If you’ve followed the problems that bad weather created for US airlines over the recent holiday season, you know that one airline, Southwest, has been responsible for a hugely disproportionate share of flight cancellations. On December 25 and 26, for example, Southwest canceled more than 5,500 flights. To put that in perspective, Delta Air Lines, which had the second-most cancellations of any airline, canceled 311 flights. It turns out that this was not just a weather issue. If it had been, the Southwest cancellations would not have been eighteen times the number of Delta cancellations. Although Southwest is generally known for its innovations that have created strong competition in the industry, it is behind the curve on one particular technology: its method of assigning flight crews. When very bad weather calls for changes in assigning crews, the Southwest technology is just not up to snuff. In response to the Southwest “meltdown,” Transportation Secretary Pete Buttigieg has called for Southwest to be “accountable.” What does accountability mean for an airline or for any for-profit business? Also, because Buttigieg is a government employee, it’s worth asking what accountability means for government employees. A crucial question is whether for-profit companies are more or less accountable than government agencies. I’ll save you the suspense. For-profit companies are far more accountable. And the reason has to do with the presence or absence of what economists call a residual claimant. These are the opening two paragraphs of David R. Henderson, “Don’t Let Government Be the Pilot,” Defining Ideas, January 5, 2023. And what Buttegieg could do to make things better: Is there anything Buttigieg could do to improve the airline business? There is, and economists have talked about it for years: allow foreign airlines to compete in the domestic market. Deregulation of airlines in the late 1970s and early 1980s was a tremendous success. Before deregulation, airlines had to give notice to the Civil Aeronautics Board (CAB) in advance of fare reductions, and other airlines could intervene to contest the cuts. They often did. Also, an airline that wanted to add a route between any two cities had to first get permission from the CAB. Other airlines that already flew that route could contest that also. But when economist Alfred E. Kahn took over as CAB chair under President Carter, he did everything he could within the law to allow airlines to change fares and to add routes. At the same time, a Harvard law professor named Stephen Breyer worked closely with Democratic Senator Edward Kennedy to pass an airline deregulation bill that ended CAB regulation of fares and routes. (Breyer later became a US Supreme Court justice from 1994 to 2022.) A cozy airline cartel that had existed since 1938 was ended. The results were noticeable almost immediately. Before deregulation, airlines had charged high fares and competed on meals and frequency (a famous airline jingle in the early 1970s was “Delta is ready when you are”). After deregulation, they competed on price and ultimately dropped almost all meals. Consumers were quite happy to save on fares and buy their own meals in the airport. Between 1978 and 2000, inflation-adjusted airline fares fell by 44.9 percent. Economists Clifford Winston and Steven Morrison estimated that half of this fall was due to deregulation. In short, competition worked, and works. So let’s have more of it. Allowing foreign airlines to fly domestic routes would create more competition, more options, and lower fares. Even radical leftist Mexican President Andrés Manuel López Obrador sees the benefit of allowing that to happen in Mexico. If even a socialist can see the benefits of competition, then maybe Buttigieg can too. Of course, he would need the permission of his boss, President Biden, to start pushing for it, and Biden would need Congress. Maybe it’s a long shot, but in the mid-1970s, airline deregulation was a long shot. By December 31, 1984, the Civil Aeronautics Board had been abolished. Read the whole thing. Note: In the first edition of The Concise Encyclopedia of Economics, which was originally The Fortune Encyclopedia of Economics, I commissioned Alfred [Fred] Kahn to write the article on airline deregulation. Here it is. A delightful guy to deal with. In the second edition, I had Fred L. Smith, Jr. and Braden Cox do a badly needed update. (0 COMMENTS)

Like David Henderson, I was saddened to learn of the unfortunate death of Jeffrey Friedman. He was the founder of Critical Review, a journal I always find interesting, as well as the author of what I think is the most persuasive explanation of the 2008 financial crisis published so far. He was also a strong critic of both the economics profession and libertarianism, which makes him (to me) deeply interesting and engaging to read. I was very eager to read what turned out to be his final book, Power Without Knowledge: A Critique of Technocracy, as soon as it was released. I happened to have re-read it recently, and I will be putting together a series of posts reviewing the book. First, a stylistic note is in order. While I find Friedman’s ideas engaging, his writing style flows like a river of bricks. Here’s a typical sentence: The waters are only muddied if we conceptualize this inter-individual process of culture production as supra-individual, as when we pit intersubjectivity against subjectivity by omitting a factor that makes both ideational homogeneity and ideational heterogeneity possible: communication among individual human subjects. You might want to skip this book if 350 pages of that kind of prose don’t appeal to you. That note having been made, let’s begin with an overview. Friedman wishes to critically examine technocracy. Helpfully, he provides a clear definition of what he means by that term: A polity that aims to solve, mitigate, or prevent social and economic problems among its people (henceforth, for convenience, their “social problems.”) Now that he’s defined what a technocracy is, who are the technocrats? Friedman applies a broad brush here, classifying as technocrats not only putative experts, but also ordinary citizens who engage in political activity with the intent of achieving social goals. From here, he gives each group a distinctive classification: In the meantime, let us define as “technocrats” all political actors who make knowledge claims (express or tacit) about the scope, causes of, and cures for social problems – whether these actors are trained, credentialed specialists or not. In turn, let us call “epistocrats” either trained, credentialed specialists (or any other political actors) who claim to have technocratic knowledge unavailable to ordinary citizens. Finally, let us call “citizen-technocrats” political actors who have non-esoteric opinions – explicit or tacit – about the scope, causes of, and cures for social problems. By Friedman’s definitions, technocracy isn’t inherently an antidemocratic system where elites attempt to steer society. Instead: What distinguishes this type of regime from others is not the number of its personnel in proportion to the population being governed – “the few” versus “the many” – but the nature of the regime’s mission: to solve, mitigate, and prevent social problems. Friedman expects his inclusion of ordinary citizens as technocrats will be controversial: Empirically oriented political scientists might scoff at the notion that ordinary citizens should be counted as technocrats…because they doubt that ordinary citizens are equipped to weigh policies’ costs against their benefits. Against this concern, Friedman replies: I am suggesting only that [citizens] political decisions are heavily influenced by perceptions of whether or not public policies can be expected to “work,” or are already “working”…Consider the well-established tendency of ordinary twentieth-century US citizens to vote retrospectively: that is, on the basis of whether the incumbent candidate or party has prevented or mitigated important social problems such as inflation, unemployment, or war. Retrospection of this sort is an all-things-considered form of cost-benefit analysis. Retrospective voters are tacitly claiming to know whether technocratic policies have produced good economic or foreign-policy consequences overall. Having offered definitions of both technocracy and technocrats, Friedman sets out to examine the legitimacy of technocracy. His goal is not to raise an external critique of technocracy, as a libertarian might by arguing the project is illegitimate due to normative beliefs about the proper scope of government. Instead, he raises an internal critique – is technocracy workable according to its own purpose, as defined above? If a technocracy can’t reliably achieve the intended aims, or if those aims can be achieved by lower cost means, then technocracy would be internally illegitimate by its own standards. Friedman identifies four different types of knowledge technocrats would need to achieve the goals of technocracy: Type 1. Knowledge of which social problems are not only real but significant, in the sense that they affect large numbers of people – or small numbers intensely. (This amounts to the negative-utilitarian benefits to be achieved by solving, preventing, or mitigating problems.) Type 2. Knowledge of what is causing the significant problems, and (preferably) knowledge of what might cause significant problems in the future. Type 3. Knowledge of which technocratic actions can efficaciously solve, mitigate, or prevent the significant problems. Type 4. Knowledge of the costs of efficacious solutions, including not only anticipated costs but those that are not intended, and thus not anticipated. (As a side note, while I’ve argued it’s sensible to speak of costs that are unintended but still anticipated, by Friedman’s lights, all unintended costs are also unanticipated. Given that this is a review of his book, I’ll be using those terms according to his stipulated definitions.) Without accurate type 1 knowledge, technocrats might expend considerable resources attempting to solve nonexistent or minor problems, preventing resources from being used to solve real or larger ones. Even with accurate type 1 knowledge, lacking type 2 knowledge will cause technocratic solutions to be useless or counterproductive. An example would be a doctor who knows the symptoms (accurate type 1 knowledge) but misdiagnoses the disease causing those symptoms (inaccurate type 2 knowledge). The treatments the doctor applies in this case will be wasted effort at best, and possibly harmful or fatal. Even with accurate type 1 and 2 knowledge, without accurate type 3 knowledge, technocratic policies will “devote scarce resources to inefficacious solutions, indirectly causing unintended problems by reducing our ability to implement efficacious solutions.” And finally, type 4 knowledge is needed to ensure that the cure isn’t worse than the disease. However, Friedman doesn’t want to put forth an “unrealistically demanding” standard, and sets the bar at what seems like a reasonable level: As a human enterprise, technocracy should not be held to standards of perfection…Thus, I suggest that as a working assumption, we deem a technocratic regime internally legitimate if it tends to do more good, overall, than the harm it creates in the form of costs, including unintended ones. According to this criterion, technocratic decision makers need to know, more often than not, how to establish the existence of social problems, how to roughly prioritize them according to their significance, how to discern their causes, and how to solve them well enough to do more good than the costs these solutions generate. This standard of adequacy cuts technocrats a great deal of slack without licensing too many policy backfires, invisible costs, and misguided missiles. Thus, the stage is set for Friedman’s review of technocratic legitimacy. Over the next several posts, I’ll summarize the ideas Friedman uses to examine this question and the conclusions he reaches. I’ll wrap up by reviewing what I learned from this book, where he changed my mind, and where I find shortcomings in his argument.     Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.  (0 COMMENTS)

In response to my post about Jeff Hummel’s article on slavery, “U.S. Slavery and Economic Thought,” in David R. Henderson, ed., The Concise Encyclopedia of Economics, commenter Warren Platt quoted one part of Jeff’s article and made a lengthy comment. Here’s the part Warren quoted: Strictly speaking, economists usually and most broadly employ the term “efficiency” as a measure of welfare rather than of output. Thus, while economic historians now agree that antebellum slavery marginally increased the output of cotton and other products, it still could have diminished total welfare. In measuring efficiency, economists have no precise unit to compare the subjective gains and losses from involuntary transfers. But because most coercive transfers in the Old South were from poor slaves to rich slaveholders, to assume unrealistically that such transfers were a wash in which slaveholder gains equaled slave losses is to bias the analysis in favor of slavery. [bold added by Warren.] Warren wrote: I guess what’s bugging me is the concept of “efficiency” as deployed in Jeffrey’s encyclopedia entry is that it may be too squishy to be of objective use. Strictly speaking, economists usually and most broadly employ the term “efficiency” as a measure of welfare rather than of output. Thus, while economic historians now agree that antebellum slavery marginally increased the output of cotton and other products, it still could have diminished total welfare. In measuring efficiency, economists have no precise unit to compare the subjective gains and losses from involuntary transfers. But because most coercive transfers in the Old South were from poor slaves to rich slaveholders, to assume unrealistically that such transfers were a wash in which slaveholder gains equaled slave losses is to bias the analysis in favor of slavery. I get it that “Slaves were being pushed off their preferred labor-leisure trade off, forcing them to work harder and/or longer than they otherwise would have chosen.” And that “This increased labor input caused output to increase but welfare (economic well-being) to decrease [for the slaves!] But what about the slaveholders? Couldn’t it be equally argued that the gain in economic well-being exceeded the losses of well-being to the enslaved? The Southern planter class was the closest thing the USA ever had to a European-style aristocracy. Natchez Mississippi in 1860 had the highest percentage of millionaires (who would be worth at least $33 million in today’s dollars) of any town or city in the United States. Could not one argue that such a level of opulence enabled a qualitatively higher, refined lifestyle that far exceeded the welfare losses of the slaves? And that after emancipation, the slaveholders were pushed off their preferred labor-leisure tradeoff and that their loss may have exceeded the gain to the formerly enslaved persons? If one wanted to put a dollar figure on the gain to economic welfare to the planter class that could perhaps be approximated by the risk and the cost of the war itself. One website says the direct costs to the South were around $3.25 billion. Then of course there was the loss of the value of the slaves themselves. So we’re talking around $7 billion, that would have been worth 100 years of the net economic losses estimated by F&E that only took into account the gain to planters of the extra cotton production, or around 10 years worth of the entire Southern regional income. (Imagine the United States of today expending $230 trillion in a risky & ultimately vain attempt to preserve the current status quo.) Now, don’t get me wrong: I am not trying to make a case for slavery. I get it that slavery is superbad. But slavery can be sufficiently condemned on moral grounds with no need for economics to bend over backwards to show that the Southern planters were not only immoral but were also stupid. Certainly, Thomas Jefferson was immoral as judged by our 21st century morality; but to say he was stupid? That’s a stretch. [bold in Warren’s original.] I was pretty sure I knew the answer from having read and edited Jeff’s article. But I was also sure that Jeff would do a better job than I at explaining. Like Jeff, by the way, I had no idea why Warren thought that Jeff was claiming that Thomas Jefferson was stupid. Jeff has once again stepped up to the plate and responded. Here’s his response: Warren, yes some slaveholders were very wealthy. But bear in mind that only about one-fourth of white households in the Old South owned any slaves at all, and about half of those owned fewer than five. The South’s per capita income in 1860, including the slaves, was about 20 percent below that of the North. Even if you completely exclude the third of the population enslaved, per capita income in the South was still only about equal to per capita income in the North. Thus the tiny minority of planters who enjoyed a “level of opulence” that “enabled a qualitatively higher, refined lifestyle” were confined to no more than one percent of heads of white households. Of course, all slaveholders were wealthier than their slaves because they owned between $2.7 and $3.7 billion of their slaves’ human capital. But because wealth and income are related yet still distinct measures, that total alone tells us little about the impact of emancipation on incomes, much less welfare. Emancipation did not eliminate this human capital; it just transferred it back to its rightful owners, the slaves. Around four million former slaves became wealthier, while a far smaller number of former slaveholders became a lot poorer. Yet because the freed slaves did not use all of their restored human capital to generate income but instead to consume more leisure, total  commodity output initially fell after emancipation. Because the freed slaves were now devoting a portion of their human capital to consumption, the resulting reduction in the monetary value of the freed slave’s stock of human capital is roughly equivalent to the discounted present value of the prior increase in the slaveholders’ income flow from forcing slaves to work harder and longer than they would have freely chosen. How large was this additional income gain to planters? For one year alone, 1850, Fogel and Engerman estimated it to be $10 million. This is not slaveholders’ total return on their exploited human capital but just the increase from forcing slaves off their preferred labor-leisure trade off. F&E also estimated that the resulting increase in output also generated an additional $14 million to consumers of slave products in the form of reduced prices. Based on the wage premiumthat would have been required to entice free labor to work at the same pace as slaves, F&E concluded that slaves suffered an additional loss of $84 million in potential income. No matter how you slice the gains from the increased output, and even assume all gains went to slaveholders instead of consumers of slave products, you still have a total deadweight loss of $60 million. That is how much the welfare loss to slaves exceeded all the gains from additional output to anyone else in the world. Based on alternative estimates of the underlying variables offered by other cliometricians, you can end up with total deadweight loss slightly lower or much larger. But none of these alternative calculations comes close to finding that the gains to slaveholders were greater than the welfare loss to slaves. That is why my entry brackets the annual deadweight loss from output inefficiency to the southern economy (ignoring gains to foreign consumers) at between $38 million and $176 million. Unless you drastically reduce the wage premium required to attract free labor to plantation work, it is impossible to  get a result in which the slaveholders’ monetary gain exceeded the slaves’ welfare loss. Indeed, if the slaveholders’ gain had in fact been greater, after emancipation planters should have been able to pay former slaves or other workers a wage high enough to continue laboring on plantations. Yet the only place this actually happened to a limited extent was on some particularly lucrative sugar plantations in Louisiana. As for slaveholders being stupid, nowhere did I suggest that nor does my analysis in any way imply such. Rather it treats planters as hard-nosed, capital-owning businessmen guided by profit under the constant pressure of competition. Only the slave owner willing to employ his slaves in the most productive manner would earn a return sufficient to cover slave prices. But that does not mean that the outcome was efficient in the sense of maximizing welfare. The businessman who successfully lobbies for a lavish government subsidy is certainly not stupid and usually hard working. But under most circumstances, economic analysis demonstrates that the resulting gains to him and his customers are less than the losses imposed on taxpayers, potential competitors, and others.  Given that most planters were already hard working, it is not likely that emancipation significantly altered their preferred allocation between labor and leisure.  Even if it did, changing one’s preferred labor-leisure trade off is far different than being violently forced off one’s preferred labor-leisure trade off. People’s preferences can alter all the time due to changing market circumstances, and doing so maximizes their subjective welfare. Surely forcing a teetotaler to pay for and drink alcohol against his or her will is not quite the same as a former teetotaler who has voluntarily decided to buy a drink. In fact, the supply of labor is partly a function of how changing wages cause individuals to change their labor-leisure trade-off. Or, to return to our businessman with a government subsidy financed with taxes, if instead his enterprise was financed with voluntary contributions, then that part of what welfare analysis previously counted as a loss would now become a gain. You likewise would get a different result if the slaves worked on the plantations voluntarily (but then they wouldn’t be slaves). You are free to eschew welfare analysis as “squishy,” and it admittedly can be imprecise, but doing so deprives you of a useful and standard economic tool for evaluating government policies. You then can still argue that lavish government subsidies are immoral but not that they are inefficient. [bold and italics in original]       (0 COMMENTS)

  We warn you to prepare for this deep dive conversation about life, midlife, and our inevitable death. EconTalk host Russ Roberts holds the view that “the poignance of death adds a richness to day-to-day life,” a thought he’s shared in previous episodes. In this episode, Russ welcomes philosopher Kieran Setiya, who shares personal stories from his book, Midlife: A Philosophical Guide, and proposes that FOMO and competitive tendencies contribute to the malaise that affects so many in the bottom of the U shaped happiness curve also known as the mid-life crisis. Setiya argues we can learn to deal with the ennui to which so many midlifers succumb–along with regrets for roads not taken and wistfulness for what could have been. Setiya argues that a well-lived life needs fewer projects and more pursuits that don’t have goals or endpoints. We hope that these questions invite introspection and perhaps an existential conversation. Please share a response for others to consider; we value all your insights.     1- Whether you are approaching, are in, or are beyond midlife, how does the “gentle U” of life satisfaction resonate with you? To what extent has the midlife trope shaped your outlook on life?   2- Both John Stuart Mill and Kieran Setiya suffered an early life crisis at the ages of 20 and 35 respectively.  Both experienced the paradox of dissatisfaction with life while simultaneously being “successful.” What are some similarities and differences in their stories? What other circumstances can support this paradox?   3- Aristotle called it “contemplation of the structure of the cosmos”. Kieran Setiya refers to the same thing as existential value, using John Stuart Mill’s love of poetry as an example. Do you agree with Setiya that almost everyone has some form of art that is deeply meaningful to them? Do you?   4- Roberts suggests that “you’re either living exclusively in the past or in the future” when your life is focused on projects and goals. He believes that our cultural influence to value optimizing leads us astray. How does Kieran Setiya relate optimization (of articles published) to contemplating death?   5- Setiya suggests that “existential FOMO is inevitable and that it’s a function of something good”. Do you think about this “value pluralism” as positive or negative? Does your view resonate with Russ Roberts proposal that ”You have no idea what life’s going to be like”? Explain.   (0 COMMENTS)

Garett Jones has written an impressive new book on the implications of culture for international migration. In The Culture Transplant (subtitled:  How Migrants Make The Economies They Move To A Lot Like The Ones They Left), Jones makes the following arguments:1. Some cultures are better than others at certain important tasks, including good governance and wealth creation.2. These cultural attributes relate to deep historical patterns, including the level of development achieved by that society’s ancestors thousands of years in the past.3. These cultural attributes are relatively persistent and remain intact (to some extent) even several generations after individuals migrate to a new country.Jones argues that these facts have important implications for immigration policy. In particular, he suggests that migration from cultures that are less successful will tend to degrade the receiving country. He worries about a decline in the quality of governance, less ability to innovate, and even (in extreme cases) more civil strife. I would expect this book to be of particular interest to conservative opponents of immigration.Reviewers such as Bryan Caplan and Alex Nowrasteh have argued Jones overstates the case against high levels of immigration. I also believe that Jones somewhat overstates his case (which nonetheless may have some merit), and will suggest some additional reasons why.    Jones writes in an engaging style and understands how to keep readers interested.  Instead of opening with some dry theory, he begins with a few short chapters that provide extended anecdotes aimed at illustrating his basic point.  Thus in the preface, Jones argues that poor countries such as Egypt, Paraguay, and Indonesia would benefit from receiving lots of immigrants from China.  By beginning with this example, Jones is signaling that he’s not reflexively anti-immigration; rather he’s specifically worried about immigration from less successful cultures.  China has a long history of achievement in three areas that Jones suggests are highly significant: state capacity (S), agriculture (A), and technology (T).  He develops an index called SAT, which aggregates these metrics and assigns an SAT score for each country (not to be confused with the college entrance exam.) In a later chapter, Jones shows that many Southeast Asian nations have benefited from Chinese immigration.  I think he’s right, but I also believe he underestimates the problem with using China as an example of the importance of culture.  If Chinese culture is so superior at wealth creation and good governance, then why is China itself relatively poor?  And why has China been relatively poorly governed over almost all of the past 150 years? There are reasonable responses one can offer, and again I think he’s right about Chinese immigration to Southeast Asia.  Nonetheless, it’s odd to start your book with such a poor example, a case that requires adding some “epicycles” to the model in order to explain awkward facts.  Yes, China’s been held back by communism, but Jones’s argument is that some immigrants groups are better because they have cultures associated with good governance.  So why has China been poorly governed for most of its recent history? This is just a short opening chapter, and certainly doesn’t discredit his model, which relies on a wide range of empirical studies.  But chapter 1 (The Assimilation Myth”) also opens with an extended anecdote, which is even less favorable to Jones’s model.  Jones explains how Argentina was one of the world’s richest nations back in 1913, but after a century of bad governments has fallen back to a middle-income level.  He attributes their relative decline to a massive wave of immigration from Italy (and to a lesser extent Spain) in the early 1900s.  (Although Spanish speaking, in an ethnic sense Argentina is dominated by Italians.) [BTW, Razib Khan says that when people say something to the effect that “the model minority view of Asians is a myth”, it’s a pretty good indication that’s it’s at least partly true.  That’s how I feel about “the assimilation myth”.] The Argentine example has the opposite problem of the China example.  Italy and Spain are fully developed Western European nations, with per capita GDPs that are nearly twice as high as Argentina (in PPP terms, there’s an even greater gap in dollar terms).  So if these were low quality migrants, why do they produce such bad results in Argentina where they are only a portion of the population, and good results back in their European homelands, where they represent almost the entire population? Italy is often cited as a case study for the cultural issues that Jones is focusing on.  Southern Italy has a relatively low trust culture with high levels of corruption and lots of low productivity family firms.  Northern Italy has a much higher trust culture, with less corruption and many successful wealth-creating companies.  So did Argentina receive its immigrants from the less successful part of Italy?   Actually, only about half of Italian immigrants to Argentina came from southern Italy.  In contrast, the overwhelming majority of Italian immigrants to the US came from southern Italy.  And yet America’s Italian immigrants successfully assimilated into our middle class, while Argentina’s supposedly superior mix of Italian immigrants did poorly.  Why?  Jones mentions something about anarchist agitators arriving from Europe.  But that sort of reliance on the effect of a few individuals with problematic political views is at odds with the sort of cultural determinism that underlies his model.  (Here it might be helpful to recall the longstanding debate between the “great man” theory of history and the deep cultural forces theory.  Jones is clearly in the latter camp.)  After completing chapter one, we’ve encountered two important case studies, China and Italy.  With China, we have immigrants leaving a dysfunctional society and doing well elsewhere, and with Italy we have immigrants leaving a highly successful society and doing poorly in Argentina.  Again, this doesn’t mean Jones’s theory is wrong (I think he’s partly correct), but it’s a bit concerning that the two anecdotes he cherry picks to illustrate his model are such a poor fit for what he will subsequently try to show.  He could have opened with any number of case studies, and indeed elsewhere he mentions better examples, such as the fact that Norwegians do well in Norway and also in the US.   In chapter 5, Jones pushes back against the mantra that “diversity is our strength”.  He worries that cultural diversity can lead to civil strife and a deterioration in the quality of governance, which will eventually make a country poorer.  While this may be correct, it’s difficult to explain why highly diverse America is much richer than any other country with a population of more than 10 million.  (Our per capita GDP (PPP) is more than $5000 above second place Netherlands.)  If cultural diversity is a strong negative, how can the US be much richer than any other non-small country?  Why is America more than 50% richer than Japan?  Some might dismiss the US case as a mere anecdote; what matters are the correlations that show up in statistical regressions involving many countries.  But the US is a fairly important case, and I suspect that most readers of Jones book will be Americans.  How do we know that the ability to assimilate immigrants is a stable parameter?  Casual empiricism suggests exactly the opposite.  East Asian immigrants seem to be assimilating relatively successfully into the US, while (as Jones points out) Chinese immigrants in Southeast Asia often maintain quite separate communities.  Muslim immigrants to America have done quite well, even as Muslim immigrants to France have done relatively poorly.  Of course you can keep adding epicycles to the theory, such as looking at the specific type of Muslim immigrant to each country.  But the nature of the receiving country is also important.  In a dynamic market economy with a relatively small welfare state for non-workers, the level of employment is likely to be higher than in a more statist economy where unemployment is high and welfare benefits are strong.  Employment is important, as immigrants that work with locals are more likely to adopt the local culture.  I suspect that unemployed Muslim immigrants stuck in housing projects outside Paris are less likely to assimilate than fully employed Muslim immigrants in America. On page 81, Jones does acknowledge that ethnic conflicts occasionally fade over time.  I wish he had spent more effort thinking about why they tend to fade more in countries such as the US than in places like former Yugoslavia.  I’d also have liked to see a discussion of Switzerland.  Jones is famous for writing a book extolling the benefits of having “10% less democracy”, citing Singapore as an example.  But Switzerland is an even more successful place than Singapore (if living standards are measured correctly), and it has at least 10% more democracy (and decentralization) than any other country.  Might that be why the various language groups in Switzerland get along better than in former Yugoslavia?  (Switzerland also has an extremely high proportion of immigrants.) It is very difficult to predict the impact of immigration on a country’s politics.  About 10 years ago, there were many predictions that immigration would make US politics more left wing.  This was based on the fact that immigrants are more likely to vote for the Democrats.  But this is a simplistic way of looking at the impact of ethnicity.  Blacks tend to vote Democratic, but the higher the black population of a state, the more likely it is to be controlled by the Republicans.  Immigration to the US seems to have energized the Republican Party, leading to the election of Trump in 2016.  (In my view, he would have been re-elected if he had been less . . . er . . . controversial.) There is also evidence that ethnic diversity leads to a smaller welfare state and lower taxes, as the majority resists paying benefits to lower income minority groups.  Some have argued that this explains why the welfare state in America is smaller than in Europe.  It’s also been suggested that immigrants from places like Latin America will bring with them a preference for populist authoritarian leaders, the so-called “man on horseback”.  But when America was finally presented with such a candidate in 2016 and 2020, it turns out that he was mostly supported by whites, and Hispanic voters tended to opt for the more liberal candidate.  In big cities, whites are more likely to support ideas such as “defund the police”, while black voters shy away from these sorts of nutty ideas.  In Democratic primaries, black voters tend to be more skeptical of candidates that identify as “socialist”.  None of this means that Jones is wrong, but I suspect that the relationship between culture and politics is more complicated than he assumes. In chapter 6, Jones shows that most of the important innovations leading to higher living standards are produced by just a handful of major developed countries in Europe, North America and East Asia.  He worries that the quality of these countries may be watered down by mass immigration from less successful cultures, hobbling the primary engines of world innovation.  Oddly, he repeatedly suggests that being large makes a country more innovative, even though his own data doesn’t really support that claim.  For instance, while his data suggests that big countries produce the most Nobel Prize winners, it also shows that small countries tend to lead in Nobel Prize winners per capita.  Thus I don’t understand this claim (p. 118): So Denmark, with a population of 5 million, probably uses many more ideas from Germany (population 83 million) than the other way around.  The small, in this way exploit the large—another reminder that every nation relies on the inventions created in just a few nations. The term “exploit” seems misleading; he’s confusing total innovation with innovation per capita.  If Jones’s claim were correct, then if Germany were to divide up into a bunch of independent nations with the populations equal to places like Switzerland, Austria, Belgium, Denmark, Luxembourg and Netherlands, then global innovation would suffer—because bigger is better.  But in aggregate these six small nations are just about as successful in producing Nobel Prize winners (99) as is Germany (with 113), despite having a far smaller total population.  If anything, Germany is less innovative than its neighbors.  (Adding Sweden would boost the total of Nobel Prizes in this group of small nations to well above Germany, despite still having a lower total population.)  In any case, the bigger is better argument is not necessary for Jones to make his point.  It’s enough to point out that at a global level innovation is concentrated in a few areas.  Even within the US, innovation is concentrated in places such as Silicon Valley, Boston and Hollywood.  The question is whether more immigration will hurt innovation, will “kill the goose that lays the golden eggs”.  Jones understands that innovations in places such as Silicon Valley are often produced by immigrants.  He’s making a different point.  He worries that mass immigration from unsuccessful cultures will degrade our political system, leading to worse economic policies and thereby reducing innovation in the long run.  But the book doesn’t present any examples of that phenomenon occurring, apart from the highly suspect example of Argentina. I am not saying that Jones is completely wrong; indeed I suspect that his hypothesis is partly correct.  Culture does play an important role in the wealth of nations.  Cultural traits tend to persist over time.  But at the margin, I don’t see this concern as having important implications for US immigration policy, for several reasons: 1.  Immigrants to the US tend to assimilate better than immigrants to many other nations. 2. Immigrants to the US from even highly dysfunctional places such as South Asia and West Africa tend to do relatively well in the US. Thus I see no evidence in Jones’s book contradicting the view that the US would benefit from any politically feasible boost in immigration.  So what are the policy implications? 1. Jones successfully raises some doubts about a policy of completely open borders, particularly for a small nation.  It’s hard for me to imagine the impact of Switzerland removing all border controls and allowing unlimited immigration from the world’s poorest nations.  And even for larger countries such as the US, that policy would have to be accompanied (at a minimum) by a removal of welfare benefits for new arrivals.  And even then the wave of immigration would probably be too much for the voters to accept, at least until world incomes become somewhat more equal.  But not completely equal.  Contrary to popular imagination, not all income differences lead to large waves of migration.  Lots of people still live in places such as Bulgaria and Romania, despite free migration within the EU and income levels in the Balkans that are a small fraction of incomes in northwestern Europe.  But the world’s poorest countries are far poorer than even Bulgaria, and have vastly larger populations.  So completely open borders would be a very hard sell to the rich world’s voters.   The second policy implication is that skill based immigration policies that you see in places like Canada and Australia may have more positive long run cultural effects than policy regimes that don’t favor high skilled immigrants.  To be clear, I don’t see any problem in the current mix of skills in US immigrants; they seem to be doing fine in most cases.  But there’s at least a respectable argument for shifting the US immigrant mix a bit further toward the highly skilled groups.  (Unlike Jones, I’m not convinced that the social science research on culture is strong enough to distinguish between relatively high skilled people from successful places like Norway and similar people from failed states like India and Nigeria, so I’d take them all.) I’m surprised that Jones doesn’t spend more time discussing the advantages of cultural diversity.  The US entertainment industry (broadly defined to include film, comedy, music and sports) dominates the global scene.  Why is this?  I can’t help noticing that various minority groups play an important role in these industries (notably Jews and African-Americans.)  When people discuss the disproportionate share of Indian immigrants among Silicon Valley CEOs, they often point to cultural factors such as a familiarity with the English language (relative to East Asian immigrants.) It seems plausible that America’s diversity helps its economy by allowing various ethnic groups to engage in areas where each has a comparative advantage.   In contrast, Japan did extremely well during the postwar decades when they focused on high quality manufacturing of consumer goods such as cars and TVs, but after the 1990s their monoculture proved unable to smoothly adapt to the post-industrial economy that relies heavily on creating new ideas that break with tradition.  An economy with cultural diversity might be less brittle, better able to adapt to a wide variety of economic conditions. It seems to me that Jones’s book has implications that challenge some long held views on both the right and the left.  His research suggests that immigrants from less successful places are better off assimilating into American culture.  Yet the “identity politics” of the left increasingly opposes the traditional goal of making America a melting pot, and instead encourages groups to hold onto their ethnic identity.  Would Italian-Americans be better off today if they had held firmly to the cultural traditions of southern Italy?  Jones’s research does suggest that Italian Americans have not fully assimilated, but it’s certainly true that compared to when I was young one hears far fewer reports of the influence of the Italian mafia.  (In contrast, the mafia remains very active in southern Italy.) If Jones is correct that cultures evolve extremely slowly over time, then conservatives may need to rethink their claim that the legacy of slavery does not provide an “excuse” for current problems in the African American community.  Recent West African immigrants that are doing well in America did not experience the brutal suppression of traditional family structures that occurred under American forms of slavery.  Conservatives cannot have it both ways, claiming that cultures are almost impossible to change in a period of 100 years, while also suggesting that America’s blacks should have simply rebuilt the cultural structures that were destroyed by slavery. Bryan Caplan argues that even if Jones is correct, the actual implications of his book are that America should provide open borders with a fairly large range of countries, comprising a few billion people.  That would be a radical move toward significantly more open borders.  Caplan might well be correct, but it’s not the impression the typical conservative reader will take from the book.  I wonder how Jones responds to Caplan’s claim. Alex Nowrasteh raises serious questions about the quality of the social science research that Jones relies on.  In a sense, I’ve implicitly raised some questions with my observations about America’s extraordinary success. We have a fairly substantial share of our population from places with somewhat dysfunctional cultures, such as Africa, Latin America, South Asia, southern Italy, Cambodia, Laos, and the Philippines.  And yet we are far richer than places with supposedly (culturally) superior populations, such as Japan and Germany.  Why?  Size alone doesn’t seem to provide the answer, as the smaller countries of northwestern Europe are roughly as rich as Germany, and some of the smaller economies in East Asia are roughly as rich as Japan (in PPP terms).  If Denmark, the Netherlands, Switzerland and Austria can all be richer than Germany, then why can’t Canada be richer than the US?  Perhaps our ethnic diversity is not the explanation, but it certainly doesn’t seem to have greatly held us back.   A reader of Jones’s book might assume that many Americans are leaving dysfunction states such as Texas for the greener pastures of West Virginia.  After all, Texas is only about 40% non-Hispanic white, and his model suggests that having a large share of people from places like Africa and Latin American will lead to bad governance.  In contrast, West Virginia is mostly white, with relatively few immigrants.  So why is it doing so much worse than Texas? I would encourage people to check their biases.  I grew up as a white person in a heavily white area, and tended to view white culture as “normal”.  I wonder how many whites realize that Asian Americans often view whites as a violent gun-toting race?  Many whites are aware of the phenomenon of “white flight”, the tendency to move out of school systems with large black and Hispanic populations.  How many whites are aware of the existence of white flight from school systems where Asian students outperform whites? It’s human nature to view our own group as normal, having just the right amount of murder, just the right number of slacker students and meth addicts.  I don’t see evidence of that sort of bias in Garett Jones, but I worry it exists in the larger anti-immigrant community. Yes, immigrants sometimes bring problems.  But they also bring in a fresh set of skill and attitudes, which enrich the complex American mosaic.   PS.  Don’t be put off by my objections to specific points made by Jones.  It’s an excellent book and well worth reading.  There are no easy answers in this area. (0 COMMENTS)

In a recent Substack post, George Mason University economist and former EconLog blogger Bryan Caplan attempts to distinguish between two different viewpoints of prominent libertarians about appropriate policy responses to Covid. He focuses fairly selectively on 4 economists at George Mason University–Tyler Cowen, Alex Tabarrok, Don Boudreaux, and Daniel Klein–and on Phil Magness of the American Institute for Economic Research. His distinction doesn’t hold up. Bryan sorts these 5 people into two competing viewpoints. He puts Alex Tabarrok and Tyler Cowen into the category of people who “pushed for the freedom to fight Covid.” He puts Don Boudreaux, Dan Klein, and Phil Magness into the category of people who “pushed for freedom from the fight against Covid.” I think Bryan’s categorization of Tabarrok and Cowen is roughly correct. What’s off  is his categorization of Boudreaux, Klein, and Magness. It’s true that they wanted people to have freedom from the government interventions that he specified. But in no way does that mean that they wanted people to be free from the fight against Covid. There were many ways to fight against Covid: allowing people to use ivermectin, for example, or making sure that state governments didn’t put carriers of Covid into nursing homes whether they would infect the most vulnerable. (Governors Cuomo of New York, Murphy of New Jersey, Wolf of Pennsylvania, and Whitmer of Michigan all did this.) I don’t recall how frequently these three denounced these governors’ measures but I’m pretty sure they did. Also, I think they denounced the absurd idea of giving the vaccine first to the politically powerful and not prioritizing the elderly. And even if I’m wrong about this, there are libertarians who fit both categories. I’m one of them. I argued strongly against lockdowns, and not just late in the game but in March and April of 2020. I opposed the lockdowns in a March 22,  2020 radio interview, I wrote an April 13, 2020 article, “Liberation from Lockdown Now!” in which I advocated ending the lockdowns, and I debated University of Michigan economist Justin Wolfers on the lockdowns in late April 2020. I also argued strongly for the freedom to fight Covid with drugs. I was quite outspoken about ivermectin, and political allocation of initial vaccine jabs. Charley Hooper and I argued for loosening the FDA requirement for efficacy in a March 25, 2020 Wall Street Journal article. Also, in December 2020, Charley Hooper and I denounced “The FDA’s Deadly Caution” in approving the Covid vaccine. Maybe I’ve answered something I wondered about when I first Bryan’s post: why he didn’t mention me. Could it be that I didn’t fit at all into one category but, instead, spanned both, and so it didn’t fit his dichotomy? I understand the temptation to set up dichotomies. But contradictory evidence can mess up many an hypothesis. (0 COMMENTS)

[Editor’s note: Read Wenzel’s Part 1 here.] As the pilot of the eponymous reconnaissance flight to Arras, Saint-Exupéry witnesses first-hand France’s utter defeat at the hands of Germany.  The French army, unmotorized and outnumbered, faced the Nazi Blitzkrieg of modern warfare coordinated among concentrated armored divisions, infantry, and a superior air force (96-99).  For Saint-Exupéry, the French defeat was inevitable (148-149).  The inevitability is reflected in his plane, as the controls freeze at 30,000 feet – a problem that had been identified before the war, but was never resolved for want of individual responsibility (94).  “We were living in the blind belly of an administration.  An administration is a machine.  The more perfect the machine, the more human initiative is eliminated from it… But a machine is not built for creation.  It is built for administration.  It goes unvaryingly through motions pre-ordained once and for always.  And an administration, like a machine, does not create.  It carries on.  It applies a given penalty to a given breach of rules, a given method to a given aim.  An administration is not conceived for the purpose of solving fresh problems” (92-93). The French army burned villages as it retreated – with no effect on the advancing Nazi army (96).  This led to the infamous Exode, as millions of French civilians (including my grandmother, her sisters, and her parents) fled the advancing Nazis, in one of the three largest population movements in Western Europe in the 20th century (117-139).  From his vantage point, Saint-Exupéry could write:  “I can see from my plane the long swarming highways, that interminable syrup flowing endless on the horizon.”  As the refugees move South, the local villages are pushed to capacity:  “Southward the most generous hearts are beginning little by little to harden at the sight of this mad invasion which little by little, like a sluggish river of mud, is beginning to suffocate them.”  (117).  Naturally, the clogged roads contributed to the already limited mobility of the French army. In the great tension between futility and duty, Saint-Exupéry reflects on the war (surely, some of these reflections simmered during his American exile – but he also finds himself daydreaming at the stick).  “I was later to hear foreigners reproach France with the few bridges that were not blown up, the handful of village we did not burn, the men who failed to die.  But here on the scene, it is the contrary, it is exactly the contrary, that strikes me so powerfully.  It is our desperate struggle against self-evident fact.  We know that nothing can do any good, yet we blow up bridges nevertheless, in order to play the game.  We burn down real villages, in order to play the game.  It is in order to play the game that men die.”  (99-100) Saint-Exupéry – a French officer and a Frenchman – reflects on the meaning of the utter French defeat at the hands of the Blitzkrieg war machine.  “Defeat not only splits men off from other men, it creates a split within the individual himself.  If those apathetic fugitives do not mourn the fate of a collapsing France it is simply because they are the defeated.  It is in the hearts of those men that France has been defeated.  To weep for France is already the promise of victory” (146).  He laments the defeat:  “Tomorrow we of France enter into the night of defeat.  May my country still exist when day dawns again.  What ought we do to save my country?  I do not know.  Contradictory things.  Our spiritual heritage must be preserved, else our people will be deprived of their genius.  Our people must be preserved else our heritage will become lost.  For want of a way to reconcile heritage and people in their formulas, logicians will be tempted to sacrifice either the body or the soul.  But I want nothing to do with logicians.  I want my country to exist both in the flesh and in the spirit when day dawns.  Therefore I must bear with all the weight of my love in that direction.”  (221-222).  Interestingly, for all his love of France, Saint-Exupéry does not fall into the logical fallacy of the Hegelian nation-state; he remains a methodological individualist:  “Man is not the same as men.  We say nothing essential about the cathedral when we speak of its stones” (242).  This conflicted, notably, with Charles de Gaulle’s vision of France as an entity, and its historically inevitable grandeur. Flight to Arras was, surprisingly, controversial.  Stacy Schiff, in her biography of Saint-Exupéry, explains how the book was denounced by both sides, in turns as defeatist, patriotic without party affiliation, insufficiently anti-semite, or fascist (because of Saint-Exupéry’s methodological individualism, somehow).  After a brief post-armistice stay in France, Saint-Exupéry exiled himself to New York for 28 unhappy but productive months – in part to get out of the Vichy heat, but in part to drum up American support for the war effort against the Nazis (this was still a good year before Pearl Harbor).  Saint-Exupéry had expressed concerns about US isolationism in Arras:  “For after all, why do we go on fighting?  For democracy?  If we die for democracy, then we must be one of the democracies.  Let the rest fight with us, if that is the case.  But the most powerful of them, the only democracy that could save us, chooses to bide its time.  Very good.  That is right.  But by so doing, that democracy signifies that we are fighting for ourselves alone” (154). Saint-Exupéry arrived in the US ready to encourage American support for Western democracies against the Nazis.  But he soon found himself in a nest of vipers, as he refused to take sides, between Vichy and Free France – but also, among the different factions of the French resistance, most notably that led by General Charles de Gaulle in London.  Saint-Exupéry specifically mistrusted de Gaulle, in whom he saw the seeds of post-war authoritarianism.  Ever the humanist, he sought to unify, rather than divide – the enemy was, after all, Nazi barbarism.  “Since I am one with the people of France, I shall never reject my people, whatever they may do.  I shall never preach against them in the hearing of others.  Whenever it is possible to take their defence, I shall defend them.  If they cover me with shame I shall lock up that shame in my heart and be silent.  Whatever at such time I shall think of them, I shall never bear witness against them.  Does a husband go from house to house crying out to his neighbors that his wife is a strumpet?  Is it thus that he can preserve his honour?  No, for his wife is one with the home.  No, for he cannot establish his dignity against her.  Let him go home to her, and there unburden himself of his anger.”  He continues:  “I shall not contribute to these divisions between Frenchmen by casting the responsibility for the disaster upon those of my people who think differently from me.  Where there is no judge, nothing is to be gained by hurling accusations.  All Frenchmen were defeated together.”   This sentiment was reflected in his famous appeal for unity, his “Open Letter to Frenchmen Everywhere,” published in The New York Times on 29 November 1942.  As a sidebar comment, the Times would still publish such things, and was not yet a postmodern, woke, neo-Marxist mouthpiece. Saint-Exupéry was reviled by all sides during his exile, just as all sides attempted to recruit him for their cause.  Stacy Schiff concludes that Saint-Exupéry “spoke too eloquently to be ignored but too softly to suit anyone’s agenda” (367).  He would spend 28 unhappy months in New York City, entertaining his hosts with parlor tricks and water balloons thrown from the balcony of his apartment – but also writing Arras, The Little Prince, and his last work, Citadel.  When the US joined the European war effort in 1942, with Operation Torch and the invasion of North Africa, Saint-Exupéry rejoined the Free French forces as an observation pilot.  He had to use his trademark guile and charm to receive flying clearance – he was, after all, 42, and his multiple flying injuries posed a risk.  In late July 1944, he was grounded for one of his frequent bouts of insubordination.  But he broke the rules on July 31, 1944, and flew solo for a reconnaissance mission over Southern France.  He never returned. Flight to Arras offers a vivid first-hand account of the Battle of France, and the administrative roots of France’s defeat in six short weeks.  It also offers reflections on honor, craft, and futility.  Saint-Exupéry was a feel-good writer, a man of principle for divided times (World War Two, of course, but perhaps a writer who could be rediscovered in these times of division).  Stacy Schiff concludes that his “work adds up to only an armful, some of it dated, much of it flawed.  But it is all of it rich in spirit:  it makes us want to overreach ourselves.  It makes us dream” (447).   Questions Classical liberalism prizes individualism, and is skeptical of the collectivist, Hegelian, nation-state. And, yet, there is something about culture, something about public orthodoxy, something about shared values – and, in the face of invasion and occupation by a tyrannical force, something about preserving the country and its liberties.  Where is the balance between the individual and a culture (or perhaps even a nation)?   World War Two arguably started in 1938 (with the annexation of the Sudetenland) – or perhaps with the 1937 invasion of China by the Japanese Empire. The US did not enter World War Two until December 1941, after Pearl Harbor, and did not engage in formal European combat until Operation Torch in November 1942.  Saint-Exupéry, in 1940 and throughout his New York exile, lamented the lack of US support for “the Occident” against the Nazi.  What are the limits of isolationism?  When do sad geopolitics become a human right, and cause for intervention by countries that would not otherwise have a dog in the fight?  What lessons can be learned from World War Two for today’s world, especially the Russian invasion of Ukraine?   For the history geeks only. Saint-Exupéry wrote of the inevitability of the French defeat.  This sentiment is not shared by two key German generals, in their autobiographies (Lost Victories:  The War Memoirs of Hitler’s Most Brilliant General, by Erich von Mannstein, and Panzer Leader, by Heinz Guderian); both generals feared the roughly equal numbers of troops, divisions, and tanks on either side, in the May 1940 invasion of France.  In the end, technology and tactics won the day for the Nazis.  Was Saint-Exupéry too pessimistic?  Or were the German generals?   Nikolai G. Wenzel is the L.V. Hackley Chair for the Study of Capitalism and Free Enterprise, and Distinguished Professor of Economics, Broadwell College of Business and Economics, Fayetteville State University (Fayetteville, NC). (0 COMMENTS)

Contractarianism is the theory that models or evaluates social interaction on the basis of a social contract. Whether one tends to agree or disagree with this approach, it is important to understand it. In my review of Geoffrey Brennan and James Buchanan’s The Reason of Rules, just out on Econlib, I note: The classical liberal contractarianism elaborated in The Reason of Rules presents a big challenge to both the anarchist, who thinks that the state cannot be beneficial to everybody, and the statist, who believes that it must be run by some enlightened elite, numerical majorities, or populist movements. The commenters who engaged with my EconLog posts on Buchanan’s theories may want to read the book or at least my review. Two more short excerpts of the latter, which of course doesn’t do justice to this complex but fascinating topic: A fundamental component of the contractarian theory defended in The Reason of Rules is that the basic rules of human interaction must be agreed upon unanimously, by all individuals. The social contract is the set of these basic rules. Individuals would have little hope of agreeing on actual outcomes (think about agreeing on the actual distribution of income or other advantages), but they all have an interest in agreeing on the rules of the social game, the general rules that will guide social interactions among individuals each pursuing his own self-interest. Brennan and Buchanan emphasize how the contractarian approach radically differs from non-contractarian views. In a contractarian perspective, politics is the search for what every individual wants. In the non-contractarian view, “the good” is something external to individuals and politics becomes a search for it, analogous to the search for truth in science. In the best case, “[t]hose who disagree with the definition of the ‘good’ are misinformed and in error.” In the worst case, the supposed “good” is imposed by a benevolent despot, democratic or not. (0 COMMENTS)

Last week, I posted on Jeff Hummel’s article “U.S. Slavery and Economic Thought” in David R. Henderson, ed., The Concise Encyclopedia of Economics. Many commenters posted their thoughts on the article. One of the things I love is when people go back to the longer article behind the blog post rather than settling for the teasers that I quote. One commenter, Warren Platts, did so and quoted this segment from the article: One confirmation of slavery’s output inefficiency is the post-Civil War’s significant decline in southern output and income per capita. The real value of total commodity output (agriculture, manufacturing, and mining) in the eleven defeated Confederate states did not return to its 1860 level until nearly two decades later and, since population had also risen, real output per person in 1880 was almost 20 percent below prewar levels. Platts then wrote: This doesn’t make sense to me. Maybe someone can explain it. It seems to me that an economy with a relatively high productivity is an efficient economy. And productivity is commonly measured in real output per person. Thus, how can an economy whose real output per person be 20% lower than it was 20 years previous be considered a more efficient economy? Jeff Hummel sent me an answer that he thought was too long to be a comment. My problem with it, though, was that it was too good to be just a comment. It deserved a place as a standalone post. Here is Jeff’s answer: To be clear, I am not claiming that the post-Civil War South was necessarily “a more efficient economy” in all respects. Despite the increase in efficiency (welfare) brought about by slavery’s abolition (with its accompanying fall in output), other postwar factors not directly related to emancipation were also affecting the real income and/or efficiency of the southern economy overall. The demand for U.S. cotton had softened because Great Britain and other importers had shifted their purchases during the war to India, Brazil, and Egypt. The South did not recover its market share until the 1880s while at the same time world cotton consumption was growing at half its prewar rate. The wartime Republican administrations had hiked tariffs to protectionist levels, ending the prewar policy of relatively free trade, and the burden of these tariffs inevitably fell disproportionately on the South’s exporting economy. The tariff was also the national government’s main source of revenue. Yet residents of the former Confederate states rarely if ever received two of the largest government’s postwar expenditures partly financed by the tariff: interest on plus payment of the wartime debt and veterans benefits. The new Reconstruction governments in the South, despite all the benefits they provided to the former slaves, also made extravagant new expenditures on railroad subsidies, public education, and other social services, requiring some of the heaviest state and local taxation in proportion to wealth up until that time in U.S. history. Emancipation did undermine the South’s financial sector, given that, prior to the war, slaves had been a major form of collateral. Nonetheless, a new well-developed financial system might have emerged if not for war-induced changes in the nation’s monetary and banking legislation. The new National Banking System openly discriminated against the South, prohibited nationally chartered banks from making real-estate loans, and deprived state-chartered banks in the South, as elsewhere, from issuing banknotes. Preexisting restrictions on branch banking, plus the fact that national banks had to match their note issue to an ever shrinking supply of Treasury securities, inhibited shifting credit to areas where interest rates were highest. State-chartered banks could still issue deposits, but the nineteenth-century was a period when checking accounts were confined to individuals of recognized wealth or unquestioned probity. The poor or undistinguished were thus confined to cash. But the denominations of national bank notes could not be smaller than one dollar (despite wartime inflation, equivalent to $18 in 2022); the circulation of Greenbacks, available in lower denominations, was being contracted; and a mint ratio that favored large denomination gold coins combined with the melting down of silver coins during the wartime inflation had caused the prewar supply of silver coins to dwindle by two-thirds. All this occurred during a period of deflation, in which the purchasing power of each dollar was continually rising. The net effect of all these factors was to starve the postwar South of credit and small-denomination cash, at the very moment the South’s monetary needs had expanded. The slave plantation had been a mini-planned economy, within which resources were allocated at the planter’s discretion. Upon emancipation, most slaves for the first time had to purchase many of their necessities. Meanwhile interest rates in the rural South soared to five times their prewar levels. Is it any surprise that southern agriculture was reduced to essentially barter transactions? Sharecropping, after all, involves cotton or other products exchanged for the use of land. And the almost exclusive source of rural credit was small country stores, that advanced food, clothing, and agricultural supplies with crops pledged as security. Incidentally, in reading Jeff’s response, I was reminded that he had covered a number of these issues in his Masters in Monetary Theory class at San Jose State University that I took on Zoom from January to May, 2021.   (0 COMMENTS)

As co-blogger Scott Sumner noted a little while ago, monetary economist Ben McCallum has died. He was 87. Ben wrote the article on Monetarism for the second edition of The Concise Encyclopedia of Economy. I chose him because of his wide knowledge and clarity of expression. I was not disappointed on either. Here’s his opening paragraph: Monetarism is a macroeconomic school of thought that emphasizes (1) long-run monetary neutrality, (2) short-run monetary nonneutrality, (3) the distinction between real and nominal interest rates, and (4) the role of monetary aggregates in policy analysis. It is particularly associated with the writings of Milton Friedman, Anna Schwartz, Karl Brunner, and Allan Meltzer, with early contributors outside the United States including David Laidler, Michael Parkin, and Alan Walters. Some journalists—especially in the United Kingdom—have used the term to refer to doctrinal support of free-market positions more generally, but that usage is inappropriate; many free-market advocates would not dream of describing themselves as monetarists. And one of his concluding paragraphs: What is left today of monetarism? While some disagreement remains, certain things are clear. Interestingly, most of the changes to Keynesian thinking that early monetarists proposed are accepted today as part of standard macro/monetary analysis. After all, the main proposed changes were to distinguish carefully between real and nominal variables, to distinguish between real and nominal interest rates, and to deny the existence of a long-run trade-off between inflation and unemployment. Also, most research economists today accept, at least tacitly, the proposition that monetary policy is more potent and useful than fiscal policy for stabilizing the economy. There is some academic support, and a bit in central bank circles, for the real-business-cycle suggestion that monetary policy has no important effect on real variables, but this idea probably has marginal significance. It is hard to believe that the major recession of 1981–1983 in the United States was not caused largely by the Fed’s deliberate tightening of 1981—a tightening that shows up in ex-post real interest rates and in M1B growth rates as adjusted by the Fed at the time (Table 1, column 6) to take account of major institutional changes. But don’t miss his discussion of the so-called “monetarist experiment” under Fed Chair Paul Volcker. As Scott pointed out, he was very kind and generous. I first him, I believe, at the fall 1975 Carnegie-Rochester conference at Carnegie Mellon University in Pittsburgh, during my first year as an assistant professor of economics at the University of Rochester’s Graduate School of Management. What stands out in my mind is that he raised his tall frame to make a critical comment a paper that has just been presented and then ended with, “I liked the paper.” People responded by smiling and/or laughing appreciatively at his clear ability to distinguish a criticism from an attack. (0 COMMENTS)