Market Distortions

June 28, 2026June 26, 2026Leave a comment

June 28, 2026

By Stephen Stofka

Last week I wrote about different types of authority, and whether authority without responsibility is legitimate. From last week: “Through its legislative authority and police power, a government controls the terms of contracts between private parties. It grants licenses to individuals and companies to conduct business. It sets rules that contracts must follow. Those contracts govern the distribution of wealth within a society. Does a government have an accompanying responsibility to ameliorate the economic outcomes from those contracts?”

A utopian economic model popular with some libertarian economists is laissez-faire economics. In this model, government has a limited role in commerce, but what are those limits? The term acts as a signaling device between pundits rather than a precise economic doctrine. Economists prefer to discuss the balance between market failures and government failures. Market failures occur when market participants don’t pay for a benefit or inadvertently cause harm. Pollution is a frequently used example. Let’s turn to government failures.

In his seminal work The Wealth of Nations, Adam Smith argued that governments provide essential institutions for commerce. These include defense, a court system to adjudicate contracts and protect property, provision of public works, a system of weights and measures, a reliable money to conduct business, and the granting of patents and copyrights. Smith supported public education, a controversial idea in the late 18^th century. He thought it would improve the labor pool and civic life. He thought there should be few regulations and few, if any, programs of redistribution to people or businesses. He was very critical of grants of monopolies, which stifled competition and retarded commercial improvement.

Governments inherit a legacy of past arrangements, property rights and commercial licenses that were doled out by a king or some other royalty after a conquest. The island of Manhattan in New York City is some of the priciest real estate in the world. During the reign of England’s King Charles II, the English navy seized the island from the Dutch in 1664. The king granted the land to his brother, the Duke of York (Source). A common practice was to subdivide the land and sell it for money, or to secure key political allies. Our economic system is built on a legacy of colonial conquest and monarchical power and privileges.

A company may owe part of its fortune to its ownership of a key parcel of land in a harbor port like New York City. That ownership is based directly or indirectly on a conquest and land grant. These past arrangements have created economic advantages for some private parties who leveraged those assets over decades, then sold them to other private parties. Those advantages may have seemed right and fair several centuries ago, but standards of fairness change with the passing of generations, and each generation must deal with the legacy of those past arrangements.

Governments protect the transfer of property rights down through the generations to maintain a stable and predictable economic and legal system, the backbone of a flourishing society. Long lived governments like the City of New York inherited an authority of several centuries. They have an accompanying responsibility to rectify the unequal outcomes that have arisen from those ancient arrangements. Denying that responsibility diminishes their authority in the eyes of those they govern.

Naturally, those that benefit from those advantages fight to keep those benefits. They believe their wealth was entirely deserved and promote ideologies that champion the virtues of accumulated wealth. Descendants inherit the authority over the assets but reject any responsibility for the circumstances under which those assets were accumulated. Our legal system accommodates the inheritors of wealth because the rules were written by the inheritors.

When governments try to correct those inequalities of income and circumstance, they often make a mess of it. Frederich Hayek (1899 – 1992), a Nobel Prize winning economist, pointed out that market prices carry a lot of information that coordinates production and distribution. Government redistribution schemes distort that information system. To achieve their goals, governments can not access enough information to make prudent decisions. Inevitably, they distort the private marketplace and investment decisions. It’s a matter of opinion whether corrective redistribution programs do more good than harm to the people they are designed to help.

Prices in a market system provide both information and benefits that we take for granted. Let’s consider a textbook example of rent regulation in New York City. 1.6 million people live on the island of Manhattan in an area of 22 square miles. That’s a density of 73,000 people per square mile (Source), more than four times the density of Greater Tokyo. Brooklyn has 38,000 residents per square mile. Naturally, there is a strong demand for housing and this puts upward pressure on prices and rents. For many working families, housing costs can consume 50% of income, far above the 30% recommended threshold. I grew up in the city and left in my 20s because living costs were too high.

For over a hundred years, there has been some form of rent regulation in the city. Under the old systems, known collectively as rent control and phased out in 1969, rents were often frozen. Landlords skimped on building maintenance and tenants were reluctant to push too hard for repairs or improvements in case the landlord used that as a reason to do upgrades which terminated the apartment’s status as a rent controlled unit.

The Rent Stabilization program was created in 1969 and replaced the older rent control systems that had been in place for fifty years. There are more than two million rental units in the city and slightly less than half are rent regulated. Almost all of those units are under the new rent stabilization program. Unlike the older rent control program, annual rent increases occur without landlords having to apply to a government agency.

In a market system model, supply and demand regulate prices. In the Rent Stabilization program, a government agency called the Rent Guidelines Board sets a cap on these rent increases (see note below). The Board must review thousands of data points on the costs of providing housing to determine a reasonable percentage cap for rent increases (Source). In a market system, thousands or millions of people make choices that influence the price of the goods and services they buy.

Several economic studies have concluded that rent regulation reduces housing supply. An investor can’t simply buy an older building, move the old tenants out, demolish the building and build something new. Rent stabilized buildings have guaranteed lease renewal so it is very difficult to move the old tenants out. Rent regulations dampen investment in new housing. Even though new buildings are exempt from rent stabilization, policies can change and investors can not be assured that a newly constructed building will remain exempt (Source).

Rent stabilization reduces the turnover rate. Tenants remain in their rent stabilized units regardless of a change in their job location, income, or family size. This encourages mixed-income neighborhoods but the benefits of the program flow to high income families who don’t need the financial assistance. Critics say that housing vouchers would better target needy families.

Under a free market system, prices respond as people make choices to balance their income and needs. Given the cost of living in New York City, why don’t more people move to Clifton, New Jersey? The city has a population of 90,000, a density of only 8,000 per square mile and it’s a 35 minute drive from Manhattan. Housing prices are modest and the city gets a good rating at Livability.com. Why isn’t the free market system inducing more people to move from NYC to Clifton? The fact that prices and quality of living are not attracting more people indicates that the housing market has characteristics and constraints that place it outside of the free market model.

People buy more than square feet when they buy or rent a home. A home is an essential part of daily life and each family’s home package is unique. They purchase a housing package of resources that include job opportunities, schools, churches and other social institutions, transportation, shopping, green space, hobbies and entertainment, and networks of other people. A family may spend $3000 a month for housing in a city with adequate public transportation so that they do not have to spend $1000 a month on a car and gas to get to work, school and play activities. Another family spends $2000 a month for similar housing but has additional transportation costs that add $1000. Both housing packages cost the same.

When some pundits criticize rent regulation as government interference, it is important to keep in mind that, in those cities with rent regulation, the physical home is a small part of the entire housing package. One time when I visited my brother who lived in Manhattan, we went deep sea fishing during the day then attended a riverboat concert that night. We took public transportation and spent about $300 (2026 dollars) combined, including meals. That seems like a bargain but we need to add in the cost of apartment rent in Manhattan. Access to all the amenities that the city has to offer comprises the entire housing package and is capitalized into the cost of housing. That’s why rents and housing prices in New York City are so high.

Secondly, the free market model is a distortion of actual free market dynamics because most markets have frictions and ancillary benefits. When economists build their models, these frictions and benefits are assigned a Greek letter and added to the equation. Present day governments must negotiate a long history of entitlements and endowments that were themselves a distortion of the free market. With authority comes responsibility. When pundits complain about government distortions of the market, ask yourself if a government program is distorting the market more than the model itself. I hope to see you next week.

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Photo by Kaleb Nimz on Unsplash

Note: On Thursday evening, June 25, the Rent Guidelines Board voted 7-1 to freeze rents on units with 1 and 2 year leases. This is the first time in the 56 year history of the rent stabilization program (Source).

Which Authority?

June 21, 2026June 19, 2026Leave a comment

June 21, 2026

By Stephen Stofka

Last week I looked at schisms in religious and political organizations. I ended with the speculation that many of our disagreements ultimately are about authority. I want to take a look at the various types of authority we recognize, and what characteristics they share. Secondly, what is the relationship between authority and responsibility?

Most cultures recognize a parental authority derived from the responsibility that a parent has for a child. Religious tradition claims that parental responsibility and authority come from God, not the state. However, states claimed a responsibility under the doctrine of parens patriae, a Greek term meaning “parent of the country.” Therefore, the state had a duty to protect anyone, particularly children, who could not protect themselves. In 1962, a seminal paper published by Kempe, M.D. et al (Source) identified a clinical condition of physical abuse in young children that the authors termed battered child syndrome. Doctors and hospitals became more likely to report suspected child abuse to local authorities, and legislatures passed laws mandating such reporting

On the other hand, many jurisdictions regarded the home as a private sphere. Police were reluctant to actively intervene in cases of suspected domestic violence (Source). Litigation and activism by women’s rights groups prompted legislatures to adopt laws that criminalized domestic violence, rather than treating it as a private family matter. As we can see, the spheres of authority are not clearly defined and clashes over authority are frequent in human societies.

Governments at all levels claim a political authority, a right to make and enforce laws in its role as the parent of the country. Authority is not power but authority can be imposed by power. Monarchies and theocracies base their claims to authority on God, not the people. In a democracy, a government’s police power is based on the consent of the governed. In a multi-layered system like the United States, governments often clash over jurisdictional authority.

A central debate divides the electorate. Through its legislative authority and police power, a government controls the terms of contracts between private parties. It grants licenses to individuals and companies to conduct business. It sets rules that contracts must follow. Those contracts govern the distribution of wealth within a society. Does a government have an accompanying responsibility to ameliorate the economic outcomes from those contracts? Half of the population says yes, and advocate social programs that address inequalities of circumstances. Half of the electorate says no. The government may make the rules but has no responsibility for the outcomes. Question: is authority without responsibility legitimate?

Legal authority is derived from political authority, but is concerned with applying the law rather than making it. It is the least responsible branch of government in our country because many judges are unelected and are not held accountable to the public. Often there is not a clear distinction between applying the law and making law. Lawmakers often write laws using imprecise language so that they can reach a consensus. Judges must interpret such language, and are accused of making law when some people don’t like their interpretation.

However, even when a law or constitutional amendment is clearly worded, judges have been unable to resist a secret desire to write law through their interpretation. Let’s call this an authority by implication, by implied meaning. Here’s an example. The 14^th Amendment states “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States.” In the 1873 Slaughterhouse Cases, a 5-4 majority of the Supreme Court interpreted that language to create two sets of citizenships with distinct rights (Source). Citizens of the United States had one set of rights. Citizens of the State had a separate set of rights. Does the 14^th Amendment state any such thing? No. Does that language imply that there are two separated sets of rights? Implied meanings are personal and quite arbitrary. Did the framers intend to give the judiciary both arbitrary power to draw their own implications and lifetime tenure? These are the essential characteristics of kingly power. After a seven year war of independence against the British King George, they decidedly did not grant such a power. The judiciary grabbed that power.

God is a convenient source for authority claims, because God can accommodate many different claims to truth. Clergy claim a religious authority based on sacred texts like the Bible, or Qur’an, or on some divine revelation. Why do church institutions feel the need to claim authority? Ultimately, they want to convince others to submit to their authority. The philosopher Fredrich Nietzsche (1844 – 1900) rejected claims by any institution that it had unquestionable authority over human thought, morality, or values. His targeted Christianity because of its influence over European morality, but his criticism extended to all religious, moral and political systems that claimed control of the human mind.

Clergy often link religious authority with moral authority, claiming that objective morality is impossible without God. Early Christian leaders like Augustine and Aquinas taught that all moral laws are derived from God. Of course, the classical Greeks would have disagreed, but Christian teaching has long rejected secular principles and virtues. More recently, the evangelist preacher Billy Graham preached that, without God, everything was permissible. Without God as a foundation for morality, actions cannot be judged right or wrong. Right actions are simply social and personal preferences. There is an obvious contradiction here. How can a subjective belief in God create a foundation for an objective morality? Religious believers are practiced at embracing contradictions. Never let a contradiction get in the way of a religious claim to truth.

Expert authority may be based on a practiced knowledge or it may be based on nothing more than the recognition of other practitioners in a certain field. For several thousand years, the theory of humors was the bedrock of the medical practice. First proposed by the Greek physician Hippocrates (c. 460 B.C.E. – c. 375 B.C.E.), the theory claimed that disease was an imbalance of four humors in the body. Bloodletting was a common practice to rebalance the humors. The theory was flexible and could be used to explain any outcome. If the patient got better after bloodletting, that demonstrated the truth of the theory. If the patient died, as in the case of President Washington, it was because the humors were too far out of balance. The effectiveness of bloodletting was not tested until around 1820, when it was shown that bloodletting was either ineffective or harmful for most diseases. How did experts get it wrong for two millennia? They relied on an authority based on tradition.

Many of our institutions depend on managerial authority, derived from the hierarchy in an institution. Examples include corporations, universities, and military organizations. A manager with little experience in a field may override the experience and knowledge of employees that he manages. The problem is particularly acute in the federal government. After a change of the executive, political appointees are put in charge of a large department based on their loyalty to the President or fundraising ability rather than knowledge critical to the successful operation of the department.

Linked to managerial authority is economic authority. Employers, lenders, and property owners control economic assets, investment and job opportunities. As a recent example, Iran’s control of the Strait of Hormuz, a key shipping lane, supported an economic authority that proved to be as powerful as the authority that the United States claimed as a military hegemon.

We can classify authority by its justification. There is an authority by force, which needs no justification. Might makes right, as the saying goes. Even those who use force to impose their authority often make some of the other justifications I have noted above because force is an expensive tool to implement a regime of command. Authority by consent enlists the cooperation of those subjected to that authority and requires fewer resources. Expertise, tradition, political, moral and religious justifications are often woven together in a packagethat helps defeat challenges to an institution’s authority. In our daily disputes, we can keep an eye out for these combinations of justifications to help us unravel competing claims. And, with that, I hope to see you next week.

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Photo by Chad Stembridge on Unsplash

The Schisms

June 14, 2026June 10, 2026Leave a comment

June 14, 2026

By Stephen Stofka

This week I want to write about the divides within human organizations, particularly our political and religious institutions. I’m trying to understand what there is about us as social beings that causes these splits. Typically, a fundamental issue comes up that cannot be resolved and a congregation will split over the disagreement. Are these ideological splits inevitable, a product of the human temperament? Let’s look at some historical examples and see if we can see some common elements.

Soon after the founding of our country, two political parties formed with fundamental differences about the role of the federal government. The Federalists favored a strong central government, following the sympathies of Alexander Hamilton, President Washington and John Adams. The Democratic-Republicans wanted a weaker federal government with stronger state and local control, a type of governance favored by Thomas Jefferson and James Madison. What started as a political dispute has now grown into separate philosophies about the role of local institutions, including the family, in our lives.

In Islam, the Sunnis and Shia split over the leadership of the Muslim community. The Sunni believed that the community should choose its leader from among qualified companions of the Prophet, leading to the selection of Abu Bakr as the first caliph. The Shias believed that succession after Muhammed’s death in 632 C.E. should remain within the Prophet’s family and that his cousin and son-in-law, Ali ibn Abi Talib, had been designated as his rightful successor. What began as a political dispute gradually developed into distinct religious traditions. Over time, Sunni and Shia Islam evolved different views about religious authority, leadership, and certain theological questions.

In the ancient Jewish community, the Pharisees and Sadducees disagreed over the source and interpretation of religious authority. The Sadducees accepted only the written Torah (the first five books of the Hebrew Bible) as authoritative. The Pharisees accepted the written Torah but also believed in an Oral Torah—a body of interpretations and traditions passed down alongside the written text. Because the Sadducees’ authority was tied closely to the Temple, its destruction in 70 A.D. caused their movement to disappear. An oral tradition allowed the Pharisees to adapt religious law to new circumstances and eventually became the foundation of Rabbinic Judaism.

Their disagreement reminds us of the disputes between Christians who insist on a literal interpretation of the Bible and those who understand the Bible as story, as allegory, as poetry. We can see elements of this dispute in our current debates about judicial interpretation and analysis. The Sadducees rejected any doctrines that were not explicitly stated in the written Torah. Textualist judges believe that legal analysis must be firmly grounded in and confined only to the text, and its meaning as they understand it.

The first followers of Jesus were Jewish. They attended synagogues, observed Jewish law to varying degrees, and regarded themselves as part of Judaism. Some believed Jesus was the Messiah that Jewish tradition had long spoke off. However, some followers began to regard him as divine, provoking a clash with Jews who believed in strict monotheism. After the destruction of the Second Temple, Rabbinic Jews rejected claims that Jesus was the Messiah or divine. By the middle of the second century, many Jews and Christians regarded themselves as separate communities.

Over the centuries, frictions over papal authority grew between Greek-speaking Christians in Eastern Europe and the Middle East, and Latin-speaking Christians in Western Europe. The bishops in Rome, the center of western Christianity, claimed universal jurisdiction over Christians everywhere. Bishops in the east believed that they should govern together as equals. This is similar to the disagreement between the Federalists and anti-Federalists at the Constitutional Convention. The Federalists wanted a strong centralized structure. The anti-Federalists wanted a confederacy of equals. In 1054 C.E., the bishop of Rome, also called the pope, and the bishop, or patriarch of Constantinople excommunicated each other. Western churches called themselves Roman Catholic. Eastern churches called themselves Eastern Orthodox.

The historical examples so far have been ideological divides over authority. Who gets to be boss? It surprises me that these persistent divisions in human society have similar characteristics to playground disputes. A fundamental feature of loosely organized games is the lack of authority, an anarchy that is central to the relations between countries. If the players do not agree to a higher authority, then disagreements are inevitable.

In the 16^th century, Martin Luther challenged the hierarchical structure of the Catholic Church and Christianity divided into Catholics and Protestants. Catholics believed in the authority of priests and bishops to interpret the Bible, and salvation was through these intermediaries. Protestants advocated for a more collegial structure in which believers and local churches had the final authority to interpret the Bible. Salvation was directly from God. This echoes the political disputes over the role of the central government in American society, and the schism between the eastern and western churches. Throughout Europe, Protestants and Catholics fought a series of bloody civil wars without resolving these conflicts. Whole countries went one way or the other. Many European countries in the south went Catholic. Those in the north went Protestant.

In 19^th century France, republicans and conservatives argued over the role of religion in the educational curriculum. In 1881- 2, the Ferry Laws made primary education free, compulsory and secular. Republicans believed that the curriculum should foster loyalty to the French Republic, not the Catholic Church. Conservatives, monarchists, and many Catholics maintained that religion was essential to moral education, and the integrity of society itself. Secular schools could not instill the principles that built moral character. The dispute concerned the identity of France itself. Would it be an orderly society grounded primarily in Catholic tradition or one organized around less clearly defined republican and secular principles?

In the 19^th century, American Methodists divided over slavery. Northern Methodists opposed slavery, while southern Methodists believed slavery was compatible with Christian principles and the Bible. After a hundred years, the two branches reunified in 1939. Divisions over same-sex marriage and the ordination of gay clergy led to another split. Underneath these disagreements lies a major dispute among Protestant Christians over the interpretation of the Bible. Should sacred texts be understood through historical tradition and the plain meaning of the text, or should interpretation be guided by changing social and cultural circumstances? There is a similar dispute among judges as to the proper way to interpret the Constitution and the law.

Disputes over ideological matters can mask a dispute over authority. Take the case of the Methodists and slavery. In Colossians 3:22 and 1 Peter 2:18, the apostle Paul encourages slaves to obey their masters. Does that mean Paul endorsed slavery or is he advising a behavior within a relationship that was common in the old world? Pro-slavery interpreters argued the former. Abolitionists argued the latter contextual understanding. Slavery contradicted the central message of Christianity, that all people were equal before God and could be saved. Why did this drive the Methodist congregations apart? In many southern churches, Jim Crow laws mandated that enslaved people sit in segregated sections of the church. Northern churches had no such restriction.

Hidden within that tangle of claims and arguments is a question of authority. Whose rule wins? Who is the final interpreter, the decider of what the Bible, or the Constitution, or the Quran means?There is none. Organizations are glued together by forced or voluntary consent. To secure ratification of the Constitution, the framers agreed to add the First Amendment. This separated the government’s power to enforce consent from the voluntary consent of religious belief and association.

The natural tendency of human organizations to fracture leads to a profusion of beliefs and practices. Ideas evolve as living creatures evolve. They adapt to a changing social, economic and cultural environment. Conservatives naturally resist institutional change but it is inevitable. Progressives want to engineer institutional change but such change must happen in response to changes in the environment of a human society. That’s why so many proposed changes seem forced.

There is no newspaper titled Our Daily Disputes but that is the news. Knowing that most conflicts in our lives are really about authority, and who gets to make the rules, can help us understand our own feelings. I hope to see you next week.

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Photo by Fineas Anton on Unsplash