffs will increase the value of the USD relative to other fiat currencies and thus encourage foreign “investors” to invest in USD assets. Therefore, there have to be capital controls, but they have to be on the capital inflows. I’d say charging foreign investors the same capital gains taxes that Americans have to pay would be at least a start. But what do I know since I’m a mere geologist…
Pierre Lemieux
Mar 17 2025 at 12:30pm
Warren: You seem to be a great advocate of the syllogism–I think in the series “Yes, Minister,” which I quote from memory:
As for your last sentence, even if the people voted 49.8% or 50.2% against geologists learning economics, you wouldn’t have to submit. But it does require an effort. Reading EconLog is a first step.
Jon Murphy
Mar 17 2025 at 12:48pm
As a factual statement, this claim is prima facie incorrect. If people wanted to end the trade deficit, they have it well within their power to do so without the need to use any compulsion: simply stop buying imports. The mere fact the trade deficit exists is evidence that the body politic wants it to exist. Or, what comes to the same thing, that the cost of eliminating the deficit is not worth the benefits.
Warren Platts
Mar 17 2025 at 4:01pm
(A)#1 geologists are still doing what they are supposed to do: they are still fracking in Pennsylvania and mining tar sands in Alberta and looking for gold on the Moon. Actual production stuff. I’m beginning to wonder what do you guys do? I asked a simple question: How to end the trade deficit? I get it: “trade deficits don’t matter” at Mises & GMU. But that’s not the question: just answer it: How do we end the trade deficit, using whatever tyrannical, authoritarian means necessary. The fact there is no straight answer entails (a) you all have no idea; or (b) you think you are in possession of esoteric knowledge that the public “CAN’T HANDLE THE TRUTH!” Either way, this is why the economics profession is going the way of climate science (that wants to spend trillions on a hallucination) & virology (that killed 20 million people and cost $20 trillion). This shouldn’t be hard. You should be able to spit out half a dozen ways to end the trade deficit. It’s like being a lawyer: a good lawyer can either save a man or hang a man depending on what side he’s on.
Jon Murphy
Mar 17 2025 at 6:21pm
To be clear, it’s not just GMU and Mises. Just about any economist anywhere will tell you the same thing. You have to go heterodox (and pretty deep into the weird heterodox circles) to get otherwise.
Warren Platts
Mar 17 2025 at 7:51pm
Yes, even University of Chicago economists (where I went) will tell you the same thing. But I will ask you the same thing I’ve asked for 3 times now: If you were paid by Trump to figure out a way to end the trade deficit, what would you say? Again failure is not an option. Failure is not your task. You’ve been told what to do. Granted, you could resign your position. Or DOGE could eliminate your position.. But an honest answer to how end the trade deficit would be welcome!
Jon Murphy
Mar 17 2025 at 8:00pm
I gave an answer. You quoted it.
Craig
Mar 17 2025 at 8:32pm
Trump has also opined that any country that undermines the USD as a global reserve currency will be subjected to tariffs. But how do the people holding the USD as a reserve currency get those dollars?
” Therefore, there have to be capital controls, but they have to be on the capital inflows. ”
Jon Murphy
Mar 17 2025 at 8:47pm
And that’s the problem with Trump, Craig. There’s no rhyme nor reason to his trade views. It changes minute to minute, literally these days. He just wants tariffs.
Warren Platts
Mar 18 2025 at 2:23am
Again, for the 4th time I ask: What is the best way to end a trade deficit? Tyrannical, authoritarian means are allowed. It is not your job to moralize and tell us what to do. Your job is to provide us options so that we can decide what to do. There is an arrogance in the economics profession. And it is not that I am opposed to trade: I personally have this Chinese guy who lives in Arizona, but he’s got connections to the old country, and so if I need new keyboard because you made me spill my beer on it, he will dig it up, it might take 2 or 3 weeks, but for a decent price, he will provide the parts I want. And the parts work, and he is honest. So I personally and most Americans are not against trade (And what can possibly be more ironic than Libertarians defending Communism?)
So again, for the 4th time: What is the, uh less bad way (we’ll put it that way) to end a trade deficit. That’s your job to tell us. “Stop buying imports,” is not an answer. I hate to say this, but Grok is a better source of information than you all…
Craig
Mar 18 2025 at 9:15am
“Again, for the 4th time I ask: What is the best way to end a trade deficit? Tyrannical, authoritarian means are allowed. It is not your job to moralize and tell us what to do. Your job is to provide us options so that we can decide what to do.”
Honestly I’d say ‘weaken the dollar’ and if the regime weakens it and the trade deficit persists weaken it, weaken it until it does actually go away, there will be consequences to that of course, but that is how I would do it.
Warren Platts
Mar 18 2025 at 10:30am
Thank you Craig! An honest answer! From a lawyer of course because the economists here will not provide an honest answer. There should be six options on the plate. But yes, devaluing the USD is one option. The problem is, we tried this in Plaza Accords in the 1980s. That is to say, engaging in the race to the bottom requires cooperation from other countries. The Japanese were perhaps tractable, but the Communist Chinese are not. So I’m still leaning on capital controls and real estate bans..
Felix
Mar 17 2025 at 10:44pm
Yes, just roll over and think of Olde Englande. As I am sure you did during the Biden years.
Your prescription doesn’t pass the smell test. If everyone just rolled over and thought of Olde Englande, nothing would ever change. Progress comes from people bucking the system, not those milking it.
nobody.really
Mar 28 2025 at 1:31pm
George Bernard Shaw
Mactoul
Mar 16 2025 at 8:34pm
Should the reality conform to the social contract theories or vice-versa?
Because the social contract theories have no notion of political divisions neither do they heed insider/outsider, neighbor/stranger, friend/enemy dichotomies, should we pretend that these dichotomies don’t exist at all?
Adam Smith called his work The Wealth of Nations but now it is insisted that nations don’t exist at all.
Pierre Lemieux
Mar 16 2025 at 10:54pm
Mactoul: You write:
I assume that you mean “political divisions” between different countries. I think I recommended a few times that you read James Buchanan’s, notably Why I, Too, Am Not a Conservative and, with Geoffrey Brennan, The Reason of Rules. You may not agree, but at least, if you allow me to be frank, you will have an idea of what the most important contractarian theory of our times says and of what you pretend to criticize.
Mactoul
Mar 17 2025 at 2:40am
While I have not been able to get my hand on Why I, Too, Am Not a Conservative, perhaps you could refer more precisely to where the question of political division of mankind is treated in this or any other writing of Buchanan. I have read your reviews of Buchanan and by others too, but I never came across this topic.
The Why I, Too, Am Not a Conservative itself would be interesting to discuss in greater detail. It seems Buchanan’s view of liberalism and conservatism is rather idiosyncratic.
Pierre Lemieux
Mar 17 2025 at 2:30pm
Mactoul: For a quick answer to your questions, here is what I wrote in my review of Why I, Too, Am Not a Conservative:
In my review of Buchanan and Tullock’s seminal The Calculus of Consent, I reported:
These ideas are of course better explained in Buchana’s actual writings, which cover many volumes. But the idea of different social contracts in different societies underlies his whole theoretical construction. A social contract, however, requires equally free individuals who have to agree on abstract rules if they want to benefit from life in society, as opposed to Hobbesian war or submission.
Mactoul
Mar 18 2025 at 4:11am
Thanks. I had read your reviews so I was familiar with Buchanan’s views on assimilation and immigration.
But my question was different. Existence of different countries is a given in social contract theory. It does not emerge from something fundamental. Why there exist multiple countries and thus multiple social contracts–this I have never seen address. Perhaps it is not an interesting question but I feel neglect of this aspect is detrimental to the understanding of political divisions of mankind.
Pierre Lemieux
Mar 19 2025 at 9:41pm
Mactoul: I don’t know if he treated the topic in more detail somewhere. But the example of Sweeden and the US suggests, to take a “concrete” example, that it is more plausible that the Swedes would have unanimously agreed to a constitutional rule establishing or not banning an income insurance regime, while it would have received a lot of opposition in the United States (and you theoretically need only one individual who would be willing to sink the social contract and risk a Hobbesian war on that matter).
Mactoul
Mar 16 2025 at 10:03pm
Crux of matter is whether there are choices which can only be made collectively?
Milton Friedman gave the example of the extent of property right in air above one’s private property.
Curiously, the classical liberal voices have been muted in past two decades of debate and conflict over same-sex marriage and the transgender question. One wonders why?
nobody.really
Mar 17 2025 at 1:29am
Doesn’t this describe the law of the jungle? The strong do as they wish; the weak suffer what they must. And if anyone tries to call the strong to account, the strong merely have to voice an objection to evade consequence.
As I understand it, humans are at the top of the food chain precisely because we have a peculiar genius for cooperation, and we use that genius to coordinate efforts to rein in strong humans, very much without their consent. Insisting on unanimous decision-making would seem to guarantee exploitation rather than guard against it.
Perhaps taxation of capital inflows is a bad idea. But to make this argument, you start by arguing that ALL taxation—and indeed ALL government—is a bad idea. I don’t doubt that some will share this view, but I absolutely doubt that anyone will be persuaded to reject all government and all taxation simply out of concern for the taxation of capital flows.
Yes, some idealistic people embrace “sponteneous order” just as some reject all use of force. I suspect that these people mostly live under both the burdens and protections of artificially (and forcefully) imposed orders.
Pierre Lemieux
Mar 17 2025 at 12:17pm
Nobody: You write:
Obviously not, simply because the exploited would have a veto. I explain the original idea in my review of Buchanan and Tullock’s The calculus of Consent. (It is still better to read the book, but that one is a bit technical.) It takes time to understand that. Being a slow learner, it took me 20 years.
You also write:
No, I only need to accept that, in a society where everyone would be equally free, nobody could be taxed without his own individual consent. But there are many rational arguments against all taxation; but you don’t need to accept them to agree will my whole post above.
nobody.really
Mar 17 2025 at 1:52pm
How exactly would the weak exercise a veto on being abused by the strong? As far as I know, the principle mechanism for doing this is by banding together with other weak people and then IMPOSING the rule of law on the strong, whether they consent or not. Since you would exempt people from being subject to the rule of law without their consent, what other mechanism were you considering for constraining the strong?
This discussion seems to assume that government is the sole source of exploitation. I find that a weak assumption.
Perhaps we’re just defining terms differently. “Taxation by unanimous consent” strikes me as a needlessly verbose way to say “donation.”
Felix
Mar 17 2025 at 10:51pm
Because you specifically said unanimous:
How can unanimity lead to exploitation under any circumstances, let alone guarantee it?
nobody.really
Mar 18 2025 at 12:14am
If you read the beginning of my posts, you’ll see me quoting Pierre Lemieux saying “Any collective choice that is not unanimous means that some individuals will be exploited by others…” (emphasis added). I understand collective choice to refer to government action. Lemieux makes no equivalent prohibition on private actions–including the actions of the strong against the weak.
Indeed, I understand Lemieux (and libertarians in general) as demanding a rather broad scope for private actions. Most stop short of demanding that there would be no law enforcement unless it was by unanimous consent; indeed, Lemieux’s summary of the views of James Buchanan raise this very question. (“Buchanan was a radical liberal, but he was not an anarchist. He believed that a limited government and the rule of law are necessary for the maintenance of a free society.”) So I ask Lemieux to explain this paradox.
Pierre Lemieux
Mar 19 2025 at 10:06pm
Nobody: I don’t see where the paradox is. Here are two keys to understanding Buchanan. First, very simply, one has to understand what a free exchange is. Consider a private exchange between Elon Musk and I. We each have a veto. He tells me, “Here is a Starlink subscription for $100 a month.” My veto is simple: decline the exchange. (It would be very different if he succeeded in having the federal government impose on each taxpayer to get the subscription.) Second, the unanimous social contract is a political exchange of basically the same sort about rules (the fact that it is about rules and not specific decisions is important). Imagine a group of people who are eager to sign a social contract (agree on the basic rules that will preside over their society) because the alternative is not fun: at best individual autarky, at worst the Hobbesian war of all against all. If somebody proposes a rule against murder, all are likely to accept. But if one proposes a rule according to which every year 5% of citizens will be chosen at random for a sacrifice to the gods, it would be surprising if nobody opposed his veto. The same, of course, if a rule is proposed that only the blacks will pay taxes or that all people who have two kidneys can be conscripted to give one to some of those who need one to survive. Read Buchanan’s The Limits of Liberty or (with Brennan) The Reason of Rules whichever you find the less difficult to follow (I assume you are not an economist).
nobody.really
Mar 21 2025 at 12:56am
So very kind; in the spirit of Buchanan-esque reciprocity, let me extend the same courtesy to you.
I agree that it would be helpful to understand free exchange. And I agree that we understand it differently.
What if, when you decline the exchange with Elon, he beats you up, takes your $100, and then declines to consent to any retribution you would take against him? As far as I can tell, free exchanges tend to occur best where participants have cause to fear the consequences of resorting to force—consequences they would expect to experience whether or not they consented to bearing those consequences.
Did you mention war? As in, the use of force against people without their consent?
So can we acknowledge that even a Buchanan-esque world requires at least the threat of the use of force without consent, so as to induce people into a social contract?
Moreover, can we acknowledge that a Buchanan-esque world would require such a threat against people who operate OUTSIDE the constraints of the social contract? Perhaps not.
I started this discussion by asking of this was just the law of the jungle. And this statement seems to concede it: Strong individuals/factions can simply demand that everyone submit to being enslaved or killed. This strikes me as a fair statement of realpolitik. But I would expect that a person confronted with this choice would at least consider the option of wielding force in her own defense, even if the would-be enslavers did not consent to it. But as summarized by Lemieux, it appears that Buchanan would insist that the victimized individual would pursue only consensual negotiations—“buying off” the enslavers—even under these circumstances.
Ah, so a social contract would provide for a “protective state” to enforce its terms? And would that state have the option of using coercion against those who have not consented to the social contract? Would it have the option of using coercion against those who HAD consented to the social contract—but then recant? After all,
This seems to imply that at any moment, even signatories of a social contract could opt out.
I don’t mean to needlessly disparage Buchanan: He makes a valiant effort to resolve Juvenal’s ancient quandry, Quis custodiet ipsos custodes? And I haven’t read Buchanan’s works—though, as a gesture of good faith, I have downloaded Boudreaux’s The Essential James Buchanan. I appears I am destined to learn public choice theory from people with French names. Dit moi merde.
But for now, my operating hypothesis remains that since before the evolution of homo sapien sapiens, groups grew under coercive leaders. Sometimes these leaders act in a manner that tends to perpetuate the groups; sometimes not; and time and chance happeneth to them all. But I know of no examples of societies—or even families—enduring without coercion. (If you’ve managed to raise a toddler without using physical restraints, do tell.) I remain interested in discussing how to minimize the role of coercion, but skeptical of our ability to eliminate it completely.
Mactoul
Mar 18 2025 at 5:28am
Do you mean that the political boundaries are arbitrary? But the borders have emerged out of historical processes through war and negotiations for peace. Is that arbitrary?
The problem of political we is inherent in liberalism which denies the political nature of man. If you rule out the political dichotomies as illiberal , then by natural consequence the political we is incomprehensible.
Pierre Lemieux
Mar 19 2025 at 10:17pm
Mactoul: The interface between tradition and the social contract is indeed complex. But you can’t charge liberal contractarians à la Buchanan to deny the social nature of man: to live in society, individuals are even willing to accept essential rules and limit their liberty. (None or not many or not 49%, however, are willing to be continually exploited by the rest.) As for de Jasay, his whole (anti-contractarian) theory rests on traditional conventions.
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