Russell Roberts's Blog, page 1412

Quotation of the Day…

… is from page 70 of the 1978 edition of the late Ludwig Lachmann's 1956 book Capital and Its Structure; here, Lachmann is discussing Keynes's cramped and inadequate understanding of the role of capital markets, including the role of stock exchanges:

Keynes not merely failed to realize the real nature of the specific problem he was facing, viz. intertemporal price inconsistency expressing itself in divergent expectations.  He was probably unaware of the importance, perhaps even of the existence, of the class of problems of which this is one: problems of the transmission of knowledge.  There is very little evidence that he grasped the economic function of the market as an institution through which people exchange knowledge with each other.

Thomas Sowell on the Great Depression

Thomas Sowell argues that "there was no Great Depression until AFTER politicians started intervening in the economy."

There was a stock market crash in October 1929 and unemployment shot up to 9 percent — for one month. Then unemployment started drifting back down until it was 6.3 percent in June 1930, when the first major federal intervention took place.

That was the Smoot-Hawley tariff bill, which more than a thousand economists across the country pleaded with Congress and President Hoover not to enact. But then, as now, politicians decided that they had to "do something."

Within 6 months, unemployment hit double digits. Then, as now, when "doing something" made things worse, many felt that the answer was to do something more.

Both President Hoover and President Roosevelt did more — and more, and more. Unemployment remained in double digits for the entire remainder of the decade. Indeed, unemployment topped 20 percent and remained there for 35 months, stretching from the Hoover administration into the Roosevelt administration.

Sowell is correct generally – correct that government interventions and other failures put the "Great" in the "Great Depression" – but he is incorrect in his suggestion that Smoot-Hawley did much to spark such a major increase in unemployment.  Smoot-Hawley certainly didn't help matters, and likely hurt just a bit.  But as Doug Irwin argues in his new book Peddling Protectionism, foreign trade was too small a part of America's economy in 1930 to have enabled Smoot-Hawley – as ill-advised as it unquestionably was – to be a major factor in deepening and prolonging the Great Depression.

A far worse government failure than Smoot-Hawley was the "Great Contraction" – the Fed allowing the money supply to fall by one-third between 1930 and 1933.  And, following this calamity, an even more destructive curse descended on America: FDR's New Dealing hyperactivity in which his Trusted Brains cartelized industries, destroyed agricultural products, attempted artificially to raise prices (in the wake of the Great Contraction, no less!), launched entirely new regulatory agencies headed either by Geniuses or by cronies, spent and ran up government debt orgiastically, pumped labor unions with more arbitrary power to behave monopolistically, and demonized entrepreneurs and industrialists.

The regime uncertainty unleashed by this earthquake of arrogance ought to be – but, sadly, isn't – a sufficient warning to avoid such mistakes today.

Some Links

The great Bruce Yandle – Emeritus Professor of Economics at Clemson University – is interviewed in the current issue of the Richmond Fed's Region Focus.  One of the finest privileges of my life was being Bruce's colleague at Clemson for five wonderful years.

Here's a video contest for you creative students!

Carpe Diem's Mark Perry explains that trade is always balanced.

The editors at the Wall Street Journal rightly criticize Mitt Romney for his economically uninformed – but obviously politically motivated – criticisms of Beijing's monetary policy.  Listening to politicians address economic issues is like listening to astrologers talk about physics of the formation of stars.

The September 2011 issue of The Freeman is, as is typical of each issue of this superb publication edited by Sheldon Richman, loaded with great material.  At the risk of unintentionally insulting some authors, though, I want especially to recommend the powerful essay by Cato's David Boaz on the outlandish and evil 'war on drugs,' and the essay by Freeman columnist and historian Burt Folsom on the Great Depression.

Over at The Independent Review, Julio Cole tells of the intellectual journey of Nobel laureate writer Mario Vargas Llosa.

My buddy Wayne Crews, of the Competitive Enterprise Institute, explains how we can transcend post- 9/11 insecurity here in our homeland.

My GMU colleague (formerly in the Dep't. of Economics, but now over in the School of Public Policy) Jack High explains, in this letter in the Washington Post, why we ought to be skeptical of policy solutions proposed by Keynesians.

And George Will discusses "our floundering 'federal family'."

Bryan Caplan on Law

I agree – with an important caveat – with Bryan Caplan's post on his refusal to respect "the law" simply because it's the law.  My caveat – one pointed out by some commenters to Bryan's post – is that law is not at all the same thing as legislation.  Law deserves far more respect (although, still, not respect given mindlessly) than does legislation; indeed, legislation, by its very nature, is frequently used to break the law.  For example, Jim Crow legislation in the late 19th-century American south broke the law that effectively enforced racial desegregation on streetcars.

One of the greatest dangers unleashed by modern language is the treatment of "legislation" and "law" as synonyms for each other – and, hence, the bestowal on legislation of the genuine respect that is due to law.

This theme, explained well in the first volume of Hayek's Law, Legislation, and Liberty, is the subject of this talk that I gave last October to the GMU Economics Society and the Future of Freedom Foundation.

And here's a short letter that I wrote a few years ago on this topic.

Quotation of the Day…

… is Art. 1, Sec. 8 of the United States Constitution:

Section. 8.The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow Money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

To establish Post Offices and post Roads;

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

To constitute Tribunals inferior to the supreme Court;

To define and punish Piracies and Felonies committed on the high Seas, and Offences against the Law of Nations;

To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;

To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

To provide and maintain a Navy;

To make Rules for the Government and Regulation of the land and naval Forces;

To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;

To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;

To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the Acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings; — And

To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

Two Sides to Those Political 'Transactions'

Here's a letter to the New York Times:

Ridiculing those of us who would rely more on voluntary charitable giving – rather than on forced extractions from taxpayers – to care for people in need, Paul Krugman asserts that "compassion is out of fashion" ("Free to Die," Sept. 16).

Even granting the dubious assumption that a people are compassionate only if they tax themselves and spend the proceeds through government on good deeds, it doesn't follow that programs such as Obamacare, Medicare, and Social Security are, in fact, monuments of compassion.

Insofar as such programs are enacted and survive because of political support they receive from their beneficiaries, they are creatures not of compassion but of greed: 'give me what you've got because I want it and I'm willing to vote to ensure that the officials in charge of prisons and the police will use those instruments to take from you what I want for myself.'

Does anyone doubt that at least some of the support for such programs comes, not from generous people wishing to give, but instead from greedy people itching to take?

Sincerely,

Donald J. Boudreaux

Stupid in America

Tomorrow (Saturday) evening at 10:00pm EDT, a new special report by the great John Stossel will be telecast on the Fox News channel.  The special, on the state of education in America, is summarized  here by Stossel himself.

I'll be watching (and thanking my stars that my parents – as strapped for wealth as they were – sent me to Catholic schools rather than to the institutions misnamed "public schools" in New Orleans's suburbs).

Go Ford

Our family has two Hondas. My first car was a Honda. But I've owned a Ford Explorer–it was our first kid car before we got a minivan. I tend to buy Hondas because I like the way they feel and drive and when I try out American cars, particularly GM or Chrysler, they have a boxier less interesting interior and I don't like the way they drive. That's just me.

But after the bailouts of GM and Chrysler, I said to myself that I should try a Ford sometime again and I'd never buy a GM or Chrysler product. At least for a long while. It's not much of a pledge because as I said, I've never bought one. So no big deal.

But I was shocked to see the following commercial. It is very rare to see a major American corporation take a pro–real-capitalism and anti-crony-capitalism stand and use it in their marketing. I saw this the first time on TV and it blew me away. As Milton Friedman liked to point out, business leaders tend to be against capitalism. It makes them compete and they sometimes fail. Business prefers being coddled and protected. Anyway, watch the ad if you haven't seen it.

 

Quotation of the Day…

… is from pages 7-8 of James Buchanan's essay "Economics and Its Scientific Neighbors" (reprinted as Chapter 1 of Jim's Moral Science and Moral Order, Vol. 17 of The Collected Works of James M. Buchanan):

Contrast this [the development of game theory] with the Keynesian and post-Keynesian attention on macro-economics and macro-economic models.  Does this "theory" provide the economist with an additional set of tools?  Does it extend the application of the central principles of the discipline?  Unfortunately, the answer must be negative here.  Precisely because it has divorced itself from the central proposition relating to human behavior, modern macro-economic theory is really no theory at all.  It has evolved, and remains, a set of models for the workings of economic aggregates, models that have little predictive value.  Lord Keynes, of course, recognized this, and it was for this reason that he tried to tie his theoretical structure to basic psychological propensities.  These propensities, which were designed to replace the more simple neoclassical behavioral propositions, have never fulfilled the role that Keynes must have hoped for them, and the modern model builders seem largely to leave even these out of account.

The State Isn't Us

Washington Post columnist Eugene Robinson reports Ron Paul's answer to a question about taxpayers' responsibility for paying for medical care to keep alive a man who irresponsibly refused to buy health insurance for himself:

in Paul's vision of America, "our neighbors, our friends, our churches" would choose to assume the man's care – with government bearing no responsibility and playing no role.

Robinson is appalled by Paul, accusing him of being part of an "immoral" movement that would interpret the Constitution's Preamble to read "We the unconnected individuals who couldn't care less about one another . . . ."

I don't get it.  Why is Robinson's call to force Smith to care for Jones an exhibition of compassion, while Paul's endorsement of arrangements under which Smith voluntarily cares for Jones a display of heartless indifference to the plight of others?

Reasonable people can disagree over whether or not voluntary charity would be sufficient.  It's a mistake, however, to classify coerced 'giving' as "compassion," and downright bizarre to accuse those of us who would rely more upon genuine compassion – evidenced by people giving from the goodness of their hearts rather than from a desire to avoid imprisonment – as endorsing a society without compassion.

….

And a follow-up point: To the extent that government programs such as Medicare and Social Security were enacted, and survive, because the beneficiaries of these programs support them, then even on Eugene Robinson's own premises they cannot be said to reflect "compassion."  Quite the opposite.  To that extent these programs reflect greed: give me what you have because I want it and I'm willing to hire people with jail cells and guns to take from you what I want for myself.