“The more you practice the art of thankfulness, the more you have to be thankful for.” –Norman Vincent Peale Here’s a Thanksgiving message from my 2001 book, The Joy of Freedom: An Economist’s Odyssey, from a chapter titled “The Joy of Capitalism.” I pointed out in Chapter 1 that British author Thomas Carlyle called economics “the dismal science” because the free-market economists around him were strongly opposed to slavery. For me, economics is the joyous science. I started off believing in economic freedom (sometimes called capitalism) as a moral imperative, as something that should exist because it is the only system in which people deal with each other on the basis of choice rather than on the basis of force. But the more I learned about economics, the more I saw that economic freedom was also enormously practical, that it delivered the goods better than any other system, and not just better, but incredibly better. Capitalism’s incredible productivity wasn’t so easy for me to appreciate when I was in my teens and my early 20s. This was so for two reasons. First, starting at age 16, I was on my own financially and lived on a shoestring budget until I got my first full-time academic job as an assistant professor at age 24. Second, and more important, I was incredibly ignorant of economic history. Most of the history I learned in school was of the “who fought what war when and for what four reasons” variety. I learned very little about the day-to-day lives of ordinary people centuries ago. In the last 20 years, though, I have found it easier and easier to appreciate capitalism. That’s in part because my income, adjusted for inflation, has risen a lot. But it’s also because the awesome technological revolution that has been going on around us has increased virtually everyone’s real income–even those people whose incomes, adjusted for the government’s faulty inflation measure, have been stagnant. Think of what we can do nowadays, even those of us with modest incomes. If we miss a movie when it’s in the theatres, we don’t have to wait, the way we used to, until either it comes around again (unlikely) or is shown, years later, on TV, interrupted by ads and missing some of the best parts courtesy of network “censors.” Instead, we can see the uncut version at our convenience on a video recorder [DRH note: remember that I wrote this in 2001]  that costs less than the earnings from three days of work at the minimum wage. We can rent the movie for a price that is often less than half of what we would have had to pay to see it on the big screen. I know we often take this for granted. One of the joys of capitalism is that we can take its awesome productivity for granted. But it’s good, every once in a while, to have some wonder about the many things that are wonderful. A lot of “wonder robbers” out there think it’s not “cool” to have wonder. But don’t ever let anyone rob you of your sense of wonder. If you’ve already lost it, here’s your chance to reclaim it. Happy Thanksgiving to you all. I wrote this as a blog post in 2015. My daughter arrived home from San Francisco this morning and we had a nice Thanksgiving dinner in the early afternoon. At the start of the meal, she suggested that we each say 3 things we’re thankful for. I went first. The first 2 were easy: I’m thankful for her and my wife. I pondered slightly before naming the third. Then I said, “For all this country’s faults–and there are many–I’m thankful for living in the United States.” It’s still one of the freest and most dynamic countries in the world. (0 COMMENTS)

For-profit and non-profit entities share a similar trait in that both can report revenues exceeding costs over a particular time interval, a phenomenon that is also observed when governments run surpluses. In this sense, each of these institutions earns “profits” in the conventional sense of monetary income exceeding expenditures. However, a closer examination of their organizational structures and objectives reveals important differences between for-profit and non-profit enterprises. The distinction centers around the concept of owner’s equity and the differing goals these entities pursue. Public for-profit organizations have their operations grounded in the principle of equity maximization. Every investment decision, strategic initiative, and operational move aims to enhance the company’s value on some level, at least in theory. While quarterly earnings are undoubtedly a focus, accruing more assets than liabilities, and increasing this difference over time at an exponential rate, is the more important goal. While there are a variety of ways to assess the worth of a company, the value of a firm ultimately lies in its equity base. For good reason then, management of public for-profit firms focus on maximizing the return to this equity capital, while private for-profit firms typically have similar aims (though the goal may be less explicit and there is more room for other goals to take priority). By comparison, non-profits operate in an environment typically devoid of equity. They work in a cycle of raising funds and then deploying them. The absence of equity means there’s no organizational value that accumulates over time other than perhaps in terms of brand. Thus, when a non-profit generates a surplus, that surplus typically gets channeled toward some aspect of the non-profit’s mission or toward employee compensation. A subset of non-profits, those with endowments, stand out as similar in some respects to for-profit ventures. However, the goal of growing an endowment and the goal of pursuing the mission of the non-profit are typically dealt with independently. Regardless, retained earnings, invested in an endowment, can build organizational “capital” as invested assets finance other productive sectors and grow in value.  Raising money is also an important role of non-profits. Moreover, just as employees working for a for-profit company are rewarded with salary increases and bonuses, so too are non-profit employees. This means that financial incentives apply in the non-profit space, perhaps just as strongly as with for-profits. By extension, both for-profit and non-profit workers are open to the temptations of “greed.”  Problematically, non-profits typically lack of as clear an objective as “shareholder value maximization.” To offer a few examples, the United Nations’ goal is to maintain international peace and security, while the World Wildlife Fund’s mission is to conserve nature and reduce threats to biodiversity. Having less objective measures of success and less clear ways of identifying the non-profit’s marginal impact exposes non-profits to risks such as mission creep and the misuse of donor funds. The perpetual need to raise money can also result in a deviation from core objectives.  This does not make non-profit activity not worth pursuing. It does make them less efficient in general. Non-profits’ job is typically harder, their influence less easy to measure, and their opportunities to make a positive difference usually rarer, compared to their for-profit counterparts.  Due to these difficulties, the aspiration of many non-profit workers and government employees should be to effectuate a significant change or implement a critical policy that more than justifies one’s entire tenure or career from a social value perspective. Non-profit employee pay and activities often constitute social waste over any particular short-term interval, but this need not be the case over the long haul. For example, a single government employee having an innovative idea on a billion-dollar regulation could produce benefits that far outweigh the cumulative lifetime salary of that official. Marginal shifts like these, when affecting large magnitudes, may be the primary way individuals in the non-profit sector have a positive impact. Revenue generation and expenditures, budget management, and salary and bonus disbursements, are all shared activities across the for-profit and non-profit spaces. Thus, non-profits are incentivized by price signals and guided by them to an extent just as for-profits are. But the end destinations are different. For-profits aim to create value by growing a company’s equity base or distributing profits to be reinvested elsewhere. Non-profits typically don’t grow equity as such. Their value is intrinsically tied to their mission and the broader societal impact they achieve. Without a doubt, many non-profit ventures are worthwhile, but they face distinct challenges compared to for-profits, both with respect to achieving their goals as well as maintaining dedication to their missions.   James Broughel is a Senior Fellow at the Competitive Enterprise Institute with a focus on innovation and dynamism.  (0 COMMENTS)

The following tweet caught my eye:I once wrote an entire book on the causes of the Great Depression, focusing on the role of the interwar gold standard and FDR’s labor market policies.  In doing this research, I discovered that the question of causation is quite tricky.  One can look for proximate causes, such as bad macroeconomic policy, or deeper causes, such as institutional failures.  (In theory, a depression might also be caused by a natural phenomenon such as a plague or drought, but that was not the case with the Great Depression.  It was clearly a human created problem.)  Although we do not precisely know all of the factors that caused the Great Depression, we have a pretty good idea as to which hypotheses are not helpful. Many people associated the stock market crash with the Depression due to the fact that it occurred at about the time it became apparent we were sliding into a deep slump.  Note that I said “became apparent”; the Depression actually began a few months before the crash.  In October 1987, we had a nice test of the theory that the stock crash was a causal element in the Depression.  A crash of almost equal size occurred at almost exactly the same time of year, after a long economic expansion.  Many pundits expected a depression, or at least a recession.  Instead, the 1987 stock market crash was followed by a booming economy in 1988 and 1989. Of course it’s possible to explain some difference in outcome to other factors at play, but when the difference is this dramatic (booming economy vs. the greatest depression in modern history), one has to wonder whether the hypothesis is of any value at all.  The same is true of the inequality/underconsumption hypothesis.  Over the last 45 years, we’ve seen an interesting test of this theory.  China has experienced a huge increase in economic inequality.  More importantly, it has seen some of the lowest levels of consumption (as a share of GDP) ever observed.  Even lower than other fast growing East Asian economies such as South Korea.  Pundits have claimed that China’s consumption levels are too low, and that too many resources are being devoted to investment in areas of dubious merit.   That may all be true.  Perhaps China should invest less and consume more.  But it’s also clear that low levels of consumption in China have not caused a Great Depression.  Indeed China’s had one of the fastest growing economies in the world since 1978. Again, what impresses me about these two counterexamples (the US in 1987-89 and China since 1978) is not that things didn’t play out exactly as the historians might have expected based on their theory of the Great Depression.  Rather what impresses me is that the results were almost 180 degrees removed from what might have been expected.  That tells me that theories that stock market crashes and underconsumption cause depressions are essentially useless.  They are ad hoc explanations with no real supporting economic theory and no predictive power.  Why should a stock market crash cause 25% of workers to stop working?  What is the mechanism?  Why should high levels of investment cause real GDP to decline by 30% over 4 years?  What is the mechanism?  If they have no theoretical support and no predictive power, then why should we care what historians believe?  If you get creative enough you could find a causal mechanism running through aggregate demand.  But then why not argue that a decline in aggregate demand caused the Great Depression?  After all, that’s what actually did happen. You might say that it’s important to know the cause of the Great Depression.  But why?  If the theories offered by historians provide no help in understanding the modern world, then how are they of any use? More broadly, I distrust all theories of economic causation developed by non-economists (not just historians).  These theories tend to rely on “common sense”.  Thus many average people think that countries are rich because they are big, or because they have lots of natural resources.  (Perhaps because that theory sort of fits the US.)  But looking more broadly, rich countries don’t tend to be places with large populations or high levels of natural resources.  They tend to be smaller countries in East Asia and Western Europe.  The actual (institutional) factors that explain the varying wealth of nations are much harder to see, and hence tend to be ignored by non-economists. (0 COMMENTS)

George Shultz, secretary of state in the early 1980s, was also a first-rate economist. As a good economist, he put out a press release showing how little the average taxpaying household paid for aid to El Salvador. As I recall, it was about $34. (I can’t find a source.) Shultz seemed to think that $34 was a small number. But he quit talking about it pretty quickly. My guess is that he got a lot of feedback from average Americans expressing outrage at paying $34 a year for something that they valued less than that. Steven E. Rhoads, in The Economist’s View of the World, points out what seems to be a constant in opinion polls. When people are asked whether they want the government to do something, a majority says yes. But if they are asked whether they want the government to do that same thing if it means their taxes will increase, that majority shrinks to a minority. There’s a lesson here: If you want to make a case against a government program or an increased government expenditure, tell people what that will cost an average family. This is from David R. Henderson, “How Much Does $100 Billion in Federal Spending Cost You?” TaxBytes, Institute for Policy Innovation, November 22, 2023. Another excerpt: You might not be average. Based on a Tax Foundation study using 2019 data, I calculated high-income households, those in the top 20 percent of the income distribution, paid about 65 percent of all the tax revenue the feds collected. To be in the top quintile that year, you needed to have an income of $125,748 or more. Assume for simplicity that these numbers, adjusted for inflation, are about the same today. Also, I’ll assume, even though I know it’s false, that this $100 billion will be paid entirely out of taxes rather than new debt. It’s not as bad an assumption as it looks. To the extent it’s paid out of new debt and to the extent future taxes pay off that debt, based on a progressive tax structure such as the one we have now, it’s a pretty good assumption. So, the top quintile would pay 65 percent of $100 billion, which is $65 billion. That works out to $2,481 per top-quintile family. Read the whole thing, which is not long. I’ve actually quoted over half of it here. Caveat: There are a lot of people in the top quintile whose share of the $100 billion is well below $2,481, probably more like $1,500 to $1,800. The reason is that the $2,481 is an average and that average is high because of people in the top 5% who are paying much more than $2,481. Unfortunately, with the tight word constraint I’m given at IPI, I didn’t have room for that caveat.   (0 COMMENTS)

There are many ways to learn the ideas of economics. One way is through the standard method – read textbooks or attend lectures where ideas are described. But economics is about human action – which means the lessons of economics can also be found in our own lives. Some people claim that basic econ is often counterintuitive, and it indeed may be to some or most people. But as I began to study economics many years ago, I found its lessons extremely intuitive, because the ideas being described were things I had witnessed or experienced throughout my life.  For example, I found it very easy to envision all the ways people adjust their behavior in response to taxes. I grew up in Washington state, very close to the border with Oregon. There were two big tax differences between those states. (Well, probably more than two, but there were two I cared about at that time.) Oregon had a state income tax, while Washington did not. And Washington had a state sales tax, while Oregon did not.  Both of those were often cited as factors in decisions people would make. As people started getting jobs, it was common to find opportunities that were similarly appealing and equidistant, some in Washington and some just over the river in Oregon. When that happened, people would heavily favor finding a job in Washington, because if you worked in Oregon you had to pay Oregon state income tax, even if you weren’t an Oregon resident. (But even though you were an Oregon taxpayer, you were unable to cast any votes in Oregon – taxation without representation!) But it didn’t work in the other direction – friends I had in Portland didn’t feel any extra incentive to find a Washington job, because even if they worked in Washington, they would still have to pay Oregon state income tax.  However, the sales tax difference made a much more frequent impact. Washington’s sales tax in those days was, if memory serves, around 7.7%. This made it very common for people in Washington to put a little extra effort into driving to Oregon to make a purchase, particularly if it was a large purchase. If you needed to buy a new TV or a new couch, why would you voluntarily choose to pay what amounted to an unnecessary 7.7% surcharge on top of your already expensive purchase? I’m sure that over the years, retailers along the border in Washington lost a considerable number of sales to retailers just along the Oregon border, precisely because people would adjust their behavior in response to taxes.  But at the same time, the sales tax issue wasn’t decisive. If you were going to buy a new TV for a thousand dollars, if often made sense to take the extra ten minutes to drive over the Columbia River and buy it in Oregon to save nearly eighty dollars in sales tax. But if you just needed to make a small purchase, the extra time and gas costs of the longer drive meant it wasn’t worth doing to avoid the 7.7% tax rate. And the further you lived from the Oregon border, the larger a purchase would have to be in order to make you willing to do the longer drive in order to save on sales tax. Though I didn’t know the term at the time, this showed me the importance of transaction costs in our decision making. The choice you will make will be in part influenced by the fact that the choice itself carries its own cost.  One other difference between Oregon and Washington gave me a healthy skepticism of “but it creates jobs!” as a justification for some program or regulation. While I lived in the area, and until very recently, it was illegal for you to pump your own gas in Oregon. By law, you would have to hand your cash or credit card to a gas station employee and have him pump your gas for you. I absolutely hated the experience, because it just slowed the whole process down. It was very common to get to a gas station with eight pumps and only two attendants and have to wait several minutes for one to work his way over to you, tell him you wanted to fill the tank, hand him your card, and have him start filling your tank. Meanwhile he’d wander off to another vehicle, your car would finish filling up, and you’d still be left waiting several more minutes before he got back and put the nozzle away and returned your credit card so you could be on your way. Nothing was more productive as a result of these jobs existing – the whole process just became slower and more time consuming. This made it very intuitive for me to see why economists focus on production, not employment. It’s not about how many people are doing stuff, what really matters is how much stuff gets done. Using more people to achieve the same level of production (or less) isn’t how progress is made. What about you, EconLog readers? Are there any ideas in economics you learned about and immediately recognized from your own life experience? If so, drop some comments sharing what those ideas where, and where in life you saw them in action.  (0 COMMENTS)

I take political power to mean the organized use of force (violence or threat of violence) to coordinate individual actions in society. Anarchy is the absence of political power or, in Anthony de Jasay’s terms, coordination by voluntary agreement and contract instead of command. An intermediate system is coordination by tribal customs. Here is a brief overview of what we know with a high degree of confidence. (When I say “we,” I mean individuals who share a similar liberal or libertarian philosophy and political economy as I adhere to.) I will also recommend a few books, most of which are not technical (although all use economic concepts and reasoning), for those who want to push their understanding further. My first recommendation is a delicious little book that uses the triad command-contract-customs to explain economic history: John Hicks, A Theory of Economic History. Hicks was the laureate of the 1972 Nobel Prize in Economic Sciences. On the one hand, it appears that political power is useful in certain circumstances or for certain purposes. A defensive war against a worse state is the paradigmatic example. Enforcement of contracts and protection against domestic violence (violence within one’s society) may also require political power. To the extent that, as Friedrich Hayek and James Buchanan (two other Nobel economists) believe, the state (centralized political power) is necessary for the maintenance of a free society, it represents a useful institution. (See James Buchanan, The Limits of Liberty: Between Anarchy and Leviathan; and Friedrich Hayek, Law, Legislation, and Liberty, Vol. 3: The Political Order of a Free People.) On the other hand, we know that political power is very dangerous. Not only the functions I just mentioned may require more state intervention than many (classical) liberals and certainly many libertarians would like, but the state naturally tends to grow. The public-choice school of economics, inspired by James Buchanan (another Nobel laureate), Gordon Tullock and their collaborators, not to mention modern history, has shown that it is not easy to effectively constrain even a democratic state. In The State, Anthony de Jasay developed what is perhaps the most striking and persuasive theory of the process: political competition leads the rulers and would-be rulers to bid up bribes for their respective political clienteles, who express more and more demands and are more and more dissatisfied. The expected end result is the Plantation State, where the supposed citizens are in fact under the total control of the state. Western societies have been drifting in that direction for more than a century. Most of the rest of the world was already there, or close to there given the rulers’ lack of resources. Determining when the costs of political power are higher than its benefits is a mission impossible for welfare economics or cost-benefit analysis. One way around this impossibility is a conceptual social contract to which each individual agrees, thereby guaranteeing that the benefits of the package are greater than the costs for each individual. A more technical book on this is James Buchanan and Gordon Tullock, The Calculus of Consent. I mention a possible convergence with the work of Friedrich Hayek in my review of Geoffrey Brennan and James Buchanan’s The Reason of Rules: Constitutional Political Economy. We also have serious theories suggesting that anarchy—social cooperation by voluntary cooperation instead of coercion—could work well if it is really founded on individual liberty as opposed to the Marxist dream of material equality. Under anarchy, the state could not impose on everybody its conception of what its rulers think is “socially optimal.” From Adam Smith’s The Wealth of Nations, we learned that an autoregulated order is possible as well as efficient in the sense that it greatly increases prosperity and individual opportunities. We observed that this sort of social order is not undermined, but reinforced, by free individual choices in matters of religion, books, lifestyles, trade, etc. There are reasons to believe that contract can substitute for command in all domains of life—as shown, for example, by David Friedman’s The Machinery of Freedom. Many of de Jasay’s collections of articles bear on this topic, as well as his more technical (and perhaps less decisive) Social Contract, Free Ride. Not only can anarchy theoretically provide more prosperity, but a total substitution of contract to command (or customs) also seems morally superior. See, among other books, Michael Huemer’s The Problem of Political Authority; Robert Nozick’s  Anarchy, State, and Utopia is also very useful (but more technical) even if it stops short of total anarchy. Murray Rothbard’s For a New Liberty: The Libertarian Manifesto provides a simple introduction but, I think, too simple; it may still be a good antidote if not a salutary electro-shock against all the simplistic or non-examined intuitions lying around. Yet, we know that anarchy in the sense of the absolute supremacy of free and voluntary cooperation is an untested formula. Mankind’s experience with no organized political power resulted in stifling tribal customs instead of the reign of individual choice and voluntary interaction; I touch on this idea in my review of de Jasay’s Social Justice and the Indian Rope Trick. It is virtually certain that an anarchist experiment hic and nunc, with a population that has learned to depend on political commands and to glorify political leaders, would end up with a breakdown of social order and the ultimate welcoming of tyrants. Whatever degree of anarchy is possible will, at best, be achieved over a long-term horizon, by gradually chipping away at state power. Although this is banal to say, this project requires teaching our fellow humans to think differently about political power and liberty. (0 COMMENTS)

Yes, that wasn’t real socialism, and today’s foolishness. The foolishness of history was that so many people, including many great economists, were misled into believing the Soviet Union was genuinely socialist- a planned economy. Today’s foolishness is that so many people believe either that our interventionist economies are pure market economies or socialist economies. “The idea of Socialism is at once grandiose and simple“, remarked perhaps the greatest critic of socialism. The enticing greatness and the seductive boldness of a planned economy, that not only offers us unprecedented wealth but also overcomes alienation and creates a formidably just society, attracts those who fight for a better world. The idea of socialism is so great, however, that even its most learned critics have, at times, been deceived by those creating a façade of socialism. Socialism is not „when the government does stuff“, nor is it when the government does a lot of stuff. Socialism denotes a specific economic system: one in which there is a single decision-making centre that plans the entire economy, from end to beginning. There are no independently acting entrepreneurs. It is a monocentric, and not a polycentric system, as Paul Craig Roberts has stressed. And this is where its purported greatness comes from. There is no longer anarchy. However, this presupposes that it’s all according to one plan. The „foolishness of history“, to which this blog entry’s title alludes, are words that Michael Polanyi used when describing a curious phenomenon: he described that the Soviet Union, to many the main torchbearer of socialism, was in no sense a planned economy, and therefore, in its truest sense, not a socialist system – but still, many believed it was If socialism means there is someone who plans the economy, then the Soviet Union was not a planned economy, except, perhaps, for the one attempt in late 1920. Disregarding this attempt, there were substantial black markets throughout the Soviet Union’s existence. And, more importantly, the economic system was not centrally planned, but relied on countless different decision-makers, creating a heavily interventionist economy, but an interventionist, not a socialist, economy. As Don Lavoie summarised in the 1980s, “planning is, strictly speaking, not inefficient; it is impossible. What really occurs in the Soviet economy, as elsewhere, is blind intervention by a government into a polycentric order it does not understand and which is not under the control of any one person or group.” I take the foolishness of today to mainly refer to gross misunderstandings of our economies – misunderstandings that are shared by people with very different political affiliations. On the one hand, there are people who deplore the poor state of the American health care system, the 2007–2008 financial crisis, or the dire housing market. These people – think of movements such as Occupy Wall Street – then go on to chastise the „market“, or “capitalism,” for failing to live up to its promises and demand, as a remedy, nationalisations or similar government interventions. However, it is usually the government’s various interventions that are responsible for the bad outcomes. On the other hand, there are those people who today see socialism everywhere. This culminates in such preposterous denunciations of so many people as socialists. Joe Biden, by some, is then labeled a socialist. On the verge of irony, there are also many government policies that are explicitly called socialist. However, if socialism means that the government plans everything, then there can be no such thing as an intervention in a planned economy. You cannot intervene because you have already planned everything! Thus, to call an intervention socialist makes little sense. Now, of course, it is true terms can take on a different meaning over time. This may be the case with “socialism”. However, even if the meaning of socialism has changed, it still holds that many people who are critical of both comprehensive and non-comprehensive planning overlook the fact that our economy is, to a large degree, a market economy. No matter how much governments today intervene, there is still relatively free entrepreneurship, private property, and (genuine) prices. And just this is why, especially the American economy, continues to see substantial growth. The foolishness of today is not only that so many people mistake interventionist economies for pure market economies but also that so many people mistake interventionist economies for socialist economies. But the world we live in is an interventionist mess; governments intervene too much. Despite the distortions they cause, fundamentally there still is a market process at work that keeps Paris fed – and this is the reason for the massive economic growth the world has seen in recent decades. (0 COMMENTS)

I don’t normally post a link to just one video, but I found this one enormously interesting and, indeed, exciting and hopeful. It’s 5 young black men watching Peter Robinson’s interview of Thomas Sowell and discussing his ideas. I was riveted. Notice how one of them pronounces his name at the start. It reminds me of when I would tell my students the first day of a new class about my background. I mentioned my affiliation with the Hoover Institution and inevitably a student would ask me if I knew Thomas Sow (pronounced the same as you pronounce “sow”) ell. It means that they knew of him by reading him. These young men see his name on the screen. Same idea. So many highlights. I won’t mention more than a few because the whole thing is fascinating. 6:56: Watch their reaction at 6:56 to a point that Sowell makes. 7:48 to 8:30: Check Sowell’s point about blacks growing up in Germany than the young men’s reactions. 15:25: Watch their reaction to white “liberals” taking responsibility. HT2 Tyler Cowen.   (0 COMMENTS)

With Javier Milei’s recent election victory, there is speculation that Argentina might drop the peso and dollarize its economy. I won’t speculate on how likely that is to occur, as I don’t know much about the political situation in Argentina. But I do have a few comments on the economics of dollarization:1.  Dollarization would solve the problem of hyperinflation. 2.  If Argentina intends to dollarize, now would be a good time to do so. 3.  Dollarization is not a panacea.  Argentina still needs Chilean-style economic reforms, and there’s no guarantee that dollarization would lead to those reforms. 4.  Dollarization is less risky than a currency board, but not completely free of risk. There are two reasons why this is an ideal time for dollarization.  First, years of hyperinflation have produced a very small monetary base (in real terms, obviously.)  Many Argentine citizens have already switched their money holdings from pesos to dollars.  Thus the fiscal cost of dollarization would be relatively low.  Given Argentina’s severe economic problems, it would still be a heavy lift, but it’s doable if they are determined to make the switch.  Fiscal reforms would obviously make the job much easier, and Milei has promised to slash the budget.  I certainly don’t think he’ll cut anywhere near as much as promised, but some cuts seem likely. The second factor is more important, and often overlooked.  The US dollar is currently quite strong.  Thus Argentina would be adopting the dollar at a point in time where large (US dollar) currency depreciation seems more likely than large currency appreciation.  Purchasing power parity (PPP) is far from perfect, but it does exert some pressure on currencies in the very long run.  Yardeni Research provides the following graph: It might seem odd that I view a strong dollar as a propitious time to dollarize, as it makes it more likely that Argentina’s inflation rate over the next few decades will slightly exceed the US level.  If the dollar were currently weak, then Argentina might be expected to experience slightly lower inflation than the US (as the dollar strengthened.)  In fact, Argentina has far more to fear from a few years of negative 1% inflation than from a few years of 5% inflation.  Indeed, given their current triple-digit inflation rate, even a 5% inflation rate would seem like price stability to the Argentine public. This is not just a theoretical point.  Argentina did experience a period of mild deflation (and more importantly falling NGDP) during the late 1990s and early 2000s, under their currency board regime.  And the primary cause of that deflation was the rapidly strengthening US dollar.  Argentina had the misfortune to adopt a dollar peg in 1991, a point in time when the dollar was relatively weak.  As it strengthened dramatically in the late 1990s, many developing countries in East Asia sharply devalued their currencies.  Soon afterward, Brazil and Russia followed suit.  Argentina’s currency became dramatically overvalued.  The US tech boom allowed us to get by with a strong dollar.  But Argentina was a commodity exporter competing with places like Brazil and Russia. To be clear, the fact that the US dollar is currently quite strong doesn’t mean that it cannot strengthen even further.  But on balance, I consider a significant depreciation to be more likely than significant further appreciation (for PPP reasons.)  That should help Argentina to avoid the sort of deflation produced by falling NGDP. PS.  In recent years, I’ve lost all faith in politics.  Thus I have no expectation that Milei will be able to achieve any significant improvements in Argentina’s economy. He seems a bit unstable. I will say, however, that my favorite Milei proposal is a market for organ transplants.  Such a market in the US could save 40,000 lives/year.  Iran is the only country I am aware of that currently has such a market. (0 COMMENTS)

In his new book, Conservatism: A Rediscovery, Yoram Hazony argues that liberal democracy is not the only option for a viable system of government. Indeed, he doubts that liberal democracy is viable at all. Instead, he proposes an alternative he calls conservative democracy. In making this proposal, Hazony is not calling for the wholesale establishment of a new system, but rather a reestablishment of American governance to its original form. Establishing conservative democracy would, in a sense, be a revolution but, according to Hazony, in the original sense by which that term was taken, “describing something that ‘revolves’ and finally returns to its rightful place—in effect, a restoration.” Conservative democracy would be formed by the principles of historical empiricism, meaning an adherence to “constitutional traditions known, through the long historical experience of a given nation, to offer stability, wellbeing, and freedom”, nationalism, the centering of political life around “national collectives characterized by bonds of mutual loyalty and unique inherited traditions”, religion, under the notion that shared religious traditions “are essential to the national heritage and are indispensable for justice and public morals”, while ensuring “the state offers toleration to religious and social views that do not endanger the integrity and well-being of the nation as a whole”, limited executive power, where “the powers of the chief executive are limited by the representatives of the people”, and individual freedoms, which are “the basis for a society that is both free and prosperous” and such freedoms “may be infringed upon only by due process of law.”  Even the more controversial elements on this list, like the idea of religious nationalism, are things that would only represent a return to the original ideas of the United States. Hazony quotes various prominent political and public figures, as well as court rulings, from the American Founding all the way through the Second World War who all uphold and affirm the idea that America is a Christian nation, and that public policy is meant to reflect that. Even FDR declared America’s success was owed to it being among the “nations which still hold to the old ideals of Christianity and democracy.” And in describing the conflict unfolding throughout the world, FDR said in his 1939 State of the Union that events “abroad directly challenge three institutions indispensable to Americans, now as always. The first is religion. It is the source of the other two – democracy and international good faith.” Roosevelt would go on to say “An ordering of society which relegates religion, democracy, and good faith among nations to the background can find no place within it for the ideals of the Prince of Peace. The United States rejects such an ordering and retains its ancient faith.” Even up to the Second World War, and even in an administration like FDR’s, it was widely and openly admitted that religion was the source of American governance, and something that must be at the forefront rather than background of American life. Hazony points out that it was only in the 1960s that religious teaching and prayer were banned from public schools. This shows that the idea of secular government is not a longstanding American institution, but rather a relatively recent aberration from the original system. Hazony goes on to say “what is now called ‘liberal democracy’ refers not to the traditional Anglo-American constitution but to a rationalist reconstruction of it that has been detached from its historical empiricism, Christian religion, and the Anglo-American nationalist tradition. Far from being a time-tested form of government, this liberal-democratic ideal is something new to both America and Britain, establishing itself as authoritative only in recent decades.”  In light of the increasingly fractured state of liberal democracies he sees, Hazony, ever the empiricist, says that the “claim that liberal-democratic regimes of this kind can be maintained for long without the conservative principles they have discarded is a hypothesis that America and other Western nations have tested for the first time in the last sixty years…The experiment has run its course and we now know that the Enlightenment-liberal hypothesis was false. A political regime founded on Enlightenment liberalism cannot sustain itself for even three generations.” Conservatism teaches that when an experiment goes awry, we must restore things to the way they were before the disfunction arose. For that reason, we must rediscover and restore the ideas of conservative democracy.  Most importantly, Hazony argues, is that conservatism and the ability to live a conservative life holds the possibility to restore meaning and purpose to a generation that seems lost and listless. Today’s generation has grown up in a time with the fewest social constraints on how to live, with more freedom and more choice available to them, free of judgment, than at any time in the past. But that hasn’t made todays youth any happier, or more content, or filled with a sense of meaning in purpose – if anything, this appears to be an extremely depressed and unhappy generation. Liberalism lacks the tools to help people forge a meaningful life, therefore those who have “been told all their lives that they are ‘free to choose’ whatever course they please” instead “find it increasingly difficult to choose any course at all.” But conservatism is not neutral between life choices – a conservative philosophy will hold some ways of life better than others, and this knowledge of how to live a good life, developed through generations of time-tested experience, gives people structure, purpose, and meaning.  “When we live in a hierarchy to which we are loyal,” Hazony writes, “we strive to be honored by those who are important in this hierarchy: by parents and other older relations, political figures, military commanders, employers, clergy, teachers, and so on. Through this striving, we shape ourselves, building up and refining our abilities and achieving things we hope will be worthy in their eyes, in this way becoming worthy in our own eyes as well.” This is a demanding life, but it offers “paths that lead to an honorable life in which all slipperiness and evasion ceases and one is able to make one’s way with confidence and pleasure. These paths offer much more than honor. They offer purpose, meaning, direction, health, knowledge and skill.” But by failing to uphold the time-honored institutions and customs of a society, liberalism robs people of these opportunities. For when “we do away with the norms that give the individual direction and purpose, the individual is plagued by an inability to distinguish what is honorable from what is dishonorable, and what is worthy from what is unworthy…And so society comes to be characterized by the decadence of the individual, who is drowning in a sea of alternatives – none of which matter to anyone.” But in living a conservative life, receiving and embracing the customs, constraints, and inherited traditions from previous generations and passing these down to the next generation, creates the possibility of “healing a ravaged family and community, tribe and nation, reviving norms of behavior and a common sense that had been given up for dead.” To restore the conservative tradition, one must live the conservative life, for “Conservatism begins at home.” This concludes my summary of Hazony’s book. In my next posts, I will offer some thoughts and critiques of his case.  (0 COMMENTS)