Cafe Hayek — where orders emerge

Quotation of the Day…

by Don Boudreaux on June 22, 2017

in Complexity & Emergence, Hayek, Law, Seen and Unseen

… is from pages 868-869 of Mario Rizzo’s superb Winter 1985 Cato Journal article “Rules versus Cost-Benefit Analysis in the Common Law” (link added):

Hayek’s fundamental model of the common law is one of purely private rule creation. The law and the courts are not creations of the sovereign but rather are evolved institutions within which all individuals, including the sovereign, must operate. The common law antedates legislation, and it draws on preexisting implicit societal rules or customs, as well as on previous judicial decisions (Hayek 1973, p. 72). It is by deference to this preexisting opinion that the common law judge can lay claim to authority and legitimacy. People respect his judgments because, in part, they see in those judgments the crystallization of commonly held moral views.

The legitimacy of the law is also enhanced by the abstract character of the rules that the judges draw upon and that is manifest in their opinions.

DBx: Appreciation for the spontaneous and abstract character of the common law has always been rare, and it is getting even rarer. The counsel to follow abstract rules that are the result of human action but not of human design appears to the typical intellectual to be primitive. Far more sophisticated and “progressive” (it is believed) is our deferring to the conscious and discretionary commands of that particular group of human beings who have been elected to exercise power. And yet as Hayek (and a few others, such as A.V. Dicey, James Coolidge Carter, and Bruno Leoni) taught – as as Mario Rizzo elaborates – one of the many great advantages of governance by the abstract common law is that governs with far more detailed and nuanced knowledge than can possibly be used to inform legislative and administrative dictates.

To state the point differently, relying for governance upon abstract, evolving common-law rules is to rely upon a far more accurate and complete method of the weighing of costs and benefits of alternative courses of actions and social arrangements than is available when “cost-benefit” analyses are carried out by politicians, bureaucrats, or econometricians.

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Some Links

by Don Boudreaux on June 21, 2017

in Balance of Payments, Economics, Inequality, Legal Issues, Monetary Policy, Myths and Fallacies, Seen and Unseen, Trade

Someone should alert Robert Frank. (HT Craig Newmark of Newmark’s Door)

In my latest column in the Pittsburgh Tribune-Review, I explain why a U.S. trade deficit does not mean that we Americans are living beyond our means. A slice:

America offers foreigners more than just goods and services to buy. The U.S. economy, despite many imperfections, remains a vibrant, highly productive arena that also offers foreign investors and entrepreneurs an unusually rich array of promising investment opportunities.

To take advantage, foreigners need U.S. dollars. So when citizens of Germany, China, Australia and other countries want to invest in America, they cannot spend on U.S. exports all the dollars they earn when Americans import their goods and services. Foreigners accumulate dollars they invest in America by reducing their purchases of U.S. exports.

The dollars that foreigners don’t spend on U.S. exports are instead invested in America, which offers a vast open market, rule of law, honest courts and secure property and contract rights — attractive and durable institutions that are major elements of what America offers to foreigners.

So when foreigners invest their dollars in America (rather than spending those dollars buying our exports), we aren’t living beyond our means. Far from it. We are reaping the fruits of our relatively secure, entrepreneurial and free economy. The best part is that these foreign investments, by adding to U.S. capital stock, make our economy even more productive.

Art Carden uses a clever example to draw three lessons about inequality.

Here’s George Leef on James Ely on the U.S. Constitution’s contract clause.

From Commentary: a symposium on freedom of speech in America.

Steve Horwitz reveals economists’ superpowers.

John Taylor celebrates the contributions of the late Allan Meltzer. (HT Jerry Jordan and Steve Pejovich)

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Quotation of the Day…

by Don Boudreaux on June 21, 2017

in Seen and Unseen, The Profit Motive

… is from page 62 of Mike Munger’s excellent article in the Summer 2017 issue of The Independent Review, “Egalitarianism, Properly Conceived: We ALL are ‘Rawlsekians Now!” (original emphasis):

In a market system, profits can result from redirecting resources toward producing things consumers want and need. Large profits are signals that before the entrepreneurial activity there were substantial resource misallocations, implying large costs and losses for consumers. We pay the cost of the profits as a way of grasping the far larger societal benefit of greater output, higher-quality products, and much lower prices. Confiscating profits, unless it can be done by surprise, eliminates the incentives for entrepreneurship and perpetuates resource waste and misuse.

DBx: And of course – as Mike would agree – a government that surprises its subjects with such confiscatory taxes very quickly losses its ability to carry out any such confiscations with surprise. No surprise there to anyone who understands that people make plans – that is, that people choose and act mindful of the future.

Another Open Letter to Wilbur Ross

by Don Boudreaux on June 20, 2017

in Myths and Fallacies, Trade

Mr. Wilbur Ross, Secretary
U.S. Department of Commerce

Mr. Ross:

You recently declared: “Since we are the world’s largest importer of steel, we’re the main victim of the overcapacity” in the global steel industry (“U.S. Sees Possible Legal Challenges to Crackdown on Steel Imports,” New York Times, June 20).

Perhaps you can explain just how our being the world’s largest buyer of steel makes us victims of the alleged overcapacity in the global steel industry. Are car buyers who get low prices from car dealers with overflowing inventories victims? When ideal weather results in bumper crops of wheat, corn, and apples, do the resulting low prices of food victimize supermarket shoppers? And when improvements in technology increase the productive capacity of computer manufacturers, should those of us who buy computers complain of being victimized by the falling prices of laptops and desktops?

Apparently, your answer to these questions is yes. So I’ve a deal for you: I’ll sell to you a single paperclip for the price of $1 million. How can you refuse?! By your logic, this deal is for you a magnificent bargain, for by accepting it you get to pay a great deal of money in exchange for almost nothing.

I’ll mail to you the paperclip upon my receipt of your check made out to me for the amount of $1 million, which you may send to the address below. And as a bonus, just for you, I’ll also charge you for the shipping so that the total price you pay for the paperclip is even higher!

You are welcome!

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

…..

I thank Dan Griswold for alerting me to Ross’s statement.

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A&P was FEMA – Actually, a Far-Better FEMA – Before FEMA

by Don Boudreaux on June 20, 2017

in Civil Society, History, Myths and Fallacies, The Profit Motive, Wal-Mart

Here’s a passage from page 35 Michael Ruhlman’s 2017 book, Grocery: The Buying and Selling of Food in America (link added):

When the great Chicago fire decimated that growing city in 1871, [top A&P executive George] Hartford opened an A&P there (the first outside New York City) – before the bricks had even cooled, according to [Marc] Levinson. That nice turn of phrase, apparently literal, implies a certain ruthlessness in taking advantage of a tragedy. But the city was desperately in need of resources and cash to rebuild its infrastructure, as well as food and, of course, coffee and tea. A&P was there to put up a store, employ people, and send wagonloads of goods into the city.

Overlook ~~Ruhlman’s~~ the unjustified description of George Hartford’s actions as ‘ruthless.’ All economic activity aims to ‘take advantage’ of someone else’s desires. And the more intense those desires, the greater are the benefits delivered by those who satisfy those desires. Not only is it no more ruthless to rush groceries for retail to an area struck with tragedy than it is to offer popcorn at retail on any ordinary afternoon in a movie theater, rushing groceries and other goods for retail to tragedy-struck areas is – as Ruhlman correctly recognizes – especially important and worthy of applause.

Long before FEMA or a U.S. government active in such ways, a private firm – one later reviled and attacked for the relentlessness with which it lowered the prices that ordinary Americans paid for groceries – helped to relieve the pain and suffering of victims of one of America’s most famous tragedies. And it did so 146 years ago, when communications and transportation were far more costly and less reliable than they are today.

As Steve Horwitz documents, Walmart later performed a similar, very beneficial service.

UPDATE: David Boaz has convinced me that the assessment of “ruthlessness” is that of Marc Levinson and likely not that of Michael Ruhlman.

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Quotation of the Day…

by Don Boudreaux on June 20, 2017

in Philosophy of Freedom

… is from pages 9-10 of the 1976 Liberty Fund edition of John Chamberlain’s 1959 book, The Roots of Capitalism:

When contrasted with a dream of perfection, capitalism was manifestly at a disadvantage. But with the advent of socialist economies (Communist Russia, China) and the semisocialist, or “mixed,” systems of Scandinavia, Britain, and New Deal America (to say nothing of the “national” socialisms of Nazi Germany and Fascist Italy), capitalism no longer requires apologists. Under any comparative audit of systems it comes out very well indeed. It may have its islands of poverty, its “contractions,” but it does not murder people as a matter of policy or shut them up in concentration camps. It does not force men and women to accept uncongenial occupations or goods that are subjected to the approval of a small “planning” bureaucracy. It does not reduce life to a continual round of abject permissiveness.

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A Friendly Objection to Adam Ozimek on the Minimum-Wage Debate

by Don Boudreaux on June 19, 2017

in Economics, Science, Seen and Unseen, Work

Here’s a letter to a long-time Cafe Hayek reader who is also a friendly and thoughtful critic:

Mr. Raymond Polk

Dear Mr. Polk:

Thanks for sending Adam Ozimek’s essay “Sorry, Advocates, The Minimum Wage Debate Is Not Over.” I strongly agree with nearly all that Ozimek writes there, yet I disagree with his main conclusion.

Ozimek is correct that, in some circumstances, small hikes in the minimum wage might leave no one who wants a job without a job. I have myself acknowledged this possibility. Most notably, monopsony power that creates situations in which minimum-wage hikes cause no job losses are possible (although, in the U.S., extremely unlikely). Likewise, as Ozimek says, the employment-destroying impact of minimum wages is muted, or possibly completely overcome, if employers respond to minimum wages by demanding more hourly output from low-skilled workers. However, none of these points, or any other that Ozimek makes, supports his claim that the supply-and-demand framework isn’t always useful for analyzing minimum wages.

Every skilled user of supply-and-demand analysis understands that it ‘works’ only if the good or service in question doesn’t change when the price (or wage) of that good or service changes. But employers who make jobs more arduous in response to minimum-wage hikes change the service that is being supplied and demanded. The result might be no loss of employment, but that’s only because employers demand, and workers supply, now a different service. Yet for the original service that was supplied and demanded (and for the new one), a supply-and-demand graph shows clearly and accurately the negative effects of a forced increase in the wage. Thus, in the hands of a skilled economist, supply-and-demand analysis remains useful for busting the widespread myth that holds that a hike in the minimum wage merely transfers income from employers (or consumers) to low-skilled workers.

A deeper problem is that Ozimek’s conclusion – namely, that the debate over the effects of minimum wages remains open – rests on theoretical and empirical possibilities that are too contrived and rare to justify such a conclusion. Consider an analogy with freedom of the press. It’s easy to describe scenarios in which restrictions on press freedom cause none of the ill consequences that defenders of the First Amendment correctly warn will arise from such restrictions. And I’m sure that it’s possible to find real-world examples of such restrictions that, in fact, caused none of the predicted ill consequences. But who would therefore conclude that the debate over the merits of government restrictions on press freedom remains open? I think no thoughtful person would reach this conclusion. And so it should be also with minimum wages.

The proposition that people respond to higher costs by reducing their exposure to sources of those costs is theoretically overwhelming and empirically well nigh universally observed. Because there is no good reason to believe that employers of low-skilled workers fail with any regularity to respond in this way – and because the one theoretically coherent argument for the minimum wage (monopsony power) is virtually inapplicable to empirical reality – the best scientific conclusion is that hikes in the minimum wage will so routinely worsen low-skilled workers’ job-market prospects that a hard-and-fast rule against minimum-wage legislation is warranted. Case closed.

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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Some Links

by Don Boudreaux on June 19, 2017

in Cuba, Hubris and humility, Immigration, Movies, Myths and Fallacies, Philosophy of Freedom, Regulation, War

Diana Johnstone writes courageously, clearly, and correctly about the arrogance of neoconservative Americans and the dangers of nuclear weapons. (HT Walter Grinder and Mark Brady) A slice:

The damage to human society, and to “the planet”, from the projected rise of a few degrees of global temperature, while commonly described as apocalyptic, would be minor compared to the results of all-out nuclear war. More to the point, the degree of human responsibility in climate change is more disputed among serious scientists than the public is aware, due to the role of such contributing factors as solar variations. But the degree of human responsibility for nuclear weapons is unquestionably total.

Alberto Mingardi exposes the shallowness and errors of some recent ‘analysis’ offered by Mariana Mazzucato.

Mark Perry unearths a 1991 interview with Milton Friedman on the so-called “war on drugs” – a war that, as Mark notes, is in the U.S. really a war on “otherwise peaceful Americans who voluntarily choose to ingest or sell intoxicants currently proscribed by the government, which will put users or sellers in cages if caught.”

Speaking of this absurd and cruel war, David Boaz understands that Jeff Sessions does not understand drugs and crime.

GMU Econ alum Ben Powell explains that freer immigration does not mean a less-free economy.

Here’s my GMU Econ colleague Dan Klein on justice.

Dan Sanchez reviews Wonder Woman.

My Mercatus Center colleague Dan Griswold rightly calls for an end to Uncle Sam’s embargo on Cuba.

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Quotation of the Day…

by Don Boudreaux on June 19, 2017

in Myths and Fallacies, Prices, Reality Is Not Optional, Seen and Unseen, Work

… is from page 180 of the 2012 revised edition of Steven Landsburg’s 1993 book, The Armchair Economist:

In World War II price controls [in the United States] were administered by the Office of Price Administration (OPA). I have been present at discussions where serious attempts were made to assess the OPA’s damage to the Allied cause, measured in terms of the equivalent number of German panzer divisions. The estimates tended to be large.

DBx: Price controls – both price ceilings and price floors – reduce the quantities of price-controlled goods and services that consumers actually get. Forcing the money price of a good or service down with a government-imposed price ceiling reduces the amount of this good or service that consumers actually get by reducing the quantity supplied (from what that quantity would be were the money price not forced downward). Forcing the money price of a good or service up with a government-imposed price floor reduces the amount of this good or service that consumers actually get by reducing the quantity demanded (from what that quantity would be were the money price not forced upward). In both cases, the government intervention reduces economic output.

Minimum wages, statutory prohibitions on so-called “price gouging,” and other price controls reflect irrational mysticism. These controls are all premised on the notion that by forcibly changing the nominal reported value of a good or service – that is, by forcibly changing the name of the value – the real value of the good or service will change to correspond to the dictated name. It’s a notion no less batty than is the belief, say, that the New York Times can actually change the number of people killed in a terrorist attack by changing the name of the number. Yet who believes that if, say, 18 people are killed in a terrorist attack that the number of dead people will miraculously be reduced by three if the New York Times reports that “15 people were killed in a terrorist attack”? The answer, of course, is no one. Indeed, anyone who would suppose that reality is changed simply when newspaper reports of it are changed is recognized as being too far detached from reality to take seriously.

Those who support price controls are just as detached from reality. The market-determined price of a good or service is as accurate a report as is possible of the value of each unit of a good or service. This value will not move up or down simply if the government orders it to move up or down.

But the case of price controls is even worse than the case of a faulty report by the New York Times. A faulty newspaper report is unlikely to cause people to behave in destructive ways. As already noted, an inaccurate newspaper report on the number of people killed in a terrorist attack won’t cause the actual number of people killed to fall, but nor will it cause this number to rise. Price controls, in contrast, generally cause the values of price-controlled goods and services to move in the direction opposite that which government commands these values to move.

A price ceiling on, say, gasoline – by reducing the quantities of gasoline supplied to the market – raises the market value of each gallon of gasoline. And the fact that consumers are prohibited from paying this full, higher value completely with money does nothing to prevent consumers from paying the full, higher value in other ways – such as incurring the costs of waiting in line (or, as the British say, “queuing”). Likewise, a minimum wage – by causing the supply of low-skilled workers over time to increase (because it reduces the number of such workers today who get jobs) – reduces the value of each hour of low-skilled labor.

None of this matters to proponents of price controls. Such proponents are satisfied with the fact that the names of the values of good or services are changed in ways that please the eye and ear of the economically illiterate. If it is now possible to say that the highest name of the value of a gallon of gasoline is $1.00, then these proponents are content to believe that the real value is indeed $1.00. If it is now possible to say that the lowest name of the value of an hour of low-skilled labor is $7.25, then these proponents are content to believe that the real value is indeed $7.25.

It’s a foolish superstition. It is, however, a superstition that is very widespread, especially among those who today fancy themselves to be immune to superstitions.

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Do Employers Who Can’t Afford to Pay Workers a ‘Living Wage’ Have No Right to Exist?

by Don Boudreaux on June 18, 2017

in Myths and Fallacies, Seen and Unseen, Work

Cafe Hayek patron Craig Walenta sends the following e-mail:

Came across an argument from a colleague that I really didn’t know how to respond to. In some ways the argument has at least a superficial claim to equity so I wanted to inquire as to your thoughts.

Essentially the argument is if a busijess cannot afford to pay workers a living wage the business essentially has no right to exist.

How do I counter that?

Here’s my sightly edited reply:

I’ve heard that argument before. I think it’s silly. If people voluntarily contract with a business as customers, and voluntarily contract with it as suppliers (including as suppliers of labor), and if as a result the business earns sufficient profit to remain in operation, who is harmed? More to the point, whose rights are violated? The contracting is voluntary. I can find no one in this setting whose rights are violated.

Presumably – and it is a very strong presumption – both the consumers who purchase from the business and the workers and other suppliers who sell to the business find in their deals with the business the best options available to them. So the business, by existing, improves the well-being of those with whom it deals. The other alternatives open to its customers or workers might be relatively poor, but denying the business the right to operate does not improve those alternatives. It merely obliges the business’s customers and workers to settle for those even-worse alternatives.

More generally, your colleague’s argument, even if it were (contrary to fact) sound as a matter of ethics, does absolutely nothing to counter, or even to address, this economic prediction: shutting such presumably ‘unethical’ firms down will deny job opportunities to workers whose current levels of productivity are below what your colleague regards as minimally acceptable. Such a policy would oblige low-productivity workers to remain unemployed – and thereby denied not only current incomes but also the opportunities to gain on-the-job experience.

Also, ask you colleague the following. Suppose that 18-year-old Bobby earns money by mowing lawns in the neighborhood after school. Does your colleague think that Bobby should be prohibited from earning income in this way if the amount that he earns falls short of “a living wage”? Are we members of society – or Bobby’s customers – unethical if we permit Bobby to earn this low income in this way?

Now suppose that Bobby meets with some success in his little lawn-mowing business. His 18-year-old friend, Betty, then asks if she can help him mow the lawns he now has agreed to mow. Bobby and Betty agree that Betty will help Bobby mow lawns. Betty’s hourly pay turns out to be less than “a living wage,” yet she is happy enough with it to keep working for Bobby. Is Bobby unethical?

Here’s another point: the purpose of a business is not to pay workers; it’s to enable its owners to earn profits by supplying goods or services to consumers. Paying workers is simply one among the many necessities of running a successful business. Ask your colleague to consider these two different businesses:

Firm 1: a one-man operation that makes sufficient profit for its owner, but this firm employs no one at all;

Firm 2: a firm that makes sufficient profit for its owner and employs, in the process, one low-skilled worker at a wage below what your colleague regards as “living”.

Your colleague, apparently, believes that Firm 2 is unethical (and, presumably by implication, harmful on net to humanity). But it’s unclear if your colleague believes that Firm 1 is unethical. On one hand, Firm 1 isn’t employing anyone at a wage below “living,” so that fact might save Firm 1 from your colleague’s moral opprobrium. On the other hand, if Firm 1 can’t afford to hire anyone at a wage at least as high as “living,” your colleague might find Firm 1 to be morally objectionable despite the fact that Firm 1 actually employs no one at a low wage.

Let’s consider each option. The first is that your colleague has no moral objection to Firm 1. That’s a strange conclusion on your colleague’s part because Firm 1 does less to help poor workers than does Firm 2. Firm 2, at least, offers a job opportunity to a low-skilled worker while Firm 1 doesn’t.

The second option is that your colleague regards as unethical both Firm 1 and Firm 2. In this case, then, your colleague’s ethical logic – if followed consistently – should lead him or her to regard as unethical any economic activity that does not involve the hiring of at least one worker at a wage at or above “living.” Young Bobby’s one-man lawn-mowing operation is unethical if that operation doesn’t allow Bobby to be able to afford to hire at least one worker at a “living” wage. But also unethical is the selling of pencils on the street corner by a blind person, for that little enterprise clearly does not enable its proprietor to hire anyone at a “living” wage.

More can be said, but I’ve already written too much. Let me leave you with this suggestion: Ask your colleague if he or she is unethical for failing to give away all of her wealth to others such that others’ incomes are raised to the level of “living.” If he or she answers no, he or she hasn’t thought seriously or consistently about his or her ethical positions on this matter.

Don