John Mozena describes Adam Smith’s formula for economic development. A slice:
We know the book as Wealth of Nations, but that shorthand loses sight of the most important question. It was the “nature and causes” of national wealth that interested Smith, not the wealth itself. He wanted to know what makes some places wealthy, while others stay poor. Smith spent decades learning about real-world examples of wealthy places and poor places and tried to identify factors that caused each. He was fascinated how two places with roughly equal access to resources and raw materials could end up in wildly different states of prosperity or poverty.
He wouldn’t publish his full, two-volume opus until 1776, but as early as 1755, Smith had gotten to the point where he could share this insight with a lecture audience:
Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.
That’s as simple an explanation of the power of free markets and free people as you’re ever likely to find, and it’s just as valid today as it was then. It has played out around the world in case studies such as East versus West Germany, North versus South Korea, and the People’s Republic of China versus Taiwan or pre-reunification Hong Kong, where peoples divided by artificial borders ended up amidst poverty or prosperity depending on how tightly their government clung to economic control.
Smith didn’t need to wait until Karl Marx’s dumber ideas were tested to destruction. More than 160 years before the Bolshevik Revolution, he understood the inevitable result of government central planning:
All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.
While we tend to associate central planning with socialist governments, the examples Smith was working from that led him to this conclusion were practicing something far closer to what we’d today consider “industrial policy” or even “economic development.”
Perhaps the most famous example of this kind of economic model in Smith’s era was France under Jean-Baptiste Colbert, the finance minister under King Louis XIV. Colbert attempted to centrally manage France into a manufacturing, export-driven superpower through what we’d today call tariffs, tax abatements, industrial policy, and invasive regulations.
This “Colbertism” seemed to work for a while, especially from the king’s point of view, but ultimately failed, paving the way for the more free-market and entrepreneurial United Kingdom to overtake France as the economic superpower of Europe, and eventually the world. Its long-term costs also contributed to economic and societal dysfunction that culminated in the French Revolution a century later.
Mr. Biden also wants to raise the corporate rate to 28% from 21%. The 2017 tax reform slashed the rate to 21% from 35%. A National Bureau of Economic Research paper last year found that the corporate tax reform effectively paid for itself by boosting investment and raising worker wages.
So increasing the rate to 28% might result in lower tax revenue by reducing business investment and wages. A higher corporate rate is a disincentive to invest in the U.S. – which is the reason Republicans cut it. By the way, China’s corporate tax rate is 25%. But rest assured, Mr. Biden says he’s a capitalist and not anti-business.
My intrepid Mercatus Center colleague, Veronique de Rugy, writes realistically about tax hikes.
Writing in the Wall Street Journal, Phil Gramm and John Early decry the zombie-like existence of the myth of the gender pay gap. Three slices:
The pay gap is the natural economic result of choices men and women make, including how much or how little to work and which occupations to enter. The 84% figure, which is correct, is arrived at by dividing the average annual pay for women who work full-time all year by the average annual pay of men working full-time all year. But that comparison is misleading because full-time, year-round work is defined so broadly.
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The Census Bureau treats elementary and secondary teachers in a way that further distorts the wage comparison. On average teachers work only 38 weeks a year, but in its calculations, the Census Bureau pretends they work 52 weeks. This not only moves them into the year-round category with only about three-fourths of a year of work, but also reduces their average weekly earnings because their annual pay is divided by 52 rather than 38. Nearly three-fourths of elementary and secondary teachers are women.
Workers’ earning power increases as they gain more experience. On average, women over 40 have three less years of experience than men of the same age. The reason for this should be obvious: Many women drop out of the labor force at some point to rear children. That alone explains about a third of the observed pay gap.
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The claim that the gap reflects discrimination assumes that employers would pass up the chance to hire a woman at 84% of what they pay a man with the same training, skills and experience to do the same job. Since labor costs make up a significant share of total business costs, not only would employers have a strong incentive to hire women but discriminators would have a hard time staying in business. Market forces penalize discrimination and reward inclusion.
Nick Gillespie talks with Magatte Wade about Africa, foreign aid, and free markets.
Markets play an under-appreciated role in providing economic/technological order. The price system gathers the information required to allocate resources efficiently. The profit system governs the process of technological evolution, promoting useful innovations while discarding unwanted innovations and obsolete businesses.
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I see the market process as a way to sift through the ideas of producers in light of the preferences of individuals. It works in a decentralized way.
Government is one of the centralized forces that substitutes expert opinion for market information. Government faces the regulator’s calculation problem.
As Ludwig von Mises and Friedrich Hayek pointed out during the socialist calculation debate, central planners lack the information that is produced by markets. By over-riding market prices and substituting their own judgment, regulators incur the same loss of information.
