Russell Roberts's Blog, page 450
February 10, 2020
Quotation of the Day…
… is from pages 70-71 of James M. Buchanan’s and Richard E. Wagner’s insightful 1977 book, Democracy in Deficit: The Political Legacy of Lord Keynes (original emphasis):
An increasingly disproportionate public sector, quite apart from its inflationary consequences, carries with it the familiar, but always important, implications for individual liberty. The governmental bureaucracy, at least indirectly supported by the biased, if well-intentioned, notions Keynesian origin, comes to have a momentum and a power of its own. Keynesian norms may suggest, rightly or wrongly, an expansion in aggregate spending. But aggregates are made up of component parts; an expansion in overall budget size is reflected in increases in particular spending programs, each one of which will quickly come to develop its own beneficiary constituency, within both the bureaucracy itself and the clientele groups being served. To justify its continued existence, the particular bureaucracy of each spending program must increase the apparent “needs” of the services it supplies. Too often these activities by bureaucrats take the form of increasingly costly intrusions into the lives of ordinary citizens, and especially in their capacities as business decision makers.
DBx: So true.
Here again we see the expansion of government – itself often an instance of the sort of free-rider problems that many economists are quick to identify in the private sector (Jones seizes benefits at the expense of Smith) – also creating further opportunities for inefficiencies in the form of perspectives that are biased by the ability of the government to take money to support members of interest groups, as opposed to what would occur were members of interest groups required to earn incomes by operating in private-property markets.
Attempting to protect private markets from externalities by calling in politicians is akin to attempting to protect forests and pastures from fire by calling in pyromaniacs.
February 9, 2020
Some Links
Bruce Yandle asks if the coronavirus can end the trade war.
I didn’t know Rudy Gonzales. My loss.
Mark Perry gives us a good picture of just how enormous the American economy is.
The authors repeatedly glide by alternative explanations for deaths of despair that do not involve pharmaceutical company rapacity, systemic flaws in America’s health care system, or corporate power in general.
Pittsburgh Tribune-Review: “My mom”
My Pittsburgh Tribune-Review column for March 28, 2008, is one that I’ve shared here before. It’s the tribute that I wrote to my mom just after she died. You can read my tribute beneath the fold.
Quotation of the Day…
… is from page 250 of Matt Ridley’s great 2010 book, The Rational Optimist:
It is the planned economy, not the market, that requires perfect knowledge.
DBx: The core, ’tho not sole, reason for this truth is that agents who are part of a plan have much less scope to adjust to mistakes and new opportunities than do individuals acting within markets. Individuals acting within markets pursue the fulfillment only of their own plans (and in doing so they better enable a large number of other individuals to fulfill their own plans – see Adam Smith on butchers, brewers, and bakers).
In contrast, each agent in a plan is assigned a role by the planner – a role defined both by the particular purpose that that agent must pursue and by the range of means that that agent is permitted to use in pursuit of his or her assigned purpose.
Agents in a plan simply cannot be allowed to act in any ways that are inconsistent with the plan, of which he or she is merely a tool. And so when an agent in a plan encounters some reality that the plan’s designers did not anticipate – for example, an unexpectedly small available amount of some resource, or an unanticipated failure of one part of the plan to mesh well with another part, or a surprise opportunity to innovate by using some means outside of the narrow range permitted by the plan to the agent – the agent cannot respond effectively. Were the agent to respond in ways that individuals respond in markets, the plan would be upset; any such response, by its nature, is inconsistent with the plan and so cannot be allowed.
Here it’s worth emphasizing that when any part of the economy is truly and meaningfully planned by government, this reality must hold: individuals have no incentives to innovate. Genuine innovation is not foreseen and, hence, cannot be part of any real plan. And so unlike in markets which reward individuals for successful innovation, in plans agents must be punished for attempts to innovate, for such agents are attempting, however innocently, to upset the plan.
Therefore, the notion that a nation’s economy can be made more innovative and its growth enhanced by industrial policy is deeply mistaken. People who make assertions to the contrary simply have not thought carefully about what industrial policy is and what it entails. Oren Cass, Daniel McCarthy, Marco Rubio, as well as legions of “Progressives,” are enchanted by their own fine words and good intentions. It is, after all, very easy to say “Let’s plan this!” and “Government should work to achieve that excellent outcome!” And one can, with equal ease, imagine happy outcomes. Yet when the nature of national economic planning is explored with any seriousness, the reality summed up above by the quotation from Matt Ridley is revealed.
It is no good response to the above to point to profitable firms as examples of successful planning. Yes indeed, firms do operate according to plans. And workers within firms are subject to the same restraints mentioned above about agents in a government economic plan. But fundamental differences – too many to review here – distinguish firm-planning from government economic planning.
Two differences are these:
First, because firms operate in a competitive environment, meaningful feedback is continuously received from the larger market within which each firm operates. If a firm is not using labor and other resources efficiently, the firm’s owners experience losses and are thereby led to change the details of their plan. If the firm’s owners fail, the firm goes bankrupt and the resources once used by it are released for better use elsewhere. In contrast, the economic plans that are part of industrial policy do not operate in any similar competitive environment, and are not subject to the same bankruptcy constraint that is always present for privately owned firms.
Second and relatedly, among the many achievements of the competitive environment within which privately owned firms operate is the discovery of the optimal size of planning units (that is, of firms). Firms that are too small are outcompeted by firms that plan on a larger scale; firms that are too large discover that they cannot effectively plan at such expansive scales and are driven by market competition to shrink.
When industrial-policy enthusiasts such as Oren Cass quote successful entrepreneurs such as Andy Grove in support of industrial policy, these enthusiasts reveal that they do not grasp the above, vitally important point. The quoted business executives themselves also often do not grasp it. Yet two facts can hardly be denied:
(1) government officials are not entrepreneurs, if only because the former, unlike the latter, are not residual claimants, and
(2) it’s a logical fallacy to conclude that because planning to produce a relatively small range of outputs at scale X can succeed, planning to produce an arbitrarily larger range of outputs at scale 100X or 10X or even 1.5X can succeed.
Ronald Coase won a Nobel Prize in economics in part for his pioneering work on the nature of the private business firm, and on what determines its size. His ideas are not terribly complicated, but they are foundational and important. It’s too bad that people such as Oren Cass and Marco Rubio’s staffers are apparently unaware of Coase and his insights.
February 8, 2020
Bonus Quotation of the Day…
… is from page 155 of the 1996 FEE edition of Henry Hazlitt’s wonderful 1973 book, The Conquest of Poverty:
[H]ow would the Planners decide what machines to design, what capital goods to make, what technological methods to use, and at what localities to produce the consumers’ goods they wanted and in the proportions they wanted them?
This is not primarily a technological problem, but an economic one. The purpose of economic life, the purpose of producing anything, is to increase human satisfaction, to increase human well-being. In a capitalist system, if people are not willing to pay at least as much for the consumer goods that have been produced as was paid for the labor, land, capital equipment, and raw materials that were used to produce them, it is a sign that production has been misdirected and that at least some of these productive factors have been wasted. There has been a net decrease in economic well-being instead of an increase.
DBx: Proponents of industrial policy – from conservatives such as Oren Cass to “Progressives” such as Elizabeth Warren – never bother to answer the question that is most fundamental to their policy: how will government officials acquire the information necessary to out-perform the market? The standard move is to point to real-world instances of markets failing to perform as ideally as the proponent of industrial policy can imagine the economy performing, and then to conclude from this utterly banal observation that ‘science’ directs us to entrust government with more discretion over the allocation of scarce resources.
I know of no proponent of industrial policy who gives any hint of taking seriously the profound lessons in Hayek’s “The Use of Knowledge in Society” article – profound lessons about the dispersion of unique bits of knowledge and about the fact that the knowledge of the details of reality that must be acted upon ‘efficiently’ if the economy is to work are often fleeting.
Some Links
Here are Gene Epstein’s opening remarks in his recent Soho Forum debate with Steve Moore on trade. (Steve continues, disappointingly, to support Trump’s tariffs punitive taxes on Americans who buy imports.) A slice:
To justify Trump’s punitive tariffs, Steve should be able to demonstrate beyond a reasonable doubt that the leader we’re supposed to trust with this trade war understands the benefits of free trade. Yet Trump is almost completely clueless on the subject. He clearly views the nation’s trade deficit as a businessman’s profit-and-loss statement, in which losses are suffered with a trade deficit, and profits are earned if there’s a trade surplus.
Also lamenting the power of the U.S. presidency is Kevin Williamson.
Sam Staley reviews Jojo Rabbit.
Quotation of the Day…
… is from page 526 of George Will’s superb 2019 book, The Conservative Sensibility (footnote deleted):
The point of elections is to ensure that government has what Madison in Federalist 51 called a “dependence on the people.” The preoccupation of modern government, however, is to make more and more people, in more and more ways, dependent on the government.
DBx: Who can deny the validity of this conclusion?
The naive notion of democracy is that “the people” of a political jurisdiction is a singular entity with preferences and the ability to choose sensibly how these preferences will be satisfied, much like Larry Jones and Laura Smith each is a singular entity with preferences and the ability to choose sensibly how his and her preferences will be satisfied.
Yes, serious students of political philosophy, of political science, and of history understand “democracy” to mean something very different from what democracy means in this naive understanding. These serious students never forget that “the people” are plural – a number of individuals each with his and her own preferences and unique bits of knowledge. But the fact remains that the naive notion of democracy is the one that is widespread. The latest majoritarian outcome in each election is taken to be the will of “the people,” an expression of a preference that no one has any business questioning.
If “the people” is singular, then “the people” voting in favor of government dispensing this favor here and that sum of money there would pose no more of a problem than when Laura Smith chooses to treat herself to this favor or to spend her money in that way. But because “the people” are plural, voting too often is one subset of the people voting to snatch, in one way or another, the purses and wallets belonging to another subset of people.
Because “the people” are not singular, but plural, majoritarian politics is largely an exercise of each person attempting to form or join coalitions that use state power to gain at the expense of others. Majoritarian democracy – at least to the extent that it is unconstrained by constitutional rules, both formal and informal – is little more than the constant unleashing of what economists call negative externalities. There’s nothing glorious or grand or even admirable about democracy understood, as it predominately today is understood, as simple and raw majority rule. Quite the opposite.
February 7, 2020
Another Letter to Ian Fletcher
Here’s a letter to Ian Fletcher:
Ian:
Displeased with my critical response to Sherman Xie’s futile attempt to discredit the principle of comparative advantage, you assert that I “don’t take seriously enough the lock-in effects of comparative advantage in dead-end industries.” That is, you accuse me of disregarding opportunities for income growth that allegedly are lost when people specialize in tasks for which they today have a comparative advantage rather than allow themselves to be led by a wise government to change their comparative advantage so that they tomorrow successfully specialize in tasks that yield higher incomes.
There is so much wrong with your accusation that I hardly know where to begin. So I’ll limit myself here to two points.
First, neither I nor any competent free trader denies that the pattern of comparative advantage can and often does change. The pattern of comparative advantage changes continually. It changes each time a worker learns a new trade, each time a student studies a new discipline, and each time a firm does research and development. What I do deny is that government officials – all equally as ignorant as other human beings, yet unequally possessing power to coerce others – occupy a unique vantage point for determining what is the ‘best’ pattern of any country’s comparative advantage.
You believe that government officials are somehow invested with the miraculous ability to out-guess competitive markets, while I find such a belief to be disproved by both theory and history.
Second, your assertion that free trade ‘locks’ workers in to traditional jobs is at odds with a pet complaint about free trade frequently issued by many of your fellow protectionists – namely, that free trade too readily throws workers out of traditional jobs.
While I understand that the intellectual sins of one protectionist aren’t necessarily ones committed by all protectionists, I do find it remarkable that among the ranks of prominent protectionists today we have, on one hand, people such as yourself who complain that a policy of free trade locks too many workers into traditional jobs, and, on the other hand, people such as Oren Cass who complain that a policy of free trade displaces too many workers from traditional jobs. Obviously, free trade cannot be guilty of both offenses!
The fact that protectionists’ arguments are so scattershot, so varied, and so often in conflict with each other testifies to the intellectual flimsiness of protectionism and to the cavernous economic ignorance of those who peddle protectionist arguments to an unsuspecting public.
Sincerely,
Don
Some Links
Today’s Democratic ranks swell with people armed with plans and blueprints for using government to overhaul or re-engineer large swaths of the economy. These plans, all born of hubris, are fun to discuss, and the blueprints are exciting to ponder. Yet this sort of policy innovation is not tested by market competition. Government imposes these schemes on citizens, and no politician or bureaucrat — unlike a private entrepreneur — has a personal financial stake in getting things right.
If a President Sanders’ plan for making college more affordable fails, his personal wealth won’t decline. Indeed, he’ll still likely receive plaudits for his good intentions. Ditto for a President Buttigieg’s blueprint for increasing the affordability of health care. The people who will bear the costs of these interventions if they fail are ordinary Americans.
Rationality from my brilliant GMU Econ colleague Bryan Caplan.
The proposed crackdown fits nicely with the nationalist agenda, which is focused—as nationalists tend to be—on purity.
ECON 101 Teaches Humility
Here’s a letter to a new correspondent:
Mr. Jones:
Thanks for sharing your thoughts on my recent essay on the importance of Econ 101.
While I agree with much that you write, I plead guilty to your charge of “dulling students’ excitement about solving collective challenges through democratic governance.” In my opinion, too many people today – and especially young people – have far too much excitement about using the state to “solve” this and that “challenge,” both real and (as is frequently the case) illusory. Dulling this excitement, I boast, is one of the few truly productive acts that I perform.
The single greatest lesson conveyed by Econ 101, when taught well, is humility – the humility that comes from recognizing the reality of scarcity, the inescapability of trade-offs, the ubiquity of unintended consequences, and the puniness of the human mind compared to the unfathomable complexity of the details of social institutions generally and of competitive market processes in particular. And so while it’s not my goal in teaching Econ 101 to dull students’ excitement about solving collective challenges through democratic governance – my goal is nothing beyond teaching Econ 101 as well as I can – I recognize that this “dulling” outcome is indeed among the happy consequences of learning Econ 101.
The celebrated economist Jacob Viner said it well in a 1950 convocation address at Brown University: “A great part of true learning, in fact, takes the form of negative knowledge, of increasing awareness of the range and depth of our unconquered ignorance, and it is one of the major virtues of scholarship that only by means of it, one’s own or someone else’s, can one know when it is safe to dispense with it. Learned ignorance, therefore, is often praiseworthy, although ignorant learning … never is.”*
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
* Jacob Viner, “A Modest Proposal for Some Stress on Scholarship in Graduate Training,” reprinted in Douglas A. Irwin, ed., Jacob Viner: Essays on the Intellectual History of Economics (1991), pages 385-386.
Russell Roberts's Blog
- Russell Roberts's profile
- 39 followers
