My colleague Alex Tabarrok – inspired by a new paper by Vahid Montazerhodjat and Andrew Lo – argues persuasively that the FDA kills far too many people.  That the FDA performs its ghastly grim-reaping invisibly and in silence does not make these deaths less tragic.

Fortunately – as Chelsea German documents – the forces of global capitalism are working to dramatically reduce the number of people living in deep poverty.  Note that this reduction is not only in the percentage of people living in deep poverty, but also in the absolute number of people living in deep poverty.

George Will rightly has no patience for the bigoted, brutish, hypocritical, and economically ignorant buffoon who is Donald Trump.

Larry Kudlow and Steve Moore expose some of Trump’s economic fallacies.

Jerry Jordan writes insightfully about Greek losses.

Bob Higgs remembers the late Nathan Rosenberg.

My intrepid Mercatus Center colleague Veronique de Rugy continues to expose the lies and half-truths spewed by that great geyser of cronyism, the U.S. Export-Import Bank.

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New Digs for GMU Econ

by Don Boudreaux on August 27, 2015

in Current Affairs

After 20 years of being housed in Enterprise Hall on George Mason’s Fairfax campus, GMU’s Department of Economics has now moved its headquarters to a beautiful newly renovated suite in Mason Hall on the Fairfax campus.  While our colleagues in the Center for Study of Public Choice still remain in Carow Hall (about a ten-minute walk away from Mason Hall), many of our other academic colleagues with the Mercatus Center have joined us in Mason Hall.

Yesterday we enjoyed a lunch together in the Mason Hall atrium.  Here’s a photo, taken just after that lunch, of me with just some of the brilliant and inspiring colleagues who I am deeply fortunate to work with.  (From left to right: Robin Hanson, Alex Tabarrok, Dan Houser, Dan Klein, Kevin Frei [a young entrepreneur visiting us from Phoenix], me, and Bryan Caplan.)

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… is from pages 181-182 of F.A. Hayek’s 1938 essay “Freedom and the Economic System,” which is reprinted as chapter eight of the 1997 collection, edited by Bruce Caldwell, Socialism and War:

The similarity between many of the characteristic features of the ‘fascist’ and the ‘communist’ regimes becomes steadily more obvious.  Nor is it an accident that in the fascist states a socialist is often regarded as a potential recruit while the liberal of the old school is regarded as the arch-enemy.

Adherents of all popular political ideologies other than classical-liberalism and libertarianism assume, explicitly or implicitly, that social order must ultimately be created by the conscious exercise of force by an agency charged with “governing” society.  Only classical liberals and libertarians understand not only that this assumption is false both historically and theoretically, but also that acting upon this assumption uncorks a cascade of unintended ill consequences.

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Here’s the extended cut (just under 14 minutes) of a great new Learn Liberty video featuring philosophy professor Rob Gressis interviewing students on the distinction between charity and ‘forced charity.’

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Jeff Jacoby, writing in the Boston Globe, helps to further expose Donald Trump as the hypocritical, property-rights-violating, grasping brute that Trump is.

In my most-recent Pittsburgh Tribune-Review column I reflect on the wonderful life that I lead as a middle-class American in the early 21st century.  A slice:

Here are just some of the many other ways that my life — that of an ordinary middle-class American of the early 21st century — differs from the lives of ordinary people prior to the Industrial Revolution.

• Assuming I don’t start playing ice hockey, I’ll keep all of my real teeth for 80 or 90 years.

• I’ve never been at any real risk of suffering the loss of a child.

….

• I can listen to many people perform beautiful music as I sit alone in my living room or drive alone along a lonely road. And if I grow tired of listening, say, to the Vienna Philharmonic perform Beethoven symphonies, I can summon immediately John, Paul, George and Ringo to entertain me with songs about a boy wanting to hold a girl’s hand or about strawberry fields.

Even if I were to die today, my life would count as one of the richest and fullest in all humanity.

David Henderson’s Concise Encyclopedia biography of Oliver Williamson is now on-line.

The government has no legitimate business interfering in the prostitution business.

Isaac Morehouse explains that “[a]bsent competition and markets, being entrepreneurial has no value.  In fact, it can destroy value if channeled into the political process.

Over at A Force for Good, the insightful young economist Jon Murphy reflects on businessman Dan Price’s recent attempt (using his own money) to pay his workers wages above the value of those workers’ productivity.

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I love this e-mail that I received last evening from Cafe Hayek patron Corey Henderson, a physicist; I paste it in full below with his kind permission (original emphasis):

I wanted to comment on some of your recent posts where you ask economists to “put their money where their mouths are” and actually start businesses that back up their claims. I don’t use Facebook, however, so I am e-mailing you directly. It’s been a great series of posts and I’ve enjoyed them.

Consider this, though: I am a physicist and we tend to bifurcate into theoreticians and experimentalists. One cannot really exist without the other, and there has long been a tension between the two groups. No one, however, can doubt that both groups are scientists. The scientific enterprise, of course, must contain both exercises. A theoretical physicist who does not include a pathway to experimentation in his work is not a scientist, and the best ones are enthusiastic whenever an experimental group is pursuing evidence for (or against) their claims. They collaborate extensively. THIS is science.

The TV show Mythbusters is credited by many scientists (including myself) for being the BEST childhood introduction to science possible today. Why? Because the show is about taking a proposition, usually “common knowledge”, and gradually working up more and more rigorous tests to prove or disprove it. It’s hands-on, messy, disastrous experimentation writ large and hugely entertaining.

If economists claim they are scientists, it’s incumbent on us to ask “who are your experimentalists then?” The answer, obviously, is “entrepreneurs”. Just like Mythbusters, they’re doing the experiments, millions of them every day, and no fancy degrees or advanced math required (usually).

Thanks for your time,
Corey A. Henderson
PhD Candidate and NSF Graduate Fellow
Dept. of Engineering Physics
Univ. of Wisconsin – Madison

Exactly so.  The market itself is a vast and on-going laboratory of experiments – experiments that are relevant, real, and revealing.  These experiments are valuable not least because they are made under real-world circumstances and by people with strong personal incentives to discover and comprehend the ‘truth’ better than their rival experimenters.  (This is a point the general thrust of which I associate with Michael Polanyi.)  When entry into, and exit out of, markets aren’t restricted by government, and when people are free to contract, or not, with their own money (and only with their own money) on terms to which each voluntarily agrees in a regime of secure private property rights, the market discovers which goods and services, production and distribution and financing processes, and trading arrangements work best compared to realistically available alternatives.

While I sincerely believe that much useful information can be gathered by academics doing empirical studies (both quantitative and non-quantitative), it is an unwarranted conceit of academics to suppose themselves and their empirical studies to be the only, or even the chief, source of empirical knowledge of social reality.

For example, against some academic-economists’ empirical findings that employers of low-skilled workers in America today enjoy monopsony power we must place the findings of those experienced and skilled real-world experimenters: entrepreneurs.  If the laboratory conditions (the market settings) are such that experimenters (entrepreneurs) are free to experiment – that is, if neither entry into nor exit out of the laboratory (the market) is artificially blocked by government, and if government hasn’t otherwise restricted the experimenters’ ability to peacefully use the available lab equipment – then these experimenters are far more likely to discover the ‘truth’ about the current state of the market than are outside observers (such as academics) who seldom, if ever, actually do relevant work in the laboratory itself and who also are necessarily restricted to using only limited sources of information for the kinds of quantitative analyses that they typically perform.

If the entrepreneurs-experimenters believe that they’ve found that some workers are underpaid, these entrepreneurs-experimenters test their hypothesis by actually trying to employ these underpaid workers differently and at slightly higher wages.  If the entrepreneurs-experimenters profit, the hypothesis is confirmed.  If instead the entrepreneurs-experimenters suffer losses, the hypothesis is rejected.  Either way, the knowledge revealed by such entrepreneurs-experimenters ought to be considered and used far more frequently by academic economists.

UPDATE: Prompted by a commenter on this post, I just remembered this relevant post from this past April.

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Quotation of the Day…

by Don Boudreaux on August 26, 2015

in Environment, Myths and Fallacies, Seen and Unseen

… is from the opening section of Jesse Ausubel’s fascinating January 2015 monograph, Nature Rebounds:

[A]bout 1970 a great reversal began in America’s use of resources.  Contrary to the expectations of many professors and preachers, America began to spare more resources for the rest of nature, first in relative and more recently in absolute amounts.  A series of decouplings is occurring, so that our economy no longer advances in tandem with exploitation of land, forests, water, and minerals.  American use of almost everything except information seems to be peaking, not because the resources are exhausted, but because consumers changed consumption and producers changed production.  Changes in behavior and technology liberate the environment.

People who worry that modernity is “unsustainable” without strict government controls or taxes on resource use and patterns of consumption should especially read Ausubel’s monograph.

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The Uber Economy

by Don Boudreaux on August 25, 2015

in Creative destruction, Innovation, Seen and Unseen

Here’s the bulk of an e-mail that I received this morning from a regular reader of Cafe Hayek; I share it here with his kind permission:

I am currently enrolled in a masters in economics program at Drexel University in Philadelphia, and am a regular patron at the Café.  In order to make ends meet, I have recently started driving for Uber.  The flexibility has been perfect for my busy schedule, and I take no small amount of pride in helping to break down the government-mandated monopoly that cab companies have enjoyed over citizens for decades.  My experience in this capacity has illustrated to me several points that seem to be common themes at the Café, and I have decided to take a moment on this slow Tuesday morning to share them with you, in hopes that you might commiserate and share my frustration.

I am not sure how well-versed you are with the pay structure at Uber, but for every ride I give, I receive 80% of the fare, with Uber taking 20% as a fee.  This is an arrangement that I find to be more than fair, and I often express my gratitude for the generosity of this system to my clients.  I am routinely dumbfounded, however, by the responses I receive.  The typical customer says something along the lines of “how can they take 20%, you’re doing ALL the work?” or if you will pardon my French, “that’s standard corporate bulls**t.”

Though I am sure it is unnecessary, I feel compelled to go through a quick breakdown of the “work” involved in this product in order to test the hypothesis proffered by these clients that I do the lion’s share.  Uber has created a massive network that uses economies of scale to seamlessly match the demand for transportation with the supply of underutilized capital (idle cars).  They have created an app that allows the customer to know where I am, how long it will take me to get there, and even to watch the exact route I take.  More importantly, they have legitimized my solicitation of rides for money in several ways: 1) By giving the customer my car’s make and model, my license plate number and a picture of me in a shirt and tie, they have virtually eliminated the awkward process of making sure that I am indeed their driver.  2) Because I am required to submit to a background check in order to be approved as an Uber driver, the customer can be confident in the fact that I am not a criminal looking to use the system for some horrible means, and finally 3) By allowing every client to which I have provided service to rate me, and then by allowing potential new clients to see that rating, they have allowed me to establish a reputation for quality service that would otherwise have been impossible.

They have also used the mountain of data they have generated to set a rate that both maximizes my willingness to provide rides with the end user’s desire to pay for them, thus negating the haggling process that would have been necessary if I were soliciting rides on my own.

For my part, I pick up the customer at the location that Uber gives me and drop them off at the destination they have uploaded, often having to follow the navigation system that the app links to and starts at the touch of a button.  It is labor that could be replaced by virtually any human being with a driver’s license and a vehicle newer than 2000 (the only requirement Uber has for vehicles).  To me, it is clear that I am overpaid.  I have tried on several occasions to engage my clients on this matter and show them how little value I actually provide, but with typically little success.  I try to get them to understand how badly my venture would fail if I tried to solicit rides without the help of the app, but they (rightly) find the idea to be ridiculous and yet fail to see that if is only because of Uber that I am able to have any success.

It is due to the beauty of this newly freed market that Uber has realized that they will maximize their profits by only taking a tiny share of each ride, thus incentivizing me to provide many more rides at virtually zero marginal cost to them.  The whole system stands to me as a glowing monument to the triumph of free markets and the profit motive, and yet the average American still seems to think that I am the indispensable part of this process.

I write you now simply because I believe you will share my frustration at this overvaluation of the most common labor and the implications it will have for policy-makers in the future….

Sincerely,
Jim Flynn

Three thoughts:

First, thanks, Mr. Flynn.  Of course I largely agree with what you’ve written here.

Second, I dispute only your suggestions that (1) drivers are dispensable – that is, not critical – to Uber’s success, and (2) you are overpaid.  You are completely correct to note, and even to emphasize, that the value contributed by Uber flows from its creative use of technology to enable ordinary owners of automobiles to transform some portion of those automobiles from consumption into production goods – a transformation that benefits Uber owners, Uber drivers, and consumers.  But although you would not enjoy the income-earning opportunity that Uber opens to you were it not for Uber, Uber would not enjoy the profit-earning opportunity that you open to it were it not for you and others who drive for Uber.  One of the many beautiful features of a market economy characterized by the division of labor is that it makes each of us profitably dependent upon the rest of us without, at the same time, giving any of us the power to hold-up any others of us.  Your pay, while to you more than adequate, is not excessive if it results from the voluntary exchanges of you, Uber, and your customers.  To be generously compensated is not necessarily to be over-compensated.

Third, Uber is but one innovation that makes even more unrealistic (as if such were possible) the claim that real-world labor markets for low-skilled workers in modern America are infected with monopsony power.

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Abby Hall (GMU Econ PhD, 2015) explains the importance of property rights.

Ilya Somin, a GMU colleague of mine from over in the law school, warns against warning labels.

Jerry Jordan reviews David Stockman’s book, The Great Deformation.

In this new Mercatus Center working paper, economists G.P. Manish and Dan Sutter explore the interesting connection between cronyism and the supply of innovative entrepreneurs.

Iain Murray points out that financial markets have long been a source of the benefits of the sharing economy.

Angus, over at Kids Prefer Cheese, helpfully summarizes four important negative theorems from economics.

I just learned from Alberto Mingardi the sad news that the great economic historian Nathan Rosenberg died yesterday.  I second, by the way, Alberto’s strong recommendation of Rosenberg’s 1986 book (with L.E. Birdzell), How the West Grew Rich.  It is a treasure.

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Here’s a letter to the Wall Street Journal:

Andy Kessler convincingly argues that Hillary Clinton’s plan to end what she calls corporate “short-termism” will do more harm than good (“The Clinton Plan to Distort Market Signals,” August 25).

One other point deserves mention: politics is afflicted with far more chronic short-termism than are financial markets.  The flows of expected future costs and benefits from how assets are used today are reflected in today’s asset prices.  To keep these prices and portfolio values as high as possible, business executives and investors have strong incentives (as Mr. Kessler explains) to act today with real regard for tomorrow.  No such future-oriented pricing mechanism operates in politics.  Each politician’s time-horizon thus extends only to the next election.  So trusting a politician with the task of assessing and addressing short-termism makes as much sense as trusting the Imperial Wizard of the KKK with the task of assessing and addressing racism.

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

Also, someone should ask Ms. Clinton – who allegedly worries about “the tyranny of today’s earning report” – if she also worries about the tyranny of today’s polling reports.

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