≡ Menu

On the Efficiency and Morality of Markets

In my latest column for AIER, I address some misconceptions about economics and liberalism. A slice:

Efficiency describes a relationship between means and ends. Efficiency says nothing whatsoever about the contents of the ends. If you want to drive this morning from Philadelphia to New York in the shortest period of time, a well-functioning GPS navigator will show you the appropriate route, one that would likely include a long stretch on I-95. If, in fact, there’s no alternative route that you could drive that would get you to New York more quickly, then the route displayed by your GPS device is efficient given your goal. But if your goal is instead to take in some beautiful scenery along the way, subject to getting to New York before nightfall, then the most-efficient route will be one that keeps you off of I-95 and in your automobile for several hours more than you’d spend if you took the fastest route.

To act efficiently is simply to act in that way that best enables you to achieve your goal, whatever that goal might be. And because you have many goals, to achieve a goal efficiently leaves you with as many as possible resources — money, time, energy — left over to pursue your other goals, whatever they might be. You want to drive from Philadelphia to NYC this morning as quickly as possible so that you have as much time as possible to prepare for a late-afternoon job interview in Manhattan. Had you erred and driven a route other than the shortest, some of the time and energy that you would have had available to prepare for your job interview gets wasted driving. That same amount of time and energy would not, however, have been wasted had your goal instead been to take in lots of beautiful scenery.

There is, in short, no way to identify an efficient course of action independently of the actor’s goals. Yet once acceptable goals are specified, along with alternative, available means of pursuing them, there can be no objection to choosing the efficient course. Legitimate objections might well be made to the goals. Goals might be justly classified as ill-advised or even immoral. But given any set of acceptable goals, it’s foolish to warn against pursuing them efficiently. And it is literally illogical to insist that some degree of efficiency in pursuit of these given goals should be sacrificed in order to achieve some other objective or to better promote some other outcome, for to so insist would be to treat the stipulated set of goals, not as given, but as changeable.

When we liberal economists praise the market for its efficiency, we praise nothing more — or less — than what we believe to be the free market’s singular success (although, of course, not perfection) at enabling people to achieve as many as possible of their peaceful goals. When we protest against government interventions such as protective tariffs, we ultimately do so not because these interventions result in lower real GDP or wages. Rather, we protest because some individuals’ ability to pursue their peaceful goals is artificially restricted in order to artificially enhance other individuals’ ability to pursue goals – which, in effect, means that the government uses its coercive power to conscript some individuals to serve the ends of other individuals. Because there’s no reason to think that such coerced engagements are mutually beneficial – indeed, because there’s every reason to think that such coerced engagements are “negative sum” – the classical-liberal economist concludes that, insofar as the goal of economic policy is maximum possible material welfare for everyone, interventions such as protectionism are inefficient because these interventions prevent the achievement of that goal.

Reasonable people can and do disagree about what are and aren’t acceptable goals. Among the virtues – so says the classical liberal – of the free market is that it minimizes the role of coercion in settling such disputes. Aware of his and everyone else’s intellectual puniness, the classical liberal is never certain enough of the merits of his own particular concrete values to believe that these should be imposed on others. He is content to allow other adults to pursue goals that he finds questionable or unattractive as long as these pursuits involve no violation of anyone else’s equal freedom to pursue their goals.

In this way, it might be said, classical liberalism is morally too ‘thin.’ It imposes no moral code beyond keeping your hands to yourself and your promises to others. It tolerates activities that many wise and good people correctly understand to be self-destructive. But first, we can never really be certain that an activity that appears to be without merit won’t eventually prove to be advantageous for society. Second and more importantly, the hard fact that different people have different substantive conceptions of the Good and the Bad means that the moment we call on government to enforce, or even just to give preference to, our preferred ‘thick’ moral code, we effectively grant permission to those whose ideas of morality differ from ours to impose on us their own ‘thick’ moral code if and when the government falls into their hands — as we would be wise to assume it eventually will.


Some Links

Ryan Bourne reports on the war on prices. A slice:

The long sweep of history, from ancient Egypt to modern America, shows us that price controls can’t quell inflation, because they don’t fundamentally change the money supply or aggregate production. What controls on market prices guarantee is inefficiency. They squelch the delicate coordination mechanism that prices and their movements provide to encourage economical action. Price ceilings, the most common incarnation, are thus a tried-and-tested recipe for shortages, declines in product quality, and black markets.

Speaking of the war on prices, John Stossel tells of the damage done by California’s minimum wage for workers at fast-food restaurants.

If you want to learn more about where prices come from and what roles they play, this opportunity is excellent.

And Brian Albrecht explains that its not price-only theory.

el gato malo corrects Paul Krugman.

Michael Strain shows that “the American dream is alive and well (and the problem of U.S. inequality greatly exaggerated).”

The Wall Street Journal‘s Editorial Board ponders the antitrust paradox of Lina Khan’s case against Amazon. A slice:

The Biden Administration’s antitrust policy is an intellectual and legal mess these days, and look no further than the Federal Trade Commission’s curious move last week to oppose booksellers that want to join its lawsuit against Amazon. FTC Chair Lina Khan doesn’t want the booksellers contradicting her arguments in court.

The American Booksellers Association (ABA) is seeking federal Judge John Chun’s permission to intervene in support of the FTC lawsuit. The independent bookseller group says Amazon unfairly leverages its size to negotiate better deals with publishers. As a result, Amazon sells books at low prices that they struggle to match. “We believe the facts we bring to the table will significantly bolster key arguments made by the FTC in their already strong and compelling case,” says ABA CEO Allison Hill.

Strange but true, Ms. Khan doesn’t want those allies. The booksellers’ intervention “would essentially create a ‘whole new suit’” because their claims are “different from those in this case,” the FTC wrote last week in a brief opposing the ABA’s request. Translation: Booksellers contradict the FTC’s arguments.

Start with their conflicting views of market competition. The FTC narrowly defines the market in which Amazon competes as “online super stores”—namely, Walmart, Target and eBay—to argue that it has monopoly power. But small booksellers rightly argue that they also compete with Amazon. As do thousands of other retailers.

Bryan Caplan has a better understanding of “luxury beliefs” than does Rob Henderson. A slice:

The fundamental flaw here, as I’ve explained, is that crazy political beliefs are a “luxury” that no one is too poor to buy. The vast majority of individuals, Harvard-Princeton-Yale grads included, have near-zero ability to change government policy. This is the foundation of the central thesis of my The Myth of the Rational Voter: Since the same policies prevail no matter what you believe, you can embrace even the most absurd political views, free of charge.

If bad policies are broadly popular, of course, the social consequences are often catastrophic. Popular belief that “National Socialism means peace” (an actual 1932 Nazi election slogan) eventually devastated Germany along with much of the known world. The point, however, is that Germans who disbelieved this slogan perished just like their most fanatical Nazi neighbors, so the marginal selfish cost of folly was still pretty much nothing.


Quotation of the Day…

… is from page 535 of the 1982 Liberty Fund version of the 1978 Oxford University Press edition of Adam Smith’s Lectures on Jurisprudence (spelling modernized):

In general, however, all taxes upon importation are hurtful in this respect, that they divert the industry of the country to an unnatural channel. The more stock there is employed in one way, there is the less to be employed in another.

DBx: This truth is simple, important, and undeniable. Nevertheless, this truth is routinely ignored by protectionists who ‘reason’ that ten peaches that the government arranges, through its trade restrictions, to be transferred from Ann to Bob – because this transfer obviously leaves Bob with more peaches – not only does not leave Ann with less fruit, but increases the total amount of fruit available to be enjoyed by both Bob and Ann.

Such is the ‘logic’ of protectionism: 10-3=15. Protectionists spend untold hours and amounts of effort denying or hiding this core feature of their doctrine. But at day’s end, economic protectionism boils down to this feature – to this bizzaro-land arithmetic.


Some Links

Art Carden reviews my GMU Econ colleague Bryan Caplan’s new graphic non-fiction book, Build, Baby, Build. A slice:

We don’t have as much housing as would be necessary to keep housing costs low because it’s illegal. Governments manufacture scarcity by wrapping building permissions in red tape. It’s absurd, for example, that so much space is zoned for single family detached housing. Many lots where apartment complexes and towers would fit are, unfortunately, limited to single family detached housing: 75 percent of residential land in LA, 77 percent on Portland, 79 percent in Chicago, 81 percent in Seattle, 84 percent in Charlotte, 94 percent in San Jose, and 38 percent in San Francisco. He states his point clearly on page 64, and I paraphrase: the status quo closes off some options, which wastes land, which makes all the options more expensive.

My Mercatus Center colleague Ben Klutsey explains that “America’s ‘non-crusaders’ personify the case for classical liberalism.” A slice:

Political liberalism ensures our freedom to participate in self-governance. Economic liberalism promotes the freedom to innovate, produce and exchange goods and services for our mutual benefit. Epistemic liberalism encourages freedom of thought and expression, as well as respectful exchange of conflicting ideas. And cultural liberalism encourages us to respect the choices of others so long as they don’t violate anyone else’s rights.

The Editorial Board of the Wall Street Journal reports that reality isn’t optional even in California and even when it comes to minimum wages.

As usual, Democrats don’t want to eat their own lousy cooking. Gov. Newsom this spring also signed legislation to carve out fast-food restaurants on government property from California’s new $20-an-hour fast-food minimum wage, which kicked in last month. Democrats don’t want the mandate interfering with government concession licenses.

California’s wage minimums are another illustration of how progressive mandates boomerang. Average weekly earnings for leisure and hospitality employees in California have declined by 2.6% over the last year owing to a steep drop in hours worked. By contrast, those average weekly earnings rose 3% nationwide, 3.2% in Florida and 5.2% in Texas.

Tom Savidge warns about the explosion in so-called “entitlements.”

GMU Econ’s Alex Tabarrok explains that the FDA is blocking your access to effective sunscreen. A slice:

Americans visiting beaches in France, Spain or Italy often do something that’s illegal back home: They purchase and use European sunscreens for better protection against sunburn and skin cancer. Many dermatologists argue that American sunscreens are far behind the scientific frontier, and they worry that the Food and Drug Administration’s decadeslong delay in approving new sunscreens for purchase in the U.S. is contributing to rising rates of skin cancer.

David Friedman asks if climate catastrophe passes the giggle test. Here’s his conclusion:

The claim that we have good reason to expect climate change on a scale that will produce not merely problems for some but catastrophe for many is one that no reasonable person should take seriously.


Quotation of the Day…

… is from pages 95-96 of the 1948 printing of the second edition (1935) of Lionel Robbins’s classic 1932 tract, An Essay on the Nature & Significance of Economic Science (original emphasis; footnote deleted):

Every first-year student since the days of Adam Smith has learnt to describe equilibrium in the distribution of particular grades of labour in terms of a tendency, not to the maximisation of money gains, but to the maximisation of net advantages in the various alternatives open.

DBx: I offer this quotation from an influential book written nearly a century ago by one of the 20th-century’s most prominent economists as evidence that economists do not assume that each person acting in the market seeks maximum monetary gains to the exclusion of the satisfaction of all possible non-monetary benefits. And yet pundits who wish to discredit economics continue to insist that economics is narrowly focused on the maximization of monetary gains and, thus, cannot be trusted as a guide to public policy in a world in which individuals, in their roles as producers, have multiple goals not all of which involve increased monetary income.

These critics of economics either are ignorant of economics or they choose to distort it. (I suspect that the former is more likely, in most cases.) Slaying an especially pathetic straw man, these critics of economics take pride in their intellectual victory and then proceed to recommend government policies – for example, protective tariffs – that they mistakenly suppose are immune to the criticisms offered by competent economists. These critics never stop to consider that if their straw man were real, then economics would predict that individuals would spend only enough money to keep themselves in peak condition as producers.

Ironically, if this straw man were real, economists would be leaders of the cult that insists that genuine consumption is not and ought not be among anyone’s activities. And Adam Smith would never have said what he said about consumption.


Some Links

Jon Miltimore praises the great Jimmy Lai – and the Hong Kong now being murdered by the thugs in Beijing.

Arnold Kling insightfully asks if an artificial-intelligence personal computer is an oxymoron.

Fiona Harrigan is correct: “Trump’s mass deportation plan is anti-American.” A slice:

Mass deportations would prompt American “business owners to cut back or start fewer new businesses, in some cases shifting their investments to less labor-intensive technologies and industries, while scaling back production to reflect the loss of consumers for their goods,” warned George Mason University economist Michael Clemens. “Prior episodes of mass deportations and exclusions” in U.S. history, Clemens continued, have reduced both employment and earnings for American workers “in the short run and long run.”

David Friedman reflects on what it’s like to be brought up by libertarian parents – in his case, brought up by Milton and Rose Friedman.

Alabama’s Attorney General, Steve Marshall, writing in the Wall Street Journal, explains that California’s “effort at setting national energy policy is misguided and unconstitutional.” A slice:

Interstate emissions and national energy policy are inherently federal issues that must be resolved under federal law by federal courts. Congress decides how to regulate national energy production and interstate emissions and has done so through laws setting standards for pipelines, power plants and other things that use oil and gas. Congress has never passed a law disrupting the balance of state and federal power in this area; nor has it empowered states to impose their own half-baked climate schemes on their neighbors.

GMU Econ alum Ninos Malek warns of the dangers of antitrust. A slice:

Antitrust legislation ostensibly exists to maintain a competitive market economy; however, it is often wielded as a governmental tool to punish success. Not surprisingly, antitrust laws are supported by less successful businesses against their more formidable rivals. In addition, the words control and power are often misused when referring to business activity. Companies like Google, Apple, Amazon, Meta, and Microsoft are often portrayed as monopolies that exercise control and power. However, this obscures the true essence of what competition really is. Trying to “kill off” one’s competitors is the goal of dominating a market. Attempting to prevent other companies from successfully negotiating deals with rival firms is not anti-competitive. In fact, these are clear examples of real competition. Power and control imply force; in the case of Google and other “tech monopolies,” they cannot force individuals to use their services. Unfortunately, this point is often ignored by standard economics textbooks and economists who label themselves as “free market”-oriented.

Libertarians booed Donald Trump because he isn’t libertarian.”

Eric Boehm isn’t swallowing Vivek Ramaswamy’s insistence that the nationalism peddled today by the likes of Donald Trump and Robert Lighthizer is nothing more than “national pride and identity.” (Also disagreeing with Ramaswamy is David Henderson – see the comments.)

Wall Street Journal columnist Allysia Finley wants to know what Fauci’s senior adviser, David Morens, was hiding. Two slices:

The Covid pandemic wasn’t government’s finest hour, not least because of a persistent lack of transparency. Emails released last week by the U.S. House reveal how Anthony Fauci’s former top adviser worked to keep the public in the dark and thwart investigations into Covid’s origins.


Dr. Morens noted in another email to Dr. [Gerald] Keusch: “I learned the tricks last year from an old friend, Marg Moore, who heads our FOIA office and also hates FOIAs.” FOIA productions are burdensome, but government officials are required by law to preserve their emails and to conduct government business on government accounts.

Dr. Morens didn’t, and his emails suggest Dr. Fauci might also have used private addresses in this manner. Dr. Morens wrote to Mr. [Peter] Daszak on April 21, 2021: “PS, i forgot to say there is no worry about FOIAs. I can either send stuff to Tony on his private gmail, or hand it to him at work or at his house. He is too smart to let colleagues send him stuff that could cause trouble.”

The next day, Dr. Morens wrote to Dr. Keusch: “If i had to bet, i would guess that beneath Tony’s macho I-am-not-worried reaction he really is concerned. And whatever the case he should be very concerned about what happened to Peter, to our research portfolio in an extremely important area, and to scientific independence.”

Daniel Hadas tweets: (HT Jay Bhattacharya)

Lockdown was a war on society, or a war of society on itself, because it attacked every bond that holds groups of people together, that makes them more than bio-mass sharing the same spaces.

Accordingly, it began by attacking the family, the earliest and tightest bond of all.


Quotation of the Day…

… is from page lix of the late John Chamberlain‘s Forward as it appears in the 2021 70th anniversary edition of William F. Buckley, Jr.’s, 1951 book, God and Man at Yale.

[T]here is no compulsion on the decent human being to be “with history” when history is driving headlong toward an abyss. The compulsion to be “with history” denies the moral freedom of man.


Some Links

David Friedman remembers his father. A slice:

Economists are supposed to think about the effect of incentives. The existence of the Federal Reserve, established to serve as a lender of last resort, meant that private banks believed it was no longer necessary for them to take expensive precautions against a run on the banks bringing down the banking system. When the run came the Fed did nothing about it and the system crashed. [Paul] Krugman’s implication that if there was no Fed to prevent it the Great Depression would still have happened is like claiming that if Lucy had not promised Charlie Brown that she would hold the football for him he still would have tried to kick it and gone head over heels.

GMU Scalia Law professor Todd Zywicki ponders the U.S. Supreme Court’s ruling in favor of the Consumer Financial Protection Bureau. A slice:

All the opinions in CFSA v. CFPB, including Alito’s dissent, miss this fundamental point. The primary problem with the CFPB’s structure is not that it represents Congress ceding its authority over the purse to an unaccountable agency (now, even more surreal, an executive agency that draws its funding from an independent agency, i.e., the Federal Reserve, with no formal appropriation from Congress). The problem is that Congress in 2010 ceded the authority of future Congresses over the CFPB’s budget.

John Phelan helps to bust the ridiculous myth of the so-called “pink tax.”

The secret ballot meant victory for Mercedes-Benz workers.” A slice:

The secret ballot is a game-changer. Last week it protected thousands of Alabama auto workers from being forced into union representation against their wishes.

Workers at two Mercedes-Benz factories voted in an election ending May 17 against joining the United Auto Workers, one of the nation’s largest unions. Nearly 4,700 of about 5,100 eligible employees cast ballots, rejecting the union by a margin of 56% to 44%. The outcome surprised many observers because in early April, about 70% of the factory workers petitioned the National Labor Relations Board for an election. That made it seem like unionization was all but guaranteed.

But it wasn’t, for a simple reason. The UAW obtained the 70% by asking workers to sign cards indicating their support for unionization—the same cards used for a process called “card check.” The card-check method for union organizing is infamous for encouraging the intimidation and harassment of workers hesitant to join a union by other workers who are pro-union. When your co-workers can see your stance on unionization, you have an incentive to go along with the loudest voices, which typically belong to activists. Union organizers have even been known to visit workers’ homes to urge them to unionize. The use of cards also allows unions to present workers with a one-sided story, which undercuts workers’ ability to make informed decisions.

Judge Glock argues that “‘Neopopulism’ is overhyped.” (And read also GMU Econ alum Dominic Pino.)

Pierre Lemieux is having none of the widespread nonsense that Chinese ‘leaders’ and their mandarin underlings, wielding economic-planning schemes, are a mighty force for bringing widespread prosperity to the Chinese people.

Wall Street Journal columnist Daniel Henninger argues that “the president is using the U.S. Treasury like a 1920s party boss’s safe.” A slice:

But has election politics ever seen spending on such a massive scale for the sole purpose of producing votes? Let’s depart from the cuddlier labels for this phenomenon and call it what it is: Biden’s bribes. Mr. Biden is using the U.S. Treasury the way a 1920s party boss would use the safe behind his desk.

Most polls have indicated for months that the 81-year-old president’s support among younger voters is soft. Worse, their turnout is relatively poor in most elections.

Voilà, the Biden student-loan debt-forgiveness plan. Questions of moral hazard aside, one may argue that with more than 40 million Americans owing about $1.7 trillion in federal and private student loans, some measure of forgiveness could be defended by a Democratic president.

But the Biden proposal tripped the what-the-heck-is-going-on alarm. It totaled $430 billion in write-offs for about 30 million borrowers. No surprise, the Supreme Court ruled that Mr. Biden overstepped his presidential spending authority. Chief Justice John Roberts wrote that the administration’s description of the plan as a “modification” was true “only in the same sense that the French Revolution ‘modified’ the status of the French nobility.”

D.G. Hart reflects on Jerry Seinfeld’s reflections on work and love.

Inspired by Mother’s Day, GMU Econ alum Liya Palagashvili offered some sound advice.


Quotation of the Day…

… is from page 321 of the 1936 English-language edition (translated from German by Alfred Stonier and Frederic Benham) of Gottfried Haberler’s magnificent 1933 work, The Theory of International Trade: With Its Application to Commercial Policy:

The decisive argument against pure export bounties, stated by Adam Smith and in a still better form by Ricardo, is the same as that against tariffs. Export bounties divert trade away from the lines indicated by comparative costs. Such bounties are a gift to the foreigner. Either they induce the economy to produce goods which could be obtained at less expense from abroad in exchange for others, or they induce subsidized industries to expand their production beyond the point at which (owing to diminishing returns) it ceases, from the rational standpoint of comparative costs, to be profitable.

DBx: Indeed so. Yet this reality is lost on the many politicians and pundits who assert that Beijing, by subsidizing Chinese producers who export to the United States, is harming Americans as it enriches China. In reality, such Chinese subsidies put America first and, simultaneously, make the Chinese people poorer than they would otherwise be, and the Chinese economy less productive.

And it’s insane that these complaining politicians and pundits in the U.S. demand that, to counter China’s self-damaging efforts, we Americans should inflict similar, or perhaps even worse, damage on ourselves.

Encountering the yammering or writing about trade by any randomly selected politician or pundit is akin to encountering yammering or writing by people who treat it as axiomatic that up is down, left is right, hot is cold, less is more, small is big, and 10-3=15. In the bizarro alternative universe of the protectionist, Jones, by wasting ever more of his resources and energy, enriches himself both absolutely and relatively to Smith, and at the exclusive expense of Smith – and Smith’s only hope of reversing this fate is to mimic (or, better, outdo) Jones at wasting ever more of his resources.


Averages Can Mislead

Here’s a letter to the Wall Street Journal:


Donald Luskin argues compellingly that the recent influx of immigrants is buoying the U.S. economy (“Open Borders Produced the Biden Economic Boom,” May 24). But his case is even stronger than he supposes. He’s not quite correct to write that “it is likely the case that the new foreign-born adults are diluting the productivity of the U.S. economy by arriving with few skills and with language and education deficits.”

The addition to the labor force of a worker whose skills are below average ‘dilutes’ the economy’s productivity only in the same way that the arrival of an infant child into a family ‘dilutes’ the height of the family members. What is ‘diluted’ is only the family’s average height; the infant’s arrival causes no individual’s height to fall. Mom and dad don’t shrink and big sister continues to grow. The family’s total height increases.

And so it is with the arrival of lower-skilled workers. They do pull down average worker productivity, but this statistical reality does not imply that the productivity of existing workers or of the U.S. economy falls. Indeed, by complementing existing workers, more low-skilled workers can raise the productivity of their higher-skilled counterparts, and of the economy at large, even as the measured average worker productivity declines.

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