Pejovich Quotes Alchian

by Don Boudreaux on January 15, 2017

in Economics, Seen and Unseen, Work

Inspired by this blog post, Steve Pejovich sent me this note:

I do not know whether you recall Armen [Alchian]’s beautiful comment in University Economics (first edition)? (I am saying from memory): First Armen quotes a labor-union leader who said that firms that cannot pay their workers at least the minimum wage should not stay in business. Then Armen said that the union leader could but didn’t say that workers whose productivity is below the minimum wage should not work. Armen pointed out that the two statements are identical but not equally attractive.

Svetozar (Steve) Pejovich
Professor Emeritus, Economics
Texas A&M University

I don’t recall this observation by Alchian.  It is not (as I recall) in the Third Edition of University Economics (which is the version that I own and have read).  Nevertheless, the observation by Alchian that Steve reports is vintage Alchian: an incisive use of a basic economic truth to make a revealing, relevant, and brilliant point.

UPDATE: See here.

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Some Links

by Don Boudreaux on January 15, 2017

in Economics, Health, Hubris and humility, Legal Issues, Media, Movies, Politics, Trade

George Will rightly supports the Cato Institute’s call for an end to the “disparagement clause” – a 1946 legislative creation that gives the U.S. Patent and Trademark Office the authority (as Will puts it) “to protect American sensitivities by denying trademark protection to ‘immoral, deceptive or scandalous’ trademarks.

I actually agree with Arnold Kling’s rather sanguine take on the likely consequences of Pres. Trump.  (Everything is relative.)  A slice:

What is true is that Mr. Trump and the professoriate have an adversarial relationship. Mr. Obama takes his world view from the faculty lounge of the sociology department, and he very much respected academic credentials. Mr. Trump is the opposite.

I think that credentialed economists deserve a bit more respect than what we receive from Mr. Trump, but much less than what many American Economics Association members seem to think we are entitled to.

John Graham rightly exposes the lousy economics of Obama’s Obamacare economists.

Will Logan is correct: protectionism will make America expensive again.

Sean Malone rightly celebrates the beautiful ideals of Hidden Figures.

Kevin Williamson rightly decries the primitive human instinct to cravenly follow political “leaders.”  (HT Warren Smith)  A slice:

The desire to rule is complexly mixed up with the desire to be ruled, just as the most masterful among us bow the lowest and grovel the most enthusiastically when presented with a strongman-savior. There is something atavistic in us that is older than the human part – the inner chimp – that makes those who listen to its voice keenly aware of their places in the social hierarchy. Even a predator instinctively recognizes a predator higher up the food chain.

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Quotation of the Day…

by Don Boudreaux on January 15, 2017

in Civil Society, Science, Truth-seeking & ideology

… is from page 8 of the final (2016) volume – Bourgeois Equality – of Deirdre N. McCloskey‘s great trilogy on the essence of bourgeois values, on their transmission, and on their essential role in modern life:

UnknownThe prejudices, which is to say our justifying discourses, would not matter if the issue were divergent judgments about, say, the latest ice cream flavors from Ben and Jerry’s.  We could then, in the easygoing English phrase, “agree to disagree.”  Chocolate Therapy versus AmeriCone Dream.  Whatever.  But the judgment about whether the System has worked for ordinary people, and why or why not, is too important to leave to personal fancy or to prideful skepticism or to a political identity adopted in late adolescence, never to be reconsidered in the light of new evidence or mature understanding, reaffirmed daily by the particular group of shouters and sneerers we tune into on cable TV.  If we are to help the remaining poor of the world, as ethically speaking we should, the political judgment needs to be made soberly and scientifically.

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Bonus Quotation of the Day…

by Don Boudreaux on January 14, 2017

in Economics, Science

… is from page xxv of the incomparable Armen Alchian‘s July 1996 Economic Inquiry article, “Principles of Professional Advancement,” as reprinted in The Collected Works of Armen A. Alchian (2006), Volume 1 (“Choice and Cost Under Uncertainty”; Daniel K. Benjamin, ed.):

41l5OkA4s9L._SY344_BO1,204,203,200_[T]he simplest concepts and propositions in economics have megaton power.

DBx: Without question, Alchian is correct.  A concept, a proposition, a theory should be judged only by how well it improves one’s understanding of reality (which improved understanding might, but does not necessarily, enhance one’s success at making accurate, specific predictions about the course of actual, observed reality).  A concept, a proposition, a theory should not be judged by how well it displays its originator’s or its user’s brilliance or work ethic.  The labor theory of value is no more valid for products of minds than it is for products of muscles.  The value of a concept, a proposition, a theory comes only from how well it enhances its user’s ability to comprehend reality, rather than from its logical beauty or from the amount of effort its creator(s) exerted to produce it.

Of course, logical beauty – like vast amounts of hard work put into developing a theory – might well help to make that theory valuable, but if so, this value comes not from the beautiful logic itself or the hard work itself, but, rather, from the improved and polished theory’s ability to cause those who use it honestly to say, to themselves or to others, “Ah ha!  Now I better understand the reality that I’m trying to grasp!”

There’s nothing awesomely ingenious about supply and demand analysis in economics.  Not even close.  This analysis is a very simple – indeed, rather plain – depiction of what our common sense tells us about human action.  But it has megaton explanatory power when used wisely and skillfully.  Supply and demand analysis is not kindergarten stuff, to be certain, but any decently attentive 14-year-old girl or boy can grasp its main features if these are explained by a competent and caring teacher.  And if that girl or boy ponders, soberly, supply and demand analysis for a few years, by the time she or he is old enough to legally buy alcohol in the United States, she or he will know about (I estimate) 60 to 65 percent of all that is worthwhile knowing in economic theory – or, at least, 60 to 65 percent of all that is worthwhile to know of economic theory for the purpose of enabling her or him to critically and sensibly assess the merits of the vast majority of real-world economic policies, both actual and proposed.

That young woman or man will know to ask, unceasingly, critical questions: Why this? Why not that? Why is that relevant? Why is this irrelevant? Where did this go? Where will that go? Where did this come from? Where will that come from? Who pays? Who benefits? Who says? According to whose judgment? How many? How much? How plausible? Which person? Which group? What else is likely to happen? (and above all, always, without fail) “As compared to what?

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From a report in today’s Washington Post on an effort by the government of Montgomery County, Maryland, to make it illegal for anyone who cannot produce at least $15 per hour for an employer in that county to be employed profitably in that county raise that county’s minimum wage to $15 per hour:

One of [County Executive Ike] Leggett’s principal objections to the Elrich bill [to raise the minimum wage] is the time allotted for phasing in the rise to $15. Leggett has said he wants an extension from 2020 to 2022 to minimize disruption or hardship for businesses.

Note: if the only theoretically sensible economic justification for minimum wages held here in reality – namely, that employers in Montgomery County, MD, possess monopsony power in the market for low-skilled labor – there would be no need to raise the minimum wage gradually rather than instantly and immediately.  If the geniuses who rule Montgomery County have accurately determined that monopsony power over low-skilled labor exists in that (very wealthy) county, and that a minimum wage of $15 per hour is indeed the wage that results in ‘correct’ outcomes that mimic those of a competitive labor market, then there is no reason not to raise the minimum wage to $15 immediately.  Under these monopsony conditions, there would be no economically relevant “disruption or hardship for businesses.”  Sure, businesses would suffer reduced profits, but those profits are excessive (by the assumption of those who rely upon the monopsony-power allegation to justify minimum wages); the hike in the minimum wage would simply transfer these excess profits from the monopsonist employers to low-skilled workers, the latter of whom would experience both higher wages and more job prospects as the result of the minimum-wage hike.

Looked at differently, the very fact that some of Montgomery County’s rulers are worried about economy-damaging business ‘disruption’ if the minimum wage is raised immediately and in a single leap to $15 per hour, is strong evidence that minimum wages are not intended to correct for the alleged ‘market failure’ of monopsony power.  And this evidence, in turn, suggests that the minimum-wage increases in Montgomery County, no matter how gradually imposed, will indeed reduce employment option for low-skilled workers.

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Quotation of the Day…

by Don Boudreaux on January 14, 2017

in Complexity & Emergence, Economics

… is from page 109 of Robert Higgs’s insightful 2011 article “The Dangers of Samuelson’s Economic Method” as this article is reprinted in Higgs’s 2015 volume, Taking a Stand; (Higgs’s quotation of Buchanan is from the latter’s 1979 article “General Implications of Subjectivism in Economics,” which is reprinted in Volume XII of Buchanan’s Collected Works) (link added; brackets original to Higgs):

taking_a_stand_180x270.jpgNothing has done more to render modern economic theory a sterile and irrelevant exercise in autoeroticism than its practitioners’ obsession with mathematical, general-equilibrium models.  Not only does this focus result in the futile spinning of mental wheels by mathematical pseudo-economists, but it has pernicious consequences for policy formulation because, as James M. Buchanan has observed, it gives rise to “the most sophisticated fallacy in economic theory, the notion that because certain relationships hold in equilibrium [in the model] the forced interferences designed to implement these relationships [in the real world] will, in fact, be desirable.”

DBx: Precisely.  Neither society in general, nor the economy in particular, is a machine to be engineered; instead, each is a process that emerges, along with each of their many and ever-changing specific features, as the result of human action but not of human design.  Economists whom I regard as the greatest – economists such as (to name only a few) Adam Smith, Ludwig von Mises, F.A. Hayek, Ludwig Lachmann, Ronald Coase, Armen Alchian, Jim Buchanan, Leland Yeager, Israel Kirzner, Harold Demsetz, Julian Simon, Richard Wagner, Deirdre McCloskey, and Bob Higgs – focus their attention on understanding the processes of human interactions and how these interactions generate undesigned and unintended orders.  These orders are never in a state of equilibrium, but they do feature extraordinarily complex interconnections and feedback loops that ‘knit’ together, into a society and an economy, all individuals whose actions contribute to the formation and maintenance of these orders.

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Bonus Quotation of the Day…

by Don Boudreaux on January 13, 2017

in Reality Is Not Optional

is from page 103 of Bob Higgs’s great 2015 book, Taking a Stand:

UnknownNevertheless, I do not condemn [John Lennon’s song] “Imagine” in every regard.  The music itself is beautiful and beautifully performed, and I cherish the line, “Imagine there’s no countries / It isn’t hard to do.”  After all, what is a nation-state but a sort of communism in its own right: a violent suppression of competing private protective agencies by a single, all-encompassing, exceedingly presumptive, and often worthless guardian – and a spectacularly obnoxious one, to boot.

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Here’s an e-mail sent to me yesterday from former Cleveland Fed president Jerry Jordan.  (I thank Jerry for his kind permission to allow me to share it publicly.)

Don, in your on-going series about trade nonsense, you might point out that Trump and his mercantilist trio of advisors have a strange way of going about achieving “balance” in US trade with Mexico. By scaring the wits out of investors in Mexico, the peso plunges and makes all those Fords built in Hermosillo even cheaper for American consumers! Slap a big tariff on Mexican-built cars and the peso falls further, making other things made in Mexico even cheaper for US buyers, while making products made in US ever more expensive for Mexican consumers. Good job guys!

(To ensure against misunderstanding, Jerry’s final sentence is facetious.)

The sad reality is that mercantilism is again riding high.  The newly elected president of the United States proudly proclaims the validity of nearly every mercantilist tenet and boasts of his support for nearly every mercantilist policy proposal.  I do not here intend to suggest that Mr. Trump knows what the word “mercantilist” means.  He likely is unfamiliar with the term.  But in all of his bloviating about trade, Trump shows himself to be about as pure a mercantilist as has ever breathed – which is to say that Trump is a fine specimen of 17th-century man.  He’s a multi-volume encyclopedia of economic ignorance, misunderstanding, confusion, illogic, and error.  And he’s about as dear a friend of crony capitalists as can be imagined.

Trump, in short, is precisely the sort of ignorant and rapacious scoundrel whose economic doctrines Adam Smith, especially in Book IV of The Wealth of Nations, exposed as ludicrous.  Yet here we are, 241 years after the publication of the Great Scot’s great book, and we in the alleged Land of the Free are pursuing economic policies as if economics from the time of Smith through today had never existed.

It’s mightily depressing.  (By the way, “Progressives” shouldn’t gloat: they’re not much better on this matter, and their current favorite musketeer, Bernie Sanders, is as much a fan of unreconstructed mercantilist ignorance as is Trump.)

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In the past few minutes, three different people have accused me of not appreciating the splendid, hard-nosed deal-making skills that President Trump will bring to the trade-negotiation table.  My response is to reprise this post from May 20th, 2015, which, I dare say, captures perfectly the sort of bargaining that Mr. Trump will do ‘for’ us.  See below the fold for the reprised post.

Read the full post →

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Results Trump Intentions

by Don Boudreaux on January 13, 2017

in Seen and Unseen, Trade

Here’s a letter to the Wall Street Journal:

Edward Basile applauds the bullying by President-elect Trump to force automakers to abandon lower-cost production opportunities in Mexico in order to use higher-cost methods of production in the United States (Letters, Jan. 13).  According to Mr. Basile, this “policy is at least intended to place the interests of working, middle-class families above corporate profits.”

Well, a central lesson of economics is that intentions are not results.  Here, however, are some of what will be the actual results of Mr. Trump’s bullying:

– automakers’ higher production costs will result in working, middle-class families paying higher prices for automobiles;

– with new cars made more expensive, working, middle-class families will keep their older cars longer – and because older cars generally aren’t as safe as new cars, driving will, as a result, be more hazardous than otherwise for working, middle-class families;

– with foreigners exporting less to Americans, foreigners’ dollar earnings will fall, causing foreigners to reduce their spending and investing in America and, thus, destroying jobs for working, middle-class families in those U.S.-based industries in which foreigners’ spending or investing falls;

– such government threats aimed at private businesses seeking to operate as efficiently as possible corrode the investment climate in America, making it less entrepreneurial and dynamic, and resulting in less opportunity and prosperity over time for working, middle-class families.

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

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