Bonus Quotation of the Day…

by Don Boudreaux on November 12, 2019

in Crony Capitalism, Myths and Fallacies, Trade

… is this Facebook post by Bob Higgs:

The case for free international trade is simply the case for freedom in general. Those who claim that conditions can be improved by restrictions, taxes, subsidies, and bans of international buying and selling are saying either that they know better than every other person what transactions will provide a net benefit to that person or that they have a right to override the buying and selling choices that all other individuals regard as in their best interest. In short, trade restrictionists of all stripes, including so-called protectionists, rest their case on either proposterous claims about what they know or outrageous presumptions of a right to pester and punish peaceful people for the sake of particular special interests who seek to pick their fellows’ pockets.

Trade restrictionists of all stripes are a plague on economic life and a threat to freedom in general — not to mention their insulting our intelligence.

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John Tamny rightly ridicules what he calls “the great conservative crack-up over China.” A slice:

Indeed, if Mr. Xi is truly shutting off Chinese markets, you wouldn’t know it from the growing sales of U.S. businesses in the “relentlessly” closed off country. Figure that Apple sells 1/5th of its iPhones in China, Boeing a quarter of its planes, GM sells more cars in China than it does in North America, China is the second largest market for Nike, McDonald’s, for the U.S. entertainment industry, and surely countless others. [Gordon] Chang yet again feels Mr. Xi has shut down access to the country’s markets, but U.S. businesses continue to expand their operations there. Starbucks, as mentioned previously, is set to double the number of stores there.

GMU Econ alum Nikolai Wenzel likes much about – but not everything about – Kimberly Clausing’s new book, Open.

From May 2014 is this essay by Neil Gilbert, in the Wall Street Journal, busting some myths about American middle-class stagnation. A slice:

The public often agrees with politicians who declare that the middle-class struggles to make ends meet. But this is a quest to satiate our desires for material consumption within our limited resources, not a struggle for survival. Americans have long accepted inequality as a necessary consequence of a system that rewards merit, productivity and, often, luck.

James Pethokoukis is justifiably alarmed by Elizabeth Warren’s – and the New York Times‘s – reckless, and often blinding, itch to soak the rich.

Speaking of soaking the rich, even some self-identified “Progressives” understand that a national wealth tax in the U.S. is unconstitutional and would likely be found by the courts to be so.

Emily Blanchard, Chad Bown, and Davin Chor have some bad news for Republican politicians who think that trade warring is good for their electoral prospects. (HT George Leef)

Jeffrey Tucker is correct: economics – when done correctly – is indeed the great reality checker.

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In my most-recent column for AIER I highlight some surprising insights conveyed by a correct understanding of the principle of comparative advantage. A slice:

Grasping this interesting fact reveals yet a third, and perhaps even more startling, surprise: Your becoming a better physician makes Jones, compared to you, economically an even better deck builder even if his carpentry skills do not improve. Before you became a better physician, Jones’s cost of building a deck was lower than your cost of doing so by $6,000. But once you become a better physician, Jones’s cost of building the deck — while still $14,000 — is lower than your cost of doing so by $7,000.

Put differently, your increased comparative advantage at supplying medical care increased Jones’s comparative advantage at building decks. Jones potentially benefits from you becoming a better doctor!

Why only “potentially”? By becoming a better physician you do not automatically increase the amount you pay to Jones to build your deck. In my earlier example — when your annual pay as a physician was $240,000 — you paid Jones $17,000 to build the deck. If with an income of $252,000 you still pay Jones $17,000, he doesn’t gain from your having become a better doctor.

But if your and other homeowners’ demands for Jones’s deck-building services are sufficiently intense, you will offer to pay him an amount close to what it would cost you to build the deck yourself. Before your annual income as a physician rose from $240,000 to $252,000, you would have paid Jones to build your deck an amount up to, but not more than, $20,000. But now that you’re earning $252,000 each year, you’re willing to pay Jones up to $21,000, for this amount would be your cost of building the deck yourself.

Your becoming a better physician raises not only your income, but potentially raises also the incomes of your trading partners. This consequence of comparative advantage helps to explain why in wealthy countries, it’s not only skilled workers, such as engineers and lawyers, but also low-skilled workers, such as janitors and hotel maids, who earn higher real incomes than do their counterparts in poor countries.

Thus, it’s in each of our interests to applaud the improved skills and productivity of the vast majority of our fellow human beings even when our own skills and productivity remain unchanged. To understand comparative advantage is to understand why we should celebrate rather than fear the economic growth of other countries.

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In my March 21st, 2006, column for the Pittsburgh Tribune-Review I did my best to warn against allowing true statistics to mislead you into false conclusions.

(For some reason, all but two of my Trib columns from late December 2005 through early April 2006 are unavailable on-line. They appeared only in print. I thank the editors of the Trib for sending to me the texts of these columns.)

You can read the column beneath the fold.

Read the full post →

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… is from page 143 of Deirdre McCloskey’s brilliant 2019 book, Why Liberalism Works: How True Liberal Values Produce a Freer, More Equal, Prosperous World for All:

Yet we all are required nowadays to have opinions about inequality, which people regularly mix up with injustice and poverty, even though the alleged inequality of “capitalism” is a small matter beside the equalizing power of the Great Enrichment.

DBx: Oh so true.

Monetary-inequality-raising fortunes are built by those who publicly draw attention to, and denounce, differences in monetary incomes and wealth. Yet professors, pundits, and politicians who pave their own paths to greater monetary wealth – and (far worse) to greater political power – by vilifying those who are unusually successful at pleasing people in markets remain curiously silent about the ever-greater equalization of consumption opportunities made possible by the very same economic forces that create large differences in monetary incomes and wealth.

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Getting Comparative Advantage Right

by Don Boudreaux on November 11, 2019

in Myths and Fallacies, Trade

In the latest issue of Economic Affairs (gated), I have a new, academic-ish article on comparative advantage. It’s titled “The disadvantage of misunderstanding comparative advantage: a response to Sherman Xie.” I wrote it in response to what I believe to be Prof. Xie’s misunderstanding of the principle of comparative advantage and of this principle’s role in the case for a policy of free trade.

Here are two slices:

1 | INTRODUCTION

Somebody or other is always trying to show that the Law of Comparative Cost is valid only under the simple assumptions upon which it was originally formulated. But we shall demonstrate that this is not so and that the simplifications merely help the exposition without affecting the essentials of the matter.

(Gottfried Haberler, 1936)

Haberler’s complaint about attempts to discredit the principle of comparative advantage (what Haberler called the ‘Law of Comparative Cost’) is as valid and relevant today as when he first issued it. Correctly perceived to be a key component of economists’ positive analysis of international trade – and, hence, central to economists’ normative case for free trade – the principle of comparative advantage has been regularly battered by those who wish to promote protectionist policies.

Just the past quarter‐century has witnessed the likes of Sir James Goldsmith (1994), Charles Schumer and Paul Craig Roberts (2004), Ha‐Joon Chang (2009), Ian Fletcher (2011), and Dani Rodrik (Bolotnikova, 2019), among others, assert that comparative advantage applies only under highly unrealistic circumstances and, thus, ought to be jettisoned from its central role in the economic analysis of trade. If so jettisoned, the economic case for free trade would indeed be weakened.

…..

Comparative advantage is not a theory in desperate search for real‐world relevance. Quite the contrary. The real world is, at each moment, filled with comparative advantages. The fact that explanations of the principle of comparative advantage typically use simplifying assumptions in order to make these explanations more tractable and understandable does not mean that this universal principle applies in reality only under these simplifying assumptions. Nor do theoretical demonstrations of the possibility that protectionist policies might yield net social benefits undermine the principle of comparative advantage or the case for free trade that is built upon it.

Dr Xie’s analysis boils down to a seeming attempt to clear the way for industrial policy, including protective tariffs, by discrediting economists’ identification of a central feature of the reality of specialisation and trade. But by failing to properly comprehend the nature of comparative advantage, as well as the role that economists’ understanding of this principle plays in their support for free trade, Xie’s attempted justification of industrial policy, and his case for scepticism of comparative advantage, must be counted as a failure.

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In my February 28th, 2006, column for the Pittsburgh Tribune-Review I continued my warning about official data on inflation.

(For some reason, all but two of my Trib columns from late December 2005 through early April 2006 are unavailable on-line. They appeared only in print. I thank the editors of the Trib for sending to me the texts of these columns.)

You can read the column beneath the fold.

Read the full post →

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Bruce Yandle explains that “freedom goes down when tariffs go up.

My intrepid Mercatus Center colleague Veronique de Rugy busts the myth that supporters of that great geyser of cronyism, the U.S. Export-Import Bank, are motivated by public spirit. A slice:

A quick look at the Ex-Im Bank’s Competitiveness Report reveals that it is extremely focused on what other export-credit agencies (ECAs) are doing, as if economic growth and jobs are the result of hand-to-hand combat between government-run dispensaries of subsidies. But they’re not. Just take a look at the hyperactive ECA in Italy. That country is the top OECD country, by volume of exports backed by ECA financing. Yet the Italian ECA’s hyperactivity doesn’t change the fact that Italy is an economic basket case. In fact, I’ll bet you that the same economic fallacies that lead to Italy being in such a bad shape also drive the belief that government subsidies can change the balance of trade or the level of exports in ways that grow the economy.

GMU Econ alum Will Luther argues that the optimal currency area is the globe.

David Henderson is not impressed with the economics displayed, in the pages of the New York Times, by two newly minted economics Nobel laureates.

Also not impressed by the economic research that was most recently awarded the Nobel Prize is Deirdre McCloskey.

George Will, favorably citing an amicus brief by the Cato Institute’s Ilya Shapiro and Josh Blackman, rightly argues for the court’s to rein in executive-branch discretion.

Arnold Kling isn’t convinced by the connection that Torben Iversen and David Soskice claim to find between prosperity and democracy.

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Quotation of the Day…

by Don Boudreaux on November 11, 2019

in Adam Smith, Crony Capitalism, The Economy, Trade

… is from page 316 of Dugald Stewart’s marvelous 1793 “Account of the Life and Writings of Adam Smith, L.L.D.,” as this series of lectures appears at the end of Liberty Fund’s 1982 collection of Smith’s Essays on Philosophical Subjects (a collection originally published by Cadell and Davies, in London, 1795):

The state of society, however, which at first arose from a singular combination of accidents, has been prolonged much beyond its natural period, by a false system of political economy, propagated by merchants and manufacturers; a class of individuals, whose interest is not always the same with that of the public, and whose professional knowledge gave them many advantages, more particularly in the infancy of this branch of science, in defending those opinions which they wished to encourage. By means of this system a new set of obstacles to the progress of national prosperity has been created. Those which arose from the disorders of the feudal ages, tended directly to disturb the internal arrangements of society, by obstructing the free circulation of labour and of stock, from employment to employment, and from place to place. The false system of political economy, which has been hitherto prevalent, as its professed object has been to regulate the commercial intercourse between different nations, has produced its effect in a way less direct and less manifest, but equally prejudicial to the states that have adopted it.

On this system, as it took its rise from the prejudices or rather from the interested views of mercantile speculators, Mr. Smith bestows the title of the Commercial or Mercantile System….

DBx: Pictured above is Stewart.

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… is from page 350 of George Will’s excellent 2019 book, The Conservative Sensibility::

Founding this republic on interests rather than virtues was prudent because interests, unlike virtues, are always with us. They are spontaneous; everyone has them. To imagine not having them is to imagine being something otherworldly. Virtues are difficult to acquire, which is why virtuousness is much rarer than interestedness. This is why prudent people seeking to fashion a firm founding for a polity under popular sovereignty will not count primarily on virtue.

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