El Camino Real (ECR), State Highway 82, the main thoroughfare connecting San Jose with San Francisco, is sandwiched between Federal Highways 280 and 101.  Maintenance and Rehabilitation is largely paid by the state with modest local government participation.  Indeed, Caltrans can repave and redesign ECR even without city approval. In 2024, Caltrans decided to repave ECR from Menlo Park southward through Palo Alto (which parallels Stanford University), Los Altos, Mountain View, to Sunnyvale.  The work included upgrading curb ramps and sidewalks to comply with the Americans with Disabilities Act.  It also added bicycle lanes.  The work was largely completed by July 1, 2025. Caltrans allocated $7,133,000 for the project, but did not explicitly list the cost of the soft white-posts-and-green-marker separated bike lanes.  I would guesstimate no more than $2 million. Restaurants and other commercial establishments complained about the loss of street parking and business before, during, and after the lane posts were installed.  Patrons sometimes have to search for street parking in residential neighborhoods.  It’s hard to know actual business losses, but I’ve watched some prospective customers give up and drive away. What about bicyclists’ use of the new dedicated bike lanes since their completion?  Every Sunday, my wife and I go out to lunch at a restaurant on ECR, or a side street off ECR.  On average, I drive weekly to Safeway Pharmacy and Grocery Store in Menlo Park along ECR.  My wife drives weekly along ECR to each of two big box stores and biweekly to Ranch 99 in Mountain View.  That’s four trips a week and nine biweekly.  On August 17, 2025, our 62nd anniversary, we went to our favorite Chinese restaurant on ECR.  We arrived early and were seated next to a large window looking out at the street.  And then, we remarked simultaneously, “Look, a bicyclist!” the first we saw using the new bike lane.  I estimate that we had driven about a hundred miles between July 1 and August 17. Several thousand students, staff, and faculty ride bicycles to Stanford each working day, having done so for years without dedicated bike lanes along ECR.  Stanford’s internal bike lanes are simply demarcated with paint and words. Are the new bike lanes worth the direct cost of installation and indirect cost of lost business?  I think not, unless and until they are more heavily used, with fewer automobiles on the road unclogging traffic and reducing carbon emissions.  Even if that occurs, businesses will continue to lose money.  But, hey, this is California!   Alvin Rabushka is the David and Joan Traitel Senior Fellow, Emeritus at the Hoover Institution. (0 COMMENTS)

American manufacturing of aircraft during WWII dwarfed that of its enemies. By the end of the war, an American assembly line was producing a B-24 bomber in less than an hour. But that success was far from inevitable. Structural engineer and writer Brian Potter speaks with EconTalk’s Russ Roberts about the logistical challenges of ramping up […] The post How Did America Build the Arsenal of Democracy? (with Brian Potter) appeared first on Econlib.

After spending ten posts (beginning here) outlining Musa al-Gharbi’s arguments in his book We Have Never Been Woke, it’s time to move on to my evaluation of those arguments. In this post, I’ll begin to cover some of my thoughts on al-Gharbi’s more big-picture ideas — the cause of “Awokenings,” and the motivation for “woke” symbolic capitalists in their support for policies that are harmful to the poor and vulnerable. Elite Overproduction Overall, al-Gharbi describes Awokenings as periods in which members of what he calls the symbolic capitalist class try to take the reins of social justice movements in order to preserve or enhance their own status. A key factor in this process is “elite overproduction” — the idea that there are too many people who see themselves as destined to join or remain in the elite class than there is actual capacity for elites. I think the idea of elite overproduction is basically sound. If I had to pick a nit (and I do love a good nitpick!), I’d probably have framed it as more of a supply and demand issue for elites — the term “elite overproduction” makes it sound like it’s purely a matter of excess supply. For example, when al-Gharbi talks about the overproduction of elites leading up to the first Great Awokening (in the 1920s–1930s), he points to data showing the increase in rates of college education, which was (and still is) often seen as a ticket straight into elite status. But while the increases were large in relative terms (the number of people with a PhD quadrupled!) it was still pretty tiny in absolute terms — the percentage of people with a PhD rose from 0.03% to 0.12% of the population. By itself, it doesn’t seem likely that 0.12% of the population holding a PhD would have amounted to much were it not for the impact of the Great Depression and the economic downturn that followed. In short, at least for that Awokening, it seems like the problem was more to do with the demand for elites collapsing, rather than the supply growing at an unsustainable rate. However, I do think that oversupply does a lot to capture much of the current situation. Many people in my generation grew up being told, in effect, that going to college and getting a degree was important because doing so would lock you into a strong career path. But many have graduated from college and discovered that holding a degree was far from the assurance of attaining a well-paying job they had believed. Part of the problem is that the strategy of ensuring career success by obtaining a college degree is the kind of thing that works well when most people don’t do it. Pushing more and more people into the college pipeline doesn’t ensure more and more people will be able to gain all the benefits that a degree historically provided. It just devalues the possession of a degree through inflation, leaving more and more graduates holding poor job prospects along with large student loan debt. A lot of anger over exactly this situation was visible during Occupy Wall Street. I recall at the time of those protests reading a news story about someone working in an office building overseeing an Occupy encampment who had printed out numerous job applications for basic retail and service jobs and tossed them out the window to rain down among the protesters. The not-so-subtle message was “just get a job, you unemployed losers!” And in the story, they interviewed the protesters about it. Their response was that they weren’t just random losers — they were all college-educated, had fancy degrees, and the whole reason they got those degrees was so they wouldn’t have to work those kinds of jobs — jobs they considered to be beneath their rightful station. They felt like the implicit contract they expected had been broken — they graduated high school, went to college, and got a degree, because they had been told their whole life that doing this was their ticket to the top. Yet they ended up feeling very far from secure in their prospects. (The actual details may have been slightly different, because I’m relying on my memory here, but the gist of the story was basically along those lines. But sprinkle some salt on it if you like. Memory can be a fickle thing.) Though al-Gharbi focuses mostly on the United States, “Awokenings” occurred across the world, and the methods and makeup of the “woke” were similar in different countries: largely highly educated, well-off elites. And the frustration was also about those elites (or elite aspirants) feeling insecure about their own status. This was documented by Martin Gurri in his book The Revolt of the Public (published in 2014), in the midst of the most recent Awokening.  This section of Scott Alexander’s review of that book, describing these movements in all these different countries, sounds strikingly parallel to what al-Gharbi describes: All of these movements were mostly their respective countries’ upper-middle classes; well-connected, web-savvy during an age when that meant something. Mostly young, mostly university-educated, mostly part of their countries’ most privileged ethnic groups. Not the kind of people you usually see taking to the streets or building tent cities… Gurri isn’t shy about his contempt for this. Not only were these some of the most privileged people in their respective countries, but (despite the legitimately-sucky 2008 recession), they were living during a time of unprecedented plenty. In Spain, the previous forty years had seen the fall of a military dictatorship, its replacement with a liberal democracy, and a quintupling of GDP per capita from $6000 to $32000 a year – “in 2012, four years into the crisis there were more cell phones and cars per person in Spain than in the US”. The indignado protesters in Spain had lived through the most peaceful period in Europe’s history, an almost unprecedented economic boom, and had technologies and luxuries that previous generations could barely dream of. They had cradle-to-grave free health care, university educations, and they were near the top of their society’s class pyramids. Yet they were convinced, utterly convinced, that this was the most fraudulent and oppressive government in the history of history, and constantly quoting from a manifesto called Time For Outrage! So again: There is something to elite overproduction as an idea. It is a well-founded fact that social justice activism, too, is primarily an elite activity. In my next post, we’ll look at how a well-known explanation of incentives and political coalitions might provide insight into al-Gharbi’s analysis.   As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

In the Christian Bible, there is a parable of two builders.  One built his house on stone and the other on sand: “Everyone then who hears these words of mine and acts on them will be like the wise man who built his house on rock.  The rain fell, the floods came, and the winds blew and beat on that house, but it did not fall, because it had been founded on rock.  And everyone who hears these words of mine and does not act on them will be like a foolish man who built his house on sand.  The rain fell, and the floods came, and the winds blew and beat against that house, and it fell – and great was its fall!” -(Matthew 7: 24-27, NRSV) This parable finishes the famous Sermon on the Mount, in which Jesus Christ lays out what one must do to live a good life, be a good person, and worship God.  A life built on solid principles can withstand many things: whether winds buffet, rain pours, or waters rise, the person soldiers on.  In contrast, a life built on unsolid principles collapses as soon as the bad times hit. The same is true of economic reasoning.  Econ 101 (or Econ 211 as it is called at my university), Principles of Microeconomics, is a foundational course.  One of the things I tell my students is that all their subsequent business courses build on these foundations.  If they can understand the foundations, then everything will flow from that. When I teach upper-level courses (International Trade, Money & Banking), I always reference back to Principles to reinforce appreciation of the power of principles-level economic thinking.  I frame things in terms of incentives: “Why is it that bond yields and bond prices move in opposite directions?  Don’t just tell me mathematically…what’s the incentive here?”  “Why do bonds trade at a discount when the coupon rate is below the market rate?  Don’t just tell me mathematically…what’s the incentive here”? These are questions that appear on my exams. Foundational knowledge is vital to understanding. Understanding the foundations makes economic relationships intelligible.  You may not know the precise answer (that’s where the math comes in), but often you can know when the answer you get is incorrect. Mathematics is a useful tool, but if not coupled with foundational economics, the findings are unstable—like building a house upon sand. A mathematical model may look pretty and still fall apart once the situation changes.  We see this all the time, especially with pundits like Michael Pettis and Oren Cass who toss out economic foundations and build towering edifices upon sand, only to have them collapse under scrutiny (see, for example, my post “Accounting Identities and Economic Theories” and Brian Albrecht’s post “Curing International Trade Confusion“). Even now, in a chaotic economic environment, I find that relying on the lessons learned in Econ 101 serves me well.  They help me filter out the noise so we can focus on the signal. So, my advice for anyone who wants to understand, truly understand, economics: learn your fundamentals.  Build your education on a solid foundation.  It’ll help keep your eyes clear when others try to dazzle with fancy mathematics or logical conundrums.  If they cannot link it back to economic foundations (or worse, make some appeal like “econ 101 is too simple!”), you will be able to see that you are being shown nonsense on stilts. (0 COMMENTS)

Economists are fond of talking about how people respond to incentives — and stress how social arrangements can produce suboptimal results when they give people counterproductive incentives. I recently saw a fun video on the history of how mathematicians developed the imaginary number system (hey, I think it’s fun anyway!) that shows an example of this in action. The video starts with the efforts of mathematicians to find a general solution to cubic equations. A cubic equation is one step up from a quadratic. Today, we write quadratics as ax² + bx + c = 0. A cubic would take the form ax³ + bx² +cx + d = 0. While the solution to quadratics had been independently discovered by different civilizations thousands of years prior, a general solution to cubic equations seemed impenetrable. This led Luca Pacioli, the mathematics instructor to Leonardo da Vinci, to declare the problem unsolvable. The story turns to the mathematician Scipione del Ferro, who taught mathematics in Italy during the Renaissance. In that time and place, university positions were handled very differently. Far from having the protection of tenure, a math professor could be challenged at any time for his position by another mathematician. Each would present the other with a series of math challenges to be completed — and whoever got the most correct answers would take the professorship, while the loser would be considered publicly disgraced. While this sounds like it would have created a highly meritocratic culture where only the best would be on top, it also created some unfortunate incentives. Around 1510, del Ferro made a new breakthrough, finding a general solution to what are called depressed cubics. A depressed cubic is a cubic with no x² term, and would be written out as ax³ + bx + c = 0. As the video goes on to describe: So what does he do after solving a problem that has stumped mathematicians for millennia? One considered impossible by Leonardo da Vinci’s math teacher? He tells no one. Why would he keep this breakthrough advancement in mathematics hidden away? Because of the incentives created by the aforementioned system: As far as del Farro knows, no one else in the world can solve the depressed cubic. So by keeping his solution secret, he guarantees his own job security. The system in place during del Farro’s time may have aimed at ensuring the most intelligent and capable scholars held positions at universities. To be clear, that’s not a bad goal in itself, obviously. In fact, at first glance it seems like an obviously good way to ensure each posting was held by the best possible scholar. But this would just be another case of what I’ve called Grey’s Law: solutions that are the first thing you’d think of, seem sensible, and are easy to put into practice often turn out to be terrible, ineffective ideas that once implemented will serve as a drag on civilization. To the extent that this system encouraged scholars to keep advancements and breakthroughs hidden away, it fell victim to Grey’s Law. It made it in the interests of individual professors to prevent new knowledge and discoveries from being better known, and to the extent that new breakthroughs are built on older discoveries, it had the potential to seriously slow down the advancement of knowledge. Even in situations we don’t think of as being part of “economics” like the system used to hire mathematics professors, the fundamental idea of economics – people respond to incentive, and we need to evaluate systems by the incentives they create — remains true. (0 COMMENTS)

The debate over Robert Triffin’s famous “dilemma” continues to animate policymakers and commentators. Stephen Miran, a leading economic advisor to Mr. Trump, in a November article revived the theme by arguing that the inelastic global demand for dollar-denominated assets imposes structural costs on the U.S. economy. Joseph Sternberg, in a recent column, by contrast, dismisses Triffin as a defunct economist whose predictions never materialized. Yet both approaches overlook the crucial fiscal dimension. The real problem is not that the world uses the dollar as a reserve currency; if nothing else, it is a blessing, an “exorbitant privilege,” as it is called. The problem is that the United States consistently couples this privilege with persistent fiscal deficits. Once the fiscal factor is brought in, the so-called Triffin dilemma looks less like a natural inevitability and more like a policy choice. Triffin originally argued that the Bretton Woods gold–dollar system was doomed. To supply the world with liquidity, the United States had to run external deficits, which would ultimately undermine confidence in dollar convertibility into gold. His reasoning was based on the assumption that the U.S. could never abandon gold convertibility. Yet Nixon’s decision in 1971 did exactly that, revealing the “dilemma” to be contingent, not inexorable. Triffin lacked the imagination—or perhaps the political realism—to foresee that the U.S. might decouple the dollar from gold and continue issuing liabilities without constraint. Sternberg seizes on this point to discredit Triffin wholesale. But this is too harsh. The deeper insight—that reserve currency status interacts with domestic policy in ways that can create global imbalances—remains valid. What Triffin missed was the political willingness to jettison gold, and what Sternberg misses is the way fiscal policy drives the pathologies associated with the dollar system. Miran argues that persistent foreign demand for safe dollar assets leads to chronic dollar overvaluation, weakening U.S. manufacturing and hollowing out industrial communities. He interprets the trade deficit as the mechanism through which the U.S. “exports” Treasury securities to supply the world with reserves. From this perspective, American deficits are not a vice but a structural necessity—a paradox that leads inexorably to twin deficits and eventual financial strain. Yet Miran’s framework treats the fiscal stance of the U.S. government as an afterthought. He emphasizes the demand side (foreigners want dollars) while neglecting the supply side (the U.S. issues them through public deficits). Contrary to those views, I would like to point out that there is no inherent need for perverse outcomes if the U.S. refrains from chronic fiscal deficits. Absent government dissaving, foreign demand for dollar assets would not automatically translate into unproductive flows into Treasury bonds. Instead, it would take two healthier forms: 1. Private Capital Allocation. Foreigners seeking dollar-denominated assets would need to invest in American private enterprises. This would direct global savings toward productive investment—expanding capacity, innovation, and ultimately generating returns sufficient to repay creditors. 2. Cash Balances via Asset Exchanges. Alternatively, foreigners could accumulate dollars by selling assets to Americans, as occurred during the interwar gold exchange standard and in the early Bretton Woods period. In such cases, capital inflows did not require U.S. fiscal deficits but arose from cross-border asset reallocations. These mechanisms disprove Miran’s claim that the Triffin dynamics necessarily trap the U.S. in permanent deficits. The pathology arises only when Washington runs structural fiscal imbalances, turning foreign demand for safe assets into a subsidy for public consumption rather than productive investment. Sternberg is correct that Triffin’s original forecasts failed: the world did not collapse into deflation, and the dollar survived the end of Bretton Woods. But his dismissal overlooks the fiscal innovation that made this possible. The U.S. effectively replaced the gold anchor with its own deficit-financed debt as the backbone of the system. This worked, but only by turning the American public sector into the main consumer of the world’s savings—a development Triffin never envisioned. The true “dilemma” is not an iron law of reserve currencies but a consequence of U.S. fiscal profligacy. If the United States balances its budget, global demand for dollar assets can be satisfied through private-sector channels that foster productive growth. It is only when the public sector runs persistent deficits that reserve demand translates into overconsumption and debt accumulation. Thus, the way forward is not to lament Triffin’s logic or resign to Miran’s determinism, but to recognize the conditional nature of the problem. The U.S. dollar can remain the world’s reserve currency without imposing perverse outcomes—if, and only if, American fiscal policy avoids exporting its deficits to the world.   Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain. (0 COMMENTS)

John Locke’s idea that tyranny is arbitrary power as opposed to the rule of law seems to underlie the whole classical liberal tradition (see Locke’s Second Treatise of Government [1690, Chapter 18]). Arbitrary power allows the state or any other central political authority to discriminate among its subjects by bribing its supporters and harming its opponents. In reality, public discrimination (in the sense of state discrimination) is probably a synonym of arbitrary power. The gradual discovery of the rule of law has come with the idea that the state should not discriminate among its citizens, residents, and often even foreigners. If, in your country, you kill a foreigner with no justification, your own liberal government will come after you. John Hicks, the 1972 laureate of the Nobel prize in economics, recalled a high form of this ideal in the 19th century (“The Pursuit of Economic Freedom,” in E.F. Jacob, Ed., What We Defend: Essays in Freedom by Members of the University of Manchester [Oxford: Oxford University Press, 1942]: The Manchester Liberals believed in Free Trade not only on the ground of Fairness among Englishmen, but also on the ground of Fairness between Englishmen and foreigners. The State, so they held, ought not to discriminate among its own citizens; also it ought not to discriminate between its own citizens and others. Contemporary classical liberalism is solidly anchored in that tradition. Friedrich Hayek defended the rule of law as a set of abstract and typically negative rules applying equally to all individuals (see the first volume of his Law, Legislation, and Liberty, which I reviewed at EconLib). James Buchanan’s concept of “generality” represents the same ideal with different conceptual foundations. Buchanan’s theory defines a social contract with unanimously accepted rules that also bind the state (see his The Limits of Liberty: Between Anarchy and Leviathan, which I reviewed at EconLib). He proposed constitutional amendments that would forbid government to discriminate through its expenditures (no cronies!), to incur budget deficits (in normal times), and to regulate free trade, internal and external (see his “Three Amendments: Responsibility, Generality, and Natural Liberty,” Cato Unbound, December 4, 2005). A simple example of the generality or no-government-discrimination principle can be seen in how to determine the age of majority. If one looks at particular cases, it seems obvious that some individuals reach maturity and personal responsibility at different ages. But granting a government the power to decide individual cases would entail an unacceptable discrimination between individuals granted full individual liberty and those forced to remain in adolescence (and until when?). The only non-discriminatory solution has been (with some undefendable exceptions, such as drinking or buying tobacco) to determine a general rule, such as 21 or 18. Everybody—black or white, man or woman, rich and poor, etc.—is assumed to enjoy full liberty at the same age (or the same truncated liberty if full liberty does not exist). Banning public discrimination is even more important given the power that contemporary states have acquired—even after the Civil War had stopped the power of governments to discriminate against the Blacks and to support slave owners in protecting their “property.” The state now seems capable of destroying any individual or group that the rulers hate. Even influential corporate executives grovel before the main ruler to avoid his wrath. We may even witness the state taking pride in its power to discriminate (sometimes under the excuse of non-discrimination), and even using the military to impose its decrees against some citizens. Economist and political philosopher Anthony de Jasay refers to the discriminatory state as the “adversary state” “taking sides” with some citizens against others (read his classic 1985 book The State, which I also reviewed at EconLib). The phenomenon has become so widespread that most people don’t even notice it. Just to take an example, why do governments want to reduce the price of housing (relative to other prices)? It takes sides against current homeowners, who typically have an important part of their savings in their houses. De Jasay also believed that the state is by nature discriminatory and that constitutions cannot change this—which puts him at odds with mainstream liberals such as Hayek and Buchanan. The objection that government discrimination is unavoidable by invoking bans on murder, theft, and other real crimes is a non sequitur. There is a virtual unanimity among citizens for banning these crimes. Even murderers don’t want to be murdered. Victimless crimes are another matter as well as the government harming Paul to help Pierre. Most drug consumers and dealers are adult citizens too! The example of Harvard University, which has been threatened by the current administration essentially for the ideas defended there, is telling. For Buchanan and Hayek, government subsidies to Harvard are legitimate if they are also available to other universities; at any rate, they can’t be used to blackmail private institutions into accepting diktats from politicians. I suspect that de Jasay, who alas left our valley of tears in 2019, would use this case to repeat his argument that generality is impossible because the criterion to define the group of entities to be treated equally (universities? plus educational institutions? plus think tanks?) is itself arbitrary (see his book Justice and Its Surroundings, which I reviewed in Regulation). (My apologies for quoting again a book review of mine; sometimes, I get the false and dangerous impression that I have reviewed all the important books of the past 100 years.) What is sure is that there is no classical liberal argument for supporting the naked discriminatory state. This reflection also suggests that three alternatives exist for the future of human societies: tyranny (of the left or the right, democratic or not), generality (standard classical liberalism), and anarchy (liberty without the state, if that can work).   As an Amazon Associate, Econlib earns from qualifying purchases. ****************************** Referee taking sides with the Black team       (1 COMMENTS)

Can a zoning meeting help rush hour traffic? According to Alain Bertaud, urban building regulations can indeed have a major impact on the flow of city traffic.  On this episode of EconTalk, Russ Roberts is joined by urbanist Alain Bertaud where they discuss designing cities and the effects that regulation, culture, and topography have on a city’s functionality and charm.  Bertaud begins by explaining what an urbanist is. Unlike the city planners that design a city to conform with a specific vision, an urbanist works with a city’s unique culture and features to solve the problems its population face. He is doctor of cities, diagnosing and treating sicknesses in city structure and procedures.  One common ailment is congested traffic. Many things affect the amount of regional traffic – road space, public transportation, amounts of cars, and even parking policy. Oftentimes, city policy incentivizes car ownership simply by providing free street parking. Although removing all street parking may not be the answer, Bertaud does suggest creating a market around parking spaces and treating parking real estate like hotels for cars by charging people to park at rates reflective of the demand for space. He offers Singapore’s congested parking as an example. While parking may be expensive on the weekends when those spaces are in high demand, lower weekday fees encourage people to visit that area during the week. Variable pricing levels out the flow of traffic in a region simply by decreasing unnecessary traffic during busy hours and increasing traffic during slow hours.  Bertaud also suggests building underground. While dense cities can expand housing upward, cities can also expand downward. Subways and Metro lines can help decongest the streets by rerouting the flow of people onto trains underground. But it is not just about smoothing out rush hour. Bertaud reminds us that urban transportation is about connecting people. Cities provide the opportunity for different people to randomly interact. The new acquaintance at a local café, the rude subway passenger, the inspiring conversation over coffee – all these experiences with people different from oneself are beautiful and desirable.    The beauty of cities’ randomness, however, is one often lacking in American cities. “I think,” Bertaud comments, “that Americans still have the spirit of the frontier, where you will move West. I mean, maybe it’s a myth, but it’s in the spirit. So, they value the size of housing much more than Europeans do. And, they value also having a piece of land around their house.” These preferences, along with a dislike for people different from oneself, expand American cities into large suburbs filled with single family housing. While owning property and liking space is not a bad thing, it is a tradeoff for the charm of walkable cities. It is the difference between the French café and the neighborhood barbeque.    Now let’s hear what you think… Share your responses to the questions below, and let’s continue the conversation.   1.)   What are major problems in American cities that need a doctor? How might local governments address these issues more effectively?  2.)   What are the pros and cons for American preferences for land and spacious housing? Are these preferences merely a cultural trade off or is there something more meaningful behind them?  3.)   Bertaud clearly values a city’s diversity, but the term “diversity” is often a dividing point in politics. What are the pros and cons of diversity? How can diversity be a strength? How can it be a weakness?  (0 COMMENTS)

Despite facing little explicit costs, Kiki’s delivery service is a costly endeavor. Fortunately, for viewers, it’s a charming lesson on the nature of costs and an introduction to James Buchanan’s work on cost and choice. Kiki’s Delivery Service, Studio Ghibli’s 1989 masterpiece, captures genuine moments of a young witch trying to make it on her own. Moreover, it highlights the fundamental nature of cost and choice. The logic of cost is deceptively unintuitive and often difficult for students and laymen alike, mainly because common usage defines it as losing money. Typical notions of cost also often refer to inherent qualities of objects, e.g., a loaf of bread costs $5, and as an inevitable, negative outcome. The economic way of thinking clarifies a deeper meaning of cost, and Kiki shows this in one standout scene.  As Kiki settles in her new town—with the help of a nice baker, her cat familiar, a few friends, and a good dog—she begins a delivery service. Kiki can fly on a broom so she realizes she can quickly transport goods. The scene (about minute 47) begins with the visuals and sounds of people walking, shopping, and eating around town, amidst the honking and noise of city life. In contrast, Kiki is having a “boring” day in the bakery where her view through the window affords a few glances of passersby. As the day develops and as Kiki hopes for customers for her delivery service—so she can eat something other than pancakes—she is bombarded with choices. A customer calls the bakery for a 4:30 delivery, her would-be friend comes into the shop to buy a cookie and asks her to a party (at the Aviation Club, a “serious club for kids who are into flying and aircraft and stuff”), and another customer enters the shop with an “urgent” request to deliver a heavy package. Kiki accepts all these requests, and the scene builds. She frantically runs to the owner of the bakery for guidance about what to wear and her ensuing dilemma; the sound of quickened footsteps and her running into the wall sell the tension. Kiki worries about what she should wear to the party, and she realizes she doesn’t have enough time to fulfill all these objectives. It is already 4:00, she has the urgent delivery, the 4:30 delivery, and the party at 6:00. Kiki sets out to make her deliveries. She ends up helping one of her customers bake a pie, loses track of time, and misses the party. Kiki doesn’t explicitly recognize the costs she faces because the movie has other concerns and she doesn’t face explicit, monetary costs. She does, however, face implicit or opportunity costs. She implicitly considers the costs of her actions, which explains her behavior and the sub plot. In this way, the scene nicely encapsulates the logic of cost, starting with scarcity. In economics, scarcity is a state of the world where there are more wants and desires than there are resources to fulfill those wants and desires. Kiki realizes that her time has become relatively scarce; she has more wants and uses of her time than there is time available. She must choose how to use her time, e.g., figuring out what to wear, making urgent deliveries or the scheduled one, and going to the party or making her deliveries. Even though she is a witch, she cannot be in two places at once, and her broom only goes so fast. Scarcity entails choice, which entails sacrifice. That’s where cost comes in. If Kiki chooses to go to the dance, she cannot also make her deliveries and vice versa. When she chooses to make a delivery, her opportunity cost is the forgone value of another delivery and, perhaps, going to a party. If she had more time, say if the dance was another night, there might be less of a conflict and she would face a lower cost. Each of her choices would be less dear to her. If she had more time to spare, that is, she could make her deliveries and go to the dance and go visit the nearby dirigible. The charming aspect of this scene, like the rest of the movie, is that you can see the internal drama, the emotions, and the choices Kiki faces. And as for costs, this scene demonstrates how economists think about costs; they are internal, subjective evaluations about the choices we face. Kiki never faces an explicit cost, they are only borne in her mind. For example, she doesn’t pay fuel costs or air mileage to fly her broom and make deliveries. She still bears costs; they are opportunity costs. Moreover, these costs change with changing circumstances. Prompted by a customer in an earlier scene, Kiki states that she has never thought about the cost of a delivery, that is the price she might charge to customers. This is likely, following the logic of opportunity cost, because her lack of customers indicates a relatively low opportunity cost. During her “boring” day in the bakery, additionally, Kiki’s opportunity cost of making a delivery was fairly low as she had so few obligations. When she was asked to the party and when other requests came in, her opportunity cost became higher. These lessons about cost are universal, like the universal charm in the movie. We all face choices in an uncertain world. We all face opportunity costs. These lessons are also core aspects of economic science, as costs influence human behavior. An end of the chapter question in The Economic Way of Thinking highlights the lesson and how easily we might err. Francis Wayland once wrote:  …the qualities and relations of natural agents are the gift of God, and being his gift, they cost us nothing. Thus, in order to avail ourselves of the momentum produced by a water-fall, we have only to construct the water-wheel and its necessary appendages, and place them in a proper position. We then have the use of the falling water, without further expense. As, therefore, our only outlay is the cost of the instrument by which the natural agent is rendered available, this is the only expenditure which demands the attention of the political economist. Waylon’s error is that he didn’t recognize water and “water wheels” might have alternative uses, which entails opportunity costs. These are also the lessons James Buchanan clarifies in his landmark book Cost and Choice (here is my summary of the book). His work develops the history of thought behind cost, recognizes the necessity of linking cost with choice, and advances a distinction between forward looking or choice-influencing costs and past looking or choice-influenced costs. To Buchanan, (opportunity) costs are only borne by individuals facing choices, like Kiki choosing between delivery requests and going to the party. Cost is subjective, as Kiki discovers during her considerations of going to the party, making her deliveries, and helping customers. She isn’t too fond of the boy who asked her to the party, but she still accepts. Similarly, these considerations are about anticipations given current information. When Kiki decides to make the deliveries, she anticipates a travel plan, a reward, lost opportunities, and so on. Cost, i.e., the value of a foregone opportunity, isn’t felt because of the choice itself, but rather from an individual’s deliberation within the mind. This also implies that opportunity cost cannot be directly observed and that they are dated (at the latest) at the moment of choice. We see Kiki flying off to make deliveries, but we cannot see the opportunity costs she bore when she chose to make the deliveries, or when she chose to sacrifice other opportunities. How Kiki behaves—like anyone else—depends on her subjective evaluations of expected benefits and expected opportunity costs. She could have gone to the party, for example, but she placed a higher value on developing her business and helping customers. She was willing to bear the opportunity cost of missing the party. This isn’t to say choices do not entail lost opportunities in an objective sense, e.g., imagine a fee for flying. Buchanan notes that other people can determine the value of potential alternatives—but the individual still determines subjective evaluations and ultimately chooses. In Chapter 3 of Cost and Choice, Buchanan states that, “At the moment of choice itself, cost is the chooser’s evaluation of the anticipated enjoyments that he must give up once commitment is made; it is also that which he can avoid by choosing another alternative.”  We might also experience regret about the decisions we make, which can be a kind of cost. Kiki, for example, might regret losing track of time when she was helping the older woman bake her herring and pumpkin pie, which leads to her missing the party. Or she might regret taking on more business than she can handle. Such regrets, hindsights, and other things that could have been, to Buchanan and economists, are only choice-influencing costs to the extent they alter how we perceive future circumstances. Cost will likely retain varied meanings, but the economic approach provides a richer interpretation of behavior. Kiki’s Delivery Service provides a wonderful way for students and laymen to explore this approach. As so much of economics follows introductory concepts like cost and choice, clarifying the concepts and marshaling additional examples can help us better consider the economic way of thinking.   Byron “Trey” Carson is an Associate Professor of Economics and Business at Hampden-Sydney College in Virginia, where he teaches courses on introductory economics, money and banking, health economics, and urban economics. (0 COMMENTS)

Soon after the Wall Street Journal published Phil Gramm’s and my warning of the destructiveness of President Trump’s steel and aluminum tariffs, a thoughtful CEO of a steel-producing firm in Pennsylvania emailed me to cordially express his concern that, if Sen. Gramm’s and my warning is heeded, failure to protect American producers of steel and aluminum will jeopardize U.S. national security. Much can be written to address this concern, but not wishing to excessively tax this gentleman’s patience and time, I limited my response to what I share here. ….. Mr. B_: Thanks for your thoughtful and challenging email in response to Phil Gramm’s and my argument that President Trump’s tariffs on steel and aluminum are destructive. It deserves a substantive reply. Let me begin with a point of complete agreement between us: Regulation done in the name of protecting the environment has gone too far in the U.S., and this regulation has deleterious effects on the American economy. It should be rolled back. I also agree that ensuring adequate military readiness is of great importance, and that narrowly targeted trade restrictions can sometimes be an appropriate means of helping to ensure this readiness. But resorting to such restrictions must be done with unusual care because claims of the need for trade restrictions to protect national security are especially prone to be abused. Not only are politicians frightened of being publicly accused of negligence regarding national security, these claims are not as straightforward as they at first appear. No Industry Can Expand Without Causing Other Industries to Be Smaller One cost of any trade restriction is that, by diverting resources into the protected industries, resources are diverted away from other industries. Such a diversion occurs regardless of the underlying justification for the restriction. If we could be sure that the industries that shrink as a result of using protectionism to strengthen national security are industries that are of little to no consequence for national security – say, the cosmetics and tobacco industries – the case for such protection on national-security grounds gains strength. But in the real world we can seldom have any such assurance. What if – as strikes me as probable – the tariff-induced expansion of U.S. steel and aluminum manufacturing causes these firms to draw workers and resources away from producing, not the likes of eyeliner and cigarettes, but from producing militarily significant goods such as carbon fiber, chemicals, and rubber? How can we be sure that the benefit to national security generated by more domestic steel and aluminum production isn’t overwhelmed by the harm to national security that comes from producing fewer chemicals and less rubber? If only because it’s practically impossible to know just what other industries will shrink, and by how much, if tariffs are raised on steel and aluminum, I see no realistic way to make any such firm assessment. A seemingly easy maneuver to avoid this problem is to grant protection, on national-security grounds, also to these other industries. But who decides what other industries should receive such protection? Do producers of, say, lumber and glass qualify for protection? These outputs, after all, also have military uses. Even if we successfully meet the challenge of accurately identifying which other industries with national-security significance will shrink as a result of protecting steel and aluminum, problems remain. One such problem is that the protection given to these other industries runs against the purpose of the initial reason for protection – namely, to increase domestic production of steel and aluminum. It does so by obliging steel and aluminum producers to pay higher wages for workers, and higher prices for inputs, that, because of the protection of the other industries, are now in higher demand by these other protected industries. Further, the protected ‘other’ industries, having lost some workers and inputs to steel and aluminum producers, must now themselves – if they are to remain viable – draw resources away from yet a third set of industries, such as, perhaps, energy, construction, and microelectronics. How many industries among this third set produce outputs that are plausibly important for national defense? In my experience, proponents of tariffs are blind to the complexity of the reality that they propose to meddle in. This blindness leads to the presumption that a sufficient condition for justifying protection on national-security grounds is to identify some seemingly obvious inputs, such as steel and aluminum, as critical for national security. But if these inputs aren’t the only ones that plausibly serve important national-security goals, this presumption is mistaken. And acting on it can be counterproductive. ‘Critical for National Defense’ Is a Fuzzy Concept At this juncture it might be thought that the entire problem is solvable simply by granting immediate protection to all industries classified as critical for national defense, with the criteria for such a classification being wide. Again, however, we confront the problem of determining which industries do, and which industries don’t, fit this bill. (You can bet, of course, that insofar as protection on national-security grounds is available, every industry will lobby to make the case that its output is a national-security necessity.) As a practical matter, some industries will be in the gray area, with some dispassionate analysts concluding that those industries are important for national security, while other dispassionate analysts conclude otherwise. Suppose that glass producers are in that gray area but are eventually denied protection for the sound reason that current domestic production of glass is quite high. Glass producers will thus lose workers and resources to the industries that expand as a result of the protection of other industries. Domestic production of glass will fall and glass imports will rise. Because glass does have military uses, the decline in glass production will increase the military significance (or at least the asserted military significance) of what remains of the U.S. glass industry. Pressure to extend protection to the glass industry will grow as the same considerations that earlier counseled the extension of protection to rubber and chemicals now come into play for glass. Protective tariffs would likely eventually be imposed on imports of glass, thus causing yet other industries to contract as the glass industry expands. Because nearly everything in the modern global economy is connected in one way or another to everything else – and because no domestic industry can expand without causing other domestic industries to be smaller than they would otherwise be, and thus causing the prices of many inputs unexpectedly to rise throughout the economy – there is no categorically distinct set of industries that can objectively be identified as “Critical for National Defense” with other industries identified as not-critical. As soon as the national-security exception to the case for free trade is made available, determining which industries are to be protected and which aren’t will inevitably be done with a heavy helping of guess-work and speculation, and topped off with heaping amounts of pork and politics. This unfortunate reality – along with many other, more familiar challenges reviewed elsewhere – about the difficulties of using protectionism to strengthen national security doesn’t mean that there are no real-world instances for which the use of such trade restrictions is appropriate. Reality is messy, imperfect, and uncertain. The point of the above economic assessment is simply to warn that identifying some goods, such as steel and aluminum, that clearly are currently major inputs used by the military is not itself sufficient to justify protecting domestic producers of these goods from foreign competition. National security itself stands a good chance of being compromised by too quickly concluding that producers of such goods must be protected in order to ensure national security.   Donald J. Boudreaux is Professor of Economics, George Mason University. He blogs at Café Hayek (www.cafehayek.com). (0 COMMENTS)