This essay by Scott Lincicome is on the long side, but it is well worth reading carefully – including reading what’s at the generously supplied links. (HT my intrepid Mercatus Center colleague Veronique de Rugy)

Here Scott exposes as being a facile fabric of fallacies the narrative told by the likes of Tucker Carlson, Sam Hammond, and many others that selfish American “elites” sold ordinary Americans down the global drain by allowing Americans to trade more freely with the Chinese.

And just fyi, it’s through-the-looking-glass – and shockingly – absurd that, in the tale told by Carlson, et al., “elites” are accused of visiting an injustice on ordinary people when, specifically, what the “elites” are accused of doing is simply removing themselves and their agents from obstructing the economic choices of ordinary people.

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Quotation of the Day…

by Don Boudreaux on January 16, 2019

in Doux Commerce, Myths and Fallacies, Trade

… is from Arnold Kling’s essay “International Trade,” which is a chapter in the indispensable Concise Encyclopedia of Economics (David Henderson, ed.) (footnote deleted; emphasis and links original):

The noneconomic views of trade all seem to stem from a common root: the tendency for human beings to emphasize tribal rivalries. For most people, viewing trade as a rivalry is as instinctive as rooting for their national team in Olympic basketball.

To economists, Olympic basketball is not an appropriate analogy for international trade. Instead, we see international trade as analogous to a production technique. Opening up to trade is equivalent to adopting a more efficient technology. International trade enhances efficiency by allocating resources to increase the amount produced for a given level of effort. Classical liberals, such as Richard Cobden, believed that free trade could bring about world peace by substituting commercial relationships among individuals for competitive relationships between states.

DBx: Pictured above is Free Trade Hall in Manchester. Built in 1853 to commemorate the repeal of Britain’s corn laws, today it’s an excellent hotel owned by Radisson.

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Here’s a letter to a Cafe Hayek reader:

Mr. John G____

Mr. G____:

Thanks for your e-mail, and I apologize for the tardiness of my reply.

You write that “In order for trade to be free, the terms of trade must be enforceable. In other words, a legal system that enforces contracts freely entered into must exist, and there must be a law of contract within which the freedom of trade can thrive. There is no liberty unless there is a rule of law within which individuals can freely trade.”

I agree. Yet contrary to your later claim, these conditions for trade require neither a world government (which, like you, I would fear and loathe) nor “nations … negotiating rules of trade on behalf of their citizens.”

All that a policy of free trade requires is that a government not obstruct its citizens’ individual choices to carry out commerce with foreigners. Period. That’s it. If America had a policy of free trade, each American, individually, would determine whether or not the terms of trade on each particular deal are acceptable. These terms, of course, would include the risk of the foreign counterparty not living up to its side of the deal. You as an adult American no more need Uncle Sam to superintend – and much less to override – your choices in such matters than you need Uncle Sam to superintend or to override the peaceful choices you make in any other aspect of your life.

Not only do terms of trade not need to be uniform across all citizens within a jurisdiction (what is acceptable for you might not be acceptable for me, and vice-versa), laws of commerce do not need to be crafted or enforced by sovereign authorities. Traders for centuries have created through their daily practices, and without the assistance of sovereign states, nuanced laws to govern their commerce – laws that work remarkably well. Indeed, the core of commercial law that most modern sovereign states have adopted and use today – the lex mercatoria – was the creation, not of states or sovereign rulers, but of traders going about their daily business.

If you think my previous two paragraph to be fanciful, consider Hong Kong. The people of Hong Kong today suffer almost no obstacles erected by their government to their commerce with people outside of Hong Kong. And that policy of free trade has been successful by any measure. It has been instrumental in allowing the people of that resource-poor jurisdiction to rapidly transform themselves into among the world’s wealthiest.

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

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GMU Econ alum Eric Crampton blogs on Andrew Farrant’s new paper – a paper that exposes as utterly fallacious Nancy MacLean’s accusation that Jim Buchanan was an advisor to Pinochet.

Richard Ebeling defends Ludwig von Mises against Quinn Slobodian’s intellectual carelessness.

Here’s GMU Econ alum Wayne Crews on the current government ‘shutdown.’

Mike Rappaport writes again on the myth that unemployment insurance definitely cannot be supplied by the private sector.

David Henderson shares some vignettes about the late Harold Demsetz.

Here’s part 1 of Alberto Mingardi’s and Terence Kealey’s critical take on the work of Mariana Mazzucato.

Marian Tupy explains how capitalism brought tourism to the masses.

Mark Perry reports on yet another unnecessary burden that Trump’s tariffs are imposing on Americans.

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… is from Robert McGee’s June 1989 review, in The Freeman, of Richard McKenzie’s 1988 book, The American Job Machine:

The trade deficit is measured by the difference between imports and exports, so a decline in exports will increase the trade deficit if imports remain constant. Yet exports may decline because an expanding internal economy has siphoned domestically produced goods away from world markets. American producers are selling to other Americans rather than to foreigners. So a trade deficit can be caused by an expanding domestic economy – which is a sign of economic health rather than sickness.

DBx: Yep. And as regular readers of this blog know, there are many other reasons why trade deficits – or, more generally, current-account deficits – are not necessarily symptoms of economic weakness at home. The very opposite is very often the case. Nor are such “deficits” ever symptoms of “unfair” trade practices abroad. Nor are such “deficits” sources of future economic woes.

The main function served by trade deficits is to allow protectionists to spook the general public into a willingness to be preyed upon by politically powerful domestic producers.

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FRED Facts

by Don Boudreaux on January 14, 2019

in Data, Myths and Fallacies, The Economy, Trade

In my latest column for AIER, I use some data – mostly from FRED – to debunk some persistent myths about the American economy. A slice:

Take, for example, the frequent assertion that globalization or other economic changes in recent decades have caused the United States to deindustrialize. Not so.

Industrial capacity in the U.S. is today at an all-time high. Today it’s 15 percent higher than it was when China joined the World Trade Organization (WTO) in 2001, and 66 percent higher than when NAFTA was launched in 1994. Unsurprisingly, therefore, real U.S. manufacturing output is today near the all-time high that it hit in 2007, just before the Great Recession, and it continues to rise. Despite the fact that America continues to more and more become a service economy, manufacturers in America today produce 11 percent more output than they produced when China joined the WTO 18 years ago and 45 percent more than when NAFTA took effect.

A somewhat broader measure of non-service-sector output is the Industrial Production Index, which tracks the output not only of the manufacturing sector, but also of mining and of electric and gas utilities. Today this output is higher than it has ever been. (Just FYI: the U.S. is the world’s 4th largest exporter of coal, the 6th largest exporter of natural gas, and the 16th largest exporter of electricity.)

While there would be nothing at all wrong with U.S. output of goods and energy falling — service-sector output is no less economically meaningful, real, or valuable than is non-service-sector output — the plain fact is that U.S. production of goods and energy today is, contrary to popular myth, high and rising.

Also high and rising is the real net worth of nonfinancial incorporated businesses in the U.S. Adjusted for inflation using the Consumer Price Index (which likely overstates inflation), these corporations are today worth on net 62 percent more than they were worth in 2001, and 200 percent more than when America, in 1975, last ran an annual trade surplus.

Here’s something else that’s high and rising: U.S. exports. Today these are 85 percent higher than when China joined the WTO, 200 percent higher than when NAFTA commenced, and nearly 800 percent higher than in 1975.

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In today’s Wall Street Journal, David Henderson remembers Harold Demsetz, who died last week at the age of 88. A slice (link added):

Perhaps Demsetz’s most enduring contribution to social science came in 1969, when he coined what is now known as the “nirvana fallacy” in a critique of fellow economist Kenneth J. Arrow’s assumption that government could make markets more efficient. Demsetz conceded that perfect government intervention might improve things, but noted that Arrow, like many economists, had failed to show that actual government intervention would: “Those who adopt the nirvana viewpoint seek to discover discrepancies between the ideal and the real and if discrepancies are found, they deduce that the real is inefficient.”

Jeffrey Tucker writes about Friedrich List, a 19th-century popularizer of countless protectionist fallacies. A slice:

List posited a conflict between the interests of commercial society and the interests of the nation as a whole. In that sense, his thinking is squarely in line with the Right Hegelianism popular during his educational formation. It’s a devastating concession to turn over trade policy to the state. In the worst possible rendering, he subjected trade policy to the Fuhrerprinzip.

Scott Sumner clarifies a Trumpian confusion about trade, the trade deficit, and manufacturing jobs.

Bruce Yandle explains that tariffs are taxes paid by people – and that higher U.S. tariffs increase the tax burden of American consumers.

Chris Edwards correctly concludes from the current ‘shutdown’ of the U.S. government that that government controls too much of the economy.

Also writing wisely and well – and contra Paul Krugman – on this government ‘shutdown’ is Ryan Bourne. Here’s Ryan’s conclusion:

Krugman knows it is disingenuous to suggest that the current chaos is some libertarian policy experiment. But as some Republicans do make the case that the programs above are vital for the health of the economy, and libertarians continue to make the case for their abolition, perhaps he will finally cease lumping Republicans and libertarians together in his columns.

Robert Samuelson calls the creative destruction that is inseparable from capitalism “tough love.

Nominal prices and wages over the past 20 years.

This past August, John Stossel spoke to students at a Fund for American Studies event.

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Quotation of the Day…

by Don Boudreaux on January 14, 2019

in Myths and Fallacies, Trade

… is from page 93 of the 1985 NYU Press edition of the 1963 English-language translation of Carl Menger’s 1883 Investigations Into the Method of the Social Sciences with Special Reference to Economics (Untersuchungen über die Methode der Sozialwissenschaften und der politischen Okonomie insbesondere) (footnote deleted; original emphases):

The nation as such is not a large subject that has needs, that works, practices economy, and consumes; and what is called ‘national economy’ is therefore not the economy of a nation in the true sense of the word. ‘National economy’ is not a phenomenon analogous to the singular economies in the nation to which also the economy of finance belongs. It is not a large singular economy; just as little as it is one opposed to or existing along with the singular economies in the nation. It is in its most general form of phenomena a peculiar combination of singular economies.

Thus the phenomena of “national economy” are by no means direct expressions of the life of a nation as such or direct results of an “economic nation.” They are, rather, the results of all the innumerable individual economic efforts in the nation, and they therefore are not to be brought within the scope of our theoretical understanding from the point of view of the above fiction. Rather the phenomena of “national economy,” just as they present themselves to us in reality as results of individual economic efforts, must also be theoretically interpreted in this light.

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Quotation of the Day…

by Don Boudreaux on January 13, 2019

in Complexity & Emergence, Economics, Prices

… is from page 952 of my emeritus colleague and 2002 Nobel laureate Vernon Smith’s important December 1982 American Economic Review paper, “Microeconomic Systems as an Experimental Science”:

At the heart of economics is a scientific mystery: How is it that the pricing system accomplishes the world’s work without anyone being in charge? Like language, no one invented it. None of us could have invented it, and its operation depends in no way on anyone’s comprehension or understanding of it. Somehow, it is a product of culture; yet in important ways, the pricing system is what makes culture possible. Smash it in the command economy and it rises as a Phoenix with a thousand heads, as the command system becomes shot through with bribery, favors, barter and underground exchange. Indeed, these latter elements may prevent the command system from collapsing. No law and no police force can stop it, for the police may become as large a part of the problem as of the solution. The pricing system – How is order produced from freedom of choice? – is a scientific mystery as deep, fundamental, and inspiring as that of the expanding universe or the forces that bind matter.

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The Absurdity of Protectionism

by Don Boudreaux on January 12, 2019

in Trade

Here’s a letter to Mr. Andy Harris, a regular reader of Cafe Hayek:

Mr. Harris:

Thanks for your e-mail.

With respect, I disagree with you that in my letter to young Ms. Emily Shin I “did her a disservice by not giving her both sides of the debate over free trade vs protection.”

First, Ms. Shin asked me “What is the one deepest mistake made by persons who fight against free trade?” She did not ask me to list alleged mistakes made by persons who fight for free trade.

Second, the protectionist side of the debate is so muddled and absurd that, frankly, it deserves only ridicule. Intellectually, it’s the equivalent of the belief that 2+2=1, or that the moon is a slab of cheese. Yet nevertheless protectionism remains the default belief among most people – a sad reality that means that neither Ms. Shin nor anyone else needs me to rehearse protectionist fallacies and superstitions. The role that I play in this debate is to do whatever I can, however modest, to debunk this nonsense.

You might insist that there’s a middle ground between free trade and protectionism, and that the truth is to be found there. I would challenge this insistence. To me, this insistence has no more validity than would the insistence, say, in 1850 America that there’s a middle ground between slavery as it then existed and complete emancipation. While I do not believe that protectionism is an evil remotely equivalent to chattel slavery, I also have no doubt that protectionism is an evil and that, like chattel slavery, nothing good can sensibly be said in its defense, and that the only ethically acceptable position is its complete and unconditional abolition.

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

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