Quotation of the Day…

by Don Boudreaux on October 25, 2014

in Economics

… is from page 67 of the 2007 Liberty Fund edition of Ludwig von Mises’s 1949 magnum opus, Human Action:

It is impossible to understand the history of economic thought if one does not pay attention to the fact that economics as such is a challenge to the conceit of those in power.

Yes, but only for sound economics – the economics of scholars such as Adam Smith, J.B. Say, Frederic Bastiat, Carl Menger, Alfred Marshall, Frank Knight, Fritz Machlup, Ronald Coase, George Stigler, Milton Friedman, Armen Alchian, Yale Brozen, James Buchanan, Gordon Tullock, Leland Yeager, Harold Demsetz, Gary Becker, Bruce Yandle, Julian Simon, Deirdre McCloskey, Robert Higgs, David Friedman, and George Selgin (and, also, Austrians such as Mises, Hayek, and Israel Kirzner).  There are, of course, other species of economics, such as Keynesianism and much of modern welfare economics, that assure those in power that their conceits are justified – that the man-in-the-street’s economic superstitions are well-grounded in reality – that sufficient concentrations of power can in fact make miracles occur.

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Some Links

by Don Boudreaux on October 25, 2014

in Environment, Film, History, Seen and Unseen, Work

The Free To Choose Network’s new program, Suffer No Fools – a wonderful documentary of the life (so far!) of my great colleague Walter Williams – airs on Tuesday, October 28th, at 6:00pm (and again at 12:00am on Oct. 29th) on two Tucson public-television stations: KUAT, channel 6, and KUAS, channel 27.

David Friedman argues that, despite some claims to the contrary, his father, Milton Friedman, likely would not today support a carbon tax.

Here’s a great interview at Spiked with Reason’s Nick Gillespie.  (HT Walter Grinder)

Over at EconLog, Art Carden has some questions for Princesses Anna and Elsa.

James Pethokoukis ponders the effect of minimum-wage legislation on restaurant jobs.

Speaking of minimum-wage legislation: three different people sent me this short post by Thomas Lifson on Charlie Crist commenting on raising the minimum wage.  One of my correspondents said “At least Gov. Crist admits there’s a cost to workers of the minimum wage and he’s willing to pay it.”  I wrote back to my correspondent, pointing out that Mr. Crist will not pay that cost; rather, Mr. Crist is willing to force others – namely, many low-skilled workers – to bear that cost.

Sarah Skwire on fear of plague.

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Here’s another letter to my new correspondent from New Jersey:

Dear Mr. Sloan:

I appreciate your correspondence.  Thank you for it.

You ask if I agree that, because successful entrepreneurs “such as [Jeff] Bezos … benefit disproportionately” from government-supplied infrastructure, these entrepreneurs should be taxed at rates higher than those levied on “regular people.”

I don’t agree.  My reasons are many, not the least of which is that I doubt that successful entrepreneurs benefit disproportionately from government-supplied infrastructure.  Looking at the non-farm U.S. economy over the years 1948-2001, Yale economist William Nordhaus calculates that successful innovators capture only about two percent of the value to society of their innovations.  The other 98 percent of the value of these innovations is, as Nordhaus says, “passed on to consumers rather than captured by producers.”*

If this calculation is even only remotely accurate, then three points about taxes suggest themselves: (1) it’s unwise to raise taxes on - that is, to discourage - activities that generate such huge net benefits for society; (2) successful entrepreneurs already, through market competition, contribute to society nearly all (98 percent) of the value of their successful innovations; and (3) those who enjoy disproportionate benefits from whatever entrepreneurial innovations are made possible by government-supplied infrastructure are, thus, arguably the general public rather than the successful entrepreneurs.

It’s true that Jeff Bezos would be less wealthy today if there were no roads, airports, and other infrastructure to enable Amazon to serve consumers.  But it’s also true that consumers would be less wealthy today not only if there were no roads, airports, and other infrastructure to enable Amazon to serve consumers, but also if Jeff Bezos had instead chosen to become, say, a poet or a civil servant rather than an entrepreneur.  Mr. Bezos had to take positive, risky steps to gain his increased wealth; in contrast, consumers did nothing for their increased wealth other than enjoy it when Mr. Bezos offered it to them.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* William D. Nordhaus, “Schumpeterian Profits in the American Economy: Theory and Measurement” (April 2004).

…..

A different, but complementary, point was made to me by e-mail yesterday by a Cafe patron.  I quote him here with his kind permission:

One could effectively argue that the value of the infrastructure only exists because businesses and entrepreneurs make use of it; without them, it might as well be a fallow field.

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… is from the final paragraph of F.A. Hayek’s brilliant and profoundly important December 11, 1974 Nobel Prize lecture, “The Pretense of Knowledge“:

There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, ‘dizzy with success’, to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will.  The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson in humility which should guard him against becoming an accomplice in men’s final striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

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Here’s a letter to a student in New Jersey:

Dear Mr. Sloan:

Thanks for your latest note.  You remember correctly that I agree that Pres. Obama’s “You didn’t build that!” quip referred to infrastructure and other inputs – admittedly produced by others – that each entrepreneur relies on.  You’re mistaken, however, to insist that “because government makes businesses’ profits possible, even the most innovative” entrepreneurs and investors “earn only a portion of their profits.”

You confuse possibilities with actualities.  Infrastructure and other inputs do not turn themselves into valuable outputs.  That task requires entrepreneurial creativity, risk-taking, and effort.  The very existence of huge profits earned in markets suffused with infrastructure and other inputs implies that entrepreneurs who earn these huge profits produce something unusually rare and valuable - something that the vast majority of people, despite having the same access as do successful entrepreneurs to infrastructure and other inputs, do not produce.

In short, the outputs created by entrepreneurs would not otherwise have been produced.  Therefore, the profits of these entrepreneurs reflect the additional value to the economy of these outputs.  This is additional market value that, despite the use of infrastructure and other inputs, is created only through the actions of successful entrepreneurs.  These entrepreneurs, and they alone, are responsible for making actual that additional value which, without their efforts, would remain only an unrealized – indeed, unnoticed – potential.

This reality does not itself argue against taxation.  Infrastructure, like other inputs, must be paid for, and taxation is one way to pay for it.  But this reality does mean that it’s mistaken both to attribute to government a prime and uniquely important role in the creation of entrepreneurial profits and to suppose that government, by virtue of a politician quipping fatuously to entrepreneurs “You didn’t build that!,” becomes entitled to an open-ended claim on those profits.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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… is from page 284 of the eminent Harvard historian Richard Pipes’s wonderful 1999 volume, Property and Freedom (footnote excluded):

The trend of modern times appears to indicate that citizens of democracies are willing heedlessly to surrender their freedoms to purchase social equality (along with economic security), apparently oblivious of the consequences.  And the consequences are that their ability to hold on to and use what they earn and own, to hire and fire at will, to enter freely into contracts, and even to speak their mind is steadily being eroded by governments bent on redistributing private assets and subordinating individual rights to group rights.  The entire concept of the welfare state as it has evolved in the second half of the twentieth century is incompatible with individual liberty, for it allows various groups with common needs to combine and claim the right to satisfy them at the expense of society at large, in the process steadily enhancing the power of the state which acts on their behalf.

Yes.  And, again, this obliviousness to the freedom-crushing features of the obsession with economic inequality and ‘redistribution’ has as part of its foundation the strange “Progressive” notion that the desire to keep what one owns and has earned is illiberal, ungenerous, anachronistic, and greedy, while the desire to take what others own and have earned is liberal, generous, enlightened, and selfless.  As I say, it’s a strange notion, but one that – because it is repeated so often in so many ways and in so many different venues – strikes most people today as being not only normal but right.

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Some Links

by Don Boudreaux on October 22, 2014

in Antitrust, Environment, Nanny State, Other People's Money, Seen and Unseen

Over at EconLog, Alberto Mingardi weighs in on Paul Krugman’s strange if unsurprising hostility toward Amazon.

In my latest column in the Pittsburgh Tribune-Review I remember two people who played especially important roles in my life: Michelle Bailliet and Leonard Liggio.  A slice:

Also great was Leonard Liggio, a man who did more than any other individual over the past half-century to build the libertarian intellectual movement. A lifelong bachelor, Leonard attended seemingly every significant conference, anywhere on Earth, at which ideas related to free markets and limited government were discussed. Not only did Leonard speak at these conferences, he networked brilliantly. He met everyone in the libertarian movement and tirelessly introduced to each other people he suspected would work together productively. Leonard’s goal was never to affect the outcome of the next election. He correctly understood that society is made more free or less free by the ideas that prevail in society. Electoral outcomes are consequences of ideas, not causes. So, what matters most is getting the ideas right.

George Leef is unimpressed – and rightly sometimes frightened – by government-sponsored research.   (See also Judge Napolitano.)

Jonah Goldberg productively ponders environmental complexities and trade-offs.

A former GMU student of mine, Romina Boccia, makes a case for reducing Uncle Sam’s girth and reach.

Thomas Sowell rightly criticizes the predatory politics that feeds in part on opposition to pay-day lending.

Shikha Dalmia on “The Left’s Creeping Totalitarianism on Affirmative [Sexual] Consent.”  Here’s Shikha’s concluding paragraph:

Throwing sons and brothers under the bus for crimes they haven’t committed in a utopian quest to protect women from their lovers perverts justice, and reminds us that utopianism and totalitarianism are often two sides of the same coin.

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Paul Krugman’s recent New York Times column on Amazon’s alleged market power reads like countless pro-antitrust articles, essays, and court opinions from the mid-20th century.  Here’s the thrust of the dominant narrative from many decades ago about antitrust :

A currently big, successful, and well-known company that admittedly has pioneered great efficiency-enhancing production or distribution procedures – procedures that have, in turn, increased consumers’ choices and lowered the prices of those choices – is continuing to be an intrepid competitor.  This firm (as Krugman himself admits about Amazon) “has not tried to exploit consumers” – yet.  But don’t let it fool you!  The firm will one day turn on consumers unless the government breaks it up or otherwise restricts its ability to engage in consensual capitalist acts with other firms, including its suppliers.

There are many problems with the above narrative, not least of which is the fact that such warnings have almost never proven correct, even in those many instances when the government refused to unleash the vigorous interventions that those who warn of the coming monopoly monsters insist are necessary to slay the monsters before they turn on consumers.  (Indeed, I likely do not need to qualify the previous claim with the word “almost.”)

I’ve not now the time to write a post outlining the specifics of all that is wrong with the above narrative.  We can all be grateful, though, that this narrative – while still popular with pundits, politicians, and professors who are insufficiently knowledgeable of economic history and the history of antitrust – is no longer the dominant narrative among antitrust scholars.  Not even close.  It was the dominant narrative until sometime in the 1970s.  Then, the “new learning” revealed this narrative to be historically uninformed and theoretically weak.  (The “new learning” on antitrust came mostly from scholarship produced at the University of Chicago and at U.C.L.A., but the Austrians also were on the same job.  The brilliant work of the late Donald Dewey, at Duke then Columbia, must also be mentioned, as must that of Ken Elzinga and the late Bill Breit at the University of Virginia, and Oliver Williamson at Penn, Yale, and Berkeley.)  Krugman’s column reads as if he is utterly unaware of this revolution in antitrust.  It’s fine if he doesn’t accept its conclusions – many people don’t – but Krugman writes about such matters as if he fell asleep in 1960 and awakened only in 2014.

….

One substantive issue: Tyler Cowen likes Krugman’s point about how sales at Amazon help create “buzz” for a book.  I agree with Tyler that this point is relevant.  But I disagree with Krugman that Amazon’s unusual capacity to create buzz for a book is a good reason for government to intervene into Amazon’s dealings with publishers.  It’s true that a book that Amazon refuses to carry, or carries only on terms less favorable to its publisher than are terms given to other books, will be less likely to get the important Amazonian “buzz.”  But riddle me this: to whom does the buzz belong?  Or asked a bit differently: to whom does the buzz-making capacity belong?

My answer is: Amazon.  Amazon’s capacity to create or to amplify buzz for a book did not descend upon it by happenstance, like rain falling from the sky upon a pedestrian unprepared with an umbrella or raincoat.  The very buzz that Amazon generates for books is a product of Amazon’s own entrepreneurial efforts – its creativity, its risk-taking, its investments, its skill at staying on top of the modern retailing world, its success at building enormous trust with consumers over the past couple of decades.  Krugman, while conceding Amazon’s entrepreneurial innovativeness, nevertheless treats the capacity to create that buzz as something that somehow belongs, not to Amazon, but to the public – or to any book publisher who believes that it is being mistreated by Amazon.

Even if we ignore the immorality of forcing a company to supply on terms that it thinks unattractive a valuable good or service (here, the capacity to generate buzz) that admittedly would not exist were it not for that company’s entrepreneurial efforts, there remains the reality that such government interventions will (1) reduce Amazon’s ability to maintain its buzz-generating capacity, and (2) dampen similar entrepreneurial efforts, by other firms, in the future.

Paul Krugman apparently believes that his academic credentials and perch at the New York Times enable him to detect which business practices are and which are not best, or at least acceptable, over the long-run for consumers.  But in fact Krugman is no more able to successfully assess such matters than he is able to successfully perform cardiovascular surgery or to rebuild the transmission in my car.  He knows next to nothing about any of the all-important details of this market.  Ditto for politicians, antitrust bureaucrats, judges, juries, and even antitrust scholars – and ditto for me, too: none of these people has enough knowledge to successfully second-guess the actual outcomes of the process of actual voluntary contracting in markets.

A final word about the careless and misleading use of the word “power” when discussing the actions of successful firms.  Amazon has no power of the sort that any government has.  Amazon does not coerce anyone to deal with it.  Amazon’s so-called “power” is in reality its unusually great capacity to bestow economic benefits on consumers and on suppliers.

Consider an analogy: Smith invests ten billion dollars in a very risky venture to find a cure for cancer.  He succeeds.  He invents a pill that, taken once, cures cancer and protects against any future occurrence of any kind of cancer.  The pill has no ill side effects.  Once the costly work of figuring out the chemistry of the pill is completed, producing the pill for market costs a mere $1.00 per 1,000 pills produced and distributed.  And even if Smith doesn’t patent his pill, it is so complex that he is correctly confident that it’ll be at least ten years before anyone else succeeds in developing a competitive product.

No one was prevented by any man-made force from doing what Smith did – either before he did it, while he was doing it, or after he succeeded in discovering the formula for a pill that cures cancer.

Smith, seeking to make as much money as possible, sells his pill at a price of $10,000 each.  He refuses all entreaties from newspaper columnists, professors, preachers, and politicians to lower his price.  Does Smith have “too much power”?  Should Smith be forced to sell his pill on terms that Nobel laureate economists or government officials think are appropriate even when Smith thinks those terms to be inappropriate?  Only someone with severe myopia and the ethics of an armed robber would answer yes.

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Quotation of the Day…

by Don Boudreaux on October 22, 2014

in Civil Society, Nanny State

… is from page 94 of my late Nobel-laureate colleague James M. Buchanan‘s 2005 book, Why I, Too, Am Not a Conservative: The Normative Vision of Classical Liberalism:

To be free to choose implies acceptance of the results of choices made, which means, in turn, that there should be no assignment of blame to others, including the state, if these choices turn out to have been wrong.

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… is from page 35 of the manuscript of Deirdre McCloskey‘s new, extensive, and brilliant review of Thomas Piketty’s Capital in the Twenty-First Century; (quoted here with Deirdre’s kind permission):

It is important in thinking about the issues Piketty so energetically raises to keep straight what exactly is unequal.  Physical capital and the paper claims to it are unequally owned, of course, although pension funds and the like do compensate to some degree.  The yield on such portions of the nation’s capital stock is the income of the rich, especially the rich-by-inheritance whom Piketty worries most about.  But if capital is more comprehensively measured, to include increasingly important human capital such as engineering degrees and increasingly important commonly-owned capital such as public parks and modern knowledge (think: the internet), the income yield on the capital is less unequally owned, I have noted, than are paper claims to physical capital.

Earlier in her review, Deirdre quite rightly criticizes Piketty for excluding the value of human capital from his [Piketty's] measure of nations’ capital stocks.  Such an exclusion is akin to, say, the decision of a scholar whose goal is to measure the number of automobiles owned by Americans to exclude SUVs and pick-up trucks from the class of vehicles classified as “automobiles.”

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