Government regulation vs. the market

by Russ Roberts on December 3, 2014

in Regulation

Here is everything wrong with government regulation captured in a single story of how Nevada handles cab service from the airport. Amazing. Do not miss it. (HT: https://twitter.com/webbmedia)

Add a Comment    Share Share    Print    Email

Quotation of the Day…

by Don Boudreaux on December 3, 2014

in Growth, Inequality, Myths and Fallacies

… is from page 49 of the 2006 Liberty Fund edition of Ludwig von Mises’s 1956 volume, The Anti-Capitalistic Mentality:

Men, cooperating under the system of the division of labor, have created all the wealth which the daydreamers consider as a free gift of nature.  With regard to the “distribution” of this wealth, it is nonsensical to refer to an allegedly divine or natural principle of justice.  What matters is not the allocation of portions out of a fund presented to man by nature.  The problem is rather to further those social institutions which enable people to continue and to enlarge the production of all those things which they need.

Add a Comment    Share Share    Print    Email

Mr. Merrill Matthews
Institute for Policy Innovation

Dear Merrill:

Thanks for weighing in against the minimum wage (“Minimum Wage Increase Is Another Form of Income Redistribution”).  This regulation does indeed redistribute income unjustly.  But the redistribution is even more pernicious than you describe.  The chief redistribution is not from businesses to workers; instead, it’s from the least-advantaged workers to workers with greater advantages.

Whatever the hardships suffered by firms ordered to raise workers’ pay, most businesses manage to cope.  They do so by hiring fewer workers with the lowest skill sets.  Some businesses replace their lowest-skilled workers with machines or with a smaller complement of skilled workers.  Other businesses - especially those that continue to use large numbers of low-skilled workers - scale back and become more selective in choosing which low-skilled workers to employ.  The result is higher wages for skilled workers (including those who invent and build the likes of computers and robots) as well as for the more ‘desirable’ unskilled workers (such as middle-class teenagers from affluent suburbs with good schools).

In short, minimum-wage legislation enriches more-advantaged workers by rendering the least-advantaged workers unemployable.  Such redistribution is not only unjust; it is downright cruel – and made all the more so by the fact that not one in a thousand of its victims understands the true cause of his or her plight.

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

I normally find sports-writers’ forays into matters other than sports to be depressing and annoying – as depressing and annoying as I imagine it would be for a knowledgeable beat reporter for the Montreal Canadiens to encounter anything that I might write about the subtleties of ice hockey, a sport about which I know next to nothing.  Every now and then, however, a sports writer venturing outside of sports hits a home run, as the Washington Post‘s Sally Jenkins does today in her justified criticism of Missouri officials who object to some St. Louis Rams football players peacefully showing signs of opposition to police brutality.

Speaking of which, my friend Janet Neilson, on her Facebook page, weighs in on the question of police brutality raised by the killing of Michael Brown.  A slice:

It’s about the fact that neighbourhood beat cops have been replaced by men in riot gear driving tanks. It’s about the fact that dogs might be killed by American police officers as often as one every 98 minutes. It’s about the fact that a twelve year old playing with a toy gun is shot dead in a state where carrying a gun is legal. It’s about mentally ill men being shot by the police, firing squad-style while armed with only a pen.

It’s about stop-and-frisk programs. It’s about the fact that more people are killed by police in Utah than by gangs. It’s about grandmothers and veterans being shot more than fifty times in their own homes. It’s about babies having holes blown in their sides by grenades thrown by police.

It’s about police departments that get as much as 89% of their funding from assets that can be seized without charging anyone with a crime. It’s about states that react to death row exonerations by shutting down reviews of other cases. It’s about judges feeding kids into the criminal justice system for cash. It’s about not being able to walk down the street with your hands in your pockets because your skin is the wrong colour.

Conservatives should learn that government is no more trustworthy, knowledgeable, and noble when doing things conservatives like than when doing things “progressives” like.

In this short Cato podcast with my former GMU Econ student Caleb Brown, I discuss my recent Cato Policy Report essay on public-choice insights.

My Mercatus Center colleague Adam Thierer and GMU student Ryan Hagemann explain that smart cars can save lives.  And, in another venue, these authors wisely warn against excessive regulation of smart cars.

Economic growth, not government mandates such as minimum-wage legislation, raises wages.

Add a Comment    Share Share    Print    Email

Quotation of the Day…

by Don Boudreaux on December 2, 2014

in Seen and Unseen

… is from page 208 of the fourth and latest economics murder mystery by Marshall JevonsThe Mystery of the Invisible Hand (2014):

And yet as he looked around at the professors in the faculty club at Monte Vista University, he saw a great paradox.  Many of these professors were anti-market.  But their anti-market leanings were not hindered for a single moment by the knowledge that their daily necessities were being made available, both tomorrow and into the future, courtesy of that self same free market.

Add a Comment    Share Share    Print    Email

The Adam Smith Problem

by Russ Roberts on December 2, 2014

in Adam Smith

Anthony Annett of the IMF has a thoughtful review of my Adam Smith book in the IMF publication, Finance and Development. He likes my overall summary of The Theory of Moral Sentiments but he is not so enamored of my explanation for the so-called Adam Smith problem:

An enormous amount of ink has been spilled over the years over the famous “Adam Smith problem”—how to reconcile the emphasis on benevolence in Moral Sentiments with the emphasis on self-interest in The Wealth of Nations. The most obvious answer is that the latter focuses on the bare minimum conditions for beneficial market exchange, while the former focuses on the deeper underpinnings of our broader social interactions.­

As Sen put it, Smith’s insight was narrowly confined to exchange, ignoring equally important concepts like production and distribution. And even in pure exchange, self-interest can take us only so far and must be supplemented with shared trust and mutual confidence in the ethics of all involved. In other words, moral sentiments are never too far from the surface.­

Roberts takes a different tack. He argues that Smith’s two books are about different and nonoverlapping spheres of human interaction. Borrowing from economist and philosopher Friedrich Hayek, he argues that “we need to inhabit two different worlds at the same time to interact within our families and then move into the commercial sphere and interact with strangers.” Thus Moral Sentiments is about our “personal space”—the world of friends, family, and close acquaintances—while The Wealth of Nations is more about interpersonal exchange in a “world of strangers.” Different worlds, different norms of behavior.­

Reading Smith through these Hayekian bifocals is not at all convincing. Imposing Hayek’s crimped philosophical worldview on Smith does him a disservice. It narrows the scope of his contribution far too much.­

Ultimately, Smith is concerned with virtue—especially benevolence, courage, temperance, justice, and prudence. Indeed, Deirdre McCloskey argued that Smith is the last of the virtue ethicists, following in a long tradition that began with Aristotle. And when we start with virtue, we are naturally inclined toward human flourishing—in all aspects of life. There are no bifurcated or disembodied virtues!

Because Roberts draws such a fine line between the different spheres of life, he never really teases out the implications of Smith’s moral philosophy for today’s economy—what we really should care about. This is a pity, because Smith’s insights would be especially valuable right now.­

For example, what would the impartial spectator say about the behavior of the financial sector in recent years, when extreme recklessness and short-termism swamped all notions of virtue? Or more generally, what would she say about a business model that puts short-term profit above duty to stakeholders like workers, clients, the natural environment, and society in general? These are the important questions that are not really answered in this book.­

I agree that Smith is concerned with virtue and I have many examples in the book of the challenges of being virtuous in the workplace—telling your boss, for example, that a particular approach damages the reputation of the firm or is unethical. I think the Smithian approach of being loved and lovely definitely plays a role in how we treat our employees and colleagues. Smith encourages us to remain lovely even when it costs us a raise or a promotion. I also speculate on why the financial sector appears to be less virtuous than it used to be. I agree with Annett that these are important questions. Where I disagree with his assessment is how Smith can help us do better in these areas. I think one of the lesson of Smith’s two books is not to be overly romantic or optimistic about how much virtue can be introduced when we interact with strangers. I think Smith is very Hayekian in the sense that he too believed the world of face-to-face interaction is very different from how we interact with strangers. We care more about people near us than people who are far away. We might wish that we felt otherwise but I don’t think Smith thought it was possible.

The triumph of The Wealth of Nations is that even when dealing with people who are far away, we don’t have to be so virtuous. That doesn’t mean we should cheat them or that we do. But Smith’s point is that competition motivates self-interested people to act virtuously and that we don’t need to have extensive knowledge about the the people we trade with in order for that trade to make both parties better off.

In short, I don’t agree with Annett that the Hayekian “two worlds” perspective shortchanges Smith. I think it is one way to describe what Smith understood about the limits of virtue and the power of the impartial spectator.

You can read a lengthy excerpt from the chapter Annett is criticizing here.

Add a Comment    Share Share    Print    Email

Some Links

by Don Boudreaux on December 1, 2014

in Environment, Hayek, Inequality, Myths and Fallacies, Trade, Wal-Mart

Here’s the great Bob Higgs on income inequality.  A slice:

The personal (or family or household) distribution of income is not a human condition. It is only, to repeat, a statistical artifact. It is a measure such as the Gini coefficient for describing the degree of inequality of the values of individual observations in any aggregate of such observations. The aggregate of the measurement is arbitrary: why, for example, should inequality be measured for the entire U.S. population, rather than for population of the city or state in which one lives, the entire North American population (including Mexico), the entire Western Hemisphere population, or indeed the entire world population? The answer is that the measurement is done for certain political units with an eye to “doing something about” the measured inequality, which is always to say, doing something to reduce it, whatever it now happens to be. Thus, this topic is and always has been a hobbyhorse for socialists and others whose ideologies rest on a psychological foundation of envy, of seeking to justify taking from high-income recipients and giving to low-income recipients.

Income inequality has no necessary connection with poverty, the lack of material resources for a decent life, such as adequate food, shelter, and clothing. A society with great income inequality may have no poor people, and a society with no income inequality may have nothing but poor people. Coercively reducing income inequality by fiscal measures may do nothing to reduce the extent of real poverty and may indeed—to tell the truth, almost certainly will—create incentives that increase the extent of real poverty (and many other social ills).

Richard McKenzie remembers my late, great colleague Gordon Tullock.

Cato’s Dan Ikenson reviews many fallacies that obscure the case for free trade.

I thought about writing a letter-to-the-editor in response to John Edward Terrell’s uninformed critique, in the New York Times, of individualism.  (Among other problems, Mr. Terrell reveals himself to be an outstanding slayer of men of straw.)  But Terrell’s essay is so bad that I don’t have the stomach to try to write about it as if it makes sense.  Here’s David Henderson on it.

Richard Ebeling reflects on Hayek’s Nobel lecture.

Writing at Investor’s Business Daily, Mark Perry explains the economic nonsense that is at the heart of the now-annual labor-union protests of Wal-Mart on Black Friday.  A slice:

What is overlooked or ignored by labor unions and anti-Wal-Mart organizations is that it takes highly compensated, superstar-level managerial talent to efficiently run a retail giant like Wal-Mart.

These activists then make an even bigger mistake by assuming Wal-Mart’s top leaders are highly paid at the expense of lower wages for part-time hourly workers.

Consider: Wal-Mart employs roughly 600,000 part-time employees. If the company’s executive team were replaced by lower-paid managers who forfeited 25% of a $71 million total compensation package, the extra take-home pay for part-timers would total just under $30 — per year, that is.

Indur Goklany explains that the World Health Organization enormously overestimates the number of deaths that will likely be caused by climate change.

Add a Comment    Share Share    Print    Email

I, Egg

by Don Boudreaux on December 1, 2014

in Complexity & Emergence, Energy, Seen and Unseen, Video

It’s as if someone responsible for making this recent commercial for Exxon-Mobile has read Leonard Read’s 1958 essay, “I, Pencil.”  (HT Ken Maurer and Jon Murphy)


It cannot be said too often: our modern world, although not perfect, works so incredibly and so consistently well for the great majority of people that we take the marvels of our daily lives for granted.  These marvels are nearly all the product of unplanned human cooperation that spans the globe and involves the creativity and efforts of literally hundreds of millions of people.  A distinguishing feature of this marvelous market-created world of ours is that not only do you not know how to make any of the individual goods and services that you consume, but no one knows how to make any of these things.  With rare exceptions (almost all involving intimate personal services such as massages), everything that each of us moderns consumes daily requires the knowledge and information possessed by multitudes of strangers – knowledge and information that is not and cannot possibly be contained in a single mind or place.

Add a Comment    Share Share    Print    Email

Quotation of the Day…

by Don Boudreaux on December 1, 2014

in Cleaned by Capitalism, History, Standard of Living

… is from page 167 of Antonia Fraser’s fast-paced 1979 biography of Charles Stuart II (1630-1685), Royal Charles; the reference here is to Charles’s youngest sister, Henriette-Anne:

Her teeth, unlike those of so many beauties of the time, were white and regular.

Our standards of human beauty today are far higher than they were in pre-industrial times (which is to say, for nearly all of human history) – times when regular bathing was unknown (except perhaps to a few fortunate royals), dental hygiene virtually nonexistent, diets poor and irregular (and, hence, stature small, bent, and not seldom downright deformed), disease (both internal and dermal) rampant, and clothing and bedding filthy and bug-ridden.

Add a Comment    Share Share    Print    Email

Here’s a letter to the New York Sun:

Chuck Schumer has a long track record as both an opponent of free trade and as a successful politician.  You’re therefore surely correct that Mr. Schumer will advise his fellow Democrats to win more votes by warmly embracing protectionist policies (“Smoot Schumer’s Next Move,” Nov. 30) - policies that, while economic idiocy for society writ large, are gold for the politically potent corporations who are shielded from competition by the tariffs that Mr. Schumer champions.

Of course, Mr. Schumer likely knows that his arguments in support of protectionism are absurd.  But he doesn’t care: such policies strengthen his power base.  As the great Gustave de Molinari observed more than a century ago about the case for protectionism: “These are arguments for show.  The most ardent defenders of the protective tariff do not take them seriously….  Protectionism is nothing but political power placed in the service of certain political interests in opposition to the general interest.”*  Indeed so.  And Mr. Schumer is nothing if not a magnificent servant of political interests.

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

* See paragraph II.5 here.

By the way, a splendid annotated bibliography of Molinari’s work is offered here by David Hart.

Add a Comment    Share Share    Print    Email