Russell Roberts's Blog, page 409

Yet Another Open Letter to Oren Cass

(Don Boudreaux)

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Oren:

Debating Mike Munger at Pairagraph, you include as part of your case for industrial policy the assertion that “No economic theory holds that the attractiveness of a choice [of how to invest] will correlate with its value to the society.”

This claim is incorrect. The economic theory of how investors who are free of government direction are led to make socially advantageous choices is very well-developed. It’s the theory of profits and losses that is part of the more general theory of microeconomics. And it dates back to the writings of Adam Smith.

Here’s how it works; it’s quite beautiful and not difficult to grasp:

Consumers left free to spend their incomes as they choose reveal, through their spending choices, the relative values they attach to all products on offer. The resulting relative prices of different products both inform and incite entrepreneurs to direct resources to those productive activities featuring the largest differences between selling prices and costs of production. Production opportunities for which this difference is greatest are those for which the social value of increasing production is greatest. Happily, these opportunities are also those for which potential profits are greatest.

Businesses that successfully seize these opportunities earn profits; business that don’t succeed at doing so suffer losses. Further, profits attract yet more resources into these socially productive activities until unusually high profits there are no longer available. In contrast, businesses that waste resources by producing outputs that sell at prices too low to cover costs are driven by these losses to stop those activities. Owners of resources freed by losses from wasteful activities have strong incentives to redirect their resources into activities that produce positive value for others.

In this way, the attractiveness of each investment choice “will correlate with its value to the society.” This account is at the core of the economic theory of markets.

You will undoubtedly protest that this competitive process does not work perfectly. And you will be correct about this fact. But you will be incorrect in your protest’s implication that the case for free markets requires perfection. The economic argument for free markets is that markets over time allocate resources better than can any other method – better than tradition and better than politicians and government bureaucrats.

By now I’ve read many of your pleas for giving government officials increased power to override the processes by which markets allocate resources. But disappointingly, I’ve yet to find in your pleas any evidence that you actually understand the case for markets. The case as you present it is invariably not only a straw man, but a poorly fashioned one to boot. Even more disappointingly, I’ve yet to find in your case any explanation whatsoever of how the government officials who you would empower to override market processes will get the information required for them to perform better than the markets that they displace.

Whatever the shortfalls, lacunae, and qualifications of the economic theory of how markets allocate resources toward socially valued uses, those of us who oppose industrial policy at least have such a theory – and it’s one with a fair amount of empirical support. In contrast, you have absolutely nothing.

We opponents of industrial policy offer theory and evidence; you offer straw men and assertions. So I close with this challenge: Tell us, publicly, just how government officials charged with carrying out industrial policy will get the necessary information to out-perform markets. Until you do so, you will not have earned the right to have your assertions or your policy proposals taken seriously.

Sincerely,

Don

Quotation of the Day…

(Don Boudreaux)

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… is from page 236 of Roger Koppl’s superb 2018 book, Expert Failure (link added):

Imposed knowledge cannot grow and change as freely or rapidly as synecological knowledge. In other words, it cannot grow or change as freely or rapidly as the divided knowledge emergent from an ecology of interacting, dispersed, and autonomous knowers. Imposed knowledge becomes dogma and thus deeply “unscientific” if, at least, “science” means open inquiry. Thus, apoplectic appeals to “science” in defense of the administrative state are mistaken.

DBx: Our world teems with unscientific people. And here, like Koppl above, I refer not to unschooled rubes or to those who would intentionally replace science with revelation, tradition-because-it’s-tradition, or some theology. Instead, I refer to educated, smart people who respect science.

Far too many such smart, educated people, while knowledgeable – many professionally so – of natural sciences, refuse to understand the economy scientifically. Seeing only some surface phenomena of the economy, they are blind to the inconceivably complex processes of detailed decisions and adjustments constantly in play that give rise to these relatively few observable surface phenomena.

These unscientific scientific people then, ironically, think themselves to be on the scientific forefront by measuring these surface phenomena with oh-so-sophisticated econometric tools and then proposing to improve the economy by having the government coercively adjust various of these surface  phenomena into a pattern more pleasing to the fancies of the ‘scientific’ observers.

Is the observed “distribution” of income unappealing? No problem. We can make it more appealing by having the state seize income or wealth from some people and then “redistribute” this income or wealth to other people. Easy peasy.

How about the observed origins of our imports? Does the pattern of these imports appear to show that we import too much overall? Or that we import too many ‘vital’ goods? No problem. All government must do is to use tariffs and subsidies – or more ‘comprehensive’ industrial policy – designed (scientifically!) to result in a more appealing pattern of international trade. It’s a snap!

Does it appear to you that too few workers have paid leave as part of their employment contracts? Well, your interpretation of observed reality must be accurate because you, after all, are motivated by excellent intentions and you perhaps even boast a Ph.D. or a J.D. And so the solution is objectively clear: Have the state command that more workers receive paid leave as part of their employment contracts. What could be simpler?!

This pseudo-scientific arrogance is destructive.

Be Careful With this Exception

(Don Boudreaux)

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Here’s a letter to frequent and valued Café Hayek commenter Richard Fulmer:

Mr. Fulmer:

Your comments at Café Hayek are always valued. Thank you for them.

In your comment on this post you understandably point to the national-defense exception to the case for free trade. This exception is real, yet one must take care to avoid embracing it too quickly. Politicians and pundits who call for restricting trade in the name of national defense often forget trade’s mutuality.

It’s true that the freer is American trade with the Chinese the more enriched are the Chinese. And this enrichment of the Chinese people indeed makes available to the Chinese government more resources to put to military use. But this trade also enriches us Americans and thus makes available more resources for our military use. Therefore, trade restrictions imposed by our government, while denying some resources to Beijing’s military, denies some resources also to the Pentagon. The same trade obstructions that decrease wealth in China decrease wealth here.

It follows that one cannot say in the abstract that reducing America’s trade with the Chinese will weaken China’s military relative to America’s military. Perhaps a general restriction of trade with the Chinese will have this effect. But perhaps it will have the opposite effect – namely, it might weaken our military relative to China’s. There’s no way to tell in the abstract.

The national-defense exception to free trade becomes downright illogical when offered by the likes of Donald Trump, Peter Navarro, and other vocal protectionists. Such protectionists would have us believe that when foreigners are denied real goods and services by American trade restrictions their countries are economically weakened, but that when Americans are denied real goods and services by American trade restrictions the U.S. is economically strengthened. It’s bizarre.

Sincerely,

Don

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Quotation of the Day…

(Don Boudreaux)

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… is from page 208 of Philipp Blom’s superb 2010 book, A Wicked Company:

The first problem with Rousseau’s concept of the social contract is that the “general will” he posits has, like God, no voice to make itself heard directly. For its expression and interpretation, it must rely on particular, wise individuals to lend it theirs.

DBx: Surely among the top three greatest fallacies of the modern age – the age that was only beginning to form when Rousseau and his contemporaries were on the scene – is the notion that a group of people has a will and that this will of the People is only, or at least most reliably, revealed in the results of majoritarian democracy.

If this notion were true, it would indeed be obnoxious to impose restraints upon the expression of this ‘will’ and on it being carried out. But there is no will of the People. No group of people has a will because no group of people has a mind. A group of people is a group of different wills and different minds. These different minds might well share many preferences. Each of these minds – being human – certainly is influenced in its thoughts and preferences by what that mind imagines the other minds think of it. But a group of people, as such, has no will.

And that which doesn’t exist cannot be discovered or put into action.

There are many goods and services that are best supplied simultaneously to a group of people in a manner that makes it impossible, or too costly, to exclude particular individuals from being able to consume the good or service. An example is the reduction of air pollution in the Los Angeles basin. Every person in the basin gets to breathe the cleaner air whether or not he or she contributed to the effort to cleanse it. This inability to exclude non-payers creates obvious challenges to those who would, through private initiative, provide the service of cleansing the air.

Some group effort to cleanse the air, therefore, is likely appropriate. And individualist principles counsel that every individual who will plausibly be significantly affected by the collective effort cleanse the air have a say into whether or not, and how, that effort is carried out. Majoritarian democracy is one such way, and this way might be, all things considered, the best way.

Yet the result of majoritarian voting ought not be sold as being more than it is. The result of majoritarian voting – or, indeed, of any sort of voting or of any collective-choice process – is simply the result of that collective-choice process. This result is categorically different from the result of an individual choosing some course of action from among perceived alternatives. The latter can with accuracy be said to reveal the individual’s will; the former cannot be accurately said to reveal the will of the group or of the voters.

Among the practical and important implications of the above reality is that anyone who asserts that he or she is the voice of ‘the people’ or is carrying out ‘the will of the People’ is either delusional or lying, and in either case is not to be trusted.

The (Il)Logic of Retaliatory Industrial Policy and Protectionism

(Don Boudreaux)

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In my latest column for AIER, I use a 2X2 matrix that my son, Thomas, generously drew for me to help me explain the (il)logic of adopting tariffs and subsidies at home in response to tariffs and subsidies adopted abroad. A slice:

On the north-south axis and in blue is the U.S.A. On the east-west axis and in red is China. Each of the four boxes contains two numbers, each one a measure of a country’s economic performance. (For simplicity, you can think of the numbers as monetary figures.) The blue number in each box’s northwest corner shows U.S. economic performance. The red number in each box’s southeast corner shows Chinese economic performance. The absolute value of these numbers is meaningless. What matters is the value of one number relative to any of the others.

In this simplified example, each government pursues one of two policies: free market or industrial policy. If each country’s market is free, economic performance in each country is 1,000. This outcome – the best one possible – is shown in the box in the upper left of the figure.

Now, however, suppose that Beijing pursues industrial policy. That policy will significantly worsen the performance of China’s economy. But because the U.S. and Chinese economies are somewhat integrated with each other through trade, the degree to which China’s economy suffers depends upon what happens in the U.S. If America sticks with free markets, some of the benefits of these free markets continue to be shared with the Chinese people. Beijing’s use of industrial policy will thus cause Chinese economic performance to fall ‘only’ from 1,000 to 500.

But if the U.S. government retaliates with its own industrial policy, the performance also of the U.S. economy will worsen. And this worsening of U.S. economic performance will further worsen the performance of China’s economy. Industrial policy pursued in both countries causes economic performance in each country to be 200, as shown in the box in the lower-right-hand-corner.

When pundits and politicians in America insist that Beijing’s use of industrial policy creates the need for industrial policy in America, they see only the harm that Beijing’s policy inflicts on Americans. That is, they see only the reduction in American economic performance from 1,000 to 900 (as seen when moving from the northwest box to the northeast box).

Some Links

(Don Boudreaux)

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Pierre Lemieux draws a lesson from Trump’s presidency. A slice:

To advance liberty, an ignorant disrupter is not sufficient. He is more likely to advance tyranny. If he appears to defend one libertarian cause—say, the Second Amendment—he will more probably bring it into disrepute.

Speaking of Trump’s presidency, for George Will it cannot end soon enough. A slice:

In life’s unforgiving arithmetic, we are the sum of our choices. Congressional Republicans have made theirs for more than 1,200 days. We cannot know all the measures necessary to restore the nation’s domestic health and international standing, but we know the first step: Senate Republicans must be routed, as condign punishment for their Vichyite collaboration, leaving the Republican remnant to wonder: Was it sensible to sacrifice dignity, such as it ever was, and to shed principles, if convictions so easily jettisoned could be dignified as principles, for . . . what? Praying people should pray, and all others should hope: May I never crave anything as much as these people crave membership in the world’s most risible deliberative body.

James Bovard identifies the looting champs.

Jeff Jacoby writes about indecent cops and indecent rioters – and, unrelatedly, also about Joe Biden and Milton Friedman.

Doux commerce.

Arnold Kling reviews Robert P. Saldin’s and Steven M. Teles’s Never Trump.

Quotation of the Day…

(Don Boudreaux)

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… is from page 226 of the late Harold Demsetz’s 1969 paper “Perfect Competition, Regulation, and the Stock Market” as this paper is reprinted in volume II of the 1989 collection of some of Demsetz’s most important works, Efficiency, Competition, and Policy:

Complete absence of imperfections is consistent with efficiency only if the cost of accomplishing this objective is zero.

This Line About Political-Party Platforms Appears in an Op-Ed…

(Don Boudreaux)

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… apparently without irony (original emphasis):

Elections are about communicating ideas. So the platform should be a product that can be boiled down into soundbites and tweets.

Aren’t elections uplifting? Ain’t politics grand?

Pittsburgh Tribune-Review: “Fair’s fair — right?”

(Don Boudreaux)

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In my column for the October 16th, 2009, edition of the Pittsburgh Tribune-Review I did my best to explain the error of inferring unfairness from differences in income. You can read my column beneath the fold.

(more…)

Some Links

(Don Boudreaux)

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Max Gulker explains that basic economics taught well conveys the reality and importance of market processes. A slice:

Faced with uncertainty across so many dimensions, reopening firms are not simply central planners with smaller jurisdictions than government. Their best practices emerge as they do business in this new landscape, observe price signals, make mistakes, and ultimately adjust countless times. The process of competition is what central planners can’t replicate.

Speaking of process, Logan Chipkin reviews Matt Ridley’s new book, How Innovation Works.

Alberto Mingardi continues to be unimpressed with Marianna Mazzucato’s efforts to credit the state with accomplishment for which it deserves no credit. A slice:

This is standard Mazzucato. Shining words and great parsimony of details. How were academia, the army, the private sector, and civil society mobilized? Who did what? What incentives were put in place, how was spending channeled through? We are asked for a leap of faith: it was “the State”.

Omigosh, how the lives of ordinary people in the modern world have improved since the 1990s! (HT Russ Roberts)

Scott Atlas, John Birge, Ralph Keeney, and Alexander Lipton predict that the covid lockdown will prove to be very lethal.

Scott Sumner rightly praises this excellent tweet by Matt Yglesias.

David Hart offers a brilliant and deep history on Bastiat’s ‘Seen and Unseen.‘