Russell Roberts's Blog, page 399

Some Links

(Don Boudreaux)

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Eric Boehm highlights three things to know about the new NAFTA (the “USMCA”), which took effect on Wednesday. A slice:

Although Trump’s supporters sometimes claim that the president is actually pursuing a radical free-trade agenda and only using protectionist tactics to achieve it, the USMCA is strong evidence that Trump would prefer to see more barriers to trade.

For example, the administration pushed for the inclusion of stricter rules that make it more difficult for cars and car parts to cross national borders duty-free. Under the USMCA, 75 percent of the component parts of vehicles would have to be produced in North America to avoid tariffs, and 40 percent would have to be built by workers earning at least $16 an hour—effectively putting a minimum wage on Mexican manufacturing plants with lower wages.

Alberto Mingardi is justifiably harsh in his assessment of Marianna Mazzucato’s recent New York Times op-ed. A slice:

I don’t know if you have seen The Invention of Lying. In the movie Ricky Gervais lives in a world where nobody ever lied; he is the first who come up with the idea and builds his success on it. It seems to me that Mazzucato may star in a similar movie, The Invention of Government [which is the title of her latest book]. Her narrative that we socialize risk but never properly compensate governments fits very well a world where taxation does not exist. Sadly, that is not the world we live in.

John O. McGinnis discusses the differences that separate Justice Clarence Thomas from Chief Justice John Roberts over the interpretation of stare decisis.

George Will applauds Espinoza v. Montana Department of Revenue.

Here’s wisdom from Wall Street Journal columnist Daniel Henninger. A slice:

It is a misstatement to call what is going on now an American revolution. The Declaration’s revolution was about creating a new nation. Today’s claimants see the future as de novo, a blank slate, an exercise in elimination. It is closer to what the ever-ironic 1960s radical anarchist Abbie Hoffman called “revolution for the hell of it.”

Larry Sand endorses greater reliance upon the wisdom of markets.

Matthew Lesh adds his clear voice to those calling out the absurdity of the assertion that modern capitalism is the child of slavery. A slice:

Nor did the slave trade fund the industrial revolution. Leading economic historian Deirdre McCloskey explains that the slave trade, and the goods produced by slaves, were a tiny portion of foreign trade in Britain. Additionally, slaves were not passive: From Jamaica to St Dominique they rebelled against their masters. Quashing these rebellions was not cheap. More broadly, McCloskey argues that the industrial revolution was spurred by domestic innovations and not trade or minuscule imperialist returns.

Michael Sellenberger writes honestly and sensibly about environmental policy.

My GMU Econ colleague Dan Klein continues to write informatively – in a way that cannot be waved off – about covid.

Quotation of the Day…

(Don Boudreaux)

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… is from page 73 of the May 9th, 2020, draft of the important forthcoming monograph from Deirdre McCloskey and Alberto Mingardi, The Illiberal and Anti-Entrepreneurial State of Mariana Mazzucato:

“There is nothing in the DNA of the public sector,” Mazzucato declares, “that makes it less innovative than the private sector.” Oh, yes there is. One thing is clear: only people innovate. It is they who think, research, tinker, ponder, imagine, create, produce. Not the bureau, the office, the factory, the corporation, the market, the private sector, the public sector. The State and the market are simply settings, contexts, structures, in which actual people operate – for innovation or against it, wise improvements or waste, bettering or pillage.

So the question is which setting is best for people to innovate, sometimes succeeding, sometimes failing – a market of free people or a State coercing them to directionality? Are people more likely to be creative and innovate if they themselves, or their willing investors, pay the costs and earn the benefits of betterments, or alternatively if taxpayers foot the bill for remote bureaucrats to decide?

DBx: Deirdre and Alberto here unearth more evidence that much opposition to free markets springs from the mistaken belief that the economy is an engineering project.

Proponents of industrial policy and related kinds of economic interventions by the state – people such as Marianna Mazzucato (from the left) and Oren Cass (from the right) – conceive of economic activity as being much like painting by numbers. The only significant question, under this conception, is this: “Who will choose the image that is to be painted?” Once the image is chosen, it’s a purely mechanical process to actually produce the final product.

Proponents of industrial policy who, like Mazzucato and Cass, aren’t utterly without some sound economic instincts will admit that market forces can come in handy to emit the necessary incentives for workers to apply the paint according to the numbers chosen by government officials. But the ultimate objective of all this work is the production of images the forms and color palettes of which have been carefully chosen and prescribed by wise and apolitical government officials. (The conclusion that these government officials are wise and apolitical is justified by the presumption that they will heed the advice of scholars such as Marianna Mazzucato and Oren Cass.)

Completely absent in the work of people such as Mazzucato and Cass is an appreciation of the logic of market processes – processes driven by market prices, and by entrepreneurs’ profits and losses, generated when individuals spend their own money as consumers and invest their own money (and time) as investors. People such as Mazzucato and Cass simply cannot conceive that any economy that is not consciously guided to result in a pre-chosen image will result in anything but an ugly, chaotic mash-up of globs of paint.

People such as Mazzucato and Cass do not understand markets. And they especially don’t understand the knowledge-gathering and dispensing function of markets. Failure to understand markets is failure to understand the processes that generate market ‘outcomes’ and that these ‘outcomes’ are far better than any that could possibly be consciously chosen.

Pardon now my sudden change to a different analogy: It’s as if someone today catalogs all the parts of a pig and concludes that there’s nothing special about the countless individual forces of natural selection that result in the pig. A skilled engineer can, at least as well as blind natural selection, gather from nature all of the parts that make a pig and assemble them accordingly. In no time we’ll hear joyous oinking! Such is the belief of top-down thinkers such as Mazzucato and Cass.

And this skilled engineer can then design animals that are better than those ‘designed’ by blind, stupid, aimless natural selection. We can now have pigs that fly! Horses that talk! Cows that give chocolate milk! Dogs that don’t defecate! Cats that do our laundry! Humans with x-ray vision! Even rainbow-colored unicorns! It’s simply a matter of knowing how to consciously assemble atoms found in nature into these wonders. Indeed, the fact that natural selection hasn’t yet produced wonders such as these proves that natural selection is random and unreliable and must be replaced by conscious design and control.

It’s engineering, is all it is. We don’t rely upon natural selection to assemble our wristwatches. Why should we rely upon competitive free-market forces to assemble our economy?

…..

Changing the analogy yet again: Industrial-policy advocates think of the economy as a ship that needs a captain to conduct the economy to an appropriate destination. The captain directs the ship there by consulting a reliable compass.

This great helmsman might choose the destination himself or be of a democratic bent and, thus, consult the passengers on where they might like the ship to go. No matter. For the ship to arrive at a worthwhile destination, that destination must be consciously chosen and steered there by a trusty compass-consulting skipper. The passengers on this ship – even if captained by the democrat – inevitably discover that they are not so much passengers as they are conscripted crew under the command of the compass-clutching captain. They must do as the captain commands if the ship is to sail in the pre-selected direction.

…..

The fact that humanity over the past 200 or so years has experienced an unprecedented rise in material prosperity largely as a result of market forces that the likes of Mazzucato and Cass believe cannot possibly deliver any such outcomes is denied. The focus of the denial à la Mazzucato is that modern prosperity is really the result of state action. (“Oh, look, the state prescribed this and proscribed that! Our modern prosperity is, therefore, the consequence of this prescription and that proscription! Q.E.D.”) That there is a tight and positive correlation between the wealth of ordinary people and the freedom of their economies from state direction is legerdemained away.

The focus of this denial à la Cass is that things really aren’t so great after all. In fact, things stink. Working American males, Cass tells us, cannot today support their families in the way that they could support their families decades ago. Ergo, the American economy is stranded on the shoals. Mr. Cass & crew have the compass needed to direct the ship back out to sea, through waters calm and with breezes favorable, toward the Promised Land.

With Bill Walton and John Tamny

(Don Boudreaux)

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I’m honored to have been a guest recently, along with John Tamny, on Bill Walton’s show. In this program we discussed a variety of issues, including American Compass’s misguided “Coin-Flip Capitalism” project.

Bonus Quotation of the Day…

(Don Boudreaux)

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… is from page 227 of the late Nathan Glazer’s 2000 paper “Disaggregating Culture,” which is chapter 16 in Culture Matters, Lawrence E. Harrison and Samuel P. Huntington, eds. (2000):

It is of benefit, every group thinks, to be seen as victim, not as superior.

“While everyone was distracted by Saul Alinsky, it turns out the real action was Antonio Gramsci.”

(Don Boudreaux)

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The title of this post is from an e-mail that my GMU colleague Todd Zywicki sent after he watched this video by Marc Sidwell. (I thank Todd for his kind permission to quote him. I thank also my colleague Dan Klein for alerting me – and Todd – to this video, the length of which is just over five minutes.)

Some Links

(Don Boudreaux)

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My intrepid Mercatus Center colleague Veronique de Rugy wishes that more people would heed the advice of Frederic Bastiat to look for that which is unseen. A slice:

Take, for example, the massive amount of additional debt the federal government has imposed on future generations of Americans during the COVID-19 crisis. That which is seen is the money flowing from the federal government to the unemployed, to those taking leave due to rescue money given to businesses during the pandemic. While we might be aware in the abstract that there is an accompanying rise in U.S. government indebtedness, that which is not seen is the increase in taxes that must be paid by future generations. Nor do we see the slower economic growth that will be caused by the need to pay off this debt.

Writing in the Wall Street Journal, University of Chicago scholars Todd Henderson and Steven Kaplan expose some of the many fallacies that infect American Compass’s “Coin-Flip Capitalism” project. A slice:

The data are clear that private equity has created enormous social value. While returns net of fees have modestly exceeded the return of the market over the past decade, gross returns have averaged more than 5% a year better than the market over this time. This means that the roughly $300 billion invested in private equity deals in 2018 will generate an excess social return of more than $100 billion over the average seven-year life of these investments.

Private-equity firms create this value by improving a company’s performance in finance, governance and operations. When a private-equity fund buys a company, it can put in place better incentives and a more sustainable capital structure, install more competent management, and improve operations with a focus on long-term value creation. Managers of companies owned by private equity have more skin in the game—the CEO typically gets about 5% of the equity and the management team about 15%, compared with less than a few percent in publicly traded companies. Boards are smaller and tend to monitor executive performance more closely.

Arnold Kling laments the ambiguity of data on covid and its consequences.

Richard Epstein argues that American workers do not need labor unions. A slice:

A pro-union strategy is still more disastrous when its so-called “incidental effects” are taken into account. It is well-established in economic theory that the benefits to any monopolist do not come from increased productivity, but from its ability to raise price above marginal cost, such that some beneficial transactions that would have taken place in competitive markets are eliminated to preserve monopoly power. That simple insight means the gains to the labor union and its members come both at the expense of excluded workers, and from the squeeze put on shareholders, suppliers, and customers. Even if these were just dollar-for-dollar trade-offs, it is questionable as a social matter whether we should favor policies that redistribute wealth towards union members and away from lower-income workers. But there is no reason to dwell on these niceties, because the legislative scheme here is not zero-sum; it is negative sum. The union members gain less than other members of society lose, as in all cases of monopoly.

Here are David Henderson’s Happy-90th-Birthday wishes to Thomas Sowell.

Back to Bastiat: here’s Art Carden.

Quotation of the Day…

(Don Boudreaux)

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… is from Thomas J. DiLorenzo’s June 1998 essay “The Ghost of John D. Rockefeller” (footnote deleted); I offer this quotation on this day, July 2nd, 2020, the 130th anniversary of President Benjamin Harrison signing into law the unfortunately revered Sherman Antitrust Act – a piece of legislation sold as attacking a non-existent problem but one later used to create problems:

The Sherman Act was a protectionist scheme in more ways than one. The real source of monopoly power in the late nineteenth century was government intervention. In October 1890, just three months after the Sherman Act was passed, Congress passed the McKinley tariff the largest tariff increase in history up to that point. The bill was sponsored by none other than Senator John Sherman himself. Sherman, as a leader of the Republican Party, had championed protectionism and high tariffs since the Civil War. In the Senate debate over his antitrust bill he attacked the trusts because they supposedly “subverted the tariff system; they undermined the policy of government to protect . . . American industries by levying duties on imported goods.” That is, the price-cutting by the trusts undermined the manufacturing cartel that was created and sustained by the Republicans’ high-tariff policies.

The Sherman Act was a political fig leaf designed to deflect attention away from the real source of monopoly power: the tariff and the true price-fixing conspirators, Congress and protectionist manufacturers.

DBx: No one who is knowledgeable about 19th-century American economic history believes that free markets were sources of monopoly power. Sources of firms unprecedentedly large, yes. (The optimal sizes of many firms’ markets were naturally expanded by the spread of railroads, telegraphs, and telephones.) Sources of unprecedentedly large personal fortunes, yes. (These fortunes – such as those of John D. Rockefeller, Andrew Carnegie, and Gustavus Swift – were earned as these men had the entrepreneurial vision, gumption, and skills necessary to take advantage of new market opportunities to better serve consumers.)

But were free markets in the U.S. back then sources of monopoly power – of the power to restrict output and to raise prices? No. All the evidence points in a direction opposite that which would support the pop notion that the United States was plagued with privately created monopoly power in the 19th century.

And as DiLorenzo argues, it is simply unbelievable that the same Congress that in October 1890 enacted one of the largest tariff hikes in American history, did, three months earlier, intend with its Sherman Act to promote consumer welfare by attacking what that Congress believed to be monopoly power.

The Sherman Antitrust Act stands as an early example of U.S. industrial policy. It is, again, legislation cynically trumpeted as helping ordinary Americans by deploying the power of government to attack a problem that didn’t exist. And it became – by being used, in the name of promoting competition, to stifle competition – itself a friend and source of what it pretends to abhor and uproot. Some of this stifling of competition was and remains intentional; other of it was and remains the unintentional result of economists and lawyers arrogantly fancying themselves able to identify which particular market arrangements and business practices are ‘good’ for the economy and which aren’t.

…..

Pictured above is the tariff-loving Sen. John Sherman (who was a younger brother of William Tecumseh Sherman).

Bonus Quotation of the Day…

(Don Boudreaux)

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… is from page 57 of the May 9th, 2020, draft of the important forthcoming monograph from Deirdre McCloskey and Alberto Mingardi, The Illiberal and Anti-Entrepreneurial State of Mariana Mazzucato:

For example, the Chinese system of high-speed trains is a glorious State project, which now stretches through the entire immense country—all of the trains raised twenty meters above grade on viaducts. Stunning. But was it a good idea? China, still with an income per head, despite its successes from economic liberalism, only one-fifth or one-fourth that of the United States, has more of such three-hundred-kilometer-per-hour trains than the rest of the world combined. Like the TGV in France, the trains are nice for affluent people with a high opportunity cost of personal time, and are massively subsidized for their benefit. But they reduce income on balance for the rest of the nation.

DBx: Many people who assert that industrial policy has a splendid record of success point to things such as Chinese high-speed trains. Such people do not understand the economic case against industrial policy.

The economic case against industrial policy is not that the state is unable to arrange for some project to be completed or some industry to survive or even to thrive. Of course an agency that can commandeer resources and obstruct people’s commercial choices can build the likes of a high-speed rail system or ensure that steel or computer-chip or soybean producers receive enough revenues to sustain their operations and even to be able to produce outputs that foreigners voluntarily purchase.

What no such agency can do, however, is to know that the uses of resources that it arranges with its tariffs, subsidies, and diktats are worthwhile. That is, the state cannot possibly know that its industrial-policy ‘successes’ generate satisfaction for consumers that is at least equal to the satisfaction that would have been generated for consumers had the resources commandeered by the state been instead allocated to whatever uses the market would have directed them. And because these state-ordered allocations of resources are made by suppressing market prices, the overwhelming likelihood is that even the most impressive-looking industrial-policy ‘success’ is really a failure.

…..

“Oh look! China exports lots of medical devices because of Chinese industrial policy! See! Industrial policy works!” — Assertions such as these, commonplace as they are, utterly miss the point. To point to particular industries that succeed as a result of industrial policy and exclaim “See! Government restrictions on free trade and free markets work!” makes no more sense than, say, to point to some Chinese people reading Chairman Mao’s Little Red Book and exclaiming “See! Government restrictions on freedom of the press and freedom of thought work!”

Alas, although sensible people understand that such ‘reasoning’ by protectionists and industrial-policy advocates is manifestly foolish, the world apparently has in it enough people who are sufficiently gullible to find such reasoning enchantingly compelling.

Taking the Knowledge Problem Seriously

(Don Boudreaux)

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Here’s a letter to Ian Fletcher, who e-mailed me yesterday in response to this earlier post of mine.

Ian:

Thanks for your e-mail in response to my request that you, as a proponent of industrial policy, explain how government officials would get the information they need in order to outperform markets. You respond that “There are a number of answers to this question,” and you then offer five specific ones. Unfortunately, only two answers are real; the other three are red herrings. For example, the fact that “the present international environment” features “aggressive mercantilism” is no answer to the question of how government officials will acquire the knowledge necessary to carry out industrial policy successfully.

One of your two real answers is that governments have access to information “from the Commerce Department” about the size of the trade deficit. That you believe that knowledge of the trade deficit is the sort of knowledge that government officials must access in order to outperform competitive free markets means that you’re unaware of the nature of the knowledge problem that must be solved if industrial policy is to work as advertised.

The knowledge about which I ask is knowledge of which particular goods and services should be produced and, more importantly, also of how best to produce these goods and services. How many computer chips to produce relative to potato chips (and to every other good and service)? And how should each of these goods and services be produced? How much labor to use relative to capital and to land? And which specific materials are best to use today in their production? Which kinds will be best to use tomorrow?

You perhaps think that the other of your real answers to my question suffices as a response – namely that these decisions will be made, as you put it, “by applying the logic of technology.”

Alas, this answer of yours is precisely 100 years behind the times. In 1920 Ludwig von Mises’s published a famous paper showing that, because nearly every good or service can be produced using many different methods and with countless different resource combinations, learning which are the economically best uses of resources is not a problem of technology. Instead, it’s a problem of relative economic valuation. It’s a problem of acting in accordance with the relative scarcities of innumerable possible inputs, from asphalt to asparagus and from zinc to zippers. Mises explained that an economy that fails to act in reasonable accordance with these relative scarcities can satisfy no more than a tiny handful of human desires. He showed also that market prices are indispensable conveyers of this information: prices lead producers to use fewer of those inputs whose prices have risen and more of those inputs whose prices have fallen.

Insofar as it operates, industrial policy replaces competitively set market prices as guides to resource allocation with bureaucratic commands. Industrial-policy advocates presume that government officials not only can learn all the relative resource scarcities that are at every moment taken account of by producers responding to market prices, but can acquire knowledge of these resource scarcities that is greater than is the amount of knowledge used in markets.

What you, Oren Cass, Henry Olsen, Marco Rubio, Elizabeth Warren, and other advocates of industrial policy must explain is how this knowledge – what Hayek called “knowledge of the particular circumstances of time and place” – knowledge that is inconceivably vast in volume, ever-changing, and dispersed across the globe and amongst billions of minds – will be gathered by bureaucrats and used by them productively. So far, neither you nor any other advocate today of industrial policy has shown even an awareness of the nature and reality of this problem. And you certainly haven’t taken the first step toward offering a credible explanation of how you propose to solve it. Until you do, no proposal you offer for industrial policy should be taken seriously.

Sincerely,

Don

Quotation of the Day…

(Don Boudreaux)

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… is from pages 324-325 of the final chapter of Columbia University economics professor Arvind Panagariya’s superb and must-read 2019 book, Free Trade and Prosperity:

I have reviewed several major cases of sustained rapid growth and found that in every case, low or declining barriers to trade were an integral part of the growth strategy…. I do not find a single case in which high or rising protection has accompanied rapid growth.

DBx: Protectionists and advocates of industrial policy deny the reality described here by Professor Panagariya. In defense of their schemes, they offer recitations of obscure theoretical possibilities (that no sound economist denies) and long lists of ways – also well-known to economists – in which real-world markets differ from the perfectly competitive markets described in economic textbooks. And amidst their tiresome recitations and lists protectionists and advocates of industrial policy never fail to include also claims about reality that are either certifiably mistaken or horribly misconstrued.

What protectionists and advocates of industrial policy never do, though, is to explain how government officials who impose tariffs and dispense subsidies will acquire the knowledge necessary to make likely the promised success of their schemes.