Quotation of the Day…

by Don Boudreaux on September 30, 2014

in Competition

… is from page 146 of Ludwig von Mises‘s 1951 essay “Profit and Loss,” as reprinted in the 2008 Liberty Fund edition of Mises’s 1952 collection, Planning for Freedom:

What has been called the democracy of the market manifests itself in the fact that profit-seeking business is unconditionally subject to the supremacy of the buying public.

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Inequality Does NOT Explain This Fact

by Don Boudreaux on September 29, 2014

in Health, Inequality, Myths and Fallacies

In a new and, I’m certain, well-researched paper, Alice Chen, Emily Oster, and Heidi Williams explore reasons why infant mortality is higher in the U.S. than it is in many other developed countries.  (HT Tyler Cowen)  Here’s the abstract:

The US has a substantial – and poorly understood – infant mortality disadvantage relative to peer countries. We combine comprehensive micro-data on births and infant deaths in the US from 2000 to 2005 with comparable data from Austria and Finland to investigate this disadvantage. Differential reporting of births near the threshold of viability can explain up to 40% of the US infant mortality disadvantage. Worse conditions at birth account for 75% of the remaining gap relative to Finland, but only 30% relative to Austria. Most striking, the US has similar neonatal mortality but a substantial disadvantage in post neonatal mortality. This postneonatal mortality disadvantage is driven almost exclusively by excess inequality in the US: infants born to white, college-educated, married US mothers have similar mortality to advantaged women in Europe. Our results suggest that high mortality in less advantaged groups in the postneonatal period is an important contributor to the US infant mortality disadvantage.

The empirical results strike me as being quite plausible.  So far I’ve only skimmed the paper, but these reported results seem to accurately reflect what is likely the underlying reality.  One take away: while some (40 percent) of the official deficiency of the U.S. on the infant-mortality front is a statistical artifact of different criteria for reporting a birth as ‘live’ or stillborn, a large chunk of the U.S. deficiency is in fact due to worse material conditions for many mothers in the U.S. relative to conditions for mothers in other developed countries.

But this latter problem is almost certainly not caused by “excess inequality in the US”; rather, it’s caused by many more women in the U.S. being poorer than their peers in other developed countries.  Inequality does not imply poverty; poverty is is not a result of inequality.  The two – as John Cochrane so eloquently reminds us – are not at all the same.  It is sloppy thinking (especially for economists) to write as if wealth is a lump of goodies whose total mass is fixed in size.  Many women in America are poor for a variety of different reasons, none of which is that wealthier Americans are wealthier than they are.

Or ask this question: which of the following two alternatives will lower infant-mortality rates in the U.S.?  (1) Make poor American women richer; or (2) confiscate and destroy lots of wealth of relatively rich American women – and thus make these once-richer women poorer – so that there’s greater income equality.  Only if you believe that #(2) will work better than will #(1) to lower infant-mortality rates in the U.S. do you really believe that relatively high infant mortality in the U.S., compared to that in other developed countries, (to quote the abstract above) “is driven almost exclusively by excess inequality.”

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Here’s the text of the truly splendid talk that John Cochrane gave this past Friday at a Hoover Institution conference, in honor of Gary Becker, on inequality.  Two slices:

But there are lots of different kinds of inequality, and an enormous variety of different mechanisms at work. Lumping them all together, and attacking the symptom, “inequality,” without attacking the problems is a mistake. It’s like saying “fever is a problem. So medicine shall consist of reducing fevers.”

….

More puzzling, why are critics on the left so focused on the 1% in the US, when by many measures we live in an era of great leveling?

Earnings inequality between men and women has narrowed drastically, as Kevin Murphy reminded us. Inequality across countries, and thus across people around the globe, has also been shrinking dramatically even as income inequality within advanced countries has risen. One billion Chinese were rescued from totalitarian misery, and a billion Indians sort-of-rescued from British-style license-Raj socialism. These are wonderful events for human progress as well as, incidentally, for global inequality. Sure, these countries have many political and economic problems left, but the “its’ all getting worse” story just aint’ so. China and India did not start growing by confiscatory taxation of income and wealth, and increasing state intervention in markets. Exactly the opposite. And the parts of the world left or falling behind – parts of the Middle East, Latin Amirica (think Venezuela), parts of Africa – have just nothing to do with the private-jet purchases of US hedge fund billionaires.

“Inequality” is about more than income or wealth, reported to tax authorities. Consumption is much flatter than income. Rich people mostly give away or reinvest their wealth. It’s hard to see just how this is a problem.

Nick Gillespie, over at Reason.com, skewers Damon Linker’s recent uninformed attack on the libertarian understanding of spontaneous order.  (HT Julian Morris)  A slice:

But in fact Linker attributes to Hayek and other libertarians a definition of spontaneous order (sometimes called the “extended order,” as in Hayek’s Fatal Conceit) that is made of the finest straw. In Hayek’s writing—and that of most libertarians and classical liberals who preceded them—the term is essentially a modern vision of Adam Smith’s “invisible hand.”

That is, it helps to explain how goods and services and all sorts of social organization form absent centralized planning (or how alternatives crop up in the face of centralized planning). Especially in the context of the 18th and even the 20th century, the idea that markets and people could function autonomously from rulers dictating virtually every aspect of life wasn’t take for granted. Explaining how complicated social and economic activity could happen absent such oversight and control was one of the main projects of liberal thought.

Shane Tews explains that governments are obstructing spontaneous-ordering forces that promote sharing.

My GMU Econ and Mercatus Center colleague Pete Boettke commemorates the birthday of Ludwig von Mises (who was born on this date in 1881).

Bob Murphy also remembers Mises.

Paul Samuelson said somewhere something like “In economics, things aren’t always as they seem.”  He was correct.  Scott Sumner offers some instances of this reality.

And my colleague Walter Williams might say that ‘In statistics, things aren’t always as they seem.’

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Here’s a letter to the New York Times:

In his New York Times blog on Wednesday - in a post entitled “Having It and Flaunting It” – Paul Krugman complained that America’s rich are obsessed with exhibiting their wealth in the form of “ostentatious” consumption.  Indeed, Mr. Krugman asserted that “for many of the rich flaunting is what it’s all about….  [I]t’s largely about display.”  And this display, Mr. Krugman alleged, “imposes negative externalities on the rest of the population.”

A mere five days later, in his New York Times column today - a column entitled “Our Invisible Rich” – Mr. Krugman gripes that the reason more Americans aren’t infuriated by today’s great income inequality is that “the truly rich are so removed from ordinary people’s lives that we never see what they have.”

Mr. Krugman is here ostentatiously inconsistent!

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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Quotation of the Day…

by Don Boudreaux on September 29, 2014

in Inequality

… is the title of Chapter 5 of William Easterly’s excellent 2006 book, The White Man’s Burden:

The rich have markets, the poor have bureaucrats.

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This post by Phil Birnbaum on the unfortunate ease with which statistics on income distributions are misinterpreted – often in ways that are profoundly mistaken – is one of the best things that I’ve read on income inequality in quite a while.  (HT Francis Stiff)  Birnbaum’s post is longer than the usual blog post but, please trust me, it’s well worth reading in full.  A slice:

It sure seems like the [New York] Times writer believes the numbers [in a recent Fed report on income distribution] apply to individuals. For instance, he also wrote,

“There is growing evidence that inequality may be weighing on economic growth by keeping money disproportionately in the hands of those who already have so much they are less inclined to spend it.”

The phrase “already have so much” implies the author thinks they’re the same people, doesn’t it? Change the context a bit. “Lottery winners picked up 10 percent higher jackpots in 2013 than 2010, keeping winnings disproportionately in the hands of those who already won so much.”

That would be an absurd thing to say for someone who realizes that the jackpot winners of 2013 are not necessarily the same people as the jackpot winners of 2010.

Speaking of economic inequality: I don’t know if the Grumpy Economist John Cochrane ever visits Cafe Hayek, but I take this opportunity to plead that he post at his blog – or somewhere – the talk that he gave on Friday at the Hoover Institution conference in honor of Gary Becker.  That talk was as witty as it was profound, wise, and important – all greatly so.  (Here’s one of my favorite lines from John’s talk; it was a line in a part of his talk explaining some differences between old wealth and new: [I'm going on memory here]: “Mark Zuckerberg wears a hoodie, not a top hat.”)

And on the fate of the living standards of middle-class Americans, Scott Sumner’s post on this topic is worthwhile.

Edward Conard challenges, in this brief post, Paul Krugman’s recent Bob-Frank-like lament that allegedly so much economic activity is wasteful competition for status.  Note, by the way, the tension between Krugman’s claim here and the claim that Birnbaum quotes above from the New York Times‘s reporter.  If Krugman is correct that “for many of the rich flaunting is what it’s all about,” then Thomas Piketty’s thesis is weakened.  The reason is that spending lavishly and conspicuously reduces the growth and accumulation of capital for the rich that Piketty believes to be a fundamental ‘law’ of capitalism and the heart of the problem with capitalism.

Stephan Livera takes on Damon Linker’s recent poorly informed criticism of the libertarian understanding of spontaneous order.

In response to this recent post at the Cafe, Duke economist Ed Tower sent me this related Forbes essay, by Robert Archibald and David Feldman, from 2010.

The London-based Institute of Economic Affairs produced this short video on the regressively of sin taxes in Britain.

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Quotation of the Day…

by Don Boudreaux on September 28, 2014

in Complexity & Emergence, Hubris and humility

… is from page 43 of George Smith’s 2013 Cambridge University Press volume, The System of Liberty:

Hume argued that the social utility of a juridical system is not due merely to the direct effects of each constituent rule, considered separately and in isolation, but rather to the indirect, long-range benefits of the system as a whole, which contributes stability and predictability to a social system.

Rules are vitally important.  Good rules themselves embody much wisdom, and there is much wisdom – and security – in a commitment to follow rules.  Society progresses, however, only when patterns are broken.  Yet society can also regress when patterns are broken.  The challenge is to arrange for the experimentation and risk-taking that are the seeds of progress while simultaneously protecting the social order from the dangers of large-scale harmful disruptions.  While listing and elaborating on how best to meet this challenge would take volumes, one point seems clear: decentralization of decision-making is necessary.  Not only can individual decision-makers in a decentralized society experiment with breaking ‘the rules’ – experiment with different ways of achieving their ends – without having first to get the approval of some collective or some authority, but also, when such individual experiments fail, the consequences are localized and more thoroughly concentrated (“internalized”) on the responsible decision-makers.

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Bonus Quotation of the Day…

by Don Boudreaux on September 27, 2014

in Reality Is Not Optional, Seen and Unseen, War

… is from page 172 of the must-read lead article in the current issue of The Independent Review by my colleague Chris Coyne and GMU Econ student Abigail Hall, “Perfecting Tyranny: Foreign Intervention as Experimentation in State Control“; this is an essay that deserves the close attention of everyone – and especially that of hawkish conservatives (link added):

Those who have developed a comparative advantage in innovating and implementing state-produced social control via foreign interventions will benefit in the form of higher wages by employing their unique human capital domestically.  Specialists in state-produced social control are able to suggest and implement new techniques and organizational forms of state social control on the domestic population based on their experiences of doing the same to distant populations.  The result is that domestic activities, whether in the public sector or the private sector, are influenced by the experiences and skills gained during the coercive foreign intervention.  As this process unfolds, the distinction between the state-produced social control used abroad and state-produced social control used domestically becomes blurred.

In some cases, the skills in state-produced social control are explicit, meaning the person becomes known for being an expert in a certain type of social control – for example, monitoring and surveillance, military strategy and tactics, and so on – and is rewarded for effectively implementing and administering those techniques and methods at home.  Specialists in state-produced social control may be employed within an existing government agency or may be involved in the creation of an entirely new state agency or group within a government agency.  Alternatively, they may be hired by or may found a private firm that receives government contracts associated with the production of social control.

In other cases, the skills acquired through coercive foreign interventions are implicit, meaning they shape the person’s view of government-produced social control.  Per Herbert Simon’s insight, one cannot help but be shaped by the organizational context within which one is embedded.  In this scenario, activities that previously would have been thought of as unacceptable, extreme, or outright repugnant become normalized and natural.  The way things were done abroad becomes standard operating procedure for how government activities are carried out.  Domestic citizens begin to be treated as foreign populations were treated.  Whether the skills accumulated through coercive foreign interventions are explicit or implicit, the result is that advances in state-produced social control developed abroad are imported back to the intervening country.

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Quotation of the Day…

by Don Boudreaux on September 27, 2014

in Growth, Inequality, Standard of Living

… is from page 303 of 2006 Nobel laureate Edmund Phelps’s 2013 book, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change:​

There are plenty of economies in human history that offer more stability and equality than any modern economy ever did.  But observation over modern history does not turn up alternatives to the modern economy that deliver less inequality and less instability while delivering no less of the good life.

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… but so, too, has the value of this education.  See this graph offered today by the brilliant Kevin Murphy at a Hoover Institution conference, in honor of the late Gary Becker, on inequality.

GetFileAttachment

This graph shows, for the United States from the early 1960s, the average annual monetary-income return to each year of college education.  For this time period, these returns reached a low in the mid-1970s – looks like a mere two years before I started college in 1976 – and began rising impressively starting in 1981.  These returns have leveled out (with some year-to-year variability, of course) since about 2000.

When an asset – in this case, college-crafted human capital – becomes more productive, it’s neither a surprise nor a ‘market failure’ for the cost of acquiring that asset to rise.  (Note that I am not suggesting that all, or even most, of the rise in inflation-adjusted tuition rates for colleges in the U.S. is due to the rising return to collegiate education.  I suggest – following Kevin Murphy [and many others] – that this increasing real return is part of the reason for the rise in tuition rates.   I have no doubt that other, less savory factors are also in play.)

See also this related 2007 essay by Becker and Murphy.

And one wonders what further information would be revealed if the salaries paid to persons who majored in subjects such as engineering, accounting, finance, economics, and nursing are separated out from the salaries paid to persons who majored in any of the various ‘I’m-Outraged-that-Society-Doesn’t-Fit-My-Idea-of-Perfection Studies.”

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