Russell Roberts's Blog, page 1473

George Will can really put a sentence together

The latest EconTalk is George Will talking about his career, the state of America, the state of American politics, baseball, and a few other things along the way. He is a beautiful talker. I particularly liked his thoughts on whether American politics hasn't gotten any uglier in recent years. Enjoy.

Open Letter to An E-Mail Correspondent

27 February 2011

Mr. Lance B_________

Dear Mr. B_________:

You urge me "to take more serious the argument [that] free trade hurts Americans when our trade partners don't protect their workers as strong as us Americans do."

You go on to explain that foreign governments that fail to enforce the same high standards of environmental protection and workplace safety that Uncle Sam currently enforces provide for their producers "unfair cost advantages."  Free trade with such countries, you assert, only harms Americans.

I have some questions for you.

Suppose that a brilliant Chinese entrepreneur invents an automobile factory that converts house-fly droppings into all of the energy that the factory requires for its operations.  Suppose further that this entrepreneur devises a process that causes house flies, in their natural search for food, to fly through a series of teeny-weeny turnstiles whose combined movements result in an incredibly productive assembly-line process for daily churning out high-quality, low-priced automobiles for export to America.  This factory requires only three human workers; its chief workers are unpaid house flies whose instincts prompt them to set in motion mechanical processes that produce an incredible quantity of high-quality automobiles each day.

The small complement of human workers are paid and protected handsomely by the factory owner, but the bulk of the factory's labor is supplied by unpaid house flies, none of whom enjoys the slightest bit of legislatively enforced 'worker' protections.

Would Americans be harmed by trading freely with this Chinese factory?  Should Uncle Sam prevent Americans from buying these Chinese-made cars on grounds that most of the workers in this Chinese factory are paid less – and receive far fewer work-place protections – than do American workers?

The point of my questions is not to justify cruel exploitation of foreign workers; it is, rather, to challenge your contention that free trade with foreigners who produce at lower costs – both 'real' and government-induced – than their American rivals harms Americans.  It does not.

Sincerely,

Donald J. Boudreaux

Actually, New York City Should Erect Its Own Tariff Walls….

Here's a letter to the Huffington Post:

Arguing for greater U.S. protectionism, Ian Fletcher asserts that the Great Britain of Adam Smith's day owed its historically unprecedented economic growth to protectionist policies ("In Praise of Mercantilism (or Why Economic History Isn't Boring)," Feb. 25).  Forget that the only evidence offered for this thesis is that 17th- and 18th-century Great Britain (like nearly every other country on earth) was 'protected' by a welter of both mercantilist and natural restraints on international trade.  Instead, focus on the fact that, if Mr. Fletcher's thesis is correct, the implications he draws from it are far too modest.

Great Britain's population in the mid-18th century was about 6.5 million.  Arizona, Indiana, Massachusetts, and Tennessee today each have populations about that size; 12 other states have even larger populations.  So if trade barriers erected around populations of at least 6.5 million people increase the economic prosperity of those people, Mr. Fletcher should propose that Congress allow citizens of populous states such as Arizona, California, and New Jersey each to erect tariff walls around their respective states.  Such tariffs would, according to Mr. Fletcher's interpretation of the historical record, promote for Arizonans, Californians, New Jerseyites, and citizens of other populous states rates of economic growth and levels of economic prosperity higher than these citizens can achieve being burdened, as they are now, with the ability to trade freely with citizens of all 50 states.

Sincerely,

Donald J. Boudreaux

Economic Lysenkoism

Here's a letter to the Huffington Post:

Ian Fletcher – seeking respectable intellectual provenance for the protectionism that he champions – writes that mercantilism "was, in fact, a remarkably sophisticated attempt, given the limited conceptual apparatus of the time, to advance national economic development" ("In Praise of Mercantilism (or Why Economic History Isn't Boring)," Feb. 25).

He's half-correct.  Mercantilism was indeed focused on "national economic development" – and in being so focused mercantilism gave no credence at all to the idea that a successful economy is one that increasingly better satisfies ordinary consumer demands.  As UCLA economist William Allen wrote about mercantilist doctrines, "Economic well-being and betterment were not defined in terms of or measured by the satisfying of revealed community consumption preferences….  Selling – both at home and abroad – was something of a mercantilist end in itself."*

Not surprisingly, then, mercantilism was anything but "remarkably sophisticated."  The great economic historian Jacob Viner called mercantilism "essentially a folk doctrine."**  And William Allen properly notes about the mercantlists that "in neither the large nor the small, in neither the abstract nor the concrete did they provide an explanation of societal arrangement and procedure – a vital omission not merely illustrated by, but largely consisting in, their failure to provide an adequate price theory" [i.e., microeconomic theory].

Any modern-day economist who praises the 'sophistication' of mercantilism is as uninformed as a modern-day geneticist who praises the 'sophistication' of Lysenkoism.

Sincerely,

Donald J. Boudreaux

* William R. Allen, "Mercantilism," in John Eatwell, Murray Milgate, & Peter Newman, eds., The World of Economics (New York: W.W. Norton, 1987), pp. 440-448; the quotations in the letter are from pages 441, 443, and 447.

** Jacob Viner, "Mercantilist Thought," in International Encyclopedia of the Social Sciences (New York: Macmillan, 1968), p. 436.

What I'll Watch on TV this Weekend

John Stossel's "Battle for the Future," airing on Sunday at 10:00pm EST on Fox Business.

Nicholas Phillipson and Jim Otteson discussing Adam Smith on C-SPAN2 (various times).

More on Ian Fletcher's Misinformation about Trade

Here's a letter to the Huffington Post:

Ian Fletcher's latest call for higher U.S. tariffs as a means of "fixing" our "trade imbalance" has too many flaws to list, let alone address, in a single letter ("Yes We Can! (Fix Our Trade Mess)"), Feb. 24).  So I confine myself here to one of these flaws.

Mr. Fletcher writes as if the only way foreign governments can retaliate against higher U.S. tariffs is to increase subsidies to their export industries.  He overlooks the most obvious means of retaliation: discriminatory tariff hikes.  So even if foreign governments won't increase subsidies in response to higher U.S. tariffs, Mr. Fletcher is wrong to blithely assert that therefore higher U.S. tariffs won't spark a trade war, for trade wars can be (and have been) fought with escalating discriminatory tariffs.

For evidence, Mr. Fletcher can read Dartmouth trade economist Douglas Irwin's just-released book Peddling Protectionism.  After a careful review of the data, Prof. Irwin concludes that "Smoot-Hawley clearly inspired retaliatory moves against the United States, particularly – but not exclusively – by Canada.  This retaliation had a significant effect in reducing U.S. exports" [p. 183].

Apparently unaware of history, Mr. Fletcher doesn't even consider the possibility – much less argue against the claim – that higher U.S. tariffs would be met by retaliatory tariff hikes abroad.

Sincerely,

Donald J. Boudreaux

Some Links

Writing in Investor's Business Daily, Bob Higgs explains why the the economy is still mired in the doldrums.

Here's Carpe Diem's – and, I boast, my former r.a. at GMU Econ – Mark Perry writing in today's Wall Street Journal on the still-very-much-alive state of U.S. manufacturing.

Tom Palmer offers this update on what the Atlas Economic Foundation is doing to promote liberalism and markets in Egypt.

The March issue of The Freeman.

Here's a superb paper on federalism by my GMU Econ colleague Dick Wagner and Sapienza University's Giuseppe Eusepi.

Don't follow the money

One of the arguments of the buy local movement is that buying local "keeps the money in the community." This seems like a good idea but it's a red herring that misleads.

Suppose my neighbor Bob starts a car company. He manages to create a car that is of the same quality as the Honda Accord using lots of talented local workers. The car costs $1 million. Should I buy a Honda Accord or a Bob? If I buy the Accord, the money leaves the community. Wouldn't it be better for the community if I bought the Bob? Better for Bob, yes. Worse for me. So my natural inclination is to buy the Accord. I will have a lot more money to buy other things. Yes, some of those things will be local, so it is tempting to say that even buying non-local is good for the community because eventually I'll spend some of the savings here. But suppose I spend NONE of the savings locally. I just buy the best products and services I can find, the products and services that provide the best value. Suppose none of those are local. Am I being selfish? Don't I care about my community?

Before I try to answer that question, let's try another thought experiment. Instead of making a million dollar car that is as good as the Honda Accord, Bob's million dollar car actually doesn't work. But should I buy it anyway because it "keeps the money in the community?" Or because it keeps the jobs in the community? It will do both of those things. But these are unproductive jobs. Clearly if we buy non-working goods from each other, we keep the jobs and money in the community but we have very little to eat. We are very poor.

The way to prosperity is to find ways to serve others by producing something you value enough to pay the price I charge. If I serve you poorly either by making a lousy product or one that is more expensive than the alternatives, but ask you to buy from me anyway, that is charity. That may be a nice thing to do. I may choose to do it because I care about you. But don't pretend that it creates wealth when I am getting less value for my money than I could get elsewhere. It doesn't. What it does is put my purchasing power in your pocket.

But shouldn't we support and help each other by buying local? Maybe. But don't pretend it creates material prosperity. It reduces material prosperity unless I get equal or greater value from purchasing local compared to the alternatives. But in that case, buying local comes naturally and you don't need to exhort anyone to do it.

When my neighbor asks me to buy his product because he is local, he is asking me to forego benefits. If we all choose to do so and if everyone outside of our community does the same–they only buy locally in their communities–we restrict the range of people we can buy from and sell to. We reduce the range of people we can cooperate with implicitly via specialization. That makes us poorer.

Another way to see it is when I refuse to buy local as an overriding principle, I am telling you, my neighbor, that I expect you to compete with others outside of our community in providing me goods and services of value. But because other outside of our community are willing to trade outside of their communities as well, you will have more people who demand your goods and services. The trick is finding the activity that provides value. The alternative is limiting the choices of others so that particular activities that you would like to do may still be of value, anyway. That is not the road to prosperity. That is the road to poverty.

We have tried buy local before. It is called the Middle Ages.

The Road to Hell

Here is the way I've started to think about the crisis–how the underlying incentives combined with good intentions to create bad decisions with bipartisan support. This is from my interview with Daron Acemoglu.

The whole interview is here.

Harsanyi on Wisconsin

Superb. It opens like this:

According to Nobel laureate and raconteur Paul Krugman, Gov. Scott Walker and "his backers" are attempting to "make Wisconsin — and eventually, America — less of a functioning democracy and more of a Third World-style oligarchy."

Now, it's common knowledge that throwing around loaded words like "socialism" is both uncivil and obtuse, so it's comforting to know we can still refer to people as "Third World-style oligarchs." And boy, that kind of Banana Republic doesn't seem very appealing.

Democracy, naturally, can only be saved by public sector unions, which attain their political power and taxpayer-funded benefits by "negotiating" with politicians elected with the help of unions who use, well, taxpayer dollars. And you know, that doesn't sound like an oligarchy at all.

While Walker, who won office using obnoxious Third World oligarchic tactics like "getting more votes than the other candidate," is a cancer in the heart of democracy, union- funded Democrats evading their constitutional obligation to cast votes are only protecting the integrity of representative government by completely avoiding democracy.

You're getting it now, right?

It get's better. Read the whole thing.