Quotation of the Day…

by Don Boudreaux on August 17, 2017

in Economics, Politics, Seen and Unseen

… is from page 110 of my late Nobel laureate colleague Jim Buchanan‘s 1980 paper “Rent Seeking and Profit Seeking,” as it is reprinted in volume 1 of The Collected Works of James M. Buchanan: The Logical Foundations of Constitutional Liberty:

If allowed to function within a set of laws and institutions that protect individual property rights and enforce contracts, markets will allocate resources among alternative uses so as to ensure tolerably efficient results.  But economists have concentrated far too much attention on efficiency and far too little on the political role of markets.  To the extent that markets are allowed to allocated resources among uses, political allocation is not required.  Markets minimize resort to politics.  Once markets are not allowed to work, however, or once they are interfered with in their allocative functioning, politics must enter.  And political allocation, like market allocation, involves profit seeking as a dynamic activating force.

DBx: Many opponents of markets find the open quest for profits in market economies to be unethical or unaesthetic, and they blame markets.  What these opponents miss is the fact that the self-interest that is typically – and even the greed that is sometimes – on display in markets is not created by commercial markets.  Commercial markets are merely a forum in which individuals act on these motivations.  One of most profound errors committed by market opponents is to suppose that when activities are transferred from commercial markets into the realm of politics human imperfections and self-interest are replaced by superhuman perfection and altruism.  But as Buchanan argues, it’s naive to suppose that the mere shifting of activities from one resource-allocation forum to another changes the underlying human motivations.  (And such shifting certainly does not change the underlying human cognitive limitations.)

So profit seeking occurs in political settings no less than in market settings.  But the kinds of information and constraints in political settings differ greatly from those in market settings.  Therefore, the kinds of actions taken in one setting, and the consequences of those actions, differ from the actions and consequences in the other setting.  One important difference is that in markets, profits are earned only through voluntary payments while in politics profits are typically extracted by forcibly transferring property from the politically weak to the politically strong.  The fact that such transfers are not overtly called “profit seeking” – and the fact that political activities are camouflaged with public-interest rhetoric – doesn’t change the underlying reality.

In summary, in the market Smith profits only by building a better mousetrap or by devising a process that reduces the amount of resources used to build a familiar mousetrap.  (Smith might do so directly, as a mousetrap producer, or indirectly, as someone who secures the financing for a mousetrap producer.)  In politics, Jones typically profits by confiscating mousetraps from Smith or from Smith’s customers, or by confiscating the inputs that Smith would otherwise use to make mousetraps.

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Trade’s Greatest Benefit

by Don Boudreaux on August 16, 2017

in Trade, War

In the August 17th edition of the Washington Post is a letter that I wrote to highlight the most important benefit of freer trade and the greater global economic integration that it promotes: increased prospects for peace.

Regarding the Aug. 13 news article “China to N. Korea: You’re on your own if you attack U.S.”:

Would Beijing have issued the same warning 50 years ago? While the answer is uncertain, it’s plausible to suppose that Beijing back then would have been less likely than today to warn a communist ally not to start a war with the United States. If the United States suffers severe damage from nuclear (or even conventional) weapons, China today has far more to lose than it did under Mao Zedong. Unlike China under Mao, the Chinese today have legions of commercial customers and suppliers in the United States. And a pretty good rule of business is “Don’t kill your customers.” Don’t even be complicit in such killing.

Perhaps we are today reaping one of the unsung benefits of freer trade and the international economic integration that it promotes: a greater reluctance of trading partners to go to war with each other. Maybe, just maybe, the United States’ much-derided economic integration with China will not only continue to enrich the people of both countries materially, but also — and far more importantly — prevent senseless slaughter.

Donald J. Boudreaux, Fairfax


Apologies to my dear friend Tom Palmer from whom I snatch the line about not killing your customers.

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… is from pages 263-264 of my late Nobel-laureate colleague James Buchanan’s 1991 paper “The Minimal Politics of Market Order,” as this paper is reprinted in Choice, Contract, and Constitutions (2001), which is volume 16 of The Collected Works of James M. Buchanan:

If resources are not allocated and products distributed through the workings of a market system, then the allocative and distributive functions must be performed directly by a political-bureaucratic agency.  In this direct and obvious sense, markets, to the extent that they are allowed to operate, constrain bureaucratic intervention into the lives of citizens.

This conclusion does not imply that markets or market organizations eliminate, as if by magic, the elemental constraints imposed by scarce resources.  By increasing efficiency in resource use, markets may reduce the severity of these ultimate constraints.  Yet the basic limits on resources remain; markets replace the implementation and representation of constraints through coercive intrusion of personalized bureaucracy by the impersonal price structure.  The discretionary power or authority of the bureaucrat is replaced by the impersonal authority of prices, with the accompanying differences in interpersonal relationships.

DBx: Many people distrust or otherwise dislike the allocation of resources according to market-set prices precisely because such prices (and, hence, the patterns of resource allocation that arise from such prices) are impersonal.  No human agency is in charge to ensure that worthy people receive all they ‘should’ receive and that unworthy people be denied what they ‘should’ be denied.  Anyone above the age of four can locate in reality instances of seeming economic ‘injustices,’ and, in the process of doing so, easily imagine how god would improve on the observed economic arrangement.  Indeed, such flights of imagination are both fun and fill the imaginer with a satisfying sense of self-righteousness.

But as Thomas Sowell repeatedly reminds us, reality isn’t optional.  Reality is not a pliable dough that can be formed into whatever shapes our imaginations conjure.

In competitive markets, prices and wages – although of course never ‘perfect’ – reflect more accurately than any other institution known to humankind the real and relative scarcities of different goods, services, and inputs (including different types of human labor).  I emphasize: scarcities aren’t created by existing market prices; scarcities are reflected in existing market prices.  And because such reflections are as accurate as is humanly possible, people’s reactions to these prices – reactions as consumers and as producers – typically keep the current ‘bite’ of the scarcities as mild as possible (which isn’t to say that that bite isn’t often painfully sharp) and cause the sharpness of this ‘bite’ to weaken over time.

Those who would suppress market prices as the chief means of allocating resources in market economies almost never think seriously about what forces arise in the place of prices.  Sometimes those who would suppress market prices imagine that government officials would allocate resources better.  But how?  From where to these officials get the information necessary to allocate resources wisely, efficiently, or “better”?  This question is seldom asked because those who call for the suppression of market prices and wages typically assume either that the problem of resource allocation is an easy one or that the government officials charged with the task somehow have superhuman abilities.

Note that the problem of resource allocation by conscious human direction isn’t only one of information; it’s also one of incentives.  People with a faith in government simply trust that a ‘good’ government (however ‘good’ is defined by the particular devotee of government control) will serve worthy people – the poor, the weak, the forgotten – better than does the market.  Those with such a faith are ignorant of actual economic history and of actual political reality.


Pictured in the above photo are, left to right, Anne Buchanan (Jim’s wife), Jim Buchanan, and Betty Tillman (Jim’s long-time devoted secretary and personal assistant).

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The Encyclopedia of Libertarianism is now on-line and ungated.

Unskilled immigrants do not harm Americans.

Jairaj Devadiga explains that jobs are destroyed by government, not by innovation.

Doug Badger is not impressed with Obamacare.  A slice:

Obamacare is insuring more poor people and uninsuring millions of middle-income people. That suits the Democratic party and many congressional Republicans just fine. They measure social progress in the number of people receiving government assistance. Those struggling to pay their own way evoke little sympathy. Lawmakers of both parties, whose consciences were lacerated by CBO’s theory that millions would “lose” coverage under the GOP’s “repeal and replace” legislation (most of those “losses” the result of people voluntarily dropping insurance once the individual mandate was repealed) are unmoved that millions actually have lost coverage under the law they fought to preserve.

Jeff Miron makes the case for ending the so-called “war on drugs.

U.S. Sen. James Lankford (R-OK) is one of the rare politicians who talks good sense about trade.  A slice:

When a Canadian company decides to invest in a U.S.-based company, it increases our trade deficit. Similarly, when the Mexican government buys U.S. Treasury bonds (as most of the world does), the likelihood of an American trade deficit increases. Investments such as these are indicative of a strong economy.

It should be an encouraging sign that we are by far the world’s largest receiver of foreign direct investment. Our trade deficit means, in part, that U.S. companies are considered to be a better investment than companies in other countries. More investment in American businesses means more jobs and higher wages for American workers.

(One small correction: more foreign investment in America doesn’t mean more jobs in America.  Instead, it means different and better jobs in America – the creation of which is chiefly how such investment raises wages in America.)

Russ Roberts’s latest EconTalk podcast is with my colleague Tyler Cowen.

GMU Econ doctoral candidate Jon Murphy ponders the difference between good and not-so-good economists.

Randy Holcombe writes about tax reform: here, and here.

Brian Doherty argues that Trump’s responses to the recent events in Charlottesville are only further evidence of Trump’s deep hostility to genuine liberalism.

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Quotation of the Day…

by Don Boudreaux on August 16, 2017

in Economics, Virginia Political Economy

… is from pages 48-49 of my late Nobel-laureate colleague Jim Buchanan’s 1996 paper “Economics as a Public Science,” as this paper is reprinted in Economic Inquiry and Its Logic (2000), which is volume 12 of the Collected Works of James M. Buchanan (footnote deleted):

Economists often complain about the observed fact that “everyone is his own economist,” in an expression of the view that scientific counsel fails to command the deference it seems to warrant.  In the absence of an effective exit option, however, everyone will continue to be, and should be, his own economist, at least to the extent of participating in the selection of constraints that are to be imposed collectively, constraints that affect the actions of everyone simultaneously.  The effective scientific community in economics is, therefore, necessarily inclusive in a sense that is not applicable in natural science.

“Doing economics,” as the specialized activity of economists, should reflect a different emphasis on the transmission of basic knowledge relative to the discovery of new knowledge at the scientific frontiers.  Because of the public features of economics noted, the activity of “doing economics” must be more akin to that observed in the behaviour of the ordinary scientist who rarely makes discoveries.  In modern practice, too much talented intellectual capital is used up in searches for the solutions to stylized puzzles with little or no relevance for the ongoing, necessarily receptive and sometimes boring, activity of “teaching” the long-accepted principles of the science.

DBx: Yes.  Buchanan here – as in countless other parts of his vast writings – explicitly rejects the rule of experts.  He explicitly affirms the moral and political right of everyone to participate equally in the making of collective decisions.  No technocracy, plutocracy, or autocracy for Buchanan.  Democracy.  Whether Buchanan was correct or incorrect in the details of his assessment of the workability of democracy is a separate question.  But either way, for someone such as Nancy MacLean to interpret Buchanan as being an enemy of democracy reveals that she (1) did not read Buchanan’s works carefully, or (2) hasn’t the mental acuity to understand Buchanan’s writings, or (3) intentionally misrepresents Buchanan.  (I strongly suspect that it’s a combination of (1) and (2), for the stunning ignorance on display throughout Democracy in Chains – and in MacLean’s subsequent ad homimen-filled “defenses” of her work – seems to be both sincere and deeply rooted.)

Note also Buchanan’s plea that we professional economists spend less time solving clever puzzles and more time teaching the eternal verities of our discipline.  He’s wise to issue this plea.  Again and again and again and again conveying to students and the general public the basics of economics – for example, the reality of unintended consequences, the universality of the law of demand, and the importance of the fact that nearly all decisions are made ‘at the margin’ – is not sexy and it carries with it almost no professional rewards.  Yet performing this duty successfully is the highest and finest service that a good economist can perform for humanity.

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Quotation of the Day…

by Don Boudreaux on August 15, 2017

in Inequality, Seen and Unseen

… is from page 131 of my colleague Dick Wagner’s insightful 2016 book, Politics as a Peculiar Business (link added):

Consider a variation on Henry Fawcett’s (1871) tale of Robinson and Smith.  Each started at the same point in life in similar occupations earning similar amounts of income.  Robinson spent all of his income, with a good part of that going to amusement.  Smith saved part of his income, and put a good part of the remainder into personal improvement.  As the years passed, Smith advanced into higher-paying positions while Robinson stayed pretty much where he started.  The incomes of the two diverged increasingly as the years passed.  If the two were compared after, say, 30 years, Smith could well be judged to be wealthy and thus taxed to support Robinson, who was poor.  Yet the difference between the two is only a reflection of the different choices they made over the preceding years.  Robinson could have been less of a spendthrift and saved more in preceding years, as did Smith.  Alternatively, Robinson might have been more energetic in his job and hence received similar advancements to what Smith received.  However these comparative histories might have unfolded, an observation of comparative income positions in one particular year provides no information about how those people came to hold those positions.

DBx: To understand the details of “the” income or “the” wealth “distribution” requires knowledge of the choices made, through the decades, by the individuals who comprise the population over which the analyst decides to calculate such a “distribution.”  This understanding requires also knowledge of the differences, material and non-material, in each individual’s starting point.  It requires also knowledge of the institutional settings within which the individuals chose and acted – settings that might differ in important ways from one individual to another.  (For example: Perhaps Smith lives in a jurisdiction that taxes capital gains at a lower rate than capital gains are taxed in the jurisdiction in which Robinson lives.)  Knowledge is also required of any changes in these institutional details.  And this list of what must be known to truly understand and explain “the” income or “the” wealth “distribution” only scratches the surface.

To grasp the significance of such real-world personal and institutional facts in determining “the” income or “the” wealth “distribution” is to realize that attempts to explain this “distribution” as being the result of a handful of aggregate forces that act on people in the mass but are not traceable to their countless individual choices – aggregate forces as perhaps might be described by the accounting artifact, r>g, that is central to Thomas Piketty’s narrative – are specious.

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Who’d a-Thunk It?

by Don Boudreaux on August 14, 2017

in Reality Is Not Optional, Seen and Unseen, Work

We study the effect of minimum wage increases on employment in automatable jobs – jobs in which employers may find it easier to substitute machines for people – focusing on low-skilled workers from whom such substitution may be spurred by minimum wage increases. Based on CPS data from 1980-2015, we find that increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers, and increases the likelihood that low-skilled workers in automatable jobs become unemployed. The average effects mask significant heterogeneity by industry and demographic group, including substantive adverse effects for older, low-skilled workers in manufacturing. The findings imply that groups often ignored in the minimum wage literature are in fact quite vulnerable to employment changes and job loss because of automation following a minimum wage increase.

That’s the abstract of a new paper by Grace Lordan and David Neumark, titled “People Versus Machines: The Impact of Minimum Wages on Automatable Jobs.”  (emphasis added)

Reality is not optional and the law of demand holds for low-skilled labor no less than it holds for kumquats, for yoga instruction, and for high-quality jewelry.  Indeed, the law of demand is universal.  Therefore, government diktats requiring all workers to insist on being paid at least some minimum hourly wage from employers will cause the quantities of any given kind of low-skilled labor demanded by employers to be fewer than these quantities would be in the absence of such diktats.

Minimum-wage proponents fancy themselves to be champions of the poor, but these fancies are belied by the reality that minimum wages reduce the employment prospects of the very people that well-meaning minimum-wage proponents intend to help.

(HT Frank Stephenson)

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Bonus Quotation of the Day…

by Don Boudreaux on August 14, 2017

in Virginia Political Economy

… is from page 277 of my late colleague Jim Buchanan‘s 1985 article “Constitutional Democracy, Individual Liberty, and Political Equality” as it is reprinted in Moral Science and Moral Order, Vol. 17 of The Collected Works of James M. Buchanan:

Those persons who object to the explicit introduction of or an extension of constitutional limits over the range and scope of political activity often, at the same time, strongly support constitutional guarantees of democratic decision-making procedures, as such.  In the literal sense, therefore, these persons are also “constitutionalists,” and they would acknowledge the necessity of affixing the word “constitutional” to “democracy.”  Without effective guarantees of electoral processes, a majority coalition, once in office, could, of course, simply abolish all elections and establish itself in permanent authority.  In this context, those persons who most strongly oppose constitutional constraints on the activities of governments accept the necessity of constitutional constraints on the procedures of politics.  There are few who claims to adhere to democratic values, however these values may be described, who are not, at the same time, constitutionalists of one sort or another.  There is then no inherent or internal inconsistency in the position that urges the imposition of constraints on the range of activities open to political authority.  Just as a majority coalition may, unless it is restricted, abolish electoral feedbacks that insure the potential for rotation in office, so may any effectively operating political coalition seek to extend its authority beyond any plausibly acceptable boundaries described by the publicness notion.

DBx: One of the most irritating facts about Nancy MacLean’s fabulist book, Democracy in Chains – apart from her countless careless factual errors, flights of illogical ‘reasoning,’ and tales fabricated out of thin air – is her palpable ignorance of political theory.  She isn’t ignorant only of public-choice scholarship.  She seems to be ignorant of political theory generally.  Nowhere does she give evidence of seriously appreciating the manifold difficulties that scholars throughout the ages, and of diverse ideological stripes, have identified with collective decision-making procedures.  For her, majority-rule democracy is a rather simple and straightforward institution that is unquestionably superior to all alternatives at ensuring that government acts in ways that promote the true public interest.  (In his review of MacLean’s book, Mike Munger marveled that MacLean herself champions, with apparent sincerity, a straw-man version of majoritarian democracy.)  Any one who wishes to put majority-rule democracy “in chains” is, therefore in MacLean’s opinion, either a fool or a villain.  (On her telling, Jim Buchanan was a villain.)

So I wonder what MacLean would say to those who argue for a constitutional rule that prevents today’s winning majority coalition from eliminating democratic elections going forward?  Would she accuse those who support such a rule as being enemies of the People – enemies who would deny the majority the right to do as it pleases?  I suspect not.  That is, I suspect that even the naive MacLean would see the wisdom in “chaining” today’s majority from changing the voting rules going forward in ways that protect that majority from being outvoted in the future.

Yet if so – that is, if MacLean would support this constitutional restriction on the power of the current majority – then she obviously does not trust the majority always to do what’s best for the general public.  But once the majority is reckoned not to be 100-percent trustworthy, surely it’s prudent at least to consider the possibility that constitutional restrictions on the power of the majority (beyond those that restrict its ability to abolish majority rule itself) might yield positive benefits for society at large.  If today’s majority is not to be trusted without constraint to use its power wisely for the public interest, then there is no good reason to interpret calls for constitutional limitations on the scope and power of political majorities as evidence that those who make such calls are foolish or villainous – or anti-democratic – enemies of ‘the People.’

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Kerry McDonald celebrates homeschooling.

Most of us Americans today enjoy benefits available a quarter-century ago only to multimillionaires.

Here’s more good news: efforts to price low-skilled workers out of jobs with mandatory $15 minimum wages are waning.  (HT Warren Smith)  A slice (link added):

In fact, University of California, Irvine, economist David Neumark examined more than 100 credible minimum wage studies of the past two decades and found that 85% of them “found consistent evidence of job loss effects on low-skilled workers” — including lost jobs, reduced hours and closed businesses.

Mark Perry identifies a significant inconsistency in the beliefs of “diversity” advocates.

Richard Epstein riffs on the UAW’s recent resounding defeat in Canton, Mississippi.  (Among the myths that “Progressives” cling to is the notion that workers’ wages rise, not mainly because of competition among employers for workers, but because – and to the extent that – workers bargain harder with employers.  Bargain as hard as you like: no employer will pay you a wage higher than the value of your marginal product.)

Erik Goepner and Trevor Thrall argue against U.S. drone strikes in the Philippines.

Writing in the Wall Street Journal, John Tamny explains the foolishness of the belief – held by Trump and many others – that a weak U.S. dollar is good for Americans.  A slice:

A final simple point is that American workers are paid in dollars. Devaluing the currency erodes their ability to buy the necessities and pleasures of life, whether they’re created across the street, or on the other side of the world. This obvious truth has long eluded proponents of a weak currency, who are prone to limiting their analysis to first-stage implications. They focus on the economy as an abstract blob, forgetting that it’s made up of millions of individual workers who earn dollars. Never explained by Mr. Trump or any backer of a weak currency is how eroding its value will help these people and companies.

Virginia Postrel makes a case for permissionless innovation.

My Mercatus Center colleagues Stefanie Haeffele-Balch and Virgil Storr plea for moderation.

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Quotation of the Day…

by Don Boudreaux on August 14, 2017

in Complexity & Emergence, Hubris and humility

… is from page 291 of the late Vincent Ostrom’s 1997 book, The Meaning of Democracy and the Vulnerabilities of Democracies:

Great Societies are not organized by some single center of Supreme Authority exercising tutelage over Society.  Knowledgeable, skillful, and intelligible persons build great societies by working with one another and mediating conflicts to achieve conflict resolution in forming coherent patterns of relationships with one another.

DBx: Yes.  But to understand the reality here identified by Ostrom (and identified elsewhere by scholars such as Adam Smith, Carl Menger, Ludwig von Mises, F.A. Hayek, Bruno Leoni, and Vincent Ostrom’s Nobel-laureate wife, the late Elinor Ostrom) requires adult thought.  To grasp this understanding requires (1) a willingness to overcome the temptation to see conscious design or intent in all observed patterns, (2) relatedly, the maturity to reject interpretations of all social interactions as a child might – namely, as battles between good guys and bad guys, and (3) the civility to judge other people’s actions (and the outcomes of those actions) by criteria other than your own personal preferences and suppositions.

None of the above is to say that human intent is irrelevant, that there aren’t sometimes battles between good guys and bad guys, or that your own personal preferences are insignificant and your own suppositions always mistaken.  It is, however, to insist that, when observing and assessing the economy or society, you exercise more thought and maturity, and less arrogance and hubris, than are too often exercised by those who observe and assess social reality.  That reality is vastly more complex than you know.  For example, in market-oriented economies income isn’t “distributed” by anyone or by any cabal; nor is income or wealth “distributed” in accordance with a consciously chosen plan or with a simple formula such as r>g.  Prices and wages aren’t “set” by conscious design or to satisfy the wills of evil plutocrats or of angelic politicians.  Patterns of specialization and trade aren’t determined by government or CEO design.  At the levels on which people focus most discussions of policy – “the” economy, this industry, that group of workers, etc. – the patterns that exist are all emergent.  They are the results of human action but not of human design.

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