Quotation of the Day…

by Don Boudreaux on November 16, 2015

in Adam Smith, Complexity & Emergence, Economics, Growth, Hayek, Prices

… is from page 263 of my emeritus Nobel laureate colleague – and now Chapman University professor – Vernon Smith‘s essay “Adam Smith and Experimental Economics: Sentiments to Wealth,” which is chapter 16 in the forthcoming (2016) volume from Princeton University Press and edited by Ryan Patrick Hanley, Adam Smith: His Life, Thought, and Legacy (citations omitted; links added; original emphasis):

In Wealth [of Nations] property is necessary but not sufficient, and Adam Smith supplies the essential Discovery Axiom that fuels wealth creation: “the propensity to truck, barter and exchange.”  Just as in [The Theory of Moral] Sentiments, it is process all the way up; it’s not about the whiteboard mechanics of market clearing prices and outcomes, based on specialization, that creates wealth; it’s about the discovery of prices, whose very existence call for comparisons that otherwise would not be made between one’s own circumstances and that of all others as revealed in prices as they form; prices provide the connection between the individual and all others in economic commerce, just as the “impartial spectator” is the connecting link between the individual and all others in social commerce.  This price discovery perspective in Wealth was lost in the neoclassical marginal revolution and its aftermath.  Instead of supplementing the price discovery process in Wealth, it was displaced by equilibrium market statics until revived by Hayek’s critique of price theory and the unexpected results of laboratory market experiments.

Those who would interfere with the market’s pricing process in an attempt to improve that process and its results are akin to those who would interfere with people’s freedom of speech and the press in order to improve that process and its results.  The hubris of such people is manifest.  Worse, their lack of understanding of both the logic and of the importance of the process that they would subvert with their own notions of what its specifics ‘should’ be is deeply harmful if policy advice offered by such people is taken seriously.

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Quotation of the Day…

by Don Boudreaux on November 15, 2015

in Hayek, Politics

… is from page 93 of the first volume (“Rules and Order,” 1973) of F.A. Hayek’s brilliant Law, Legislation, and Liberty:

In fact, what everywhere is the ultimate power, namely that opinion which produces allegiance, will be a limited power, although it in turn limits the power of all legislators.  This ultimate power is thus a negative power, but as a power of withholding allegiance it limits all positive power.  And in a free society in which all power rests on opinion, this ultimate power will be a power which determines nothing directly yet controls all positive power by tolerating only certain kinds of exercise of that power.

It it not too much of a simplification to say that the political forces identified by public-choice scholarship push government to serve special-interest groups at the expense of society at large up to, but not past, the limits imposed upon government power by public opinion.

Think of public opinion as setting the boundaries, on one hand, of what government must do and, on the other hand, of what government can get away with doing.  The forces identified by public-choice scholars – most notably, the special-interest-group effect – ensure that government fills the space within these boundaries.  But the boundaries themselves are determined by public opinion; they are determined by the prevailing ideas and ideologies – by what Deirdre McCloskey calls people’s “habit of the lip” (that is, how we talk and what we say to each other).  If public opinion changes so, too, do these boundaries.  These boundaries can together shift, or widen or narrow, so that the set of activities that government ‘must’ do as well as the set of activities that it can get away with doing both change and, depending upon just how public opinion changes, become either larger or smaller.

At the end of the day, changing government policy in whatever way you deem desirable requires a change in public opinion.  Changing the identity of political office-holders will do only very little.  People impatient for the world to conform more to their liking do not like this conclusion; such people want change to come quickly.  So do I.  But reality isn’t optional.  Such change does not come quickly – or, more precisely, cannot and will not come any more quickly than the speed at which public opinion changes.

So if you want to change public policy from its current expanse and direction, your only hope is to do whatever you can to change the climate of ideas.

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Bonus Quotation of the Day…

by Don Boudreaux on November 14, 2015

in Myths and Fallacies, War

is from a Facebook post earlier today by my dear and deeply wise friend Bob Higgs:

Despite constant claims to the contrary, governments do not really provide their subjects with genuine security.  They provide only the illusion of security.  This, unfortunately, is enough to satisfy most people, who are incapable of exercising appropriate skepticism about the government’s claims.

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An App For the Economically Ignorant

by Don Boudreaux on November 14, 2015

in Inequality, Seen and Unseen

Here’s a letter to someone who, I’m pretty sure, is only trying to make a few bucks by marketing a product to economically uninformed “Progressives.”

Dr. Shameem Heetun
Fulbright Scholar and CEO of Antilope, LLC

Dr. Heetun:

In a mass e-mail that I received this morning, you boast that your company has developed “a web portal that monetizes the greed of our economic system to balance out our Economic Inequality.”  You describe this marvel as being “a handheld application that will allow people to scan a product and ascertain whether the manufacturer supports the 99% or the 1%, and make their purchasing decision accordingly.”

Excuse me, but doesn’t the fact that a manufacturer produces products for sale to the 99% itself mean that that manufacturer “supports the 99%”?  Doesn’t a manufacturer that supplies product features and quality at prices that many in the 99% find attractive necessarily improve the economic well-being of the 99%?  Doesn’t a manufacturer whose relentless cost reductions make goods and services that were once affordable only by the 1% increasingly affordable to the 99% thereby make people more economically equal in the way that matters most – namely, in what they consume?  And do you not worry that, in an attempt to satisfy your and your customers’ mistaken notion of what it means to “support the 99%,” firms such as Wal-Mart and McDonald’s will adopt politically correct but more costly methods of production that will drive up their prices and, as a result, worsen rather than improve those companies’ abilities to “support the 99%”?

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

UPDATE: Matt Moore just e-mailed the following note to me (shared here with his kind permission):

Dear Don,
I note that, as a Fulbright scholar, Dr. Shameem Heetun is almost certainly himself a member if the global 1% and finds himself in the unfortunate position of having to recommend that no one purchase his app.
Matt Moore

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… is from pages 550-551 of Douglas Irwin’s excellent essay “Adam Smith and Free Trade,” which is chapter 32 in the forthcoming (2016) volume from Princeton University Press and edited by Ryan Patrick Hanley, Adam Smith: His Life, Thought, and Legacy (citations omitted):

Having rejected the case for restricting imports, Smith moved on to reject the case for promoting exports.  He scoffed at government efforts to increase exports through artificial methods such as bounties and subsidies, remarking that “trade which cannot be carried on but by means of a bounty” is “necessarily a losing trade.”  He explained that a country could not force other countries to buy its goods, but it could pay them (through subsidies) to buy them.  But without the subsidy, merchants would devote their resources to other activities, and therefore the effect of the subsidy would be to “force the trade of a country into a channel much less advantageous that that in which it would naturally run of its own accord.”

(The quotations from Adam Smith are all from Book IV, Chapter V of An Inquiry Into the Nature and Causes of the Wealth of Nations.)

I do not doubt that, were he alive today, Smith would be among the leaders of those who expose the fallacies, deceits, pretenses, and cupidity that fuel support for that great geyser of cronyism, the U.S. Export-Import Bank.

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As people grow wealthier, their demand for cleanliness and risk-reducing amenities increases.  Cleanliness and risk-reducing amenities – amenities such as seat-belts in cars and safer workplaces – are what economists call “normal goods.”  These are goods the demands for which change in the same direction as changes in consumers’ real incomes.

The fact that cleanliness and risk-reduction are normal goods helps to explain the shape of the environmental Kuznets curve.  This curve shows in a stylized way the relationship between per-capita income and industrial pollution.  As a society, through greater industrialization and specialization and trade, moves from being one of only subsistence wealth to one of great wealth, industrial pollution at first increases and then starts to decrease.  The logic is the following: when very poor people first begin to enjoy economic growth, they either don’t care very much about, or are unwilling to pay to abate, the increasing concentrations of industrial pollutants in the atmosphere.  They prefer instead to take nearly all of the fruits of economic growth in the form of increased personal consumption options.

But as people grow even wealthier, the relative attractiveness to them of having a cleaner environment rises, so they devote more and more resources to pollution abatement.  At some point people become so rich that the amounts of resources that they devote to pollution abatement is so great that pollution levels begin to fall.  This account explains why the air in London and New York City today contains fewer of the industrial pollutants that were common to it in the late 19th and early 20th centuries.

As regular readers of Cafe Hayek know, I follow Julian Simon in endorsing a broader conception of pollution.  Pollution is not only the emissions of industrial processes.  It is, more broadly, the presence in people’s environments of any physical matter that reduces people’s capacity to enjoy life.  So, yes, the sulphur dioxide emitted from a factory’s smokestack into the surrounding air is pollution, but so too are the diarrhea-inducing bacteria in people’s food and the rodent droppings that fall from a thatched roof onto the heads of people living beneath it.

As I read history, people – as they start to grow wealthier beyond subsistence – do indeed seem willing at first to endure increasing levels of industrial pollutants, but they almost immediately spend resources to shield themselves from other kinds of pollutants – namely, the kinds of pollutants that are up-close, personal, and often of such lethality that these pollutants kill with great certainty within days or weeks rather only probabilistically over the course of years or decades.

I’m told by people with first-hand experience in sub-Saharan Africa that one of the first things that poor Africans buy when they get some little bit of wealth is soap.  David Landes notes that, at the dawn of the industrial revolution, among the first products of that revolution that was bought by the British masses was machine-woven underwear that could be vigorously washed.  Even people very poor by the standards of modern America acquire dwellings with hard floors and roofs (as opposed to dirt-and-thresh floors and thatched roofs).  Indoor plumbing seems to be an amenity that people do not wait long to get once their growing wealth brings this amenity into the range of what’s affordable.

In other words, my hypothesis – which I believe is borne out by the historical record – is that people almost immediately start to consume greater cleanliness as they become wealthier.

But – damn reality! – we continue to be plagued by trade-offs.  The production of the wealth that allows people to begin early on in the economic-development process to rid themselves of many pollutants itself generates pollutants – specifically, those industrial pollutants that do not seem to start to be cleansed out of the atmosphere until some significant amount of sustained and widespread economic development has occurred.


So I propose this amended version of the analysis.  The red curve in the nearby graph is the standard environmental Kuznets curve.  This red curve shows the relationship between per-capita income and industrial pollutants.  The blue curve shows the relationship between per-capita income and what we might, as a short-hand, call “naturally occurring pollutants” (that is, filth such as bacteria, mud on indoor floors, and rodent and bird droppings from the ceiling of one’s home).

If I am correct in my reading of history that people almost from the start of economic development begin to reduce their exposure to naturally occurring pollutants, then even during that ‘stage’ of economic development when industrial pollutants are still increasing, it is incorrect to conclude that people’s environments necessarily are becoming more polluted.  The decline in naturally occurring pollutants works in the opposite direction as the rise in industrial pollutants.  The costs of the latter must be reckoned against the benefits of the former.

By the way, this amended analysis suggests that one possible reason why people early on in the economic-development process do not spend many resources on the abatement of industrial pollutants is that people care more about reducing their exposure to naturally occurring pollutants than they care about reducing their exposure to industrial pollutants.  In other words, it is incorrect to argue that when people are still very poor they cannot afford pollution reduction or that they are still too poor to ‘care’ about reducing their exposure to pollution.  The reason is that even very poor people, as soon as they can afford to do so, in fact purchase pollution abatement in the form of reduced exposure to naturally occurring pollutants.


I thank my son, Thomas, for his expert help in constructing the above graph.  And thanks also to Sam Grove for his help in making the graph less cluttered.

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… is from pages 162-163 of Hayek’s brilliant 1952 volume The Counter-Revolution of Science, as reprinted in Studies On the Abuse & Decline of Reason (Bruce Caldwell, ed.; 2010), which is volume 13 of the Collected Works of F.A. Hayek (footnotes excluded):

The problem of securing an efficient use of our resources is thus very largely one of how that knowledge of the particular circumstances of the moment can be most effectively utilised; and the task which faces the designer of a rational order of society is to find a method whereby this widely dispersed knowledge may best be drawn upon.  It is begging the question to describe this task, as is usually done, as one of effectively using the ‘available’ resources to satisfy ‘existing’ needs.  Neither ‘available’ resources nor the ‘existing’ needs are objective facts in the sense of those which the engineer deals in his limited field: they can never be directly known in all relevant detail to as single planning body.  Resources and needs exist for practical purposes only through somebody knowing about them, and there will always be infinitely more known to all the people together than can be known to the most competent authority.  A successful solution can therefore not be based on the authority dealing directly with the objective facts, but must be based on a method of utilising the knowledge dispersed among all members of society, knowledge of which in any particular instance the central authority will usually know neither who possesses it nor whether it exists at all.

The nature of the economic problem as described here by Hayek requires that prices be set by processes of voluntary exchanges between owners of private property.  It is these market-determined prices that prompt millions of individuals each to act as if he or she (1) possesses all of the information and knowledge that is spread out across and divided among those millions of different minds, and (2) intends to coordinate his or her actions with millions of strangers in ways that result in a productive and orderly economy.

Those who would use government to control prices and wages would use government to mute what is by far the most effective communications system available to ensure that markets continue to function as smoothly and as productively as possible.

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Heard This Morning On NPR

by Don Boudreaux on November 13, 2015

in Reality Is Not Optional

Driving to the office just now I heard on WAMU – a DC-area NPR station – two items that caught my attention.

The first was an announcement of an upcoming broadcast of a conversation with Treasury secretary Jack Lew.  We listeners were informed that Sec. Lew would discuss ideas on how to help “people who have inadequate retirement savings.”

“People who have inadequate retirement savings” is a phrase that makes it sound as if such people are akin to people who have Russian ancestors or people who have inadequate arches in their feet.  That is, this phrasing suggests that “having inadequate retirement savings” is something that just happens to people – or is an inherent characteristic of some people – independently of their choices.  It sounds as if some people are blessed to “have” adequate retirement savings while other people, unluckily, “have” inadequate retirement saving.  NPR’s perspective – which, of course, is widespread – is all wrong.

Of course it’s true that some people suffer, through no fault of their own, misfortunes that devastate their retirement savings.  But surely such misfortune is hardly the norm.  I have no stats on the matter, but knowing what I know about modern America and the American economy, I’m quite sure that a significant majority of Americans today who “have” inadequate retirement savings “have” only themselves to blame.

I’m aware that such a statement about personal responsibility is greeted as warmly by today’s typical intellectual as he or she would greet an invitation to a monster-truck rally.  But the size of your retirement savings, unlike your genes or the flatness of your feet, is not something that just happens to you independently of your choices.


The second ditty that I heard on NPR was a report in which a member of the DC city council worried aloud that money “will pollute our politics.”  Such a concern is akin to worrying that dropping a moldy bagel into a cesspool will pollute the contents of the cesspool.

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George Selgin remembers the late, great Anna Schwartz on what would have been her 100th birthday.

Mark Perry is sour on Marco Rubio’s support for the cronyism that is the Uncle Sam’s policy of artificially sweetening the bank accounts of U.S. sugar growers.

In this video, Miriam Roff explains how carried interest should – and shouldn’t – be taxed.

Warren Meyer nicely exposes the mindlessness, hypocrisy, and authoritarianism that is running wild today on college campuses.  A slice:

I once thought that a key goal of “diversity” was to eliminate the in-group/ out-group dynamic that has been so destructive through all of history.  But I am increasingly convinced that the true objective of diversity programs as practiced on university campuses is to simply shift the “out-group” tag from one set of people to another.  More horrible things are said on campus about whites, males, Asians, wealthy people, straights, frats, etc than I ever heard in my entire lifetime from anyone about, say, African Americans.

George Leef makes a strong case that the slippery slope of government control over our lives is both real and much more slippery than most people realize it to be.

Steve Horwitz valuably labors against the labor theory of value.

Shikha Dalmia thumps Trump.  As does Mark Perry.

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With this post I launch a new series here at Cafe Hayek.  This series’s title is “If Only H.L. Mencken Were Still Alive….”  The point is to have fun imagining what Mencken (1880-1956), the greatest American journalist of all time, would have written about a current event.  And so…

If only H.L. Mencken were still alive to comment on Hillary Clinton’s claim that she, not long after graduating from Yale’s law school, tried to join the U.S. Marine Corps.  Oh what fun Mencken would have had – and would have treated us to – with this one!


I must say that Tony Kornheiser’s reaction to this story, when it first broke 21 years ago, is indeed almost Mencken-esque – or, at least, P.J. O’Rourkean:

Last week, I was stunned to learn that in 1975 Hillary tried to enlist in the Marines. (Possibly she was looking for a few good men, as she was about to marry a man who was looking for a few good women.)

Too bad that Ms. Clinton was rejected by the Marines.  The experience that she would have received by being in that corps would surely have better enabled her to handle the sniper fire that she encountered during a 1996 trip to Bosnia.

(HT former Marine Lyle Albaugh for alerting me to the hilarious account of H. Clinton’s claim to have once attempted to join the Marine Corp.)



A sound test of a person’s intelligence is to gauge how seriously he or she takes any politician who stands a better-than-even chance of winning high political office.  Anyone who takes such a politician seriously is quite likely to be unintelligent.  His or her I.Q. might be high, but he or she is almost certainly not ‘intelligent’ in any practical meaning of that word.  Politicians’ public statements are not always faithful to the underlying reality.

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