There are many candidates for ‘worst Paul Krugman column ever.’  Yesterday’s column is among them.  David Henderson wrote wisely on that column over at EconLog.  Here’s a comment that I left there:

David is absolutely correct: that column by Krugman awful. It’s anti-economics. It’s written as though its author is unfamiliar with the introductory chapters of a principles-of-microeconomics textbook. And I’m not talking here about the conflict between the theoretical prediction that higher minimum wages cause job losses for some low-skilled workers and some empirical findings to the contrary. I’m talking instead of statements by Krugman such as this one: “and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.”

What the heck does Krugman mean by “simple supply and demand”? No economist of any merit has ever taught that supply and demand are context-less, free-floating presences that are independent of the likes of “social forces and political power.” For 33 years I’ve taught my principles students that, for example, occupational-licensing regulations (the product of political power) reduce the supply of workers in licensed occupations. Similarly, I explain that the strengthening of the social norm against smoking cigarettes (an instance of social forces) has reduced the demand for cigarettes.

But neither social forces nor political power – in the form of minimum-wage legislation – are likely to make N-number of workers each more productive. And neither social forces nor political power can long ensure that employers who pay workers more than the value of their marginal products will remain in business.

Social forces and political power are real, and they affect supply and demand – but they do not affect supply and demand always, or even usually, in the ways that interventionists would like.

In short, to say that social forces and political power affect supply and demand and, hence, equilibrium wages is true. But it does not follow that any particular social force or any specific unsheathing of political power will bring about those happy equilibrium conditions that are intended by those people who fuel the social force or who wield the political power.

In the end, prices and wages are determined by supply and demand – a brilliant tool quite capable showing the influence on prices and wages of social forces and political power. Krugman, though, seems to suggest that social forces and political power play a role independently of supply and demand in setting prices and wages. That’s anti-economics. That’s the kind of talk one can excuse in a taxi driver or podiatrist who’s never taken a course in economics or read a book in the subject. But it’s a shame to hear it come from a professional economist.

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In the comments section of this EconLog post by David Henderson (a post that highlights Charley Hooper’s excellent case against government restrictions on insider trading) I offered the following comment:

Regarding an exchange above [in the EconLog-post's comments section] between Zeke and David Henderson –

David argued (as did the pioneering scholar on this matter, Henry Manne) that proscriptions against insider trading should be left to corporations and not be hijacked or otherwise overridden by politicians or government bureaucrats or courts. Zeke then responded that such decision-making would likely have to be made at the level of shareholders, but that, practically speaking (because many large corporations have many shareholders), any efficiency-enhancing rule to proscribe insider trading would not be made because of collective-action problems among the shareholders.

David then suggested an opt-out rule: have a general prohibition on insider trading until and unless a majority (or supermajority) of shareholders votes to allow insider trading for their firm.

Two points (and forgive me if I missed if these points were made elsewhere in the comments):

First, Zeke and David presume that the best default rule is against insider trading. Why? David’s rule would be desirable only if corporations generally would prefer that their insiders be prohibited from trading on inside information. It’s not at all clear to me that such a presumption is justified. If collective-action problems really do plague shareholder decision-making, and if insider trading is generally in the best interests of shareholders – then David’s rule would be harmful, not helpful.

Of course, if my second “if” above were different, then David’s rule would be helpful, not harmful. My only point here is that we shouldn’t be too quick to presume that insider trading is generally so undesirable that a default rule against it is justified.

Second, and more importantly, this discussion (including my own in the paragraphs above) overlooks another of Henry Manne’s profound insights – namely, the operation of the market for corporate control.

At the risk of summarizing too bluntly Henry’s nuanced explanation of the operation of that market, an active market for corporate shares – through, for example, mergers or hostile takeovers – solves the collective-action problem that would otherwise afflict owners of shares of large, publicly held corporations. Outsiders to the corporation – such as corporate raiders – specialize in monitoring the performance of corporations and mustering the financing and carrying out the activities that are necessary to assemble a controlling block of shares if and when incumbent managers are likely managing the corporation incompetently. The controlling block of shares is then used by those entrepreneurs who assembled it to oust the incumbent managers and to replace them with better managers. The corporation’s new controlling owners can, and presumably will, also change whatever by-laws and policies are thought to work against the best interests of that company’s shareholders.

So, if Acme Corp. ‘should’ prohibit its insiders from trading on nonpublic information but, for collective-action reasons (or due to the incompetency of incumbent managers), does not do so, Acme’s share prices will be lower than what they would be if such a prohibition were in place. The market for corporate control will then kick in to inspire a takeover of the corporation and a change in its by-laws and policies. Acme will then start to prohibit insider trading by its executives and other agents. Likewise, of course, if Acme Corp. ‘should’ allow its insiders to trade on nonpublic information but doesn’t currently do so.

I recently, by the way, re-read nearly all that Henry Manne wrote on insider trading.  (You can find it all collected in the second volume of Henry’s Collected Works.)  This work by Henry – spanning four decades, from 1966 through 2006 – displays his remarkable genius as an economist, his deep knowledge of law and legislation, as well as his impressive devotion to scholarship and truth.  (If you purchase this volume, don’t overlook Stephen Bainbridge’s excellent introductory essay.)

UPDATE: David Henderson, in a follow-up comment, clarifies what I already knew but failed to make clear in my own comment, namely, that David doesn’t really believe that a default rule against insider trading is optimal.  David was merely, and quite sensibly, attempting to offer to Zeke a compromise position.

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Stagnant Thinking

by Don Boudreaux on March 3, 2015

in Myths and Fallacies, Standard of Living

In today’s Wall Street Journal, the Cato Institute’s Alan Reynolds clearly explains, again, that middle-class Americans have emphatically not suffered economic stagnation since the 1970s.  Lest anyone suppose that this stagnation claim is fading away or that it is espoused only by fringe figures, Reynolds quotes the current Council of Economic Advisors chairman, Jason Furman, as having recently lamented at the Vox blog that America has suffered a

40-year stagnation in incomes for the middle class and those working to get into the middle class.

Reynolds rightly exposes Furman’s claim as ridiculous – as, at best, an artifact of highly misleading (and often poorly constructed) statistics.  (I say “at best” because no statement coming from any political operative, of whatever party, should ever be assumed to unquestionably reflect that person’s unbiased assessment of reality.  Some number of such statements – likely a very large percentage of them – are made for their political impact with little or no regard for their veracity.  For the record, I have no idea if Jason Furman in this case really believes this claim of his, but I am quite sure that, if he does believe it, he’s a poor economic historian.)

Relatedly, Mark Perry informatively riffed on my recent comparison of a 1972 Chevy Vega with a 2015 Toyota Corolla.  Here’s a slice from Mark’s post:

In the early 1970s, the average age of the passenger cars owned by Americans was only about 5.2 years; today’s it’s 11.4 years, the highest in history. Today’s cars are more dependable, require fewer repairs, and last for many years longer than the cars of 40 years ago.

It’s both astonishing and sad that so many people fall for the absurd assertion that middle-income Americans enjoy today a standard of living that is barely improved from the standard of living enjoyed by middle-income Americans when “Happy Days” was still playing in prime time.

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… is from page 211 of Gary Becker’s and Guity Nashat Becker’s 1997 book, The Economics of Life​:

Voting out crooked politicians and punishing people in business who illegally influence policies discourages corruption.  Reform movements that come to power often make good for a while on their promises to clean up the process and eliminate corruption.  During such crackdowns, businesses and other rent-seekers must rely on campaign contributions and other legal ways to influence outcomes.

But corruption always reemerges wherever governments have a major impact on economic conditions.  The momentum behind reform movements peters out as politicians, officials, and companies become tempted once again to risk exposure and disgrace by giving and receiving bribes and engaging in other corrupt acts.

There is only one permanent way to reduce undesirable business influence over the political process: Weaken the link between business and politics.  It is essential to simplify, to standardize, and especially to eliminate many of the regulations affecting economic activity.

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David Henderson is unhappy with Paul Krugman’s assessment of the respective roles that economists from MIT and the University of Chicago play in high-profile public-policy making.

Bob Murphy is unhappy about the same.

The late Henry Manne would be pleased with Charley Hooper’s defense of insider trading.  A slice:

Insider trading laws are yet another example of government’s desire to capture and exercise political, regulatory and legal power, gain huge monetary awards, and garner favorable PR, all for the sake of prosecuting victimless “crimes” and promoting misplaced notions of fairness. Insider trading should be embraced for its beneficial effects on market efficiency and left as a private matter for those companies interested in preventing it.

Alberto Mingardi discusses one of the unintended consequences of the Spanish government’s ban on Uber in the bulk of Iberia.  Here’s Alberto’s spot-on opening:

One thing that regulators, and regulation’s enthusiasts, rarely get is that private businesses will do their best to off-set the impact regulation has on them.

Arnold Kling reviews Ira Katznelson’s Fear Itself.  A slice:

It is hardly uncommon to find intellectuals who believe that decentralized markets are chaotic, capricious, and misanthropic. On occasion, those with such beliefs have disparaged democracy and instead gravitated toward totalitarianism. Those who instead value the right of individual dissent and democratic decision processes tend to believe in a sort of collectivism that somehow emerges from and reflects the popular will. As we will see, Katznelson himself appears to fall within this latter camp.

Prof. Mario Villarreal-Diaz explains, in this short LearnLiberty video, the concept of opportunity cost.

Doug Bandow asks: why is there a government postal monopoly?

Norbert Michel rightly decries government’s regulation of financial markets.

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… is from page 269 of Amar Bhidé’s excellent 2008 book, The Venturesome Economy (original emphasis; footnote excluded; link added):

[C]ommercially successful innovations usually enrich more than just the innovator.  For instance, new products and services also generate a consumer surplus – value to their users in excess of the price.  If they didn’t, why would a consumer ever take a chance on a new product or service?  The distribution of value between innovators and users also is noteworthy.  Successful innovators (and their investors) can secure extraordinary wealth, whereas the total dollar value of an innovation secured by a user is often quite small; therefore, it is tempting to think that innovators are the main beneficiaries.  But users outnumber innovators by a wide margin.  Moreover, according to [William] Baumol’s analysis, a competitive, free market system provides a positive but small share of the gains to the innovator, whereas the users get the rest.

People who fret over economic inequality are especially encouraged to keep also in mind that many innovations, even those that make the spread of monetary incomes wider (that is, less equal), make the spread of access to goods and services narrower (that is, more equal).

For example, the innovation by Fred Smith of FedEx that made overnight letter and package delivery affordable to middle-class Americans also made Fred Smith a hugely wealthy man.  And this innovation likely increased monetary-income (and monetary-wealth) inequality in America (and in the world).  Yet not only did this innovation improve ordinary people’s living standards, it made ordinary people more equal to the superrich in terms of access to speedy delivery and receipt of letters and packages.  Before affordable overnight delivery, the superrich and the politically powerful could afford to ship, and to receive, letters and packages delivered overnight.  If in, say, 1970 Howard Hughes just had to send a love-letter or a box of chocolates ASAP to woman a thousand miles away from him, he could afford to pay for a plane and a pilot to perform the delivery.  Likewise, the President of the United States no doubt had no difficulty sending letters and packages across the country or the globe for overnight delivery.  But no ordinary American could afford such a luxury.  Today, in vivid contrast, speedy delivery is within the reach of nearly every American.

And so a germane question is suggested: even if Fred Smith’s innovation unambiguously increased monetary-income (or monetary-wealth) inequality, did this innovation increase economic inequality (properly reckoned)?  My answer is ‘no’; this innovation decreased economic inequality by making consumption possibilities more equal.

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The Tax Foundation‘s Joe Henchman alerted me to this YouTube clip of the first episode of “The New Price Is Right” (featuring Bob Barker).  This episode aired on September 4, 1972, right around the time I started my freshman year of high school.  Watching it will give you a pretty good snapshot of what life was like in the United States in the early- and mid-1970s – the time when, according to many pundits, middle-America’s living standards reached a peak from which they’ve barely budged in the ensuing nearly half-century.  You judge for yourself if, as evidenced by this video, the living standards of ordinary Americans are today likely not much higher than were the living standards of ordinary Americans during early- and mid-1970s.

Note how much work time it took ordinary private-sector workers back then to earn enough income to buy some of the goods featured on this episode of “The New Price Is Right.”

Consider – appearing at around the 3:30 mark of the show – the 30-inch electric kitchen range priced at $385.  In 1972, the average hourly earnings of a production or nonsupervisory private-sector worker in America was $3.90.  So, such a worker in 1972 had to toil for 99 hours to earn enough income to buy that range.  Here’s a 30-inch range available today at Home Depot for $349.00.  The average hourly earnings of a production or nonsupervisory private-sector worker in America today (January 2015) is $20.80.  So, today’s ‘ordinary’ worker can earn enough income to buy a 30-inch electric kitchen range in just 16.8 hours – a mere 17 percent of the work time required in 1972.

I could do this sort of work-time comparison for all goods and other prizes featured on this show.  The results in nearly all cases would reveal that ordinary American workers today get far more for each hour of their work time than they did back in 1972.

I say “nearly” because the modest car – a Chevy Vega (with “AM radio!”) that is introduced at around the 4:10 mark is priced at $2,746 – was less costly in work time than is a modest car today.  To earn enough (pre-tax) income to buy that 1972 Vega required the ordinary American worker in 1972 to work 704 hours (or almost four-and-a-half months).  Today, a low- (although, like the Vega of its day, not bottom-) end car costs the ordinary American worker more work hours.  Consider a 2015 Toyota Corolla, starting at $16,950.  At this price, the ordinary American worker today must work 815 hours (more than five months) to earn enough income to purchase this modest car.

But is today’s car really more expensive (when measured in work-time) than was a car in 1972?  Perhaps.  But perhaps not.  The answer is not as objective as you might think.  Switching t.v. game shows: Let’s Make A Deal!  On your current (2015) salary, you can buy a shiny, never driven, and fully functional and fully warrantied 1972 Vega at a price of 2,746 2015 dollars* or a brand-new shiny, never driven, fully functional and fully warrantied 2015 standard-package 2015 Toyota Corolla for $16,950.  What car would you buy to satisfy your personal transportation (as opposed to your car-collector’s) needs?

Some people might choose, at these prices, the 1972 Vega over the 2015 Corolla.  They’d, of course, not be wrong to do so.  But I’m confident that lots of people – I believe the great majority – would choose the 2015 Corolla, even though its work-time price is higher than that of the Vega.  The reason is that the 2015 Corolla is a luxurious, marvel-filled vehicle compared to the 1972 Vega.  The 2015 Corolla is also much safer than was the 1972 Vega.  (I myself would definitely choose the 2015 Corolla.  As it happens, the first car I ever bought was a used 1972 Chevy Vega.  I bought it when I graduated from high-school in 1976; the seller was my friend Roger who worked with me at a local supermarket.  My high-school graduation gift from my parents was $100 toward the purchase of this car.  I drove my Vega for two years until it was ruined in the great New Orleans flood of May 3rd, 1978.  For nearly all of that time I had to put a quart of oil into it every 50 miles.  I bought cans of oil by the case and kept them in the back of my Vega, beneath its hatchback.  I would often pull over to the side of the road to pour in another quart of oil.  And note: back then, motor oil came only in cans.  To pour motor oil into a car’s engine required that a metal spout be manually pushed into the top of the can of oil – almost always a messy job.)


* The only modification of this 1972 beaut is that, unlike in 1972, its engine burns unleaded gasoline.

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… is from page 446 of the 2011 Definitive Edition (Ronald Hamowy, Ed.) of F.A. Hayek’s 1960 book, The Constitution of Liberty (footnote excluded):

The whole attitude which regards large gains as unnecessary and socially undesirable springs from the state of mind of people who arc used to selling their time for a fixed salary or fixed wages and who consequently regard a remuneration of so much per unit of time as the normal thing.  But though this method of remuneration has become predominant in an increasing number of fields, it is appropriate only where people sell their time to be used at another’s direction or at least act on behalf of and in fulfillment of the will of others.  It is meaningless for men whose task is to administer resources at their own risk and responsibility and whose main aim is to increase the resources under their control out of their own earnings. For them the control of resources is a condition for practicing their vocation,’just as the acquisition of certain skills or of particular knowledge is such a condition in the professions.  Profits and losses are mainly a mechanism for redistributing capital among these men rather than a means of providing their current sustenance.  The conception that current net receipts are normally intended for current consumption, though natural to the salaried man, is alien to the thinking of those whose aim is to build up a business.  Even the conception of income itself is in their case largely an abstraction forced upon them by the income tax.  It is no more than an estimate of what, in view of their expectations and plans, they can afford to spend without bringing their prospective power of expenditure below the present level.  I doubt whether a society consisting mainly of “self-employed” individuals would ever have come to take the concept of income so much for granted as we do or would ever have thought of taxing the earnings from a certain service according to the rate at which they accrued in time.

It is questionable whether a society which will recognize no reward other than what appears to its majority as an appropriate income, and which does not regard the acquisition of a fortune in a relatively short time as a legitimate form of remuneration for certain kinds of activities, can in the long run preserve a system of private enterprise.

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A Taxing Institution

by Don Boudreaux on February 28, 2015

in Other People's Money, Politics

Here’s a letter to the D.C.-based WTOP Radio:

You report that the IRS is cutting back on “customer service.”  Pleading poverty because of the budget cuts it must endure as a result of Congressional displeasure with its recent mistreatment of many of its ‘customers,’ the IRS moans that it simply has too few resources now to adequately man its customer-service phone lines.  The IRS’s message to its ‘customers’ is clear: tell your representatives to increase our funding or we’ll make your lives even more miserable than we already do.

There’s a key, if familiar, lesson here: when private firms in competitive markets seek more revenue they considerately offer customers the carrot of better service; in contrast, when government agencies seek more revenue they angrily whack ‘customers’ with the stick of worsened service.

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

Of course, there’s a real upside to this particular instance of bureaucratic greed: also predicted to fall in number are IRS audits.

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Quotation of the Day…

by Don Boudreaux on February 28, 2015

in Dinner Table Economics, Nanny State, Seen and Unseen

… is from page 16 of Jeffrey Miron’s excellent 2004 monograph, Drug War Crimes:

Under legalization, the incidence of accidental poisonings or overdoses would not be zero, just as it is not zero for currently legal goods such as alcohol.  But the rate of such incidents would decline significantly, since consumers would know the potency of the drugs they consume and have far greater confidence that the drugs contained the desired ingredients rather than unknown contaminants.

Because suppliers under prohibition need to hide their activities from the authorities, traffickers have an incentive to produce and ship drugs in the most concentrated and hence most easily concealed form (e.g., crack versus cocaine, heroin versus opium, spirits versus beer).  This implies that prohibition expands the availability of potent forms of drugs or even helps create those more potent forms.

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