Big- and Ordinary-Sized Hearts

by Don Boudreaux on October 11, 2017

in Prices, Reality Is Not Optional

Here’s a letter to the Wall Street Journal:

Some letter-writers who criticize my defense of so-called “price gouging” mistakenly assume that I oppose charitable actions to help victims of natural disasters (Letters, Oct. 11).  In fact, I applaud any and all outpourings of such generosity.  To the extent that big-hearted people make available, at zero or very low prices, additional supplies of goods such as water and propane, the prices of these goods are kept from rising as high as they would rise without such generous giving.  This result is entirely commendable.

Yet the very fact that, with every natural disaster, prices of such goods nevertheless rise to levels higher than they were pre-disaster proves that the amounts of goods supplied charitably are insufficient to meet all of the victims’ needs at pre-disaster prices.  The resulting rise in prices, therefore, continues to serve the useful function of enticing those people with ordinary-sized hearts to work harder to bring much-needed supplies to the victims and to persuade the victims themselves not to use available supplies frivolously.

By all means, let’s encourage as much charity as we can.  But the happy reality that our world has in it many big-hearted people willing to charitably help others does not mean that we should therefore reject market mechanisms that pick up the slack left by the failure of charity to completely eliminate the harsh economic realities caused by natural disasters.

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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Quotation of the Day…

by Don Boudreaux on October 11, 2017

in Economics, Virginia Political Economy

… is from page 239 of my late George Mason University colleague James Buchanan’s contribution to the 1989 volume, edited by Werner Sichel, The State of Economic Sciences: Views of Six Nobel Laureates, as this contribution is reprinted in Choice, Contract, and Constitutions (2001), which is volume 16 of The Collected Works of James M. Buchanan (link added; footnote deleted):

And, at least in the 1940s, everyone knew that “the economic problem” was defined by Lionel Robbins as the allocation of scarce resources among alternative ends.  Scarcity, the inability to meet all demands, implies that choices must be made, from which it seems to follow directly that a criterion for “better” and “worse” choices is required.  This criterion emerges as some common denominator that allows the differing demands to be translated into a single dimension, which we [economists] then label as “utility” or “value.”  The “economic principle” offers the abstractly defined normative solution to the economic problem.  Scarce resources are allocated among alternative uses so as to secure maximum value when a unit of each scarce resource  yields equivalent value in each use to which it is put.  Satisfying this norm maximizes value subject to the resource scarcity constraints.  Economics, as a realm for scientific inquiry, does indeed seem to be reducible to applied maximization; the calculus seems surely to be its basic mathematics.

I want to suggest here that this economics, which is the economics that I learned both as a student and as a young professional, generates intellectual confusion and misunderstanding because it focuses attention inappropriately on scarcity, on choice, and on value maximization, while shifting attention away from the institutional structure of an economy, with the consequent failure to make elementary distinctions among alternative structures.

DBx: ‘Optimal’ resource allocation is certainly desirable – that is, such an allocation is better than any allocation that by any widely accepted criterion would be described as ‘suboptimal.’  And mainstream economics supplies just such a criterion, one that, were it understood more widely, would surely receive more widespread acceptance.

But mainstream economics, while it brilliantly and beautifully describes what such an optimal allocation of resources looks like, has never supplied a compelling explanation of just how such an allocation might be brought about – might emerge – in reality.  Mainstream economics, as such, supplies very little understanding of the processes that occur in reality to improve patterns of resource allocation.  One feature of Austrian economics that I’ve always appreciated is its focus on these processes.  And one very attractive feature of the economics of scholars such as Buchanan, Ronald Coase, Armen Alchian, Harold Demsetz, Lin Ostrom, and Oliver Williamson is its attention to the institutional processes and structures that we human beings create, stumble upon, and alter in on-going and never-ending processes to better achieve our ends.

Useful economics should better explain how people engage with each other to solve problems – how we exchange with each other in the many ways that we do, not just arms-length commercial contracting.

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Reagan on Trade

by Don Boudreaux on October 10, 2017

in Trade, Video

Thanks to Bryan Riley for sharing this newly released video, from November 1988, of Ronald Reagan reading a radio address on trade.  It’s a beautiful speech, nearly completely correct in all of its economics.  Twenty-nine years later, in stark and sad contrast, today’s G.O.P. president proudly flaunts his seemingly bottomless ignorance about trade.  Truly, the contrast on this matter between the wise and knowledgeable Reagan and the knavish and stupid Trump could not be greater.

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True Irrationality

by Don Boudreaux on October 10, 2017

in Economics, Immigration, Myths and Fallacies, Trade

Encountering daily Trump’s (and many non-Trumpians’) hostility to immigration, as well as Trump’s (and many non-Trumpians’) hostility to free trade, reinforces the sad truth that large numbers of my fellow human beings believe that prosperity springs from scarcity.  The fewer are the workers in our economy, and the fewer are the goods and services in our economy, the richer we all will be!

Of course, those whose minds are enfeebled by such economic ignorance cannot be expected to be consistent.  Many of the same people who praise the higher prices brought about by import restrictions, and who joyfully predict that higher wages will result from further restrictions on immigration, bemoan and protest the higher prices and profits brought about by natural disasters (while they simultaneously praise the rebuilding made necessary by the disasters).  Scarcity is enriching, except when it is impoverishing.  Higher prices are evidence of sound economic conditions, except when they are evidence of unsound economic conditions.

….

Numerous logical fallacies are afoot in discussions of trade and immigration, but none so frequent or so dangerous as the fallacy of composition.  It is true (it really is) that I am enriched if government protects me from competition – either directly, by preventing other human beings from competing for my job, or indirectly, by preventing other human beings from offering goods or services for sale in competition with the goods and services that I offer for sale.  My resulting higher wages or the higher prices that I fetch for my wares are real, and they really improve my well-being.

But from where do my greater riches come?  The likes of Trump and Sanders and Schumer and Graham and Navarro and you-name-the-proponent of government-enhanced scarcity want everyone to believe that my greater riches come from foreigners or from idle, rich oligarchs who employ foreigners or who retail in America goods made by foreigners.  And more: Trump, Sanders, and other scarcityists assure me – and assure my fellow citizens – that I deserve my increased prosperity, as if I actually earned it.

In fact, of course, much of my artificially increased (and undeserved) wealth comes from my fellow Americans – from the pockets and purses of those who pay higher prices to buy my wares, as well as from the wallets and bank accounts of those who work at jobs less attractive because the resources that are artificially directed to me by government policies are not available to support firms and industries that would otherwise exist and that would offer better employment opportunities.

All that is seen are my higher wages, my increased income, and my higher standard of living.  “Hey, just as it’s true that if everyone stands up at the baseball game everyone will get the same improved view that is gotten when one person stands up at the baseball game, it’s also true that if government artificially increases the scarcity of goods and services in a way that raises my standard of living, government policies that increase scarcity for the nation as a whole will improve everyone’s standard of living!  What could be plainer?!”

….

Richard Thaler is the second scholar (Daniel Kahneman is the first) to win a Nobel Prize in Economics for documenting that individuals in markets do not behave as rationally as they behave in economics textbooks.  Whatever you think of behavioral economics, and whatever you think are the likely real-world consequences of such ‘irrational’ behavior, all such irrationality is indistinguishable from the wisdom of Solomon and the rationality of a full-breed Vulcan when compared to the irrationality of the beliefs that daily guide thinking and commentary about economics and politics.

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Bonus Quotation of the Day…

by Don Boudreaux on October 10, 2017

in Economics, Science, Scientism

… is from page 160 of Frank Knight‘s 1940 review essay titled “‘What Is Truth’ in Economics?” as this essay is reprinted in Knight’s 1956 collection On the History and Method of Economics (footnote deleted):

The whole subject matter of [human] conduct – interests and motivation – constitutes a different realm of reality from the external world, and this fact gives to its problems a different order of subtlety and complexity than those of the sciences of (unconscious) nature.

The first fact to be recorded is that this realm of reality exists, or “is there.”  This fact cannot be proved or argued or “tested.”  If anyone denies that men have interests or that “we” have a considerable amount of valid knowledge about them, economics and all its works will simply be to such a person what the world of color is to the blind man.  But there would still be one difference; a man who is physically, ocularly blind may still be rated of normal intelligence and in his right mind.

DBx: The subject matter of the social sciences differs fundamentally from that of what Knight calls “the sciences of (unconscious) nature.”  Economists and other social scientists ultimately must understand and explain how the phenomena with which they are concerned arise from the subjective and inherently unobservable and unquantifiable mental impressions of individual human beings as they engage with each other in myriad forms of interaction (not the least of which is talking).  This understanding requires (among other things) that social scientists understand what is understood by human actors.  For example, what do people understand when they encounter market prices?  What do human beings understand when they say – and when they hear – “This shirt is mine” or “That land is hers”?  What understandings, expectations, and actions occurred to give rise to observed commercial practices?  What human purposes are served by the details of contract law?  What goes through human minds to enable a relatively small group of human beings to persuade a much larger number of physically stronger (and well-armed) human beings to die for purposes declared by the smaller group to be worthy to die for?

All such understanding requires a deep understanding of human understanding.

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… is from pages 174-175 of W.H. Hutt’s 1964 volume, The Economics of the Colour Bar:

Unchecked state power (or the private use of coercive power tolerated by the state) tends deliberately or unintendedly, patently or deviously, to repress minorities or politically weak groups.  Thus the effective colour bars which have denied economic opportunities and condemned non-whites to be “hewers of wood and drawers of water” have all been created in response to demands for state intervention by most political parties (although in some of the most blatant cases, to pressures from those who claimed to be “syndicalists,” or “Marxists”).  Of course, the extension of state control need not necessarily involve discrimination on the grounds of race, colour, caste or creed; yet in practice it does seem always to discriminate against the politically weak; and by reason of history, the non-whites have (so far) usually fallen into this class.

DBx: Although in the book quoted here Hutt wrote chiefly about apartheid South Africa, much of Hutt’s analysis applies with little or no adjustment to the United States – especially, but not only, to Jim Crow United States.  It cannot be too often pointed out – because it is too often forgotten or ignored or never learned – that apartheid and Jim Crow were legislative policies.  The unjust discrimination, the denial of opportunity, the suppression, and the cruelty of apartheid and of Jim Crow were not the results of market forces; they were the results of government suppression of market forces.

Although such suppression is today less likely than in the past to be racially motivated, many of the consequences of such suppression today have disproportionately harmful impacts on racial minorities.  The minimum wage, of course, remains Exhibit A.  But also policies such as occupational licensing, land-use restrictions, and government-run schooling inflict disproportionate harm on racial minorities and others who can least afford to be be victimized by the state.

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Mario Rizzo reflects on the newly minted Economics Nobel laureate, Richard Thaler, and behavioral economics.  A slice:

Nevertheless, the emphasis on the limits of the standard rational paradigm, as pioneered by Thaler, has been a very refreshing and useful thing. And yet behavioral economics remains wedded to this narrow conception of rationality as a normative and prescriptive standard of evaluation. It drives the critique of many market outcomes and is the basis of policy prescriptions. It is precisely because people are not narrowly rational that their behavior must be fixed. Their behavior must be taxed, regulated or nudged in the direction of the behavior of the perfectly rational neoclassical man. For example, it is alleged that people are obese because they fail to take “full account” of the negative effects of their unhealthful eating habits. What is full account? They must reckon or discount these effects at the rational rate of discount – the long-run rate, the rate one would use if one were super-rational and calm in making a diet plan to be implemented in, say, six months or a year. But how the agent looks at things now, at the moment of deciding what to eat, is wrong. It is impetuous. It is “present biased.” The individual needs help. And, in practice, it is the government’s help.

Aside from the policy implications, there is an incredible irony here. Standard economics is mocked for its rationality assumptions and yet those assumptions are held up as an ideal for real human beings.

Also on Thaler and behavioral economics are Tyler CowenAlex Tabarrok, and Scott Sumner.

And here’s David Henderson, in the Wall Street Journal, on Thaler’s work.  Here’s David’s conclusion:

Mr. Thaler has yet to apply in a serious way his theory of irrationality to government officials. Their bad decisions are even worse because citizens bear most of the costs. It would be great if Mr. Thaler explored this area more. Someone should nudge him.

Alberto Mingardi reviews the new collection Rethinking Capitalism.  He’s not impressed.

In this short video, Johan Norberg marks the 60th anniversary of the publication of Atlas Shrugged.

James Pethokoukis helps to debunk the myth that Amazon is a dangerous monopolist.

Who today is America’s most accomplishing politician?  George Will’s answer might surprise you.

David Bier explains seven of the many problems with Trump’s immigration ‘principles’.

My colleague Chris Coyne and GMU Econ alum Abby Hall critically examine a U.S. government drone program.

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Over at Medium, James Devereaux reviews the fabulist tale told by Nancy MacLean in Democracy in Chains.  Some slices:

Unfortunately for MacLean, and those heaping praise, it is clear this tale rests on ransom-note-style citations, cutting and pasting together portions of phrases to change the meaning and support her narrative. In certain places it appears she has woefully misunderstood the source material or did not care- the notes do not match the claims. By cobbling together this mish-mash of selective quotes and speculation MacLean errs twice: first in describing Buchanan’s views and second in describing the motives of Buchanan and anyone sympathetic to his view.

….

MacLean’s inability to remove her bias has made a mess of the primary sources and does a disservice to her profession and discipline. The art of creating good credible academic work is piecing the source material together in a manner which both provides accurate representation of the sources and contains original and thoughtful insight into the subject matter. MacLean fails on both accounts, she provides numerous endnotes, many of them appear interesting- I was left wanting when I consulted them- but they fail to buttress most of her claims. Overall the book does not provide new insight, as it is mostly inaccurate, and relies on the common political caricature proffered by talking heads.

Even without what borders academic fraud, this book lacks any argumentative nuance and continuously attempts to tie Buchanan and other libertarians to historical figures such as Calhoun or the Southern Agrarians without supporting evidence.

….

To support her view of markets and economics, without any irony, she quotes Richard T. Ely, co-founder of the American Economic Association, progressive, racist, and eugenics enthusiast, to explain laissez-faire economics as a “tool in the hands of the greedy and avaricious for keeping down and oppressing the laboring classes” (page 164). Strangely absent from her endorsement of Ely’s view on economics is any recognition of his advocacy of discrimination against those he considered inferior. Ely, and many of his progressive compatriots, saw economics as a two-edged sword of benefit and burden wherein the economist stood on high employing the tools of science to distribute and choose who deserved to receive. He was quite clear on who he thought worth the favor.

….

This is the reality of her book. It ignores facts, it lacks nuance, it vilifies where disagreement was sufficient, it mischaracterizes or does not understand the work of economics, and it fails to distinguish- both in her own views and those of others- between the positive and normative. Her analysis of events reflects that failure and depends on fallacies to make her case instead of building it through rigor and care. One is inclined to believe that she failed to grasp public choice economics as a method of analysis and instead thought ad hominin would suffice as a critique of the discipline.

….

This book belongs in the tradition of polemics and muckrakers not as a serious academic work, and certainly not as a contender for the National Book Award. No number of endnotes redeems the misrepresentation of those very notes, and we should be careful to distinguish between the serious and the seriously misleading.

DBx: The sheer, unalloyed ignorance displayed by MacLean – her complete and utter failure to grasp any relevant element of any relevant person, event, or doctrine mentioned in her book – is truly breath-taking.  Democracy in Chains is a stunning work of monumental illogic, incomprehension, and incompetence.

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Here’s a letter to Cafe Hayek commenter Mark Phelan:

Mr. Phelan:

In your comment on this blog post of mine you ask “Shouldn’t society take some ‘nudging’ position when it comes to individual addictions [such as] obesity [and] opioid abuse?”

Care must be taken when talking about “society” doing “some ‘nudging.’”  Most advocates of ‘nudging’ – including the 2017 Nobel economics laureate, Richard Thaler – wish to empower the state to nudge.  Whatever you think of the propriety, wisdom, or justice of adults being ‘nudged’ away from choosing options that they would otherwise choose, any nudging done by the state is not nudging done by society.  Instead, nudging done by the state is in reality nudging done by particular flesh-and-blood individuals.  Describing such nudging as being done by “society” masks the danger that lurks in giving some individuals the power to superintend the lives of other individuals.  What good reason have you to suppose that those individuals who are empowered to nudge others are themselves immune from the psychological quirks that allegedly justify their power to nudge others?  And further, what good reason have you to trust that the nudgers, when their nudges fail, won’t redouble their efforts to direct the lives of others by resorting to shoving?

There is, though, a way in which nudging is genuinely done by society.  We’re social creatures who are deeply influenced by the opinions and reactions of our fellows.  The feedback that we all give to each other through our approval and disapproval – through our applause and our jeers – through expressions of our gratitude and of our disappointment – nudges each of us to act more appropriately (at least as judged my most of our fellows) without at the same time empowering any of us to shove others around.  Such nudging by society isn’t perfect, but, in my view, it’s far more reliable and less dangerous than is power – even nudging power – exercised by even the most well-meaning and highly educated state officials.

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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… is from pages 291 of my late Nobel-laureate colleague Jim Buchanan‘s profound 1991 essay “The Foundations of Normative Individualism,” as this essay is reprinted in volume 1 of The Collected Works of James M. Buchanan: The Logical Foundations of Constitutional Liberty (1999); in this essay, Buchanan challenges the justification for free markets that rests upon the claim that each individual has a “utility function” that he or she knows better than any third-party or third-parties, including government officials, how to “maximize”; Buchanan calls this common justification for free markets and individualism “the epistemic defense of individualism”; while not denying that each individual generally knows his or her preferences better than do third-parties, Buchanan recognizes – as does the 2017 economics Nobel laureate Richard Thaler – that in practice individuals often do make choices that can be reasonably judged to be ‘irrational’ if the premise is accepted that each individual is a machine supposedly programmed to “maximize” his or her independently existing “utility function”:

The alternative philosophical foundations for normative individualism, and for the structure of institutions that allow the exercise of voluntary choice, carry quite different implications for individual responsibility [than are carried by the epistemic defense of individualism].  The vulnerability of the epistemic defense of individualism to demonstration of incompetence on the part of some members of the political community lends itself readily to politicized corrections of such incompetence.  Regardless of the institutional structure, which may itself reflect a generalized acceptance of normative individualism, the elite may express concern for those who do not demonstrate the capacity of knowing what is really best for themselves, in the selection of either means or ends.  The way is open for the modern welfare states, which combine elements of epistemic individualism wit the elitism of those who defend the institution of human slavery.  The normative individualist whose ontology is subjectivists operates on the presumption that, by their very being as individuals. members of humankind are and must be treated as responsible for their own choices.  Individuals are not to be “protected from their own folly,” even if this basic stance is tempered with ordinary compassion.

DBx: Children and severely mentally handicapped individuals aside, each person chooses what he or she chooses because he or she chooses in that way.  Period.  As Buchanan says, each adult human being ought to be treated as sovereign over himself or herself.  (If Smith isn’t treated as sovereign over himself, then Jones must exercise sovereignty over both herself and over Smith.  What is the normative justification for such an arrangement?)  This sovereignty, of course, entails the freedom of each individual to choose to enter into contracts and other arrangements under which he or she voluntarily agrees to live by certain rules that constrain his or her actions.

On Buchanan’s normative foundation for individualism, the case for government paternalism – be it “nudging” or ‘forcing’ – is rejected.  I am my own keeper, and whether or not I keep myself wisely or foolishly – by your standards or even by my own – is none of your business.  You, of course, enjoy the same freedom from any arrogance that I might wish to inflict upon you.

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