Russell Roberts's Blog, page 1490

Open Letter to Sethstorm

Mr./Ms. Sethstorm

Dear Sethstorm:

Commenting on my explanation for why there's nothing unusual about Americans specializing in designing products such as iPhones but not specializing in assembling them, you write "Bollocks," and then accuse me of supporting slavery.

Let me make my point even simpler.  Ernest Hemingway specialized in writing prose fiction.  But he himself never manufactured any of the paper or printed any of the books that were used to make his novels and short stories accessible to millions of readers.

Did some economic snafu happen in Hemingway's case?  Would you have been impressed had the TIME pundit written that "conventional economics tells us that since Hemingway had a clear advantage in writing novels, Hemingway should not have outsourced the process of physically manufacturing his books to non-Hemingwayians."

I suspect that you, correctly, would understand such a claim to be absurd.

The TIME pundit committed an error in economic reasoning identical to the error committed by someone who would suggest that Hemingway should have also manufactured the paper and printed the books used for his novels.  Pray tell, how does my pointing out this error lend support to slavery?

Sincerely,

Donald J. Boudreaux

Time for Better Economic Reporting

12 January 2011

Mr. Michael Schuman

The Curious Capitalist

TIME magazine

Dear Mr. Schuman:

You write that "Conventional economics tells us that since the U.S. has a clear technological advantage in designing a product like the iPhone over the still-developing Chinese economy, the U.S. should be exporting iPhones to China.  That's the kind of theory you learn in Econ 101.  But, as the ADBI study shows, that's not what's actually happening in the new world economic order – because Apple has outsourced the manufacturing of what it has designed" ("Is the iPhone bad for the American economy?" Jan. 11).

Wrong.  If that's what your Econ 101 professor taught you, you wuz robbed.

What economics teaches – be it Econ 101 or Econ 999 – is that, with free trade, there develops detailed specialization of labor that spans the globe, with each separable part of the production process performed by those producers who perform that part at the lowest cost.  So the fact that America has a comparative advantage at designing products like the iPhone does not mean that America has a comparative advantage at manufacturing such products.  Indeed, the better Americans become at design, the more we do (and should) specialize in that part of the production process and leave other parts to be performed by peoples elsewhere.

Put differently, Americans succeed at doing high value-added tasks such as information-technology design precisely because we don't have to spend much of our time and resources performing other parts of the production process.

Sincerely,

Donald J. Boudreaux

Professor of Economics

George Mason University

Fairfax, VA  22030

(HT Nick Mueller)

Stimulus Too Small? Nein!

Here's a letter to the Wall Street Journal:

You report that "Germany's economy in 2010 grew at its strongest rate since the country's reunification" – by about 3.5 percent ("German Economy Grows at Record Pace," Jan. 12).  You report also that Germany's government-budget deficit for 2010 was 3.5 percent of German GDP, and that government spending there rose by 2.9 percent in 2009 and then by 2.2 percent in 2010.  You might also have reported that Germany's unemployment rate fell in 2010, from 7.8 percent in November 2009 to 7.1 percent in November 2010.

These data on Germany cast further doubt on the wisdom of those pundits, politicians, and economists – most famously Paul Krugman – who insist that the continuing sluggishness of the U.S. economy is caused by insufficiently copious fiscal stimulus spending here at home.

In 2010, Uncle Sam's budget deficit was 10.65 percent of U.S. GDP – triple the size of Germany's figure.  And Uncle Sam's spending increased by a whopping 17.9 percent in 2009 and then by another 5.8 percent in 2010.  Yet unemployment here remains high, at 9.4 percent, and our GDP in 2010 likely will be no more than 3.0 percent higher than its 2009 level.

Sincerely,

Donald J. Boudreaux

A Lott to Ponder

John Lott joins the debate, at the New York Times, on whether or not more guns lead to less crime.

The Rights Stuff

There is so much more to Ronald Coase's contributions to economics – and to his penetrating insights into the role of property rights and transaction costs – than I was able to touch upon in my small tribute to him here.

In Defense of Global Capitalism

I have removed, at the request of the Cato Institute (owner of the copyright on the U.S. edition of Johan Norberg's indispensable book In Defense of Global Capitalism), Johan's book from Cafe Hayek.  Apparently its free availability on-line, at the site where I discovered it, was inadvertent.  I apologize to Cato, and to Johan, for any problems caused by my linking to it here.

In the Long Run, It's All Microeconomics

Tim Worstall puts his finger precisely on the important difference between Keynesians and economists whose focus is different.

The Climate of Hate

More sanity about the insanity of blaming partisan rhetoric for the Arizona shooting. Here, John Hayward takes on Krugman.

Hayek on Keynes

I'm so grateful to Jim DeLong for finding this ungated version of the Henry Hazlitt -edited collection The Critics of Keynesian Economics.  (Jim tells me in an e-mail that an essay in this book that he especially likes is the one by David McCord Wright.  I concur.)

In Hazlitt's collection is reprinted this choice and profound passage from page 409 of Hayek's 1941 book The Pure Theory of Capital:

I cannot help regarding the increasing concentration on short-run effects–which in this context amounts to the same thing as concentration on purely monetary factors–not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization. To the understanding of the forces which determine the day-to-day changes of business, the economist has probably little to contribute that the man of affairs does not know better. It used, however, to be regarded as the duty and the privilege of the economist to study and to stress the long effects which are apt to be hidden to the untrained eye, and to leave the concern about the more immediate effects to the practical man, who in any event would see only the latter and nothing else. The aim and effect of two hundred years of continuous development of economic thought have essentially been to lead us away from, and "behind," the more superficial monetary mechanism and to bring out the real forces which guide long-run development. I do not wish to deny that the preoccupation with the "real" as distinguished from the monetary aspects of the problems may sometimes have gone too far. But this can be no excuse for the present tendencies which have already gone far towards taking us back to the pre-scientific stage of economics, when the whole working of the price mechanism was not yet understood, and only the problems of the impact of a varying money stream on a supply of goods and services with given prices aroused interest. It is not surprising that Mr. Keynes finds his views anticipated by the mercantilist writers and gifted amateurs: concern with the surface phenomena has always marked the first stage of the scientific approach to our subject. But it is alarming to see that after we have once gone through the process of developing a systematic account of those forces which in the long run determine prices and production, we are now called upon to scrap it, in order to replace it by the short-sighted philosophy of the business man raised to the dignity of a science. Are we not even told that, "since in the long run we are all dead," policy should be guided entirely by short-run considerations? I fear that these believers in the principle of apres nous le deluge may get what they have bargained for sooner than they wish.

Jobs Destroyed and Created

Here's a letter to a very good-natured gentleman (one on my e-mail list) who e-mailed me about an hour ago:

Dear Mr. Y_______:

Thanks for your e-mail, and for its gracious tone.

You write: "OK, the US gets other jobs when manufacturing jobs go overseas.  A majority of these other jobs, however, are in the service sector which pays less than manufacturing.  We cannot keep this up."

First, manufacturing jobs are 'lost' not only to imports from overseas but also to mechanization.

Second and more to your point, the service-sector jobs that have replaced manufacturing jobs do not typically pay less than manufacturing.  Using data from the U.S. Bureau of Labor Statistics, the Cato Institute's Dan Griswold calculated – as he reports on page 38 of his superb 2009 book Mad About Trade – that "For every one job lost in manufacturing since 1991, our economy has created five in better-paying service sectors, three in less well-paying sectors, and one in government.  That pattern was not just a phenomenon of the 1990s.  During the Bush years of 2001-2008, two-thirds of the net new jobs were also created in sectors that paid more than manufacturing."

I don't know how old you are, Mr. Y______, or if you have children.  But if you do have children, do you ever tell them that you want them to grow up to work in a factory?  Do they ever express such a yearning to you?  My guess is that you want your children to become doctors or lawyers or architects or research scientists, and that they, too, have such aspirations – that is, aspirations to work, not in manufacturing jobs, but in service-sector jobs.

I do not disparage manufacturing jobs; my father was a pipefitter in a shipyard and I'm damn proud of who he was.  But he would have thought me daffy had I aspired to follow in his difficult and relatively low-paid footsteps.

Sincerely,

Donald J. Boudreaux