… is from pages 80-81 of my late Nobel-laureate colleague James M. Buchanan‘s 2005 book, Why I, Too, Am Not a Conservative: The Normative Vision of Classical Liberalism:

Interpreting the market culture as community allows classical liberals to respond readily to modern communitarian critics of market capitalism who charge that the market order is destructive of valued cultural traditions.  These critics concentrate on the destruction of one set of cultural rules while neglecting the role of a well-functioning market in the construction of an alternative set of rules, adherence to which signifies the presence of an alternative community, one that is both more inclusive and more productive of economic value.

By the way, among the foundational rules of the market order is ‘producers work for consumers’ (and not ‘consumers work for producers’).  Put differently, individuals as producers are obliged – if and to the extent that they wish to earn market incomes – to adjust their activities to the spending patterns of consumers; individuals as consumers are not obliged – and ought not be forced – to adjust their spending patterns to the activities of producers.  Therefore, proponents of tariffs and other trade restrictions (including occupational-licensing requirements) are proponents of rule-breaking: they want select individuals – in their roles as producers – to be exempt from the rule that requires producers to serve consumers.

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OMG! We’re Not Paying Enough!

by Don Boudreaux on August 16, 2016

in Myths and Fallacies, Trade

Here’s a letter to the Wall Street Journal:

Dennis O’Connor asserts that free trade now harms America because “U.S. goods and services imports from China were triple U.S. exports to China in 2015, $498 billion versus $161 billion” (Letters, August 16).

Let’s play along with Mr. O’Connor’s failure to understand that in a world of many countries there is no more reason to expect that America will sell to China the same dollar amount of products that it buys from China than there is to expect that in a world of many people LeBron James will sell to his local supermarket the same dollar amount of products that he buys from his local supermarket.  And let’s be clear about just what Mr. O’Connor complains – namely, that we Americans get more goods and services from the Chinese than we give in exchange.

I’ve some questions for Mr. O’Connor to probe the sincerity of his evident belief that people are harmed whenever they get in exchange more than they give.  When your employer, Mr. O’Connor, offers you a ten-percent raise, do you demand that your employer also increase your work hours by ten percent, so that your hourly pay remains unchanged?  When your local liquor store cuts by 17 percent the price of a six-pack of your favorite beer, do you demand that the store remove one of the bottles, so that you get only a five-pack?  When you buy a new computer that, because of Moore’s Law, has twice the computing power of your last computer, do you demand to pay for your new computer twice the price that you paid for your last computer?  And whenever the value of your stock portfolio rises, do you donate all of your capital gains to your stockbroker to ensure that when you sell your assets you receive in return no more than what you paid for them?

If Mr. O’Conner answers “no” to any of these questions, he should reconsider his odd belief that we Americans are harmed if the value of the imports that we receive exceeds the value of the exports that we give as payment for these imports.

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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Young Eric Cunningham is that rarest of commodities: an economically informed journalist who sees not only what is immediately obvious but what is less obvious if no less real.  (HT Bryan Riley)  A slice:

These trends in some ways reflect manufacturing productivity across America: a recent study by Ball State University, for example, found that national manufacturing output between 1990 and 2013 rose by nearly $1 trillion, while nearly 90 percent of lost manufacturing jobs from 2000-2010 were caused not by trade, but by productivity gains. In other words: American manufacturers can produce more but with fewer workers, and a job that today requires only one worker might once have required five. Meanwhile, outside of manufacturing, the country has gained tens of millions of jobs over the same period.

Mark Perry riffs productively on a quotation from Frederick Douglass that was sent to Mark by Jeff Jacoby.

Richard Rahn makes a case for free trade.

Bill Shughart and Michael Jensen explain that government efforts to promote ‘green’ energy hurt the poor.

Here’s the latest Love Gov video.

Jeff Tucker is correct: socialists are scarcity-deniers.

In this excellent post from 2011, George Selgin exposes the many faults in today’s arguments against fractional-reserve banking.

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Quotation of the Day…

by Don Boudreaux on August 16, 2016

in Growth, Innovation, Standard of Living, The Economy

… is from Leonard Read’s 1956 essay “Unearned Riches” (original emphasis):

Others – society past and present – place within his reach [that of an ordinary worker in modern society] goods and services and knowledge in such an array and abundance that he could not himself produce in thousands of years that portion of it which he consumes in a single day.  And he obtains all of this in exchange for his own meager efforts.

The astounding thing is that it is possible for him to gain without any change in his efforts, his skills, his knowledge.  Let others become more inventive and more productive, and he may receive more in exchange for what he has to offer.  Parenthetically, it is also possible for him to lose out entirely, as might happen if he persisted in offering nothing in exchange but buggy whips.

There is a fact still more astounding.  Our wage earner may think of his plight as hapless when compared to the one who inherited his millions.  True, the millionaire has gained much from the doings of others.  But the wage earner himself owes his life to the doings of others.

Do not forget William Nordhaus’s estimation that the overwhelming bulk – nearly 98% – of the benefits of capitalist innovation are reaped, not by the innovators, but by consumers.  (Nordhaus’s calculations are for the non-farm U.S. economy over the years 1948-2001.  But there’s no reason to believe that this slice of modern economic history is unique in this regard.)  Talk about income – or material-benefits – redistribution!

This reality is one among the many reasons why I oppose any government-granted basic income guarantee.  Everyone living in a modern economy – such as in America’s portion of today’s global economy – is already guaranteed easy access to an abundance of material wealth of a like and magnitude that would have left the richest rentier in pre-industrial times speechless with wonder and lime-green with envy.

Indeed, even American billionaires of just 100 years ago were not as materially prosperous as are ordinary Americans today.

Life in a market-oriented, bourgeoised modern society already practically guarantees to each of its denizens enormous material riches – or, at least, it guarantees access to such riches that is so easy as to make, in my mind, the economic and ethical case for a basic guaranteed income very weak indeed.

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Bonus Quotation of the Day…

by Don Boudreaux on August 15, 2016

in History, Hubris and humility, Work

… is from page 161 of Princeton University economist Thomas Leonard’s revealing 2016 book, Illiberal Reformers, which is a study of how the scientistic pretenses of late-19th and early-20th century “Progressives” led them to endorse illiberal – indeed, often vicious – social-engineering schemes, including eugenics and minimum-wage legislation:

The many left progressives who advocated the minimum wage, among them Father John Ryan, Charles Henderson, Matthew B. Hammond, Henry A. Millis, Henry R. Seager, Arthur T. Holcombe, and Albert B. Wolfe, agreed that the minimum wage would throw the least productive employees out [of] work and prevent their employment in the first place.  But the reformers saw the removal of the less productive not as a cost of the minimum wage but as a positive benefit to society.  Removing the inferior from work was not a regrettable outcome, justified by the higher wages for other workers.  Removing the inferior from work benefitted society by protecting American wages and Anglo-Saxon racial integrity.

Again, at least these early 20th-century “Progressives” – despite their egregious ethics and naive scientism –  correctly understood the economics of the minimum wage.

And for those who would do (dubious) “cost-benefit tests” to judge the worth of minimum wages, I’ve this question: suppose that the minimum wage causes the incomes of white blue-bloods to rise by $X but at the expense of causing the incomes of swarthy ‘inferiors’ to fall by .75$X; does this outcome pass your cost-benefit test?

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Here’s a response to a young man who either is, or will soon be, pursuing a PhD in economics:

Mr. Scott Johnson

Mr. Johnson:

Thanks for your e-mail.

You accuse me of “assuming dogmatically [that] higher [minimum] wages lower the quantity demanded of workers.”  You then insist that “it is a factual question that needs answering with facts, not armchair abstractions….  It violates scientific integrity to talk of minimum wage effects in the abstract, not knowing what the data [are] in each situation.”

I agree that the question of the effects of minimum wages on employment is ultimately an empirical one.  But I disagree that what you call my “talk of minimum wage effects in the abstract” is dogmatic and non-empirical.  The empirical fact is that we have enormous – indeed, overwhelming – empirical evidence that the law of demand operates in reality.  Moreover, everyone over the age of three understands the law of demand in practice (if not as a theoretical construct) and acts as if it holds in all aspects of life.  Everyone understands that raising someone’s cost of taking a particular course of action prompts that someone to alter her actions in ways that minimize the ill effects that she suffers from the higher cost.  An understanding of the law of demand is why parents discipline misbehaving children; it’s central to why teachers give poor grades for poor student performance; it’s central to why society punishes criminals; it’s central to why defendants who are found negligent in tort suits are required to compensate their victims; it’s central to why wives and husbands express anger at their unfaithful spouses; it’s central to why homeowners display “Beware of Dog” signs; it’s central to why police officers carry unconcealed weapons; it’s central to why fewer people sunbathe on the Jersey Shore in January than in July.  It’s central to human existence.

The law of demand, in other words, is not a law that applies to the particular goods and services – such as lemons, lollipops, and labor hours – that are demanded.  Instead, it is a law that applies to human action.  Until and unless someone offers compelling reason to believe, and overwhelming evidence to show, that when people employ low-skilled workers they act fundamentally differently than they and other people act in all other aspects of life, predicting that higher minimum wages reduce the quantity of low-skilled labor demanded by employers is every bit as legitimate – indeed, every bit as scientifically required – as predicting that higher airfares reduce air travel, higher tariffs reduce imports, and higher carbon taxes reduce carbon emissions.  Again, the reason is that we have a staggeringly, mind-bogglingly large amount of empirical evidence that among the ever-present forces that govern human action is the law of demand.

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

And just as a feather blowing upward (or otherwise not falling downward) in a brisk wind is not correctly regarded as evidence that the law of gravity doesn’t always apply to feathers, a real-world instance of increased (or not decreased) employment of low-skilled workers that follows an increased minimum wage is not correctly regarded as evidence that the law of demand doesn’t always apply to labor.

Some people will object to the above by saying that economists who argue that raising the minimum wage does not reduce the employment prospects of low-skilled workers do not claim that the law of demand does not apply to employers who employ low-skilled workers.  The argument, rather, (the objection continues) is that real-world monopsony power or the active presence of some forces that run against the implicit assumption of ceteris paribus are in play in reality to override or overwhelm the operation of the law of demand.

To this objection I say: some economists’ do indeed argue as such – that is, not all economists who insist that raising the minimum wage does not necessarily reduce low-skilled-workers’ employment prospects reject the universality of the law of demand.  (Good for them!)  But I’ve encountered enough economists who at least talk and write as if the application of the law of demand to the market for low-skilled workers is so iffy that it is to be treated as an open, empirical question in every case whether or not raising the minimum wage reduces low-skilled workers’ employment prospects.  Young Mr. Johnson seems to be of this mind.

Now consider the undeniable theoretical possibility that the real-world presence of monopsony power in the labor market might result in higher minimum wages not reducing (or even in increasing) low-skilled workers’ employment prospects.  Again, not only is such monopsony power a necessary but not sufficient condition for minimum wages not to reduce low-skilled workers’ employment prospects – and not only does reality in modern American labor markets make assertions of the presence of such monopsony power extraordinarily dubious* – an empirical showing, under such circumstances, that a higher minimum wage did not reduce low-skilled workers’ employment prospects cannot legitimately be generalized into a case for minimum wages.

Because this argument for the minimum wage depends on pockets of reality being distorted such that the standard prediction of the law of demand doesn’t empirically play out in those specific pockets of reality, a finding that a particular hike in the minimum wage, imposed in some particular place at some particular time, caused no reduction in employment in that particular place at that particular time gives us no reason to suppose that even the same real-sized hike in the minimum wage in some different place – or in the same place but at a different time – will not reduce the employment prospects of low-skilled workers.

Put differently, the true dogmatists are those economists who, conceding that the law of demand is universal and finding in an empirical study or studies evidence that a past hike in the minimum wage caused no reduction in low-skilled workers’ employment prospects, conclude that other hikes in the minimum wage will have the same happy consequences.  Any such conclusion is one based not on reason but on an unreasonable presumption that the monopsony power is so strong and so permanent that legislated increases in minimum wages are justified.  But, again, because the conditions under which the standard predictions of the law of demand do not hold are relatively rare and likely fleeting in reality, even a correct empirical finding that a $X hike in the minimum wage at place N and at time T caused no reduction in low-skilled workers’ employment prospects supplies no good scientific justification for concluding that a $X hike in the minimum wage at place M is justified – or even for concluding that maintaining the minimum wage at place N beyond time T is justified.

……

* It’s as if the presence of monopsony power is asserted simply as a means of saving theoretical face for those economists who are determined to apologize for minimum wages.

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Quotation of the Day…

by Don Boudreaux on August 15, 2016

in Myths and Fallacies

… is from pages 107-108 of the 2000 Liberty Fund edition of Frederic William Maitland’s 1875 dissertation at Trinity College, Cambridge, A Historical Sketch of Liberty and Equality (original emphasis):

But if we construe liberty into simpler terms, if liberty means absence of restraint, how shall we say that the citizen who is always out-voted in the National Assembly is more free than the subject of an absolute monarch?  We are not asking whether democracy be good or bad, but simply whether it be a free government….  [“To live as one chooses”*] is at first sight a fair description of perfect freedom.  But to live as the majority wishes, seems to imply that unless we all agree, some of us must be under restraint, must be without liberty.

The enthusiast for collective action will object with the observation that if Jones is free to live as he chooses without restraint, then Jones’s choices and actions will prevent Smith and Williams from enjoying the same freedom.  As Maitland – one of the greatest historians of the common law ever to write – would note, this formulation of liberty is not meant to describe liberty for a single individual but for all individuals.  Each of us should be free to choose as long as our freedom of choice does not violate the right of other individuals each to enjoy the same scope of freedom of choice.

That there are some difficult specific cases – for example: Does my legitimate ownership of a plot of land give me the right to erect a structure that blocks your view of the nearby shoreline? – is no reason to treat this formulation of the free-to-choose principle as unworkable or unrealistic.  The vast majority of human interactions have no difficulty about them.  I can be free to exercise my preference for vanilla ice cream over chocolate without interfering in any way with your freedom to exercise a different preference.  Your freedom to offer your services as a faith healer (and people’s freedom to choose to patronize you) does not interfere with my freedom to offer my services as a scientifically trained physician (and people’s freedom to choose to patronize me).  My freedom to buy lumber grown in, and automobiles assembled in, America does not interfere with your freedom to buy lumber grown in Canada and automobiles assembled in Japan.  My freedom to inject heroin into my veins does not interfere with your freedom to not do so.

Similarly, the fact that some goods are “public” (especially if we take the existence, size, and functions of a polity as given and fixed) – and, hence, the reality that choices about these goods cannot be made individually – does not imply that choices about the vast majority of goods (which are not “public”) cannot or ought not be made individually.  It’s true, for example, that this year’s budget for the police department of the town of Burgville cannot be one figure for Jones, a different figure for Smith, and yet a third figure for Williams.  And it’s also true that, given this fact, some method of collective decision-making involving all the adult citizens of Burgville is desirable (with the specific method likely being majority rule).  But the fact that in such situations majoritarian democracy is the best means of making decisions does not imply that making all or more decisions “democratically” is desirable.  Jones, Smith, and Williams each might sensibly agree to abide by the results of a majoritarian election to decide on the size of this year’s police-department budget for Burgville, but the superiority of democracy for deciding on matters involving public goods does not mean that democracy is desirable for deciding on matters not involving public goods.  There is, for example, no good reason for Jones, Smith, and Williams to have any say in what each other does peacefully in his or her bedroom and in his or her boardroom.

…..

* In the original text Maitland renders this quotation in Greek; the translation – “To live as one chooses” – appears in a footnote to the Greek quotation.

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Bonus Quotation of the Day…

by Don Boudreaux on August 14, 2016

in Complexity & Emergence, Economics, Prices

… is from paragraph 4 of Chapter 4 of David Ricardo’s 1817 magnum opusOn the Principles of Political Economy and Taxation:

When we look to the markets of a large town, and observe how regularly they are supplied both with home and foreign commodities, in the quantity in which they are required, under all the circumstances of varying demand, arising from the caprice of taste, or a change in the amount of population, without often producing either the effects of a glut from a too abundant supply, or an enormously high price from the supply being unequal to the demand, we must confess that the principle which apportions capital to each trade in the precise amount that it is required, is more active than is generally supposed.

Market-determined prices are essential to this (today globe-spanning) spontaneously organized complexity.  This complexity – what Bastiat identified as the marvel of Paris being fed daily through the (mostly) self-interested actions of tens of thousands of strangers, and without anyone designing or superintending the process – is a common and happy feature of modernity.  Indeed, this feature is so common and so happy that it is today taken for granted save by a relatively small handful of economists who realize just how remarkable and wondrous it is.

Unfortunately, that which is taken for granted inspires too little attention and wonder.  Too few people ponder this organized complexity with sufficient care to understand and to appreciate how it happens.  This lack of understanding, in turn, contributes to the acceptance of crackpot schemes – including, of course, protectionism and state-imposed controls on prices and wages – to ‘improve’ society.

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Some Links

by Don Boudreaux on August 14, 2016

in Books, Economics, Politics, Seen and Unseen, Trade

Ross Kaminsky marshals logic and facts to rightly expose as baloney the protectionist arguments made by Clump.  A slice:

And nobody talks about what should be your fundamental right to buy what you want from whom you want without pandering politicians telling you to pay one-third more because they’re trying to scrounge up some votes in Ohio.

Bill Watson further explains why one particular half of Clump is clueless about trade.

Tyler Cowen rightly recommends the new edition of Jim Gwartney’s, Rick Stroup’s, Dwight Lee’s, Tawni Ferrarini’s, and Joe Calhoun’s Common Sense Economics.  A slice from Tyler’s post:

[T]this is a very good introduction to economics for say a smart high school student who reads books.  Sadly, more and more politicians and indeed professional Ph.d. economists need this wisdom too.

(Indeed.  Possessing a PhD in economics – even one from a highly ranked university – is not necessarily to possess economic understanding.)

Gary Galles warns against committing the fallacy of decomposition.

In this essay in National Affairs, George Will ponders the limits of majority rule.  A slice:

There are those, and they might be an American majority, who believe that majority rule is the sovereign American value that trumps all others. They believe that the degree of America’s goodness is defined by the extent to which majorities are able to have their way. Such people are bound to believe that it is the job of the judicial branch of government to facilitate this by adopting a modest, deferential stance regarding what legislatures do.

Many also implicitly believe that such an attitude should shape the attitude of courts toward what executive branch officials and agencies do. Here, judicial deference is said to be dictated by the plebiscitary nature of the modern presidency. This began with the presidency of Andrew Jackson, but did not fully flower until modern communications technologies — especially radio and then television — changed the nature of the American regime by changing the nature of political campaigns and of governance. Many have argued that, because presidents alone are elected by a national constituency, they are unique embodiments of the national will, and hence should enjoy the maximum feasible untrammeled latitude to translate that will into policies.

The two-fold problem with such an attitude of deference, however, is that majorities can be abusive, and that some questions are not properly submitted to disposition by majority rule because there are some — actually, there are many — closed questions even in an open society.

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… is from page 247 of David Friedman’s excellent 1996 book, Hidden Order:

The result – that price control results in a cost to the consumer, pecuniary plus nonpecuniary, higher than the uncontrolled price – does not depend on the details of the [supply and demand] diagram.  Consumers cannot consume more gas than producers produce, so the nonpecuniary cost must be large enough to drive quantity demanded down to quantity supplied.  Quantity supplied is lower than without price control, so cost to the consumer must be higher.

In other words, because a government-imposed limit – a “ceiling” – on the monetary price that suppliers are allowed to charge (and that buyers are allowed to pay) causes suppliers to supply less than they would supply without this government-imposed price ceiling, the height of the ‘cost-obstacle’ that stands between consumers and supplies of this good or service must increase.  With fewer units available for sale (per period of time), something must deter consumers from actually buying the full number of units that they would have bought were a larger number of units available for sale.

That something is typically (although not always) the nonpecuniary cost of queuing – or, in American parlance, “waiting in line.”  The time and effort spent waiting in line is a cost to each person who waits in line no less than is the sacrifice of money paid for the good by each person who buys the good.  In each case, the person sacrifices something of value in order to acquire something that has for him or her higher value.  Waiting in line to buy the good involves the sacrifice of whatever income or enjoyment would otherwise have been yielded to the person had she spent in some other way – say, working at her office job – the time that she actually spent waiting in line.  Spending money on the good involves the sacrifice of whatever goods or services that she would have otherwise bought had she not spent the money on this good.*

While the consumer in this example might be indifferent between these two means of expenditures on the good, the suppliers are most certainly not indifferent between them.  (Note: because monetary payments are the most general form of payment, in practice most consumers – even ones with relatively modest incomes – would prefer paying money prices to paying nonpecuniary prices.  But explanation of this reality is beyond the scope of this post.)  To the extent that consumers acquire the good by paying money to the suppliers of the good, the suppliers get something of value in return – which prompts suppliers to supply the good in sufficient quantities.  But to the extent that consumers acquire the good by paying for it in some other way that does not redound to the benefit of suppliers – say, by waiting in long lines – the consumers’ expenditures are not translated into efforts by suppliers to bring sufficient quantities of the good to market.  Price controls are a policy of forcing an unnecessarily large portion of the amount of resources that consumers spend to acquire goods to be spent in ways that do nothing to call forth greater quantities supplied of goods.

Again, although price ceilings might be sincerely meant to lower consumers’ cost of acquiring price-ceilinged goods, price ceilings lower only the amount of consumers’ expenditures on the good that are received by suppliers of the good.  The result is reduced quantities supplied – which, in turn, inevitably cause the nonpecuniary portion of the cost of the good to rise such that the total cost (pecuniary plus nonpecuniary) is higher than the total cost of the good would be without the price ceiling.  In short, price ceilings not only artificially reduce the quantities of the good that consumers get, they raise the cost to consumers of acquiring the good.

……

* To be more precise: As James Buchanan explains in his brilliant little 1969 book, Cost and Choice, what is ultimately sacrificed is the subjective utility that the person anticipates she would have gotten had she chosen differently than she actually chose.

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