… is from page 76 of F.A. Hayek’s last – his 1988 – book, The Fatal Conceit:

Friedrich August von Hayek_0The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.  To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order.  Yet that decentralization actually leads to more information being taken into account.

DBx: Hayek died 25 years ago today.

Hayek’s great lesson is that each of us, individually, can know only an infinitesimally small amount of the knowledge the full use of which is required for any great and prosperous civilization to exist – but that, when we engage with each other under the laws of private property, contract, and tort (what Hayek called “the rules of just conduct”), each of us is led by this engagement to combine his or her speck of knowledge with the specks of knowledge of countless others in a way that causes this use of these dispersed bits of knowledge to produce and sustain a great and prosperous civilization.

Hayek’s great counsel is that we never forget how individually ignorant each of us inevitably is, or how unfathomably great is the amount of knowledge daily put to productive use in free, market-oriented societies.

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Here’s a letter to the Wall Street Journal:

The headline is promising: “Peter Navarro Responds to His Trade Critics” (March 22).  So I eagerly anticipated reading Navarro’s substantive defense, against knowledgeable critics, of his reasons for fearing trade deficits.  Alas, disappointment.  Navarro offers not a single relevant argument.

Typical is his contemptuous treatment of Dan Ikenson.  To establish that Mr. Ikenson has an “Alice-in-Wonderland worldview,” Navarro merely lists some of Mr. Ikenson’s policy positions without offering as much as a syllable to inform us why these positions are untenable.  (Each of Mr. Ikenson’s positions strikes me as quite reasonable.)

The closest Navarro comes to making a relevant argument is when he writes, responding to Desmond Lachman, that “if India agrees to lower its tariffs on Harley Davidson motorcycles, Indian consumers will buy more Harleys and save less while Harley will sell more Harleys and invest more.”

Well, no one has ever denied that Indians would buy, and Harley would sell, more Harleys if India reduces its tariff on these bikes.  But it doesn’t follow that Indians would necessarily, as a result, save less.  (Does Navarro always save less when his cost of living falls?)  And while more resources would indeed likely be invested in Harley’s operations, these resources would have to come from foreigners if Americans don’t increase their savings.  Contrary, therefore, to the conclusion that Navarro wants us to draw from what he pretentiously (if inaccurately) calls “obvious general equilibrium effects,” a cut in India’s tariffs on Harleys is not remotely guaranteed to lead to a decrease the U.S. trade deficit.

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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More on Real Versus Fake Wants

by Don Boudreaux on March 22, 2017

in Myths and Fallacies, Trade

Here’s a letter to Intissar Guettou, who is with ReportLinker

Thanks for e-mailing your press release announcing the results of a survey showing that “57% of Americans are ready to pay more for ‘Made in USA’ products.”

Alas, I’m confident that these survey results are utterly unreliable.  The reason for my confidence is that Americans are now, and have always been, free to pay more for “Made in USA” products (which, as you surely know, really only means “Final-assembly-occurred-in-USA” products).  Yet American consumers consistently choose not to pay more for such products.

The fact that American consumers, when given the actual choice – and when spending their own money – choose to buy so many lower-priced foreign-assembled household products that few American companies can today successfully compete to be the final assemblers of these products is proof as good as it gets that Americans really do not want to pay higher prices for “Made in USA” products.

The only “wants” that are trustworthy guides for what should reign in reality are wants that people are willing to pay for.  To want something that you are unwilling to pay for is to want something the value of which is not worth its cost.  Such a something, indeed, is something that you really do not want.

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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Surprised and Dismayed?

by Don Boudreaux on March 22, 2017

in Politics, Reality Is Not Optional

Below is a letter to WTOP Radio in Washington.  When I heard this college-age kid express his ‘surprise’ I burst out laughing.

I’m struck by the young man interviewed on your station, during the 12pm hour, who said that the politics on display at the Senate hearings on Neil Gorsuch’s Supreme Court nomination is “surprising and dismaying.”

To be sure, observing the performance of these U.S. Senators is neither enlightening nor uplifting.  But to be surprised and dismayed upon going to the Capitol and observing its resident politicians not seeking truth and understanding but, instead, scoring partisan points makes no more sense than being surprised and dismayed upon going to the zoo’s reptile exhibit and observing its resident snakes not tap dancing and twirling canes, but, instead, slithering on their bellies.

One should not be surprised or dismayed that creatures behave as they are directed by their nature and their environment.

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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Levi Russell nicely busts a common myth about economics.  (Note: to the extent that any actual economists are guilty of even coming close to living ‘up’ to this myth, among the actual economists who emphatically do not live ‘up’ to this myth are the Austrians – who are, of course, the most consistently market-oriented economists in the world today.)

Speaking of economics and economists, here’s Arnold Kling.

T. Norman Van Cott corrects a common fallacy about immigrants’ spending.

GMU Econ alum Mark Perry is inspired by a recent post from my Mercatus Center colleague Dan Griswold to further explain why the U.S. trade deficit isn’t making Americans poorer.

James Pethokoukis reports on a possible source of slower productivity growth.

Tico Moreno explains that any American who truly want to ‘put America first’ should support free trade.

The comments thread on this Steve Landsburg post on the health-insurance market caused me to remember this interesting 1992 article, in Regulation, by Susan Feigenbaum.

Here’s the second installment in George Selgin’s warning against drawing mistaken lessons from Canada’s experience with privately issued currency.

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Here’s a letter to the Wall Street Journal:

Yukon Huang correctly argues that, as the title of his essay explains, “America’s Trade Deficit With China Doesn’t Matter” (March 22).  Yet in reaching this sound conclusion he inadvertently strengthens protectionists’ hands by perpetuating other common myths about trade deficits.

For example, Mr. Huang confusingly writes that “Rapidly growing economies often experience trade deficits because surging consumption requires more imports, while a stagnant economy has less need for imports.”  While in practice people who grow richer do indeed buy more imports, protectionists reply – correctly – that surging consumption requires only more consumer goods rather than more imports.  ‘Let’s make those additional consumer goods right here at home,’ protectionists demand.  ‘We’ll grow even faster!’

Mr. Huang’s above-quoted passage creates the false impression that the only connection between economic growth and increased imports is that the former causes the latter.  In fact, however, access to imports – both as final consumption goods and as intermediate goods – is itself an important source of economic growth.  Americans’ acquisition of foreign-made products at prices lower than the costs we’d incur to produce these items at home means that we spend fewer resources acquiring these items and, thus, have more resources available to create new firms and industries, and to expand and improve existing ones.

Explicitly recognizing that imports also are a cause of economic growth exposes the protectionist policy of artificially restricting imports as being a policy of artificially stifling economic growth.

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 43 of my Mercatus Center colleague Dan Griswold’s compelling 2009 book, Mad About Trade:

Linkedin_fig_564x314_5CW-695x419Globalization has helped to boost the net worth of American households in two main ways: first, by raising household income above what it would be without expanded trade, and second, by enlarging opportunities to tap into global capital markets directly and indirectly.

DBx: You and your young family live in a cool, small city – call it Apertus.  With a couple of young children, you don’t yet save much.  But you do manage to buy a small share of ownership in the organic-foods market (“Compete Foods”) located just down the street from you.  You’re impressed with the majority-owner’s – Ann’s – entrepreneurial vision and drive.  In fact, lots of people are impressed with Ann’s business acumen.  People from all over the state, and many from outside of the state, invest in Complete Foods.  These investments allow Complete Foods to grow and improve.  As it grows, Complete Foods hires as employees more people from Apertus.

And, of course, these investments in Complete Foods from people outside of Apertus also increase the value of your share of ownership in that company.  You become wealthier.

Life, while not perfect, is pretty good.

On election day, however, the majority of the voters in Apertus surprisingly choose as the new mayor Mr. Clausus.  Mr. Clausus’s key campaign theme was Apertus’s trade deficit with the rest of humanity.  “Non-Apertusians are killing us!” he routinely thundered while on the campaign trail.  “We buy lots of stuff from outside of Apertus, but they don’t buy as much from us as we buy from them!  That’s very, very bad behavior!  Very bad!” Clausus would insist.  “Our leaders have for too long failed to put Apertus first!”

After a pause, Clausus on the campaign trail would continue: “Our trade deficit not only means that many of our jobs are destroyed because non-Apertusians unfairly buy too little of what our hardworking men, women, and merchants produce.  It means also that non-Apertusians are buying up all of Apertus.  And it means that Apertusians are sinking ever more deeply into debt to non-Apertusians.”  (No one ever bothered to point out to Clausus that most of the investment by non-Apertusians in Apertus is in equity shares of Complete Foods – and that these investments, while they do raise Apertus’s trade deficit, are neither a cause nor a symptom of Apertusians going further into debt.)

“Elect me and I’ll put an end to the economic homicide committed by non-Apertusians!” Clausus would always end his campaign tirades.  “Let’s together make Apertus great again by putting Apertusians first!!”

Once elected, Clausus immediately set to work to fulfill his campaign promises.  He convinced the city council to punitively tax each purchase by an Apertusian of a good or service not produced in Apertus.  (Many on the city council worried that this policy was bad for the people of Apertus, but a majority of the council members – enjoying their positions of power above all else – went along with Clausus out of fear that failure to do so would result in their losing their coveted council seats.  “I can’t do any good for the people of Apertus if I’m not in office,” each such council member would assure himself or herself, and explain to his or her friends.)

Now, with Clausus in the mayor’s office, you and other denizens of Apertus pay higher prices for medical care, auto and home repair, lawn care, babysitting, and fresh fruits and vegetables.  As a result, you and other Apertusians have less money to spend patronizing the upscale Compete Foods.  Complete Foods starts to decline.  It contracts its operations.  And, of course, worried investors – many of whom are from outside of Apertus – sell their shares of Complete Foods.  The value of your modest investment in Complete Foods tanks.

One evening at home you enjoy some local craft beers with your neighbor Bob.  Being brewed in Apertus, your purchase of these beers isn’t hit by Mayor Clausus’s punitive tax on outside-of-Apertus purchases.  But you realize that the price you pay for this local brew has nevertheless risen substantially.  And this beer doesn’t taste as yummy as it once did.  You sigh as you open two more bottles for a second round.

As you’re serving the second round, Bob remarks, trying to sound enthusiastic: “Isn’t it good that Apertus no longer has a trade deficit?!”

You shake your head.  “I don’t know.  Things seem to be worse now, not better.”

“But look,” Bob continues, “Apertus as of last week has a trade surplus!  That’s gotta be good news, right?!  We Apertusians are investing more outside of Apertus than non-Apertusians are investing in our economy.  Surely that’s great economic news!”  Bob pauses, reflecting on what he just said.  Then, in a more ambivalent tone, he adds “I mean, Mayor Clausus said just today that this news is really good.”

You and Bob say nothing more.  You pour a third round.

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Ricardo’s Remarkable Idea

by Don Boudreaux on March 21, 2017

in Economics, Trade

April 19th will be the 200th anniversary of the publication of David Ricardo’s On the Principles of Political Economy and Taxation.  My current column in the Pittsburgh Tribune-Review discusses the most famous innovation in economic analysis that was revealed in that book: the principle of comparative advantage.  A slice:

He [Ricardo] explained that a country’s ability to produce more of some good than can be produced elsewhere does not mean that country necessarily is that good’s most efficient producer. Efficiency in producing some good — say, cloth — is reflected not in how much cloth can be produced but, instead, in how many other goods must be sacrificed to produce cloth.

Assume (as Ricardo did) that the Portuguese can produce more wine and more cloth than the British can. Yet also recognize, along with Ricardo, that in each country, producing more wine means producing less cloth, and producing more cloth means producing less wine. What matters, said Ricardo, is the amount of wine Portugal gives up to produce more cloth compared to the amount of wine Britain gives up to produce more cloth.

Suppose producing an additional bolt of cloth causes Portuguese wine production to fall by four gallons, but causes British wine production to fall by only two gallons. Under these circumstances, the British produce cloth at a lower cost than the Portuguese do, even though Portugal is capable of producing absolutely more cloth than Britain is.

So if the British sell the Portuguese a bolt of cloth for, say, three gallons of wine, both gain. Producing the bolt of cloth cost the British only two gallons of wine, while they sell it for three gallons. The Portuguese get a bolt of cloth by sacrificing only three gallons of wine rather than sacrificing four gallons to produce the cloth themselves.

Ricardo’s brilliant insight reveals that the citizens of even the most economically advanced countries will always be able to find opportunities to gain from international trade.

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Here’s an e-mail that I just sent to AEI’s James Pethokoukis:

Mr. Pethokoukis:

I admire your work greatly.  Even on those rare occasions when I disagree, I learn something from your writings.  So it’s with more than a little trepidation that I send this e-mail.

You get much correct in your recent post “A brief, simple explanation why the Trump theory on trade deficits is wrong.”  Indeed, I agree with your central point.  And I agree too with much of the passage that you favorably quote from JP Morgan’s Mike Feroli.  But your post would have been stronger – much stronger – had you objected to Mr. Feroli’s claim that “Every dollar by which US purchases from abroad exceed sales to abroad is matched by a dollar that is borrowed by someone in the US from someone overseas, who has chosen to invest that dollar in the US.”

I realize that it’s conventional to describe a trade deficit as increased indebtedness.  Yet this convention is both mistaken and dangerous.

This convention is mistaken because, contrary to Mr. Feroli’s claim, in practice only some – and in principle possibly none – of a trade deficit becomes debt.  For example, BMW’s use of dollars to build its factory in Greer, South Carolina, caused the U.S. trade deficit to rise, but this greenfield equity investment by a foreign firm in the U.S. did not cause a corresponding rise in American indebtedness.  Only that portion of the U.S. trade deficit that foreigners actually lend to Americans becomes American debt.

This convention is dangerous because, by conveying the mistaken impression that we Americans are more financially indebted to foreigners than we really are, it further fuels efforts to obstruct trade.  If more Americans understood that the U.S. trade deficit can rise without making Americans more indebted to foreigners, President Trump, Peter Navarro, and other protectionists would have a more difficult time scaring Americans into accepting restraints on their freedom to trade.

Protectionists already have disproportionately large – I’m tempted to say unfair! – p.r. advantages in the public debate over trade policy.  We free traders should not allow protectionists the unjustified additional advantage of speaking and writing of changes in the U.S. trade deficit as if these changes are synonymous with changes in Americans’ indebtedness.

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

Here’s my introduction to this post on Facebook:

Joe builds a better mousetrap. He uses his profits to buy a house for cash, for U.S. dollars, in Buffalo, NY. If Joe lives in Buffalo – or in Butte, or in Maui, or anywhere in the U.S. – no one supposes that Joe’s purchase of his new house in Buffalo causes any American(s) to go further into debt. But if Joe lives in Toronto, then people will say that Americans are now more indebted by the amount of the purchase price of the house. The convention of describing changes in a country’s trade deficit as being synonymous with changes in the indebtedness of that country’s citizens is very common – and very wrong.

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Kevin Williamson hits this nail squarely and ringingly on its head.  A slice:

The people who have an explicit legal obligation to work not on our behalf but on behalf of their shareholders do a pretty good job of giving us what we want; the people who vow to work on our behalf do not. That is a paradox only if you do not think about it too much, and not thinking about it too much is the business that politicians are in.

If capitalism – which is to say, human ingenuity set free to follow its own natural course – is a kind of social machine, then politicians are something like children who take apart complex machines without understanding what they do or how to put them back together. (At their worst, they are simply saboteurs.) When they rail against capitalism, automation, trade, and the like, they resemble nothing so much as those hominids at the beginning of 2001: A Space Odyssey, shrieking hysterically at something that is simply beyond their comprehension.

Here are David Henderson’s thoughts on the GOP’s proposed alternative to Obamacare.

Tim Worstall reminds me, by e-mail, of this 2015 post by Arindrajit Dube in which Arin correctly explains that U.S. government welfare programs other than EITC do not lower the wages of low-income workers and, thus, do not subsidize employers of low-income workers.  Here’s the most relevant part of the Dube post:

But what about other programs like food stamps or housing assistance? These means tested public assistance programs are not tied to work, and we should not expect them to lower wages. Let’s take food stamps, which are available to eligible families whether or not a family member works or not. Indeed, when people are not working, they are more likely to be eligible for food stamps since their family incomes will be lower. Therefore, SNAP is likely to raise, and not lower a worker’s reservation wages—the fallback position if she loses her job.  This will tend to contract labor supply (or improve a worker’s bargaining position), putting an upward pressure on the wage. Whether or not wages are increased is an empirical matter: there is evidence that the initial roll-out of the food stamps program across counties in the 1970s lowered work hours, consistent with an increase in the reservation wage. The key point is that it is difficult to imagine how food stamps would lower wages.  And if they don’t lower wages, they can’t be thought of as subsidies to low wage employers. The same logic applies to other means tested programs like energy or housing assistance. Moreover, these conclusions hold in a wide array of models of the labor market, including ones that emphasize bargaining or efficiency wage concerns.

Here’s Stan Veuger on the proposed border-adjustment tax.

Also on the border-adjustment tax is my intrepid Mercatus Center colleague Veronique de Rugy.

James Pethokoukis offers reasons for optimism – but not for complacency – about the American economy’s productivity.

Jeff Tucker explains that the best means of reducing poverty is free markets.

On April 1st on GMU’s Fairfax campus a number of excellent speakers – including several of my colleagues – will participate in a day-long event, sponsored by the Institute for Humane Studies, titled “How is Social Entrepreneurship Impacting Disability Services?”  Register now!

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