Quotation of the Day…

by Don Boudreaux on August 12, 2014

in Myths and Fallacies

… is from page 50 of the 2006 Liberty Fund edition of Ludwig von Mises’s 1956 volume, The Anti-Capitalistic Mentality:

It was not vain disquisitions about a vague concept of justice that raised the standard of living of the common man in the capitalistic countries to its present height, but the activities of men dubbed as “rugged individualists” and “exploiters.”  The poverty of the backward nations is due to the fact that their policies of expropriation, discriminatory taxation and foreign exchange control prevent the investment of foreign capital while their domestic policies preclude the accumulation of indigenous capital.

All those resisting capitalism on moral grounds as an unfair system are deluded by their failure to comprehend what capital is, how it comes into existence and how it is maintained, and what the benefits are which are derived from its employment in production processes.

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Here’s an exaggeration no greater than many other exaggerations designed to make vivid a valid point: there are two ways to see economic development.  One way is to see economic development as being chiefly a physical occurrence: valuable output X is made available when useful inputs A, B, and C are combined together in a way that generates X.  This first ‘vision’ of economic development makes such development appear to be an engineering outcome.

A second, and very different, way to see economic development is to recognize that the combination of A, B, and C into valuable output X is not the essence of development.  Sure, it and similar production processes are necessary, but they are not remotely close to being sufficient; they are not the essence of economic development – they are, instead, one of its results.

What is central to development, in this second way of seeing, are creativity (which itself cannot be engineered), consumer sovereignty (which is the only known means of reliably determining which outputs are truly worthwhile and which are not – and which requires freedom for both consumers and for producers), power-limiting institutions (such as – and most importantly – private property), and a culture that not only tolerates but celebrates innovation and material prosperity.  Too much discussion of economic development proceeds as if governments can achieve development simply by mimicking the material outcomes of genuine economic development: people in rich countries have lots to eat, so let’s give people in poor countries more food; people in rich countries have lots of paved roads, so let’s give people in poor countries lots of paved road; people in rich countries do not allow their children to work in factories, so let’s insist that people in poor countries act similarly….

Whatever the merits of people in rich countries supplying such things to people in poor countries, no such supplies will spark any development in poor countries.  It’s time for people to stop being misled – largely by a mistaken view of what it means to be scientific – into the habit of confusing results with causes.

Here’s a superb video, on this general topic, featuring George Gilder.

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Profiteering

by Don Boudreaux on August 11, 2014

in Growth, Inequality, Innovation

This post is prompted by my reading Ben Zycher’s excellent essay “In Defense of Price Gouging and Profiteering“.

Dick and Jane are neighbors; both are entrepreneurs.  Both Dick and Jane each pioneer the innovative introduction into the market of new products: Dick sells didjets and Jane sell jadjets.  There are no legal restrictions on other entrepreneurs entering the market to compete directly with either Dick or Jane, but the special and unique talents of these each of these entrepreneurs assures each that no other serious competitors will arise for at least a year.

Dick invested $2 million to cover the cost of producing didjets and making them available for sale to the public.  During his first year of operation, he produced 200,000 didjets at an average total cost of $10 per didjet.  The market price for didjets turned out to be $10.50 per didjet.  Dick sold during that year all of his 200,000 didjets.  Dick’s enterprise is profitable; he pockets during that year $100,000 of profits (for an annual rate of return on his investment of 5 percent).

Jane invested $2 million to cover the cost of producing jadjets and making them available for sale to the public.  During her first year of operation, she produced 2,000,000 jadjets at an average total cost of $1 per jadjet.  The market price for jadjets turned out to be $100 per jadjet.  Jane sold during that year all of her 2,000,000 jadjets.  Jane’s enterprise is very profitable; she pockets $198 million of profits (for an annual rate of return on her investment of 9,900 percent).

(For purposes of this exposition, let’s ignore taxes.)

Further suppose that Dick donates $80,000 of his $100,000 profit to a school for special-needs children.  Dick is frugal; he lives only off of the remaining $20,000.

Jane is neither as frugal nor as philanthropic as is Dick.  She spends $97,000,000 of her profits on original 19th-century paintings for her private residence.  She spends $1,000,000 on her other living expenses.  She invests the remaining $100 million in a larger and better jadjet factory.  She gives not one cent to any philanthropic cause.

Some questions:

1. Is Jane a “profiteer”?  After all, she could have still profited handsomely had she chosen to sell her jadjets at a price of, say, $10 each rather than at $100 each.

2. Which (if any) of these two entrepreneurs contributes most to human betterment?

It’s important to realize that by far the greatest benefit that successful business people contribute to society is not whatever benefits flow through their charitable giving.  Those benefits are often real; they are also often detriments rather than benefits.  But it’s in entrepreneurs’ and businesses’ creation of – and in their efforts to make affordable – valuable goods and services for consumers that successful entrepreneurs, business people, and investors contribute most to society.

It’s important also to realize that profits can be higher than ‘normal’ not only as a result of socially harmful institutions (almost always government-granted special privileges to producers), but also as a result of conditions or facts that benefit society.  An entrepreneur who increases his or her profits by lowering production costs benefits society; an entrepreneur who creates a product that people are willing to pay very high prices for benefits society.

This last claim might sound counterintuitive.  But ponder the Dick and Jane hypothetical above.   Suppose that the product created by Jane would have had a market price, not of $100 each, but of only, say, $30 each.  Jane’s profits would have been lower.  But note that the lower market price ($30) of Jane’s jadjets would have meant that, at the margin, each jadjet contributes less to human well-being than it would have had the market price been $100 each.  The market price of a good or service reflects the value that one additional unit of that good or service contributes to human welfare.  As long as no one is prevented by government from entering into competition with Jane, then the higher is the jadjet price that Jane fetches from consumers voluntarily spending their own money, then the greater are Jane’s contributions to society through her entrepreneurial creation of jadjets.

Put differently, a ‘high’ price of some good or service can be the result either of low supply or high demand.  The former is unfortunate – and especially so if that low supply is artificial, created by government barriers to the expansion of the supply of the good or service.  The latter, in contrast, is unambiguously good.  The more successful an entrepreneur or business is at creating and offering for sale a good or service that consumers like, the higher is the price that consumers are willing to pay for that good or service.

….

Now here’s a third question: If Dick and Jane were both, prior to their successful innovations, ordinary, middle-income denizens of society, then Jane’s innovation led to greater income and wealth inequality – so, ought we lament this result, or at least regard it as being a ‘cost’ of Jane’s unusually great success at innovation?

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Propaganda

by Don Boudreaux on August 11, 2014

in Media, Politics, Video

Propaganda, of course, is unique neither to Barack Obama nor to the U.S. Democratic party.  Because ideas matter, and because voters are both rationally ignorant and rationally irrational, government officials – ordinary human beings hungry for ever-more-secure and expansive power – are constantly tempted to use it.  Yet as with all human endeavors, some people are more skilled at propaganda than are other people.  (And also, it should be noted, some people are more susceptible to propaganda than are other people.)

See also this write-up at Reason.com.

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Quotation of the Day…

by Don Boudreaux on August 11, 2014

in Politics

… is from page 15 of my emeritus colleague Gordon Tullock’s 2000 monograph, The Theory of Public Choice, which is included in Government: Whose Obedient Servant? (Gordon Tullock, Arthur Seldon, & Gordon L. Brady, eds., 2000):

The student of public choice is unlikely to believe that government officials are overly concerned with the public interest.  Since they operate in an area where information is very poor (and the proof that the voters’ information on political issues would be poor was one of the first achievements of the public choice theory), deception is much more likely to be a paying tactic than it is in the market-place.  Therefore, one would anticipate more dishonesty in government.

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Matt Welch is a superb guide through today’s New York Times Magazine cover story on libertarianism.

Sheldon Richman reflects on World War I.  A slice:

Could the men responsible for the war have wrought anything like the horrors they inflicted had they not controlled a state apparatus — an army, a navy, a compulsory revenue-collection agency, and a bureaucracy to conscript (enslave) the nation’s young males? (The draft was fittingly called the blood-tax.) It wasn’t just the European state system that is implicated. Three years into the conflict, a purported constitutionally limited republic — the United States — joined the orgy of violence and determined the tragic outcome. That the Great War brought to an end the halting, imperfect journey toward genuine liberalism merely compounded the catastrophe.

David Henderson celebrates the personal caring supplied to each of us by “the economy of strangers.

Ben Zycher explains the very real benefits of so-called “price gouging” and “profiteering.”  A slice:

The plain reality is that any system of allocating the available water will favor some people and not others. How about a footrace to the local water warehouse? That would favor the swift and the young. How about violence as a rationing mechanism: letting people just fight it out. That would favor the young, the strong, and males rather than females. Suppose we allow beauty to be the criterion. A lot of guys like me would go awfully thirsty. “Fairness” in this context too often is defined as the system under which a given person thinks that he will be able to compete most effectively. Where people stand depends on where they sit.

And so the moral disadvantage of “price gouging” relative to other methods of allocating a good suddenly more valuable remains entirely obscure. The argument that the suppression of “price gouging” will advantage the poor is a fallacy: The net effect on the poor depends on the choice of an alternative rationing scheme, and on whether the poor actually are able to compete more effectively under the latter. Moreover, the nonpoor, prevented from bidding up the price of bottled water, are very likely to shift their spending to other markets, bidding up the prices of those goods instead. Is that better for the poor? And price suppression analytically is a tax borne in part by producers; are not some of them “poor”? More broadly, price controls must have the effect of making the economy smaller. Is that good for the poor? When such politicians as DeWine speak, the answers to those fundamental questions remain shrouded in rhetorical fog.

“Price gouging” — allocation by market price — provides powerful incentives to conserve, and powerful incentives for people to find ways to supply more bottled water. Are those not desirable outcomes? Price rationing may or may not be good for the poor, but, then, any rationing scheme is bad for someone. Unless we want to argue that the poor have a greater moral claim than others — a position that I would criticize sharply — the widely assumed but poorly reasoned premise that “price gouging,” that is, rationing by price, is morally deficient is a popular fallacy.

Salim Furth explores the scholarship on that great geyser of cronyism, the U.S. Export-Import Bank.  A slice:

Paul Krugman broke his uncharacteristic silence on Ex-Im to offer the lukewarm endorsement that Ex-Im is less harmful than usual when interest rates are stuck at zero. He dismisses the usual case for keeping Ex-Im in place, writing that “you can make various strategic trade policy arguments, but the case for a special export lender is weak at best.” Then he reverses position, citing current interest rate conditions as a reason why mercantilism will “work” for the moment.[24]

But if the relevant interest rates really are stuck at zero, it is now the perfect time to eliminate Ex-Im. Since Ex-Im functions as a lender, its removal could cause a small short-term shift in the supply of loanable funds. (In the long run, and possibly very quickly, that supply would be replaced by private banks.) But if the equilibrium full-employment interest rate is currently below zero, the quantity of loans is demand-determined and a leftward shift in supply will have no impact on quantity.

If Krugman is thinking of Ex-Im as a form of fiscal stimulus, his argument collides head-on with the more common defense of Ex-Im, that it does not cost taxpayers money. If Ex-Im runs a surplus, ending it would be a form of stimulus! Alternatively, if Krugman is thinking of Ex-Im’s lending as a form of quantitative easing, it can surely be offset by the Federal Reserve.

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Quotation of the Day…

by Don Boudreaux on August 10, 2014

in Inequality, Politics

… is from page 57 the 19th-century German economist Wilhelm Roscher’s 1895 volume, Geistliche Gedanken eines Nationalokonomen, as quoted in translation by Helmut Schoeck, on page 234 of the 1987 Liberty Fund edition of Schoeck’s 1966 study, Envy:

Whereas most other sins at least begin by being pleasurable, the feeling of envy is miserable from the outset.  Yet envy, is these democratic days, is particularly prevalent.  How many of those moods which we supposed to be a sense of justice are infected at their very base by envious impulses.

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Billed

by Don Boudreaux on August 9, 2014

in Crony Capitalism, Other People's Money, Sports, Subsidies

Here’s a letter to the New York Times:

You report that “Gov. Andrew M. Cuomo of New York wants to do everything he can to keep the Buffalo Bills in the state” (“Cuomo Says He Could Consider New Bills Stadium,” Aug. 9).  Yet you immediately explain that what Mr. Cuomo means is that he “will consider public aid for a new stadium if necessary.”

In words more clarifying: Gov. Cuomo wants to force other people - New York state taxpayers - to do everything they can to bribe the owner of a business worth $840 million to keep that business in New York State.

So in fact Mr. Cuomo isn’t willing to do everything he can; he hasn’t offered to put up any of his own money for this project.  Instead, he wants to stick other people with the bill for the Bills.

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 August 9, 2014

in Seen and Unseen, War

… is from pages 80-81 of Tom G. Palmer’s important forthcoming collection, Peace, Love, & Liberty; specifically, it’s from Tom’s chapter, “The Political Economy of Empire and War” (footnote excluded); this passage appears immediately after Tom quoted the early 20th-century scholar Parker T. Moon:

It is at best an abbreviation of the complex activities behind a war to say that “Country X made war or sent soldiers to invade Country Y”; in fact, some group of people in Country X made choices with serious consequences for others and the task of a serious social scientist is to understand how and why those choices were made and why others complied with them.  War is a choice, at least on the part of the aggressor.  The attempt to aggregate all of the people, all of the interests, and all of the opinions found in a country into one organic choice-making agent is not only an example of mystical nonsense, but worse, it conceals from us all of the important questions of political science.  Yet that is the approach taken by too many commentators, analysts, and ideologues of war and conflict.  They fail to understand the issues involved because they are collectivists not only in morality, but in social science methods as well.  They think that a country, which is made up of huge numbers of diverse individuals and their complex relationships (families, networks, political parties, enterprises, religious affiliations, and on and on and on) is an individual just like the individuals who comprise it.  That is sloppy thinking with serious consequences.

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McCloskey on Inequality

by Don Boudreaux on August 9, 2014

in Growth, Inequality, Video

In this 24-minute interview on the BBC’s HARDtalk, Deirdre McCloskey talks about economic inequality and Thomas Piketty.

See also this related interview that Deirdre did with ieaTV, where near the start she says

I think the obsession with inequality has a feeling of envy about it, which I find sad because envy is insatiable.

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