Some Welcome News

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Free market articles, always in an uphill struggle against the dominant statism, have a doom and gloom bias. The state’s actions dominate the front pages, and so each day’s news almost always looks bad. Yesterday it was a Congressional energy bill, today Fannie Mae is being bailed out.

On the surface, things look bad, very bad, for free markets. My e-mails are biased toward the negative. LRC readers seem to be weighted toward pessimists who believe that any number of dire scenarios are about to occur with high probability or even certainty. Granted, there is a lower tail to what may occur, but the odds are against it. One should not bet the farm on extreme outcomes.

Beneath the surface, things are not so bad. And even if the worst happens, it won’t be as bad as the doom and gloomers think. Free markets and free market thinking are winning and will win. The basic fundamental, which is God’s grace, is intact. The result is that the human spirit is resilient. The human being will overcome obstacles.

In financial terms, the human race is constantly engaged in massive amounts of risk arbitrage. We are constantly on the lookout for improving things and bettering our positions. We are constantly seeking profit. We are always looking for ways to achieve more with less. We are value-creators, and this shows up in a perpetual striving to create wealth. And despite all the depredations of the state, value and wealth are created over the long-term.

Free markets enhance this process because this process is what free markets are all about. States can do no more than temporarily hold back the energy and striving of the human race. Barriers to value and wealth creation that are created by states all crumble in the long run. There is every reason to be a long-run optimist.

E-mails will now arrive telling me "Yes, but in the short-run, look how bad things are! There has been no progress in my lifetime, and the prospects have never been more dim. What kind of fool are you?" Even presenting a balanced view looks a bit crazy to a reader who expects imminent catastrophe. Let’s give pessimism a break. Can’t a man reasonably express optimism once in a while? I can easily fill up the rest of this article with bad news. I’m not going to.

What spurred these thoughts? Several things. A few weeks ago, I learned that Dave Berry, a biotech whiz kid, is trying to prod microbes into making hydrocarbons. This simply reinforced the fact that energy sources are, for all practical purposes, infinite. Fuels can already be produced by the Fischer-Tropsch process using coal. There is always nuclear energy, and old prejudices over nuclear will break down (part of that arbitrage process). Energy prices will probably fall over the long-term. Who knows?

This is merely one tiny bit of scientific news. One cannot keep up with the advances in even one field like biotechnology. The number of companies engaged in research is astounding. The entire field did not exist only a few decades ago. The stock market of today is filled with an incredible roster of new names.

On Sunday, Venezuelans voted 51% to 49% to reject the new constitution proposed by Hugo Chávez. This was a welcome vote for freedom and against a more centralized and authoritarian (socialist) government like Castro’s. (The turnout was 56% of the electorate.) The margin of victory was narrow. It will not stop the efforts of Chávez to get what he wants. But it is welcome news nonetheless. It is like the current unpopularity of the Iraq War among Americans.

Another welcome news item is that the level of killing has decreased in Iraq. The story there is far more complex. All the killing in this war was triggered by the U.S. invasion, so that any progress now is conditional on that fact. Furthermore, the U.S. presence attracted al-Qaedan terrorists. And if the U.S. had simply withdrawn some years ago, the Iraqis would probably have eliminated the foreign influence of al-Qaeda themselves in short order, etc., etc. So that for me to laud a decreased level of killing is not to be interpreted as support for the surge or the American presence, and in no way a measure of U.S. victory. The decline may prove temporary. Who knows? It’s still good news. But not unalloyed as the Iraqi situation is still a mess. In fact, we have had the development, not unexpected, that the U.S. will have a more or less permanent, official, and large presence in Iraq for a very long time to come, as the large bases constructed there already suggested it would.

We have just had published a National Intelligence Estimate on Iran’s nuclear intentions and capabilities. It contains a sharp re-assessment concerning Iran. In 2005, it said "Assess with high confidence that Iran currently is determined to develop nuclear weapons despite its international obligations and international pressure, but we do not assess that Iran is immovable."

Now in 2007, it says "Judge with high confidence that in fall 2003, Tehran halted its nuclear weapons program. Judge with high confidence that the halt lasted at least several years. (DOE and the NIC have moderate confidence that the halt to those activities represents a halt to Iran’s entire nuclear weapons program.) Assess with moderate confidence Tehran had not restarted its nuclear weapons program as of mid-2007, but we do not know whether it currently intends to develop nuclear weapons."

This report was very welcome news. Intrade has contracts that assess the probability of an overt air strike by the U.S. on Iran. That probability dropped very, very sharply in the wake of this report. The June, 2008 probability, which had been as high as 34% after Bush had revived his bellicose rhetoric in late November, has dropped to 2.1 bid and 13.4 asked. It has so far held this level despite Bush having reiterated that the report "would not prompt him to take off the table the possibility of pre-emptive military action against Iran." This suggests that Bush has been dealt a political setback. His hands are far more tied now with respect to Iran than a short time ago. A future President is likely to be more restrained toward Iran too. This conclusion can change, of course, as events transpire. It also depends on the assumption that the Intrade prediction markets make reliable assessments that are about as accurate as any that are publically available. I am of the opinion that such an assumption is warranted.

Now of course the Bush supporters will do everything they can to gainsay the report, such as by saying that the key report writers are anti-Bush officials. Such criticisms do not matter very much. What matters is that divided government has shown a sign of working again. We no longer have a monolithic voice coming from Washington. This means that Bush’s political clout has been taken down a notch or two.

The President warned in October that Iranian nuclear weapons could lead to World War III. This report "has dealt another blow to Bush’s credibility — which already was low over his false claims about illicit weapons in Iraq — because he was aware of the findings when he warned on Oct. 17 that Iran’s quest for nuclear weapons could ignite World War III."

The future is continually arriving as the present. If we are to look forward to a brighter future and try to make it brighter, it is always nice to see some of it transpiring in the present. Sometimes we have to search a little bit extra hard to find the bright spots amid the torrent of bad news. This week we didn’t have to search very far, and for that I am thankful.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

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