Russell Roberts's Blog, page 1522

October 5, 2010

Game theorist on game theory

Ariel Rubinstein critiques the state of game theory in an unlikely setting.



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Published on October 05, 2010 11:50

%*$%#$& Restrictions!

Here's a letter to the Wall Street Journal:


Postmaster General John Potter complains that the U.S. Postal Service's financial problems stem from "a legislatively imposed lack of flexibility in managing the Postal Service business" (Letters, Oct. 5).


Give me a break.  The root problem here, while not the one that Mr. Potter singles out, is indeed "legislatively imposed" – namely, government's grant to the USPS of an exclusive monopoly over the delivery of first-class mail.  This grant of monopoly privilege is an unwarranted legislative imposition on entrepreneurs who would compete with the USPS and, more fundamentally, on consumers who would patronize those entrepreneurs.


It is more than a smidgen audacious for the CEO of a government-protected monopolist to complain about "legislatively imposed" restrictions.


Sincerely,

Donald J. Boudreaux



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Published on October 05, 2010 09:34

The Logic of Trade

When I talk about the idea of "buying local" I often say that we've tried the "buy local" experiment, it's called the Middle Ages. In the Middle Ages, we mainly bought local and pretty much everyone is poor. This isn't a proof that buying local is impoverishing. A lot of things have changed since the Middle Ages so it could be that we're richer now than we once were because of those things, not because we trade with a wider slice of humanity than we did then. But I'm trying to get people to think about the logic of buying local. Even if we had the technology we have now and traded with only a few thousand people who lived near us (as was the case in the Middle Ages for the most part), we'd be desperately poor. We couldn't sustain the division of labor that creates our current level of prosperity.


Even if we traded with a few million others, the people just in our city or our state, we'd be much poorer than we are now. Even with current technology.


Having said that, I believe that we would not have the technology we have today if we lived as we did in the Middle Ages. It is the opportunity to trade with billions of people that makes technology so powerful and so profitable.


There are of course many studies of "buy local" that find that the movement creates jobs, makes us richer and so on. These studies are poorly done. They leave out many factors that cannot be measured.They are done by advocates, sometimes misguided but sometimes trying to enrich themselves by making others think that buying local is good for everyone rather than just themselves.


I've been thinking about this while I read recent posts like this one. by Don, and the comments. It's very difficult to provide convincing empirical evidence on either side of this debate. The world is a complicated place. It's hard to hold everything else constant and isolate the impact of one variable, trade policy.


So I find it useful and more compelling to think about the logic of trade. The logic of trade is why I reject the idea that buying local, writ large, creates prosperity. The Middle Ages thought experiment helps me see that. Maybe you disagree. Happy to hear how a small group can produce the wealth of stuff we enjoy from mint-flavored dental floss to heart pumps and antibiotics…


The logic of trade (and protectionism) has many facets. It, too, is complicated. You can't explain it in one post. But both Don and I have written books on the logic of trade and you can read them if you want to understand the arguments in their fullest form. My book is here. Don's is here. And I like this podcast on how the division of labor creates prosperity.



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Published on October 05, 2010 07:23

More on Mercantilism and 19th-century American Economic Growth

My friend Tim Worstall sent to me the following e-mail in response to my post on the question of whether or not mercantilism promoted U.S. economic growth in the 19th-century:


There's a sixth point to be made, from Power and Plenty by Findlay and O'Rourke.


Tariffs are not the only barrier to trade. And what is important is the total barrier to trade, not that part of it which is tariff or transport or regulation or whatever.


As they show, shipping costs (long distance ones, trans-Atlantic etc) were falling so rapidly in the period 1850-1914 that despite (several?) tariff rises the total trade barriers into the US were falling throughout the period.


Another way of looking at this is that given that transport costs were high at the time (certainly in relation to nowadays) even if falling, the tariff was in fact rather lower than commonly assumed. A 40% (just as an example) tariff looks high but if transport costs are 50% of value then it's not, not really. Certainly nowhere near the effect of a 40% tariff when transport costs are 1% of value.



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Published on October 05, 2010 04:59

October 4, 2010

Did Mercantilism Promote Economic Growth in the U.S.?

Some commentors here at the Cafe have insisted that – as "Brutus" put matters today when commenting on this post – "If the history of mercantilism showed that it weakened an economy, then I would agree with you [that protectionism harms an economy]. But the data indicates [sic] the otherwise, including the history of the US."


This myth is quite common.  But the best evidence disputes it.


First, here's a paper on this very topic by Dartmouth economist Douglas Irwin.  The abstract of Doug's paper is this:


Were high import tariffs somehow related to the strong U.S. economic growth during the late nineteenth century? This paper examines this frequently mentioned but controversial question and investigates the channels by which tariffs could have promoted growth during this period. The paper shows that: (i) late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth; (ii) tariffs may have discouraged capital accumulation by raising the price of imported capital goods; (iii) productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff.


Second, the U.S. had largely open borders for labor during the 19th century, and evidence suggests that open immigration helped to mitigate – or, rather, hide – much of the economic harm done by trade restrictions.  On this matter, see this paper by Cecil Bohanon and T. Norman Van Cott.


Third, economic intervention into the American economy during the 19th century was – while not non-existent – quite minimal by today's standards.  The resulting freedom fueled dynamism and creativity and opportunities for investment that, in a country as large and as otherwise open as the United States, resulted in substantial economic growth.


Fourth, the huge size of the U.S. itself helped to mitigate – or, rather, hide – the harmful effects of protective tariffs.  With free trade from the Atlantic to the Pacific, and from Canada to Mexico, the opportunities for specialization combined with the competition that emerged from railroads, telegraphy, and telephony to spark and to maintain economic growth.


Fifth, and relatedly, if protectionism worked for the U.S., would each U.S. state have grown wealthy – or wealthier – had each state protected its domestic suppliers from not only non-American but from out-of-state competition?  Highly doubtful.  The U.S. was then – and remains today – a huge free-trade zone.  This fact testifies to the benefits of free trade and to the destructiveness of mercantilism.



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Published on October 04, 2010 13:42

Social Networking for Free Trade

My friend Norbert Michel – now teaching at my alma mater Nicholls State University – started this Facebook page to promote efforts to persuade Sen. Sherrod Brown to debate free trade with me.


It's a debate that I'd very dearly love to have.



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Published on October 04, 2010 10:22

Another Open Letter to Sen. Sherrod Brown

4 October 2010


Sen. Sherrod Brown (D-Ohio)

Capitol Hill

Washington, DC


Dear Sen. Brown:


Your office is advertising for an unpaid intern – one whose responsibilities will be quite extensive.


But on your webpage you boast of your efforts to fight poverty by raising the national minimum-wage.


Are you not concerned that you are promoting poverty by paying this intern an hourly wage of $0.00?  Or are young men and women who choose to build their resume by working free of charge for you more intelligent and far-sighted than are young men and women who would – were it not illegal to do so – choose to build their resumes by working in the private sector at wages below the legislated minimum?  If not – that is, if your interns aren't generally more smart and prudent than are young people who seek employment in the private sector – then why do you continue to deny low-skilled employees generally the right to choose the terms of their own employment?


Sincerely,

Donald J. Boudreaux


P.S.  I'm disappointed that you turned down John Stossel's invitation to debate free trade with me on his show next week.  I hope that you'll agree to debate me some other time.


(HT to Jim Swift for alerting me to Sen. Brown's efforts to hire unpaid interns.)



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Published on October 04, 2010 08:11

Caplan on immigration

The latest EconTalk is Bryan Caplan making the case for open borders. He makes it very well and manages to get about 90 minutes of insight squeezed into 60 minutes of recording. Give it a listen and comment over at EconTalk if it moves you.



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Published on October 04, 2010 06:21

October 3, 2010

James M. Buchanan

Ninety-one years ago today, in a small town in Tennessee, one of the greates economists of the past hundred years was born: James McGill Buchanan.


Happily, Jim is still with us, his mind as powerful as ever.


Happy birthday, Jim!



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Published on October 03, 2010 18:50

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