Russell Roberts's Blog, page 1469
March 10, 2011
Questions for Ian Fletcher
9 March 2011
Mr. Ian Fletcher
Dear Ian:
In your latest essay at the Huffington Post you state that sensible protectionists, like you, want to use tariffs to protect, not "dying" industries, but, rather, only industries of "the future" ("Protectionism of the Past vs. Protectionism of the Future," March 9).
Who but a backwoods bumpkin doesn't cheer for the industries of "the future"? But I've some questions.
- How do we identify such industries? Who'll be charged with determining which industries are of "the future" and which industries are sufficiently passé as to be left unshielded from being slain by foreign competition – slayings that you suppose are the inevitable fate of all U.S. industries not protected by high U.S. tariffs?
- What criteria will be used to distinguished industries of "the future" from what I suppose we ought to call "industries of the past"? Rates of return on capital? Total volume of employment? Productivity per worker? Rates of annual productivity growth? Rates of export growth? Total amount of corporate taxes paid? The technological 'wow-ness' of the industries' outputs – as determined, perhaps, by the amount of positive attention such outputs receive from nightly network news reporters? The age of the industry?
Oh! I know the answer: total dollar amount of contributions to the political campaigns of incumbent members of Congress and the U.S. presidency.
- In those inescapable instances when dispassionate minds, such as yours, discover that protection was mistakenly given to industries of the past that were for a time wrongly thought to be industries of the future, will the shareholders and workers in those industries, whose prosperity has for a long time been made possible only by the tariff protections that their industries received, gracefully accept the revised determination that they have all along been investing in, and working for, industries of the past and, therefore, must now lose their assets and jobs for the greater good? What will you tell these poor workers, shareholders, and bondholders?
- Finally, if an industry really does have such a promising future that even government bureaucrats recognize this promise, why wouldn't this same promise be recognized by private investors? Seems as though it would. And private investors, then, will pour sufficient amounts of private financing into this industry. Isn't it one of the central functions of private capital markets to identify – and to shower with liquidity – upstart firms that are likely to be parts of industries of "the future"?
I'm eager to receive your replies.
Sincerely,
Donald J. Boudreaux
March 9, 2011
Bear vs. Lehman
I'm reading Diane Coyle's The Economics of Enough, preparing to interview her for EconTalk. She is of the persuasion (and she is in populous company) that the world was on the brink of a financial apocalypse in 2008 when Lehman Brothers went bankrupt, interest rates spiked, money markets shuddered and so on.
I believe that one of the central questions of the crisis will be whether this narrative is true. Was the decision not to rescue Lehman the precipitating cause of the crisis? Or was it the decision months before to rescue the creditors of Bear Stearns via the marriage to JP Morgan Chase?
I have argued that the Bear Stearns decision encouraged other firms with similar balance sheets (Lehman for example) to assume that they too would be rescued. This allowed them to continue to borrow. It also encouraged lenders (including money market funds, incredibly) to continue to finance Lehman.
Vincent Reinhart also argues for the importance of the Bear Stearns decision. (HT: Arnold Kling at EconLog). Reinhart points out that the expectation of creditor rescue encouraged speculators to short Lehman's stock and load up on Lehman debt. I have also observed that in the bankruptcy filing of Lehman, most of its largest creditors were Japanese banks with limited political pull. I'd love to know if this is accurate and if Bear was different. There is more of these stories to be told.
A steal
For reasons I don't understand, Amazon is selling my latest book, The Price of Everything, for a mere $8.99. Get 'em while they're hot.
3.9.1776
Today is the 235th anniversary of the publication of Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations.
Here is a brief (13 minutes) conversation on the anniversary with me and Caleb Brown of Cato:
Here is Dan Klein and Brandon Lucas on the physical and intellectual centrality of the invisible hand metaphor in both The Wealth of Nations and the Theory of Moral Sentiments. Mark Skousen comments on their work here.
Some Links
Bob Higgs levels yet another brilliant blast against the warfare state.
George Jonas, writing in Canada's National Post, objects to prohibitions on monetary payments for transplantable body organs. (HT David Stinson) Here's an especially nice paragraph:
Most of all, what makes anyone think that he is entitled to pass a death sentence on a fellow human being by forbidding him to purchase an organ from a willing seller? Is it principle? Choosing to die for one's principles is one thing; obliging others to die for them is something else again. (In Canada, forcing others to die for one's principles is called socialized medicine.)
March 8, 2011
Will Asks
George Will asks penetrating and germane questions to those persons calling for the U.S. military to enforce a no-fly zone over Libya. Here's a key passage:
Today, some Washington voices are calling for U.S. force to be applied, somehow, on behalf of the people trying to overthrow Moammar Gaddafi. Some interventionists are Republicans, whose skepticism about government's abilities to achieve intended effects ends at the water's edge.
Demsetz On Coase and Pigou
This new paper by Harold Demsetz is – like so many of Demsetz's papers – truly profound. I hope it gets the attention it deserves, which is lots. I'll say more about it in the weeks and months ahead.
In the meantime, here's a – although not the only – key part (pp. 4-5; emphasis added):
[A.C.] Pigou's other examples are of the same sort. They depict conditions that seem quite removed from how we would describe a decentralized, private-ownership economic system (populated by rational persons). A private person (or the Dept. of Recreation) constructs a park but does not control its use by others; the park is over-crowded as a result. But it must be that the owner of the property takes pleasure from the overcrowding or that he neglects his own interest. In the first case there is no inefficiency, since the pleasure he derives from large crowds must be taken into account; in the second case, this person cannot be a resident of the model being examined by Smith or neoclassical economists. A third type of example involves what we now call an agency problem. An owner of land rents the land to an occupant. Pigou asserts that the occupant will not take proper care of the land because he cannot be monitored closely by the owner of the land. Hence, Pigou calls for legislation to reduce the severity of misuse of property. But there is no reason to suppose the State can monitor the renter more effectively than can the land's owner. It must be then, if the owner is rational, that the cost of monitoring the tenant's behavior exceeds the added value that doing so would bring to the owner's property. Hence, there is no inefficiency. All Pigou's examples that I have examined suffer from this type of failure: they assume faulty behavior or a non-private organizational arrangement (State ownership or the complete absence of ownership) that is precluded by the neoclassical model. Special attention should be given to the last example discussed above, the land-owner/land-renter example, for the assumed positive cost of monitoring comes very close to costs that Coase would classify as transaction costs or as being necessary to a price system.
.
In response to the inefficiencies that he sees, Pigou turns to the State to levy taxes or confer subsidies that result in equality between private and social cost. His manner of doing this idealizes the State, which somehow knows the facts and is able to employ them at less cost than could private parties. He writes of idealized State-directed solutions to the problems that, as illustrated above, are likely to have been caused by the State itself. A Nirvana State is a dangerous tool, for it diverts attention from the real underlying problem. Why is ownership lacking or why is an owner not tending to his self-interest? In The Economics of Welfare and the doctrine that it spawned, the State is but a magic wand that Pigou waves with no effort to make private and social cost equal – the same State that, through its mismanagement, has caused many of the inequalities between private and social cost that Pigou discusses.
.
Notwithstanding the weaknesses in Pigou's demonstration, his view commanded attention from economists and succeeded in replacing or becoming an appendage to the neoclassical model. Then, in 1960, came Coase's ' The Problem of Social Cost.' Coase noted, as had Knight, that Pigou's examples were offered without rationalizing their emergence from or within a private ownership, decentralized, competitive economy. Coase then goes on to modify the conditions that describe the decentralized, private-ownership economic system. Since perfect decentralization assumes that all persons know all prices that are relevant to their decisions, the model implicitly assumes that the cost of acquiring knowledge about various opportunities for employing resources is zero. Coase identifies this implicit assumption as a presumption that the price system is free to all to use, and he argues effectively for rejecting this assumption and replacing it with one that recognizes that resources are needed to create and maintain a price system. (Following contemporary discussion, I henceforth denote the cost of creating and maintaining the price system as the cost of transacting.) I concur with Coase in his claim that the perfect decentralization model treats the price system as if it were free. Where Pigou simply conjures unowned resources and failures of contracts, Coase essentially proposes a modified model of a decentralized, private-ownership economic system in which positive transaction cost is embedded. However, had Coase remembered Knight's work, he might have found an equally good or, in my judgment, a better way to enrich the neoclassical model. The model assumes that private ownership attaches to all resources and that rights of ownership are fully respected. In effect, in addition to a free price system, it assumes a free private ownership system. And we know this cannot be the case. Rather than rely on positive transaction cost, Coase could have insisted on positive cost of ownership, or on both.
Lamenting the Demise of Slavery?
Here's a letter to a publication called red pepper (HT Steve McDuffie):
Lamenting the emergence of the modern market order, Tom Malleson asserts that "A market society requires that the most basic constituent parts of society – labour, land, and money – come under the sway of the market. They have to be commodified. But labour and land are not naturally commodities – they do not exist, like widgets, for the purpose of sale. They can only ever be what [Karl] Polanyi calls 'fictitious commodities'" ("Countering capitalism," March 2011).
Contrary to Mr Malleon's insinuation, over the past few hundred years money has become more a creature of the state and less a creature of the market.
As for labour and land, Mr Malleson is correct: in recent centuries these have indeed been exchanged more and more freely in open markets – a development that has emancipated ordinary men and women from millennia in serfdom and slavery (what 'non-commodified labour' always is in practice), and enabled them to enjoy what, for most of recorded history, was enjoyed only by princes and priests: ownership of land and the prosperity and protection that such ownership makes possible.
Sincerely,
Donald J. Boudreaux
Russell Roberts's Blog
- Russell Roberts's profile
- 39 followers
