Congress continues to resist further funding Ukraine’s war effort against Russia. In late November, the American Enterprise Institute’s Marc Thiessen responded in The Washington Post that, even if Ukraine war skeptics don’t agree that “it is in the United States’ vital interests to arm Ukraine” on geopolitical grounds, they should at least consider that such support modernizes the U.S. military and boosts the domestic economy. Thiessen and his colleagues identified “117 production lines in at least 31 states and 71 cities where American workers are producing major weapons systems for Ukraine.” Moreover, “[e]very single state” contributes “suppliers that provide these contractors with parts” and smaller materiel. Further, with both the United States and other allies sending “often decades old” weapons systems abroad, the United States is manufacturing more advanced systems that presumably wouldn’t otherwise have been built. For this boost to the U.S. economy and military modernization, Thiessen said, 90% of “the $68 billion in military and related assistance Congress has approved since Russia invaded Ukraine … is going to Americans.” He concluded, to call this “aid” would therefore be a “misnomer.” Fellow Ukraine hawks have mirrored the point. Brookings Institution’s Fiona Hill recently wrote, “arming Ukraine means significant job creation and retention across the United States” and “replenishing and upgrading our own weapons stocks.” Stanford’s Michael McFaul blared, it “enhances directly OUR national security. … How can anyone vote against modernizing OUR military & enhancing OUR readiness?”   The “broken window” fallacy and economic development These pundits overlook the lesson in economist Henry Hazlitt’s famous Economics in One Lesson (1946), which expands on French economist Frédéric Bastiat’s 1850 insight between the seen and the unseen. Investopedia recounts the heart of the idea with Bastiat’s “broken window parable”: In Bastiat’s tale, a boy breaks a window [which belongs to his father, a shopkeeper]. The townspeople looking on decide that the boy has actually done the community a service because his father will have to pay the town’s glazier [glassmaker] to replace the broken pane. The glazier will then spend the extra money on something else, jump-starting the local economy. The onlookers come to believe that breaking windows stimulates the economy. Bastiat points out that further analysis exposes the fallacy. By forcing his father to pay for a window, …[h]is father will not be able to purchase [other things]. Productivity has also decreased, as the time the father spends dealing with the broken window could have been put to better use. Thus, the broken window might help the glazier, but at the same time, it robs other industries and reduces the amount spent on other goods. Bastiat recognized that “there are not just two characters, but three, in the little drama.” Hazlitt, imagining that the shopkeeper might have bought a new suit were he not spending money fixing the broken window, explained: The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye. Because the broken window meant that the shopkeeper had to spend money he would not otherwise have spent on a new window, Bastiat summarized, “it has to be concluded that, taken as a whole…, society has lost the value of the broken window.” In other words, breaking the window was an economic loss, not a gain. Bastiat’s major point was to look not only at immediate effects, but also to look deeper at other effects. To him, of economic “effects only the first is immediate; …it is seen. The others merely occur successively; they are not seen[.]” To Bastiat, “The entire difference between a bad and a good Economist is apparent here.” In the case of Ukraine war funding, we see domestic manufacturing receiving more resources. But what if capital was not diverted for weapons manufacturing? The unseen is all the other sorts of production that otherwise might have occurred, which we will never get to enjoy. Is Ukraine funding then an economic gain or loss? Are more jobs created or lost? The broken windows tale gives us a clue. After the second world war, Henry Hazlitt addressed those who “tell us how much better off economically we all are in war than in peace,” who “joyously count the houses [in Europe], the whole cities that have been leveled to the ground and that ‘will have to be replaced.’” He protested that “when they build more houses they will have just that much less manpower and productive capacity left over for everything else.” To Investopedia, the “core of the broken window fallacy argues that spending money on items that have been destroyed does not lead to economic gain. … The theory suggests that a boost to one part of the economy can cause losses to other sectors of the economy.” Bastiat summarizes: “Destruction is not profitable.”   Modernizing the military Thiessen might respond that replacing old with advanced military technology is worth the price. But military modernization suffers the same problem. Without sending outdated equipment to Ukraine, the United States would still have its older equipment and could also build more advanced equipment. Yet Thiessen asserted that the military was not modernizing on its own, that such modernization was necessary, that a kickstart was required, and that supporting the Ukraine effort has been doing just that. Setting aside the dubious proposition that participation in foreign conflicts, particularly those that threaten nuclear annihilation, is a legitimate policy for economic development or military infrastructure, the military can and should modernize in other ways. The U.S. military’s budget is the largest in the world by a mile, and its innovative potential may be unleashed by fighting corruption and waste, avoiding protectionism, restructuring grant awards, and reforming immigration.   Conclusion Thiessen’s logic ultimately leads to the absurd result that America should intervene in as many global conflicts as possible for maximum economic and military development. Perversely, it also means America’s effort strengthens Russia’s military and economy to the extent it prolongs the Ukraine conflict and stimulates Russia’s military industry. Instead, the argument must crumble because supporting a foreign war is neither necessary nor proper to strengthen America’s military and economy. Bastiat shows it’s actively harmful. As Thiessen noted, there are good reasons to support Ukraine in its fight against Russia, from geostrategy to anti-imperialism and anti-authoritarianism. Yet there are equally good reasons to oppose it, such as concluding the current horrors of war and avoiding nuclear catastrophe. Let’s debate the issue directly, avoid bad arguments, and stop breaking windows.   Michael Zigismund is a Senior Associate Attorney and Director of the Immigration Law Department at The Law Offices of Robert Tsigler. He received his J.D. from the Benjamin N. Cardozo School of Law and his B.A. from Tufts University. You can also read his work at the Online Library of Liberty. (0 COMMENTS)

As Claudia Goldin accepts the Nobel Prize in Economics this month, we can take a lesson from her research on the hidden contributions from women in the labor force by recognizing more women who contributed to the development of economic thought. There are actually hundreds of such women, despite that only three women have been awarded the Nobel Prize in economics – Elinor Ostrom, Esther Duflo, and now Claudia Goldin. Despite being hidden from view, their contributions are many and often major.  In my new working paper, I identified 163 women who contributed to economic thought by using the Nobel Prize lecture in economics from 1969 to 2008, and separately considering Elinor Ostrom’s lecture from her 2009 award. Many of these women are not included in other lists, but by manually reviewing citations in the Noble lectures, I was able to identify many women whose work dates back to 1918 and whose work was recognized as important enough to cite by the laureates. Women made many kinds of contributions to economics during this time period, so although the citation rate by laureates was often low until Ostrom’s lecture, we can learn much by adding their work to our understanding of the literature. In addition to the 125 women who were cited as authors, 29 women were cited for their work as editors of books and other volumes and 20 women were thanked by laureates in their lecture acknowledgements for work ranging from comments to editing and actually typing out the lecture. These contributions are hardly minor – and may even provide opportunities for identifying more work done by these women with the laureates before they won the Nobel Prize. In addition to identifying women whom readers may be familiar with, including Rose Friedman, Joan Robinson, and Anna Schwartz, the citations included work by women who made major contributions but do not carry the household familiarity of the laureates who cited them. One such scholar was Irma Adelman, a Roman-American development economist who was cited both as an author and an editor and held positions in both academia and the World Bank. Another was Cynthia Taft Morris, an American development economist who worked with Adelman and who worked on the Marshall Plan with her; Barbara Bergmann, a feminist economist who co-founded the International Association for Feminist Economists; and Margaret Reid, whose work on household production preceded work by laureates Gary Becker and Simon Kuznets.  Although some scholars have identified women in the Australia, Canada, Europe, and the United Kingdom, the Nobel lectures provide a large international resource of scholars around the world. The citations, for example, include economists who held prominent roles outside of the United States, including Françoise Forges, a French game theorist who was awarded the CNRS Silver Medal; Birgit Grodal, a Danish economist who was the first woman president-elect of the European Economic Association before her death; and Shahra Razavi, an Iranian economist who worked with the International Labor Organisation and the United Nations. The Nobel lectures also include women from outside the economics mainstream, as Elinor Ostrom herself was as a political science PhD. Over time, women were gradually cited more and more, although this inclusion is not distributed evenly between fields: laureates in microeconomics, economic history, and econometric theory led in citing women more than average.  My working paper joins the detailed work of many other scholars, including work by Evelyn Forget, Mary Ann Dimand, Robert Dimand, Kirsten Madden, and Edith Kuiper, as well as studies of women scholars during the 18th and 19th centuries. As Goldin rightfully joins the ranks of the laureates in economics, we should recognize and remember the hidden contributions of women in economics whose major contributions went unrecognized in the past but still hold relevance for research today.   [Editor’s Note: The Liberty Matters Forum, Why Do We Need Feminist Economics? may also be of interest.] Darwyyn Deyo is an Associate Professor of Economics at San Jose State University. (0 COMMENTS)

Social choice theory analyzes under which conditions the preferences and values of different individuals can (or cannot) be transformed into social preferences and values capable of legitimizing collective choices. With his famous Impossibility Theorem, Nobel economist Kenneth Arrow was the main founder of this field of study (see Kenneth J. Arrow, Social Choice and Individual Values [Yale University Press, 1963; 1951 for the first edition]). Welfare economics was a precursor of social choice and with similar results: there is no way without arbitrary value judgments to aggregate individual preferences and values in a “social welfare function” representative of the preferences of all individuals. Here is a simple example. Suppose a society composed of two individuals, A and B. If A’s preferred color is blue and B’s is yellow, is their socially preferred color green, to be coercively imposed on everybody? A and B will be forbidden to buy cars of any other color than green, and forced to knit only green sweaters for their grandkids. The Department of Commerce will allow only green stuff to be imported from China. And so forth. Or is the social choice blue because A is a “dictator.” (The reader will recognize non-dictatorship as one Arrow’s conditions for a representative or legitimate social choice.) The conventional wisdom of our times lies in one or the other of these social choices: all green or all blue; that is, either a sort of vague communitarianism, or the dictatorship of the majority. Preferences and choices in a real society involve a very large number of goods and activities, which cannot generally be mixed like colors, as well as a large number of individuals with different preferences and values. But the color example may be useful to illustrate the basic problem of social choice. Except arguably in tribes or in an ideal dictatorship of one person, social choices are collective choices with a certain level of formalism. And collective choices are nothing but government decisions. For most classical liberals, legitimate collective or governmental choices are possible but only within a restricted domain. Mainstream contemporary economic theory characterizes this restricted domain as the production or financing of “public goods” as formally defined by Paul Samuelson (another Nobel economist) in two 1950s articles in the Review of Economics and Statistics (“The Pure Theory of Public Expenditures” and “Diagrammatic Exposition of a Theory of Public Expenditure”). Economists in the classical liberal tradition have entertained different views of where exactly to limit the domain of collective choices. James Buchanan, also a Nobel economist, argued that public goods are whatever is publicly provided according to basic constitutional rules unanimously agreed to in an implicit social contract. Buchanan certainly saw the role of the state as more restricted than Samuelson, who was not philosophically a classical liberal. (Among my articles on Buchanan’s theory, see my Econlib review of his 1975 book The Limits of Liberty: Between Anarchy and Leviathan.) Nobel economist Friedrich Hayek saw a free society as an auto-regulated order, which still allowed for a quite wide role of government. (See notably the third part of his Law, Legislation, and Liberty, which I reviewed for Econlib; he later became less tolerant of government power.) Anthony de Jasay, a fascinating economist and political philosopher who defined himself as both a classical liberal and an anarchist, argued that any social choice is dictatorial: a collective choice necessarily favors some individuals to the detriment of other individuals who are forced to obey and to choose what they would not otherwise have chosen if not for threats of fines and jail if not worse. In other words, a truly social choice is impossible. A “social choice” is always coercively imposed on some peaceful individuals. It is an interesting fact that Buchanan is nearly as critical of “social choice”  as de Jasay, except for the possibility of an implicit social contract, which would be the only true social choice. If you are up to deep political philosophy solidly anchored in economics, perhaps the best book to read from de Jasay after The State is his Against Politics: On Government, Anarchy, and Order (Routledge, 1997). Expect to be challenged. (0 COMMENTS)

An interesting blog post by Jordan Schneider and Irene Zhang linked to an article in Macro Polo discussing the global distribution of AI talent.  The graph below is based on the following definition in the Macro Polo article: We created a unique and rich dataset of researchers with papers accepted at NeurIPS 2019, using that as a proxy for the top-tier (approximately top 20%) of AI research talent Elsewhere they provide specific percentages for the undergraduate degree locations:  China 29%, US 20%, Europe 18%, Canada 5%, UK 4%, Iran 3%, Israel 3%, rest of world 10%. How should we think about those figures?  Notice that the US has only about 4 times as much AI talent as Canada, despite having more than 8 times Canada’s population.  On the other hand, the US has only about 2.5 times as many people of Chinese or Indian descent as does Canada.  If these two groups are disproportionately represented in the AI field, it might explain why Canada is able to “punch above its weight” in this area.  It seems likely that ethnic Asian researchers are also overrepresented in the undergraduate programs of countries beyond China and India, especially Canada, the US and the UK.  If so, then although only 37% of top talent comes out of undergraduate programs in China and India, closer to 50% of global top AI talent may be ethnically Chinese or Indian. Here is Schneider and Zhang: NeurIPS was global. While most attendees sported American academic or industry affiliations, perhaps less than a quarter of the crowd had native English. My guess is at least 30% of the conference spoke fluent Chinese, with this set evenly split between Chinese and American affiliations. The rest were European or South Asian, with what felt like literal single-digit cohorts of Black and Hispanic researchers. The median age was around 28, reflecting how much new talent has come into the field in recent years. There was perhaps an 80/20 gender split.  To be sure, China and India have combined population of roughly 2.8 billion, but even so those ethnic groups may well be overrepresented in AI relative to their share of the world’s 8 billion people.  It’s also worth noting that China is considerably richer than India, and also has a considerably larger share of top talent in the AI field.  To summarize: 1. Asians appear overrepresented in AI, especially people of Chinese and Indian descent. 2. Income also seems important.  Relative to population, Chinese do better than Indians, and Asians in North American universities seem to do better than Asians in Asian universities. 3.  Japan is missing from the list, despite the fact that smaller countries such as Iran, Israel and South Korea show up on the list.  Adjusted for population, the representation of Iranians and Israelis is even more impressive than ethnic Chinese and Indians.  The graph above also shows that talent tends to migrate toward the US after graduation.  The Macro Polo article has another table that gives percentages of where these top researchers work today, which shows even further consolidation:  US 59%, China 11%, Europe 10%, Canada 6%, UK 4%, others 10%.  Based on those figures, Canada is the only country where the share of talent relative to population is even close to that of the US.  (Perhaps Israel might also qualify.)  This suggests one important benefit of Canada’s immigration policy, which has clearly attracted substantial tech talent.  [As an aside, I just saw the film Blackberry, which is an amusing look at a Canadian tech firm struggling to compete with American megacap firms.] Nonetheless, it is hard for any country to compete with the US for both institutional reasons (our regulatory and tax laws are favorable to new tech companies) and the advantages associated with “network effects” (lots of AI talent collaborating in locations such as Silicon Valley.) To summarize, tech talent first arises in places with the right cultural attitudes toward STEM education and the resources necessary to educate that talent.  The talent then migrates toward the places where it can be used most productively—especially the US. Ironically, this AI talent is engaged in a quest to produce non-human intellectual talent.  Predicting the long run effect of that search is far above my pay grade, but I can’t help thinking the effects will be both unexpected and profound. PS.  Bloomberg has an interesting article discussing the wave of immigration that is occurring at the southern border.  Apparently, it’s not just Central Americans intending to be farm workers: The migrants are part of a growing number of the Chinese middle class on the run from an economic slowdown. They include entrepreneurs who saw business evaporate in the downturn, middle-aged fathers laid-off from China’s collapsing real-estate sector and young software engineers eager to make it in Silicon Valley. . . . Data from the Department of Homeland Security shows the number of people with passports from mainland China crossing the US border without the proper paperwork has more than doubled in recent years. Almost 60,000 Chinese migrants have been detained for crossing the border illegally in the past 14 months, almost a quarter of them in California. Lots of people believe the surge of immigration is due to the US having an “open door” policy.  Lax policy might explain a part of the surge, but illegal immigration at the southern border also surged in 2019, a boom year.  I suspect the actual reason is a strong labor market with relatively high wages (by international standards.) (0 COMMENTS)

Not too long into their microeconomics courses, students encounter the model of ‘perfect competition.’ “To reach this highest form of competition,” one standard microeconomics textbook explains: …a market must have two characteristics: (1) the goods offered for sale are all exactly the same, and (2) the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price. The student might ask how realistic these assumptions are. They might be told that this doesn’t matter; as Milton Friedman argued: A hypothesis is important if it “explains” much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone. To be important, therefore, a hypothesis must be descriptively false in its assumptions. But if one doesn’t share this view of the proper nature of assumptions, the economist Israel Kirzner wrote; …this must render the model of perfect competition far less useful than the standard microeconomics textbooks appear to believe. The model cannot be used to “explain” market prices; the model presumes that everyone has, somehow, correctly and self-fulfillingly guessed what the market price is going to be. The circumstances that (quite apart from the assumed correctness of the anticipated prices) the model treats each market participant as a price-taker further underscores the uselessness of the model as an explanation for the manner in which prices are adjusted. This dispute is of more than academic interest. In his 1973 book Competition & Entrepreneurship, Kirzner wrote that “the dominant theory not only suffers from serious weaknesses as a vehicle for economic understanding, but has also…led to grievously faulty conclusions for economic policy.” Perfect competition is an equilibrium model, but for Kirzner, what mattered was the process by which equilibrium was approached. “[I]n the approach to price theory underlying this book,” he wrote: …we look to [it] to help us understand how the decisions of individual participants in the market interact to generate the market forces which compel changes in prices, in outputs, and in methods of production and the allocation of resources. In a given period, some producers will find that they can sell more (less) than they plan at a given price and some consumers will find that they can purchase more (less) than they plan at a given price. Either way, “This newly acquired information concerning the plans of others can be expected to generate, for the succeeding period of time, a revised set of decisions.” “[E]ven without changes in the basic data of the market,” Kirzner writes: …(i.e., in consumer tastes, technological possibilities, and resource availabilities), the decisions made in one period of time generate systematic alterations in the corresponding decisions for the succeeding period. Taken over time, this series of systematic changes in the interconnected network of market decisions constitutes the market process. Given continual changes in “the basic data of the market,” markets in process are a more useful subject of study than markets in equilibrium. The same critique extends to other equilibrium market models, such as ‘monopolistic competition.’ The standard focus on equilibrium over process has important ramifications for policy. “[A] state of equilibrium,” Kirzner writes, “does not permit activity designed to outstrip the efforts of others in catering to the wishes of the market,” which is competition; think of the entrepreneur acting on her “newly acquired information concerning the plans of others.” Instead, to equilibrium theorists, ‘competition’ refers: …to a state of affairs into which so many competing participants have already entered that that no room remains for additional entry (or other modifications of existing market conditions)…[B]y referring to the situation in which no room remains for further steps in the competitive market process, [competition] has come to be understood as the very opposite of the kind of activity of which that process consists. Thus…any real-world departure from equilibrium conditions came to be stamped as the opposite of “competitive” and, hence, by simple extension, as actually “monopolistic.” Interventions in the market process justified on the mistaken notion that deviations from the ‘perfectly competitive’ equilibrium are necessarily anti-competitive can be harmful. “The efficiency of the price system…does not depend on the optimality…of the resource allocation pattern at the equilibrium,” Kirzner writes, “rather, it depends on the degree of success with which market forces can be relied upon to generate spontaneous corrections in the allocation patterns prevailing at times of disequilibrium.” Markets are more successful at generating these corrections than any other system. This is only one facet of Kirzner’s short but profound book. Students will still benefit from reading it and doing so not too long into their courses.   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

I don’t want to let 2023 pass without paying tribute to arguably the most important birthday three hundred years ago: that of economist and moral philosopher Adam Smith. Smith wrote two important books: his lesser-known The Theory of Moral Sentiments (TMS) published in 1759 and his well-known An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776. Both were important but The Wealth of Nations (WN) was much more important. While it is an exaggeration to say that Smith was the first economist, it is no exaggeration to say that he was the most important up to his time. His belief in the labor theory of value, which so misled Karl Marx, was shown, in the marginal revolution of 1870, to be wrong. But a list of his insights that still stand is extensive. Page through WN and you will find many important thoughts: on the division of labor, what’s wrong with mercantilism and protectionism, the folly of industrial policy, and many more. These are the opening two paragraphs of my last Defining Ideas article for 2023, “The Profound Wisdom–and Humanitarianism–of Adam Smith,” Defining Ideas, December 20, 2023. There was so much more I wanted to write. But I didn’t want to go badly over my 2,000-word limit. Read the whole thing. (0 COMMENTS)

It’s not for nothing that in David Henderson’s Ten Pillars of Economic Wisdom we find the following observation, coming in at number one: “TANSTAAFL: There ain’t no such thing as a free lunch.” Everything comes with a cost. When people say something to the effect of “Healthcare should be free” (or swap out “healthcare” with anything else you like), they are making an impossible demand. The only thing this demand could mean is “when I receive healthcare, I shouldn’t have to pay for it.” But health care doesn’t become “free” just because you, personally, didn’t receive a bill. Someone else will end up bearing the cost. So what this statement necessarily entails is “when I receive healthcare, it should be paid for by someone else.” Now, very few people would be willing to openly say “When I receive [insert good or service here], other people should have to pay for it, not me.” But advocates of free healthcare, free college, free childcare, etc, are in fact making that claim.  Or at least some of them are. I’d say the “such-and-such should be free” crowd probably falls into two camps. The first camp is made up of people who understand perfectly well that what they’re actually saying is “other people should pay my bills,” but know better than to say that openly. So, they use language like “free”, or perhaps declare the good or service in question to be a “human right,” as a means of sidestepping the no-free-lunch issue. But I also suspect that there are a lot of people who genuinely do think that as long as no bill is received, then something really was “free” in some grand metaphysical sense – manna falling from heaven.  I recently got the impression of someone falling into the second camp when I saw a news story about how Southwest Airlines handles situations with customers who, due to their size, physically occupy more than one seat. Southwest’s policy is to grant the traveler an extra seat or, if need be, an entire row, without an additional charge. This is, as you might imagine, a very popular policy with people who find that they might need the extra space, particularly since with most other airlines if you use two seats, you have to pay for two seats. In the news story, it shows a picture one such traveler posted to her Instagram account, and on that post she included the following caption: Some people need two seats on a plane. If so, the 2nd one should be free. She also gave an interview with Fox Business where she said the following: “The Southwest customer size policy helps many travelers offset the disproportionate costs that we incur because of needing extra room,” she said. “And so, it’s not just about physical accessibility. It’s also about financial accessibility.” I get the feeling this is someone who engages in magical thinking, and really does think the second seat actually is “free.” But, there ain’t no such thing as a free lunch. Just because she’s not paying for the second seat doesn’t make the second seat free – it’s just a question of how the second seat gets paid for.  First, there’s the opportunity cost – the extra seat used by this traveler is now a seat that cannot be used by someone else who also had travel plans. And this runs into another Southwest policy – the fact that Southwest Airlines uses open rather than assigned seating. Because heavyset travelers are able to buy just one ticket but use multiple seats, in cases where flights are full (or multiple passengers use this policy), Southwest simply removes other ticketed passengers from the plane to free up the necessary seats. The story also interviews a mother who, along with her two teen daughters, were bumped from a flight for just this reason: But during their layover, Southwest Airlines officials informed her that the flight was “overbooked” and they could not board the plane — despite spending $620.72 on tickets. “Please help me understand why do I have to spend the night without any accommodations in Baltimore because an oversized person didn’t purchase a second ticket,” the exasperated mother said, claiming all of her and the teenagers’ luggage was sent to their final destination in Denver. She said airline officials told her “It is their right to kick a person out of the plane for the oversized person,” and shared a video of a conversation she had with an airline manager who said, “Even if there are not enough seats, we have to accommodate that customer of size. “If they need an extra seat, we don’t charge for extra seats,” the manager could be heard telling the woman. So that’s one way the extra seats being called “free” are actually not free, and how the costs are simply passed onto others. Money is, of course, another way costs can be passed along. Airlines can attempt to work out how often there will be cases of passengers who use two seats but only pay for one and make up the cost of the lost ticket sales by increasing the prices of everyone else’s tickets. In this case as well, the additional seat isn’t “free” – it’ s simply being subsidized by everyone else on the plane. The caption in the above Instagram post would be more accurate if it said: Some people need two seats on a plane. If so, the 2nd one should be paid for by other travelers. Because one way or another, the costs of those extra seats must be paid for. If it’s not paid for by the person using it, the costs must be passed on to someone else. We can’t make this fact go away by simply declaring that things “should” be “free.” There ain’t no such thing as a free lunch, on airplanes or anywhere else. (0 COMMENTS)

One word sums up this episode and topic: Wow! Explore the GOATs of economics as judged by Tyler Cowen in his zero-cost downloadable book embedded in a ChatGPT-4 option for user-friendly queries. Russ Roberts encourages us to read it in its entirety and we hope that his excellent interview with Tyler sharing highlights of this first-of-its-kind digital book entices you to do so. The links in the transcript connect to a curated list of each prominent thinker’s winning written contribution. We promise that Tyler’s choice for the single GOAT Economist won’t be revealed. You can discover it for yourself in the final chapter. Enjoy Tyler’s fandom as he walks us through what he describes as the case studies of the most talented thinkers in the history of economics. Have a listen and explore this extraordinary book. Once you do, we hope you’ll take a moment and share your thoughts with us. As Russ says, we love to hear from you1     Of the six finalists and five semifinalists, Russ begins by questioning Paul Samuelson’s low ranking. Many listeners of a certain age group will likely remember the heavy brown Samuelson textbook from their college Micro and Macro courses. Tyler himself credits Samuelson with the two best articles ever written. What critique(s) of Samuelson does Tyler make to support his judgment?    Tyler names Hayek’s “The Use of Knowledge in Society,” as the single best economics article. He repeatedly points out the change in the field of economics away from ideas about how the real world works. In a refresher skimming of Hayek’s great piece, (or a first time experience!), what specific phrases, illustrations or literary aspects of this renowned article strike you as tools for clearly conveying an idea?   What does Tyler believe we get wrong about Thomas Malthus and the term “Malthusian” as a descriptor of his beliefs?   Tyler describes John Maynard Keynes and others as tirelessly dedicated to improving the world around them and how the quality of their writing bring their personalities to life. It is the breadth and depth of Keynes (and John Stuart Mill’s) writings that both Russ and Tyler agree is scarce among today’s great thinkers. Why is that? What did you find most interesting about Tyler’s assessment of Keynes?   On what topics of Adam Smith’s Wealth of Nations do Russ and Tyler assert are too often overlooked yet critically important to the beginning of modern economic thought? These two Smith scholars differ greatly on Smith’s significance. Whose side are you on, and why?   (0 COMMENTS)

In 1968, Congress enacted a major tax increase to control inflation, eliminating the budget deficit. It didn’t work. Monetary policy became more expansionary and inflation increased still further. This was a major failure of the Keynesian model, and it helped lead to a revival of monetarism.In 1981, taxes were cut and military spending was increased, sharply boosting the budget deficit. Keynesians expected higher inflation. Instead, a tight money policy by the Fed led to recession and lower inflation.  This led to a “New Keynesian” model that de-emphasized fiscal policy.In 2021, fiscal stimulus was accompanied by monetary stimulus, which boosted both growth and inflation.  That fit the traditional Keynesian model.The facts are not controversial, but there is some dispute as to how we should view this data. Today, I received an email from the ECB discussing a new working paper. This description caught my eye: Lukas Hack (University of Mannheim), Klodiana Istrefi (Directorate General Research, ECB, and CEPR) and Mathias Meier (University of Mannheim) present evidence on the role that US monetary policy plays in how fiscal spending affects the economy. A dovish Federal Open Market Committee (FOMC) delays policy rate increases, while a hawkish FOMC tightens monetary policy more promptly, following increased fiscal spending. The authors then show that the dovish response supports fiscal expansions. In contrast, the hawkish response results in a GDP decline but effectively controls inflation expectations. In one sense, that’s completely in agreement with the examples that I just provided.  But the framing is odd.  The comments seem to suggest that fiscal policy drives aggregate demand, while monetary policy plays only a supporting role.  In fact, it is monetary policy that explains how the economy reacts in all three of the cases discussed above, whereas fiscal policy is informative in only one case (2021).  Wouldn’t it be more useful to ignore fiscal policy entirely and simply focus on what monetary policy is doing?  Couldn’t the final sentence be re-written as follows: “The authors then show that dovish monetary policy is expansionary. In contrast, hawkish policy results in a GDP decline but effectively controls inflation expectations.” Just delete all mention of fiscal policy.   (0 COMMENTS)

Argentina, a nation that epitomizes inflationary finance, finds itself once again at a crucial juncture. The recent shift in leadership, marked by economist and self-described libertarian Javier Milei’s unequivocal statement that closing the central bank is non-negotiable, has reignited debates about the prospect of dollarizing the Argentine economy. Milei has initiated a tough austerity plan, to be succeeded by substantial deregulation. If these reforms are forthcoming, why dollarize? Here are three reasons.   Dollarization as a Credible Commitment Device: The primary rationale lies in the necessity for a credible commitment device. This paper by Emilio Ocampo explains how dollarization can serve as such for Argentina. Drawing from the experience of Ecuador under Rafael Correa, we see that dollarization acts as a credible institutional constraint that diminishes the costs associated with a populist regime. In a country where political shifts are frequent, and the probability of populism returning to power is 100%, establishing a stable monetary system becomes indispensable for sustained economic success.   Dollarization is Cost-Effective and a Safer Solution: In relative terms, dollarization is the most cost-effective and safest alternative. With an annual inflation rate hovering around 160% (and expected to go up in the coming weeks), the demand for Argentine pesos is practically nonexistent. Dollarization facilitates the redenomination of financial liabilities in pesos into US dollars, eliminating the risk of a run against the peso. This would not only stabilize the currency but also afford the government more time to enact necessary changes. Given the combination of high inflation and a lack of credibility in Argentine politics, the amount of US dollars required to sustain the peso exceeds the US dollars needed to implement dollarization. Those who argue that dollarization is not possible due to the lack of dollars at the central bank need to think seriously about where they intend to obtain the dollars to bring the peso back to life. Furthermore, as dollarization implies phasing out the peso, its success becomes more plausible than reviving the peso.   Dollarization facilitates Addressing a Large Monetary Disequilibrium: The third rationale stems from the magnitude of the monetary disequilibrium confronting Argentina. The central bank’s issuance of short-term liquidity bills (Leliq) and other financial liabilities, reaching three to four times the base money, has placed the nation on the precipice of hyperinflation. Any policy aiming to sustain the peso must generate a confidence shock substantial enough for peso demand to absorb the outstanding amount of these financial liabilities in a timely manner. Can Milei, with no governors and only a handful of representatives in Congress, garner enough support to generate such a shock? Dollarization also allows more time to grapple with the “liquidity bills problem.” Not only would dollarization stabilize the economy, but it would also lay the foundation for constructing a robust and sustainable financial system. Argentina’s persistent struggle with inflation, which has averaged 60% annually since the mid-1940s, has impeded long-term planning and economic growth. The nation has exhausted every textbook solution to high inflation, all of which have proven futile. The most successful attempt was the 1990s convertibility law, which, due to poor political decisions, culminated in an economic crisis of historic proportions and eroding the credibility of this monetary regime. Dollarization presents a credible means to break free from the cycle of high inflation and severe future crises by cutting the ties between domestic politics and the monetary regime in place, offering a more stable environment for economic planning and growth. When the political system is fiscally irresponsible and central bank independence is a chimera, price stability can only be achieved by adopting a stable currency as legal tender. That is the case of Argentina today.   [Editor’s note: See also Cachanosky’s interview with David Beckworth at Macro Musings on Argentine dollarization.]   Nicolás Cachanosky is a professor of Economics and Director of the Center for Free Enterprise at University of Texas at El Paso, Senior Fellow at the American Institute of Economic Research (AIER), and Fellow of the UCEMA Friedman-Hayek Center for the Study of a Free Society. He also serves as co-editor of LIBERTAS: Segunda Época.  For more articles from Cachanosky, see the Archive. (0 COMMENTS)