Russell Roberts's Blog, page 1464

Was Adam Smith the 18th-century's Paul Krugman?

Here's a letter to The American Conservative (HT Ross Mohan):

Reviewing Nicholas Phillipson's new biography of Adam Smith, George Scialabba portrays Smith as having been less a proto-Milton Friedman and more a proto-Paul Krugman ("Das Capitalist," March).  His portrait, alas, bears no resemblance to the real Adam Smith.

For example, while Mr. Scialabba is correct that "Smith roundly mistrusted businessmen," such mistrust is a hallmark of market-oriented economics rather than evidence of its rejection.  Precisely because many business people are untrustworthy, competitive markets – free of government-granted privileges (such as the tariffs endorsed by Mr. Scialabba) – are necessary to give consumers and workers maximum possible scope to avoid dealing with business people who are either unethical or incompetent (or both).  Or so market-oriented scholars have argued for generations.

An even more farcical piece of evidence offered by Mr. Scialabba to support his notion that Smith was skeptical of free markets is Scaiabba's observation that "Smith was firmly on the side of the workers, a robust partisan of full employment and high wages."  Indeed he was.  (Mr. Scialabba apparently believes that the ranks of market-oriented economists are full of scholars who advocate unemployment and low wages.)  Smith sided with workers against government-protected monopolies and high tariffs, arguing that what he called "the obvious and simple system of natural liberty" would best promote the welfare of ordinary men and women far more surely than that welfare can be promoted by the prescriptions, proscriptions, taxes, and other intrusions into the market of the "man of system."

Sincerely,

Donald J. Boudreaux

This essay by Scialabba is stuffed with many more errors, misinterpretations, and half-truths than can be mentioned in a single letter.  Curious readers might seek them out and list these errors in the comments section.

Irwin vs. Fletcher on China

Here's a letter to The Huffington Post:

Ian Fletcher writes that "What progress against poverty has occurred in the world in recent decades has not been due to free trade, but due to the embrace of mercantilism and industrial policy by some poor nations….  According to the World Bank, the entire net global decline in the number of people living in poverty since 1981 has been in mercantilist China, where free trade is spurned" ("Free Trade Isn't Helping World Poverty," March 19)

Overlook the unbelievable claim, allegedly taken from World Bank data (for which Mr. Fletcher offers neither link nor citation), that China alone is responsible for the past 30 years of the globe's net decline in number of people living in poverty.  Focus instead on Mr. Fletcher's assertion that China's recent growth is due to that country's embrace of mercantilism and its "spurning" of free trade.  This assertion is simply wrong.

While it's true that China – like nearly every other nation on earth – has in place a plethora of growth-inhibiting mercantilist policies, the overwhelming economic story in China over the past 33 years is the liberalization of its markets – a liberalization that includes dramatic reductions in trade barriers.  Here's economist Douglas Irwin: "In December 1978 China began to end its policy of economic isolation.  Under the leadership of Deng Xiaopeng, the government decollectivized agriculture, allowed private entities to trade, and permitted foreign investment….  In 1992 the weighted average tariff [in China] on manufactured goods was over 45 percent.  Since China joined the WTO in 2001, the country's average tariff will eventually fall to less than 7 percent."*

Mr. Fletcher's suggestion that China has been moving toward mercantilism and making trade less free is contradicted by the facts.

Sincerely,

Donald J. Boudreaux

* Douglas A. Irwin, Free Trade Under Fire, 3rd ed. (Princeton University Press, 2009), pp. 181-182.

Proclaimed Intentions are Not Results

Here's a letter to the Los Angeles Times:

Ariel Dorfman wants President Obama, during his trip to Chile, to visit Salvador Allende's grave as a means of paying respect to the late Marxist leader that nation ("Ghosts of Chile," March 20).

Such a visit would be improper.  The fact that Allende was ousted in a coup that resulted in the brutal regime of Augusto Pinochet doesn't justify the Left's deification of Allende; he, too, was a thieving brute.  Not only did Allende nationalize (i.e., steal) many of Chile's industries; not only did his irresponsible monetary policy result in annual inflation rates as high as 140 percent (i.e., more theft of assets, this time from ordinary citizens who saw the return to their work effort diminish daily); and not only did he praise and cozy up to Cuba's murderous Fidel Castro – Allende also violated, with reprehensible actions, Chile's constitution.

Harvard-trained economist Jose Pinera, brother of Chile's current president, notes that, while Allende was popularly elected, "his government lost its democratic character by repeatedly violating the Constitution."  And just weeks before Allende was deposed, Chile's democratically elected Chamber of Deputies drew up "a list of twenty legal and constitutional violations of President Allende's government (including illegal detentions and torture)."*

The fact that Allende justified his thuggish lawlessness with pseudo-intellectual Marxist gibberish hardly makes him or his regime praiseworthy.

Sincerely,

Donald J. Boudreaux

* Jose Pinera, "How Chile Was Saved," Navigator, Sept. 2003.

St. Augustine Anticipates H.L. Mencken and Walter Williams

After reading my quotation of Mencken, my friend G.M. Curtis pointed out that the "Notable & Quotable" in today's Wall Street Journal is this germane passage from St. Augustine's City of God:

Justice being taken away, then, what are kingdoms but great robberies? For what are robberies themselves, but little kingdoms? The band itself is made up of men; it is ruled by the authority of a prince, it is knit together by the pact of the confederacy; the booty is divided by the law agreed on. If, by the admittance of abandoned men, this evil increases to such a degree that it holds places, fixes abodes, takes possession of cities, and subdues peoples, it assumes the more plainly the name of a kingdom, because the reality is now manifestly conferred on it, not by the removal of covetousness, but by the addition of impunity. Indeed, that was an apt and true reply which was given to Alexander the Great by a pirate who had been seized. For when that king had asked the man what he meant by keeping hostile possession of the sea, he answered with bold pride, "What thou meanest by seizing the whole earth; but because I do it with a petty ship, I am called a robber, whilst thou who dost it with a great fleet art styled emperor."

For A More Poetic Explanation, Read Wilfred Owen's Most Famous Poem

Here's a letter to the Washington Post:

Linda Graff writes "As my son prepares for officer training this year, I feel torn: Can I stand in the middle of the street?  I want to support the troops.  I support my son.  I did not support the invasion of Iraq and do not believe we will 'win' in Afghanistan.  Is there now a possibility that he could be sent to Libya?  What I learned from my father and several presidents was a healthy disbelief in the idea that our government will do what is right.  I would like to trust the generals and the president to know what is best for our nation and national security, but I am afraid that too many young people have died in vain.  Maybe I am the coward" ("My father the soldier, my son the soldier," March 19).

Ms. Graff is no coward.  She's wise.  And the wisest part of her understands what was so well explained by H.L. Mencken:

"It seems to be difficult if not impossible for human beings to avoid thinking of government as mystical entity with a nature and a history all its own.  It constitutes for them a creature somehow interposed between themselves and the great flow of cosmic events, and they look to it to think for them and to protect them.  In democratic countries it is theoretically their agent, but there seems to be a strong tendency to convert the presumably free citizen into its agent, or at all events, its client.  This exalted view of its scope, character, powers and autonomy is fundamentally false.  A government at bottom is nothing more than a group of men, and as a practical matter most of them are inferior men….  Yet these nonentities, by the intellectual laziness of men in general, have come to a degree of puissance in the world that is unchallenged by that of any other group.  Their fiats, however preposterous, are generally obeyed as a matter of duty, they are assumed to have a  kind of wisdom that is superior to ordinary wisdom, and the lives of multitudes are willingly sacrificed in their interest."*

Indeed and sadly so.

Sincerely,

Donald J. Boudreaux

* H.L.Mencken, Minority Report (Baltimore: Johns Hopkins University Press, 1997 [1956]), pp. 56-57.

An Anniversary of A Regrettable Movement

2011 is the 200th anniversary of Luddism.  Hopefully one day protectionism will be embraced by no more than the small number of historically uninformed or deleriously romantic persons who today embrace Luddism.

Krugman's Forgotten History

Here's a letter to the New York Times:

Paul Krugman writes that "In early 2009, John Boehner, now the speaker of the House, was widely and rightly mocked for declaring that since families were suffering, the government should tighten its own belt.  That's Herbert Hoover economics, and it's as wrong now as it was in the 1930s" ("The Forgotten Millions," March 2011).  Whether this economics is wrong or right, Mr. Krugman is wrong to repeat the myth that Herbert Hoover reduced – or even reined in the growth of – government spending.

From 1924 to 1928 Uncle Sam's real per-capita spending fell by 4.3 percent.  But this spending rose significantly during Hoover's term in the White House.  From 1928 to 1929 real per-capita spending rose by 4.7 percent; from 1929-30 by 8.0 percent; from 1930-31 by 17.2 percent; and from 1931-32 by 15.8 percent.  (This spending rose by another 28.4 percent from 1932-33.)  The overall increase in real per-capita spending from 1928 to 1932 was a whopping 53.5 percent.  Real per-capita spending excluding outlays for defense and interest on government debt increased during Hoover's years in office even more dramatically, skyrocketing by 130 percent.*

Belt-tightening indeed! – of a sort. By bloating Uncle Sam's girth, Herbert Hoover's policies caused Uncle Sam's belly to press more tightly against his belt.  Before long, that belt's buckle broke.

Sincerely,

Donald J. Boudreaux

* Randall G. Holcombe, "The Growth of the Federal Government in the 1920s," Cato Journal, Vol. 16, Fall 1996.

DeLong vs Cowen

Brad DeLong and Tyler Cowen are having an argument.

Brad argues that because interest rates are low in the US, the government should borrow more money:

Otherwise, the purpose of a market is to tell you what things are valuable so that you can make more of them. Right now with the decline in interest rates on government debt the market is telling us that government debt is more valuable than it was last week. So we should make more government debt–pull spending forward from the future into the present and push taxes back from the present into the future.

Tyler responds:

In my view, a low rate of interest on Treasury securities indicates a high chance that the investors will be paid back. That is all it means. It is not a market signal that the government output should be produced.

Brad answers and says yes, it is a signal that the government should produce more:

If the price of something–in this case, government production–goes down, as it has in the aftermath of the earthquake-and-tsunami as U.S. Treasury interest rates have dropped by 10 basis points, shouldn't you buy more of it? Yes.

It is true that the world is poorer as a result of the earthquake–poorer by perhaps $100 billion as a result of all the destruction. And a poorer world should buy less of everything. But the U.S. is not poorer: we should not buy less of anything.

So it is very clear to me that the U.S. government should spend more.

Another Keynesian mystery for me. A lower interest rate doesn't mean that government production is less expensive. It means government borrowing is less expensive. The cost of government spending is foregone private spending. Maybe the government should be bigger. Maybe we don't have enough interstate highways or Mars manned space missions while everything else is at just the right level. So government should be bigger. The only way this makes sense is the Keynesian idea that when there is excess capacity, government spending is a free lunch–there is no foregone private output or if there is, the lower interest rate says there's less foregone private output.

Think about it at the personal level. Does a lower price of debt mean I should borrow more? Leave further beyond my means? It does not. It might mean I should make a lower down payment and borrow more for my car or house. But even that doesn't automatically follow.

Brad disagrees:

Yes, to the extent that mortgage rates drop, people can afford to buy bigger and more expensive houses.

And they should do so.

To argue that people should not respond to falling mortgage rates by buying bigger houses is simply silly, like arguing that people should respond to falling computer prices by buying fewer and simpler computers or should respond to falling clothes prices by making more of their own garments.

It's true it would be silly to respond to lower clothes prices by making more of your own garments. But it would be equally silly always to buy more shirts when they get cheaper. It's nice to have more shirts than fewer shirts. I like choice. But it would be a mistake to keep expanding my stock of shirts just because the price of shirts goes down. At some point, even though shirts are cheaper and more choice costs me less than it did before, the benefits of additional choice is offset by the cost of the other things I give up when I acquire another shirt.

When interest rates are lower, borrowing to finance public spending is cheaper. So what? It's also cheaper to finance future private consumption. Brad is implicitly arguing that another bridge or road or bigger payments to farmers or expanding the US military doesn't mean less of something else. He also seems to forget that the world is an uncertain place. Buy the bigger house  or spend another trillion and you may find yourself in an unexpected situation that is not pleasant.

by Russ Roberts

 

Who wrote it?

Many of you receive this blog via the RSS feed or via a daily email in the morning. We have not been able to figure out how WordPress can identify the author of a post in the RSS feed. So at least for a while, if we remember, we're going to put the author's at the bottom of each post so you can figure out who wrote what. We'll see how it works.

by Russ Roberts

No Fetish for Manufacturing

Speaking of manufacturing fetishes, I just discovered this superb essay – from Steve Fritzinger, writing for the BBC – on this very topic.  The following quotation is especially worthy [image error] "The value of a dollar's worth of cloth is exactly the same as a dollar's worth of web design.  One dollar."