In my latest column for AIER, I celebrate the fact that sound economics works like acid to dissolve popular myths.  A slice:

To think like a good economist is not only to be forever skeptical of popular explanations of economic phenomena, it is also to be fearless at examining reality in ways that often strike non-economists as bizarre.

My favorite example of a seemingly bizarre but enormously revealing take on reality is my late colleague Gordon Tullock’s observation that if Congress really wants to reduce highway traffic fatalities to near zero, all it need do is to mandate that the steering column of each automobile be fitted with a sharp steel dagger pointed directly at the driver’s heart.

Sheer brilliance. Upon hearing Gordon’s suggestion, the typical person immediately asks incredulously, “What?”— a reaction that seconds later turns into the realization that Gordon is indisputably correct. No degree in economics is needed to understand how people would respond to this incentive.

Once someone understands Gordon’s insight, that person can easily be shown its true, practical importance, which is this: reality is more complex than it initially appears. If, for example, government mandates that automobiles be made safer to drive, then people are likely to drive less carefully. The decline in highway fatalities will thus be disappointingly small.

On its own, Gordon’s insight isn’t sufficient to show that government-mandated safety improvements are unjustified. But it is sufficient to warn us to avoid basing policy recommendations on our first impressions. Relentlessly issuing this warning, as simple and obvious as it sounds, is the single most important service economists can render to the public.

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Mutual Self-Impoverishment is Foolish

by Don Boudreaux on September 17, 2018

in Myths and Fallacies, Trade

Here’s a letter to a Cafe Hayek reader:

Mr. Larry Clark

Mr. Clark:

Thanks for your e-mail.

You’re correct: I do indeed believe that the United States government has no business “retaliating” against foreign protectionism with U.S. protectionism.

My first objection is based on ethics. It is unethical for Uncle Sam, in an effort to drum up additional sales for some Americans, to obstruct other Americans’ freedom to spend their incomes as they choose and in ways that everyone agrees to be otherwise acceptable. Even if the result of such “retaliation” would be a net gain to Americans collectively – measured in money or utility or both – I know of no principle of ethics that, in the ordinary course of affairs, excuses holding Smith economically hostage for the benefit of Jones.

My second objection is grounded in economics. Contrary to your (and Pres. Trump’s) assumption, foreign-government protectionism weakens rather than strengthens foreign economies that practice it. Why should we “retaliate” by weakening our own economy?

Suppose that your neighbor chooses to make all of his own clothing. He might do so because he gets unusual delight from being his own spinner, weaver, tailor, tanner, and cobbler. Or he might do so because he labors (literally!) under the misimpression that he thereby makes himself materially richer. Whatever his reason, his insistence on making his own clothing makes him materially poorer.

Do you believe that you’d make yourself richer by mimicking your neighbor’s self-impoverishing ways? Do you suppose that your net wealth over time would rise if your following in your neighbor’s ways somehow convinced him to abandon his policy of wardrobe self-sufficiency? I suspect not; you’d regard your copying your neighbor’s policy to be foolish.

And so if my suspicion is correct, you should see that it is equally foolish for Uncle Sam to impose greater self-sufficiency on Americans simply because other governments impose greater self-sufficiency on non-Americans.

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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Quotation of the Day…

by Don Boudreaux on September 17, 2018

in Legal Issues

… is from page 35 of my late colleague Gordon Tullock’s 1993 article “Public Choice: What I Hope for the Next Twenty-five Years,” as this article is reprinted in Virginia Political Economy, which is Vol. 1 of The Selected Works of Gordon Tullock (Charles K. Rowley, ed., 2004):

The famous constitutional cases that you read in courses in constitutional law in law schools are almost exclusively cases in which the Supreme Court laid down a rule that was not in the Constitution. In many cases the rule seems to be rather inconsistent with the rest of the Constitution although, of course, in other cases it simply extends them.

DBx: Happy Constitution Day, my fellow Americans.

Gordon’s observation above – with which I completely agree – gives me the opportunity to express once again the lament that conservatives, over the past several decades, have leapt recklessly from their justifiable objection to courts’ extending the meaning and reach of the Constitution to their unjustifiable objection to courts’ defending the meaning and reach of the Constitution. Fearful of courts’ practice of reading into the Constitution meaning that is not there, conservatives themselves unwittingly and ironically joined “progressives” in reading into the Constitution meaning that is not there – namely, that, with rare exception, electoral majorities ought not be disturbed by Constitutional constraints.

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Jeffery Tucker is correct: to work seriously and to good effect to change the world requires patience. A slice:

Change doesn’t usually come about through threats, screaming, signs, and intimidating demands, much less unhinged dreams of how you think the world should work. If the movements gathering around the country to demand this and that in front of the Supreme Court reduced their ambitions to immediate family and friends, they might discover the truth of what [Jordan] Peterson is teaching. Making a loud fuss can be satisfying but it doesn’t get the job done.

Marian Tupy explains that the enormous fall in workplace fatalities during the 20th century was overwhelmingly the result of market forces. A slice:

What accounts for those improvements [in workplace safety]? Labour union activism, including strikes and protests, has been traditionally credited with making the workplace safer. But improving working conditions cannot be divorced from the overall improvement in the standard of living. The massive economic expansion in the second half of the 19th century, in particular, tightened the labour market and workers started to gravitate toward more generous employers. It was only after a certain critical mass of workers achieved more tolerable working conditions that more general workplace regulations became imaginable and, more importantly, affordable.

In this video for Regulator Watch I discuss F.A. Hayek.

George Will found in Texas a Democrat who, by the standards of our low standards, is not excessively silly.

In the Wall Street Journal, Jason Willick profiles Nathan Glazer. A slice:

Mr. Glazer hoped the Northern model of race relations could spread to the South after civil rights. Instead, liberals began thinking about race in the North along Southern lines—an unfortunate turn, in Mr. Glazer’s view. “I kept on fighting the word ‘segregation’ of blacks in the North,” he says. Northern blacks “didn’t have money, they lived where they could.” But they “were not segregated in schools; they were concentrated because that’s where they were”—just as ethnic neighborhoods in midcentury New York had schools that were heavily Puerto Rican or Italian.

“The existence of government infrastructure deters or “crowds out” private investment” – so begins this excellent new post by Cato’s Chris Edwards.

Here’s Arnold Kling on books that have influenced him.

Eamonn Butler writes about public-choice economics.

Randy Simmons calls for much more humility from those who propose policies to ‘save’ the climate. A slice:

I doubt that speakers at the Global Climate Change Summit will talk about what I think is our best bet, which is to adapt and mitigate, rather than spend billions to prevent change. But that would be an unpopular position among the climate change activists and it is not popular with politicians or reporters. Proposals to adapt and mitigate are poorly received when talking about climate change. The poor reception might be because risk is something that people in general evaluate poorly. There is a lot of pressure on politicians to “do something.” Pick up any newspaper and there are letters to the editor from the old, young, informed, uninformed, frightened, and optimistic that something must be done. And so on.

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Quotation of the Day…

by Don Boudreaux on September 16, 2018

in Economics, Philosophy of Freedom

… is from page 49 of Eamonn Butler’s excellent 2018 monograph, An Introduction to Capitalism:

Self-interest means people pursuing their own aims, visions, purposes and ambitions, and not those imposed on them by others. They pursue those dreams not just for their individual benefit but for the benefit of their families and others whom they love and care about.

DBx: Indeed so.

It’s astonishing how often those who are hostile to free markets self-righteously insist that it is anti-social and “greedy” for Smith and Jones each to pursue ends that each chooses, while it is the height of pro-social magnanimity for Jones to force Smith to pursue ends that Jones chooses.

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Quotation of the Day…

by Don Boudreaux on September 15, 2018

in Trade

… is from page 591 of Douglas Irwin’s splendid 2017 book, Clashing Over Commerce (footnote deleted); Doug is here discussing mainly the Multifiber Arrangement which – as described by Wikipedia – “governed the world trade in textiles and garments from 1974 through 2004, imposing quotas on the amount developing countries could export to developed countries. It expired on 1 January 2005”:

The problem is that import restrictions were a costly and inefficient way of saving some jobs in the industry. The import restrictions were being used to save very poor jobs: average hourly earning in the apparel and non-rubber footwear industries were among the lowest in all of manufacturing. The consumer cost of protection per job saved, which measured the total loss to consumers divided by the number of jobs saved in the protected industry, was more than $100,000 for industries in which the average worker earned perhaps $12,000 annually.

DBx: Protectionists – alert only to what Deirdre McCloskey calls “Act One” of the economic drama – see only the jobs that are saved by trade restrictions, and (those jobs being real) conclude triumphantly that protectionism increases the wealth of the nation. Protectionists are too impatient or tendentious to sit for the entire drama; seeing only what they want to see, protectionists insist that what they want to see is all that there is to see.

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George Selgin clearly explains the controversy over TNB.

America has an imperfect record of resisting homegrown tyrants.

George Leef writes of business schools being invaded by “social justice” teachings.

Richard Ebeling is correct: macroeconomic aggregates hide more than they reveal.

Joe Carter adds his clear voice to those who lament how hurricanes stir up the broken-window fallacy. And read also Rick Newman.

Speaking of natural disasters, here’s Dan Mitchell’s guide to everything you need to know about FEMA and U.S. government disaster “relief.

They’re gated, but here are links to Geoff Brennan’s review, and to Jennifer Burns’s review, of Nancy MacLean’s fictional, vicious tale Democracy in Chains. (HT Andrew Farrant) (I will try to get ungated copies of these reviews to post here at Cafe Hayek.)

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With hurricane Florence now striking the U.S. east coast, the typical late-summer silly season in economics commentary is about to launch. And nothing is more silly than is the barrage of self-righteous condemnations we’ll hear of so-called “price gouging.” The letter below will be personalized and sent to each of the many politicians and pundits who will, predictably, use the occasion of this hurricane to expose his or her economic ignorance.

Mr. or Ms. [Politician or pundit who laments higher prices caused by natural disasters yet celebrates higher prices caused by tariffs]

Mr. or Ms. [name here]:

You are slamming merchants in the path of hurricane Florence for so-called “price gouging” – that is, for raising the prices they charge in response to the fact that this storm has reduced supplies of goods and services. Yet you are also on record as supporting tariffs. Can you explain this inconsistency?

Tariffs increase employment in protected industries only by making the tariffed goods more scarce. This greater scarcity prompts protected firms to raise the prices they charge. In turn, these higher prices better ensure not only the survival, but also the increased production, of the protected firms. Your support for tariffs implies that you applaud these consequences (even if you overlook the consequent reduced outputs and employment elsewhere in the economy).

Just like tariffs, natural disasters also make goods more scarce. Why do you, therefore, find it to be unethical and harmful for merchants to raise prices when the increase in scarcity is caused by natural disasters, but ethical and helpful for merchants to raise prices when the increase in scarcity is caused by tariffs? And why are you blind to the increase in outputs of firms whose prices rise because of natural disasters, while you see clearly the increase in outputs of firms whose prices rise because of tariffs?

Greater scarcity is either a blessing or it’s a curse. People of good sense understand that it’s always a curse, yet one made as tolerable as possible by prices rising to accurately reflect this greater scarcity. Like people of good sense, you recognize that greater scarcity is a curse if caused by nature. But unlike people of good sense you, bizarrely, think that greater scarcity is a blessing if caused by tariffs. Also unlike people of good sense, you do not understand that, regardless of the cause of greater scarcity, it is always good for prices to rise to reflect this accursed reality.

Why do you expect merchants to take advantage of the greater scarcities caused by tariffs (and applaud them for doing so), but are surprised when merchants take advantage of the greater scarcities caused by natural disasters (and criticize them for doing so)?

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 24 of Razeen Sally’s 1998 book, Classical Liberalism and International Economic Order:

The market order, more than any competing economic order or any realistically conceivable political order, facilitates and vastly expands the individual’s choice of means and ends by recourse to ‘exit’ – in economic terms, the consumer rejecting the products of one supplier in favor of those for another. As argued before, such individual choice allows for the powerful expression of individuality and diversity – ‘pursuing his own interest his own way’, as Adam Smith puts it, or ‘using own knowledge for own purposes’, according to Hayek. It is important to stress here that the freedom of the individual not only is concerned with the creation of material wealth, but also is more generally concerned with the freedom of expression in all aspects of life, political, economic, social and cultural, which is the essence of an ‘open’ society.

DBx: Sound principles should be generalized. Of course all sexual activity should be consensual; each of us has the right to say “no” whenever and however often we choose to the offer of sexual encounters, and this right ought to be universally respected. But the right to say “no” is a splendid thing and so it should to be celebrated and respected in all aspects of life rather than only in those aspects that are currently the obsession of the Politically Correct crowd. I support a much-expanded right to say “no” – for example, the low-skilled worker’s right say “no” to the state that demands that he or she refuse to work for less than the state-mandated minimum wage, and the right of each individual to say “no” to the state that demands that he or she subsidize politically powerful corporations.

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Tariffs are Man-made Disasters

by Don Boudreaux on September 13, 2018

in Prices, Trade

This e-mail is to a self-described “skeptical but curious reader” of my blog.

Mr. Chris Pham

Mr. Pham:

Thanks for your e-mail.

You ask if I’m inconsistent, on one hand, to support higher prices caused by natural disasters yet, on the other hand, to oppose higher prices caused by tariffs.

Your question is good, yet there’s no inconsistency. In the absence of government-imposed price ceilings and price floors, prices reflect prevailing supply scarcities and consumer demands. When, say, a hurricane strikes, nature simultaneously reduces available supplies and increases consumer demands. The result is higher prices.

In addition to telling the truth about the underlying economic misfortunes caused by the hurricane, these higher prices serve two important functions. First, the higher prices give consumers incentives not to use the now-scarcer goods and services as casually as they would if the prices were lower. Second, the higher prices both inform suppliers of the unusually intense ‘need’ of hurricane victims for more units of these goods and services, and give suppliers incentives to exert the extra effort necessary to bring additional supplies into the devastated region.

Higher prices caused by tariffs are completely different. I don’t oppose per se the higher prices caused by tariffs. Given the tariffs, prices should rise and should be allowed to rise. What I oppose are the tariffs themselves. Tariffs are not disasters inflicted on us by nature; they are disasters inflicted on us by fellow human beings (namely, those in government). Like natural disasters, tariffs make goods and services more scarce; but unlike natural disasters, tariffs are completely and easily avoidable. The increased scarcities caused by natural disasters are, well, natural; the increased scarcities caused by tariffs are artificial.

Put differently, it would – for obvious reasons – make no sense for anyone to rail against nature for its policy of routinely inflicting hurricanes, earthquakes, and other such disasters on humanity. Yet for reasons equally obvious, it does indeed make sense for people of goodwill to rail against government for its policy of routinely inflicting tariffs, import quotas, and other such disasters on humanity.

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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