Our sister publication “Law & Liberty” published a piece recently by Oren Cass in which he criticizes economists for their beliefs in free trade and trade based on comparative advantage. It’s “Free Trade’s Origin Myth,” Law & Liberty, January 2, 2024. Co-blogger Pierre Lemieux has criticized the collectivist premise that Cass uses in his discussion. There’s also much economic content to criticize in his article. I want to focus on one important misunderstanding. Cass writes: Since 1992, the United States has accumulated $15 trillion in trade debt—goods and services consumed by Americans for which nothing was produced in return. He gets to that figure, presumably, by adding up the yearly current account deficits between 1992 and now. But he never tells the reader why he thinks that trade deficits translate, dollar for dollar, into debt. They don’t. When there’s a current account deficit, there’s necessarily an offsetting capital account surplus. When foreigners sell us goods and services, they have basically five things to do with the money that they don’t spend on our goods and services: (1) buy U.S. dollar-denominated debt, typically U.S. government Treasury bills and bonds; (2) buy stock in U.S. companies; (3) buy land in the United States; (4) directly invest in the United States; and (5) hold on to the actual currency because it’s still the world’s leading currency. In only one of those cases, case (1), does the current account deficit translate into debt. It’s understandable that Cass makes that mistake because many bona fide economists do. They often talk about the capital account surplus as if it’s all debt, even though they know (or should know) better. I wrote about some of this in 1988, when many observers, not including me, were worried that Japanese people would take an outsize share of U.S. capital assets. It’s titled “America for Sale?” Reason, July 1988. By the way, to the extent (5) applies, the U.S. Federal Reserve makes out well. It costs the U.S. government under 30 cents to print a $100 bill. And in return for that $100, we get actual goods. As Jay Leno said, in a 1989 ad for Doritos, “Crunch all you want; we’ll make more.”   (0 COMMENTS)

One of the ideas that has bugged me over the years is the claim that capitalism is soulless. In a literal sense, of course, it has to be soulless because it’s a system, not a person. But the term is used so often that it’s important to examine the claim more closely. Don Boudreaux does so admirably in his article  “Capitalism Is Impersonal, Not Soulless,” AIER, January 4, 2024. I’ll quote a few excellent passages and then go on to say that this is a rare example where I think Don understates his case. And it relates to the picture above. But I’m getting ahead of myself. Don writes: Read narrowly, this assertion [that capitalism is soulless] is empty of useful meaning. Capitalism isn’t a sentient creature; it has neither consciousness nor a conscience. Capitalism is the name we give to a particular manner of human interactions. It therefore is no more useful to observe that “capitalism is soulless” than it is to observe that “automobile traffic is soulless.” But the ‘soullessness’ of capitalism is claimed so very frequently, and by people of all ideological stripes, that this claim obviously conveys some substantive meaning to those who encounter it. What might that meaning be? I think I know. The claim that capitalism is soulless reflects a confusion of “impersonal” with “soulless.” Capitalism does indeed feature myriad impersonal exchanges, but this reality doesn’t mean that capitalism is soulless. And: Motivated, in fact, not by love but by self-interest – and guided not by personal knowledge, but by impersonal market signals – capitalist markets are indeed impersonal. And I grant that they seem cold and soulless when compared to the face-to-face connections that we have with loved ones, neighbors, and mom’n’pop merchants in small towns. But surely when compared to the deadly poverty that we’d experience if we had economic connections only with people we know by face and name, capitalist markets ought to be applauded for their humanity. To describe as “soulless” a system that encourages and enables countless strangers to peacefully and productively cooperate for each other’s benefit surely conveys a wholly false impression. It’s in the second sentence of the above paragraph that I think Don understates. Not terribly, but somewhat. To make the point, I’ll tell a true story. My wife and I are cat lovers. At any given time, we have 3 cats. When one dies, we get another, typically with only a 1-week to 3-month lag. It occurred to us over a decade ago that we value our cats so much that we should get good insurance for their vet bills. So we did. We learned the hard way that you can blow through the upper limits of coverage pretty quickly. So we looked around and found a company named Trupanion. We have insured with them for about the last 6 or 7 years. Trupanion has been as excellent as we had hoped. Sounds impersonal so far, right? But then, a couple of years ago, one of our favorite cats ever, Kipper, a gentle thing who was so loving to his “siblings,” got very sick and it was clear that we needed to let him go. Of course, our vet went on line to get the last procedures paid for. A couple of weeks later, a package arrived in the mail from Trupanion. It was a framed picture of our wonderful cat Kipper. This is not something we had contracted for. Of course, you can remind me, although you don’t need to, that there’s no such thing as a free Kipper picture. Implicitly, we did pay for it in our premium. But, as I mentioned, that was not part of the contract. So we thought we were getting good value from the company even without that picture. The picture was pure sentimental consumer surplus. And a stranger at Trupanion had enough “soul” to do that.   (0 COMMENTS)

Our sister website Law & Liberty published an article by Oren Cass, a defender of protectionism (“Free Trade’s Original Myth,” January 3). It is an interesting piece although, I suggest, more from a rhetorical than a social-scientific or even simply logical viewpoint. Let me just discuss one irredeemable flaw. Social anthropomorphism is a first symptom. Writing about the goods and services exchanged in international trade, Mr. Cass writes: Once the products at issue are of different strategic value, any nation might rationally place its finger on the scale to gain comparative advantage in that which it prefers to produce. How can a nation put its finger on anything? Who is the nation’s finger? Émile Faguet, the great classical-liberal essayist and French Academician, mocked this sort of “zoological politics”: “You think you are a man,” he wrote; “in fact, you are a foot”—“Vous vous croyez un honme; vous êtes un pied” (Le Libéralisme, Paris, 1902/1903). Or perhaps by “nation,” Mr. Cass just means the government—politicians and bureaucrats. Perhaps it is just a way of speaking. But what does the talk actually mean? General Motors and its owners prefer to produce cars while Microsoft and its owners prefer to produce software and cloud services. Mr. Cass prefers to produce articles and PR. So what does the social organism prefer to produce? Ways of speaking often express or lead to ways of thinking. The anthropomorphic or organic conception of society has nearly always been associated with authoritarian politics. (I give examples in my article “The Impossibility of Populism,” The Independent Review, Summer 2021.) But perhaps what Mr. Cass and protectionists are defending is not literally social anthropomorphism but simply collectivism, the bundles (or should I say the “fasces”?) of doctrines claiming that the collective is superior to the individual and that collective choices should take precedence over individual choices. Mr. Cass writes: Dig to the bottom of the post-war case for free trade, and one finds not a closely reasoned and unassailable doctrine, but rather a condescending lecture about preferring the global to the national interest. Who was the “we” that had “agreed” to this? Condescending? Since, for Mr. Cass, individuals are not practically or morally competent to make their own decisions (like, say, buying dolls from Chinese sellers), since individual liberty does not create an auto-regulated order, they need collective discipline and our author knows which collective, which “we,” they should be submitted to: not the world collective but the United States collective. One collective must rule and the “national interest”is the best collective interest. By the way, how does one calculate the collective interest in a numerous society of different individuals with different preferences and in different circumstances? At any rate, once some majority determines the goals, all individuals will have to obey, or else. Economists, we are told, “have a vital role to play in analyzing how best to accomplish the nation’s goals.” Fortunately and quite coherently, a large number of economists have tended to stand more on the individual’s side. In the (classical) liberal and individualist perspective, individuals live in different, often overlapping, societies—the world, their countries, their villages, their online communities, their professions, etc.—because each thinks it is in his interest to do so. In a free society, characterized by individual liberty, each one pursues his own goals (his “ends” in the terms of Friedrich Hayek). Each one is free to pursue his own happiness. That the collectivist ideology espoused by protectionists would lead to logical contradictions is not surprising. In defending the “national interest,” protectionists are strangely incoherent, as 19th-century economist James Mill and his more famous son John Stuart already pointed out. The protectionists want their country’s resources (“our national resources”) to produce goods for the consumption of foreigners, which is what exportation is; and they hate to see the resources of foreigners used to produce goods for their fellow citizens, the importing country’s residents, which is what importation means. To be coherent with their own collectivist logic, they should instead favor imports and fight exports. In short, an essential element is missing from Mr. Cass’s arguments: the individual; protectionists only know collectives. The individual is missing both in a methodological sense and in a substantive moral and philosophical sense. Economists virtually always adhere to methodological individualism, the theory that one needs to start from the individuals to understand social groups, not the other way around. (One exception is Karl Marx, which explains why he did not use standard tools of economic analysis and why indeed his economic credentials are doubtful.) Consequently and naturally (although it is not logically necessary), most economists tend to espouse, or have tended to espouse, an individualist political philosophy, sympathetic to individual sovereignty. Like socialists (at least those in the Marxist tradition) and the old European right, Mr. Cass rejects individualism in both its meanings—methodological and ethical. This illuminates a phenomenon otherwise mysterious: the convergence between the anti-individualist right and the anti-individualist left. (0 COMMENTS)

Here’s a seemingly simple question: Are high-paying jobs desirable? It seems like the answer here is an obvious “yes.” But there’s more to the story; otherwise, this would probably set a record for the shortest blog post on this website. So, what are the subtleties here? The reason the answer might seem like an obvious “yes” is that it’s easy to respond by answering a slightly different question: Does higher pay make a job more desirable? That is almost certainly an obvious “yes” for almost everyone. All else being equal, the higher pay a job offers, the more desirable that job will seem. However, frustratingly, all else is rarely equal. And while a job being higher-paying makes that job more desirable than it otherwise would be, it doesn’t follow that higher-paying jobs are intrinsically more desirable. Pay is, after all, compensation. Frequently, jobs that are widely considered undesirable must offer very high pay to compensate for the unpleasant nature of the job. So, in many cases, a job’s high pay can be a signal that the job is actually very undesirable. It works in the opposite direction as well. Low wages can be a sign that a job is highly desirable. The desirability of that job is itself something that drives down the wages of the job. People don’t require as much compensation to be willing to do something they find pleasant and enjoyable. The idea here is what economists call compensating differentials. A job being more desirable lowers that job’s pay, all else being equal, and the undesirability of a job increases its pay, all else being equal. Two things I’ve recently read brought this idea to mind. One was in the book The Economic Consequences of U.S. Mobilization for the Second World War by Alexander Field. There were many kinds of shortages throughout the economy during the war, and one major shortage was for labor. This shortage was, itself, in part a result of the draft. That’s partly because everyone drafted into the military was not available to other industries, of course. But that’s not the whole story. Field also notes that “defense plants faced an exodus of workers” as huge amounts of the labor force moved “to farm employments, not because those jobs paid more, but because such workers enjoyed an immunity from military service” and were thus exempt from the draft. This exemption, Field writes, “reflected the power of the farm bloc” and as a result “agricultural workers were passing up the higher wages in defense plants for fear of losing their deferment.” Draft exemption was a huge compensating differential that, for many, more than offset the lower wages of agricultural work. So we would be wrong to infer that the lower wages of agricultural work were a sign those jobs were undesirable – in this case, the opposite is true. The jobs could be lower paying precisely because they were, to many, much more desirable. The second thing that reminded me of this idea was my surprise at learning the salary range for astronauts. Apparently, the yearly pay range for astronauts is between about $66,000 on the low end and upwards of $160,000 on the high end. Now, it’s not exactly as though being an astronaut pays poverty wages – particularly at the high end. But at the same time, being an astronaut is very difficult and demanding work, both mentally and physically. The dangers associated with the job are obvious and significant. Even a yearly salary of $161k seemed surprisingly low to me, given the demands and risks of the job. At least, that’s how it seemed until I thought of the compensating differentials. Becoming an astronaut isn’t a career you sort of stumble into. It’s a job that people dream of from their childhood and put years of focused and dedicated effort into pursuing. I’m willing to bet that being selected to become an astronaut is, in each and every instance, the fulfillment of a lifelong dream – and how many people, upon finally reaching that threshold, will say, “Actually, given the demands of this job, the pay seems a bit low, so I think I’ll pass”? Not many, I suspect. Plus, whenever you are met with the question “So, what do you do for a living?”, you’re almost guaranteed to have the respect of anyone you answer. The high social status of the job and the dream fulfillment it represents are compensating differentials that explain why the wages aren’t higher despite the danger and physical and mental demands of the job. The upshot – we should resist the urge to see people in high-paying jobs as inherently in an enviable situation or seeing people in low-paying jobs as being in unfortunate situations. Some people are in stressful, unpleasant jobs they truly dislike but put up with it anyway because the job pays so well. And other people make relatively little money but spend their time doing something they find fulfilling and rewarding. Compensating differentials are not all there is to the story, of course, but the idea can remind us that we shouldn’t confuse how well a job pays with how desirable it is – and that often, the fact that a job pays well is a clear sign that it’s not a desirable job at all. (0 COMMENTS)

When you think of the future, how far out does your imagination take you? Next year, a century, a half million years?  In this episode, Will MacAskill presents “longtermism” to us, suggesting that we have a moral responsibility to the people who will live after us, as their numbers will be substantially greater than those who live now or who lived before us. Host Russ Roberts asks provocative questions that will undoubtedly leave you wondering…What do we owe the future? We would love to hear your thoughts in the comments below.    1- In the opening thought experiment that Russ reads, what images came into your mind of living others’ lives in the proposed long future? What most worried you and what most resonated with you as you visualized the world in which the majority of humanity will likely live?   2- The billions of people who live after of us will likely be considerably materially richer thanks in part to our groundwork. MacAskill believes that we are morally responsible for preserving the opportunity for future generations to flourish. What differentiates their richness and flourishing and why do you think each is important?   3- MacAskill refers to Big Gods in world religions as an innovation. How does he connect this to free-riding? Do you worry about an increasingly atheist or agnostic world? Why or why not?   4- How does MacAskill’s thought experiment about catastrophic population destruction illustrate Smithian gains from division of labor? What remaining population numbers might be necessary for gains from the extent of trade?   5- What do you think of MacAskill’s preference-satisfaction view: living for positive conscious experiences–like happiness, joy, bliss, meaningful moments–and the avoidance of negative experiences–like suffering, misery, depression? Does this view contrast with societies that encourage moral entrepreneurs such as Benjamin Lay? Explain. (0 COMMENTS)

In order to have a successful monetary policy, it is necessary to understand what success looks like. I fear that many pundits have the wrong view of success. They envision heroic central bankers valiantly fighting against cycles of too much spending and too little spending. In fact, that’s what failure looks like. To see why, it will be helpful to first review the famous Newcomb’s Paradox:Imagine that an omniscient entity puts $1000 into Box A and either $0 or $1,000,000 into Box B. You can choose to take either Box B alone, or both Box A and Box B. It seems like it’s better to take both boxes. But there’s a twist. The omniscient entity (OE) tells you that it can predict your future actions, and if it thinks you will greedily take both boxes, then it will only put $0 into Box B. There are many ways to think about this paradox, depending on your views of free will, determinism, and omniscience. For our purposes, however, I’d like to explore one particular train of thought. At first glance, I might decide to take both boxes, because at the point I make the decision, the OE has already put the money into the two boxes. Taking both boxes gives me a higher expected value than taking just one box.Alternatively, I might fear the OE’s omniscience, and decide that one box is the safer bet. But how do I avoid changing my mind at the point when I make the choice, after the OE has already decided? I do so by changing the sort of person I am at the point where the game is explained to me. I change my personality from a cynical profit maximizer to a sincere and honest person, the sort of person that will always do what he or she commits to do (even if the commitment is introspective, not verbalized.)According to this interpretation, because the OE is omniscient the only path to success is a sincere change in your personality—a sort of “Road to Damascus” moment in your life. Anything less will be perceived as insincere, and will lead the OE to put $0 into Box B.Central banks also face a commitment problem.  They need to commit to a policy that is something close to NGDP level targeting, and promise to return to the target path if their are deviations.  If the commitment is credible, then NGDP will rarely deviate far from the target path.  In other words, the economy will magically seem to become almost free of “shocks”.  If the central bank policy is not credible, then NGDP will often wander far from the trend line, and central bankers will be frequently required to fix problems by boosting or restraining growth in spending.  If successful in eventually fixing these problems, they become lauded as heroes by a public that doesn’t understand that the so-called “shocks” were caused by previous errors in monetary policy.  Even worse, it’s not just that there were previous errors, there was a policy regime in place that made errors much more likely. In Newcomb’s Paradox, the prospect of taking both boxes becomes frightening, due to the OE’s omniscience.  At the point in time when you actually choose, it may be tempting to see the game as one where “bygones are bygones”, as the OE’s decision has already been made.  And then grab both boxes.  But a wiser participant in the game will fear the omniscience to the OE and stick with their previous internal commitment to take one box. When inflation overshoots its 2% target, a central bank that previously committed to average inflation targeting will be tempted to abandon the commitment and refrain from bringing the average back down to 2%.  After all, the commitment had already done its job and spurred a strong recovery.  But if the financial market understands that the central bank is not sincere, then it will fail to move interest rates in the sort of anticipatory way that would prevent the inflation overshoot.  The central bank’s lack of sincerity will cause the very problem they are later praised for resolving. Successful central bank policies don’t look exciting, full of adept and timely actions by central bankers.  They look boring, as if the central bank is presiding over a “lucky country” that is almost free of destabilizing shocks. (What did Napoleon say about lucky generals?) Market forecasts are nowhere near as accurate as my imaginary OE, but they are still the best that we have.  Thus I become very frightened when people ask what the central bank should do when things go way off course.  The fact that the economy is far off course means that the market has already determined that the central bank lacks commitment to fix the problem.  How likely is future success when the world’s best forecaster believes that you will fail?  So what should the Fed do when it’s far off course?  I’m reminded of what the laconic farmer said to the lost motorist: “First of all, I wouldn’t start from here.” Australia is often referred to as the lucky country.  Apart from a brief Covid slump, Australia has gone more than 30 years without a recession.  When I speak to people about this case, they instinctively assume that Australia must be lucky—its economy has somehow avoided being hit by shocks.  After all, if you don’t believe that central banks cause our recessions (and most people don’t), then how else can one explain Australia’s success? In fact, Australia is an unlucky country.  It’s a small economy that is highly dependent on the export of a few commodities, which is a highly unstable sector.  A lucky country would be focused on a stable sector, such as services.  Australia is buffeted by much stronger non-monetary shocks than is the US economy.  It doesn’t look that way because we have many more recessions.  But that’s because we have had a much less stable monetary policy.  Unlucky Australia has outperformed the lucky USA. PS.  Students of history might see an analogy to how we rate presidents.  Boring presidents that preside over peace and prosperity (say Coolidge) are placed near the bottom of the rankings by historians.  Like economic pundits, historians place active presidents that screw up (say Wilson or LBJ) far ahead of boring presidents that don’t create problems in the first place. PS.  During Australia’s only recent recession, unemployment rose from 5.2% in March 2020 to a peak of 7.5% in July 2020.  It was back down to 5.1% by May 2021.  That’s far better than the US.  Here is Australia’s boring real GDP graph: PPPS.  Others have also argued that success is banal.  Here’s what Orson Welles’ character says in The Third Man: In Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love – they had 500 years of democracy and peace, and what did that produce? The cuckoo clock. (1 COMMENTS)

Harvard University president Claudine Gay was hit with six additional allegations of plagiarism on Monday in a complaint filed with the university, breathing fresh life into a scandal that has embroiled her nascent presidency and pushing the total number of allegations near 50. This is from Aaron Sibarium, “Harvard President Claudine Gay Hit With Six New Charges of Plagiarism,” Free Beacon, January 1, 2024. The strangest part of the defensive responses of various Harvard faculty was this: Another Harvard lawyer, Charles Fried, was more explicit, describing the allegations as an “extreme right-wing attack on elite institutions.” “If it came from some other quarter, I might be granting it some credence,” he told the Times. “But not from these people.” To be clear, Fried said this in December, before these latest charges, something that the Free Beacon news story did not make clear. Fried should know better, and he probably used to, given that he was Solicitor General from 1985 to 1989 under President Ronald Reagan. When someone makes a factual charge, it’s relatively easy to examine the factual charge regardless of the motives of the person making it. Indeed the motives are completely irrelevant to whether the charge is true. Lawyers are typically very good at understanding that. Fried has flunked basic reasoning 101.   (0 COMMENTS)

Tyler Cowen makes a convincing case that when it comes to choosing the greatest economist of all time, what matters is the journey, not the destination.  I’m not qualified to offer an opinion on that topic, but I do have some views on the more limited question of who’s the greatest macroeconomist of all time. Macro is often defined as including three broad areas: 1.  The determinants of long run economic growth. 2.  The determinants of nominal aggregates such as the price level and NGDP. 3.  The determinants of short run changes in output and employment. Call these topics growth, inflation and the business cycle. As far as growth is concerned, it seems like we are all in the shadow of Adam Smith.  He had pretty much figured things out by 1755, a full 21 years before writing his classic book on growth theory, The Wealth of Nations: Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical. What more is there to say? But I’m going to focus on the other two parts of macro, sometimes referred to as the theory of money, prices and employment.  This area is my favorite part of economics, and has attracted many of the very best minds.  While most of growth theory is boring and useless, money/macro is full of fascinating, counterintuitive puzzles and elegant theories.  It is regarded as being less “scientific” than micro, but I don’t believe that is correct.  Yes, we cannot predict the business cycle, but we also cannot predict movements in the price of oil or wheat. Like Tyler, I won’t name a single GOAT in money/macro, instead I’ll consider three names:  David Hume, Irving Fisher and Milton Friedman.  Those are obviously not the three names that most economists would chose, so I’ll need to explain my choices. Tyler Cowen somewhat downgraded economists that developed important theories, if he viewed the theories as being wrong.  I will do the same, but even more ruthlessly than Tyler.  Thus I need to begin by explaining what I view as the correct model of money/macro.  I see two fundamental models that have endured the test of time, each of which contains numerous sub-models: Model #1:  Nominal aggregates are determined by changes in the supply and demand for the medium of account (usually money).  In the long run, an exogenous change in the stock of money leads to a proportionate change in aggregates such as the price level and NGDP.  In contrast, an increase in money demand reduces prices and NGDP. Model #2:  In the short run, nominal (monetary) shocks also cause employment and output to move in the same direction.  In the long run, money is neutral and employment and output return to their natural rates. Obviously, there’s much more to money/macro then those two models.  But I see these models as being fundamental, while other useful models explain and extend these two basis theories.  My choice for the three greatest economists in the field of money/macro include the economist who developed the basic framework, and two others who extended these models in some highly useful ways. Hume:  In economics, it’s almost never the case that an innovator is actually the first to develop an idea. You can almost always find precursors to a “new idea”.  Even so, in the mid-1700s David Hume developed both Model #1 and Model #2 to a level of sophistication that is well ahead of anyone else of whom I am aware.  For instance, consider the famous equation of exchange: M*V = P*Y Hume never wrote down that equation, but he discussed the monetary theory using those variables as a basic framework.  More specifically, he observed that: 1. In the long run, an exogenous change in money leads to a proportional change in the same direction in prices. 2. A reduction in velocity will tend to affect prices in exactly the same way as a reduction in the money supply. 3. An increase in real output will tend to cause a proportionate reduction in prices. Before you say “duh”, keep in mind that even many modern economists do not know these things.  Many economists still believe that rapid economic growth is inflationary.  Here are three quotations from Hume’s writing to support my claims. Quantity theory of money: Suppose four-fifths of all the money in great britain to be annihilated in one night, and the nation reduced to the same condition, with regard to specie [gold and silver], as in the reigns of the harrys and edwards, what would be the consequence? Must not the price of all labour and commodities sink in proportion, and every thing be sold as cheap as they were in those ages? . . . Again, suppose, that all the money of great britain were multiplied fivefold in a night, must not the contrary effect follow? Effect of falling velocity: If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated. Effect of real economic growth: Suppose a nation removed into the Pacific ocean, without any foreign commerce, or any knowledge of navigation: Suppose, that this nation possesses always the same stock of coin, but is continually encreasing in its numbers and industry: It is evident, that the price of every commodity must gradually diminish in that kingdom; since it is the proportion between money and any species of goods, which fixes their mutual value. Hume also developed Model #2.  He argued that increases in the money supply cause a temporary boom, and decreases cause a temporary depression: We must consider, that though the high price of commodities be a necessary consequence of the encrease of gold and silver, yet it follows not immediately upon that encrease; but some time is required before the money circulates through the whole state, and makes its effect be felt on all ranks of people. At first, no alteration is perceived; by degrees the price rises, first of one commodity, then of another; till the whole at last reaches a just proportion with the new quantity of specie [money] which is in the kingdom. In my opinion, it is only in this interval or intermediate situation, between the acquisition of money and rise of prices, that the encreasing quantity of gold and silver is favourable to industry. . . . A nation, whose money decreases, is actually, at that time, weaker and more miserable then another nation, which possesses no more money, but is on the encreasing hand. This will be easily accounted for, if we consider, that the alterations in the quantity of money, either on one side or the other, are not immediately attended with proportionable alterations in the price of commodities. There is always an interval before matters be adjusted to their new situation; and this interval is as pernicious to industry, when gold and silver are diminishing, as it is advantageous when these metals are encreasing. It’s almost impossible to overstate the brilliance of Hume’s work on money/macro.  Even today, many economists have trouble holding both of these facts in their minds at the same time: 1. More money leads to higher prices and higher output in the short run. 2. More output leads to lower prices. Now think about the world in which Hume lived.  He couldn’t just look up these ideas in a book, as economics didn’t even exist as a field.  There was very little economic data on variables such as the money supply, the price level and GDP.  Monetary policy didn’t exist in the modern sense of the term. Hume certainly knew something about the world or else he would not have been able to develop these models.  But more clearly than anyone else, he was able to look at a messy, complicated reality and see the underlying forces driving movements in prices, employment and output.  In my view, that makes him a contender for the greatest macroeconomist in history.  Milton Friedman would almost certainly agree: Double-digit inflation and double-digit interest rates, not the elegance of theoretical reasoning or the overwhelming persuasiveness of serried masses of statistics massaged through modern computers, explain the rediscovery of money.” (Friedman, 1975, p. 176.) As I see it, we have advanced beyond Hume in two respects only; first, we now have a more secure grasp of the quantitative magnitudes involved; second, we have gone one derivative beyond Hume.” (Friedman, 1975, p. 177.) Why is Hume not more highly rated?  Modern economists often whine that they cannot understand a model unless it’s written down as a set of equations.  That tells us more about the poverty of their understanding than about the advantage of “rigor”.  Thus the problem with MMT is not that they don’t have a rigorous mathematical model, the problem is that their verbal model is nonsense. So who advanced the field beyond Hume?  Who pushed it one derivative further?  Who wrote the classic studies of the “quantitative magnitudes”? There are two names that stand far above all others, Irving Fisher and Milton Friedman.  Hume looked at what happened when there was a change in the price level.  Fisher and Friedman considered the effect of a change in the rate of inflation.  Hume had very little data to work with.  Fisher and Friedman helped develop some extremely important data sets, and did brilliant analysis with their data. Fisher:  I am not expert on the history of economic thought, but I am aware of several important contributions of Irving Fisher: 1. The Fisher equation:  Nominal interest rate = real interest rate + expected inflation.  This is where he went one derivative beyond Hume. 2. The Phillips Curve:  In 1923 and 1925 he published papers showing a strong correlation between employment/output and a distributed lag of inflation.  It wasn’t until 1973 that economists recognized that Fisher had preceded Phillips by 34 years. 3. A model of the real interest rate based on time preference (saving) and investment. 4.  An outstanding history of the “stable money” movement.  Fisher was an advocate of price level targeting, to be accomplished by adjustments in the dollar price of gold.  FDR adopted this approach in 1933. 5.  Although Hume developed the idea behind the Equation of Exchange, it was Fisher who first wrote down the equation. 6.  Fisher wrote “The Money Illusion” in 1928, a brilliant analysis of the concept. I’ve argued that there are three basic approaches to monetary economics, the quantity of money approach, the price of money approach, and the interest rate approach.  While most economists only use one approach, Fisher did high quality work using both the quantity of money approach and the price of money approach.  (He wisely avoided the interest rate approach, which is the weakest of the three.) David Henderson has a very nice summary of Fisher’s achievements in a wide variety of areas.  I was especially gratified to learn that Fisher opposed income taxes and instead favored a consumption tax.  (BTW, by the standards of the 1920s, Fisher was a “progressive”.)  Joseph Schumpeter, James Tobin and Friedman all called Fisher the greatest American economist. Friedman:  Milton Friedman added one derivative to the Hume/Fisher “Phillips Curve” model.  In my view, the Natural Rate Hypothesis (developed independently by Friedman and Phelps) was Friedman’s most important theoretical innovation.  Of course he also did a great deal of high quality empirical work, notably the Monetary History, co-authored by Anna Schwartz. Hume and Fisher both lived in a world dominated by commodity money, where it was natural to think in terms of one-time changes in the price level (up or down.)  Friedman lived in a fiat money world, where people began thinking in terms of changes in the trend rate of inflation.   At the time Friedman did his best work, the field of macro was dominated by Keynesian theory.  But this proved to be something of a dead end in a world of fiat money, and Friedman was able to revive the old quantity theory of money, updated for a world of fiat money.   Importantly, Friedman developed this approach before the gold price peg was abandoned in 1968, and inflation took off.  His model did extremely well “out-of-sample”. I won’t say any more about Friedman, as his greatness is pretty well understood.  I recently did several long Econlog posts (here and here) explaining his importance to money/macro. PS.   I have a few observations on some other important macroeconomists who did work in money/macro.  (I’m not an expert on the history of economic thought, so this list is incomplete.) 1. Next to Fisher, Ralph Hawtrey is my favorite interwar economist.  Gustav Cassel and George Warren were also excellent.  Keynes’s Tract on Monetary Reform is outstanding, but he fails to make my top three due to the General Theory, which is a highly flawed book.  People defend the book by pointing to some supposedly brilliant insights.  Those insights do exist, but they are not the ones usually cited.  Thus his comparison of asset markets to a beauty contest is nonsense.  He is extraordinarily unfair to the so-called “classical” economists, who did not believe what he says they believed.  His “multiplier” approach to aggregate demand is useless, and his attempt to defend arguments for things like fiscal stimulus and protectionism is worse than useless.  He had little understanding of the importance of the Fisher effect or supply shocks.  He was wrong about monetary policy being ineffective at the zero lower bound, confusing that issue with the constraints on monetary policy under a commodity money regime.  And the book is often confusing, poorly written by the standards of its highly talented author.  (In contrast, the Tract is very clear and easy to follow.) 2. During the period when Friedman did his best work, his closest rival was Robert Mundell.  In contrast to Friedman’s quantity theoretic approach, Mundell used a price of money approach. 3. In the final decades of the 20th century, Robert Lucas was the dominant figure in macro.  Bennett McCallum did the best work updating macro theory based on the insights of Friedman and Lucas.  And Earl Thompson was hugely underrated, doing some of the most interesting work. 4. In the 21st century, the Princeton School has done the most important work.  The key paper here is Paul Krugman’s 1998 article on monetary policy at the zero lower bound. Happy New Year!   (1 COMMENTS)

I haven’t felt well this week that just ended, and so I’m a day late. These four things stand out. David T. Beito, “How FDR Emasculated the Black Press in World War II,” Reason, December 27, 2023. Excerpt: While federal authorities did not bring legal charges against the black press for the balance of the war, that doesn’t mean they shifted to a hands-off approach. Instead, they ratcheted up both intense monitoring and informal pressure. In the first half of 1942, FBI agents visited leading black newspapers that had carried critical stories about the federal government. Moreover, postal inspectors admonished two leading papers that the “benefits of citizenship” carried an obligation not to “‘play up’ isolated and rare instances in such a fashion as to obstruct recruiting and in other ways hamper the war effort.” Federal officials seemed particularly upset about the articles of George S. Schuyler, an editor and columnist at the Courier. Rated as particularly offensive were his arguments that the status quo offered no hope for “liberty, equality, and fraternity” and that the “Negrophobic philosophy, originating in the South, had become the official policy of the government.” An official at the Department of Justice reacted to these statements by urging the Office of War Information to take “action” against the paper.   Malcolm Cochran,”1,000 Bits of Good News You May Have Missed in 2023,” Human Progress, December 30, 2023. Excerpt: Reading the news can leave you depressed and misinformed. It’s partisan, shallow, and, above all, hopelessly negative. As Steven Pinker from Harvard University quipped, “The news is a nonrandom sample of the worst events happening on the planet on a given day.” It’s worth going through randomly and checking on links. Many of them are impressive. Here’s one. But sadly, good news doesn’t sell as well as bad news. Steven Calabresi, “Donald Trump and Section 3 of the 14th Amendment,” Reason, December 31, 2023. Excerpt: An early draft of Section 3 of the Fourteenth Amendment provided in effect that: “No person shall be President or Vice President, Senator or Representative, or elector of President of President and Vice President or hold any office, civil or military, under the United States, or under any State, or as a Member of any State Legislature, or as any executive or judicial officer who, having previously taken an oath to support the Constitution of the United States shall have engaged in insurrection or rebellion against the same, or given aid or comfort to the enemies thereof. (bold added by Calabresi.) The words “President or Vice President” were deliberately edited out of the final version of Section 3 of the Fourteenth Amendment. This, together with the disqualification of presidential electors and vice-presidential elector who have engaged in “insurrection or rebellion” makes it clear that the Framers’ of Section 3 did not intend for it to apply to presidents or vice presidents who engaged in insurrection. This impression is augmented by the fact that Section 3 methodically applies in order from the highest office to the lowest office.  Section 3 first disqualifies insurrectionist Senators and then Representatives. It then disqualifies all appointed civil or military officers; it then disqualifies insurrectionists from serving as a member of any State legislature, and it finally disqualifies in insurrectionists from serving as State executive or judicial officers.  This careful hierarchy suggests that the phrase “or hold any office, civil or military, under the United States” does not apply to the President or Vice President, but applies only to appointed federal officers. “Dave Barry’s 2023 Year in Review: Yes, the situation is hopeless,” December 31, 2023. Opening of the article: It was a year of reckoning, a year in which humanity finally began to understand that it faces an existential threat, a threat unlike any we have ever faced before, a threat that will wreak havoc on our fragile planet if we fail to stop it — and it may already be too late. We are referring, of course, to pickleball.   (0 COMMENTS)

A remarkable essay on “effective altruism” by Financial Times columnist Martin Sandbu conveys much information on that fad (see “Effective Altruism Was the Favoured Creed of Sam Bankman-Fried. Can It Survive His Fall,” December 29, 2023). But don’t make this sort of altruism your New Year’s resolution. Effective altruism aims at maximizing the good that a charitable action does. It is a moral offshoot of Benthamite utilitarianism as is cost-benefit analysis. Both theories fall for the same reason, which is, as Anthony the Jasay repeats, that they are based on what somebody says so: they try to calculate the relative values of different consequences by comparing the subjective utility gained or lost by different individuals. An action will be effective altruism if it promotes the “greatest good for the greatest number”—for example, if 100 individuals each gain 10 units of utility and one individual loses 100. Note that the same reasoning applies if one individual (a “utility monster”) gains 1,000 in utility while 100 lose only 5 each. Utilitarian “calculations” are guesses based on intuitions. If $1 is stolen from Bill Gates and given to a homeless person, it looks sensible to say that the former loses less utility than the latter gains; and that, therefore, the total “social utility” or “social welfare” increases. Even if the theory seems reasonable in such extreme cases, it loses any intuitive support in most real-world problems. Is it possible that the Nazis gained more utility than the Jews lost? A more pedestrian case: when one of the 400 wealthiest American households pays $126 million in annual taxes (which is the actual average—see Gramm et al., The Myth of American Inequality, Table 7.1, p.102), is it really worth less for the household members than for the beneficiaries of the new great government projects made possible with this increase of 0.000018 in total government expenditures? Nobody who answers yes or no to these questions is capable of providing a demonstration with which a goodwill analyst will have to agree. The problem is that a utilitarian calculus is made by adding and comparing the unobservable and subjective valuations of millions of persons. Moreover, tracing long-term consequences is an epistemological impossibility. Any pretended calculus of the balance of utility is just the author’s own guess, supposedly valid because he says so. Every charitable person tries to contribute to the causes he finds most worthy. That these evaluations vary widely is shown by the very large number of charitable acts and charitable organizations. Over and above this diversity in charitable activities, a general claim for realistic and “effective” altruism should focus on how individuals signal their needs, as they each perceive them, by serving other individuals’ demand on markets. In other words, effective altruism cannot ignore the efficiency of a market society moved by effective signals and based on an ethics of reciprocity and formal (not coercive) equality. Many who have jumped on the bandwagon of effective altruism are rich entrepreneurs, business executives, and youngsters, all morally disoriented and typically not cognizant of economics. It would be highly desirable that they look instead toward classical liberal ethics, of the sort James Buchanan, Friedrich Hayek, or Anthony de Jasay have been defending. Let me give four examples of what I mean by altruism coherent with classical liberalism. First, consider the Industrial Revolution when, for the first time in the history of mankind, ordinary individuals in the West were left free to try to improve their situation on markets and thereby escaped millennial poverty. Second example, closer to our own time: thanks in large part to less impeded international trade, the proportion of people living in extreme poverty in the world dropped from 44% in 1981 to 12% in 2013, despite a 60% increase in population. The rate of decrease in poverty has slowed down in the last 10 years. My third example is a specific case of poor people who self-reliantly try to better their conditions by serving customers on markets. Many of my readers must have had the same computer experience as myself: You ask for technical support—say, to Microsoft, which has much improved recently in this respect, at least if you have at least a very basic business account. You will be able to easily and rapidly get a techie on the phone and on your screen. It is most often somebody with a strong accent, working from India, Africa, or some such place. Sometimes, you hear a dog barking in the background and you can nearly imagine the chickens running around. The person is trying hard to help you because this allows him or her to get out of poverty. Being understanding and tolerant toward these people amounts to liberal and effective altruism. Moreover, Microsoft could not offer such good technical support without resorting to inexpensive manpower (contributing, at the same time, to bidding up these people’s wages). It is, by the way, the same for poor people working in “sweatshops” to make inexpensive shoes and clothes for you and your family. My fourth example of really effective altruism (which serves your own interests to the extent that one’s small purchases have any significant impact) is to fight protectionism pushed by special interests and relatively rich workers in your own country. If one does want to be a truly effective altruist, I suggest that his New Year resolution should be to promote free trade and commerce. There is no way to be an effective altruist the way it is currently preached. (0 COMMENTS)