Russell Roberts's Blog, page 417

Some Links

(Don Boudreaux)

Tweet

Joakim Book brilliantly exposes the many weaknesses in the argument for government intervention to correct markets failures allegedly caused by asymmetric information. A slice:

The very definition of specialization is to focus your efforts and knowledge into producing things you are – comparatively speaking – better at producing, and outsource the rest to others. By default, then, these others will know more about everything they produce just as you will know more about the specialized things you produce.

Dan Ikenson is happy to debate Sen. Josh Hawley (R-MO) over the value of the WTO. A slice:

When Hawley says the WTO enabled China’s rise, he’s not wrong. China’s long march to join the WTO required it to deliver massive economic reforms. When Beijing demonstrated that it was serious about reforms and that the Chinese economy and some of its government’s practices would become subject to the rules of the global trading system, the rest of the world responded by investing in China and cultivating deeper economic ties. That legitimacy contributed importantly to the development of China. But that was the plan, and it succeeded.

Michael Strain reports that America remains a society of upward mobility.

Joseph Loconte makes the case that “[t]he government’s response to the pandemic should give conservative advocates of a more powerful state pause.”

Matt Ridley is not impressed, to put it lightly, with the Imperial College modeling of Neil Ferguson – modeling from which predictions were drawn that pushed many governments to impose draconian lockdowns in response to covid-19.

Quotation of the Day…

(Don Boudreaux)

Tweet

… is from page 263 of George Will’s excellent 2019 book, The Conservative Sensibility (footnote deleted):

For many Americans, slower growth seems less a menace than a promise – the promise of restfulness, of respite from the accelerated social churning imposed by globalization. “People suppose that the new societies are going to change shape daily,” wrote Tocqueville nearly two centuries ago, “but my fear is that they will wind up being too unalterably fixed with the same institutions, prejudices, and mores, so that mankind will stop progressing and will dig itself in.” The digging in is far advanced in twenty-first century America.

DBx: And those doing the shoveling are not only intellectuals and politicians on the political left – the ironically named “Progressives” – but also, increasingly, intellectuals and politicians on the political right. Conservatives such as Oren Cass, Julius Krein, Henry Olsen, Daniel McCarthy, Marco Rubio, and Josh Hawley have consumed the Kool-Aid that deludes those who down it that economic change that has negative effects on any ordinary people is undesirable and can be prevented by government in ways that have no negative effects on ordinary people – in ways that will ensure that ordinary people finally get their due from the economy.

Conservative nationalists go on…

Perhaps a price to preserve the economy in these conservatives’ amber will be paid, but if so it will be paid by the ‘elites,’ who deserve it! After all, it is the ‘elites’ whose cosmopolitanism and lack of fellow-feeling have created this hell in which ordinary Americans now writhe in agony and without hope. Opportunistically trumpeting the juvenile nostrums of Milton Friedman and too stupid or stubborn to find in F.A. Hayek anything except “simplistic absolutisms,” “market fundamentalists” promote dangerous notions. And no notion is more dangerous than the alleged virtues of libertarian individualism, for it gives rise to dog-eat-dog free markets that undermine the nation, communities, families, and the quest for dignity.

But don’t despair! Conservative nationalists have arrived to battle courageously against the mighty forces now shoving laissez-faire capitalism and so-called “free trade” down the throats of the helpless masses. These conservatives brilliantly reveal, contrary to the assumptions and conclusions of idiot libertarians, that human beings care about country, community, and family – that human beings are not driven exclusively by materialist motives – that human beings find meaning and value and identity in work. These conservative scholars, pundits, and politicians expose also other fallacies peddled by “market fundamentalists” – fallacies such as that the current pattern of comparative advantage can never or should never be changed, that markets are perfect, that all individuals acting in markets have full knowledge, and that foreign governments don’t meddle harmfully in economic affairs.

And once the hypnotic spell of “market fundamentalism” is broken, governments – manned by well-meaning and wise public servants – can intervene knowledgeably, with tariffs and subsidies, in order to protect meaningful jobs, to temper the pace of economic change, and to ensure that all Americans, not just elites, once again gain from participating in the economy and from global trade.

… or so goes the tale told by conservative nationalists.

Some Links

(Don Boudreaux)

Tweet

Edward Stringham justly praises the Wall Street Journal‘s editorial stance throughout the lockdown.

Also writing sensibly about the lockdown is Conor Friedersdorf. (HT Gene Epstein) A slice:

“A prolonged depression will stunt lives as surely as any viral epidemic, and its toll will not be confined to the elderly,” Heather Mac Donald argues at Spectator USA. “The shuttering of auto manufacturing plants led to an 85 percent increase in opioid overdose deaths in the surrounding counties over seven years, according to a recent study.” Deficit spending may be necessary to keep people afloat, she continued, but the wealth that permits it could quickly evaporate. “The enormously complex web of trade, once killed, cannot be brought back to life by government stimulus. And who is going to pay for all that deficit spending as businesses close and tax revenues disappear?”

Jeffrey Tucker looks back at the polio pandemic of the mid-20th century.

Simon Lester and Huan Zhu urge sobriety for those who discuss China.

We should all breathe a sigh of relief that Dennis Prager and Tulsi Gabbard lost their suits against Google.

And we should all hope for the success of Dr. Timothy Wong.

My brilliant GMU Econ colleague Bryan Caplan makes a passionate – yet powerfully reasoned – case for paid voluntary human experimentation.

Complexity is a Real Factor

(Don Boudreaux)

Tweet

In my latest column for AIER, I steal Paul Romer’s idea of using simple arithmetic to explain the enormous challenge that markets meet in bringing about productive arrangements of the world’s multitudinous inputs. A slice:

When I was young, the number of family members gathered for our family’s Thanksgiving dinner was about 20 – a large dinner gathering, yes, but nothing out of the ordinary. Yet the number of different ways to arrange the seating of a mere 20 people around a dinner table is – drumroll! – 2,432,902,008,176,640,000.

A number this large has no non-scientific name. It is inconceivably high and unimaginably humongous. It’s just a bit larger, by a mere several thousand trillion, but roughly equivalent to this number: 2,428,272,000,000,000,000 – which is the number of seconds (as in “60 seconds in a minute”) there are in 77 billion years. Note that astronomers estimate the universe’s age to be 13.8 billion years.

I didn’t write the above to impress you with my knowledge of advanced arithmetic or my ability to google “How old is the universe?” I wrote the above to make a point about the economy.

Solving economic problems – creating value – requires discovering how to arrange inputs productively. The number of inputs available for use is not 20 or even 20,000; it’s in the billions. Therefore the factorial operation means that the number of possible ways to arrange these billions of inputs is indescribably far beyond human comprehension. Yet only a minuscule fraction of these ways has any prospect of being productive. Almost all possible arrangements are useless or even dangerous.

One among these countless arrangements is gin mixed with turpentine and anchovies, but the resulting martini would be terrible. How best to discover the vanishingly small number of productive arrangements out of the sprawling and gigantic number of possible arrangements?

Obviously, relying on random chance will not do. Equally futile would be reliance on what on the surface appears to be the opposite of random chance: central planning. No human being or committee could possibly even survey and list all of the possible different arrangements of billions or inputs. Much less could any individual genius, or agency of geniuses, discover from this vast list of possibilities which of these arrangements are most useful compared to the uncountably large number of other possible arrangements.

Given the puniness of the human mind relative to the incalculable number of possible different arrangements of an economy’s inputs, to turn over to government the responsibility for choosing how resources should be allocated is, in effect, to rely upon random chance.

Quotation of the Day…

(Don Boudreaux)

Tweet

… is from page 4 of the 1999 Liberty Fund edition of James M. Buchanan’s and Gordon Tullock’s seminal 1962 book, The Calculus of Consent:

In a genuine sense, economic theory is also a theory of collective choice, and, as such, provides us with an explanation of how separate individual interests are reconciled through the mechanism of trade or exchange. Indeed, when individual interests are assumed to be identical, the main body of economic theory vanishes. If all men were equal interest and in endowment, natural or artificial, there would be no organized economic activity to explain…. Economic theory thus explains why men co-operate through trade. They do so because they are different.

DBx: What distinguishes humans from other animals? The conventional answer is big brains and language. We do indeed have unusually large brains relative to our body size (although the size of the human brain relative to human body weight isn’t that much more impressive than is this ratio in chimpanzees, and hardly at all greater than that for Dusky dolphins). And while other animals communicate with each other, including – as we humans chiefly do – by manipulating airwaves, our language is truly more complex than any known in other species (or so goes my pedestrian understanding).

But there’s another candidate for ’vitally important uniquely human trait’: It’s what Adam Smith called “the propensity to truck, barter, and exchange one thing for another.” Note that Smith was explicit that this propensity is “in human nature,” one likely owing, Smith says, to “the faculties of reason and speech.” So reason, speech, and trade are interconnected, no doubt each enhancing the other over time.

Our trade with each other is off-the-charts unusual. Matt Ridley – in his recent podcast with Juliette Sellgren (available here) – claims that our success as a species can be chalked up to trade. He’s correct. Every distinctly human achievement is the result of trade. Many of these are obviously the results of extensive trade (or, rather, ‘obviously’ to those not blinded by hostility to bourgeois activities) – for example, the pencil; Paris being daily fed, our daily bread, supermarkets, affordable automobiles, all the countless goods and services that are “Made on Earth.”

But even human achievements that are not obviously the results of trade are the results of trade. The achievements of ancient Athens. Bach’s, Beethoven’s, and the Beatles’ timeless music. Pure science itself requires the leisure, the communications tools, and extensive physical facilities and scientific devices the ample supply of which requires markets and trade and the accompanying specialization. Indeed, the full bellies, widespread literacy, and electronic devices that make possible the expression today by so many people of contempt for trade, commerce, and market-tested innovation are the results of trade, commerce, and market-tested innovation.

The kind, frequency, and extensiveness of human trade make human trade categorically different from any of the simple exchanges that members of some other species are observed to make with each other. Extensive trade is uniquely human; it features exchanges with countless strangers across space and time. Such trade is the natural foundation of modern human society. To obstruct and interfere with trade is to obstruct and interfere with a core part of human nature. It’s akin, say, to a bossy and well-armed spider issuing commands to ignorant or cowardly other spiders that they stop spinning webs as large and as complex as they are naturally prone to spin.

Bonus Quotation of the Day…

(Don Boudreaux)

Tweet

… is from page 148 of Sir Dennis Robertson’s important 1954 lecture “What Does the Economist Economize?”, as this lecture appears in his 1956 collection, Economic Commentaries:

There exists in every human breast an inevitable state of tension between the aggressive and acquisitive instincts and the instincts of benevolence and self-sacrifice. It is for the preacher, lay or clerical, to inculcate the ultimate duty of subordinating the former to the latter. It is the humbler, and often the invidious, role of the economist to help, so far as he can, in reducing the preacher’s task to manageable dimensions. It is his function to emit a warning bark if he sees courses of action being advocated or pursued which will increase unnecessarily the inevitable tension between self-interest and public duty; and to wag his tail in approval of courses of action which will tend to keep the tension low and tolerable.

DBx: Indeed (regardless of Michael Sandel’s protestations to the contrary).

We Should Applaud and Not Oppose Foreign Investment in Our Country

(Don Boudreaux)

Tweet

Here’s a follow-up note to Mr. B. Johnson:

Mr. Johnson:

Thanks for your follow-up e-mail in response to this note in which I summarize my reasons for not sharing your worry about purchases by foreigners of businesses in the United States.

You write “Ownership changes but you [Boudreaux] miss the point on the control which moves to hands not necessarily possessing the same interests, motivations and sympathies as a domestic owner might possess. Control is attached to the ownership.”

With respect, I believe that I don’t miss the point. In a market economy, businesses survive only by serving consumers better than do rival businesses. That is, in a market economy, the feature we overwhelmingly rely upon to ensure that businesses serve us – to ensure that businesses promote the public good – is not business-owners’ altruism or patriotism but, instead, competition. Among the key benefits of markets is the fact that they reduce much further than do any other economic arrangements the relevance of market-participants’ motives.

Business owners who, for whatever reason, don’t compete well in the market eventually lose control of their assets. Those assets are either purchased by others who’ll use them more efficiently or are reduced in value to that of scrap. It’s thus incorrect to suppose that business ownership gives to those who possess it a great deal of discretionary control. One of the happy ironies of free markets is that, while markets absolutely require that assets be owned privately, they induce these owners to use their assets not only for their own good but also for the good of the public – specifically, for the good of consumers and for businesses’ workers and other suppliers.

Of course it’s imaginable that foreigners buy or launch firms here and then intentionally run these in ways that are counter to the public good. But to the extent that such operations occur, those business owners personally pay a high price, and the longer businesses operate in this fashion, the higher is the price paid by those owners. This reality discourages the sort of thing that you worry about, and renders the assets so controlled by those owners less and less productive and valuable.

In short, I see no reason in theory – just as I know of no evidence from history – to suggest that foreign investments in a market economy pose any real risk to that economy’s health or to its government’s national-defense abilities. Quite the opposite, in fact.

And if war breaks out, there’s no reason whatsoever to suppose that government’s ability to commandeer the assets of domestic firms owned by foreigners would be any less complete or potent than is its ability to commandeer the assets of domestic firms owned by its own citizens.

The mere ability to imagine some hypothetical bad outcome of foreign investment in the U.S. is a poor reason to reject commercial investments by foreigners in our country – investments that, it’s worth repeating, give to the foreign owners of those assets a greater personal interest in the peace and well-being of our country.

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

Quotation of the Day…

(Don Boudreaux)

Tweet

… is from an e-mail sent to me yesterday by my GMU Econ colleague Dick Wagner (quoted here with his kind permission). Earlier in the day I’d e-mailed Dick telling him of the challenge that I’m having writing a paper to clearly explain just what Jim Buchanan meant when he criticized Anglo-American economists for analyzing the taxing (“factor-market”) side of a government’s budget separately from the spending (“product-market”) side; Buchanan sought to build a “bridge” between these two sides of a government’s budget choices so that decisions made on one side are tied more closely to decisions made on the other side:

In this respect, it is also notable that nearly invariably politicians stress the product market side of their doings and avoid the factor market side. If you take that Herbert Hoover pledge of a chicken in every pot, that pledge could have been stated as a program to force people to spend a day a week working in chicken farms. But that program would rightfully sound draconian to people, whereas the other sounds warm-and-fuzzy.

DBx: It’s a sad reality that the collective nature of governments’ budgetary choices make the use of such fiscal bridges damaging to the political careers of those in any polity larger than a relatively small number of individuals.

On Trade Deficits and Foreign Ownership

(Don Boudreaux)

Tweet

Here’s a letter to a thoughtful Café Hayek reader who, because he doesn’t use Facebook, commented on this recent post by e-mailing me:

Mr. Johnson:

Thanks for your e-mail.

You write: “Regarding trade imbalances, I wish those who say they don’t matter would bring into the conversation the change of ownership that results.”

Your wish has been granted. I (among others) write about this fact often. Here are a few links to just some of the essays and letters in which I address this fact. I do so also in Chapter 4 of my 2008 book, Globalization.

To repeat here only one of the many points that I and others make about what you call “the change of ownership”: Because the amount of capital in the world, and in any country, isn’t fixed, if foreigners buy (say) a factory in America for $100M, this fact does not necessarily mean that Americans’ net worth has fallen by $100M. The American seller of the factory must do something with the $100M. If invested wisely elsewhere, the amount of capital in the world, and perhaps also in the U.S., grows – as does the net worth of Americans as a group, if you’re concerned about such an aggregate figure.

But even if the seller spends all of the $100M on a lavish party, we must ask: What’s the problem? The American seller sold the factory voluntarily; it was his to sell – not yours or mine or the government’s. His reason for earlier operating the factory profitably was to increase his and his family’s ability to consume.

We must also ask: What good is the factory to its new, foreign owner? Factories aren’t profitable – and hence aren’t valuable – by nature or automatically. They must be made so and kept so. If the foreign owner runs the factory inefficiently, he loses money, for the value of the factory falls below the $100M that he paid for it. More competent owners will eventually buy it from him.

If, instead, the foreign owner runs the factory profitably, the resulting rise in the factory’s value – value created by this foreigner – reflects the factory’s increased productivity. American consumers thereby enjoy improved consumption options and American workers enjoy higher wages.

And importantly, the greater the profitability and value of this foreign-owned factory, the greater is the stake that its non-American owner has, and feels, in America and in the American economy.

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

Quotation of the Day…

(Don Boudreaux)

Tweet

… is from page 136 of the original edition of Lee Francis Lybarger’s 1914 book, The Tariff (original emphasis):

But for some reason the protectionist brain has taken special delight in the fact that we ship out hundreds of millions of dollars’ worth more than we get back. I presume if we got nothing back in return for anything we shipped out, he would be happier still!

DBx: Whenever the typical politician or pundit complains about the so-called “trade deficit” he or she is usually in the grip of the core mercantilist fallacy that trade is good only insofar as it enables the home country to export more than it imports. According to this fallacy, the benefit of trade lies only in its ability to bring into the home country as much money as possible. Therefore (so goes this specious reasoning) because exports bring in money and imports ship out money, the more that we export relative to the amount that we import, the greater are our gains from trade – the more we “win” from trade.

This mercantilist belief – this superstitious fear of trade deficits – is sheer nonsense. It is, alas, nonsense proudly embraced not only by the President of the United States, but by politicians and pundits left, right, and center.

But why is this belief nonsense? Isn’t getting more money in fact good? Yes, but getting more money is good only because that money can be used to acquire real goods and services. If the money gotten in exchange for imports is recognized for what it is – claims on real goods and services – then any excess this period (measured in some monetary unit) of exports over imports would be recognized either as future imports or past imports.

If, say, we Americans today export more than we today import and receive the difference in euros, these euros enable us Americans to import tomorrow goods and services that we paid for today with today’s excess of American exports over American imports. Or, alternatively, if we Americans yesterday imported more than we exported and paid the difference in U.S. dollars, today’s excess of American exports over American imports comes as a result of non-Americans redeeming the claims that they earned yesterday by their exporting more to Americans than they imported from Americans.

In both cases, the benefits to Americans of trade are found in Americans’ imports.

Of course, in reality dollars and other currencies can and are also used for investment purposes. But because people invest only for the purpose of ultimately increasing their ability to acquire real goods and services, taking account of international investments changes nothing fundamental about the relationship between exports and imports. And that fundamental relationship is this: people produce and trade only to increase their ability to consume. People produce and trade only to acquire real goods and services, either today or in the future. And economically nothing but inessential details change when such trade occurs across political jurisdictions rather than only within any single jurisdiction.

If the excess of money received when the people of a country export more than they import were, immediately upon receipt, transformed into Monopoly money, mercantilists – if they follow their logic – would cheer. If, instead, mercantilists – upon seeing the dollars or euros or yen in their hands change before their eyes into Monopoly money – would recognize the resulting impoverishment, they would thereby reveal that they do not understand the logic of their ridiculous doctrine.