Quotation of the Day…

by Don Boudreaux on January 20, 2015

in Hubris and humility, Man of System, Regulation

… is from page 238 of H.L. Mencken’s essay on Teddy Roosevelt “Roosevelt I,” as reprinted in Mencken’s 1949 collection, A Mencken Chrestomathy:

Roosevelt, for all his fluent mastery of democratic counter-words, democratic gestures and all the rest of the armamentarium of the mob-master, had no such faith in his heart of hearts.  He didn’t believe in democracy; he believed simply in government.  His remedy for all the great pangs and longings of existence was not a dispersion of authority, but a hard concentration of authority.  He was not in favor of unlimited experiment; he was in favor of a rigid control from above, a despotism of inspired prophets and policemen.  He was not for democracy as his followers understood democracy, and as it actually is and must be; he was for a paternalism of the true Bismarckian pattern, almost of the Napoleonic or Ludendorffian pattern – a paternalism concerning itself with all things, from the regulation of coal-mining and meat-packing to the regulation of spelling and marital rights.

Add a Comment    Share Share    Print    Email

On Ordinary Americans’ Living Standards

by Don Boudreaux on January 19, 2015

in Growth, Standard of Living

After reading a few days ago Pierre Lemieux’s excellent essay – “A Slow-Motion Collapse” – in the current issue of Regulation, I saw in it an opportunity to drive home a point that I’ve made before about the connection between arguments over the fate of ordinary Americans’ living standards and political ideology.  Until now, though, I put off doing so (for no reason other than that I’ve been busy with other tasks).  But now that David Henderson has pointed to Noah Smith’s excellent response to Brad DeLong’s claim that ordinary Americans have stagnated economically since 1979, I’ll finally weigh in with what I want to say about Pierre’s essay.

First, however, I can’t resist commenting here on this passage in DeLong’s post:

Moreover, across most of the income distribution Americans today are little if any better off than their predecessors back in 1979, at the business-cycle peak in the Jimmy Carter presidency. Yes, today Americans have remarkable access to incredibly cheap electronic toys. But those are a small part of expenditure….

It’s an error to minimize the significance (and size of benefits) of Americans’ “remarkable access to incredibly cheap electronic toys” on the grounds that “those are a small part of expenditure.”  The fact that American households today are filled with lots of these economic goods – and are getting more filled as time goes on – means that the fact that acquiring these goods requires only a “small” expenditure renders Americans’ “remarkable access” to such goods a huge benefit.

Consider the extreme case: suppose that in a year or two electronic goods of the sort that DeLong has in mind become so inexpensive that each American household annually buys goo-gobs of them with a total expenditure of $0.01.  The portion of households’ expenditure used to acquire these goods would be much lower even than it is now.  But would anyone conclude from the fact that Americans’ spend such a paltry amount on these goods that the contribution of these goods to raising Americans’ standard of living is minimal?  Would anyone conclude that the contributions of these goods to raising Americans’ standard of living would be greater if they were priced higher and if, as a result, Americans spent more in total to acquire such goods?  I certainly wouldn’t.

Also note that DeLong’s calling these electronic goods “toys” trivializes their significance.  It’s true that some of these goods are toys, but most are not.  Automatic dishwashers create more leisure time for household members; cell phones – with zero-marginal-cost long-distance calling and texting – increase people’s opportunities to communicate in real time with loved ones, friends, and co-workers; GPS navigation means that we get to our destinations faster and with less anxieity and fewer wrong turns; cameras in our smartphones means that we can much more easily and on the spur-of-the-moment capture memories and share them more widely than any denizen of the disco decade could have done; ebook readers make the purchase of books less costly and the carrying of reading material easier.  This list can be extended.

….

Now to the point inspired by Pierre’s essay: I have argued earlier that I see no obvious ideological advantage for free-market types (such as myself) to insist that the living standards of middle-class Americans have in fact risen significantly over the past 35 or 40 years.  Nor do I seen any obvious ideological disadvantage for “Progressives” to deny this improvement in living standards.

Here’s the opening paragraph of Pierre’s article:

Six decades ago, fewer than 5 percent of Americans needed some sort of professional license (not counting mere certification) to work in their field.  Today, that proportion is almost 30 percent.  The growth of government regulation like licensure requirements seems to be a defining characteristic of the 20th and, thus far, 21st centuries.  Most, if not all, economic life has been gradually brought under some kind—and usually many kinds—of regulation.

This paragraph nicely captures a theme of Pierre’s essay – namely, that government regulation, on the whole and despite some real deregulation in the late 1970s and early 1980s, has grown more and more burdensome for at least the last 60 years.  If you read the essay, you’ll find further evidence in support of this claim.

If this evidence is correct (as I believe it to be) – that is, if it’s really true that government has intruded more and more into markets over the past several decades – then it would be easy and ideologically convenient for someone like me to go along with the likes of DeLong, Robert Reich, and Paul Krugman and agree that the living standards of ordinary Americans have stagnated.  The culprit would be this increasingly burdensome regulation.  And yet, as much as one part of me would like to find easy evidence that increasingly burdensome regulation has caused such stagnation, I cannot deny what my reading of the evidence tells me: Ordinary Americans’ living standards have improved dramatically over the time period that many “Progressives” insist have witnessed economic stagnation.

(On the other side, I’m sincere when I ask: Why do so few “Progressives” admit the impressive rise in the living standards of ordinary Americans and proclaim “See!  Government works!”  If I were a “Progressive,” I’m pretty sure that that’s what I’d do – loudly and frequently.)

Pierre makes the case that, absent such regulatory growth, ordinary Americans would today be much richer even than they currently are.  I believe that he is correct.

Add a Comment    Share Share    Print    Email

Maybe This Is What Gives

by Don Boudreaux on January 19, 2015

in Man of System, Myths and Fallacies

Princeton University Press just sent me a copy of its newly published American Insecurity, by Cornell political scientist Adam Seth Levine.  (I’ve not yet read this book.)  Here’s part of Jacob Hacker’s endorsing blurb that accompanies the book:

The worst economic crisis since the Great Depression, growing financial threats to the middle class, and the biggest political movement is the antigovernment Tea Party.  What gives?  The answer is that Americans buffeted by economic crisis don’t give.  They don’t give money or time to political organizations seeking to improve economic security.  When you try to rally people to the cause, you inadvertently but powerfully deter their political participation.

Notice Hacker’s presumption that improving the economy for the middle class requires greater “political participation” – and participation that is pro- and not anti-government.  This proposition about the necessity of active government intervention and redistributive taxation on behalf of the middle-class could be correct (although I don’t believe it to be so); but its correctness is hardly as indisputable as Hacker seems to think.  It’s telling that Hacker treats this proposition as a valid presumption.

Perhaps the reason that “Americans buffeted by economic crisis don’t give” to those political causes that Hacker (and I assume also Levine) presume to support middle-class economic security and prosperity is because a sizable number of Americans in fact do not share Hacker’s confidence in the necessity, efficacy, and trustworthiness of the government – at least compared to market forces – to improve their economic prospects.  And maybe, just maybe, many of these middle-class Americans put the bulk of the blame for the crisis on government itself.

I know that my own parents – working-class Americans from head to toe and from cradle to grave – instinctively opposed big and active government on the domestic front.  And it’s not because my parents were ideological in any recognizable sense.  My father never read a single book, and my mother read only biographies of movie stars.  I’m quite certain that they’d never heard the term “libertarian” until I became one as a young adult, and I know that they were never quite sure what being a libertarian meant.  They almost never discussed politics.

Yet something in their marrow would not abide relying on government handouts or allow them to look favorably upon any politician or pundit who proposed to tax rich people more heavily and then transfer the booty to them and their friends.  They harbored neither envy nor suspicion of rich people, yet were naturally suspicious of politicians and government.

I can’t say for certain that my parents were very much like lots of working-class Americans, but I have every reason to suppose that they were not unusual.  And if my supposition here is correct, then the explanation for why so few middle-class Americans support political activism of the sort that Hacker presumes is pro-middle-class is more straightforward than Hacker and Levine think: relatively few middle-class Americans share Hacker’s fear of markets and his confidence in politicians and bureaucrats.

Add a Comment    Share Share    Print    Email

Quotation of the Day…

by Don Boudreaux on January 19, 2015

in Competition, History, Myths and Fallacies

… is from Thomas Sowell’s October 28, 2005, column, “Rosa Parks and history“:

Those who see government as the solution to social problems may be surprised to learn it was government that created this problem.  Many, if not most, municipal transit systems were privately owned in the 19th century and the private owners of these systems had no incentive to segregate the races.

These owners may have been racists themselves but they were in business to make a profit — and you don’t make a profit by alienating a lot of your customers.  There was not enough market demand for Jim Crow seating on municipal transit to bring it about.

It was politics that segregated the races because the incentives of the political process are different from the incentives of the economic process.  Both blacks and whites spent money to ride the buses but, after the disenfranchisement of black voters in the late 19th and early 20th century, only whites counted in the political process.

,,,,

People who decry the fact that businesses are in business “just to make money” seldom understand the implications of what they are saying.  You make money by doing what other people want, not what you want.

Black people’s money was just as good as white people’s money, even though that was not the case when it came to votes.

For more depth and detail, see Robert Higgs, Competition and Coercion: Blacks in the American Economy, 1865-1914 (1976).

Add a Comment    Share Share    Print    Email

An Anecdote In Support of Clemens & Wither

by Don Boudreaux on January 18, 2015

in Seen and Unseen, Work

The New York Times Magazine today ran this fine essay by Jan Ellison.  Cafe patron Mike Wilson, applauding Ms. Ellison’s essay, sent the following letter to her by e-mail (pasted here with Mr. Wilson’s kind permission):

Dear Ms. Ellison,

I greatly enjoyed your description of the many benefits you accrued by working at so many different jobs in your youth.  Your story is as powerful a case against raising the minimum wage as I have encountered.  How sad that so many of today’s politicians and pundits have successfully advocated to use government force to deprive low-skilled workers, such as teenagers in poor families, the opportunities you had to develop your valuable work habits and help your family.  No amount of cherry picked (and flawed) studies showing no loss of employment opportunities will help the many unemployed youth (especially African American youth: over 40%!) who will not learn the many valuable life-changing lessons you describe in your column.  And you worked from age eleven!  Did you secretly buck child labor laws?  And now the same ill-informed and self-righteous pundits who support an above-market minimum wage are agitating to eliminate unpaid internships!

Your wonderful column is powerful testimony to the many non-wage benefits of working at so-called menial jobs.  I only hope some day that well-meaning but economically ignorant politicians will come to understand that.  Thank you for providing such compelling testimony.

Sincerely,
Mike Wilson

Mr. Wilson reports that Ms. Ellison responded to his e-mail to express her, her husband’s, and her son’s wholehearted agreement with it.

(Ms. Ellison’s essay, of course, would likely not surprise Jeffrey Clemens and Michael Wither.)

Add a Comment    Share Share    Print    Email

Here are two reports featured prominently today on the website of the Washington Post.  The first involves a famous man proposing to forcibly take money from others.  The second involves a famous man proposing to engage in voluntary, consensual, peaceful, and mutually advantageous exchange.

The first man will not be arrested for his offense or suspended from his job; indeed, many people will applaud him for the imaginary benefit that his proposal allegedly will bestow on society.  The second man was arrested and suspended from his job for the imaginary harm that his proposal allegedly inflicts on society.

How perverse.

UPDATE: Here’s a letter that I just sent to the Washington Post:

Two reports in your pages today stand in sharp and sad contrast to each other. According to the first, a famous man proposed to forcibly take money from other people; according to the second, a famous man proposed to peacefully exchange his own money for a service rendered voluntarily by another person. Yet unlike the man in the second report, the man in the first was neither arrested nor suspended from his high-profile job for his actions.

How is it that Barack Obama in calling for higher taxes on ‘the rich’ – that is, advocating the forcible taking of other people’s stuff – is celebrated and feted for his actions (“Obama to seek billions in new taxes on wealthy”), while Greg Anthony in calling for a call girl – that is, peacefully offering to pay his own money to a woman to voluntarily have sex with him – is arrested and suspended from his job (“D.C. police arrest CBS sports commentator Greg Anthony in prostitution sting”)?

This state of affairs is perverse.

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

Add a Comment    Share Share    Print    Email

Manne and Alchian

by Don Boudreaux on January 18, 2015

in Complexity & Emergence, Economics, Seen and Unseen

Henry Manne’s death prompts me to ponder just why I admire him and his work so deeply.  The reason has much to do with Henry’s close association with the late Armen Alchian.

As anyone who has spent even a modest amount of time with Henry knows, Alchian was Henry’s great hero – and Henry was decidedly not a man prone to having heroes.  Yet Henry’s regard for Alchian, the man and his work, was vast and unreserved.  I think what Henry saw in Alchian – and what Henry’s own admirers saw in Henry – was the reality that each unfailingly understood that competition in human affairs is an intrepid force and, hence, realized that the ways that competition plays out in reality are far greater than are the ways that are identified in even the best economic textbooks.

Alchian and Henry had a too-rare knack for using formal economic theory properly.  Never did they mistake the categories (such as “prices,” “quantities,” “marginal-cost schedule”) used in textbooks for being either descriptions of reality or prescriptions for reality.  They understood what such categories – and their verbal, graphical, and mathematical depictions – are: tools of thought and analyses to help our puny minds get a better grip on the enormously complex economic reality.  Alchian and Henry used microeconomic theory with far greater facility than do 99 percent of all other economists because they understood its limitations better than do 99 percent of economists.

Alchian and Henry were both masters at identifying ways that competitive forces, if suppressed at point A in the economy, would intensify at points B and C.  The fact that points B and C are never identified in any formal economic model never kept Alchian and Henry from knowing that B and C exist and are affected when there is change in those parts of the economy that are identified in conventional theory.

Here’s one straightforward example of the insightful mindset that I’m describing: Henry Manne almost single-handedly exposed the fundamental flaw in Adolf Berle’s and Gardiner Means’s argument that, because executives in large modern corporations seldom personally own large ownership shares of the firms that they manage, this ‘separation of ownership from control’ causes modern corporations to be managed poorly.  Henry identified other economic margins in reality on which competition aligns the interests of corporate managers with those of corporate shareholders.  The stock market, and the ability especially of corporate raiders to take advantage of the low share prices of poorly managed firms, protects shareholders from being victimized by lazy, incompetent, or corrupt managers even when these managers own not a single share of stock in the corporations that they manage.  And, so, also of course, Henry understood that government efforts to prevent so-called ‘corporate raiding’ would not merely prevent corporate raiding: it would, in fact, protect incumbent managers from the bracing and healthy forces of competition – a protection that would indeed divorce the interests of incumbent managers from the interests of corporate shareholders.

Henry and Alchian, in short, naturally saw – naturally knew to look for – that which even most other economists are blind to.  Henry and Alchian instinctively refused to accept claims that competition suppressed here, or artificially stimulated there, means that competition in toto is dimmed or intensified.  Reactions are inevitable, and they were both intrepid in searching for, and finding, just where and how such reactions played out.

….

It is perhaps difficult for non-economists to appreciate the importance of these traits in Alchian and Henry.  But for economists – or, at least, for this economist – the brilliance and example of their scholarship looms large.  I too often encounter economists, frequently highly credentialed and respected ones, who take their models too literally.  If they don’t see it in their models, it doesn’t exist.  These economists, perhaps blinded by their mastery of formal theory, slip unawares into supposing that the formal theory that they know (or in ways that they can tweak) is a close-enough description of reality to make that theory an appropriate basis for prescribing government fixes and adjustments to reality.  But reality is indescribably larger and more complex than even the best models and theory.  Alchian and Henry – with wisdom – always saw this fact and pursued its implications with a brilliance and creativity seldom matched and never yet surpassed.

Add a Comment    Share Share    Print    Email

Quotation of the Day…

by Don Boudreaux on January 18, 2015

in Economics

… is from pages 235-236 of my former professor Leland Yeager’s 1999 paper “The Moral Element in Mises’ Human Action,” which is a chapter in Human Action: A 50-Year Tribute (Richard B. Ebeling, ed., 2000):

It is too much to expect that most people should actively understand economics; perhaps it suffices if they have the humility to recognize their ignorance and refrain from destructively imposing its consequences.

Still, it is important that enough people do get economics straight and disseminate its teachings.  That requires subtle insights and a perspective different from those of the layperson.  Its conclusions are counterintuitive, and fallacies pervade public opinion.  Most do not understand the law of unintended consequences.  Economic ignorance is so widespread and its consequences so frightening that, as [Israel] Kirzner said, reducing it “becomes a goal invested with independent moral worth.”  Economic education serves a human goal of such importance that “passionate concern becomes … a morally natural phenomenon.”

Add a Comment    Share Share    Print    Email

Henry Manne (1928-2015)

by Don Boudreaux on January 17, 2015

in Economics

I just, within the past fifteen minutes, learned this awful news: Henry Manne has died.  Here’s David Henderson’s remembrance.

I’ll write more later.

Henry was one of the greats – one who, although ‘sung,’ was grossly unsung relative to the depth and breadth of his insights.  The fields of law and economics, corporate law, and the economics of education owe more to Henry than most practitioners of these disciplines realize.  And George Mason University owes Henry a special debt: becoming Dean of the law school in 1986, Henry transformed that school from a non-entity into the superb institution that it is today.

Henry: You were a great and pioneering scholar and institution builder.  You will be missed; your legacy will live and thrive.

Add a Comment    Share Share    Print    Email

… is from page 186 of Benn Steil’s and Manuel Hinds’s great 2009 book, Money, Markets & Sovereignty (footnotes excluded):

It is quite difficult to believe that the downward rigidity of wages could have played a major role in the escalation of unemployment during the Great Depression.  It is reasonable to surmise that people would refuse to see their salaries reduced (in the same job or through a change in jobs) if the probability of getting another job with the same salary was high.  Yet such refusal sounds unrealistic when, as was the case in the United States in the 1930s, the unemployment rate was on the order of 15% to 25%, and when the unemployed had to stand in line with their families just to get some charity soup.  The testimonies of people living through these times do not talk of people refusing to work at the prevailing wage.  On the contrary, people talk about their desire for work at any wage.

….  Yet the evidence suggests that the rigidity of nominal wages [between 1929 and 1932] was not the result of workers’ resistance to nominal wage reduction.  Instead, it was business leaders, under great pressure from President Hoover, who refrained from lowering wages even as stock prices, profits, and employment fell.  This policy so delighted Keynes that he wrote a memo to the British prime minister supporting Hoover’s action.  The fact that unemployment fell in Britain while deflation was raging supports the case that political meddling in the United States had more to do with the rise in unemployment than workers opting for near-starvation in preference to lower nominal wages.

We have here yet more evidence and plausible argument that

(1) Herbert Hoover was no devotee of laissez faire during his term in the White House;

(2) popular, ‘of-course-it’s-true’ beliefs are often mistaken (in this case, the belief that wages are naturally sticky downward and that such natural downward stickiness was a major cause of high unemployment in the U.S. in the early 1930s);

(3) J.M. Keynes, for all of his undoubted brilliance, was a lousy economist.  Keynes largely ignored the all-important microeconomic relationships and details and instead devoted his rhetorical skills to giving ancient man-in-the-street economic myths a gloss of faux-science.  (The ancient man-in-the-street economic myth that Keynes glossed so well and so catastrophically for economic science is the one that insists that what matters above all for the health of an economy is the volume and rate of aggregate spending – the correctness of relative prices, the appropriateness of the details of the structure of capital, and the economic and political implications of empowering the state to engage in active fiscal, monetary, and regulatory policies all be damned as insignificant when set beside the alleged overwhelming importance of maintaining aggregate demand at high levels.)

Add a Comment    Share Share    Print    Email