A few months ago, I noticed a trend in my Twitter feed – many of the people I follow were sending out Tweets with the title “Introduce Yourself With 10 Books,” or retweeting others who had posted the same thing. Generally, this seemed to be the ten books that had most influenced the thinking or shaped the worldview of whoever was sending out the list. Now, I’m always happy to jump on a bandwagon a few months after it’s already passed, and on top of that I tend to do it the wrong way as well. (It’s part of my charm, I tell myself.) I have a slightly different take in mind for this list. These won’t necessarily be the ten best books I’ve ever read, or the ten that most influenced my thinking, or the ten books I think everyone should read, or anything like that. Instead, these are ten books that I would say had an oversized influence on how I read, think, and understand the world, even if they aren’t necessarily top-ten tier overall. The next two posts will be listing out the books in no particular order, and describing why each book was an oversized influence for me.  The Radical and the Republican: Frederick Douglass, Abraham Lincoln, and the Triumph of Antislavery Politics by James Oakes Long before I read Mike Munger on the difference between directionalist and destinationist libertarians, this book introduced me to the basic idea. The directionalist libertarian supports policies that move in the direction of liberty, even if they are only half measures, while the destinationalist libertarian only supports policies that pass an appropriate purity test. James Oakes describes how this same divide was at play in the careers of Abraham Lincoln and Frederick Douglass. Lincoln, the Republican and directionalist, was willing to engage in compromise and accept half-measures that limited slavery in the United States, even if they fell short of full abolition. Douglass, the Radical and destinationalist, saw things differently. Slavery is an evil and abominable institution, and you simply don’t compromise or negotiate with evil. You eliminate it – end of moral analysis. Still, Douglass found himself struggling with the full implications of his destinationalism, particularly when he and his fellow thinkers found themselves opposing the Missouri Compromise, which would have preemptively banned slavery for any new states in the Union, on the grounds that it did nothing to address slavery in current slave states. The give and take between these two men and the broader movements they represent did a lot to move me more into the directionalist camp. In my younger years, I (like many, I suspect) was far more concerned with ideological purity above all else, and this book was what began to dislodge that idea in my mind.  Black Rednecks and White Liberals by Thomas Sowell I wouldn’t call this Thomas Sowell’s best work – in terms of pure intellectual achievement, I’d have to put Knowledge and Decisions at the top of that list. However, this was the book that introduced me to Thomas Sowell. I picked it up entirely on a whim, because I thought the title was interestingly provocative. Each of the six essays collected in the book, however, were eye-opening for me, due in no small part to Sowell’s clear, forceful, and jargon-free style of writing. As one example, his essay The Real History of Slavery blew my mind. Before picking up this book, all I knew about slavery was what I learned about it from the public school in the small rural town I grew up in – slavery was something that existed in America, and that it was driven by racial antipathy and a belief that whites were superior to blacks. Prior to reading this book, I had no idea that slavery was a worldwide institution, that for the vast majority of its existence it had no connection to race and that its later racial divide was simply due to historical happenstance, or that the moral opposition to slavery was largely driven by developments in Western civilization and forcefully stamped out throughout the world by Western nations, particularly the English. None of this was featured in my public-school education – and it seems even less likely to be brought up now. Insightful and interesting as this book might be, what puts it on this list is that it introduced me to Sowell.    The Great Melody: A Thematic Biography of Edmund Burke by Conner Cruise O’Brien I once heard Peter Boettke say that in order to truly understand what someone is arguing you need to understand who and what they were arguing against. This was particularly true for me regarding Edmund Burke and his most famous work, Further Reflections on the French Revolution. I tried reading that book and found myself struggling with it. A major reason for that is the very nature of the book. Unlike many political tracts from those days, Burke was conscientiously writing a commentary on current events, not a treatise on timeless political principles. After reading Connor Cruise O’Brien’s biography, I was able to revisit Burke’s Reflections and, properly understanding the context in which it was written and the people and events it references, I found it to be an engrossing and powerful book. The Great Melody also convinced me that many of Burke’s modern critics, who classify Burke as a reactionary, ultimately root their criticism in a misleadingly literal reading of the Reflections and Burke’s other works criticizing the French Revolution and its aftermath. Because Burke wrote the Reflections as a polemic about ongoing events with the aim of countering or swaying public opinion, he deliberately amped up his rhetoric, overemphasizing some ideas and downplaying others, to create an argument that was targeted to the crisis of the moment. The general lesson I took from this book was the importance of studying ideas in their proper historical context, as well as the importance of studying the biographies of major thinkers.  The Yom Kippur War: The Epic Encounter That Transformed the Middle East by Abraham Rabinovich I picked up this book shortly after it was released, because I was trying to better understand the history behind the seemingly endless conflicts in the Middle East. While the book presents a very detailed account of how the conflict played out, hour by hour, what puts it on this list for me was the lesson it taught me about the politics of war. Two key points come to mind. The first nicely connects with Scott Sumner’s recent post on why it’s important to keep strategic intentions clear. While it’s often said that Israel was caught completely off guard by the Yom Kippur war, Abraham Rabinovich shows that isn’t quite true. While the Israeli government was very slow to realize an attack was coming, they did realize it a few days in advance. This was far too late to mobilize the troops and equipment they’d need to create an effective front line against the invasion, but they did have the opportunity to launch first strikes with bombers and long-range missiles on the enemy lines. This was overruled by Golda Meir, who believed that when the invasion came Israel would need support and supplies from the United States, and if Israel pulled the trigger first, they wouldn’t receive that support. Later, Henry Kissinger confirmed to her that she was correct, and that if Israel had fired the first shot, they would not have received “so much as a nail” from the United States. The other point that stuck with me is how negotiations to end the conflict were carried out not between the countries that were fighting each other, but between the United States and the USSR. Rabinovich describes how Kissinger, when traveling to the USSR to begin the negotiations, stipulated that no negotiation would take place until after he had landed and had an opportunity to get a full 8 hours of sleep. Ostensibly this was because he didn’t want to negotiation while sleepy or jet lagged. In reality Kissinger had correctly intuited that the tide of the war was turning, that Egypt and Syria had lost their initial momentum and Israel quickly gaining the upper hand. His insistence on that extra time was to give the Israeli forces more time to further gain the advantage – at which point, just as the invading forces were about to be fully routed, he’d have the strongest hand to negotiate. While that might seem like a masterful move of negotiation, I (a lowly Lance Corporal in the Marines at the time) couldn’t stop myself from seeing this from the position of the people on the ground – the kind of person I would be as well. For those additional hours, people were continuing to experience the terror of combat, being maimed and killed, very likely seeing themselves as fighting for their respective causes, when in reality their fate was being dictated by high level politicians from other countries. These kinds of policies look very different when you’re the kind of person who would be on the ground fighting and dying.  Writings on an Ethical Life by Peter Singer I picked up this book because I had become aware of Peter Singer entirely from the controversy surrounding him and his views. I couldn’t quite believe that anyone really held the views being ascribed to Singer – ideas like failing to give away money to charity in order to save lives was morally no different from actively killing people, yet at the same time, literal infanticide was not morally wrong. This book contained a series of small essays and papers where he lays out arguments for these and other views. Yet I was forced to concede upon reading this book that Peter Singer is not some kind of madman or ogre. I believed – and still believe – that he is very wrong about many issues of great importance. Nonetheless, his arguments were stronger than I expected, and he has changed my thinking along the margins of many issues. While I disagree with Singer far more often than I agree with him, I gained respect for him as a thinker. And the lesson I took from this book that puts it on this list is the importance of seeking out and reading books and arguments written by people with whom you strongly disagree. Most importantly, you might conclude you were wrong about something, which is always a win. But even when it doesn’t change your mind, it’s important to understand where these ideas come from, to see how conclusions with which you strongly disagree can be held by people who are smart, well informed, and well intentioned. Far too many people these days act as though contrary views can only be motivated by bad intentions or sheer stupidity – and Peter Singer helped me realize that even views that were extremely contrary to my own need not be rooted in either.  (0 COMMENTS)

In recent years, Minneapolis enacted a set of reforms making it easier to build multifamily housing.  Tim Peach directed me to a blog post written by Matthew Maltman, which suggests the effects have been fairly dramatic: Scott Alexander recently suggested that building more housing might actually boost housing prices, by making cities more dense.  In a previous post, I used cross sectional evidence to cast doubt on that claim.  Maltman’s post provides time series evidence that rents in Minneapolis have risen by substantially less than in other midwestern cities: Another graph shows declining homelessness in Minneapolis, at a time homelessness was rising in comparable cities. In contrast, housing construction plunged soon after St. Paul voters enacted rent control in 2021: When it comes to construction of duplexes, triplexes and other forms of multi-family housing, St. Paul’s building permits plummeted by 48% last year [2022] compared with the year before, according to HUD, the federal department of Housing and Urban Development. Scott Alexander is correct that bigger cities are often more expensive.  (Not always; compare Houston and Austin.)  When a city grows rapidly because of a rapid increase in the number of people who wish to live there, housing costs often rise.  Austin is a good example.  But when the housing stock rises due to regulatory changes making it easier to build, housing prices tend to fall. Never reason from a quantity change. PS.  After writing this post I noticed a Bloomberg piece that makes some similar points. PPS.  Matt Yglesias has an excellent post on the politics of YIMBYism. (0 COMMENTS)

One exhibit in the trial against democratic political mythology is the idea that the incumbent president, or chief ruler, is to blame for higher gasoline prices, and the observation that voters believe in their ruler’s benevolent omnipotence. The Financial Times reports (“Rising Petrol Prices Spark New Concern in Washington,” August 6, 2023): Rising US fuel prices are triggering alarm in Washington just as President Joe Biden steps up his bid for re-election by touting lower inflation and the strength of the US economy. … “The White House is in full-blown panic mode,” said Bob McNally, head of Washington-based consultancy Rapidan Energy Group and a former adviser to president George W Bush. “Any sitting president is threatened when pump prices go up because of the impact on consumer confidence and the president’s approval rating.” It should be pretty obvious that the president’s power to set world prices is (fortunately) nil. Any influence he can have on them involves the (risky) possibility that he engages in horse trading with other, worse rulers in the world: The Biden administration has repeatedly called on Riyadh to pump more oil in the past two years, and last year accused the Opec+ cartel of “aligning with Russia” when it launched its current phase of supply cuts. Politicians’ incentives don’t push them to discourage a belief in their benevolent omnipotence. They have little incentive to explain to their people that, even with OPEC (whose member states control about 38% of the world’s crude oil production), the price of oil is determined on the world market, and that they already have their hands full protecting the individual liberty of their citizens, assuming that this is what they do. Liberal political economy suggests the following. Free individuals and their free enterprises in a free country would take the world price of oil as it is, and buy low or sell high according to their own interests. (0 COMMENTS)

Bryan Caplan did yet another commendable thing: He made two lectures by Ralph Raico available online. You can find them, together with Bryan’s recollections of Ralph, here. The lectures are splendid. In the first, to sketch an outline of classical liberalism, Raico brilliantly digs into the state’s mystique, including how support for the arts plays with the legitimization of the mercantile system. He provides a wonderful sketch of the Levellers and explains why the idea of natural, unalienable rights reversed the common thinking on men and state, putting the latter at the service of the first, plays sword with the phantom of Jean-Jacques Rousseau (a man who erupted in moral outrage for things he was doing any other day of the week). Interestingly enough, to explain the importance of history, Raico begins by quoting Thomas Szasz, a scholar he greatly admired. In the second, Raico describes a classical liberalism which was upfront, not on the defensive. The classical liberals’ emphasis on harmonious interests presupposes a society in which coercion and privileges have been seized and limited: it is not a way of justifying the status quo. Raico remembers how liberals fought against plunder, exploitation by the ruling class at the expense of the productive classes. Ralph Raico was a great scholar and a wonderfully idiosyncratic man. He was also a great teacher, as you would immediately understand listening to his lectures. Bryan complains that Raico didn’t write that much – but his archive page at Mises.org is still a treasure trove you can dig into. (0 COMMENTS)

I lost a good friend last March, Harry Watson, whom I had met at the University of Western Ontario in September 1971 and with whom I went to graduate school at UCLA, starting in September 1972. I’ve hesitated to write about him on EconLog because I’ve wanted to follow the overall rule to write about economics. But yesterday I was talking with a fellow UCLA graduate student, Tom Nagle, who had also been friends with Harry, and the stories that came up were all about economics. So here goes. At UWO, Harry and I were in a class taught by a Keynesian professor. I won’t name him because a few years ago I emailed him to ask if he remembered having said what Harry and I clearly remembered him saying, and he said he hadn’t. So I’ll call him Bob. Bob was a nice man. At the same time, he was totally sold on the Keynesian model. Harry Watson and I would often criticize the Keynesian model and propose Milton Friedman’s monetarism as an alternative. We were never nasty; hey, we were Canadian. But we were persistent. One time, Bob, frustrated at our objections, pointed to us and said to the class, “These guys are dangerous.” If you ever wanted to persuade people not to be outspoken, this was not the way to do it. I was 21 at the time and I suddenly felt taken seriously.  Harry was 23 and I’m guessing he thought the same. Every time Harry and I got together after that–and it was literally dozens of times–and there were other people around, he would tell that story and we would laugh uproariously. That’s one reason I remember it so well. It happened in the spring of 1972 and Harry started telling the story regularly from about 1976 on. I also remember one area in which we disagreed with “Bob” a lot: Milton Friedman’s permanent income hypothesis (PIH). It just made sense to us that people would base their consumption on some conception of their “permanent income” rather than on whatever their income happened to be at the time. But Bob presented empirical studies that purported to find evidence against the PIH. They were typically of cases where people got a windfall. If Friedman’s PIH was right, they would spend about 1/3 of it in the year they got the windfall. If Keynes was right, they would spend well over half of it. My recollection of some of the studies is, understandably, vague here because this happened over 51 years ago. But one study stands out. And it stands out because Harry Watson always made it part of his “routine” when he talked about our discussions in Bob’s class. The study was about conscripts in Israel’s army getting out and being given a lump sum of about $200 (in early 1960s dollars, and it might have been less: it wasn’t more.) That’s not a small sum but it’s not a large amount either. Inflation adjusted by the CPI, it’s about $2,000 today. Bob showed that the conscripts had spent almost all of it the first year. Harry challenged him, not on the data, but on the interpretation. “You’ve got guys getting out of the Israeli military, where they have been subject to a lot of discipline. They’re going to want to go out and drink and spend it on women,” said Harry. “This is not strong evidence against the PIH.” That gets to something I noticed about Harry within 2 weeks of being in the same class with him: the perspective he brought to each issue, which seemed to be of someone way older than 23. I later learned why. His dad had married late in life and when Harry was born, his dad was 56. His dad, a successful businessman in Brantford, Ontario, had a number of male friends of approximately the same age. Many of them became Harry’s friends. I remember Harry telling me that at age 14 and 15, he had been a pallbearer at a number of their funerals. So he brought a wisdom to things that I had not seen in someone so young. It was from him, for example, that I first learned that there was an alternative view to the view I had adopted that population growth was bad. Harry pointed out that in poor countries, people needed to have a lot of kids because that was their version of Social Security. I had literally never thought of that. I shared some of these reminiscences, plus others that didn’t have much to do with economics, at his memorial service in New Hampshire last month. Note: In the above pic, taken at the first Austrian economics conference in South Royalton, Vermont, in June 1974, we were standing around talking to Milton Friedman in a polite but intense discussion. We had our intellectual differences with Milton too, but I don’t remember the issue. Behind Milton is Harry Watson. Then to our right with his arms crossed, his hair long, and a beautifully coordinated outfit is me, then Jerry O’Driscoll, then Jack High, and then Richard Ebeling. (0 COMMENTS)

Michael Eisenberg is a venture, capitalist, businessman, and author of the book The Tree of Life and Prosperity. On this episode of EconTalk, Russ Roberts hosts Michael Eisenberg for a conversation on venture capitalism, technology’s influence on the economy, and the unique lessons that can be taken from a book that has stood the test of time, the Hebrew Bible. Eisenberg expresses his optimism for people’s empowerment in a constantly evolving world: he is ‘long on humanity.’ How long on the future are you? Share your thoughts with us; as you know, we love to hear from you.     Eisenberg presents his investing philosophy with a desired profile of entrepreneurs and companies that have the potential to empower humans and businesses to be economically successful. Roberts and Eisenberg share a similar passion for the power of storytelling in business, but investors must be aware of the full story, not just the “bedtime story.” Eisenberg appeals to ‘back casting’ in finding his own vision for an investment’s viability, while Russ presents the classical economist question for valuation: ‘and then what?’ How do you approach stock investments, business plans, or life goals? What is challenging about making concrete deductions in evaluating plans?   Roberts and Eisenberg talk about the importance of teamwork in entrepreneurship and great business success, citing the collaboration of Israeli military members in revolutionizing Israeli innovations and the importance of executors behind the veil of the power of geniuses like Bill Gates and Steve Jobs. Russ presents the example of running a restaurant beyond food quality. What other examples can do you think of where failures occur because of a lack of balance or collaboration? What might have prevented such failures?   Roberts and Eisenberg present portability in technology and specifically in social networks as being a good check on competition and upholding consumer value. Recently, Instagram and Mark Zuckerberg developed “Threads” which will attempt to compete with Elon Musk’s Twitter. Instagram users can transfer their follower/following statuses easily onto the platform, but Instagram, of course, owns the new platform. If Threads gains huge popularity, do you think Elon Musk will allow users to transport their network preferences and tweets over? Why or why not? How should other tech giants like Amazon allow for more competition and consumer value?   Eisenberg highlights the importance of entrepreneurship and corporations in providing for humanity’s needs, partly because the government is still running on the ‘pony express’  and are way behind on keeping up with technology. Eisenberg lists the people behind the COVID vaccine production process as not being a ‘panel of experts’ for further support of his belief and trust in entrepreneurs to adapt and take advantage of opportunities. What should our level of dependence be on the market versus the government for creating a bigger pie of gainful opportunities for more people? (0 COMMENTS)

As I’ve mentioned on this site a few times, I’m a regular watcher of CBS Sunday Morning. My favorite segment is the nature one at the end, which goes from about 30 seconds to 45 seconds. But there are also other good segments. Steve Hartman is my other favorite: his typical story is a heart-warming one about someone doing something wonderful for someone else, often a stranger. On issues like climate and global warming, though, CBS has no balance. It doesn’t present the issue as if there is any disagreement among scientists and it typically shows spokespeople who take among the most extreme views, like the idea that if we don’t do a lot now, we will have big trouble within a few years. There is little to no basis for that view. Its August 6 segment on the recent heat wave, which was the lead story, was no exception. Even worse, there was an added wrinkle, which would be noticeable to people who closely follow Biden administration policy. Before I get to that, notice how host Jane Pauley leads off. (You have to watch the first few seconds of the video to see this; it’s not in the transcript.) She states: Politicians may still debate it but it’s getting harder and harder to deny. With temperatures climbing to new heights everywhere, something’s going on out there. Pauley tells the reader that the debate is between politicians. Unstated implication: there’s no debate among scientists, which is false. It then segues to David Pogue, who completely buys into the idea that this latest heat wave is an indicator of global warming and that global warming is a crisis. Near the end of the segment, Pogue gets into what the Biden administration is doing to deal with heat waves. Here’s an excerpt: Last month, President Biden announced some small steps toward adapting to dangerous heat, like expanding access to drinking water, improving weather forecasts, and setting up a heat alert system. But Guardaro maintains that there’s much more to be done. City planners should develop heat infrastructure (like cooling centers and strategic greenery), and the federal government should start taking heat as seriously as it treats other climate disasters. For example, FEMA has never declared extreme heat as a disaster. Do you notice something missing? I did. One major thing the Biden administration is doing is making is more expensive for people to adapt to dangerous heat. How so? With new regulations limiting hydrofluorocarbons (HFCs), an ingredient in many air conditioners. The Competitive Enterprise Institute spells out the problem here. (Disclosure: I give a small annual contribution to CEI.) Ben Lieberman, writing in 2021, stated: If finalized in its current form, the proposed rule would reduce future supplies of HFC-410a and HFC-134a and raise prices for them. As we note in our comments to the agency, doing so will increase air conditioner repair costs. Any system that loses refrigerant from a leak—a common occurrence—would have to replace the lost refrigerants with the increasingly scarce and costly supplies of HFC-410a and HFC-134a. Worst off would be low-income households, some of which can barely afford air conditioning as it is. And the current western heat wave’s victims are mostly those lacking access to air conditioning, which further underscores the need to keep it as affordable as possible. Nonetheless, the EPA’s lengthy analysis of its proposed rule ignores the impacts on homeowners and car owners, not to mention businesses that rely on HFC-using air conditioning and refrigeration equipment. What if, instead of repairing your old residential air conditioner, you decide to buy a new system designed to use one of the supposedly climate-friendlier alternative refrigerants? Expect to pay more, especially for a system using one of the patented new refrigerants that cost several times more than the HFCs they are designed to replace. But once again, the EPA turns a blind eye to these costs, insisting that these new systems will be better and cheaper overall, without ever explaining why manufacturers and consumers preferred HFC-410a in the first place.   (0 COMMENTS)

I have fallen into acquaintance with a delicious book, in which I actually found the equally delicious expression “to fall into acquaintance.” University of East Anglia historian Emma Griffin writes, referring to the 1797 autobiography of a Glasgow shoemaker, “In early adulthood, M’Kaen had ‘fallen into acquaintance’ with a young woman and wished to marry her” (Emma Griffin, Liberty’s Dawn: A People’s History of the Industrial Revolution [Yale University Press, 2013]). Griffin found her material in 350 autobiographies written by actual or former industrial workers starting in the late 18th century and often not meant for publication. The incipit of the Liberty’s Dawn says: At the dawn of the nineteenth century, a subtle and little-noticed social change began to take place in Britain. As the industrial revolution picked up pace, a growing number of ordinary working people picked up pen and paper and wrote down their memories. … This book tells their story, an unexpected tale of working people carving out for themselves new levels of wealth, freedom and autonomy. She describes the industrial revolution as follows: It is clear that something momentous happened in Britain between the end of the eighteenth century and the middle of the nineteenth. ‘Revolution’ is an unavoidable and apt description of these events. At some point, the nation stopped trying to make all its goods by hand, and started to burn fossil fuels to drive machinery to do the work instead. In the process, large numbers of families gave up working the land, and moved to towns and cities to take up employment in factories, mills, and mines. … By the end of the eighteenth century, the economic growth associated with industrialization began to ripple to society. The steady incomes provided by these industrial occupations radically changed lives. For example, as one chapter explains, the new wealth reduced the age at which marriage was possible: Skilled work, or access to relatively well-paid unskilled work in industrial areas, helped to encourage younger marriage; the absence of these opportunities in rural areas had the opposite effect. … Without access to the brighter opportunities provided by a skill, those working in agriculture, fishing, and other forms of rural day labor simply waited—their marriages were uniformly spread from their mid-twenties to their early thirties, and occasionally beyond. … We are left then with a fairly sharp break in marriage customs around the 1890s, with almost complete social conformity before that decade and a sizeable minority of couples rejecting traditional values afterwards. Griffin criticizes the opinion of “generations of historians” about the impact of the industrial revolution on workers’ lives: It must be admitted that the suggestion that many of those who lived and worked their way through the industrial revolution believed their lives had been improved by that process jars with what we think we know. Generations of historians have painted the industrial revolution in relentlessly dark colors: a force which was wholly destructive for the poor, remorseless, unforgiving in its grinding down of the independent labourer of old. This, clearly, is not the assessment of those who lived through it. We have repeatedly seen that working men were extremely adept at grasping opportunities from the turbulent times in which they lived. And now we see them glorying in changes they witnessed. Surely it is time to reconsider the oft-repeated claims that the industrial revolution brought little but misery to those who did most to produce it. The economist reader may sometime find her economic knowledge insufficient and judge a bit superficial her opinion that too much laissez-faire characterized the industrial revolution. Yet, as she admits— Yet even with a government that did nothing, there is an uncomfortable truth that we should confront: industrialisation had remarkable power to put food on the table. And for the first generation, that generation which had expected the hunger of their own childhood to be experienced once more by their children and their grandchildren, food on the table was all that really mattered. More than this, it was the manifestation, the effect of liberty’s dawn. Griffin writes: Critics will argue that the material gains for most families were small. But they were just enough to drag wage-earners out of the servile submission that poverty had forced upon them since time immemorial. Let me leave the last word to Noah Cooke, a weaver who became known as “the Weaver Poet.” In 1876, as the industrial revolution was at full speed, he wrote:  The working class never had better times than now. (0 COMMENTS)

Many economists argue that the way to reduce inflation is to create “slack” in the economy, i.e., somewhat higher unemployment.  I believe that’s a mistake.  Unemployment is often an unfortunate side effect of reducing inflation, but doesn’t cause lower inflation. David Beckworth recently interviewed Ricardo Reis, who had this to say about the Phillips curve: [T]he way I understand monetary policy is, whereby tightening monetary policy, a central bank is able to bring inflation down. In the same way that when I go to the doctor with an infection with a bacteria of some kind, antibiotics are the way to kill the bacteria and cure me from that. However, a side effect, and I emphasize, let me say it slowly, a side effect of raising interest rates is that you also cause a recession. You also lead to an increase in unemployment. In the same way that a side effect of taking antibiotics is that they tend to wreak havoc with your gastrointestinal, digestive system. Note that it is not a channel. It’s not by taking antibiotics and screwing up my intestines that I therefore kill the bacteria. No, no, it’s a side effect. Likewise, raising interest rates lowers inflation and has a side effect of unemployment, but it may not lower unemployment the same way that you may go through a course of antibiotics and be perfectly fine with your gastrointestinal system. So the fact that unemployment has not gone up, does not in any way discredit the way in which monetary policy works, does not pose a puzzle of any kind, because an increase in unemployment following a tightening of monetary policy is not something that has to happen for inflation to fall. It’s something that often happens as a side effect. This is also how I look at the Phillips curve. My only quibble is that Reis seems to equate tightening of monetary policy with higher interest rates.  That is often the case, but (as with the inflation/unemployment correlation) not always.  The tight money policies of 1929-32 and 2008 were associated with sharply falling interest rates.  It makes more sense to view rising interest rates as a common side effect of tight money, just as rising unemployment is a side effect that frequently occurs with lower inflation.  But just as high unemployment is not the cause of falling inflation, rising interest rates are not the cause of falling inflation.  Instead, it is tight money that reduces inflation. PS.  There’s been a great deal of puzzlement about the fact that NGDP growth remains well above trend, despite a dramatic rise in interest rates that began in early 2022.  But this should be no surprise, and indeed is almost the norm.  For instance, the Fed began sharply raising interest rates in the spring of 2004, and NGDP growth remained at or above trend in 2005, 2006 and 2007.  There are similar examples throughout US macroeconomic history: Generally speaking, interest rates are a somewhat procyclical variable.  For instance, they rose almost continuously throughout the 1960s.  So there’s no reason to assume that higher rates will be associated with economic weakness.  It depends entirely on why interest rates have increased.  (Or if you prefer, whether they have risen relative to the natural rate of interest.) (0 COMMENTS)

It was Don Lavoie, not Friedrich Hayek, who coined the term “knowledge problem” in his seminal 1985 National Economic Planning: What Is Left?1 (itself a more accessible and policy-focused distillation of Lavoie’s thesis, under Israel Kirzner, entitled Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered). Lavoie reformulated and clarified the knowledge problem as developed by Ludwig von Mises and Friedrich Hayek, took to task the various proposals of the day calling for more state control, and articulated a radically liberal alternative. You might think we know all there is to know about the knowledge problem by now, but as it turns out, the proposals of the 2020s don’t differ all that much from the proposals of the 1980s, and Lavoie’s knowledge problem remains just as relevant as ever. What do you know about the knowledge problem? Now, everyone knows what the knowledge problem is: central planners lack access to all the knowledge necessary to comprehensively plan an economy. And most everyone accepts the knowledge problem on this reading (everyone except for market abolitionists). Here’s how Lavoie puts it: Comprehensive planning, the classic doctrine of planning advocates, seeks to achieve economic coordination without relying on the contention of separate decision makers with one another; it thereby deprives itself of access to one of the most important sources of knowledge exhibited by these kinds of orders. Just as in biological competition, there is the ‘information bearer’ function of DNA, so in the society of Tradition, this function is further served by such developments as language and culturally acquired techniques and habits. In the society of Market, profit and loss signals are added to this array. In the society of Planning, there is no new information bearer and those of the Market are discarded. It is this lack that gives the knowledge problem argument its force. (86) But a major point of Lavoie’s “National Economic Planning: What Is Left?” was that the knowledge problem rules out not only comprehensive economic planning (nationalizing entire industries and total state ownership over all the means of production), but also non-comprehensive economic planning (targeted state ownership, subsidies, price and wage controls, tariffs, quotas, monopoly privileges, and other policies distorting price signals). This is the sort of economic planning most people support today (even those self-avowed “state socialists” who nevertheless imagine more welfare state than communist state), and it’s probably even more commonplace than in the 1980s because the fall of the Soviet Union dealt a significant blow to the case for comprehensive planning, turning its less radical cousin into the moderate, reasonable-sounding alternative. Lavoie showed not only the knowledge problem’s continuing relevance, but also its more expansive, even radical, implications. The knowledge problem is not unique to certain groups, ideologies, or even institutions. The knowledge problem afflicts all human action. Our reason can lift us to unbelievable heights, but we’re still inescapably bounded, limited, and ignorant. The question is the extent to which certain practices, procedures, and feedback mechanisms help alleviate or exacerbate the knowledge problem. Our goal is, well, to accomplish our goals. But neither the best means to our goals nor the full ramifications of our goals are automatically known (or necessarily knowable!). There is a chasm between our intentions and our consequences–not always an unbridgeable chasm, but a chasm that can often be widened or narrowed depending on what tools we use. And since our goals all simultaneously draw upon the same shared reservoir of scarce means (the time, materials, and ingenuity which may always serve alternative ends), it becomes more and more difficult to even see how wide or narrow the many overlapping chasms are, let alone “measure” them or compare them against the chasms implicit in other potential goals. Selecting from our infinite array of means and ends the most efficacious among them, or, more accurately, merely figuring out which arrays’ chasms between intention and consequence are wider or narrower, is a problem for which we need knowledge. This is the knowledge problem: achieving efficacy in the face of uncertainty, or more accurately, continually telling the efficacious from the inefficacious and trying to adjust accordingly. “The knowledge problem is part of the human condition, points to a general feature of human decision-making, and will remain an everlasting consideration in comparative institutional analysis.” This is why the knowledge problem wasn’t made irrelevant with the collapse of comprehensive planning. The knowledge problem is part of the human condition, points to a general feature of human decision-making, and will remain an everlasting consideration in comparative institutional analysis. Our lack of omniscience is omnipresent; hence our reliance on various social devices to help guide our means/ends selections, from the more explicit signs of speaking, writing, voting, and/or polling to the more implicit signs of associating, giving, and/or trading (including the resulting prices). This list is far from exhaustive and the listed devices are far from mutually exclusive. It’s hard to even imagine a society relying on any single one of them, rather than a varied mix of them at different levels, in different contexts, and on different margins. Of course, those concerned about the knowledge problem tend to place special emphasis on a device that is uniquely useful, but also uniquely misunderstood and threatened, a device which many states tried to violently abolish in the 20th century and continue to coercively interfere with today: the price system. Prices have a number of useful features such as 1) bundling material incentives with its signals (and thereby turning the signals into scarcity indicators and lowering the transaction costs of cooperation outside one’s preexisting circle of social trust), 2) compressing relatively large amounts of knowledge into relatively simple signals (and thereby lowering the transaction costs of knowledge conveyance and facilitating relatively faster adjustments in the face of change), 3) capturing dispersed, local, tacit, and/or inarticulable knowledge (and thereby facilitating more accurate comparisons between various means/ends selections), and 4) conveying people’s judgments about their opportunity costs (and thereby turning that formerly incommunicable knowledge into public, tractable, comparable, and actionable signs for others to, however unwittingly, incorporate into their means/ends selections). Of course, speaking, writing, voting, polling, associating, giving, and all other devices involve opportunity costs (all actions do), but none of them convey opportunity costs, instead keeping knowledge of opportunity costs hermetically sealed within each of us and thereby private, intractable, incomparable, and inactionable. What those devices convey are preferences, which, while incredibly useful in their own right, are nevertheless abstracted and untethered from the concrete resource tradeoffs implied by actual means/ends selections and, by extension, the potential tradeoffs implicit in the means/ends selections available for everyone simultaneously. By contrast, prices emerge from trades and therefore reflect the tradeoffs people actually make in their means/ends selections, lending the price signal an epistemically unique place along the many signals we rely on in our decision-making. The problem (efficacious decision-making) is not a mere technical one (a single planner autarkically allocating resources within a single plan) but a language one (many planners mutually coordinating resources across many plans), and price is the language of opportunity cost, the only means by which we can “economize” in the sense of comparing the opportunity costs of rival plans. Planners literally lack the medium necessary to economize: No advocate of planning has yet indicated a workable medium, analogous to the insects’ pheromones or the scientists’ journals or the market’s money prices, through which the interdepartmental rivalry [between a planned economy’s different departments] could generate a level of social intelligence that exceeds the individual intelligence of its participants. (85) The function that prices play in a market is a cognitive one. It is to reduce for each decisionmaker the otherwise overwhelming number of technologically feasible ways of producing things to the relatively much smaller number that appear economic—that is, appear to more than repay their costs. Without the guidance provided by price signals, each producer is likely to engage in a project which, were it the only goal of society, could probably be carried out (technological feasibility) but which, since it is not the only goal, finds itself running out of scarce resources used up by other producers (economic infeasibility). Price movements convey the more or less accurate knowledge of the relative scarcities, the values, of all the factors of production to those who calculate potential and actual profits with them. Yet the only force that tends to pack this scarcity information into prices is the degree of the tug exerted on prices from various directions by multitudes of competitive bidders. Each is committing himself, and either his own wealth or that which it is his responsibility to manage, to his own assessment about where future profits are to be found. (54) Seeing prices as unique cognitive devices shows why they shouldn’t be destroyed (comprehensive planning) but also why they shouldn’t be distorted (noncomprehensive planning). While comprehensive planning is like trying to communicate by abolishing language, noncomprehensive planning is like trying to communicate by speaking different languages, and instead of trade, central planners (comprehensive or otherwise) speak only coercion. As Lavoie wrote: … the profit motive cannot be viewed as merely a wind or current, a driving force that keeps the economy moving or flowing. Inextricably bound up with its operation is its function as the economy’s rudder, or as its dikes and locks, as well. When the government tries to steer a market system, it is not simply providing direction to an otherwise drifting economy; it is necessarily pulling against the directions already indicated by the principle of profitability under some agreed-upon rules of social cooperation. It is not providing guidance to a rudderless ship of state. It is instead struggling to gain control of a rudder that would in its absence steer the economy toward a relatively well-coordinated outcome, even though the government has no scientific grounds for its pretense that it knows how to steer the economy toward some alternative, equally coordinated, outcome. By blindly interfering with its rudder, the government will misdirect the ship and possibly damage or destroy its rudder. But it lacks the knowledge to replace the rudder already supplied by the profit motive.” (119-120) Essentially, the problem with noncomprehensive planning is a direct corollary of the critique of comprehensive planning. The latter is impossible, because no single agency could attain a level of individual intelligence that could rival the social intelligence that emerges from the competitive process. While noncomprehensive planning is not an impossibility (indeed the world has seen little else this century) it does represent an attempt to interfere with the competitive process in order to steer it onto desired paths of development. But the same lack of knowledge on the part of any single person or organization which makes it impossible for comprehensive planning to replace the market also makes it irrational for a noncomprehensive planning agency to try merely to ‘guide’ the market. If the guiding agency is less knowledgeable than the system it is trying to guide—and even worse, if its actions necessarily result in further undesired consequences in the working of that system—then what is going on is not planning at all but, rather, blind interference by some agents with the plans of others. A comprehensive planning agency, if it could exist in a modern economy, would be distinguished from planning of the more mundane and partial variety (as it is done, for example, by businessmen) in that it would be able to plot all the consequences of its own actions. In that case unintended consequences could be dispensed with and humanity could truly become master of its own future development. But if this ambitious goal proves unattainable, as most advocates of planning now admit it is, then what can be said in this regard of noncomprehensive planning? How does it differ from the partial planning of the individual firm? Surely neither can pretend to be able to anticipate the remote consequences (both in time and place) of the limited variables it controls. In each case the attempt by any one decisionmaker to solve one problem may unintentionally lead to the creation of new problems for other decisionmakers. The primary characteristic that distinguishes the noncomprehensive planning done by a government from the familiar planning the rest of us engage in during our daily lives would seem to be that the former has the advantage of being able to employ coercion to help achieve its purposes. The rest of us have to persuade others, for example by offering them something valuable in exchange, in order to get them to cooperate with us so that we can achieve our goals. This coercive advantage does not guarantee, however, that the goals promoted by the government planners will be accomplished. By definition, noncomprehensive planning seeks to control only part of the economic system and hence those parts which it does not control are free to react in their own ways and at their own initiative to government policies. These reactions and the consequences they engender cannot be fully anticipated by noncomprehensive planners, and thus may cause undesirable and unplanned results to follow in the wake of their policies. All proponents of noncomprehensive planning ought to address themselves to this issue. They ought to explain why any one agency in society should have this coercive advantage over others in the economy. In particular, in light of the knowledge problem, why should we expect noncomprehensive planners to be any better informed about the remote consequences of their coercion-backed plans than the rest of us are about the consequences of our persuasion-backed plans? (95-6) Comprehensive planning’s more moderate, reasonable-sounding cousin in noncomprehensive planning continues to dominate prevailing policy proposals in the form of calls to increase state control over everything from education to healthcare to housing to immigration to trade to transportation to energy and beyond. Whether left, right, or center, empowering the state to blindly interfere with something is an enduringly popular idea. But all of these schemes amount to little more than planners trying to substitute their own individual intelligence for everyone’s social intelligence by meddling in something larger than themselves, something too complex and dynamic to be captured by a static model or comprehended by a single mind, let alone controlled or “guided” by the relevant authorities. Policies which merely restrict this or regulate that may be more moderate than full-on central planning, but they are no less unreasonable. Neither will the increasingly fashionable idea of an AI-planned economy help us “transcend” markets. AI’s staunchest advocates seem to conflate the knowledge problem for a technical or computing problem and envision a world where the emergent, ongoing signals of the market’s rivalrous trial-and-error processes somehow already exist as a continuous stream of ready-made inputs for computers to manipulate and optimize. Artificial intelligence is no more a substitute for social intelligence than individual intelligence is. Lavoie, who had a degree in computer science, was well aware of both the potential and the limitations of computing power: While I confess to being as romantic as anyone about the untold benefits that computers promise for future generations, it does not strike me as even a remote possibility that these machines could replace market institutions. Rather, we can expect them to facilitate market transactions increasingly and thereby improve the coordination of plans. The reason is not only that computers are a long way from being intelligent enough to replace an individual human mind in the making of the sorts of skillful judgments that economic decision making requires. More to the point, even if some supercomputers were invented that surpassed human mental powers in every respect, their “intellect” would be put to a far more effective use if organized competitively than if organized by a single plan. Minds, whether human or not, achieve a greater social intelligence when they are coordinated through the Market than is possible if all economic activity had to confine itself to what a single supercomputer could hierarchically organize. (54-5) Whether AI technocracy, Stalinist centralization, Wilsonian militarization, RFC cartelization, populist restrictionism, democratic socialism, some mix of them all, or some new scheme drawn up tomorrow, Lavoie would suggest we close the door on economic planning and get to work on alternative, more viable, more inspiring solutions to the world’s problems. If knowledge is the problem, freedom is the answer Lavoie considered himself a “radical” in the sense that he thought “our society is in serious trouble and demands a sharp departure from current policies” (1) and affirmed the need to “transcend—through principled and concerted social action—war and militarism, political oppression, and special privilege, and to set in motion progressive forces that will begin to solve such difficult human problems as poverty, disease, and environmental decay” (1-2). But Lavoie parted ways with many radicals when it came to planning, and instead argued that “the ultimate ends of the radical movement will almost certainly be frustrated if national economic planning is chosen as the means for their realization” (2): Comprehensive and noncomprehensive planning emerge from this account as successive and ultimately reactionary diversions of what began as a genuinely progressive movement, diversions which have not only wreaked havoc on the millions of human lives who have had to live under planned economies but which have also caused immense harm to the whole notion of popular ideological movements for radical change. (9) Today the radical ideology of planning is intellectually bankrupt. All that remains are meek suggestions to try yet one more variation on the century’s dominant theme of noncomprehensive planning. But this policy does not resolve the knowledge problem; it merely substitutes a form of destructive parasitism on the market process in place of its earlier unachievable goal of dispensing with market processes altogether. The knowledge problem shows that the freely competitive market order makes more effective use of the information that lies dispersed throughout society than can any of its participants. This means that noncomprehensive planning is blind interference into a complex order, interference which can succeed in protecting and enhancing monopoly power and privilege, but which cannot improve the productive capacity of a modern technologically advanced economy. (241) In short, noncomprehensive planning is not a basis for a radical movement at all. It is politics as usual. It is another plea by messianic political leaders that we should trust them to set things right. The goal of a genuine radicalism must be to transcend this whole level of politics. (237) Lavoie actually agreed with Karl Marx that markets involved an “anarchy of production” but argued it was precisely this anarchy (the “ongoing rivalrous struggle” amongst producers) upon which the production crucially depends! Absent anarchy, all producers would be confined to a single plan and therefore blind to the opportunity costs of rival plans, lethally hampering their collective social intelligence. The “anarchic” process of ongoing mutual adjustment through the market forms an intricate, delicate tapestry, and the iron-fist of the state is not a very precise instrument. Attempting to direct, control, command, circumscribe, regiment, regulate, restrict, or otherwise interfere with this anarchy is doomed to exacerbate, not lessen, chaos. Iron-fists are also blind-fists. Lavoie identified a critical link between planning and power, which he saw as going hand-in-hand in practice: Their [“the real fathers of planning”] aspirations were not to achieve any Utopian vision but to secure for the major corporations effective isolation from the rigors and uncertainties of competition. Planning in practice was born as a mutual protection society for a corporate elite. (221) The origins of planning in practice constituted nothing more nor less than governmentally sanctioned moves by leaders of the major industries to insulate themselves from risk and the vicissitudes of market competition. It was not a failure to achieve democratic purposes; it was the ultimate fulfillment of the monopolistic purposes of certain members of the corporate elite. They had been trying for decades to find a way to use government power to protect their profits from the threat of rivals and were able to finally succeed in the war economy. (225-6) The citadels of power are in fact, whether they know it or not, more threatened by the spontaneous forces of the openly competitive market than by any other factor. Power thrives on coercive obstructions to market competition. Ideologies that seek increased governmental intervention into the economy have been only helping the powerful secure better control throughout the world. But an ideology that embraces the spontaneous forces of the market process can yet succeed where all these planning ideologies have failed. The more fully these principles are applied, the more the productive elements of the economy are released; the more opportunities for improvement that the competitive discovery process is permitted to uncover, the more the economy grows. (240) In Lavoie’s hands, the knowledge problem goes far beyond a mere negative critique of comprehensive and noncomprehensive economic planning. It also guides us in creating positive remedies for social ills. Lavoie’s “persuasion-backed planning” (or McCloskey’s “trade-tested betterment”) is an illuminating description of market processes. Testing new plans, ideas, technologies, resource combinations, organizational strategies, etc. by persuasion or trade is far superior than testing them by coercion (superior both epistemically, in terms of knowledge, and morally, in terms of freedom). Lavoie showed the intimate, perhaps necessary, connection between knowledge and freedom. It turns out epistemic progress and economic progress are not all that different, and they are both linked by freedom: Coercion obstructs the flow of knowledge in the market process for the same reason it obstructs it in the scientific community. The spontaneous transmittal of scattered information that is continually being accomplished by the various tugs of market rivals is distorted when some of the participants gain the coercive advantage. (84-5) But if knowledge—whether scientific or economic—is based on tacit skills, if it is inextricably personal, and, most important, if it depends upon the free play of open debate and contention, then the intelligentsia’s justification for special powers evaporates. For the very freedom of inquiry on which the success of science rests is in this case inconsistent with the bestowal of special powers to anyone, including the scientists themselves. (264) For the same reason that science requires freedom and intellectual competition to progress, a modern economy requires economic freedom and market competition. We rely on interpersonal rivalry to give us knowledge about alternative production methods without which most of the present world population would be doomed to starvation. (237) Lavoie closed National Economic Planning: What Is Left? with a quote about the connection between knowledge and freedom by nineteenth-century radical natural-rights theorist Lysander Spooner and it seems fitting to include that same quote here: We all come into the world in ignorance of ourselves, and of everything around us. By a fundamental law of our natures we are all constantly impelled by the desire of happiness and the fear of pain. But we have everything to learn, as to what will give us happiness, and save us from pain. No two of us are wholly alike, either physically, mentally, or emotionally; or, consequently, in our physical, mental, or emotional requirements for the acquisition of happiness, and the avoidance of unhappiness. No one of us, therefore, can learn this indispensable lesson of happiness and unhappiness, of virtue and vice, for another. Each must learn it for himself. To learn it, he must be at liberty to try all experiments that commend themselves to his judgment… And unless he can be permitted to try these experiments to his own satisfaction, he is restrained from the acquisition of knowledge, and, consequently, from pursuing the great purpose and duty of his life.2 For more on these topics, see “Peter Boettke on Don Lavoie and Central Planning,” Peter Boettke with Juliette Sellgren. Podcast episode. Adam Smith Works, The Great Antidote, January 2023. “How the Collapse of Communism Has Undermined Faith in American Capitalism,” by Richard B. McMenzie. Library of Economics and Liberty, September 7, 2020. Don Lavoie on the Socialist Calculation Debate, by David Henderson. EconLog, January 11, 2012. Peter Boettke on Mises. EconTalk. For Lavoie, the knowledge problem informed not just a radical critique but a radical vision, a lively, humanistic, cosmopolitan, and emancipatory vision of cultural, scientific, and economic progress through peaceful social cooperation, dynamic experimentation, and mutual exchange. As the knowledge problem continues to be misunderstood, underrated, or downright ignored, and as human freedom continues to be trampled on, it’s vital we keep the legacy and, more importantly, the ideas of Don Lavoie alive and well. Footnotes [1] Don Lavoie, National Economic Planning: What Is Left? Cambridge, Massachusetts: Ballinger Publishing Company, 1985. [2] Lysander Spooner, Vices Are Not Crimes, Cupertino, California: TANSTAAFL, 1977 [1875]. * Cory Massimino is an independent scholar. He is a fellow of the Center for a Stateless Society. His research focuses on virtue ethics, market process economics, and anarchist political theory. His writings have appeared in publications including The Guardian, The Independent, and Playboy. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)