Russell Roberts's Blog, page 403
June 22, 2020
Hayek and the Response to Coronavirus
Mark Pennington – author of one of my favorite books, Robust Political Economy – here discusses a range of issues, from coronavirus to industrial policy, using some of F.A. Hayek’s most profound ideas.
A Protectionist is Someone Who…
… upon seeing a robbery victim pay a hefty ransom to a thief for the return of stolen property calls the ransom the thief’s “income” and counts that “income” as a net addition to the nation’s wealth.
The protectionist, after all, is blind to the fact that income is genuinely earned only when it is the result of the successful reduction of scarcity – only when it is received as payment for the provision of some good or service that would not otherwise exist. Income is earned when it is the reward for making a net addition to the flow of goods and services available for human use.
The protectionist focuses only on the income and ignores the reason it is earned. This blindness of the protectionist cause him to leap to the mistaken conclusion that income payments themselves are net additions to prosperity. The protectionist looks with just as much admiration upon the receipt of a ransom payment by a thief – a payment made possible only by the thief’s prior act of unnecessarily creating more scarcity – as the protectionist looks upon the receipt of income by a worker who acts only to reduce scarcity.
Protectionism’s ‘logic’ is as follows: Use government coercion to make scarcity worse; watch some producers in the home country receive higher incomes as a result of responding to this increased scarcity; conclude that protectionism enriches the home country.
Protectionism’s ‘logic,’ of course is anything but. It’s utter and unsalvageable nonsense. It’s as idiotic as is the assertion that 5-2=8. Yet the desire to believe that subtraction is addition – that prosperity springs from plunder – that some favored groups’ government-granted privileges are a national treasure – is so strong that protectionism continues to attract champions and adherents.
Bonus Quotation of the Day…
… is from this recent statement from the leaders of Hillsdale College:
There is a kind of virtue that is cheap. It consists of jumping on cost-free bandwagons of public feeling – perhaps even deeply justified public feeling – and winning approval by espousing the right opinion.
DBx: I applaud Hilldale’s statement. Actions speak much louder and more truthfully than words. Words, of course, speak. Words matter. But talk is typically much more cheap than are actions.
Some Links
The narrative that white people “hold the power” conveys a wrongheaded notion of white superiority and creates an illusion of black dependency on white largess. This false assignment of responsibility, while coming from an authentic desire to produce change, can create a new kind of mental enslavement.
Glenn Loury, a Brown University economist, exposed this concern at a 2019 event sponsored by the Manhattan Institute titled “Barriers to Black Progress: Structural, Cultural or Both?” Mr. Loury was challenged with the proposition that before black people address factors within their locus of control—such as high levels of single parenthood, which create a greater likelihood of child poverty—white people’s racist attitudes and actions need to be resolved. “You just made white people, the ones who we say are the implacable, racist, indifferent, don’t-care oppressors, into the sole agents of your own delivery,” Mr. Loury said. “Really?”
David Henderson insists, correctly and rightly, that black livelihoods matter. A slice:
Economists often discuss the harmful effects of the minimum wage as an “unintended consequence.” In fact the effects were intended. Even as late as 1957, when U.S. Senators could get away with being openly racist, Senator John F. Kennedy (D-MA), at a hearing on the minimum wage, argued for increasing the minimum wage to protect white workers in the North from competition with black workers in the South.
The trouble is that a well functioning society can create an illusion that it all happens not because of the process but rather because we are so damn smart or maybe we have wise leaders with a good plan. It seems like it must be so, else how could we have become so good at what we do? Hayek’s main point is that it is a mistake to credit individual intelligence or knowledge, much less good governments with brainy leaders, with civilizational achievements; rather, the real credit belongs to institutions and processes that no one in particular controls.
While industrialization causes a short-term rise in carbon emissions, in the long term it’s beneficial to the environment as people move to cities, allowing farmland to revert to nature, and as prosperity enables them to switch to cleaner and more compact forms of energy. Carbon emissions decline as people move from wood to coal to natural gas, and then ultimately to what Mr. Shellenberger calls the safest and cleanest source: nuclear energy, the only practical technology for drastically curtailing carbon emissions, if only green activists would stop trying to shut down nuclear plants.
Richard McKenzie separates the myths from the realities about Adam Smith.
Juliette Sellgren’s discussion with food-policy expert Baylen Linnekin is excellent.
Quotation of the Day…
… is from page v of the 1969 Arlington House edition of Ludwig von Mises’s 1944 Yale University Press book, Omnipotent Government: The Rise of the Total State and Total War (available free-of-charge on-line here):
At the bottom of all totalitarian doctrines lies the belief that the rulers are wiser and loftier than their subjects and that they therefore know better what benefits those ruled than they themselves.
DBx: Indeed. And it’s therefore reasonable to argue that the greater are the numbers of decisions removed from the hands of individuals choosing and acting in the private sphere, the more closely does society take on characteristics of totalitarianism.
The state of society in general, and of the economy in particular, is not a toggle. Society and the economy are never, in practice, fully free or completely totalitarian. Within the freest real-world societies there loom some ideas and policies that make that society less free than it would otherwise be. Within the most totalitarian real-world societies, individuals manage to find some spheres, however small, in which they are free to act against the wishes of state officials. And it’s a matter of judgment, not science, when a society’s suppression of freedom by the state has become so expansive and determined that that society has earned the awful title “totalitarian.”
But a society need not be totalitarian, or even close to being totalitarian, in order to be infected with interventions that move it along the spectrum from “free” toward “totalitarian.” No interventions motor such a move more than do efforts of state officials to ‘direct’ the economy by suppressing people’s voluntary commercial choices and replacing these with resource-allocation decisions made by political authorities.
Protective tariffs alone might be insufficient to render a society totalitarian. But the use of protective tariffs moves a society in a totalitarian direction. By using such tariffs, a relatively small number of state officials deny to millions of persons the right to peacefully spend their incomes as these persons see fit. Resources in that society come to be more under the control, not of their owners, but of the state. Even if (contrary to all reality) these state officials are all earthly saints, and even if (contrary to all reality) their protectionist schemes ‘work’ economically exactly as protectionists promise, this protectionism nevertheless is a totalitarian virus within a society that is perhaps otherwise healthy and free.
Whenever some pundit, professor, or politician clamors for protective tariffs or for export subsidies, that person clamors for use of totalitarian methods, even though he or she is not clamoring for totalitarianism and would be horrified to realize the totalitarian nature of the policy ‘tools’ he or she proposes. And when this pundit, professor, or politician expands his or her call from tariffs and subsidies into more comprehensive industrial policy, that person calls for society to move even further along the spectrum from free to totalitarian.
The fact that even rather comprehensive industrial policy in some particular place and time might be insufficiently repressive to convince some reasonable people to label that society “totalitarian” does not mean that that society is not more infected with the totalitarian virus than it would be without industrial policy. Do not forget that all persons who advocate industrial policy believe that individuals spending and investing their own incomes do not do so as well as would state officials.
June 21, 2020
From a Cafe Patron
Cafe Hayek patron Felix Finch, in agreeable response to this post, sent to me the following e-mail, which I share here with his kind permission:
I had a friend who was an astrologer, and from talking about it, I believe it was a substitute for being an engineer — it has calculations, tables, formulas, esoteric data (double war time daylight savings adjustments) — all the trappings of being an engineer, without needing four years of college. I’ve often thought the same thing applies to politicians — they see caricatures of business people in movies and TV shows, all the shouting, the commands, the abrupt genius decisions — Where is that Jones report? Tell Jones he’s fired! We’ll build that plant anyway! — and that is what politics provides, all the trappings of Hollywood business people, without the need for the long years of experience and hard work.
Quotation of the Day…
… is from page 43 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:
[Mariana] Mazzucato believes that the State is good at detecting “high growth, high risk areas.” The idea is that their evaluation by a Ministry of Innovation would not be affected by politics. Dream on, we would reply. The alternative mechanism of voluntary deals responds to the boring interests rather of customers – that is, citizens, as suppliers as demanders. When political considerations are allowed to tip the scale, and protect ill-advised products and incompetent producers, the result is of course bad. Every moderately alert adult knows this. It is surprising that Mazzucato the economist does not.
DBx: As the penultimate sentence of this quotation correctly suggests, it is laughably unrealistic to pretend that politics plays no large role in industrial policy. The entire point of industrial policy is to replace market processes with the commands of politicians and their hirelings – that is, to power markets, not with the profits and losses that emerge in the process of economic competition but, instead, with prescriptions and proscriptions issued by politicians. To assume that politics plays no large role in industrial policy makes no more sense than to assume that steam plays no large role in steam engines.
And of course in place of the name “Mazzucato” in the above quotation can be substituted the name of whatever proponent of industrial policy you wish – Marco Rubio, Ian Fletcher, Oren Cass, Elizabeth Warren, Robert Reich. The list of the believers in politician-performed miracles is distressingly long and getting longer.
June 20, 2020
In Markets, Profits are Earned
My close friend Lyle Albaugh, CFO of Betsy Fisher – a small, upscale women’s clothing store in D.C. – sent to me the following e-mail in response to this recent blog post of mine. I share Lyle’s e-mail here with his kind permission.
One small point and by no means a criticism: you say ” shave a few percentage points off of costs.” For a small, closely-held corporation with, for example, $2M in costs, shaving even .5% off costs, would mean $10K in extra net income to the owners annually – a substantial sum. My point is to support your correct argument that even the smallest decrease in costs can have significant impact on stakeholders. We, small business owners, work endlessly to achieve these tiny cost savings.
Yes. To the extent that consumers can spend their money as they choose, entrepreneurs ceaselessly work hard to attract and to maintain customers. Consumers reap enormous benefits, yet they almost never notice the entrepreneurs’ hard work – the entrepreneurs’ risk-taking, the experimentation, the losses – that are inseparable from the competitive market process. Some arrogant professor or politician or pundit shows up and, seeing only the profits that successful business owners earn, complain – mistakenly supposing that these profits are wrung from the hides of consumers and workers.
It’s as maddening as it is ignorant. Yet this attitude – expressed today by many conservatives as well as by “Progressives” – is prevalent. No society can remain prosperous if this attitude becomes and stays widespread.
Yet Another Reason to Reject Industrial Policy
Here’s an e-mail that I sent to one of my graduate students, Jon Murphy:
Jon:
Thanks for alerting me to the happy fact that Art Carden linked in a recent essay of his to my 2016 EconLib piece “The Prosperity Pool.” And kudos for drawing from my essay an important lesson that I’d not realized is there.
The lesson you draw is that, because government officials are paid mostly in public acclaim rather than in monetary profits, government officials in charge of industrial policy would not be content to do what most entrepreneurs in the market do – namely, to make any of the many small but real contributions to economic well-being of the sort that have overwhelmingly been responsible for raising our standard of living. In contrast to all but a tiny number of entrepreneurs, government officials in charge of industrial policy would be driven to go for economic advances that are big, flashy, and attention-grabbing.
These officials are unlikely to realize that modern prosperity grows mainly from the accumulation of countless small improvements in goods, services, and production and distribution processes. But even if politicians and their hirelings grasped this reality, they’d win no notice and applause from the public for arranging for small improvements, no matter the number of these improvements. Instead of experimenting with the likes of better perforations in paper towels, with greater varieties of fit for shirts and pants, with more-convenient methods of brewing coffee, and with new inventory-control procedures that shave a few percentage points off of costs, officials in charge of industrial policy would devote their energies toward promoting economic advances that grab headlines and impress voters. As a result, industrial policy would direct too many resources toward the pursuit of large and glitzy projects and too few toward unnoticed small advances the accumulation of which is primarily responsible for our modern standard of living.
Thanks again for this insight. It’s lovely. I wish that I’d thought of it!
Best,
Don
Quotation of the Day…
… is from page 175 of Bas Van Der Vossen’s and Jason Brennan’s excellent 2018 book, In Defense of Openness:
Countries around the world have erected walls and barriers that stop free people from being productive. Our world actively prevents people from doing the things that actually abolish poverty. It interferes with their productive abilities, it stops them from working where their services are most needed, and it makes it difficult to sell their products to others who want them.
DBx: Here’s a commonplace fallacy: Because workers in jobs that satisfy especially pressing human wants are paid high wages, a key to making a country more prosperous is to artificially create especially pressing human wants.
Stated so starkly, no one accepts this formulation. But in practice this formulation is a central article of faith embraced by all who argue that protectionist measures promote greater prosperity in the home country. The protectionist observes that workers in the past who were employed to manufacture some particular good earned unusually high wages. Seeing that that particular good is now manufactured abroad and imported into the home country, the protectionist concludes that the home country is now poorer because those particular high-wage jobs no longer exist in the home country. How to ‘solve’ this ‘problem’? Simple! Use government coercion to make that particular good more scarce in the home country – that is, use government coercion to obstruct fellow citizens’ abilities to acquire that particular good from abroad.
Observing the protection-enabled high-paying jobs in the domestic economy, the protectionist then applauds his genius and humanity. “Take note,” the protectionist boasts, “the protectionism that I support enables these particular workers to earn higher wages!”
The protectionist – and the economically uninformed people who fall for his fallacy – doesn’t understand that the objective of production is to reduce scarcity. The protectionist misses the fact that when we rightly applaud the high incomes earned by producers who successfully reduce scarcity, we are applauding rewards justly earned for the successful reduction of scarcity. Deeply confused, the protectionist thinks that we are applauding the high wages as such. The protectionist mistakenly thinks that these high wages are a cause of prosperity; he doesn’t realize that these high wages are a result of the successful creation of more prosperity – that is, a result of the successful reduction of scarcity.
And the protectionist then leaps from this mistaken understanding to the whack-a-doodle conclusion that prosperity is created by keeping it artificially limited – that scarcity is reduced by using government coercion to make scarcity artificially increase.
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