Quotation of the Day…

by Don Boudreaux on June 21, 2011

in Competition, Complexity & Emergence, Prices, Seen and Unseen

… is from page 27 of Thomas Sowell’s Basic Economics, 3rd ed. (2007):

Knowledge is one of the scarcest of all resources and a pricing system economizes on its use by forcing those with the most knowledge of their own particular situation to make bids for goods and resources based on that knowledge, rather than on their ability to influence other people in planning commissions, legislatures, or royal palaces.

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{ 22 comments }

indianajim June 21, 2011 at 10:03 pm

This is the point that Blinder misses when he spews the sophism that there is no difference between government buying a computer versus an individual or corporations doing so:

http://online.wsj.com/article/SB10001424052702303635604576392023187860688.html?mod=WSJ_Opinion_LEADTop

Don Boudreaux June 21, 2011 at 10:06 pm

Blinder was indeed blind to this point (and many others) that I expect my freshman economics students to identify by semester’s end.

indianajim June 21, 2011 at 10:30 pm

So long as students of economics are made cognizant of economic sophistries, there is cause to celebrate! Bravo Bastiat and Boudreaux; BOOO Blinder!

Methinks1776 June 21, 2011 at 10:55 pm

I missed that article in the WSJ earlier. Ugh.

This, among other passages, seems completely untrue to me:

There are times when this “crowding-out” argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don’t rise, you don’t get crowding out.

I keep hearing this argument, but it doesn’t ring true to me. It seems to me that crowding out can exist at any interest rate. As long as government issues debt, it competes with private seekers of credit for funds, crowds out some private seekers of credit and raises the interest rate to a level above what it otherwise would have been.

Suppose, for instance, the interest rates in the U.S. are low and demand for U.S. debt increased for whatever reason, the preference of the new demand was for U.S. Treasuries and the United States did not issue new Treasuries in response to increased demand. The Treasury yield would be driven down by the increased demand. Since all other bonds are priced off Treasuries, the interest rates on all other bonds would also fall (keeping the credit spreads constant). The cost of capital would fall. Projects that were not economic would become economic.

If, on the other hand, Treasury issued enough new bonds to keep Treasury yields the same, then nothing changes. The projects that were not economic before the increased demand for U.S. debt would still not be economic. They would be crowded out by government borrowing.

How can these guys claim that adding another market participant competing for funds does not crowd anyone out?

Economiser June 21, 2011 at 11:34 pm

Of course it doesn’t ring true. It’s utter poppycock.

“Keeping interest rates low” means increasing the supply of dollars. Increasing the supply of dollars raises the price of certain goods (e.g., real estate). That crowds out people who would otherwise be buyers of the goods at lower prices and distorts price signals throughout the economy (i.e., new dollars are not distributed to all market participants at the same time).

Blinder forgets that the interest rate is just one part of an individual’s decision-making process. The other is the price level, which is the unseen victim of the Fed’s actions.

vikingvista June 22, 2011 at 12:35 am

I think the (mistaken) belief is that relative to the FR NOT keeping interest rates low, there is no crowding out of loanable funds, because the Fed is making plenty of money available for everyone.

But there are at least two groups who are clearly crowded out–those who don’t receive the FR new money (as Economiser so well explains) and those who have dollars to lend, but don’t own a printing press to produce them.

This latter group is real world. You have financial institutions that function by lending money, for instance insurance companies, that did not get bailout funds and are not members of the FR system. They have to compete with institutions who do get those benefits. If money hot of the press is being pumped into your coffers, you can offer much lower rates than the other guy who actually has to worry about risk.

Stone Glasgow June 22, 2011 at 3:57 am

The “risk free” rate is simply the risk that the US goes broke. If that risk goes lower (judged by the people that loan the United States money when they buy treasuries), other firms lower their interest rate offers because they can; because borrowers are willing to lend at lower rates because they feel safer. That does not alter the real world in any way that is not appropriate. The warlords that rule us have only become a safer bet, and investors loan money at lower rates when they trust the warlords more.

Stone Glasgow June 22, 2011 at 4:08 am

*Lenders

Mesa Econoguy June 21, 2011 at 10:34 pm

This piece struck me as quite possibly the most ignorant selection of tripe masquerading as academic economic opinion ever printed in the WSJ.

I literally laughed out loud several times at Blinder’s crap. Absolute bs.

Stone Glasgow June 22, 2011 at 3:37 am

He is a little bit right about that. Is there a difference between a mafia goon buying a computer with “protection” money and the government buying one with tax money?

vikingvista June 22, 2011 at 1:04 pm

There is. I have a much greater chance of successfully fighting back against or avoiding the mafia goon.

Methinks1776 June 21, 2011 at 10:31 pm

The current debate is about deficit spending: raising spending without raising taxes.

Huh?

BCanuck June 21, 2011 at 10:38 pm

Yeah, yeah, yeah ….
We already know about Basic Economics.
But what about Advanced Presidential Economics?
Does Sowell discuss how ATMs cause unemployment?

muirgeo June 22, 2011 at 2:35 am

Yeah so like when you have knowledge of how the structure a synthetic collateralized debt obligation (CDO) is hinged on the performance of subprime residential mortgage-backed securities (RMBS) you can make lots of money with that knowledge by shorting your own products… and the government doesn’t need to be involved…. it all works out so well… that free market pricing mechanism…its the hand of god at work…. I mean the Invisible Hand God at work. It’s why the worlds future looks so bright today….

http://www.smh.com.au/ffximage/2008/12/07/athens470.jpg

http://cache.daylife.com/imageserve/0eCUgNT0Y3c8T/610x.jpg

vidyohs June 22, 2011 at 6:20 am

“Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now. “

I seek to remain employed at my business so that I can earn things such as necessities.

As government spending most typically comes down to me on the street as a gift, grant, or privilege, it kills my incentive to work steady or even work at all.

At his close he speaks of a “bi-partisan council of economists”.

I have an idea to settle the issue. Put all the left wing politicians and economists on Hawaii and quarantine them. Put all the libertarian politicians and economists on Tahiti and quarantine them.

Come back in 1 year and see which group lived and thrived.

Speedmaster June 22, 2011 at 6:22 am

That and the follow-up, Applied Economics, are two of my most treasured books. Dr. Sowell is an intellectual giant. Imagine how much better off we might be if since its publication, every high school senior read that book?

Scott June 22, 2011 at 7:07 am

We live in a world of crony capitalism. Rand said that true monopolies could only be created by the government.

ettubloge June 22, 2011 at 10:29 am

All of Sowell’s books are simple and wise.

Justin P June 22, 2011 at 12:59 pm

Dr. Sowell is probably one of those ignorant conservative economists that Paul Krugman never reads, but is so sure is wrong about everything.

I’ve always found it odd that most on the Left have never read a Sowell book or column, but they just “KNOW” he is an “Uncle Tom” (actual quote from some of my Liberal friends).

They can’t argue with Sowell’s logic so they try to distract away from his arguments in favor of Ad Hominem attacks.

John Sullivan June 22, 2011 at 4:14 pm

It’s interesting that insider trading laws are based upon an ethic that considers “specific knowledge” to be unfair, if it is employed for the purpose of making a profit.

Even many so called free market advocates think these laws are just, when they are not. They don’t see the contradiction between inside information being considered okay in most cases, but not when it comes to betting on stocks.

Methinks1776 June 22, 2011 at 7:16 pm

LIKE!

vikingvista June 22, 2011 at 7:21 pm

In addition, they make the absurd pragmatic claim that banning insider trading, and thereby obstructing price signals, somehow benefits investors. They apparently believe that investors are better off the more ignorant they are about their investments.

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