Russell Roberts's Blog, page 414
May 20, 2020
Another Open Letter to Oren Cass
Here’s another open letter to Oren Cass:
Mr. Oren Cass
American Compass
Oren:
In your mass e-mail this morning announcing American Compass’s project that you tellingly name “Coin-Flip Capitalism,” you write:
The buying and selling of companies, the mergers and divestments, the hedging and leveraging, are not themselves valuable activity. They invent, create, build, and provide nothing. Their claim to value is purely derivative—by improving the allocation of capital and configuration of assets, they are supposed to make everyone operating in the real economy more productive.
With respect, this paragraph is a nest of nonsense.
Your most fundamental error is one that was exposed and debunked in the seminal 1965 article “Mergers and the Market for Corporate Control.” In this article, the late Henry Manne explained how mergers and other methods by which ownership rights over corporate assets are transferred are a principal means both of encouraging owners and managers to use corporate assets efficiently and to facilitate the transfer of poorly managed assets to owners who will ensure that these assets are managed better.
With no active market in assets, assets remain wherever they happen to be and used however they happen to be used, regardless of how productive or unproductive these uses are. And so for you to dismiss as “purely derivative” the market activities that transfer assets into hands that use those assets most productively reveals an oversight of a fundamental and beneficial function of capital markets.
Dismissing, as you do, the importance of such financial-market activities on the grounds that their “value is purely derivative” makes no more sense than dismissing as “purely derivative” the value of driving medical-supply delivery trucks to hospitals. Because diagnostic equipment, syringes, antibiotics, and other medical supplies become productive only when in the hands of people who use them to their best effect, all activities undertaken to get these supplies into the hands of physicians and nurses are productive no less than are the activities of the physicians and nurses who then manually use these supplies.
Do you believe that the driving of these delivery trucks is wasteful because its value is “purely derivative”? If not, you should rethink your indictment of the financial-market activities that you hold in such low esteem.
I know, I know: I’m just one of those neo-liberal market fundamentalists addicted to simplistic absolutisms. Perhaps. And so if I am mistaken in what I write above, then you have found for yourself a goldmine. With so many people being paid goo-gobs of money to perform activities that you have perceptively identified as valueless, you can make yourself incredibly rich while simultaneously improving the economy’s productivity.
Simply set up a firm that doesn’t use capital markets. If you’re correct, your firm – free of all the waste weighing down your competitors – will be extraordinarily profitable. Alternatively, hire yourself out as a consultant, advising existing firms on how to avoid all the waste that you believe clogs existing economic arrangements. Itching to get a leg up on her rivals, some perceptive corporate CEO will surely pay you big bucks for your unique insights on how her firm can increase its profits merely by refusing to participate in all the activities that you have identified as wasteful.
Sincerely,
Don
Reducing Spending > Raising Taxes
Here’s a letter that I sent last week to the Washington Post:
Editor:
Robert Samuelson is correct: the national debt is out of control (May 11). But he’s incorrect to suggest that this problem can be addressed with equal effectiveness by both tax increases and spending cuts.
In their meticulously researched 2019 book, Austerity: When It Works and When It Doesn’t, Harvard economist Alberto Alesina, along with Carlo Favero and Francesco Giavazzi, report that cutting spending is far more effective at reducing debt burdens than is raising taxes. As put by the blurb offered by the publisher, Princeton University Press: “Looking at thousands of fiscal measures adopted by sixteen advanced economies since the late 1970s, Austerity assesses the relative effectiveness of tax increases and spending cuts at reducing debt. It shows that spending cuts have much smaller costs in terms of output losses than tax increases.”
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
…..
I’m pleased to share the news that Austerity is the winner of the Manhattan Institute’s 2020 Hayek Book Prize. Congratulations to the authors for this well-deserved prize that acknowledges the high quality and deep importance of the research that they report in this superb book.
Pittsburgh Tribune-Review: “A good kind of deficit”
In the July 30th, 2009, edition of the Pittsburgh Tribune-Review, I yet again attempted to calm irrational fears about the so-called “trade deficit.” You can read my column beneath the fold.
Quotation of the Day…
… is from page 56 of the May 9th, 2020, draft of the forthcoming monograph from Deirdre McCloskey and Alberto Mingardi, The Illiberal and Anti-Entrepreneurial State of Mariana Mazzucato:
None of the Great Enrichments – not Britain’s or Sweden’s or Japan’s or Hong Kong’s or Ireland’s or Chile’s or China’s or India’s – has occurred until economic liberalism took hold.
DBx: This reality, despite being undeniable to careful students of economic history, is regularly denied by those who simply cannot let go of their belief in miracles.
Miracle numero uno believed by these deniers-of-reality is that politicians and mandarins possess, or can acquire, more knowledge about the current state of the economy, as well as about future conditions of supply and demand, than is elicited, communicated, and used by participants in a market economy. Refusing to recognize that the amount of knowledge that must be gathered and used to ensure a regular supply even of something as (seemingly) mundane as ordinary pencils is unfathomably immense, these deniers-of-reality simply assume that state officials can perform the miracle of knowing what no human mind or bureaucracy of minds can know.
May 19, 2020
Bonus Quotation of the Day…
… is from this recent Spectator essay by the brilliant novelist Lionel Shriver:
Politics, as opposed to science, does not reward the correction of mistakes, given that correcting a mistake also entails admitting to having made one. Worse, the bigger the mistake, the greater the political urgency of defending it at all costs.
Some Links
Steve Davies asks if we truly are entering a “post-liberal” era. A slice:
On the left there are two tendencies that are increasingly in bitter conflict with each other as well as with both actual liberal ideas and the current style of politics. The first is a revival of classical socialism and even Marxism, as found in publications such as Jacobin magazine. The second is what is commonly described as the Social Justice Warrior left, a kind of politics that derives ultimately from post-modernism and combines a radically subjectivist idea of identity with a tribalistic notion of social life and a highly intolerant view of public discourse.
Richard Ebeling is correct: there will be no recovery without production.
Lee Edwards makes the case for capitalism (although I’m less sure than he is that Trump knows enough about what socialism is to really oppose it – or what capitalism is to support it).
Thus, markets will always be imperfect, but that is precisely why markets exist in the first place! Markets never conform to the “ideal” of perfect competition, but this is completely irrelevant, since under such state of affairs, markets are unnecessary and redundant, since all resources are already perfectly allocated to their most valued uses. Market processes exist precisely because to generate the information necessary to better coordinate the plans and purposes of individuals in a peaceful and productive manner. The entrepreneurial lure for profit and the discipline of loss is what guides such imperfect processes in a tendency towards the creation of more complete information between buyers and sellers.
Writing in the Wall Street Journal, Alberto Mingardi reports on Italy’s calamitous use of price controls. Here’s his conclusion:
What about masks? The Italian government is preparing to make them itself, as if to ensure the economic damage will be properly spread across Italian taxpayers. Far from learning the lesson, the government has suggested it will repeat its price-fixing mistakes by setting the price of N95 masks. The results won’t be any better.
Quotation of the Day…
… is from my colleagues Peter Boettke’s and Virgil Storr’s Foreword to the 2015 Mercatus Center edition of the late Don Lavoie’s insightful 1985 book Rivalry and Central Planning:
Central planners in a socialist society simply lack the tools that they need to do their jobs. Absent private ownership of the means of production, there can be no market for the means of production. If there is no rivalry over the means of production, no money prices that reflect relative scarcities will emerge. Without money prices that reflect relative scarcities, it is impossible to determine whether or not economic projects are profitable (i.e., whether the benefits associated with a project are higher than the [value of] the resources that must be expended pursuing that project).
DBx: Notice the relevance of prices set by competition – what Lavoie calls economic “rivalry.”
The principal economic problem that springs from the elimination of private property rights in land, factories, forklifts, inventories, and other means of production is that there emerge no market prices of the means of production. Without such prices, there is no way for anyone, including government officials, to identify – from among the myriad possible methods of production and distribution – those relatively few methods that result in outputs the values of which exceed the costs of their production and distribution.
Obviously, with no prices at all this problem is most severe. Full-on socialism, which completely eliminates market prices in the means of production, would quickly ruin any economy. But the problem described above by Boettke and Storr does not only and suddenly appear with full-on socialism. Any obstruction of economic competition reduces the information content of prices.
Tariffs, for example, tell lies about the value of domestically produced outputs relative to the value of foreign-produced alternatives. Tariffs give the false impression that using domestically owned resources to produce the protected products is more economically justified than such resource use really is. Ditto for subsidies.
An economy as dynamic, large, and still relatively free – such as that of the United States – can endure a handful of such tariffs and subsidies without encountering easily noticeable problems. How many of us Americans notice the few extra dollars that we pay each year because of the cronyist protection of American sugar growers?
Nevertheless, a problem unseen and not lethal is nevertheless a problem. The economy – or, rather, the bulk of the denizens of the economy – would be better off without this problem.
But industrial policy of the sort advocated by the likes of Oren Cass, Julius Krein, Marco Rubio, and Elizabeth Warren would scale-up the information problem. By putting a significantly larger chunk of resource-allocation decisions into the hands of state officials, prices become more incomplete and filled with larger lies. Officials given the discretion to choose ‘winners’ have no way to know if the ‘winning’ goods and services they somehow divine Americans ‘should’ produce really are ones for which it would best for Americans to gain a comparative advantage at producing.
The more extensive and longer-lived is the industrial policy, the more distorted and unreliable become prices. Not only do the quantity and quality of the information available to industrial-policy mandarins decrease, so, too, do the quantity and quality of information available to market participants.
…..
This truth cannot be said too often: Despite their confident assertions to the contrary, there is no way for Oren Cass, Julius Krein, Marco Rubio, Elizabeth Warren, or any other human being or collection of human beings to know what they claim to know. They cannot possibly know that the market process has ‘failed’ by resulting in Americans now having a comparative advantage at producing, say, the amount of banking services now supplied in America rather than at producing more steel or textiles or microprocessors.
These industrial-policy advocates assert; they are excellent asserters of this, that, and the other thing. But to earn the right to be taken seriously, industrial-policy advocates must explain how government officials would, on the whole, gain more reliable information about consumers’ demands and about relative resources scarcities than is conveyed to private market participants by competitive market prices.
It isn’t that today’s proponents of industrial policy offer any such explanation that is then challenged and either confirmed or debunked. No. These proponents of industrial policy don’t even bother to offer any such explanation. They think themselves to have made their case by slaying straw-man champions of free trade and free markets. And they fancy that they score decisive points by tisk-tisking the alleged ‘epistemic nihilism’ of those of us who call them out.
Yet those of us who call out the proponents of industrial policy are emphatically not epistemic nihilists. We have a long-standing, coherent, substantive, and empirically supported account of how free markets elicit, transmit, and use the vast amounts of knowledge the use of which is necessary for the successful operation of modern economies. And we do not become guilty of ‘epistemic nihilism’ by demonstrating that the obstruction of market processes reduces the amount of knowledge that is used in economic affairs.
The true epistemic nihilists are the proponents of industrial policy: by way of an explanation of how government will acquire the knowledge necessary for industrial policy to succeed these proponents have only a void; they offer absolutely nothing.
May 18, 2020
I Don’t Understand Why this Simple Point Isn’t Immediately Obvious
Here’s a letter to a soon-to-be economics graduate student:
Mr. Mendoza:
Thanks for your e-mail.
You’re correct that “economists discovered several explanations showing situations where free trade damages the economy.” But you’re incorrect to conclude that these explanations should therefore guide real-world policy. These explanations are all white-board wonders, irrelevant to reality.
If you allow me to assume that government officials have superhuman knowledge and angelic motivations, I can – as you put it – “discover several explanations” of almost anything you care to show, not just that there should be no “presumption against protectionism.”
If we assume the existence of godlike government officials able to determine when protectionism – that is, the use of force to obstruct peaceful commerce – will redound to the public good, why not also assume that these same officials are able to determine when arson will redound to the public good? After all, a clever ninth-grader can spin a tale of how, under just the right circumstances, torching the homes and businesses of peaceful people will redound to the public good.
Indeed, given our happy situation of being ruled by superhumans, we should have no rules whatsoever. Strict prohibitions of theft, forgery, rape, even murder would be harmful, as these prohibitions would prevent our godlike leaders from allowing these activities to occur in those circumstances when, theory will show and our leaders will know, these activities are beneficial.
The bottom line is that every economic argument in support of protectionism is rooted in the twin assumptions of government officials being (1) much better informed about economic reality than are non-officials, and (2) motivated to serve the public even when doing so damages their own personal well-being.
Until and unless someone persuades me that both of these dubious (to say the least) assumptions are valid, I’ll continue to maintain that there is no rational argument against the proposition that each country’s economic interests are best served by a policy of unilateral and complete free trade.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
Pittsburgh Tribune-Review: “Individual Liberty Day”
My column for the July 24th, 2009, edition of the Pittsburgh Tribune-Review imagines what would be celebrated on Individual Liberty Day. You can read my column beneath the fold.
The Value of the Price System is Priceless
This system of prices and wages conveys reasonably reliable information to each individual about the consequences that will be experienced not only by her, but also by other people – most of them complete strangers – as a result of her choice of how to use her resources. And because the value of each person’s resources generally rises when that person uses her resources in ways that make other people, on net, better off, each person in a regime of private property has strong incentives to use her resources in ways that not only improve her well-being but also the well-being of countless strangers.
The division of ownership of resources in a regime of private (“several”) property rights and freedom of contract combines with humans’ “propensity” (as Adam Smith put it) “to truck, barter, and exchange one thing for another” to create a vast array of prices. These prices both inform and incite each individual to arrange the resources under his or her control in ways that give rise to an unfathomably complex and productive globe-spanning arrangement of resource use.
This overall arrangement of resource use is not and could never be comprehended by any individual or by any committee. Much less could it be consciously designed and built. It emerges unplanned and unplannable from billions of individuals, each informed by market prices about how he or she might better arrange the tiny clump of resources under his or her control. That what we notice of this system are its imperfections testifies to just how well and smoothly – indeed, how magnificently – it routinely performs.
Russell Roberts's Blog
- Russell Roberts's profile
- 39 followers
