Cafe Hayek — where orders emerge

Some Links

by Don Boudreaux on April 11, 2018

in Complexity & Emergence, Crony Capitalism, Data, Economics, Hubris and humility, Innovation, Man of System, Scientism, Terrorism, Trade, Truth-seeking & ideology, War

Arnold Kling explains, in a not-at-all complicated way, the important distinction between the complicated and the complex. A slice:

Many complicated problems have been solved by human beings and by our powerful computing tools. But I think this creates the expectation that we can solve complex problems as well. By understanding the difference between complication and complexity, we can take a more realistic view.

My GMU Econ colleague Alex Tabarrok reflects on the bias, or not, in economic research.

Matt Ridley’s latest column is “on the rent-seeking crony-capitalists who stifle innovation.”

George Will writes with his usual deep wisdom about escalating U.S. involvement in Syria.

Also writing on Syria is Jim Bovard. And also Trevor Thrall.

Richard Ebeling exposes the hubris of social engineers in the American past.

Megan McArdle reveals some unexpected similarities shared by partisans on the right with partisans on the left.

Stuart Anderson is dismayed by Trump’s ignorance, haughtiness, and heavy-handedness on trade. A slice:

Unfortunately, Donald Trump is not well-versed in the economics of international trade. A Jimmy Kimmel show video with a second-grader explaining trade deficits is, by objective standards, much more accurate than Donald Trump’s tweets or statements on trade. Nor is he receiving good advice.

Caroline Baum wants Congress to rein in Trump’s powers over trade. (I am not sure that I agree, although I might. I’m hesitant to let Trump’s asinine trade moves prompt a change in trade-making rules from an arrangement that has worked reasonably well over the past several decades to one that might work worse over the long-run. But I am not at all very confident that my worries are here justified.)

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Revisiting Monopsony Power

by Don Boudreaux on April 11, 2018

in Competition, Myths and Fallacies, Seen and Unseen, Work

Here’s a very slightly modified version of a comment that I left on a nice post by Scott Sumner at EconLog:

Scott:

Nice post. I add four points that I’ve made in the past at my blog.

First, as Jim Buchanan, Donald Dewey, and other economists have pointed out, as long as demand curves for outputs are downward sloping, monopsony power is only a necessary and not a sufficient condition for minimum wages not to reduce the employment prospects of low-skilled workers. For minimum wages not to reduce these workers’ employment prospects, employers with monopsony power must also have monopoly power (and not just the sort of such ‘power’ as is identified in models of monopolistic competition). That is, these employers must have the ability to keep the prices of the outputs they sell above average total costs. If they do not have this ability, then there are no excess profits, or rents, out of which the higher labor costs can be paid.

Second, empirical studies typically fail to examine all the many ways that employers and employees can adjust to minimum wages. The list of such possible adjustments other than reduced hours of employment includes reductions in formal fringe benefits (such as paid leave), reductions in informal fringe benefits (such as workplace safety higher than what is minimally required by legislation), and changes in the nature of the jobs such that workers are worked harder in order to produce more output per hour. To the extent that adjustments such as these occur, minimum-wage-induced reductions in employment will be fewer or lower, but the standard textbook model really still holds.

Third, because in the U.S. the national minimum wage has been in place now for 80 years and is at no risk of being repealed, employers have long ago adjusted their business plans – their capital-labor ratios – to the existence of minimum wages. And employers expect occasional minimum wage increases. Therefore, even the finest and most carefully controlled empirical study of a minimum-wage hike today will not detect the employment-reducing effects of the long-standing expectation of minimum-wage hikes. Because employers have already adjusted to the reality of minimum wages – and to the reality of minimum wages being increased from time to time – any study that correctly finds little or no negative employment effect from this or that minimum-wage hike today nevertheless misses the negative employment effects of minimum wages overall.

Fourth, about monopsony power: it’s more difficult to detect than, ironically, standard textbook models suggest. Suppose that Acme, Inc., competes for workers by offering unusually attractive fringe benefits and work conditions. And suppose that Acme, Inc., has a differential advantage over other employers at supplying to its workers such non-wage amenities, or that for Acme, Inc., the marginal cost of attracting X number of workers by supplying non-wage amenities is lower than is its cost of attracting X number of workers by increasing the wages it pays. Under such conditions, Acme, Inc., gains the power to lower its workers wages by some amount without losing all, or perhaps even any, of its workers.

An empirical study of this firm would conclude that Acme, Inc., has monopsony power. But this conclusion would be incorrect, for the ‘power’ that Acme, Inc., is detected to have over its workers is ‘power’ that Acme, Inc., purchased from its workers – workers who voluntarily agreed to Acme’s employment terms.

Put differently, if (as is not unreasonable for many employers) Acme, Inc., values a steady workforce, it can purchase – with non-wage amenities – from its workers the ability to cut their wages without their quitting. The textbook-bound economist, seeing only the reduced wages and no mass exodus of workers from Acme, leaps confidently to the conclusion that Acme has monopsony power. Yet clearly, in this example, that conclusion would be mistaken.

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Freeman Essay #141: A Review of Cass Sunstein’s ‘Laws of Fear’

by Don Boudreaux on April 11, 2018

in Books, Environment, Freeman, Seen and Unseen

In the October 2006 Freeman I reviewed Cass Sunstein’s very good 2005 book, Laws of Fear. Although my review is not available on-line from FEE with its own url, it is pasted below the fold.

Read the full post →

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Quotation of the Day…

by Don Boudreaux on April 11, 2018

in Media, Philosophy of Freedom

… is from page 434 of Liberty Fund’s 2011 collection of Frédéric Bastiat’s writings, The Man and the Statesman: The Correspondence and Articles on Politics – which is the first volume in what will eventually be six volumes of The Collected Works of Frédéric Bastiat; specifically, this quotation is from Bastiat’s 1848 essay “Freedom” (original emphasis):

We may be distressed to see writers delight in stirring up all forms of evil passion. However, to hobble the press is also to hobble truth as well as lies. Let us, therefore, take care never to allow the freedom of the press to die.

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A Protectionist is Someone Who…

by Don Boudreaux on April 10, 2018

in A Protectionist is..., Myths and Fallacies, Trade

… thinks that the ultimate purpose of producing goods and services is to use them to acquire as much money as possible. Unlike a free-trader who understands that the purpose of producing goods and services is to acquire for yourself and your family as many as possible real goods and services to raise as much as possible your standard of living – and who understands that exchanging for money what you directly produce is merely a means of lowering your cost of acquiring in exchange as many as possible goods and services produced by others – the protectionist thinks that the ultimate purpose of producing real goods and services is to use them to acquire as much money as possible.

The Econ 101 teacher typically draws on the white board a diagram of two countries trading with each other. Country A is shown exporting (say) steel to country B in exchange for dollars, and then using those dollars to buy lumber from country B. The Econ 101 teacher informs his or her class that, while these exchanges are mediated by dollars, what ultimately is going on in this diagram is that the people of country A produce steel and send some of that steel to the people of country B because the people of country A want lumber from country B. Likewise, the people of country B produce lumber and send some of it to the people of country A because the people of country B want steel from country A. “The money that you see, class,” explains the Econ 101 teacher, “merely facilitates the exchange of steel for lumber. What’s important here is the getting of steel and of lumber. Money is a tool used by the people of country A to transform some of the steel they produce into lumber that they want to consume. Likewise, money is a tool used by the people of country B to transform some of the lumber they produce into steel that they want to consume.”

The protectionist thinks of this hypothetical two-country exchange entirely differently from the way that the Econ 101 teacher thinks of it. For the protectionist, the people of country A produce steel as a means of getting money; that is the ultimate goal. And the people of country B produce lumber as a means of getting money; that – the getting of money – is the ultimate goal. While for the Econ 101 teacher the two-country diagram that he or she draws is meant to show how money facilitates the ultimate acquisition by the peoples of each country of real goods, for the protectionist the diagram seems to show that the production of real goods is a means of facilitating the ultimate acquisition by the peoples of each country of money.

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More on Trade, Competition, and the Baseless Argument for Compensation

by Don Boudreaux on April 10, 2018

in Myths and Fallacies, Trade

Here’s another letter to Ted Stockton:

Mr. Stockton:

Thanks for your follow-up e-mail.

I disagree with your claim that “free trade requires winners to compensate losers.” On my blog I’ve dealt often with this issue.*  Nevertheless, I here repeat two of the many reasons why I disagree with your claim.

First, imports are just one of many different manifestations of economic competition. Were we to condition all manifestations of competition on the requirement that today’s “winners” compensate today’s “losers” – that is, that today’s “winning” competitors or consumers compensate producers who, in the face of competition today, must work harder to earn their incomes, even if doing so means changing the ways that they earn their incomes – then we would require every producer who is obliged by competition to work harder to be compensated for this inconvenience, regardless of the the source of this inconvenience.

Do you think, say, that if you open a new restaurant you are ethically obliged to compensate other restaurant owners for whatever business losses they experience as a result of your competition?  And do you think that if you are not obliged by the state to pay such compensation to your competitors that the state should then impose punitive taxes on all individuals who dine at your restaurant?  If you answer ‘no,’ then the case for requiring today’s “winners” in international trade to compensate today’s “losers” is without merit, for there is nothing at all economically or ethically unique about competition that happens to come from abroad.

Second and more fundamentally: a cost is not necessarily a loss that is required in justice to be compensated.  No firm has a right to any portion of consumers’ incomes or to continuing consumer patronage.  When a domestic producer loses business to foreign rivals, that domestic producer loses no property to which he had a legal or ethical claim.  When this domestic producer chose to open up shop, he knew (or should have known) that he might suffer losses and might even fail.  So when he chose to enter that line of work he chose to incur this cost because he believed that the prospect of earning sufficiently high profits was worthwhile although not guaranteed.  The cost that this producer voluntarily incurs in order to operate or to work in a competitive environment is not a loss for which he is entitled to compensation.  No consumer who switches her allegiance from this producer to one of this producer’s rivals has unjustly harmed this producer.  No entrepreneur or firm that competes successfully against this producer has unjustly harmed this producer. This producer is entitled to no compensation for whatever losses he incurs because of competition.

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

* For example, here, here, here, and here.

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A Podcast on Trade and Trade Wars

by Don Boudreaux on April 10, 2018

in Myths and Fallacies, Podcast, Trade

In this podcast recorded last Thursday, I was pleased and honored to join my Mercatus Center colleagues Dan Griswold and Chad Reese, along with the financial writer Caroline Baum, to discuss trade in general and the looming U.S.-China trade war specifically. The length of the podcast is just over a half-hour.

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Freeman Essay #140: “Ludwig Lachmann: A Belated Appreciation”

by Don Boudreaux on April 10, 2018

in Economics, Freeman, State of Macro

In the April 2012 Freeman I reported on my deep appreciation for the work of the late economist Ludwig Lachmann – an appreciation that I took far too long to develop. My column is below the fold.

Read the full post →

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Quotation of the Day…

by Don Boudreaux on April 10, 2018

in Adam Smith, Balance of Payments, Myths and Fallacies, Trade

… is from my intrepid Mercatus Center colleague Veronique de Rugy’s superb op-ed in today’s (the April 10th) edition of the New York Times:

In 1776, Adam Smith observed that nothing “can be more absurd than this whole doctrine of the balance of trade.” Sadly, almost 250 years later, the president – along with his economic adviser Peter Navarro and Commerce Secretary Wilbur Ross – has elevated this economic fallacy into a pretext for protectionism.

Fueling this bipartisan hysteria is the widespread failure to understand that United States trade deficits generally add capital to our economy – more factories, more R & D or more machines.

DBx: No concept in economics is responsible for more confusion and policy mischief than is the so-called “balance of trade.” The many fallacious beliefs about a trade deficit include the notion that –

– aggregate demand drains from each economy that runs a trade (or current-account) deficit, thus causing overall employment to fall in each country that runs a trade deficit;

– the GDP of a country that runs a trade deficit is lowered by that trade deficit;

– the denizens of a country that runs a trade deficit spend too much on consumption and save too little;

– a trade deficit is evidence of poor policy in any country that runs such a deficit;

– a country’s trade deficit would be ‘cured’ if only the people of that country were to save more or to buy fewer imports;

– a trade deficit in the home economy is evidence of ‘unfair’ trade practices by that country’s trading partners;

– a trade deficit means that each country that runs one is “losing,” and that to “win” at trade means running a trade surplus (or, at least, to not run a trade deficit);

– a trade deficit run by the home economy means that that economy’s trading partners who have trade surpluses are being enriched at the expense of the people in the home economy;

– a trade deficit necessarily makes the citizens of any country that runs one more indebted to foreigners;

– a trade deficit involves a net transfer of capital or asset ownership from citizens of each country that runs a trade deficit to citizens of countries that run trade surpluses;

– each dollar (or each yen, or each euro, or each peso, or each pound, or each you-name-the-currency) of a country’s trade deficit today means that the people of that country must sacrifice that much consumption sometime in the future;

– bilateral trade deficits have economic meaning and relevance;

– a trade deficit is something that should be “fixed” – that is, reduced or eliminated – through government policy, including especially through trade restrictions.

None of the above-listed beliefs about trade deficits is supportable. None. Not one. Not in the least. Each and every one of these beliefs is easily refuted with either basic economics or, in many cases, with simply a clarification of the definitions of terms and concepts used in national-income accounting. And yet these – and no doubt other – false beliefs about trade deficits (and about the so-called “balance-of-payments” generally) are widespread and spill daily from the mouths and keyboards of politicians, pundits, professors, and propagandists.

The belief that trade deficits cause economic problems in countries that run them – and that trade deficits necessarily reflect poor policies or profligacy by the people of those countries – is the economic equivalent of, say, the belief that the world is ruled by sorcerers who ride fire-breathing dragons and who marry their daughters off to centaurs. Both sets of beliefs are pure madness, yet one of them serves as the basis for real-world policies.

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A Protectionist is Someone Who…

by Don Boudreaux on April 9, 2018

in A Protectionist is..., Myths and Fallacies, Trade

… is so hopelessly – indeed, comically – confused about trade that he assumes that Americans who support free trade do so only out of a willingness to sacrifice the welfare of fellow Americans in order to improve the welfare of people in poorer countries. The protectionist does not grasp the fact that voluntary trade occurs only when each party to each trade believes that he or she will be made better off by the trade. The protectionist, unable to escape from the antediluvian superstition that trade is a zero-sum exercise, self-righteously – if ridiculously – accuses free-traders in rich countries of discounting or disregarding the economic well-being of their fellow citizens. The protectionist is an intellectual prisoner of his silly presumption that if people in poor countries gain from freer trade, people in the rich countries must thereby lose.

In short, a protectionist is someone who denies the reality of gains from trade.

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