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.)
… 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.
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.
… 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.
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
UPDATE: Commenting 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.
We human creatures are sufficiently intelligent to concoct stories to tell to ourselves that enable us to believe whatever it is we wish to believe. But our intelligence regularly falls short of enabling us to distinguish, amidst the many stories told, the relatively few sensible ones from the crowded swarm of stories that are wackadoodle. Most of the notions held dear and true about the operation of the economy, government, and society are not merely uninformed; they are completely preposterous.
In my column for the August 25th, 2010, edition of the Pittsburgh Tribune-Review I wrote about my habit of writing lots of letters-to-the-editor. You can read my column beneath the fold.
The collective goal of this new phase should be to avoid repeating the mistakes of the past. When faced in March with the choice between imposing limited shutdowns to buy hospitals time and increase capacity, and enormous, indefinite shutdowns that ignored societal and economic costs, most political leaders chose the latter. When faced in May and June with the choice between embracing policies that balanced Covid-19 prevention with the activities that give life meaning and policies that sowed distrust and stirred fierce passions over civil liberties, most political leaders chose the latter. We have the opportunity to choose differently this time.
I look forward to reading the papers in the Cato Institute’s new project “Pandemics and Policy.”
Pierre Lemieux exposes yet another instance of protectionists’ wacky (il)logic.
Scott Lincicome reports on the “China Shock” that helped U.S. higher education.
… is – on this Constitution Day in the United States – the Ninth Amendment to the U.S. Constitution:
The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.
… is from page 87 of the May 9th, 2020, draft of the important forthcoming monograph from Deirdre McCloskey and Alberto Mingardi, The Illiberal and Anti-Entrepreneurial State of Mariana Mazzucato (original emphasis):
But the State is not akin to a private company. It is from a very different kinship system, that of coercion rather than persuasion. It does not start a software company in a garage, like Bill Gates. It does not go out of business if its investors quit or if its customers do not turn up at the shop. The State’s shops in Cuba are mostly empty of product, but they remain open. The State can always tax, or inflate, or nudge, or imprison, so that the whole of the population is, like it or not, its investors and its customers.
DBx: Mariana Mazzucato would have her readers believe that the state losing money on a failed business venture is akin to Mr. Smith losing money on a failed business venture. After all, what both situations share is “failure.” But as Deirdre and Alberto note, what’s relevant is what the latter situation does not share with the former. In the latter situation Mr. Smith loses only his own money (or that of people who voluntarily entrust their own money to Smith). In the former situation, the state loses other people’s money; the state loses – more precisely, state officials lose – the money of people who never agreed to entrust their money to the state and its officials.
Forget the obviously much-worse incentives that exist when some people get to “invest” money coercively extracted from others compared to when people invest only their own money. Instead consider the simple ethics of the matter. It’s stunning and sad that Mazzucato sees Sam seizing money from Sue and Steve in order to “invest” it as being no different than Bill persuading Betty and Bianca to entrust their money to him for his proposed entrepreneurial venture.
By Dr. Mazzucato’s lights, if a thief steals Joe’s money and uses it to throw a party that no one attends, the situation differs in no meaningful way from that in which Joe spends only his own money to throw a party that no one attends. ‘Hey,’ Dr. Mazzucato seems to say, ‘because some private people throw parties that, on some occasions, no one attends, there’s then no good reason to criticize government officials who seize other-people’s money and use it to throw parties that, on some occasions, no one attends.’
Ethically, the problem is not with throwing parties that no one attends. Ethically, the problem is with throwing parties with money that neither belongs to the party-thrower nor was entrusted to the party-thrower by others voluntarily. Even if parties thrown with money seized from other people turn out generally to be better – that is, more well-attended – than parties thrown privately, throwing parties on other people’s dimes remains unethical. Decent and civilized people refuse to do or endorse such things.
And the ethics of the matter don’t change one bit if those who throw parties with money seized from others hold government offices.
