How much is it worth for a large company, such as Boeing, to build a plant in your town? How about $1 billion dollars? That’s roughly the amount of so-called ‘incentives’ given in 2009 by the State of South Carolina to Boeing for building its plant in the Charleston area where I live. To put this in perspective, this incentive package exceeded $1,500 per person in the Charleston/North-Charleston MSA (Metropolitan Statistical Area), or approximately $200,000 per job Boeing had promised to create. Another state where Boeing has considerable operations, Washington, has given Boeing incentives valued at over $10 billion. But it’s not just big-name companies such as Boeing that have received such incentives. In 2022, for example, New York enticed Micron Technology with an incentive package valued at $6.4 billion and Wisconsin provided a $4.8 billion incentive for Foxconn in 2017. These are just a few of the so-called ‘megadeal’ incentives that are now widely used in about a third of U.S. states to get private firms to locate or expand their operations within the state’s political boundaries. It has now come to the point that even existing firms will threaten to leave states to get an incentive (in the case of Pennsylvania, one that had been there 70 years!). Economic development incentives at these megadeal amounts were nonexistent two decades ago. But across the nation, by now over 30 incentive awards to single companies valued at $1 billion or more, and over 330 awards valued at over $100 million, have been granted. For readers interested their state’s largest development incentives, the Subsidy Tracker database from Good Jobs First is a great place to start.1 In total, states now spend over $40 billion per year on these economic development incentives, compared to less than $500 million per year across all states in the mid-1990s. These incentive programs take many forms including job development and retraining tax credits, tax abatements, infrastructure financing, outright monetary grants, or loans of public funds. Crony Capitalism: Why Being Pro-Business Isn’t Necessarily Being Pro-Free-Market Government programs that give targeted and concentrated benefits to some firms, but not others shine interesting light on one area of significant disagreement over policy between economists who consider themselves ‘pro-free-market’, and politicians and other people who claim to be ‘pro-business’. In many cases free-market economists support the same policies as individuals who consider themselves pro-business, such as reducing regulations or the corporate income tax. But economic development incentives are not one of these areas of agreement. Policies consistent with free markets should strive to be neutral, treating all businesses the same—a level playing field in which firms compete equally for the dollar votes of consumers and the employment of labor under the rule of law. Giving special advantages to those businesses who are the most politically connected, such as is done with incentive programs, is inconsistent with these ideals, and is typical of what is often called ‘crony capitalism’—a situation in which government favoritism replaces consumer preferences in driving the profitability of firms in the marketplace. Several published studies have indeed found that companies devoting more resources toward political lobbying are more likely to receive development incentives (Gabe and Kraybill, 1998; Aobdia, Koester, and Petacchi, 2021). The politicians who grant these incentives argue that these taxpayer-funded subsidies to these large corporations are worth it because they create additional jobs, expand tax revenues, or provide other economic benefits to the areas in which these firms locate. Unfortunately, these claims are largely unfounded. There is now a large literature that examines the data and clearly brings into question the effectiveness and accountability of these programs, finding they do not lead to statistically significant improvements in tax revenue, employment, economic growth, or personal income.2 Readers familiar with the work of Frederic Bastiat in his famous parable of the broken window and his essay on ‘that which is seen and that which is unseen’ will easily understand why. New plants and new jobs are highly visible outcomes, and politicians love the media exposure of a good ribbon-cutting ceremony. But the opportunity cost of the resources, the small (unincentivized) local competing firms who go out of business or must pay more for labor, and a variety of other secondary effects and unintended consequences, are all parts of the unseen costs of these mega development incentives. A few studies attempt to estimate the approximate cost per job created at incentivized companies. The cost per job created by the incentive package to Mercedes in Alabama, for example, was $192,730 (Calcagno and Hefner, 2009), and is as much as $170,000 for the incentive for Cabela’s in West Virginia (Hicks and Shugart, 2007). In Michigan, Hicks and LaFaive (2011) find a cost of $123,000 per job created in construction, with 75% of these jobs lasting for 1 year or less. Keep in mind these are the cost per gross, not net, direct job created. For example, a large portion of the employees at an incentivized facility may come from other jobs where they were already employed, so the number of net new jobs is always significantly less than the employment level of the incentivized firm. Unproductive Entrepreneurship: Why Development Incentives Are Losers for the Overall Economy “As Bastiat would point out, the resources devoted to incentives are socially wasteful because they have an opportunity cost.” While one might think that these incentive programs are simply zero-sum (causing a firm to locate in state A rather than state B, so one state’s gain is another state’s loss), there are reasons to believe that there are secondary effects, deadweight losses, and unintended consequences of these policies that lead them to actually be negative-sum—that is society is worse off with these incentive programs that it would be without them. As Bastiat would point out, the resources devoted to incentives are socially wasteful because they have an opportunity cost. To be clear on this negative sum position, let’s consider crime as an analogy. When a burglar breaks into houses to steal jewelry the burglar’s gain is the homeowner’s exact loss. But this isn’t just a zero-sum activity. Think of the fact that in a world without crimes like this, homeowners wouldn’t have to spend money preventing theft (e.g., installing locks on doors, security systems, having a locking safe, etc.), and those individuals engaged in stealing wouldn’t spend their time investing in becoming better thieves—casing houses, planning escapes, and purchasing ski masks and crowbars. All these resources devoted to preventing theft by the homeowner and achieving the theft by the burglar are socially wasted resources, and these expenditures result in crime being negative sum (rather than zero sum) for society. Economists Gordon Tullock and William Baumol use the same logic to explain why transfers of resources from one group to another done through the political process are also, on net, unproductive. Returning to development incentives, a large secondary effect created is that when governments begin to give away large subsidies such as this, firms will spend resources competing for the giveaways. The time and effort firms spend competing for these incentives is a form of unproductive entrepreneurship—these ‘rent seeking’ expenditures are a net loss to society. Making things even worse is that this type of political competition invites corruption, and there are several high-profile cases of outright corruption involved in the awarding of these large incentives.3 Granting these incentives also leads to the necessity of having higher taxes on other economic activities to make up for the lost tax revenue granted to these firms, and to fund the additional infrastructure demands caused by the incentivized firms and their workers. Perhaps of most consequence, states generally give these incentives precisely because they have one or more uncompetitive tax policies. In the case of South Carolina, property taxes on machinery & equipment (i.e., capital investment) are the worst (highest) in the nation. Research by Calcagno and Hefner (2018) has found that when states offer these incentives they delay or fail to adopt important reforms to their inefficient tax structures—reforms that would benefit all firms and improve the economy overall. So, in my state we are left with a few lucky, politically connected firms like Boeing or BMW who enjoy a break on these excessive property taxes on their capital equipment, while the thousands of other firms in the state, who compete with them for consumers, labor, and other resources, are left paying the highest tax rates in the nation. Perhaps most troubling is the lack of accountability and transparency in most of the state incentive programs. Promises about job numbers are rarely subjected to follow-up analysis, and even when they are there generally are no consequences when companies do not live up to the promised number of jobs (or amount of capital investment). Unsurprisingly, there has been no accountability for the politicians who grant such socially wasteful programs. State officials have instead fought in court to keep the details of incentive programs and the recipient firms from being disclosed to the general public, arguing they do not want to disclose a single firm’s private operational data. Thus, the political actors who award these incentives know that key details and results will never be made public, and that it will be almost impossible to get the data (or hold anyone accountable) if the promises of the incentivized firms do not come into fruition. So, What Is the Real Reason Why Economic Losers Sometimes Make for Political Winners? When students in a principles of economics course are taught about the benefits of free trade, many ask their professor why we have tariffs and other restrictions on imports if these are not economically beneficial. The answer, of course, comes down to political incentives faced by voters, special interest groups, politicians, and bureaucrats as is explained by Leighton and Lopez (2013).4 Being an elected legislator from a district that has a steel mill who is losing revenue due to customers finding less expensive imported steel means supporting a tariff that raises the cost of imported steel to benefit the local firm. Doing so results in more votes for the incumbent’s reelection as well as likely campaign contributions. Similarly, we now know from volumes of published research that these economic development incentives are economically inefficient. So then, what explains their widespread (and growing) use by states? The answer, of course, is the same—political incentives. Many of the papers that examine the (lack of) economic gains from these incentive programs do mention the possibility that political benefits likely accrue to the elected officials who grant them. For context, 2003 was the first year in which a U.S. state awarded an incentive to a single private firm valued at more than a billion dollars. A recent paper I coauthored with Gary Wagner and Peter Calcagno is the first to attempt to quantify them.5 Somewhat fortunately, these incentives are a recent phenomenon, so it is possible to measure the pre- and post-effects of states offering them. Our results suggest that once a state begins offering these megadeal economic development incentives, campaign contributions in the average state rise by almost a million dollars annually, driven by increases from construction and labor unions, lobbyists and lawyers, and pro-business advocacy and trade organizations. It is important to note that these increases in campaign contributions and other forms of lobbying and rent seeking are not just from the incentivized firms. Prior studies have found that for every incentive granted, there are at least three firms likely competing for incentives, meaning two thirds of the firms who spend effort currying favor with politicians to get an incentive never receive one. In addition, we find that the average incumbent legislator is rewarded with a 7-percentage point increase in their margin of victory in subsequent elections after a state begins offering these development incentives. The somewhat obvious conclusion of our analysis is that the battle over the future existence of economic development incentives may lie more in overcoming the political benefits that perpetuate their existence than in demonstrating a lack of worthwhile economic effects. But there is a larger lesson to be learned. Achieving Real Growth: The Case for Economic Freedom The myth of economic development incentives is that somehow government favoritism, crony capitalism, or ‘wise-central-planning’ to put it bluntly, can create more prosperity than the alternative—which is a level playing field in which all firms are treated equally—they are all given the advantage of a development incentive in the form of lower broad-based taxes on capital, land, or profits. We now know just the opposite—that those states and countries that institute policies consistent with the concept of ‘economic freedom’ are the ones that are most prosperous. That is, broad based policies consistent with low taxes and government spending, clearly defined and enforced property rights, reasonable regulations, the rule of law, and free trade. As was first outlined by Baumol (1990) and Sobel (2008), entrepreneurial individuals seeking to generate personal gain have a choice as to whether to devote their time and effort to productive, positive-sum activities, or alternatively toward unproductive, zero- or negative-sum activities, and will allocate their efforts toward whichever generates the highest personal return. This in turn is driven by the institutional structure in that whenever economic and political institutions make it easier for individuals to secure personal returns through government transfers, they will try hard to do so. But in areas with institutions providing for secure property rights, the rule of law, contract enforcement, and effective limits on government’s ability to transfer wealth through taxation and regulation, creative individuals are more likely to engage in productive market entrepreneurship—activities that create wealth for both themselves and for others. In contrast, in areas with lower economic freedom and greater government spending, regulation and transfer activities, these same individuals are instead more likely to engage in attempts to manipulate the political or legal process to capture transfers of existing wealth through unproductive political and legal entrepreneurship—activities that destroy wealth (e.g., lobbying and lawsuits). This reallocation of effort occurs because the institutional structure largely determines the relative personal and financial rewards to investing entrepreneurial energies into productive market activities versus investing those same energies instead into unproductive political and legal activities. For more on these topics, see “What Is Seen and What Is Not Seen,” by Frederic Bastiat. In Selected Essays on Political Economy. Library of Economics and Liberty. “Prosperity Without a Price Tag,” by Lauren Heller. Library of Economics and Liberty, July 1, 2019. “The Business Subversion of Markets: Contra-Capitalism,” by Walter Donway. Library of Economics and Liberty, Oct. 4, 2021. Economic development incentives create incentives for unproductive entrepreneurship, expand the rewards to political favor seeking, and work against the very ideals of the policies necessary to promote productive entrepreneurship and economic growth. Unfortunately, the gains to the politicians that award these incentives, and to the shareholders of the large firms who receive them, are too tempting to resist in the absence of strong constitutional constraints preventing them. References Aobdia, Daniel, Allison Koester, and Reining Petacchi. (2021) “The Politics of Government Resource Allocation: Evidence from U.S. State Government Awarded Economic Incentives.” Available at SSRN 3127038. Baumol, William J. (1990) “Entrepreneurship: Productive, Unproductive and Destructive,” Journal of Political Economy, 98(5), 893–921. Bartik, Timothy J. (2019) Making sense of incentives: Taming business incentives to promote prosperity. WE Upjohn Institute. Calcagno, Peter T., and Frank Hefner. (2009) “South Carolina’s Tax Incentives: Costly, Inefficient and Distortionary,” in Peter T. Calcagno (ed.), Unleashing Capitalism: A Prescription for Economic Prosperity in South Carolina. South Carolina Policy Council: Columbia, South Carolina. Calcagno, Peter T., and Frank Hefner. (2018) “Targeted Economic Incentives: An Analysis of State Fiscal Policy and Regulatory Conditions” Review of Regional Studies, 48(1), 71-91. Gabe, Todd M., and David S. Kraybill. (1998) “Tax Incentive Requests and Offers in a State Economic Development Program,” Review of Regional Studies, 28, 1–14. Hicks, Michael J., and William F. Shughart II. (2007) “Quit Playing Favorites: Why Business Subsidies Hurt our Economy,” Chapter 8 in Russell S. Sobel (ed.), Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It. Center for Economic Growth, The Public Policy Foundation of West Virginia: Morgantown, West Virginia, 117-130. Hicks Michael J., and Michael LaFaive. (2011) “The Influence of Targeted Economic Development Tax Incentives on County Economic Growth: Evidence from Michigan’s MEGA Credits,” Economic Development Quarterly 25(2), 193-205. Lopez, Edward J., and Wayne A. Leighton. Madmen, intellectuals, and academic scribblers: The economic engine of political change. Stanford University Press, 2013. Mitchell, Matthew, Daniel Sutter, and Scott T. Eastman. (2018) “The Political Economy of Targeted Economic Development Incentives,” Review of Regional Studies, 48(1), 1-9. Sobel, Russell S. (2008) “Testing Baumol: Institutional Quality and the Productivity of Entrepreneurship,” Journal of Business Venturing, 23(6), 641–655. Sobel, Russell S., Gary A. Wagner, and Peter T. Calcagno. (2022) “The Political Economy of State Economic Development Incentives: A Case of Rent Extraction,” Economics and Politics, DOI: 10.1111/ecpo.12233. Tullock, Gordon. (1967) “The Welfare Cost of Tariffs, Monopolies, and Theft,” Western Economic Journal, 5(3), 224–232. Footnotes [1] Available online at Subsidy Tracker. [2] See, for examples, Hicks and Shughart (2007); Mitchell, Sutter, and Eastman (2018); Bartik (2019). [3] See Tullock (1967) and Baumol (1990). [4] See Chapter 4 for a more detailed explanation of how political incentives influence the outcomes of government policy. [5] Sobel, Wagner, and Calcagno (2022). * Russell S. Sobel is a professor of economics and entrepreneurship in the Baker School of Business at The Citadel. For more articles by Russell S. Sobel, see the Archive. This article was edited by Features Editor Ed Lopez. (0 COMMENTS)

Book Review of Pirate Enlightenment, or the Real Libertalia by David Graeber.1 In the Preface of Pirate Enlightenment, or the Real Libertalia by David Graeber, he states that he hopes to provide a fun read that illustrates that the pirate society of Madagascar (1690-1750) lives up to the story of a pirate utopia called Libertalia which reflected many Enlightenment principles. Unfortunately, this book doesn’t have enough fun. Perhaps that’s because Graeber didn’t get the chance to finish it properly as it was published posthumously. But we can learn about some of the ingredients that might comprise an Enlightenment utopia. Graeber’s first influential book was Debt: The First 5000 Years which explored the history of debt and credit in human civilization. He was influential in the Occupy Wall Street movement which he described as the “revolt of the caring classes”—i.e., people who wanted to do meaningful work but found themselves underpaid and in debt. He helped come up with the slogan, “We are the 99%.” Graeber was a professor of anthropology at Yale and the London School of Economics and participated in anarchist activism. He received a Fulbright to study in Madagascar which resulted in his 2007 book, Lost People: Magic and the Legacy of Slavery in Madagascar. Graeber describes the Enlightenment as an “intellectual movement uniquely tied to conversational forms,” and those conversations revolved around liberty, authority, sovereignty, and “the people” as opposed to “the elite.” In The Dawn of Everything, Graeber and his co-author, David Wengrow, identify the catalyst for the Enlightenment as the flood of new ideas coming from Europeans who were traveling and colonizing the globe. Exposure to nations with different forms of governance inspired intellectual criticism of long-standing governance structures at home. The pirate kings of Madagascar and the Malagasy didn’t have any particular interest in pursuing knowledge or exploring the nature of liberty in intellectual discussions. In the conclusion to the book, Graeber mentions that debate and good conversation were an important part of Malagasy culture, but that point is disconnected from the rest of the history. It’s not clear that Malagasy culture had any conscientious adherence to Enlightenment conversation. Any similarities between Malagasy-pirate culture and an ideal Enlightenment society (Libertalia) were a result of regular people finding a way to survive outside the influence of strong centralized governments and religions. Their culture informed Enlightenment thinkers on what would be possible if older institutions were deprived of power. Before the formation of the Betsimisaraka Confederation, the clans of Madagascar consisted of many warring clans. No particular clan leader was able to gain too much power, because he would be raided by other clans if he started to accumulate too much wealth. In these raids, clans would steal each other’s cattle and enslave each other. Women were traded like property to form alliances. The pirate kings were attracted to Madagascar because their self-interest led them there. The practice of cultural norms that supported liberty and other Enlightenment principles emerged from the self-interested dealings between people of different cultures, not because of an intellectual impulse to put philosophical ideals into practice. It seems that toleration was part of the culture because they had so many different travelers coming to trade. Three cultural eras are described in the book: the period of the Zafy Ibrahim, the period of the Malagasy women with pirate husbands and the period of the Betsimisaraka Confederation. Throughout all three periods, the Malagasy were governed by clan leaders. The clans prevented each other from gaining too much dominance. The Zafy Ibrahim were religious and patriarchal. They, along with their Malagasy neighbors, traded women as property. When pirates started arriving with their riches, Malagasy women seized the opportunity to gain some autonomy by managing their pirate husbands’ wealth. Graeber posits that the clans who formed the Betsimisaraka Confederation were partially motivated to reduce the power of the pirate wives and their mixed-race children. Graeber imagines that the pirate kingdoms were a topic of discussion in the European salons, in which case, European observation of the spontaneous order that occurred in Madagascar influenced the Enlightenment, but the pirates themselves were not great revolutionaries. While many people are personally interested in pirate stories, I have a professional interest in pirate stories and histories. I work with seasteaders. Seasteaders want to create floating communities (called seasteads) in international waters that are, importantly, outside territory claimed by any existing government. Pirates are of particular interest to seasteaders because pirate settlements were the place for radical social experiments, which is a goal for seasteading. How the open ocean creates an environment for innovation, free from land-based institutions is a fascinating question. The Golden Age of piracy only lasted 40-50 years and we still love stories about it. The potential for seasteading to have an impact on society is even greater than these long-gone pirates. A small group of people can capture the imagination of society as a whole and inspire reform, inspiring a second Enlightenment period. We can create an environment for innovation by identifying why places like Madagascar thrived. There are four things in particular I would like to highlight: autonomous women, wealth and markets, no ties to another government, and good stories. Enterprising and Autonomous Women Graeber describes the Enlightenment as the first historically known intellectual movement organized largely by women. He doesn’t offer any support for that claim. He does share a few stories about how the Malagasy women were integral to the pirates’ success. Although Graeber doesn’t explicitly say it, I am making the leap to connect his stories about Malagasy women to his claim that the Enlightenment was led by women. One example involves the Zafy Ibrahim, an immigrant community that dominated the Malagasy economy before the pirate trade disrupted them. Zafy Ibrahim had strict sexual mores. The Malagasy were much more open about sex and were not as violently protective of their women. Graeber makes the case that the Malagasy women saw the opportunity in partnering with pirates because they could avoid dealing with the Zafy Ibrahim who had misogynistic practices. Essentially, pirates coming presented an opportunity for women and they took it. Pirates didn’t bring a lot of cultural baggage with them, because they were criminals in their home countries. When the pirates brought their stolen wealth to Madagascar, the women found an equal role in partnership with the pirates, helping them sell items in the marketplace. The women were not expected to be monogamous. They had the autonomy to find new partners and their pirate husbands needed them to sell their stolen goods in the marketplace. Wealth and Markets Graeber was critical of market economics. Nevertheless, it’s clear from his book that markets and trade were major influences on the shifting cultures of Madagascar. One of the first pirate settlements, Sainte-Marie, was managed by a pirate wanted for murder in Jamaica who was funded by a New York-based slave trader. In this era, the pirates benefitted from sowing discord among Malagasy natives because they could capture the enemies of their allies and send them on slave ships. Eventually, the demand for Malagasy slaves drove the pirate manager to betray his allies by sending them on the slave ships. The Malagasy retaliated by attacking Sainte-Marie and slaughtering most of the pirates there. The slave market did not last much longer in Madagascar. Pirates in other parts of Madagascar found it more profitable to raid slave ships which incentivized them to have peaceable relationships with the Malagasy. Madagascar was between areas controlled by the British Royal African Company and the East India Company, making it a good location for pirates to avoid scrutiny as they traded their stolen gold and jewels for food and land. Once again, the pirates found themselves in a better position by honoring Enlightenment principles like liberty and sovereignty, but they did not choose the path against slavery for ideological reasons. Avoiding existing governments “On the margins of society is where radical ideas flourish.” In the Preface, Graeber states that the European Enlightenment came about because world travel exposed Europeans to new ideas from interacting with new cultures and the new social experiments could not happen in the established cities. Social experiments could only happen on the margins of society. Pirates were on the fringe of society; naturally they would be able to participate in social experiments because they had nothing to lose. They were considered criminals in their home countries. With no status to preserve, pirates formed democratic governance on their ships. When those pirates married Malagasy women, they formed a new social order that was more egalitarian. On the margins of society is where radical ideas flourish. I was interested to see how pirate societies could have an effect on the worldwide culture and economy because that is our goal with seasteading. The idea that people from different cultures coming together on the fringes of society will form freer forms of governance is very attractive to seasteaders. Graeber describes many groups of immigrants who tried to settle in Madagascar, but they brought their governments with them. One astonishing story occurs when the French settlers had formed alliances with the Malagasy by marrying Malagasy women. The French government, with the goal of improving their foothold, sent French women to marry the settlers, invalidating their marriages to the local women. The Malagasy attacked the French settlement. Hundreds of French men and women were slaughtered. The pirates didn’t have home governments telling them their marriages to the Malagasy were invalid, so their business and personal partnerships thrived. It’s the partnership between pirates and the Malagasy that created Libertalia. In Malagasy history, there is no centralization of power. Before the pirates arrived with their textiles and other booty, most wealth was accumulated in cattle. Clans could form alliances in big meetings called kabary. During the kabary, clan leaders would swear oaths to each other. Graeber equates the kabary that formed the Betsimisaraka Confederation with creating a social contract. Although the Betsimisaraka Confederation established Ratsimilaho as their war leader, Graeber says it was a voluntary agreement between peers rather than a conqueror taking control over his neighbors. Story-telling Pirates were good storytellers. The Malagasy also placed great value on their myths and stories. Possibly, telling a compelling story about a utopia is enough to encourage people to build the utopia in real life. Libertalia was described as an egalitarian republic, in which slavery had been abolished and all things were shared in common and administered democratically. Pirates experimented with new forms of governance and property arrangements. Graeber claims that even if Libertalia wasn’t a real society, the existence of the story shows that people were telling stories incorporating these ideals. It was a matter of necessity that the pirates had to form an egalitarian relationship with the Malagasy – not a pursuit of utopia. They lived by natural law because they couldn’t claim racial superiority and survive. This history falls short of Graeber’s claim since he described the Enlightenment as an intellectual movement. It’s not clear that the pirates had any attachment to Enlightenment ideals. They were looking for the good life and found it in Madagascar. They could have wives to sell their stolen loot and pretend to be kings without the stress of actually ruling over people. It’s a case of self-interest creating mutually beneficial agreements. The writing in Pirate Enlightenment, or the Real Libertalia is a confusing mix of dates, tangents, and references to unverified sources. The stories and arguments get lost in the miasma. If you happen to find a copy of Pirate Enlightenment, or the Real Libertalia in a bookstore or library, the Preface is worth reading. Some of the stories that Graeber tells are fascinating but they are hidden in a circuitous, overly cited, confusing set up. While the book shares many fascinating stories about pirates and the evolving Malagasy culture, it doesn’t clearly make Graeber’s arguments. Graeber doesn’t take the time to explicitly frame the connections between Malagasy-Pirate culture and Enlightenment culture. For more on these topics, see Cathy O’Neil on Wall St and Occupy Wall Street. EconTalk. Peter Leeson on Pirates and the Invisible Hook. EconTalk. Patri Friedman on Seasteading. EconTalk. My takeaway from this book is that pirates were a unique ingredient because they were criminals in their home countries and therefore didn’t represent any national interests. Because of their freedom from national interests, they couldn’t colonize Madagascar. Instead, they had to find their own individual way to provide value to the Malagasy society and integrate with the local culture. As a result, they found a way to bring the real Libertalia to life. Footnotes [1] Graeber, David, Pirate Enlightenment, or the Real Libertalia. Farrar, Strauss, and Giroux, 2023. * Carly Jackson is the Development Director for The Seasteading Institute. She joined the Seasteading community after meeting a group of seasteaders at the Startup Societies Conference in August 2017. She has dreamed of living on a seastead ever since. She served on the board for The Center for Natural Living, a nonprofit organization dedicated to creating autonomous and sustainable communities. She has worked and volunteered for a number of nonprofit organizations and political organizations, building communities and training activists. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Many of the books I’ve relied on most heavily were published within the last decade or so. These include Blueprint (2019), The Goodness Paradox (2019), Social (2013), The Ape That Understood the Universe (2018), The Folly of Fools (2011), Everybody Lies (2017), Why Everybody Else Is a Hypocrite (2010), The Elephant in the Brain (2017), The Enigma of Reason (2017), The Secret of Our Success (2015), Not Born Yesterday (2020), The WEIRDest People in the World (2020), Catching Fire (2009), The Social Instinct (2021), and Hidden Games (2022). —Andrew McAfee. The Geek Way: The Radical Mindset that Drives Extraordinary Results (p. 19).1 The Geek Way could be described as a popular introduction to recent theories of social behavior, with many examples drawn from business- but that would not be the optimal marketing strategy, so it is packaged as a management advice book. I am an atypical reader, in that my own interest is in the recent theories of social behavior.2 McAfee writes, The geek way is a set of solutions for thriving in a faster-moving business world. They’re cultural solutions, not technological ones. p. 26 In the middle of the last century, the American economy was dominated by heavy industry, making automobiles, steel, and other manufactured goods for the mass market. The business culture that evolved in those industries stressed planning and top-down control, as John Kenneth Galbraith argued in The New Industrial State. The leaders of such firms were allocating massive amounts of capital in irreversible ways, as in the decision to build a new plant. Needing to get these decisions right, corporate leaders relied on a cumbersome evaluation process in which each proposal was examined by a cadre of division managers and their staff analysts. Today, much of the capital in American business consists of software systems, not physical plant and equipment. Managed correctly, this software capital can be acquired—and changed—much more quickly than physical capital. This environment rewards an entirely different management culture, what McAfee calls the Geek Way, that today’s successful business leaders have arrived at. “The new business culture needs to be able to make decisions quickly, rather than put proposals through a long and painful process of analysis. It can afford a trial-and-error approach, rather than committing to an elaborate plan.” The new business culture needs to be able to make decisions quickly, rather than put proposals through a long and painful process of analysis. It can afford a trial-and-error approach, rather than committing to an elaborate plan. And it must make good use of what we know of human psychology rather than rely on hierarchical authority. Recent literature emphasizes collective brains rather than individual brains. … humanity’s superpower is at the level of the group, not the individual, so it makes sense to focus on the group. p. 102 McAfee says that today’s business leaders have arrived at four cultural norms: The first is speed: a preference for achieving results by iterating rapidly instead of planning extensively. The second norm is ownership. Compared to industrial-era organizations, geek companies have higher levels of personal autonomy, empowerment, and responsibility, fewer cross-functional processes, and less coordination. Third is the norm of science: conducting experiments, generating data, and debating how to interpret evidence. The fourth and final great geek norm is openness: sharing information and being receptive to arguments, reevaluations, and changes in direction. p. 59 The challenge is to get people to collaborate in ways that run counter to our native psychology. We care a lot about status, which makes the process of undertaking a new initiative fraught. McAfee writes, Our minds are inherently justificatory about their own ideas, and argumentative about the ideas of others. p. 143 Excess bureaucracy is a bug for anyone who wants a company to run efficiently, but it’s a feature for the Homo ultrasocialis who seek to gain status in the organization. They’ll invent work so that they can be part of it. They’ll want to participate in more and more activities over time. They’ll strive to be consulted on lots of decisions, and if possible have veto power over them. p. 156 Thus, there are two ways that a corporate decision process can go wrong. If it allows individual managers too much autonomy, they will undertake flawed initiatives. But if it allows other managers too much ability to interfere, they will suppress good initiatives. To try to avoid these excesses, senior leaders must try to establish a culture in which initiatives are to be evaluated objectively, preferably with low-cost testing and data gathering, rather than undertaken or vetoed solely at the whim of individuals competing over status. McAfee writes, Conduct evidence-based arguments so that the group makes better decisions, predictions, and estimates. For the great geek norm of ownership—the subject of this chapter—the specific ground rule is, To reduce bureaucracy, take away opportunities to gain status that aren’t aligned with the goals and values of the company. p. 166 I would say you need to reward people who contribute to solving problems, not people who build and protect empires within the organization. Concerning the norm of ownership, McAfee writes, The whole point of setting up two-pizza teams was to minimize the amount of coordination and communication needed with other Amazonians, and the number of dependencies the team had with the rest of the business. Instead of starting from the assumption that important business efforts require a lot of coordination, involvement, and buy-in from many groups, two-pizza teams were born out of the opposite assumption: the more important an effort is, the more its dependencies should be reduced and the more the team responsible for it should be given sole ownership and complete autonomy. … As two-pizza teams were getting rolled out across Amazon, the company found that the ones that worked hardest early on to reduce their dependency on the rest of the organization were the most successful over time. p. 169-170 Achieving clarity of purpose and limiting dependencies sounds like a great idea, but it requires a lot of intellectual effort and discipline. I have never seen an organization chart that neatly separated functions. No matter how you draw the boxes, there are always areas of overlap. The challenge is to avoid unnecessary overlaps, and to manage those that remain. If an organization has an incoherent structure, then the software that supports it is also bound to be messy and difficult to maintain. You want a software system that does exactly what it is supposed to do, no more and no less. But that is easier said than done. McAfee points out that software development at Amazon was disciplined by adopting so-called service-oriented architecture. Note that bureaucratic rules and checks exist for a reason. McAfee writes, … ownership provides high autonomy but has two obvious weaknesses. The first is that it can be abused. People can take advantage of the lack of required prior approvals and other checks to commit fraud, embezzle, or otherwise enrich themselves. The second potential weakness is chaos. There’s no guarantee that a bunch of atomized teams will, in aggregate, act in ways that will advance the goals of the company. p. 171-172 Perhaps surprisingly, in many organizations low-level managers and employees do not really understand how their work fits in with the goals of the enterprise. This ignorance undermines accountability, so that units focus on activities rather than results. Instead, leaders need to clearly articulate objectives and key results while conveying these down to the unit level. Humans evolved to gossip. In an organizational context, this can be counterproductive, as one team seeks to learn about and demean other teams. McAfee writes, The geeks’ distaste for coordination can seem extreme. They often don’t even want teams to talk with each other, or with the higher-ups in the company. They believe that cross-team communication can be harmful because it often turns into a soft form of bureaucracy. p. 188 Instead of noisy gossip, an organization should encourage iterative development and testing. Each time a product is put forward, the results feed back into the next iteration of the product. The product team responds to objective information, not the mere opinions of other people within the organization. The literature on cultural evolution shows that people learn by copying and by trial-and-error. The idea is to find the sweet spot between reinventing the wheel and failing to innovate. McAfee cites research showing that it is best to have multiple good models to copy from, allowing for innovative combinations. Also, trial-and-error is best done as rapidly as possible, in order to minimize time wasted on ideas that do not work out. McAfee explains how Elon Musk’s SpaceX was able to outperform NASA: The vast differences between NASA and SpaceX are well summarized by Musk: “I have this mantra. It’s called, ‘If a schedule is long, it’s wrong. If it’s tight, it’s right.’ And I just, basically, [go with] recursive improvement on schedule, with feedback loop. ‘Did this make it go faster?'” p. 225 Our psychological tendencies include being over-confident and self-justifying. Most of us are inclined to defer to authority, fearing offending high-status individuals. One can see how these characteristics could lead to disaster. An over-confident, highly defensive leader will undertake a very unwise course of action because he shuts off feedback from lower-level managers who know better, but who are intimidated by the leader. According to David Halberstam in The Best and the Brightest,3 this describes Robert McNamara during the Vietnam War escalation. McAfee uses the term “Model 1” to describe cultures that suppress bad information. Its norms include: 1. Be in unilateral control over others. 2. Strive to win and minimize losing. 3. Suppress negative feelings. (p. 242) To avoid creating a Model 1 organization, leaders need to create a culture of openness, in which it is understood that the leader welcomes criticism and bad news. For example, one CEO shared the performance review he received from the corporate board, which was mostly flattering but not entirely so. Doing so showed that he was open to getting negative feedback. The Israeli military is known for allowing junior officers to openly challenge the views of senior generals. The intelligence failure in October of 2023 will probably be blamed in part on a failure by senior officials to adhere to this cultural norm. McAfee quotes Marc Andreessen making the interesting observation that, “The most serious problem facing any organization is the one that cannot be discussed.” p. 251 I would point out that university Presidents and their Boards have not been willing to discuss the issue of campus radicalization. Now that they are losing political support, funding, and reputation, the problem is so deeply embedded that even those willing to discuss it may be unable to solve it. For more on these topics, see Andrew McAfee on the Geek Way. EconTalk. “Culture, Institutions, and Folkways,” by Arnold Kling. Library of Economics and Liberty, June 3, 2019. Michele Gelfand on Rule Makers, Rule Breakers. EconTalk. The recent literature on human culture has much to tell us about organizational behavior. Humans need to participate in groups in order to thrive. Groups in turn have to adopt and enforce norms that align the psychology of the individual to the functioning of the group. The individual desire for status needs to be channeled constructively. And large organizations must be inculcated with habits and norms that make group behavior and individual incentives congruent with the success of the organization. The more we understand about social psychology, the better we will be at maintaining organizations. Footnotes [1] Andrew McAfee, The Geek Way: The Radical Mindset that Drives Extraordinary Results. Little, Brown and Company, 2023. [2] Note that I have previously reviewed Robert Plomin’s Blueprint (see “DNA Determinism,” by Arnold Kling, Library of Economics and Liberty, Feb. 4, 2019) and Joseph Heinrich’s The WEIRDest People in the World (see “A WEIRD Turn in Social Science,” by Arnold Kling, Library of Economics and Liberty, Nov. 2, 2020), and I am familiar with several of the other books listed above. In addition to those works, McAfee also cites Gad Saad, author of Evolutionary Psychology in the Business Sciences. [3] See my review of Halberstam here: “Lessons from The Best and the Brightest,” by Arnold Kling. Library of Economics and Liberty, Aug. 7, 2017. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Over the 25 years he’s lived in Israel, author Daniel Gordis of Shalem College has seen many chapters of the Israeli-Palestinian conflict, beginning with the Second Intifada that followed the Oslo Accords. Listen as he and EconTalk’s Russ Roberts discuss why Hamas’s massacre of October 7th is different and is an existential threat to Israel. […] The post From the Second Intifada to October 7th (with Daniel Gordis) appeared first on Econlib.

. . . but war cares about you.For several years, I’ve been warning that the rise in nationalism will lead to more war. And now it’s happening.  Here’s Bloomberg: This week, the International Institute for Strategic Studies in London published the latest edition of its authoritative annual Armed Conflict Survey, and it’s not predicting much peace for the holidays. It paints a grim picture of rising violence in in many regions, of wars chronically resistant to broking of peace. The survey — which addresses regional conflicts rather than the superpower confrontation between China, Russia, the US and its allies — documents 183 conflicts for 2023, the highest number in three decades. . . . This week, the International Institute for Strategic Studies in London published the latest edition of its authoritative annual Armed Conflict Survey, and it’s not predicting much peace for the holidays. It paints a grim picture of rising violence in in many regions, of wars chronically resistant to broking of peace. The survey — which addresses regional conflicts rather than the superpower confrontation between China, Russia, the US and its allies — documents 183 conflicts for 2023, the highest number in three decades. This may seem like a faraway problem, as most of these conflicts occur in Africa, the Middle East and south/central Asia.  But as this tweet demonstrates, it is those regions that will increasingly dominate the global population: And another Bloomberg article suggests that the problem may be spreading to the previously quiet Western Hemisphere: In a move reminiscent of Vladimir Putin’s invasion of Ukraine, the dictator of Venezuela — Nicolás Maduro, a former bus driver and acolyte of leftist strongman Hugo Chávez — sponsored a referendum in his nation last week. The subject was whether to annex a vast region of Guyana adjacent to Venezuela called Essequibo, which represents roughly two-thirds of Guyana’s territory. It is a resource-rich tract with oil, gold, fresh water and timber — and a relatively tiny population of around 100,000. . . . In his brilliant 2018 book on geopolitics, The Jungle Grows Back, political scientist Robert Kagan laid out the case that the more international norms are eroded somewhere, the faster chaos descends regionally and even globally. It can start to look like the 1930s, when Nazi Germany and Imperial Japan began to grab increasingly large chunks of territory in Europe and Asia, respectively. Nationalism is not patriotism.  It is a zero-sum ideology, which looks at the world through the lens of us vs. them.  Nationalism embraces tribalism, protectionism, xenophobia, authoritarianism, militarism, misogyny and homophobia.  In my view, it has become the number one problem facing the world today.  And if not addressed, I fear that it’s about to get much worse. PS.  I’ve done a number of posts discussing the difference between nationalism and patriotism.  Bloomberg has a good article on the subject: It’s patriotism when love of your own people comes first; it’s nationalism when hate for people other than your own comes first. That definition comes from Charles de Gaulle, a former national hero and president of France.   (0 COMMENTS)

As capitalism falls in popularity among the younger generations, the opinion that free markets incentivize discrimination has become more common. Issues such as the racial and gender earnings gap and callback discrimination against black Americans are highlighted as proof of this conclusion. So, is American capitalism moral? Do markets encourage or punish discrimination? What is the government’s historical record of racial discrimination? Bryan Caplan joined EconTalk host Russ Roberts in this early episode to discuss the degree to which the market solves discrimination, the misconception about European labor markets, and how American economic values support human happiness and ambition. Caplan is a professor of economics at George Mason University, research fellow at the Mercatus Center, adjunct scholar at the Cato Institute, and publishes his own substack, Bet on It. Caplan is also the author of four books, and was a regular blogger at EconLog from 2005 until 2022. The most important topic Caplan and Roberts explore  is debunking the view that markets incentivize discrimination, which non-economists tend to hold. The main evidence for this argument is the earnings gaps along lines of sex, race, sexual orientation, and gender identity. Caplan and Roberts argue that this belief is misguided, as if this was true and employers could get away with paying oppressed groups less, then why aren’t these groups over-represented in firms? Most economists, including Caplan tend to believe that, generally, the market will eventually exterminate discrimination due to its costly nature. This added cost of discrimination will eventually cause the firms that are focused exclusively on profit instead of race to be more successful than those that care about profits and race.  The simple story is, if you want to stay in business, you can care about profits, or a lot of other things. So over time who’s going to get to stay in business? If you have people who only care about profits competing with people who care about profits and race, you should expect that over time, the people who only care about profits will come to predominate, because they people who care about two things have trouble competing. It’s very similar to sports, the people who are successful are very single minded…it’s very hard for people who are not focused to compete with people who are focused. The evidence for the market punishing discrimination isn’t just theoretical, as the economic data of residual wage differences shows a decline in discrimination, and even an elimination of the black-white income gap if certain factors are controlled for. Says Caplan,  There’s a number of kinds of discrimination where just putting in regular statistical controls makes it just completely disappear. So to take the most extreme example, if you take a look at the black-white gap in annual labor earnings with controls for the following: education, IQ score, family structure, number of children, and age, you can actually see the entire black-white gap go away. But, as with many topics in economics, it’s not that simple. As Caplan states, “If you look at the debates between economists themselves, there you’ll have a discussion about how much the market limits discrimination.” The conditions of environmental discrimination are very consequential, as if every employer or consumer were equally discriminatory then the market would punish discrimination significantly less. There’s even more reason to trust the market to solve discrimination over time, as the government’s record in fighting discrimination is quite poor, and has caused a regression in racial equality that the market was working towards. Caplan cites Jennifer Roback’s work on labor restrictions in the south, specifically  Jim Crow Laws, that made it illegal to entice an employed laborer to switch firms in order to temper competition between black and white workers. These laws went as far to outlaw recruiting a laborer to leave the state or even the county, vagrancy laws and laws against unemployment added to the inability of black workers to change jobs for higher wages. All these laws reduced the attractiveness of black labor which the market, specifically in the less discriminatory north, wanted to jump on. If the distribution of racial preferences was less racist in the north than in the south, one of the things southerners would have to be afraid of was the northern employers, who were less racist, would go and bid that labor away, and blacks would move to the north. So, if you do have an area where the least racist person is still pretty racist, part of the concern of people who like that situation and want to make sure discrimination persists, is to make sure that there isn’t any exit to a place where the least racist person is less racist than the least racist person where you actually are. Another example of government abetted discrimination was the Davis-Bacon Act, which set a minimum wage. According to Caplan, this made it easier for white employers to act on their ingroup racial bias. If you have a minimum wage, and the result of this is a surplus of labor, what are employers going to do? If you have a whole bunch of laborers who are equally qualified, there’s a line of them and you have to pick one, who are you going to pick? Well it seems that you’ll pick the person you like the most…maybe the person who looks like you…these regulations make it less costly to act on those preferences. When the ethics of markets are often called into question, often by those on the left wing, Europe is mentioned as a successful model of  market restrictions, and is viewed as a more prosperous and humane social democracy. However, Caplan disagrees. He believes that Americans have a higher standard of living, and this is precisely due to the free market, rugged individualism, and more relaxed enforcement of regulations that those who question the ethics of the free market rail against. Caplan uses the example of labor regulation enforcement as reasoning for the lower unemployment rate. In terms of the letter of the law, the same things were illegal in the U.S. and in Canada: it’s illegal to fire someone for trying to organize a union…in Canada…it’s very easy for him to get his case in court, it doesn’t take very long, usually the court rules in favor of the person who’s complaining, and he gets very good compensation, gets reinstated in his job, etc. In the U.S., even though the law is exactly the same, it takes a lot longer in order to actually get your case before the board, the board very often rules against you, and if they do rule in your favor, all you get is the difference between the earnings you made during the period and the earnings that you would have had if you stayed in the job…if you found another job the day that he fired you, he owes you nothing. This prompts Roberts to ask an excellent question: What if Europeans just value security and stability over economic change and rugged individualism? But Caplan pushes back. No, it’s just the illusion of security. If you are lucky enough to currently have a job you have more security than you do in the United States. Although if you eventually lose your job it’s going to be very hard to find another job, but more importantly, there are alot of people who don’t have jobs who would like to get them, and they are securely unemployed.   What can be taken from Caplan’s arguments in this episode? First, the free market punishes discrimination due to the large added cost and the reality of human difference. This will eventually lead to market discrimination to go extinct as discriminatory firms have less of an ability to compete with the lower prices and higher quality products and service of non-discriminatory ones. The market can create a positive feedback loop where previously discriminatory people begin to question their own discrimination because of the success of non-discriminatory individuals. There’s even more reason to believe that the market has this ability due to the historical evidence of government intervention attempting to stop the non-discriminatory effects of the market, such as minimum wage laws, and vagrancy and enticement bans in the Jim Crow South. The ethical nature of the market extends to debates over the European and American economic systems. The American focus on individualism, less strictly enforced restrictions, and a generally freer market has not only led to a lower unemployment rate, higher standard of living, and more robust job growth, but also leads to more human happiness.   While listening to this episode I had a few questions. We hope you’ll take a few moments to share your thoughts as well. 1- While free markets tend to reduce dissemination, are the cases in which it won’t? For example, what if discrimination is culturally enforced to the point where employers and consumers value discrimination over profit? Could this cause discrimination to escalate to the point where the market causes it to grow? Caplan states that the success of less discriminatory people could convince discriminatory people to question their own views. Couldn’t the economic success of less discriminatory people have the opposite effect? could this lead to stereotyping and social stratification leading discriminatory people to fall deeper into discriminatory views? What if the population being discriminated against is small enough to the point where the costs of discrimination are significantly less? How long will it take for discrimination to disappear in this environment?   2- When market discrimination in the context of racial and gender-based disparities is discussed it’s often explored in the context of individual racism or sexism as opposed to systemic discrimination and cultural factors. The problem with this is the misunderstanding of institutional or cultural discrimination; black Americans earn less than white Americans on net due to the concentration of poverty, crime, and poor education due to the historical effects of slavery, urban renewal, and housing discrimination. That being said, there is some evidence for individual racism such as the Emily and Greg vs Lakisha and Jamal callbacks study, if a minor factor behind the racial mobility gap. Why is individual discrimination so often highlighted as the reason behind socioeconomic racial gaps in discrimination as opposed to institutional discrimination? Can a spread of this view lead to an inability to solve the problem of limited economic opportunity and mobility among black Americans?   3- The government policy failures in “solving” discrimination that Roberts and Caplan referenced seem conclusive, but are there alternatives that might be more effective? For example, how might more government involvement fare in solving institutional racism, such as expanding SNAP benefits, baby bonds or public option healthcare, childcare, and paid family leave? How about more classically liberal solutions such as removing zoning laws, increasing competition among schools, or reforming welfare programs to encourage savings? Explain.   4- It’s a common argument among libertarians that discrimination shouldn’t be outlawed due to freedom of association. Why should discriminated against groups be forced to wait for the market to reduce discrimination enough to where they can participate in society at the level of those discriminating against them? Why does the freedom of association for discriminatory people outweigh the rights of discriminated against people?   Kevin Lavery is a student at Western Carolina University studying economic analysis and political science and was a 2023 Summer Scholar at Liberty Fund. (0 COMMENTS)

TL/DR: Not quite, but it’s getting there. Starting in 2016, protectionism (that is, using tariffs or other restrictions on international trade to “protect” domestic industries) came back in vogue.  This trend was supercharged during the COVID-19 pandemic as lockdowns and price controls led to shortages of many goods.  Protectionists pointed to these shortages as proof that globalization has weakened supply chains and protectionism is thus needed.  Elsewhere, I have argued why this claim is incorrect empirically and theoretically (Part 1 and Part 2).  Here, I want to do a different exploration. While economists almost unanimously argue that free trade is a 1st-best option and that any protectionist measures are exceptions rather than rules, protectionists tend to claim the opposite.  They will often argue that free trade weakens domestic firms, makes one vulnerable to supply chain disruptions, and potentially slaves to the whims of trading partners.  In an extreme sense, some protectionists even argue that free trade constitutes the reduction or removal of sovereignty of a country.  Thus, protectionism is the 1st-best (ideally autarky) and a nation should only trade for goods it cannot produce domestically.   For the purposes of this post, I will take the protectionist argument as correct (to be clear, the evidence is overwhelming that the protectionist position is incorrect.  But, for the sake of argument, we are taking it correct).  Thus, ab initio, protectionism is preferable to free trade. Rarely, however, are we in an initial state.  We are not at time point T0 but rather time point Tn.  Consequently, we need to consider the current state of the world rather than some idealized state-of-nature starting point.  We need to take into account current arrangements, laws, customs, attitudes, etc.  Under this framework, what is ideal ab initio may not be ideal or even improving currently. For example, I am reminded of the frequent pseudo-noir narrative trope: “It was 5PM on a Friday night and I already had three shots in me: two were Jack and one was an old .38 slug the doc never fished out.”  The ideal number of bullets in one’s body is 0.  However, after one has been shot, it may not always be ideal or wise to remove the bullet.  Removing it could do more harm than good.   To keep the analogy going, given our assumptions, free trade is like getting shot: it’s not ideal.  But, in 2016, the world had already been “shot.”  Since the end of World War 2, international trade has become increasingly significant around the world.  Vertical specialization has become a vital part of international trade.  Vertical specialization is where different inputs (intermediate goods) are produced all over the world and assembled in one spot.  For example, an iPhone may be “made in China,” but that is just the final assembly.  It has parts from Germany, Taiwan, the US, and all over the world.  Indeed, Dartmouth economist Doug Irwin reports estimates that about half of the US growth in trade since the 60s, and 1/3rd of the world growth in trade since the 70s, is due to vertical specialization (Free Trade Under Fire, 5th edition, page 18n10).   Protectionists point to this vertical specialization as the problem and aim to “remove” that particular “bullet” from the “body.”  But has that worked?  Numerous studies have shown that, no, protectionism has caused more harm than good.  Just some evidence: Amiti et al estimate that the tariffs imposed by Trump have reduced net American income by about $1.4 billion per month since going into effect.  IBIS World Reports report that US iron and steel manufacturing employment is down by about 0.5% since the steel tariffs went into effect.  The same company estimates washer and dryer manufacturing employment is down 4.2%.  The US trade deficit continued to increase.  In short, the protectionist policies made the country worse off and didn’t accomplish their stated goals (for a fuller survey of the evidence, see Chapter 2 of the aforementioned Free Trade Under Fire.  It’s approximately 50 pages of studies finding protectionism harms economic growth). Back to my original question: is protectionism a dead letter?  In many cases: yes, it is.  By its own goals, protectionism has failed.  The window seems to have slammed shut on protectionism.  Looking at the world as it currently is as opposed to some idealized state-of-nature, protectionism is causing harm.  But, for reasons Edwin van de Haar discusses in his excellent 2023 book Human Nature & World Affairs: An Introduction to Classical Liberalism and International Relations Theory, I am not willing to shut the door on protectionism for national defense reasons.  That justification still needs to be treated carefully for reasons I discussed in a still-relevant 2018 EconLib article, but it seems to be the only case currently where protectionism can potentially be good (for a particularly silly example of national defense justification gone too far, check out Sen. Rick Scott’s call for garlic to be tariffed on national defense grounds).   Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

Discrimination against certain categories of individuals on the basis of bodily features seems so tribal, inefficient, and bigoted that I have caught myself thinking that laws against such discrimination might be acceptable after all. The case of Harvard University president Claudine Gay and the events she has been associated with, however, bring into focus the danger of this course of conduct: forgetting that discrimination in favor of some group is ipso facto discrimination against some other group. A Wall Street Journal column by Jason Riley suggests that Ms. Gay owes her prestigious job in large part to her race, her DEI (“Diversity, equity, and inclusion)” activism, and her progressive ideology. (“Why Harvard Can’t Fire Claudine Gay,” December 19; see also “As Pressure on Harvard President Increases, University Board Feels the Squeeze,” Wall Street Journal, December 23, 2024). Somebody more competent, more scholarly, and less activist, would likely have got the job were it not for the discrimination practiced at Harvard. Even assuming that this is not true, the stain of discrimination to combat discrimination would remain. Under the excuse of fighting racial and “gender” discrimination, as well as discrimination against any “marginalized group” that gets on the victimization bandwagon,  a faction of our society has anointed itself (to use a synecdoche) with the mission of governing others, that is (in the sense of Anthony de Jasay) of harming others’ lifestyles and opportunities in the pursuit of their own contentment and interests. The complicity of governments over the last several decades has been crucial to this enterprise: without their direct and indirect support and subsidies (including to institutions of higher education), it is doubtful that the current tsunami of tribalism, ignorance, and bigotry could have spread so rapidly and so widely. We now see how attempts at politically—that is, coercively—solving problems of bigoted discrimination are likely to result in a new sort of bien-pensant and quasi-official discrimination, including against those with wrong opinions. The main problem with anti-discrimination laws is that they translate into discrimination mandates. In the jungle thus created, politicians on the other side react by proposing their own discrimination in favor of their own clienteles. Despite many historical failures at protecting individual liberty in more rather than less free societies, diversity has always been crushed incomparably more harshly in unfree societies. The slogan “Queers for Palestine” would be rather funny were it not for its tragic naivety (see Billy Binion, “The Contradictions of ‘Queers for Palestine’,” Reason Magazine, October 27, 2023).  Activists who witchhunt “micro-aggressions,” even if non-violent, unintentional, and unconsequential, blamed a savage and bloody aggression against Israelis, including women and children, on the latter’s government. The outing of the DEI fraud inspired a Wall Street Journal editorial titled “The DEI Rollback of 2023” (December 26). DEI appears to be a slogan for intimidation, uniformity, and submission in any dimension other than sex and (certain) skin colors. A major contribution of political economy is to help analyze how the opinions and actions of politicians, bureaucrats, naïve ideologues, and benevolent authoritarians do not lead to nirvana. It is not by mere happenstance that economist John Stuart Mill could, more than half a century ago, write such powerful books as On Liberty (1859) and The Subjection of Women (1869)—the latter being a rational critique of real, government-supported discrimination. (0 COMMENTS)

The video of my second OLLI talk on Adam Smith, in which I focus on The Wealth of Nations, is here. A fair number of highlights. 2:45: First sentence of WN is a zinger on the division of labor. 3:24: Pin factory. 4:58: Why division of labor works. 6:58: Propensity to truck, barter, and exchange. 7:58: Dogs don’t trade bones with other dogs. 8:34: We need the cooperation and assistant of great multitudes. 9:34: The most famous quote from WN. 10:20: Smith on mercantilism. 11:58: Wealth does not consist of money. 12:15: Gold and silver are like kitchen utensils. 12:50: Balance of trade. 15:00: Invisible hand. 17:00: George Stigler’s clever remark. 17:50: Smith on industrial policy. 21:00: Smith on protectionism. 23:04: Smith on free trade. 23:44: Producing wine in Scotland. 26:00: Corn laws and Irish famine. 27:49: Retaliatory tariffs and the “chicken tax.” 30:00: Transition costs in move to free trade. 32:05: Smith discovers the Laffer Curve. 35:40: Smith on collusion: what gets left out of quote. 37:00: Electrical equipment conspiracy. 38:27: Inequality. First, in free economy; second and more important, due to government regulaiton. 42:08: Trickle down on the consumer side. 45:40: Smith on British imperialism. 47:20: Colonies are an economic loser. 48:20: Should Britain give up the colonies voluntarily? 48:50: Who will win the American Revolution? (Someone yelled out “spoiler alert,” but this didn’t make it on to the recording. 49:50: Smith on slavery. 52:05: Smith’s 3 functions of government. 53:28: Smith’s first maxim of taxation. 54:25: Smith on universities. 57:40: Smith on lotteries. 58:40: Smith on deregulation. Then to Q&A. 59:40: East India Company. 1:01:15: Biden on Ukraine spending on U.S. arms. What would Smith say about Biden’s argument? 1:03:25: Would Smith have favored intervention to establish “orderly markets?” 1:04:15: How did Smith reconcile his Christianity with self-interest? 1:05:00: Smith and national security. 1:05:50: PPE during pandemic. 1:06:20: Should we get rid of tenure? (0 COMMENTS)

David Beckworth did a podcast with Tyler Cowen, and there was an extensive discussion of recent Fed policy.  Here’s one interesting comment: Cowen: We did as well as we did coming out of 2008-2009 because of that work. Probably, we should have done more, as you and others have argued, but I give them a lot of credit for that. And I think next time around, if we have a crash like that crash, we will do more and tolerate a 4% inflation rate in a way that we didn’t in 2009, and things will be much better. That’s when the real payoff of what Scott has done and you have done, Bennett McCallum earlier, and others, next time around we’re going to say that we can live with 4% inflation, we can get it back down later on in a painless enough way, and in the situation like the next 2009, we’re going to do better. I strongly believe that. And all of the Fed talk in the meantime, it’s Straussian. The real question [is], would Congress put up with the Fed doing 4% inflation next time around? I think it’s yes. After mid-2008, the recession of 2008-09 was an aggregate demand shock—a severe decline in nominal spending.  If the Fed were to do NGDP level targeting during that sort of crisis, then you would not even need 4% inflation.  Most of the excess NGDP growth during the recovery period would show up as real growth, not inflation. [Technically, the recession began in December 2007, and there was high inflation during the first 6 months of 2008 due to rising commodity prices.  But the deep slump began in mid-2008, and was caused by a negative demand shock with falling prices.] In addition, I’d argue that a repeat of 2008-09 would only happen in if Fed policy had no credibility.  But in that case the make-up policy would likely be ineffective, just as in 2009.  The point of level targeting is not to get a quick recovery when there’s a deep slump, the point is to prevent a deep slump. (Covid was one of those once in a century exceptions, when a deep slump was inevitable.  But Covid is not a good example to think about when designing a system.) When I make this argument people ask me “OK, but what if there is a deep slump, what then?”  It’s clear to me that they don’t really believe level targeting will work.  My answer is that you try to get back to the trend line if you’ve announced that as your policy, but I honestly don’t think it would work in that case.  If markets don’t expect success, why should I?  If an NGDP futures market showed a big drop in future expected NGDP, then you’d try to reverse that.  But the market forecast already incorporates the likely policy response.  So if markets are pessimistic then I’m also very pessimistic, even if the Fed claims to be following my preferred policy. I thought the Fed had adopted average inflation targeting back in 2020.  The markets saw through those claims before I did, and of course the markets were correct. Cowen: Scott himself has said that it’s the worst time to have nominal GDP rules. In a pandemic, I think all rules get tossed out the window, whether or not they should be, they probably should be, but they will be. Then your price data… So, if I wanted to see a movie in May 2020, is the price infinite? Is the price still $14? That’s quite arbitrary. So, how you define the price indices for services, to me, becomes arbitrary. Nominal GDP targeting just becomes seat of the pants, which to be clear I’m fine with, but it’s not really nominal GDP targeting, because the quality of the price data is gone. I’m confused by this.  If movie theaters are shut down and price data is ambiguous, that’s a stronger argument for NGDP targeting.  During Covid, the price of movies was ambiguous, but the contribution of movie theaters to NGDP was precisely zero.  One reason that NGDP is superior to inflation is that NGDP is a relatively clear concept, whereas the price level is a very vague concept that’s never been adequately defined. It’s true that I didn’t think it made sense to maintain steady NGDP growth during the shutdown, but there’d be no problem in continuing to target one or two-year forward NGDP along a 4% trend line during a pandemic.  And as a practical matter, it’s impossible to stabilize “spot NGDP”, so NGDP targeting has always been about stabilizing future expected NGDP.  The only thing that changes during a pandemic is that you might briefly wish to target NGDP a bit further out (say two years instead of one.)  If the Fed had done so, we would have avoided the inflation fiasco of 2021-22.  With 4% NGDP level targeting, inflation would have averaged 2% during 2019-23, even if headline inflation briefly reached 4% or 5% for a few months in 2022. So perhaps once every 100 years there’s a shock that leads the central bank to target two year forward NGDP instead of one year forward NGDP.  That’s doesn’t seem like a large concession. Cowen: I don’t think that we can have a Fed bound by rules, as much as I would like to do that. The old Carl Schmitt idea, “he who is sovereign decides the exception.” I just don’t think you’re going to get around that. I don’t think the Fed would ever accept rules or recommend them to Congress. What you want is a Fed imbued with NGDP ideology, that at critical key moments in history, is willing to take some chances in the right direction. We got that. We’ve won, maybe temporarily, but for now- I’m not sure what Tyler means by a “NGDP ideology”, but it can’t be anything like NGDP level targeting.  The Fed followed up a disastrous NGDP shortfall in 2008-09 with a wildly excessive level of NGDP growth in 2021-23, with no attempt to revert to the previous trend line.  So I’m not sure who has “won”, but it clearly is not market monetarists. In case this post sounds too grouchy, I do recognize that the Fed now has a better understanding of the need for make-up policy.  But being half way to enlightenment is very dangerous when an institution has a lot of discretionary authority and is subject to political pressure. I added an update to my recent post entitled Nemo judex in causa sua, where I linked to a book by Peter Boettke, Alexander Salter and Daniel Smith.  They do an excellent job showing the dangers of discretionary policy.  Tyler might be correct that discretionary policies are inevitable.  But in that case, there’s no reason to be optimistic about future Fed policy. (0 COMMENTS)