Russell Roberts's Blog, page 423

Quotation of the Day…

(Don Boudreaux)

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… is from page 268 of the 1981 Liberty Fund edition of the 1936 J. Kahane translation of Ludwig von Mises’s great 1922 volume, Socialism:

Progress in the division of labour depends entirely on a realization of its advantages, that is, of its higher productivity. The truth of this first became fully evident through the free-trade doctrines of the physiocrats and the classical eighteenth-century political economy. But in rudiments it is found in all arguments favouring peace, wherever peace is praised, or war condemned. History is a struggle between two principles, the peaceful principle, which advances the development of trade, and the militarist-imperialist principle, which interprets human society not as a friendly division of labour but as the forcible repression of some of its members by others.

The Wrecking Ball Swings

(Don Boudreaux)

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Here’s another letter to Kevin Nowak:

Mr. Nowak:

Thanks for your response to my earlier note. I’m afraid, though, that I disagree with you that “this crisis shows markets can’t handle a crisis well…. We require active government involvement.”

I could write a long epistle to explain the details of why I disagree with you. But because you read my blog (thank you!), I’ll not do so here. Much of what I have to say is already said there.

I’ll content myself here to note this one pertinent and unfortunate instance of government involvement: the U.S. Department of Justice has created a “COVID-19 Hoarding and Price Gouging Task Force.” Because a central feature of well-working markets is the rising and falling of prices in response to changing conditions of scarcity, the creation of this Task Force testifies to the fact that markets would work as they should – prices for medical supplies and other now-more-demanded goods would rise as they should, and thus call forth greater supplies – but for an obstacle to their operation imposed by government.

In short, this “government involvement” obstructs the very market forces the alleged failure of which you say justifies government involvement. Your argument is akin to observing, at a construction site, a wrecking ball swing destructively each time a house begins to rise, and then concluding that no house will be built unless we turn over responsibility for building the house to the operator of the wrecking ball.

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)

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… is from page 8 of Robert Higgs’s great 1987 book, Crisis and Leviathan:

The government’s regulatory agencies have created or sustained private monopoly power more often than they have precluded or reduced it. This result was exactly what many interested parties desired from governmental regulation, though they would have been impolitic to have said so in public.

No Such Response Is a Public Good

(Don Boudreaux)

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Here’s a letter to a frequent and always welcome correspondent, Richard Brewer:

Richard:

It’s always good to hear from you.

In response to my recent letter to Kevin Nowak, you write: “I’m somewhat confused about the issue whereby the China government has threatened to prevent China companies from selling antibiotics, etc. to U.S. companies. Are you suggesting that that threat is an idle threat?”

No.

I’m saying that the persons with the best knowledge and incentives to weigh the seriousness of this threat, to have anticipated it ahead of time, and to deal with it now are the owners and managers of each of the many U.S.-based firms that do business in medical supplies with Chinese companies. I do not say that this knowledge and these incentives are perfect, only that they are superior to the knowledge possessed by, and the incentives that motivate, government officials.

Of course it’s imaginable that a collective, U.S.-government-orchestrated response to such a threat from the Chinese might yield results better than those that would emerge from letting each American importer and exporter address the threat as it determines is best. Yet I see no reason to put faith in such a collective response. Any collective response today would be conducted by individuals with a long track record of revealing their unalloyed and ample ignorance about – and hostility to – trade. Any collective response today would be conducted by individuals with a long track record of revealing their unalloyed and ample ignorance about – and hostility to – trade. And further, as is true of all political actors but not of private actors, the officials who would conduct ‘our’ collective response to any (real or imagined) such Chinese threat have poor incentives to take proper account of the long-run consequences of their actions.

Sometimes there are no happy options. But in every case we should always strive to choose the option that is least-unhappy.

Sincerely,

Don

“America” Does Not “Buy From” or “Sell To” Anyone or Any Country

(Don Boudreaux)

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Here’s a letter to a new reader of Café Hayek, Kevin Nowak:

Mr. Nowak:

Thanks for your e-mail.

You write that you “get the putting of little confidence in Washington politicians to insure resiliency in US supplies of critical goods like medicine.” You then ask, “[i]sn’t this though better than putting confidence in foreign governments to insure this resiliency?”

Your question is understandable, but it poses a false choice. The question for us Americans is not ‘To best ensure optimal resiliency of medical supplies, do we trust our government officials or do we trust foreign government officials?’ If this question were the correct one, I’d hold my nose and answer ‘trust our government officials.’

But instead the correct question is this one: ‘To best ensure optimal resiliency of medical supplies, do we trust our government officials or do we trust the market?’ For me, the answer to this question is obvious: the market.

The market includes retailers, wholesalers, medical facilities, and manufacturers. Each of these firms has powerful incentives to ensure the integrity of its supply sources. When a tradeoff exists between low prices and the insurance that a diversity of supply sources gives against supply disruptions, no government official has either the knowledge or the incentives that are had by buyers of supplies to make this trade-off ‘optimally.’ The truth of this last observation becomes even more solid when we recognize that the best way to make this trade-off for some supplies (say, N95 masks) is different from the best way to make this trade-off for other supplies (say, antibiotics and prosthetics).

If Walgreens runs out of supplies, its shareholders personally pay a hefty price. Ditto for pharmaceutical wholesalers such as McKesson and Morris & Dickson. Ditto for U.S. producers of medical supplies such as 3M, and of pharmaceutical products such as Pfizer: disruptions of their input supplies disrupt their production and sales, including their exports. (Are you aware, by the way, that the U.S. is second only to Germany as an exporter of medical supplies? It’s ample business that shareholders and managers of these American firms are powerfully interested in keeping from being disrupted.)

The simple fact is that America does not buy from, or sell to, China or to “foreigners.” America is not a company with Congress as its board of directors, or a household with the president as our papa. All talk of “America” buying from, selling to, or “being dependent on” on non-Americans is language as careless as it is misleading. It masks the fact that, in reality, many American firms, of different sizes and playing very different roles within an astonishingly complex global supply network, buy from many Chinese and other foreign suppliers. Also, many American firms, also of different sizes and playing very different roles within an astonishingly complex global supply network, sell to many Chinese and other foreign buyers.

Of course it would be foolish to assert that market prices and the profit motive prevent any of these American firms from ever making mistakes. But of this I’m certain: each of these firms not only knows its business far better than do politicians and Washington bureaucrats, each firm also has much stronger incentives than do the likes of Marco Rubio, Nancy Pelosi, and Donald Trump to take appropriate steps to secure their sources of supplies.

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

Some Links

(Don Boudreaux)

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GMU Econ alum Raymond Niles explains the benefits to Canadians of Canada’s lack (until very recently) of legislation against so-called “price-gouging.” A slice:

When an emergency arrives suddenly, shelves may become empty during an initial bout of panic-buying, but when merchants raise prices in response (if they are permitted), people immediately reduce their purchases, goods become available on the shelves and, because producers begin producing more in response to the higher prices, prices eventually fall as more and more supplies become available. This benign process of adjustment has not been allowed to happen in the United States.

Hans Eicholz eloquently and knowledgeably scolds the New York Times for its distorted ‘understanding’ of history and of the case for free markets and genuine liberalism. Here’s his conclusion:

The first object of any would-be purveyor of power is to shut down all scrutiny of itself. Rather than foster a debate, as one ideally should expect of a daily worthy of the appellation of “newspaper,” the Times has rather retarded and hindered it, raising the natural question of the editorial board’s motives. Deliberate distortion weakens us as a country, and that is a sad additional cost we now must overcome in a crisis that has already cost everyone too much.

“Politicians talking about any data beyond hospital capacity for reopening the economy are moving the goal posts.” – so writes Ben Powell.

Let’s hope that Janan Ganesh – or at least the part of an FT essay by him quoted here by Scott Sumner – is correct.

I very much enjoyed this conversation between Amy Willis and Alberto Mingardi.

Chris Edwards makes a cogent case for a bottom-up, rather than top-down, response to covid-19. A slice:

A central plan quickly thrown together in Washington could not impose a “best” way for millions of businesses to install these sorts of changes. Every business is unique.

My intrepid Mercatus Center colleague Veronique de Rugy warns against the temptation to use the covid-19 crisis as an excuse to further bloat Washington’s size and extend its reach. A slice:

Consider the CDC. Preparing for a pandemic like COVID-19 should have been at the forefront of what it does. But instead, bureaucrats there waste most of their resources on fighting things like teen vaping. Create a new department and we’ll soon see its original intent buried underneath many other new and politically shiny priorities. And like all bureaucracies, it would find a way to continually expand its purpose and budget.

Quotation of the Day…

(Don Boudreaux)

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… is from page 96 of my late colleague Jim Buchanan’s 1960 monograph, “La Scienza delle Finanze”: The Italian Tradition in Fiscal Theory, as this monograph is reprinted in James M. Buchanan, Externalities and Public Expenditure Theory (2001), which is volume 15 of The Collected Works of James M. Buchanan:

[P]erhaps the most effective means through which the modern executive authority can distort public thinking concerning the efficiency of public expenditures lies in the use of generalized categories which are largely meaningless to the voter-taxpayer. In recent years in this country, almost all types of expenditure have been justified by the catch-all category “national defense,” and active attempts have been made by the bureaucracy to render this budget category sacrosanct.

DBx: Because any society that offers, as ours does, high standards of living to the masses is a society of deep specialization and on-going exchange among multitudes of strangers, everything truly is connected in some way to everything else. As such, it is nearly impossible to find an activity – be it production or consumption – that does not, to some degree, exert some influence on (say) national defense.

Are Americans buying steel from Brazil? Well, our doing so reduces steel-production capacity in America, thus compromising Americans’ arsenal of weapons.

Are Americans importing bubble gum from China? Well, not only do these purchases reduce the demand for American-grown sugar, thus making more vulnerable Americans’ food supplies in case of war, they also enrich the Chinese, whose government will be made better able to extract resources from them in order to build up its own military in opposition to ours. And, yikes!, we Americans are also buying medicines from China. The dangers of this arrangement are too obvious for words!

Oh, look over there. Is Senator Smith seriously proposing to cut national-government financing for higher education in America? Does he not understand that doing so will mean fewer American scientists and engineers and, hence, a weaker ability for us Americans to maintain a top-flight national-defense apparatus? How irresponsible and short-sighted of the senator!

Equally myopic is Rep. Jones, who opposes higher taxes on the rich to reduce income inequality. Is she unaware that some research shows that the more unequal is the distribution of income, the greater the alienation of those at the bottom of the distribution from society? Such alienation can only weaken our national defense by reducing the resolve of ordinary Americans to protect our nation.

And let’s not forget those elite, chardonnay-sipping intellectuals at think tanks such as the Mercatus Center and the Cato Institute who, blinded by ideology, oppose proposals for American industrial policy. Can these market fundamentalists not see that Beijing is using industrial policy in hopes of ensuring Chinese dominance in the coming decades? If we wish to keep America strong, both economically and militarily, we must, in response, adopt our own industrial policy. Only then will we protect Americans – including American workers – and prove to the world the superiority of freedom over authoritarianism.

Ban Export Bans

(Don Boudreaux)

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In this op-ed at The Hill, my intrepid Mercatus Center colleague Veronique de Rugy and I argue against export bans. A slice:

Second only to Germans as exporters of medical products – and with medical-products exports much more than double those of China – American producers depend heavily on export sales. In 2019, these sales amounted to $116.6 billion. We estimate that this figure is roughly 22 percent of total U.S. production of medical products. Losing even just half of these sales would render unprofitable much of America’s production capacity, larger production runs within existing capacity and some R&D. And large losses of export sales are almost certain if an export ban is imposed. Foreign buyers would respond by sourcing more of their medical supplies during normal times from countries less likely than the United States to ban exports during crisis times.

Bonus Quotation of the Day…

(Don Boudreaux)

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… is this comment by Gwendo V El on this earlier post in which I criticized Yale law professor Daniel Markovits’s proposal for a one-time tax, of five percent, on each American’s net wealth in excess of $2.5 million:

Assets that are traded and therefore priced daily by the market make wealth difficult to determine. That which is 5% of a person’s wealth when there is no attempt to confiscate wealth can quickly grow to 50% or more of a person’s wealth when the selling starts in response to confiscation plans. Good luck with that, monkeys. The minute there’s any serious move to confiscate wealth, it evaporates as the market adjusts to the change in enviroment, including the expectation of downward pressure on asset prices and the expectation of future “one time” wealth confiscations. The value of any asset is the discounted future cash flow it generates and the forecasts for future cash flows will also drop.

What an interesting dilemma we have here. The Fed cranks up the printing press to support stock and bond prices when they fall and this monkey wants to crash asset markets and ensure less future economic activity. Good work! And good luck with that.

DBx: In a modern economy, nearly all wealth is produced, maintained, and increased through an on-going competitive market process. Alter that process and you alter the river of wealth that is produced and volume of the wealth that exists. Contrary to the way most people think of wealth – people including economists and law professors at elite institutions of higher learning – wealth is not a blob of stuff that is stored somewhere and grows on its own.

Too many people do not understand this reality. They are misled by their own smallness as a consumer in a vast economy. Dick and Jane Jones correctly understand that if $1,000,000 in cash were stolen or seized from Jeff Bezos and given to them, then they’d be able to buy $1,000,000 worth of goods and services, and Bezos would be able to buy $1,000,000 less. Dick’s and Jane’s living standards would indeed improve noticeably and, in this particular example, Bezos’s living standards would remain utterly unaffected.

But to draw conclusions about the economy and about policy from such juvenile fantasies is to commit several fallacies, foremost of which is the fallacy of composition. The larger the scale of wealth confiscation ‘redistribution,’ the greater the reduction in the total market value of capital – a reduction that reflects both the reduced security of capital ownership and the reduced productivity of the economy.

If the Piketty and Zucman view of wealth were correct, then ‘redistribution’ would cause no reduction in the total market value of wealth. In this economically mistaken view, existing wealth is a blob of stuff, created and maintained independently of human action, with an objective value set by…. well, we’re never really told by whom or by what. The only policy question is who gets to own it.

The Economy Isn’t a Machine or a Factory

(Don Boudreaux)

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I’m honored to be a co-author with Alberto Mingardi on this essay in City Journal. A slice:

Microeconomists understand that no one can engineer these details. If the economy’s institutional environment is sound—based on secure property and contract rights, rule of law, and free and open markets—market prices, profits, and losses will lead producers and consumers to act in ways that create prosperity. But for continuing prosperity, the market process must work freely. Entrepreneurs must be able to offer new products, workers empowered to accept and to reject job offers, consumers free to spend their incomes as they wish. And prices and wages must be free of government control and allowed to rise and fall as market conditions require.

Even if government control of aggregate demand is necessary for an economy to function even tolerably well—and we aren’t sure that it is—such control is clearly not sufficient. If entrepreneurs can’t introduce new products, if businesses are denied access to low-cost supplies, and if prices are prevented from changing, the market process falters. It produces fewer of the goods and services that are the stuff of our prosperity. The same conclusion pertains if workers are prevented from showing up at farms, factories, and offices, in which case no amount of extra aggregate demand will cause markets to produce more. To stop people on the ground from producing is to stop the process by which people, cooperating in markets, generate prosperity.