Russell Roberts's Blog, page 110

Quotation of the Day…

(Don Boudreaux)

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… is from page 166 of Deirdre McCloskey’s superb 2022 volume, Beyond Positivism, Behaviorism, and Neoinstitutionalism in Economics:

Deep in left-wing thought about the economy, and in a good deal of right-wing thought, too, is the premise, as Isaiah Berlin once put it with a sneer, that government can accomplish whatever it rationally proposes to do. As has been often observed about leftists even as sweet as John Rawls, the left has no theory of the behavior of the government. It assumes that the government is a perfect expression of the will of The People.

DBx: Yes.

And nothing is more unscientific – indeed, more mystical – than is this still-commonplace practice of most Progressives, and also of very many conservatives, to analyze the economy and society, and to offer policy recommendations, using such a juvenile ‘understanding’ of the state. Yet such an ‘understanding’ of the state permeates the work even of some Nobel laureates in economics – laureates such as Paul Krugman and Joseph Stiglitz. This ‘understanding’ of the state is inseparable also from the work of pundits too many to count, but these include E.J. Dionne, Katrina vanden Heuvel, and Michael Hiltzik (to name a mere three).

That these professors and pundits think of themselves as scientific – and are widely regarded as being especially intelligent, thoughtful, and scientific – testifies to the strength of the cult of democratically rubber-stamped coercion.

One Must Really Look Beyond the Hype

(Don Boudreaux)

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The opinion piece by Nobel-laureate economist Michael Spence to which this letter is a response could have been written by a clever political-science sophomore yet to be exposed to economics. The naiveté throughout is surprising and, of course, disappointing.

Editor, Project Syndicate

Editor:

Praising the CHIPS and Science Act and other statutes recently enacted by Congress, Nobel-laureate economist Michael Spence disappointingly fails to look beyond the press releases issued for these statutes by their sponsors  (“Make America Invest Again,” August 11).

Most egregiously – and as the title of his piece accurately reveals – Prof. Spence swallows the claim that investment in America is waning and can be invigorated only by government subsidies. Yet as Scott Lincicome and Alfredo Carrillo Obregon explain, investment in the U.S. in semiconductor production has in recent years been growing despite languishing federal subsidies:

[T]here has been even more chipmaking investment dedicated to the U.S. market, even as federal subsidies have languished. Construction is now underway at four major U.S. facilities and will continue with or without subsidies – something even Intel reluctantly acknowledged when it delayed the groundbreaking ceremony on its much‐​ballyhooed Ohio facility to protest congressional inaction. This is because, as numerous experts have explained over the last year, there are real economic and geopolitical reasons to invest in additional U.S. semiconductor production – no federal subsidies needed.

Also steadily increasing in America has been private-sector R&D spending more generally, despite little change in federal government support. In 2018 St. Louis Fed economists Ana Maria Santacreu and Heting Zhu documented that inflation-adjusted R&D spending by the private sector steadily rose from 1953 through 2016 even though federal R&D spending was mostly flat. As for what’s happened since 2016, I calculate that in 2019 – on the eve of covid – inflation-adjusted R&D spending (at least in the physical sciences, the life sciences, and engineering) was 38 percent higher than it was only three years earlier.*

Sponsors of major legislation increasingly excel at falsely advertising their merchandise. It’s dismaying that a Nobel-laureate economist fell for their deceit.

Sincerely,
Donald J. Boudreaux
Professor of Economics
anda
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Nominal dollar figures are given here for “Expenses for Research and Development In The Physical, Engineering, and Life Sciences, All Establishments, Employer Firms.” I converted the figures for inflation using this on-line calculator.

Bonus Quotation of the Day…

(Don Boudreaux)

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… is from page 35 of the late Gertrude Himmelfarb’s learned 1995 volume, The De-Moralization of Society:

But it is not so easy to dismiss the overwhelming testimony of workers who believed that work, if not sacred, was essential not only to their sustenance but to their self-respect. They could, in fact, have had sustenance without work – in the poorhouse, or on the dole, or from charity. But that would have put them in a condition of “dependency,” which was repellant to the respectable working classes, for it was precisely their “independence” that defined their “respectability.”

DBx: Victorian-era workers’ strong work-ethic is very admirable.

It is civilized and appropriate – indeed, for a full life today, inescapable – to be dependent upon the voluntary cooperation of other human beings. Billions of them today, and nearly all of them strangers to us.

You and I depend upon farmers who grow cotton and carrots, software engineers who design computer programs to improve the accuracy of the process of exploring for petroleum, actuaries who help to make insurance affordable, truck drivers who deliver capital goods and consumer goods to market, hedge-fund managers whose efforts improve the allocation of capital, researchers at pharmaceutical firms who improve our health care … this list would run literally to thousands of pages.

The voluntary exchanges of the market weave us all together into a vast web of mutual dependence. It’s a dependence that is productive because – given each person’s right to say ‘no’ – no one gets something for nothing. No one extracts from others. For every market participant’s gain there is a gain enjoyed by one or more other market participants. No one lives at anyone else’s expense. Each person achieves dignity and prosperity by helping countless of his or her fellow human beings achieve their own dignity and prosperity.

A categorically different kind of dependence is that which is arranged by state coercion – the most obvious example being the welfare state.

Whatever your opinion of the practical merits of the welfare state, this fact cannot be denied: The welfare state creates a dependence of welfare recipients, not upon their ability to entice their fellow human beings to engage productively with them, but upon the state’s ability and willingness to forcibly transfer resources. This dependence should be – as it was to most Victorian-era workers – a source of embarrassment to those who endure it. The gains gotten by people who are so dependent are matched, not by gains to fellow human beings, but by losses to fellow human beings.

Such a condition of dependence does not, contrary to myriad assertions by welfare-state proponents and apologists, bring dignity to the dependents.

Another form of undignified dependence is created by protectionism. This dependence is camouflaged as dignified, but it’s just a ruse. Workers whose particular jobs and pay exist only because the state threatens to cage consumers who would purchase, without paying punitive taxes, goods and services produced by people working abroad depend for their income on state coercion no less than do recipients of overt welfare. Protected ‘workers’ are nearly as parasitic on their fellow citizens as are welfare recipients. This reality is one that many of today’s “national conservatives” miss when they make what they naively suppose to be a compelling case for protectionism.

…..

I’m quite aware that my above use of the term “parasitic” strikes many people as excessive. And I’m aware that philosophers for centuries have offered all manner of clever explanations for how a welfare state is not – or need not be – really parasitic. All such explanations that come close to making sense are ones that portray the welfare state as government-run mutual insurance: I agree today, while employed, to contribute to a fund to pay welfare to my fellow citizens who are currently down and out because these fellow citizens agree to do the same for me if and when I’m down and out. Lovely.

But precisely because there is truly a compelling logic and excellent utility to true mutual-aid arrangements, there’s no reason these cannot be arranged and carry out privately, without the use of coercion. Indeed, as historian David Beito has documented, such private arrangements actually did exist and worked remarkably well.

Jones is not a parasite on Smith and Williams if all three actually agree to mutually ensure each other. What makes the welfare state parasitic is that it survives not through voluntary agreement but because of coercion. Ditto for protectionism.

Some Links

(Don Boudreaux)

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Arnold Kling writes with his usual insight and wisdom about economics and the efforts of economists to better understand reality. (HT my intrepid Mercatus Center colleague Veronique de Rugy) Two slices:

Patterns of specialization and trade are constantly being reshaped. There is no fixed relationship between inputs and outputs.

Capital, labor, and output are highly heterogeneous. In my view, the attempt to describe an aggregate production function is futile.

…..

Today, pretty much everyone who writes on economic policy starts from the assumption that markets are misguided and government regulation is better. Sometimes, economists point out specific problems with non-economists’ regulatory proposals. But more fundamental, Austrian-inflected critiques go unappreciated.

(DBx: The work of the late Ludwig Lachmann on the heterogeneity of capital remains under-appreciated. See, for example, Lachmann’s insightful May 1947 Economica paper, “Complementarity and Substitution in the Theory of Capital.” See also Lachmann’s 1956 book, Capital and Its Structure.)

David Henderson insightfully analyzes the Orwellian-named “Inflation Reduction Act” – a loathsome piece of legislation more accurately titled “The Shrink the Economy Act.” A slice:

Consider one example: the subsidies to electric vehicles. Ignore the ironic fact that because of the domestic-content constraints the senators put on for those producers to qualify, few EVs would qualify for the subsidies. Even if all EVs did qualify, what are the odds that EVs are the way to go? Have the senators been outside lately where they would see electric bicycles whizzing by, bicycles that can be powered with a fraction of the coal or natural gas used to produce electricity for electric cars and trucks? Yet those bicycles will not get the subsidies. Nor should they. No one should get the subsidies.

And what about the hated N-word: nuclear? Nuclear power produces zero carbon emissions and is incredibly safe as well as being relatively expensive. But improved lower-cost technologies that are starting to appear in some states, combined with a tax on carbon production, might just make nuclear power the least-cost way of producing electricity in at least some parts of the country where non-nuclear electric power is relatively expensive.

We just don’t know. Neither do the Senate Democrats. The great virtue of a free market is that it can cause tens of thousands of people to pursue promising technologies and promising ways to reduce carbon at their own expense. The market leads to discovery. Politicians, by contrast, think they know “the” answer, and they’re always wrong.

Kevin Rudd, writing in the Wall Street Journal, is correct: Xi Jinping’s reach exceeds his grasp. A slice:

China’s market-based reform program stalled in 2015 and has generally been in reverse since 2017, with the notable exception of the financial sector. The party has reasserted control over a previously rampant private sector, eroding business confidence and private fixed capital investment. This intervention has taken many forms. Communist Party committees have taken management roles at private firms. The party has forced companies into mixed equity arrangements with state-owned enterprises. A “rectification” campaign has reaffirmed that the courts exist to serve the party, including in commercial cases.

Desmond Lachman explains that the Chinese state’s crushing of the Chinese economy is bad news for the world.

Reason‘s Matt Welch wisely counsels us not to believe the White House’s intellectually insulting assurances about who the newly fueled IRS will target.

Fauci’s egomania is disturbing.

Ramesh Thakur reports on the mugging of New Zealand by covid reality.

Alas, covid derangement still is on the loose in some places, including Philadelphia. A slice:

Pre-kindergarten pupils aged 3 to 5 will have to mask up all year, according to a letter to parents Friday from the School District of Philadelphia, Fox News reported.

In response to a silly CBS News report that childhood obesity is being fueled by climate change (!), Jay Bhattacharya tweets:

Public health bureaucrats closed playgrounds, limited kid’s sports, and made a virtue of extended screen time. They closed schools and PE classes. In some places this went on for years. Maybe this headline writer lives in Florida or Sweden and missed the lockdowns?

Quotation of the Day…

(Don Boudreaux)

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… is from page 257 of Thomas Sowell’s magnificent 1995 book, The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy:

In short, the built-in bias of the media is to show us what happens right under our noses, with little or no regard to what that has cost elsewhere.

Bonus Quotation of the Day…

(Don Boudreaux)

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… is from pages 139-140 of Scott Atlas’s important 2021 book, A Plague Upon Our House: My Fight at the Trump White House to Stop COVID From Destroying America (original emphasis):

Even allowing for a non-expert level of knowledge, the [Trump White House] Task Force doctors somehow ignored the evidence indicating the very low risk from this infection for the overwhelming majority of people. Birx even emphasized at the Task Force that this infection was extremely dangerous exactly because it was so commonly asymptomatic or so mild that it went unnoticed – as if it would be less dangerous if it were more deadly.

Adam Smith Must Not Be Conscripted Into the Ranks of the National Conservatives

(Don Boudreaux)

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Here’s a letter to a young and quite fervent “national conservative”:

Mr. F__:

Thanks for your e-mail in response to my recent letter sent to National Review.

You write that I “miss Nate Hochman’s meaning when he said that Adam Smith’s argument for freedom of trade depends on investors preferring to invest domestically.” On your interpretation, Mr. Hochman “only pointed out that Smith understood [that] in his day with free trade the invisible hand was around to stop self-interested investors from abandoning the national economy.  This was completely different from today where hyper-globalization incentivizes investors to invest wherever they can.  The destructive results of this breakdown of the invisible hand are all around us, especially our persistent trade deficits.”

If your reading of Mr. Hochman’s interpretation of Adam Smith is correct then he – Mr. Hochman – is even more wrong about Smith and about trade than I take him to be.

It’s true that investment today flows more easily across the globe than it did in Smith’s day, which is perhaps what you mean by the vague and loaded term “hyper-globalization.” But it’s not true that America today is suffering from this global investment or that Smith, were he still alive, would worry about whatever differences separate global investment flows today from those of his era.

Remember, with his use in The Wealth of Nations of the term “invisible hand,” Smith meant to assure his readers that, contrary to mercantilist fears, a policy of free trade would not result in the home country being denied adequate amounts of capital. And so the U.S. trade deficits that you point to as evidence of the “breakdown of the invisible hand” are emphatically no such thing. Each year when the U.S. runs a trade deficit is a year when the U.S. is a net recipient of global investment funds. The reality, then, is that the invisible hand today, far from being broken down, is working for the home economy of us Americans especially well.

And that Smith wouldn’t have cared about increases since his time in the ease and attractiveness of investing abroad is made clear by the fact that he described the very notion of the balance of trade as “absurd.”

Here’s the bottom line: Regardless of what Mr. Hochman meant in his interpretation of Adam Smith, the context in which Smith used the term “invisible hand” combines with Smith’s larger case for a policy of unilateral free trade to make clear that Smith believed that the interests of the people of the home country are best and naturally promoted by a policy of free trade – that is, by a policy under which each investor, each business person, and each consumer is left free by government to make his or her commercial decisions in ways that each of these persons believe will best promote his or her own individual interests.

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

Some Links

(Don Boudreaux)

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The Wall Street Journal‘s Editorial Board reports on the economically destructive impact of the British government’s ‘green’ policies. Two slices:

There are catastrophes and calamities, and then there’s what’s happening in the United Kingdom’s energy market. Reports this week point to spiraling costs for households and businesses this winter, pushing millions of Britons closer to poverty. It’s a steep price for climate alarmism.

…..

Britain’s energy emergency is a growing threat to an economy expected to be among the developed world’s worst performers next year. It’s a political emergency for the Tories, who are in the process of replacing Mr. Johnson. Former Chancellor Rishi Sunak and Foreign Secretary Liz Truss both say they support fracking and lower taxes on energy bills, although both still pay lip service to net zero. There’s little evidence environmentally minded voters give the Tories credit for net zero and ample evidence voters of all persuasions blame the party for the energy-price crisis.

So much for those who say conservative parties need to adopt the left’s climate agenda to court younger voters. Net zero has turned the Tories into the party that is impoverishing Britain. As steep a price as the party may one day pay at the polls for this blunder, households already are paying dearly today.

Charlie Cooke has no patience for those who waffle with respect to free speech.

Eric Boehm analyzes the Orwellian-named “Inflation Reduction Act.” A slice:

Tax increases on corporations get passed along from the board room table to the kitchen table in a variety of ways: lower pay for workers, higher prices for consumers, and smaller investment returns for shareholders.

Emma Camp rightly calls for pro-freedom actions rather than just pro-freedom talk. Here’s her conclusion:

To Democrats and Republicans alike, it seems the only kind of freedom worth protecting is the freedom to proceed with their own political agendas. While it is all well and good for Democrats to speak of the “freedom” to have abortions or marry a same-sex partner, or for Republicans to advocate our “liberty” to own guns or spurn restrictive COVID-19 regulations, we should withhold our praise until politicians on both sides start embracing the freedom to make decisions that fall outside their ideological lines.

Martin Gurri unpacks the “elite panic of 2022.” Two slices:

On April 18, U.S. District Judge Kathryn Kimball Mizelle struck down the federal requirement for wearing surgical masks on airplanes, in airports, and while riding mass transit. Online videos showed passengers and airline staff ripping off their masks and celebrating in mid-flight. Given the accumulated frustration of two years of pandemic travel, the reaction was understandable.

Far more remarkable was the vehemence of those opposed to the ruling. Judge Mizelle was unfit for office, they said. She was too young, at 35; she was unelected; she was a single, unrepresentative voice. Worst of all, she was an “activist Trump judge” and thus branded with the mark of the beast. Rescinding government policy—the kind of thing that American judges engage in with abandon, and usually to progressive cheers—in this instance was condemned as a usurpation of the powers of the executive branch.

Judge Mizelle had crashed an exclusive party reserved for people of higher caste. “The CDC has the capability, through a large number of trained epidemiologists, scientists, to be able to make projections and make recommendations,” said Anthony Fauci, bureaucratic czar of all things Covid-19. “Far more than a judge with no experience in public health.”

That was the heart of the matter. Fauci embodied a bureaucracy and political class that, with the active support of the media, had converted the public’s fear of infection into a principle of elite authority. Under this principle, only trained scientists can make projections and recommendations. The writ of government stretched as far as the boundaries of scientific truth—and those boundaries were, of course, determined by government agencies. It wasn’t just a question of specific policies like lockdowns and vaccine mandates. At stake was the restoration of the public’s habit of obedience that had gone missing during the Trump years.

By spring of this year, however, the public had shed most of its fears, as the in-flight celebrations demonstrated. Legally and psychologically, the state of emergency couldn’t last forever. Judge Mizelle merely officiated at the burial rites over the carcass of an improvised authority. The disproportion between a ruling about masks and the existential howl of the opposition can be explained in terms of the loss of elite control—and it wasn’t the only recent example of such panic.

…..

Much of the gloom reflected the changed political climate. Starting with the onset of Covid-19 in the spring of 2020, elite fortunes took an almost magical turn. The pandemic frightened the public into docility. The Black Lives Matter riots enshrined racial doctrines that demanded constant state interference as not only legitimate but mandatory in every corner of American culture. The malevolent Trump went down to defeat, and the presidency passed to Biden, a hollow man easily led by the progressive zealots around him. The Senate flipped Democratic.

This victory parade culminated on January 6, 2021, when Trump’s outrageous behavior led to his expulsion from social media and the shunning by polite society of anything that reeked of “insurgent” Republicanism. By Inauguration Day, the elites and their identitarian ideas seemed to stand unchallenged.

That was never quite true—and the moment quickly passed. The burden of incumbency has crushed the Democrats. With Trump gone, they have nothing of substance to rally around. President Biden has staggered from disaster to disaster and is touching calamitous levels of unpopularity. Biden inherited peace and a recovering economy but must now deal with inflation, shortages, and a major war in Europe.

Arnold Kling explains why he’s no fan of Donald Trump. A slice:

Debbie Lerman writes,

Q: Dr. Birx, you were officially hired as White House Coronavirus Response Coordinator on February 27, 2020. Who offered you the job?

A: My friend Matt [Pottinger], the deputy national security advisor (p. 32)

Pointer from Donald Boudreaux. In fact, if you read Lerman’s whole piece, you find that Dr. Birx was friends with Pottinger’s wife. And check out the Scott Atlas book, which I could not bear to finish because it was so depressing.

I cannot get too worked up about Fauci and Birx. They are who they are. The ultimate blame rests with the man who gave them their outsized roles in the pandemic. That man is Donald Trump.

The pandemic was barely underway when some of us sensed something wrong in the bureaucracy. I was not the only one, but please note that as early as March 19 of 2000 [DBx: Arnold here obviously means 2020], I wrote Fire the Peacetime Bureaucrats. President Trump never got around to doing that.

(DBx: Although I have finished reading Scott Atlas’s excellent book, I understand why Arnold couldn’t bear to finish reading it; what Atlas reveals is unrelentingly depressing. Deborah Birx is exposed as being utterly – indeed, almost comically – incompetent, with Fauci coming off as not much better. And of course above all, politics trumps all.)

Debbie Lerman continues to expose the incompetence of, and dangers posed by, Deborah Birx.

The Editorial Board of the Wall Street Journal decries the political manipulation, for covidian purposes, of social media. Two slices:

Social-media platforms have often censored conservatives, and sometimes in tandem with political pressure to do so. Now comes hard evidence that Twitter booted blogger Alex Berenson after White House officials privately complained about him to Twitter employees.

Mr. Berenson has been a vocal critic of government lockdowns, mask mandates and mRNA vaccines. In our view he’s been too quick to dismiss the vaccine benefits and overstated their potential risks, which has hurt his credibility. But that’s no worse than the powers-that-be who have overstated their benefits and been too quick to dismiss their potential, if small, risks.

…..

Twitter didn’t ban Mr. Berenson until August, but its employees were clearly under White House pressure to do so. This pressure probably increased over the summer of 2021 as the Delta variant surged and waning vaccine efficacy stymied Mr. Biden’s promise to shut down the virus.

Twitter is a private company. But evidence of a direct connection between White House pressure and Twitter censorship bolsters the argument that social-media platforms can be sued as “state actors” for restricting speech in violation of the First Amendment. Courts have been reluctant, and properly so, to allow such lawsuits to proceed without evidence linking specific demands from government officials to censorship.

Mr. Berenson has now shown that White House officials sought to conscript the platform into silencing him, and perhaps others who don’t toe the White House line on Covid. Have Biden officials pressured other platforms to censor users who express contrarian views on other topics such as climate change?

The government’s response to Covid shows the importance of robust debate, since much of the official wisdom has turned out to be wrong and did great harm. Think lockdowns. A condominium of Big Tech and government is itself a hazard to public health and democracy.

Rupa Subramanya writes that “A lawsuit has shown Canada’s travel vaccine mandate had little to do with science and everything to do with politics.” Two slices:

Trudeau always maintained his government’s Covid policies were based on the science and the latest evidence. Yet, his shifting rhetoric, before and after his election call, tells a different tale. Thanks to a civil lawsuit against the travel mandate by two British immigrants, we’ve now seen inside the guts of part of Trudeau’s Covid machinery, and it’s become abundantly clear that it has little if anything to do with science and everything to do with politics.

From recently released court documents, which I broke in a story for Bari Weiss’s Common Sense, show us senior government bureaucrats scrambling to find a scientific rationale for the travel mandate mere days before it was due to come into force. We’ve had the opportunity to see into the inner workings of Trudeau’s vaccine machinery thanks to two British immigrants, Shaun Rickard and Karl Harrison, who filed a civil suit against the Trudeau government in the Federal Court. Thanks to their efforts, and that of their attorney, Sam Presvelos, the affidavits, testimonies, and cross-examination of key government witnesses are now in the public domain.

These documents clearly show us that the bureaucrat charged with holding the pen, under repeated cross-examination, refused to go into details on who ordered the mandate, citing, “Cabinet confidentiality”. Exactly why the rationale for a public health mandate should be so confidential raises the disturbing possibility that there really was no rationale at all. It’s evident that a political decision was taken by Trudeau and his cabinet to go ahead with the mandates, and the hapless bureaucrats were charged with coming up with some rationale, any credible rationale after the fact.

As it happens, the bureaucrat in charge of crafting one of the world’s “strongest vaccination mandates in the world”, according to the bureaucrat herself and Trudeau, has an undergraduate degree in English literature and self-evidently didn’t have the scientific knowledge to take a call. Neither were there any doctors, epidemiologists and scientists on her team, a secretive panel whose membership is nowhere published, and which rates a passing mention on the government’s website.

…..

The tale of Trudeau’s vaccine mandates has ramifications far outside Canada. The world over, governments have invoked draconian powers, heretofore only used in wartime, to control and regulate their people and curtain fundamental individual liberties, such as the right to gather or the right to mobility. Everywhere, people are told by their governments, much as Trudeau told Canadians, we’re so sorry, we hate to restrict your freedoms, but we’re just following the science and the evidence. We know, in the case of Canada’s travel mandate, that this is simply false. In the Canadian case, Trudeau’s ministers have made it clear that the suspended mandates could come back, as, indeed, could Covid-based restrictions the world over.

J.D. Haltigan tweets: (HT Jay Bhattacharya)

The continuation of mask theater is an absolute disgrace.

Quotation of the Day…

(Don Boudreaux)

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… is from page 411 of the late, great Armen Alchian‘s 1955 paper, co-authored by Reuben Kessel, “How the Government Gains From Inflation,” as this paper is reprinted in The Collected Works of Armen A. Alchian (2006), Volume 1 (“Choice and Cost Under Uncertainty”; Daniel K. Benjamin, ed.):

However, if the government extracts resources from the community, in particular capital goods, and destroys them, the ratio of capital to labor will decrease, and the total national income will also decrease…. In this event, there will be a decrease in real wage rates resulting from the changed marginal productivity of labor.

DBx: Indeed so.

Keep this reality in mind whenever you hear self-styled champions of working men and women call for higher taxes on “the rich.” Most of the wealth of the rich in market-oriented economies is not in the form of mountains of consumption goodies stashed in the great rooms of gaudy mansions; this wealth is invested in companies. And so if Jeff Bezos is slammed with increased tax liabilities, he‘s unlikely to trade in his private jet in order to fly commercially, or to reduce his consumption of premier cru wines as he drinks more Kendall-Jackson. He‘ll pay most or all of his increased taxes by reducing his investments.

Less investment means less capital available to complement workers‘ abilities. The result is worker productivity being lower than otherwise and, hence, real wages being lower than otherwise.

The economics here isn‘t, as they say, rocket science. But it‘s true. Yet too many of the geniuses holding political power, as well as those issuing counsel to holders of political power, consistently ignore the economics here. These geniuses, with the insight of first-graders – and the ethics of thieves – imagine higher-taxed Bezos and Musk gorging themselves less on frivolous consumption goodies as ordinary people finally get more than the stale crumbs that happen to fall from the gilded terraces of billionaires‘ palaces.

It‘s such an economically and historically false image.

On Smith’s Use in The Wealth of Nations of “Invisible Hand”

(Don Boudreaux)

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Here’s a letter to National Review:

Editor:

In “Conservative Economics Can’t Ignore the National Interest” (August 4), Nate Hochman seriously misinterprets Adam Smith by asserting that “Smith’s point about the invisible hand was contingent on the capitalist’s ‘preferring the support of domestic to that of foreign industry.’”

It’s true that Smith’s lone use in The Wealth of Nations of the famous term “invisible hand” occurs when Smith notes that the self-interested investor is led by an invisible hand to support domestic industry. But Smith here was debunking the fallacious mercantilist superstition that adequate amounts of investment in home-country industries can be secured only through the use of protective tariffs. Smith observed that one of the advantages of investing in the home country is a better ability to supervise those investments (compared to investments far away). This observation was meant to bolster his argument that mercantilists err when they assert that failure to protect domestic firms from foreign competition will leave the domestic economy with an inadequate stock of capital.

Contrary to Mr. Hochman’s implication, Smith did not argue that the validity of a policy of free trade is contingent upon investors operating with some sort of special solicitation for, or patriotic interest in, the domestic economy. Mr. Hochman’s misinterpretation of Smith is highly ironic given that Smith’s core purpose, in the chapter from which Mr. Hochman quotes, was precisely to explain that under a policy of free trade no special solicitation or concern for the domestic economy is required for it to become as prosperous as possible.

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