Here’s a video of a talk that my colleague Dan Klein delivered in October at Guatemala City’s indispensable Universidad Francisco Marroquin. Dan here speaks about “The Hayekian Narrative.” (This video is not the same as the one I posted a few days ago.)
Adam Smith’s argument for the use of the market for the organisation of economic activity is much stronger than it is usually thought to be. The market is not simply an ingenious mechanism, fueled by self-interest, for securing the co-operation of individuals in the production of goods and services. In most circumstances it is the only way in which this could be done. Nor does government regulation or operation represent a satisfactory way out. A politician, when motivated by benevolence, will tend to favor his family, his friends, members of his party, inhabitants of his region or country (and this whether or not he is democratically elected). Such benevolence will not necessarily redound to the public good. And when politicians are motivated by self-interest unalloyed by benevolence, it is easy to see that the results may be even less satisfactory.
I’m reading Jeff Madrick’s new book, Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World. While written well, it’s filled with strange ideas. For instance, here’s one of Madrick’s examples of the (correct) proposition that democracy and widespread prosperity do not necessarily occur together:
On the other hand, prosperity hardly guarantees democracy and protection of human rights. Russia became wealthy in the 1930s but was a dictatorship until the 1980s [p. 26].
Russia became wealthy in the 1930s…. !! Really? What remotely sensible concept of ‘wealth’ or ‘wealthy’ can Madrick possibly have in mind to make this claim anything but obscenely mistaken?
This statement about Russia’s alleged wealth in the 1930s is bad enough, but it is made worse by the fact that it immediately follows Madrick’s example of how democracy doesn’t guarantee prosperity. That example is the United States since 1980 – a time when “economic hardship” is said to have become “a characteristic of American life.”
So Russia in the 1930s was “wealthy,” while America since 1980 has been a land of “economic hardship.” Even if we grant Madrick some poetic license (as we should), and even if we consider that he might here be talking about changes in economic fortunes rather than about absolute levels of economic fortunes, the oh-so-vast differences in the material standards of living that separate ordinary Russians in the 1930s from ordinary Americans today are so huge as to make Madrick’s argument ridiculous. Reading this analysis does nothing to give me confidence that the rest of the book is sensibly reasoned and well-researched. (I’m now about half-way through the book and, indeed, it hasn’t improved.)
… is from page 71 of the 2009 edition of H.L. Mencken’s 1926 Notes on Democracy:
There is, first, the mob, theoretically and in fact the ultimate judge of all ideas and source of all power. There is, second, the camorra of self-seeking minorities, each seeking to inflame, delude and victimize it. The political process thus becomes a mere battle of rival rogues. But the mob remains quite free to decide between them. It may even, under the hand of God, decide for a minority that happens, by some miracle, to be relatively honest and enlightened. If, in common practice, it sticks to the thieves, it is only because their words are words it understands and their ideas are ideas it cherishes.
Here’s the bulk of an e-mail from my treasured and insightful friend Yevdokiya Zagumenova (original emphasis); it’s part of the on-going on-line conversation now about whether or not slavery was a necessary spur to the advent of modern, industrial capitalism:
Thing is, slave labour was always employed in the production of cotton in the United States. Yet, until Whitney’s invention of the cotton gin large-scale cotton production was uneconomic here.
Until 1793, producing a bale of cotton required 600 hours of human labour. The gin reduced the number of human labour hours required to produce a bale of cotton to roughly 12. That’s a 98% reduction in the [labor] cost of cotton processing. Even if we concede that slave labour was cheaper (and it might have been so in the Antebellum South because of externalized enforcement costs) than free labour, the savings in labour costs from slavery pales into insignificance compared to the cost savings resulting from the invention of the cotton gin.
Moreover, American cotton was also in demand in Britain because of the particular characteristic of the American crop itself – a native American species characterized by longer and stronger fibers, making it superior to cottons grown elsewhere in the world. Obviously this means that British textile manufacturers viewed American cotton as a differentiated product and not as an undifferentiated commodity. Anyone who passed econ 101 should know what this means for the price British weavers were willing to pay for American cotton.
For these reasons alone I argue that if every slave were manumitted, the industrial revolution would have continued apace, modern Capitalism would have emerged more strongly and the American South would not only have been the Land of Cotton (with now free blacks employed on those plantations), but it would have been a stronger, richer and better place.
I have never envied my dear and brilliant friend George Selgin for specializing in research into money and banking: not only is that field the most difficult in all of economics, it’s the field of economics that attracts the greatest amount of dangerous misunderstanding – misunderstanding from the political left, right, and center. George here responds to poorly informed critics of his work.
Arnold Kling reviews Peter Wallison’s Hidden In Plain Sight. Arnold is favorably impressed by Wallison’s explanation of the origins of the 2008 financial crisis.
Imagine being forbidden to work. That is the case for people with skills under $8.25 an hour. The federal hourly minimum wage is $7.25, and additional costs, such as Social Security, unemployment insurance, and workers compensation bring the cost of employment closer to $8.25. The minimum wage is one reason why the teen unemployment rate is 18%, the youth (20 to 24) unemployment rate is 11%, and the African-American teen unemployment rate is 28%. Those groups have markedly lower skills than average.
University of California (Irvine) economist David Neumark, and University of California (San Diego) economists Jeffrey Clemens and Michael Wither have shown in separate studies that young workers with low skills are harmed the most by the minimum wage. That is not surprising, given that half of minimum-wage earners are between the ages of 16 and 24. When the minimum wage is set above someone’s skill level, that person is left on the sidelines. If people cannot get their first job, how can they get their second or third? People who take minimum-wage jobs gain entry to the professional world. Once they are in, they can keep rising.
… is from Lord Acton’s 1862 essay “Nationality“:
Liberty provokes diversity, and diversity preserves liberty by supplying the means of organisation. All those portions of law which govern the relations of men with each other, and regulate social life, are the varying result of national custom and the creation of private society. In these things, therefore, the several nations will differ from each other; for they themselves have produced them, and they do not owe them to the State which rules them all.
Note here that by “nation” Acton does not mean ‘the government of a society’; rather, he means a group of people connected to each other by a shared history, culture, and norms. The nation is emphatically not synonymous with the state(s) that rule(s) it.
Here’s the sub-headline that accompanies a link to this recent report in the New York Times:
The $1.1 trillion package that cleared the Senate over the weekend was, like many of its predecessors, filled with provisions to satisfy special interests.
Public-choice economics – still scandalously ignored by too many mainstream economists – explains reality quite well.
… is from page 112 of George Stigler’s 1975 collection, The Citizen and the State: Essays on Regulation; here, Stigler is criticizing mainstream welfare economics – that is, that branch of economics that studies the performance of markets relative to some ideal (and the ideal is nearly always that which can be imagined being implemented by an all-knowing and benevolent state):
We have a list, a long list, of market failures. They should be corrected if possible, and there are only two alternatives to the market: the state, and prayer. It turns out that the two were merged in one.
Put differently, too many economists believe in miracles.