Russell Roberts's Blog, page 1489

The Keynesian Diversion

One of my all-time favorite articles in macroeconomics is Leland Yeager's 1973 "The Keynesian Diversion."  Studying that article again today, here's one passage (among several) that stands out:

On rereading the General Theory, I was struck by how much of what Keynes says does resemble the supposedly vulgar Keynesianism of the income-expenditure theory.  If Keynes was really a disequilibrium theorist, why did he make so much of the possibility of equilibrium at underemployment?  Why did he minimize and practically deny the forces that might conceivably be working, however sluggishly, toward full-employment equilibrium?  And why did he stress the possibility of chronic unemployment due to a gap between income and consumption that investment might not be able to fill?…. Keynes is rather clearly worrying about a deep-seated deficiency of demand and not about information deficiencies, discoordination, and the like.

[Leland B. Yeager, "The Keynesian Diversion," Western Economic Journal, Vol. 11 (June 1973), pp. 150-163; reprinted in Leland B. Yeager, The Fluttering Veil (George A. Selgin, ed.; Indianpolis: Liberty Fund, 1997), pp. 199-216.  The quotation above is from pp. 207-209.]

Leland's assessment of Keynes squares in important ways with Hayek's assessment (such as this one).  Keynes was no brilliant economist, if indeed he can be said to have been an economist at all.  He was instead a brilliant public intellectual who knew just enough economics to enable him to transform a decades- (centuries?-)old mistaken understanding of the economy held by business people into "the new economics."

This mistaken understanding is an understandable result of being a businessperson: the greater the demand for your product, the better is your business.  And the better is your business, the more workers you hire and the more of other inputs you buy – thus making your suppliers' business prospects better, too.

So the key to an economy's success is high economy-wide – that is, aggregate - demand.

Countless popularizers of this view had emerged before Keynes and were correctly dismissed by real economists as being poor economists.  For example, William Foster and Waddill Catchings pressed on the public an economic 'theory' very similar to that which appears in Keynes's General Theory.

In 1929, Hayek wrote (in German) a long and scathing analysis of Foster's and Catching's work.  An English-language version of this analysis was published in 1931 in Economic under the title "The 'Paradox' of Saving" [and is reprinted as Chapter Two of F.A. Hayek, Contra Keynes and Cambridge (Bruce Caldwell, ed., University of Chicago Press, 1995), pp. 74-120].

Through Trade, Millions Tap Into the Talents and Knowledge and Efforts of Each Other

Thomas Thwaites, in his brilliant demonstration of the gargantuan complexity of the simplest toaster available today on the market, notes that the toaster that he bought as a guide for his project cost him 3 pounds, 94.

In 2010 the median weekly income in the U.K. was 499 pounds.  Assuming that the typical British worker toils even as much as 45 hours weekly at his or her job (probably an overestimate), this fact means that this worker earns 11.09 pounds per hour (or about $17.60) (probably an underestimate).

So, the typical British worker has to work all of 21 minutes to earn enough income to buy the toaster that Mr Thwaites bought at retail and featured near the beginning of his superb TED talk.

And yet, that toaster is made up of so many different materials and parts that Mr Thwaites had to ignore the vast majority of them in his attempt to build his own toaster himself, from scratch.

The result of Mr Thwaites's toaster-building effort was, of course, a product that no modern Brit (or modern anyone) would use, and much less purchase: It won't toast.  Yet Mr Thwaites took nine months to build this worthless, and likely dangerous, toaster.  Assuming that he worked on his toaster project only one hour weekly, he spent a total of 36 hours building his toaster.  If his market wage is that of the median British worker's wage, Mr Thwaites spent 103 times more time building his own toaster than he spent working to earn the income that he used to purchas the other toaster from a retail store.  103 times!!

Imagine how much time Mr Thwaites would have spent building his own toaster from scratch were his goal to build a toaster comparable to the one he bought at retail.  (Actually, don't imagine….  it's impossible.)

I, Toaster II

This ten-minute TED talk by Thomas Thwaites is a must-see.  Its lesson about the importance of trade, cooperation through competitive markets, and our current standard of living cannot be lost on any thinking person.

(I posted on this project back in June 2009, by linking to an article by Reason's Radley Balko – an article to which Mr Thwaites replied.)

(HT Kyle Flynn and Greg Loutsenko)

El Hombre

Here's a letter to the Washington Post:

In his fascinating discussion of the 1960 presidential campaign, Mark Feldstein details Richard Nixon's trickery and cynicism, as well as Nixon's greed for both power and cold cash ("A half-century of political dirty tricks" Jan. 14).  Detailed also is Jack and Bobby Kennedy's willingness to hire burglars and to otherwise play dirty for no purpose higher than to gratify the same lust for power that burned within them as hotly as it burned within Nixon.

So do tell: why are we supposed to honor such people simply because they are elected to the so-called "highest office in the land"?  Why are we expected to look to such scoundrels to inspire us – to advise us – to comfort us – to govern us – to commit our sons, daughters, and resources to wars – to define us – to rule over us on thousands of matters that touch daily upon our pocketbooks as well as upon some of the most intimate aspects of our lives?

In no field of human endeavor other than politics is success at cupidity, duplicity, deception, double-dealing, and general depravity positively celebrated and rewarded – and so handsomely to boot.

Sincerely,

Donald J. Boudreaux

Some Links

In this short discussion with ReasonTV's man-in-black, Nick Gillespie, the Wall Street Journal's intrepid Mary Anastasia O'Grady explains why Latin America needs freer trade – and drug legalization.

Paul Jacob offers common sense – both his own and that of Arnold Kling – to explain how to determine if government workers are overpaid.

This month's Immigration Reform Bulletin from Cato, by Stuart Anderson, deals with one of my pet-peeves in the debate over immigration.  Quoting Stuart: "One of the most common accusations hurled against illegal immigrants is the rhetorical question, 'Why can't they just wait in line?' The problem for lower-skilled workers is that no such line exists. For example, if an employer were to ask, "How does one obtain a legal visa for an employee to work as a maid full time at a hotel or as a waiter at a restaurant?" the short answer would be, 'There is no such visa for those jobs.'"  Read the whole thing.

Carpe Diem's Mark Perry offers data showing that the U.S. economy remains the world's most prodigious manufacturer.

Competing More Against Other Workers in the First World

Here's a letter to the Boston Globe:

Richard Klovdahl worries that "we have spent the last 30 years 'competing' for our jobs against workers in Third World countries" (Letters, Jan. 14).

Mr. Klovdahl is haunted by the myth that low hourly wages alone make workers attractive to profit-seeking businesses.

From 1980 through 2009, the 160 countries that UNCTAD classifies as "developing" – what Mr. Klovdahl calls "Third World" – together received 30 percent of total global foreign direct investment.  The eight G8 countries, whose workers earn some of the world's highest wages, received 43 percent of this investment.  The U.S. alone, during this time, received 18 percent of foreign direct investment – an amount far larger than was received by any other country on earth.*  (Over those same 30 years, inflation-adjusted compensation for the average civilian worker in America rose by 25 percent, despite the U.S. labor force expanding by 44 percent.**)

This evidence on international investment flows should calm fears that businesses are eager to shift operations from the U.S. and other developed nations in order to set up shop in the Third World.

Sincerely,

Donald J. Boudreaux

* Inward FDI flows are calculated from this table.

** See here and here.

An Unsavory Argument for a Sour Policy

Here's a letter to the Wall Street Journal:

Jack Roney, lead economist for the U.S. Sugar Alliance, insists that "Sugar policy operates at no cost to the government" (Letters, Jan. 14).

A quibble: American taxpayers pay for the customs agents and other resources used to prevent these same taxpayers from buying sugar on open global markets.  These expenses are, in common parlance, costs to the government.

More than a quibble: even if Uncle Sam's sugar policy "operates at no cost to the government," it operates at significant costs to Americans.  In 2009, this policy forced Americans to pay 16 cents more per pound of sugar than the world price of 22.1 cents – or, 72 percent more for sugar than we would have paid were there no sugar 'policy.'  Given the amount of sugar Americans consume, this fact means that, in 2009, the supposedly 'cost-free' U.S. sugar program picked Americans' pockets to the tune of $2.5 billion.

Supporters of this sour policy deserve to be caned.

Sincerely,

Donald J. Boudreaux

I hasten to add that the final sentence of the above letter is not meant to be a literal call for violence against those who don't hesitate to threaten violence against peaceful people who wish to pay lower, world prices for sugar.

Some Economics of Trade

As I pondered the issue of Americans trading with low-wage nations, Miles Stevenson e-mailed me to say that he'd just discovered Paul Krugman's superb 1996 essay "Ricardo's Difficult Idea."  I couldn't recall if I'd posted that essay here at the Cafe, so I searched.  Turns out that I did indeed post it, three years ago.  My vanity compels me to reprise that post:

Strange Case of Dr. K and Mr. K

by Don Boudreaux on January 5, 2008

in Myths and Fallacies,Trade

In yesterday's edition of the New York Times, Paul Krugman again suggests that trade with low-wage countries poses real problems for high-wage America.  (Krugman's column of December 28th is even more explicit on the point.)  I sent this letter yesterday to the Gray Lady in response:

Paul Krugman again insists that trade with low-wage countries – especially China – threatens to depress wages in America ("Dealing With the Dragon, January 4). So I again refer Mr. Krugman (the shrill pundit) to Dr. Krugman (the skilled scholar of trade).

In his excellent 1996 essay "Ricardo's Difficult Idea," Dr. Krugman pointed out that wages are determined by worker productivity.  Therefore, low wages reflect low productivity.  This fact, once grasped, reveals that low-wage countries have no general competitive advantage over high-wage countries.  Dr. Krugman continued: "Someone like [James] Goldsmith [a protectionist] looks at Vietnam and asks, 'what would happen if people who work for such low wages manage to achieve Western productivity?' The economist's answer is, 'if they achieve Western productivity, they will be paid Western wages' – as has in fact happened in Japan."

Substitute "Mr. Krugman" for "Goldsmith," and "China" for "Vietnam," and Dr. Krugman's learning should calm Mr. Krugman's fears.

Sincerely,

Donald J. Boudreaux

Trade-deficit Horsey

This horse – although old, blind, deaf, dull, decrepit, diseased, deformed, deranged, and hard-ridden – just won't die.  So I write to the Wall Street Journal:

You report that "The U.S. trade deficit with China expanded to $25.63 billion from $25.52 billion in October, reversing some of the improvement of recent months" ("U.S. Trade Deficit Narrows," Jan. 13).

Accepting for the sake of argument the popular myth that, in this world of nearly 200 nations, America's trade balance with any one nation is meaningful and relevant, I must nevertheless ask: Why do you so blithely label the recent shrinkage of this trade deficit as an "improvement"?  The U.S. trade deficit rises whenever foreigners invest more heavily in America; are such investments a cause for lamentations?  Do the factories, machines, worker training, R&D, inventories, retail outlets, pension contributions, and infrastructure throughout the U.S. that are financed – either directly or indirectly – by foreign investors hurt Americans?  Is it true that our economy is necessarily "improved" whenever such investments shrink, and harmed whenever such investments expand?

Sincerely,

Donald J. Boudreaux

Some Links

Susan Dudley reflects on the late Alfred Kahn.

David Henderson praises my favorite city in the world, New York.  (David will be a guest on tonight's Stossel.)

Here's Steve Landsburg's tribute to Ronald Coase on the latter's 100th birthday.

I'm eager to read this paper by Larry Ribstein and my GMU colleague, over in the law school, Henry Butler.  Process matters.

And speaking of Coase and of Butler, here's a short video by Henry on "the power of law and economics."

Fortune's Allan Sloan argues that a significant portion of the Bush tax cuts was absorbed by the Alternative Minimum Tax.  (HT Sheldon Jacobs)  I especially like this line from Sloan's article: "To Obama, all families with at least $250,000 of annual income and single taxpayers with $200,000 are 'rich.' But to the AMT, many of them are prey."  Why?  Quoting again Sloan: "The Tax Policy Center says that three-quarters of taxpayers with incomes between $200,000 and $500,000 lost almost two-thirds of their Bush tax cut to the AMT. 'Those people really got clobbered'" says Roberton Williams, a TPC senior fellow. 'On average, they lost 63% of their Bush tax cut.'"

Mark Perry's post reminds me why I tell my students that the term "tax cut" is vague, for it could mean a cut in tax rates, a decision to shrink the tax base, or a reduction in tax revenues.