Bonus Quotation of the Day…

by Don Boudreaux on September 19, 2020

in Complexity & Emergence, Hubris and humility

… is from page 106 of the late Stanford University economic historian Nathan Rosenberg’s insightful 1992 paper “Economic Experiments,” as this paper is reprinted in Rosenberg’s 1994 book, Exploring the Black Box: Technology, Economics, and History:

It is inherently difficult to experiment [economically] and to introduce numerous small changes, and to do so frequently, in a large hierarchical organizational structure where permissions and approvals are required from a remote central authority.

DBx: Each proponent of industrial policy, whether from the political left or right or middle, necessarily presumes that the government officials who craft the industrial policy perform their crafting with god-like knowledge. For any such plan to work – that is, for any such plan to generate outputs that when either consumed directly in the home country or traded for imports improve the economic well-being of the people of the country as much as possible – the drafters of the plan must determine just what exactly will be produced, in what quantities, and how these outputs will be produced.

If the drafters of the plan do not have such knowledge, then after the plan is launched errors will eventually be committed. Adjusting to the discovery of these errors will require revision of the plan. Such revision will, in turn, often require that the original plan be adjusted not just in the location where the error is first discovered (“Omigosh, the cost of using carbon fiber to build airplane frames is higher than we thought!”) but also in other, more-distant parts of the plan (“We need to shift some aluminum over to our aircraft producers, so you producers of automobiles and washing machines have to find some other materials to use.”)

Industrial-policy proponents simply ignore this reality. They simply – or, rather, simple-mindedly – assume that government officials either already possess or will easily come to possess all the vast amounts of knowledge, much of it subject to change, necessary to make the industrial policy a success.

I understand that regular readers of this blog likely tire of my repetitiveness, but I repeat a question that I will repeatedly ask until someone offers to it a serious answer: Exactly how will those officials who craft and monitor industrial policy obtain the knowledge they must possess in order to make industrial policy work in the ways that industrial-policy proponents promise it will work?

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Jeffrey Tucker again rightly decries the evil of the covid lockdowns.

And Bryan Caplan wonders at the cognitive dissonance that contributed to support for the evil lockdowns.

I’ve always liked Van Morrison’s music. Now I like it even more.

Bruce Yandle explains that Trump’s hubris blinds him to the reality that the economy cannot be engineered to “greatness.” A slice:

Once again, President Trump is engaged in gatekeeper capitalism, where he employs the misguided conceit that he holds the keys to the U.S. economy, and that he can marshal enough information to actually manage this massive economy from a White House conference room.

Eric Boehm inquires: “Is it too much to ask for a presidential candidate who cares about America’s fiscal health and respects the limits of his office?

Kudos to Bo Winegard.

While I could pick nits with some points that Michael Strain makes in his defense of Milton Friedman’s famous case for what is sometimes called ‘shareholder capitalism,’ overall Michael’s essay is excellent. A slice:

As a matter of practicality, asking CEOs to make society better — the environment cleaner, working conditions safer, compensation higher — is beyond their competence and ability. It also invites inconsistencies. For example, doubling workers’ wages would make them better off, but it would require raising prices, making customers worse off. And if stakeholder capitalism has any teeth, it must mean that executives should on occasion act against the interest of their company’s owners. How is that a defensible management strategy? Should union members, Friedman reasonably asked, tolerate leaders who don’t fight for better wages and working conditions to keep prices lower for customers?

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… is from page 221 of my good friend and old teacher Randy Holcombe’s superb 2019 book, Liberty in Peril: Democracy and Power in American History:

Democratic institutions act as a filter on public opinion, sifting out small costs and benefits that are spread among the population at large and focusing instead on concentrated costs and benefits that have large impacts on narrow interests. For this reason, democratic political institutions favor policies that impose small costs on most people, who are rationally ignorant about the policies, to finance large benefits to smaller groups.

DBx: History testifies repeatedly to the correctness of this observation. And yet well-meaning peddlers of schemes to use government to create on earth something closer to paradise ignore this reality. This ignorance plagues proposals whether new or merely newly packaged, and regardless of how real or fanciful are the problems that the scheme-peddlers’ propose to ‘solve.’

“Secure our supply chains!” “Secure our borders!” “Leave no child behind!” “Bring back manufacturing jobs!” “Stop exporting our jobs!” “Invest in the industries of the future!” “Protect the environment!” “Spread the wealth!” “Just say ‘No!'” “A living wage for everyone!” “Save the family farm!” “Save small businesses!” “Strengthen our national defense!” “End corporate greed!” “Protect our cultural heritage!” “Stricter campaign-finance laws!” “Break up the monopolies!” “Common-good capitalism!” “Common-good constitutional law!” “Common-good this, that, and the other thing!”

And so it goes, on and on and on – slogans with wide appeal are trumpeted, power is created ostensibly to ensure the realization of the lovely aspirations, and the pigs rush gluttonously to the resulting troughs. Yet the pigs are too seldom noticed; they devour their feasts undisturbed. Most people continue to be bedazzled by the brilliance of the mirages conjured by the slogans.

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Modern Democracy

by Don Boudreaux on September 18, 2020

in Other People's Money, Politics

Here’s a letter to MarketWatch:

Editor:

Your story today headlined “Senators Elizabeth Warren and Chuck Schumer say U.S. should immediately cancel $50,000 in student loans for millions of borrowers” reaffirmed this realization: Modern democracy is a political system under which it is both a serious crime and an atrocious ethical offense for politicians to attempt to buy votes with their own money, but under which it is not only legal, but in the eyes of many saintly, for politicians to attempt to buy votes with other people’s money.

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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… is from page five of the Mercatus Center’s hot-off-the-press 2020 reissue of the late Ludwig Lachmann’s 1986 book, The Market as an Economic Process:

No agent can enter a market, or extend his range of activity within one by making offers to other agents, without disrupting some market relationship presently existing between them and others. This fact is of course of the very essence of competition.

DBx: This insight is seemingly so obvious as to be trite. Yet failure to grasp it is typically at the core of arguments made by protectionists, and even by most free traders, that trade has “losers” as well as “winners.”

The fact that increased international trade disrupts some existing exchange relationships is, of course, undeniable. Also undeniable is the fact that sellers whose relationships with buyers are so disrupted by trade as to cause these sellers to lose sales, or to have to lower their prices, are made worse off than they would be had trade not increased. It’s this worsening in some particular sellers’ economic fortunes that people have in mind when they say that “trade has losers as well as winners.”

But as I’ve argued before, such talk is highly misleading. Whatever truth there is in the observation that trade “has losers as well as winners” is a truth not unique to trade. It’s a truth that holds for all economic change. And so to single out trade in this fashion is to imply a non-existent reality – namely, that increased international trade uniquely disrupts existing patterns of buyer-seller relationships.

Put differently, if some important point is conveyed by observing that “increased trade with foreigners has losers as well as winners,” then an equally important point is conveyed by saying that “increased trade with women has losers as well as winners” or that “increased trade with Episcopalians has losers as well as winners” or that “increased trade with gay people has losers as well as winners.” Whatever truth there is in saying that “increased trade with foreigners has losers as well as winners” exists in identical statements made about increased trade with members of any other classifications of trading partners.

And so because saying that “increased trade with foreigners has losers as well as winners” implies, or at least suggests, that increased trade with members of any other classification of trading partners does not have losers as well as winners, saying that “increased trade with foreigners has losers as well as winners” is misleading to the point of being mistaken.

Also, precisely because increased trade with members of any conceivable classification of trading partners has such losers as well as winners, if it is appropriate (as many people believe) to allow such increased trade only if it passes some cost-benefit test administered by econometricians, politicians, or thinktank wags, then increased trade with members of any other group should also be conditioned on it passing the same cost-benefit test. Let’s have econometricians, politicians, and thinktank wags offer their assessments of the justice and cost-benefit outcomes not only of increased trade with foreigners, but also of increased trade with redheads, increased trade with short people, increased trade with people 56 and older, increased trade with Denver Broncos fans, and increased trade with lesbians of Italian descent.

Anyone who recognizes the absurdity of calling for any of these last-listed cost-benefit tests should recognize the equal absurdity of calling for a cost-benefit test of increased trade with foreigners.

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In his short video I discuss Adam Smith’s national-defense exception to a policy of unilateral free trade. (Again, I thank my Mercatus Center colleague Matt Beal for producing these videos.)

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Quotation of the Day…

by Don Boudreaux on September 18, 2020

in Philosophy of Freedom, Property Rights

… is from page 48 of the 1969 Arlington House edition of Ludwig von Mises’s 1944 Yale University Press book, Omnipotent Government: The Rise of the Total State and Total War (available free-of-charge on-line here):

The essential teaching of liberalism is that social coöperation and the division of labor can be achieved only in a system of private ownership of the means of production, i.e., within a market society, or capitalism. All the other principles of liberalism – democracy, personal freedom of the individual, freedom of speech and of the press, religious tolerance, peace among the nations – are consequences of this basic postulate. They can be realized only within a society based on private property.

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I am not Bill Maher’s biggest fan – largely because I pay what will likely surprise most of you as virtually no attention to celebrities such as him. (I barely know who he is or what he’s about.) But I thank my GMU Econ colleague Dan Klein for alerting me to this clip that Maher did about three months ago on the covid lockdowns. I agree with David Henderson’s description of it earlier today (via e-mail): “It’s really good.”

Do watch.

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Bonus Quotation of the Day…

by Don Boudreaux on September 17, 2020

in Hayek, Hubris and humility

… is from F.A. Hayek’s March 3rd, 1984, closing remarks to a regional meeting in Paris of the Mont Pelerin Society (forthcoming in Essays on Liberalism, Economics, Justice, and Democracy, a volume, edited by Paul Lewis, in Hayek’s Collected Works):

I call a fatal conceit, the idea that human reason is strong enough to reorganise society deliberately in the service of known, foreseen ends and purposes.

DBx: This conceit is indeed fatal – and it is today much more widespread and unchecked, on the political right almost as much as on the political left, than it was when Hayek spoke these words in 1984.

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Economic Ignorance Runs Deeply

by Don Boudreaux on September 17, 2020

in Balance of Payments, Myths and Fallacies, Trade

Here’s a letter to a regular correspondent who is “sold on the need for our country to abandon free market fundamentalism”:

Mr. McKinney:

I did indeed read Oren Cass’s 2019 essay “Putting Dynamism In its Place,” although I didn’t blog on it. You’ll be unsurprised to learn that I don’t share your high opinion of it, for it’s marred by a persistent feature that runs through all of Cass’s work: excruciating ignorance of economics.

Consider, as an example, this paragraph:

That [trade] balanced outcome is by no means guaranteed. If trillions of dollars of foreign goods are flowing into the United States, then Americans must send back something in return. But other countries might impose obstacles to American producers selling in their markets and instead acquire U.S. assets like stocks, bonds, and real estate. For instance, what if China sends $50 billion worth of electronics to the United States and we send $50 billion worth of U.S. Treasury bonds back to China? In colloquial terms, China has sent the goods on credit. American production is lower, and government debt is higher. Such an imbalanced exchange is far from the model of prosperity-enhancing free trade taught in economics classes. It is disruptive, yes, but in ways that can reduce opportunities for workers, lower the trajectory of their productivity, and diminish the nation’s real prosperity.

To expose this paragraph’s many errors would require a lengthy monograph, so I here mention only two of Cass’s errors.

Contrary to Cass’s description, we Americans don’t pay for imports with stocks, bonds, or other such assets. We pay for imports with cash, usually dollars. Foreigners can then use those dollars to buy whatever Americans are selling. To the extent that foreigners use those dollars to buy American exports, America’s trade deficit does not rise. To the extent that foreigners use those dollars to buy American assets – that is, to invest in America – America’s trade deficit does indeed rise.

But foreigners cannot compel Americans to sell assets any more than they can compel Americans to sell goods and services. Cass therefore is mistaken to suggest that foreign tariffs on Americans’ exports somehow cause Americans to sell more assets to foreigners. Each asset sold by an American to a foreigner is one that its American owner voluntarily chose to sell.

Cass is also mistaken to assume that such asset sales are undesirable. For several reasons – also too many to cover here – this assumption is unwarranted. But I will say a few words about this assumption’s deepest flaw – namely, its exclusion of the fact that foreigners’ purchases of assets from Americans increase the size of America’s capital stock and, thus, increase the American economy’s productivity.

When, for example, foreigners buy newly issued stock by General Motors, G.M. acquires more funds for upgrading its factories and training its workers. You and Cass will insist that the same would be true if G.M.’s newly issued stock were instead bought exclusively by Americans. To which I answer, ‘Yes, perhaps, for G.M. But not for the American economy at large.’

An American outbid by a foreigner for shares of G.M. stock will likely invest elsewhere. If this American invests elsewhere in the U.S. – say, in his nephew’s new start-up in Texas – the amount of capital at work in America is greater than it would be without foreign investment here. Had no foreigner bought the G.M. stock, this American investor would have bought it, leaving him unable to invest those funds in his nephew’s start-up. (If this American instead invests abroad, the result is to push the U.S. trade deficit lower – a topic for another time, but a result presumably applauded by you and Cass.)

Bottom line: Foreign purchases of assets from Americans increase the amount of capital at work in America – a fact that, contrary to another of Cass’s uninformed claims, expands rather than reduces opportunities for workers. The protectionism that Cass endorses would thus not only deny to American consumers opportunities to get more for their dollars, it would also reduce the amount of capital at work in the American economy

I close with James Pethokoukis’s observation about Cass’s 2018 book – an observation that applies equally well to this essay by Cass that you find to be “terribly compelling”:

Although praised by several high-profile conservative wonks and writers, the only thing The Once and Future Worker really demonstrates is that it’s devilishly difficult to make sense out of nonsense. And trying to do so forces one to embrace the absurd.

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

UPDATECommenting at Facebook on my letter on Cass, John Csekitz writes:

I had to read this from Cass twice because it is so far off the mark the first time I didn’t believe what I was reading- “For instance, what if China sends $50 billion worth of electronics to the United States and we send $50 billion worth of U.S. Treasury bonds back to China? In colloquial terms, China has sent the goods on credit. American production is lower, and government debt is higher.”

Little did I know we could keep our government from borrowing by not purchasing foreign goods.

John’s point is excellent. And I thank him for making it, for in doing so he gives me the opportunity to ask again a favorite question of mine: Why would anyone who worries about the obscene size of the U.S. government’s indebtedness wish to turn over to the same irresponsible pols who create this indebtedness the power to use industrial policy as an alleged means of ensuring that the American economy is operated to perform well over the long-run?

It’s downright comical that many of the same people who complain (as Oren Cass does) that private markets are too heavily biased to the short-run believe that the ‘solution’ to this alleged problem is to give more power over the economy to politicians – the same politicians who prove time and time again, by running up debt, that their horizons extend only to the next election.

…..

Oh, note also from the part of the Cass quotation featured by John that Cass mistakenly concludes that if Americans pay for imports with assets – or, more generally, in a way that causes the U.S. trade deficit to increase – the result is reduced American production. Like many of Cass’s errors, this one is a blooper committed by students who fail Econ 101.

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