Russell Roberts's Blog, page 426
April 17, 2020
Quotation of the Day…
… is from page 243 of George Will’s excellent 2019 book, The Conservative Sensibility (link added):
Hayek said he used the word “marvel” in order to “shock the reader out of the complacency with which we often take working of this [market] mechanism for granted.” Unfortunately for the reputation of markets, their misfortunate is that they are “not the product of human design.” So “the people guided by it usually do not know why they are made to do what they do.” That is, markets are denied the prestige that accrues to human designs, including those that accomplish less marvelous things than markets routinely accomplish in allocating scarce resources.
April 16, 2020
Prices
I’d forgotten about this short LearnLiberty video of mine from several years ago on prices. “EconGirl” e-mailed to ask me to repost it. Here ’tis.
Just Say No to Protectionism
Here’s a letter to my friend T. Alan Russell:
Alan:
Thanks for your e-mail. It’s always good to hear from you.
You’re correct that the media and blogosphere now reverberate with what you call “cries for Made-in-America-only purchases.” And you’re correct, too, that heeding such calls would be extraordinarily counterproductive – perhaps even calamitous.
You ask if I’ve written on this matter. I have. See, for example, here, here, and here. But let me in my reply to you emphasize two points.
First, because of the unfathomable ‘globalness’ of today’s web of economic connections, it’s practically impossible to put a dollar figure on what U.S. autarky – that is, no U.S. trade with foreigners – would cost us. But we can perhaps infer an estimate of the absolute minimum cost from research done by Dartmouth’s great trade economist Doug Irwin. He found that the near-autarky caused in the U.S. by Thomas Jefferson’s December 1807 to March 1809 trade embargo reduced U.S. GDP then by 5 percent. An identical percentage-point reduction today would slice from U.S. GDP $1.072 trillion – reducing annual average per-person GDP in the U.S. by about $3,250.
But again, this figure is almost surely a stupendous underestimate, given that Americans today are far more integrated into the global economy than were Americans in Jefferson’s day.
Second, some people will respond that they don’t want autarky; they want America to be self-sufficient only in “critical” goods. Several problems infect this demand. It’s a demand that is so easy to utter but terribly difficult to fully grasp.
One problem is that no objective criteria exist for distinguishing “critical” from “non-critical” goods. In practice, such distinctions would be made by politicians influenced by interest groups. What could go wrong?!
A second, deeper problem is that even if we identified some goods that are unquestionably “critical,” such goods – we’d discover – are produced with inputs from around the world as well as from some of our own “uncritical” goods. We would also discover that units of many kinds of imports are components in some of our “critical” goods, and in other cases imports ‘displace’ domestic production capacity that could be portrayed as being useful in producing our “critical” goods.
To create true self-sufficiency, therefore, in the production of “critical” goods would in practice require a prohibition of nearly all imports. Autarky would be the result. Not only would we Americans lose access to the low-cost imported inputs and consumer goods that we today enjoy – and not only would many American producers that rely on exports have to scale down the size of their operations, thus pushing up per-unit costs of product development and production – we Americans, who are four percent of world population, would also shut ourselves off from the creativity of 96 percent of our fellow human beings.
We Americans would suffer immediate and noticeable economic damage, and over time become ever-more-destitute not only relative to the level of prosperity that we would have enjoyed had we remained open to global commerce, but also relative to countries more open and less fearful than us. America would become, not great, but infirm and impoverished and prostrate before history.
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
There Really Is No Such Thing As a Free Lunch
Over at EconLog, commenter Thaomas took friendly objection to David Henderson’s insistence that there ain’t no such thing as a free lunch (“TANSTAAFL”). Here’s Thaomas’s comment in full:
Actually, out of equilibrium, There Is Such a Thing As a Free Lunch. Any improvement in policy is a free lunch, unless one means that it is very unlikely that literally everyone will benefit from a better policy. A revenue neutral move to lower corporate taxes would have been a free lunch. Free trade would be a free lunch. Higher immigration would be a free lunch.
I think that economists’ main job should be to look for ways of creating free lunches and preventing the destruction of free lunches.
I agree with what I take to be the spirit of Thaomas’s comment – namely, that opportunities for gains from trade are everywhere and that “economists’ main job should be to look for ways” to clear the way for these gains actually to be gotten. But I disagree that there exist free lunches.
The examples of free lunches that Thaomas mentions are examples of sources of gains from trade. And I am wholly on board with making trade and immigration freer, and with lowering corporate taxes (in budget-neutral ways). Economically, policy moves in these directions would surely create net gains. But as Jon Murphy points out in a response to Thaomas, these gains would not be free.
The point of my post here – which consists below of sharing two comments that I left at EconLog – will strike many readers as pedantic. But I plead that it’s not. (It is, however, a post meant largely for my fellow economists.) Getting language right is important, for if we don’t we are easily misled.
Here’s my first comment; it’s in direct response to Thaomas’s comment quoted above:
I agree with Jon Murphy. Thaomas here seems to use “free lunch” in a way that is common but is mistaken – namely, to indicate unambiguous net gain in ‘social’ welfare. But as Jon points out, the fact that there’s a gain doesn’t mean that the action that was undertaken to bring that gain about is costless. Something was sacrificed, and the (subjective) value of that which was sacrificed is the cost. The fact that the cost is less than the benefit does not mean that this benefit is free.
By the way, this same conclusion holds even for changes that economists call “Pareto-improving changes” – at least insofar as such changes result from conscious human choices. (“Pareto-improving changes” are changes that leave at least one person better off while leaving no one worse off.)
Change brought about by human choice requires foregoing something; this truth holds even for Pareto-improving change. The value of that which is foregone is a cost. This cost might be minuscule relative to the gain; but it is nevertheless a cost. Because it is impossible – literally impossible – to choose without incurring a cost, it is impossible to choose in ways that bring about change without that change having a cost.
Here’s a simple demonstration of the cost that attends a Pareto-improving change:
Sam values Sara’s apple more than Sam values his (Sam’s) peach, while Sara values Sam’s peach more than Sara values her (Sara’s) apple. Sara and Sam thus agree to exchange. Sam gives Sara his peach in exchange for Sara giving Sam her apple. Both parties are made better off while no one is made worse off. Still, costs are involved. The cost to Sam of securing his gain is the subjective value that he anticipated he would have gotten from eating his peach had he not transferred it to Sara. The cost to Sara of securing her gain is the subjective value that she anticipated that she would have gotten from eating her apple had she not transferred it to Sam.
My second comment was sparked by another commenter (“artifex”) writing, in response to my first comment, this: “Unlike your example of exchanging an apple for a peach, the standard examples of comparative advantage leave all parties involved with at least as much of all goods as before.” However, my second comment (just below, and modified slightly) goes well beyond a reply to artifex:
My example [in my first comment, above] of the exchange of a peach for an apple is not intended as an example of the operation of comparative advantage. A standard example of the latter, such as this one, involves production; my example involved no production and wasn’t meant to do so.
My peach-apple example was meant to show the simple point that economic change brought about by human choice involves cost even if that change makes at least one person better off without making anyone worse off. Each party in my example experienced gain, but each party nevertheless incurred a cost to achieve his and her gain.
Nothing in my example is anything beyond second-chapter ECON 101. Yet it is common practice for economists to draw from it a conclusion that I think is mistaken. (I say “I,” but I really mean “I who have learned much from Jim Buchanan and scholars in the LSE subject-cost tradition.”) The mistaken conclusion is that the gain that arises from an exchange of the sort that I put as an example involves no cost to society.
The problem with such a claim about “no cost to society” is that society is not a sentient creature that incurs or experiences costs (or benefits, or anything else). The claim “no cost to society” would be correct only if some third creature, not Sara or Sam but “Society,” had a capacity to experience gains and losses and experienced these gains and losses by being somehow connected to Sam’s and Sara’s actions (or to each of their utility functions) – and then, this “Society,” experiences “gain” when the actions of Sara and Sam result in net gains to Sara and Sam, and experiences “loss” when the actions of Sara and Sam result in net losses to those two persons. This “Society’s” gains and losses arise for it independently of any choices that it makes, for it – “Society” – makes no choices. In this example, “Society” is merely an entity that experiences the net consequences of the choices and actions of others.
In reality, of course, no such creature, “Society,” exists (although people, including most economists, regularly talk and write as if there is such a creature). In reality, costs and benefits are experienced only by individuals.
In my simple example, each party obviously experienced a cost – namely, the sacrifice of the anticipated subjective value of continuing to possess that which he or she gave up as a means of gaining the opportunity to experience the subjective value of possessing that which he or she received in return. That this sacrifice is a cost can be seen by recognizing that each party would prefer to get what the other has without having to give up that which he or she has. Sam would prefer to have both the peach and the apple rather than only the apple. Similarly, of course, for Sara.
The fact that each party, at the moment of choice, experiences a gain in subjective utility without any other person suffering a loss in subjective utility means neither that these gains are free lunches nor that no costs are incurred in society in order to make these gains a reality.
In summary, it is misleading to talk of “costs to” and “benefits for” society. Yet I don’t go so far as some people and reject the concept of society as meaningless. Society is real, and the word “society” is meaningful. But society is made up exclusively of individuals; it is not a creature independent of the individuals who comprise it. Society, as such, experiences nothing. But obviously the people who are in society experience much.
In my example of Sam and Sara exchanging an apple and a peach, costs are incurred in society but not by society. The gains, although net, are not free lunches.
Johan Norberg Understands Prices
Monetary prices set on markets are not arbitrary. These prices are set neither by sellers nor by buyers; these prices are set by the exchange process and reflect underlying economic realities that are not changed if the state prohibits prices from moving to market-clearing levels. Prices also – but only when they reflect reality rather than the superstitions, fears, or arrogance of government officials – prompt suppliers and buyers to act in ways that improve underlying economic realties.
This short video by Johan Norberg is a must-see. (I’m delighted that, in it, Johan promotes this superb paper by the great Dwight Lee.)
Quotation of the Day…
… is from page 157 of Bas Van Der Vossen’s and Jason Brennan’s superb 2018 book, In Defense of Openness (original emphases):
But sometimes there’s a difference between doing things that show a desire to help, and doing things that actually help. Sometimes we do things because we want to help, and end up making things worse. At other times, we do things for other reasons and actually end up helping others along the way.
April 15, 2020
In the Long-Run, Keynes the Man is Dead…
… but we the living are saddled with his baneful consequences.
Here’s a letter to the Washington Post:
Editor:
Robert Samuelson is correct that today’s paroxysm of deficit spending is made calamitous by the preceding six decades of Congressional budgetary irresponsibility (“The debt reckoning has finally arrived,” April 13). He’s correct also that much blame for this irresponsibility lies at the feet of academic economists, especially John Maynard Keynes.
Offering theoretical justification for deficit spending during recessions, Keynes – ignoring political realities – was oblivious to the fact that he and his apostles thereby gave to politicians academic cover to reject long-standing norms of fiscal prudence. The present result, as Mr. Samuelson writes, is fiscal chaos.
But Mr. Samuelson errs by failing to note that not all academic economists are to blame. An unpopular few warned that Keynesianism would unleash budgetary debauchery. Foremost among these dissenting economists is the late Nobel laureate James Buchanan and my colleague Richard Wagner. In their prescient 1977 book, Democracy in Deficit: The Political Legacy of Lord Keynes, Buchanan and Wagner – observing the intellectual and ethical sea-change caused by Keynes – lamented the typical economist’s failure “to predict the results of the eclipse of the old rules for fiscal responsibility.” They then asked dolefully: “Once democratically elected politicians, and behind them their constituents in the voting public, were finally convinced that budget balance carried little or no normative weight, what was there left to restrain the ever-present spending pressures?”*
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
* James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (New York: Academic Press, 1977), page 50.
Some Links
Also writing about this mad sledgehammering is Mike Munger. And Nick Gillespie.
Here’s the first of Hans Eicholz’s blog posts on MMT and Austrian economics.
Eric Boehm writes about the staggering and frightening sudden growth in the U.S. government’s budget deficit. This fiscal incontinence will not end well.
For some reason, supporters of these policies refuse to accept that the world with a threatening event is different from the world a few days before without the same event. Something has changed in between; the conditions that brought about yesterday’s prices have changed – often suddenly and without warning. Why would you want to force anybody to operate today at yesterday’s prices?
Back to Mike Munger: in this video he discusses so-called “price gouging.“
Cleaned by Capitalism XLI
It’s been almost a year since my last “Cleaned by Capitalism” post. Now with the coronavirus infecting people’s brains with all manner of unwarranted notions and irrational fears, let’s reflect yet again on the fact that capitalism has made our lives and our environment far cleaner, much safer, and more pleasant than were the lives of any of our ancestors. Detailed in this series are just a few of the more visible ways that our lives have been, and continue to be, cleaned by capitalism.
And here’s yet one more, pictured here.
As with most of the ways that capitalism cleans our environment, this one, standing alone, is small. But nevertheless it’s real.
Back in the 1970s – that era proclaimed by modern mythology to be the period of peak prosperity for middle America – jars of the likes of peanut butter did not come with paper seals, such as this one, beneath the twist-off-and-on tops. Now such seals are commonplace. They act as an additional barrier to dirt finding its way into the contents of the jars, and to harmful elements being maliciously added.
This small improvement in consumer products almost certainly is not adequately accounted for by statisticians; again, standing alone, its significance is minuscule. Yet it represents an improvement in Americans’ living standards – an improvement, like each of countless other small improvements, easy to miss by those who claim to find that ordinary Americans are today failing to “thrive” as well as did their parents and grandparents a half-century ago.
Quotation of the Day…
… is from page 254 of Matt Ridley’s insightful 2015 volume, The Evolution of Everything:
Yet creationism in government shows no sign of fading. To this day, despite the resurgence of liberal values that came after the Second World War, and especially after the Cold War, the knee-jerk assumption on the part of much of the intelligentsia is still based on planning rather than evolutionary unfolding. Though politicians are regarded as scum, government as a machine is held to be almost infallible.
DBx: Statism is a religion. It is a faith in the state’s power to work miracles and in the benevolent concern that “our” leaders have for our well-being. Adherents to this faith – and many are evangelical about it – dogmatically attribute all observed good to the state and deny that any good is possible unless it be somehow arranged by the loving intervention and intelligent design of the state.
Those who reject the dogma of statism are treated as anti-social pariahs. Those who explain that complex and beneficial social order arises – emerges – spontaneously and unplanned are dismissed, ironically, as dogmatists whose unfaithfulness, were it more widely accepted, would unravel and ruin society.
Statists, simply unable to grasp the reality of emergent, spontaneous, complex order, trust that all that is good in human society is traceable ultimately to the wise and wonderful conscious designs of the state, and that all that is bad in human society is caused by inadequate worship of the state and a resulting failure to allow It to guide our affairs.
Statism, in other words, is the application to human society of the primitive belief in creationism. Despite most statists’ pride in their unusual smarts and learning – many boast B.A.s, B.S.s, M.A.s, M.S.s, MBAs, M.D.s, Ph.D.s, or J.D.s from elite universities! – they are as ignorant and as unreflective about society and the economy as the most cartoonish opponent of Darwin is ignorant of the origins of opposable thumbs and the migration of geese. As with the most cartoonish opponent of Darwin, no amount of sound reasoning or careful observation will shake the statist’s ‘knowledge’ that society is the creation of the state and that humanity will progress only so far as the state lovingly arranges for our progress.
Creationism and its corresponding belief in a loving, higher power is simple. It requires no thought: Whenever a problem is believed to be encountered, turn prayerfully to the state. The only obligation of the faithful is to obey and be thankful that we humans are blessed to be ruled by such an awesome Lord.
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