Fittingly enough after writing an extended review about a book about the pitfalls of rules that don’t allow for exceptions, I came across a recent news story about a recall issued for the recent ID.Buzz electric van from Volkswagen. Vehicles can be recalled for all kinds of reasons, of course. A vehicle I bought a couple of years ago recently had a recall issued to address a software bug that could make cruise control unexpectedly accelerate to dangerous levels in rare cases. This was clearly a good basis for a recall and for a fix to be issued. So, what was the critical flaw afflicting the ID.Buzz? Well, it turns out Volkswagen had given passengers in the back row too much space. In most three row vehicles, the seats in the last row tend to be small and cramped, but Volkswagen designed their vehicle to make the seats comfortable and spacious, allowing for a pleasant seating experience. Regulators, however, would have none of this. You see, the back row consists of two seats, both wide enough to comfortably seat two full size adults. In fact, the seats were so spacious that regulators argued people might decide to squeeze a third person in the back row, between the two designated seats. But that third person wouldn’t have a seatbelt! Therefore the only acceptable option according to regulators is to make sure that the seats can only barely fit two people. If you let car manufactures provide space to safely and comfortably fit two passengers, people might take the opportunity to unsafely and uncomfortably squeeze in three passengers. So the rules require you only allow enough space to seat two people uncomfortably. In order to bring things in line with what The Rules Require™, Volkswagen will take in the recalled vehicles and install a barrier in between the two seats in the back row, effectively shrinking the seating space available to convert it into the kind of cramped seating the law demands. I imagine a lot of current ID.Buzz owners will decline to get their car “fixed” in this way and just ignore the recall, but future owners will not be so lucky. Of course, it is possible that some people will attempt to do something foolish like squeeze three people into a seating area designed for two, leaving one person without a seatbelt and placing themselves at risk. On the other hand, the list of ways people can make equally foolish and risky decisions is approximately infinity pages long. There really does come a point where sensible rules takes a turn into living a life where Mrs. Grundy is hovering over you at every moment, constantly yelling “No stop it stop it stop it you might hurt yourself!” at your every move. And when the day-to-day life of citizens looks less like “give me liberty or give me death!” and more like “please regulate my seating space to stop me from hurting myself with bad choices,” I’d say we’ve long since crossed that point. (0 COMMENTS)

  I’ve noticed with increasing frequency that various commentators on the media talk about who runs the country. Many right wingers think that Joe Biden was supposed to run the country but didn’t and, instead, he deferred to a troika who ran the country. Many people across the spectrum think that Donald Trump currently runs the country. They’re all wrong. No one runs the country. Think of all the decisions that you make in a day. On how many of them does the U.S. president decide? Close to zero. He can influence your decisions, but he doesn’t run your life. And if he doesn’t run your life and doesn’t run the lives of over 300 million other residents of the United States, how could he run the country? What people may mean is that the U.S. president runs the federal government. But that’s not true either. Recall your civics class. There are 3 branches of the federal government: executive, legislative, and judicial. The president runs the executive branch and even there, there are executive agencies with some autonomy. Think of the Federal Reserve, for example. So at most the president runs one third of the federal government. On a related note: People often say that the president is the commander in chief of the country. No, he’s not. He’s the commander in chief of the military, which is less than 1% of the country.   (0 COMMENTS)

Since Trump declared a global trade war on April 2, American firms have been scrambling to manage tariffs (as an aside, this puts a lie to the oft-repeated claim that only foreigners pay tariffs). I’ve written before on some of the hidden costs of tariffs.  Another hidden cost appears in the form of Foreign Trade Zones (FTZs).  FTZs arose out of the Foreign-Trade Zones Act of 1934, an act designed to help firms manage the Smoot-Hawley tariffs (typical government, eh?  Create a problem and then sell you the solution).  It’s no surprise that they are becoming popular again to help firms manage these Smoot-Hawley-esque tariffs. An FTZ is essentially a bonded warehouse where imports can enter and be stored tariff-free for a certain period of time (up to 5 years).  The tariff on the good isn’t paid until it enters the American economy (that is, it is sold).  Furthermore, the tariff rate charged is the tariff rate on the day the good entered the FTZ, not the tariff rate that day.  If a shipment is not unloaded and stored in an FTZ, the entire tariff is due at that moment.  Depending on the size of the order, that could be a tax of hundreds of thousands of dollars on American companies due at that moment.  Many firms do not have that cash on hand.  So, to get around that problem, FTZs allow goods to be stored (and even altered) tariff-free.  When the American firm withdraws the product from the warehouse, then, and only then, does it pay the tariff.  The American firm can then plan its tax payments. This allows firms to better manage their cash.  (A quick aside: this analysis holds even if one claims the tariffs are 100% paid by foreigners.  The way the tax laws are written, the American firm still cuts the check, so cash-flow still matters even if that is made up in lower prices from their supplier).   FTZs also provide predictability in an otherwise Trumpian hurricane. The Trump Administration changes tariff policy seemingly randomly.  That sort of uncertainty makes it virtually impossible for firms to plan and is extremely costly.  At least with an FTZ, these seemingly mood-driven policy changes will have a muted effect. Let’s put some numbers here to make things a bit more concrete. Say that a firm imports $1m worth of goods, and those goods are subject to a 10% tariff.  If the goods are unloaded at a non-FTZ warehouse, then on that day, a tax of $100,000 is owed (10% of $1m).  Now, it is extraordinarily unlikely that the firm has buyers for these goods lined up and would immediately sell them.  So, the firm would have to have $100,000 in cash on hand to deal with the taxes. If the goods are instead unloaded and stored at an FTZ warehouse, then on that day, no taxes are due.  But, as each unit is sold and comes out of the warehouse, then, and only then, are the taxes due.  Let’s say that those $1m worth of goods take 10 months to sell.  That would imply an average monthly tax bill for the firm of $10,000.  Ultimately, the same amount is paid, but it is far more manageable for the firm.   So, what are the costs here?  Some are monetary: FTZs charge a fee for each shipment (it varies from zone to zone).  Other costs are opportunity costs: firms have been stockpiling to get ahead of the tariffs.  For each unit of space occupied by tariffed goods, that’s one less unit of space that can be used for other things.  Dollars spent to stockpile cannot be used for other things by the firm, and so on.  These costs are worthwhile for many firms that use FTZs, it is true; otherwise, firms would not use the FTZs.  But they are costs nonetheless.  They are an unnecessary burden foisted upon American firms. American firms are turning more and more to FTZs to ride out this storm.  While I am glad they exist, it would be far better if they were not needed in the first place.  They were formed as a way to get around exceedingly unpopular tariffs that didn’t work.  It’s no surprise FTZs are becoming popular again under similar circumstances. (0 COMMENTS)

On March 15th, 2024, the Chicago-based National Association of Realtors (NAR) came forward with a stunning announcement: in response to two 2019 class-action lawsuits, it finally agreed to a settlement sum of $626 million and promised dramatic changes in the real estate business. The lawsuit charged that the NAR had excessive market power that allowed them to create handsome commissions for their agents, resulting in higher housing prices for prospective home buyers.  A year later, a few law firms earned millions of dollars, but the settlement provided scant benefits to prospective homeowners other than some important clarifications about the structure of agent commissions. Indeed, the lawsuit was all based on a mistake about the scope of NAR’s market power. That mistake led to a domino effect of further errors in how to fix the supposed problem.  The major “fix” proposed by the lawsuit hinged on shutting down online information about buyers’ agent commissions. The idea was to put more power in the hands of home buyers to freely negotiate with their agent what the commission would be. But what sounded good in theory to some was actually a naive misunderstanding of how well the real estate market was working in practice.   One lesson learned: a lawsuit bent on trying to suppress valuable market information is a fool’s errand with unintended consequences that can hurt more than they help. A second one: sometimes what looks like excessive market power is actually a result of buyers and sellers freely deciding on the price of a service which provides high value. Some history and more details:  in the past, when a house sold, a traditional 6% fee came out of the selling price, which was typically split between the buyer’s and seller’s agent, each getting a 3% cut.  The theory of the lawsuit was that if the commission could be lowered, that would also lower home prices across the country.   Here’s how the lawsuit promised to upend the home real estate market and lower home prices.   First, it pushed for a ban on information about how commissions would be paid on the multiple listing services (MLS) so buyers wouldn’t be steered by their agents to listed homes with the highest commissions.  After the settlement, no information on commission splits is allowed on the listing service.  Second, it added clarity that home sellers could freely pick their own commission structure instead of the traditional 3%-3% split. For example, a seller could pay his listing agent, say 3%, and the buyer’s agent 1%. Or maybe pay 3% to the listing agent and 0% to the buyer’s agent. The buyers could instead come up with their own agreed upon commission rate and negotiate terms with their agent directly. The idea was to empower buyers and sellers by handing them the negotiation keys with endless possibilities to lower agent commissions.  On the first count, the MLS information ban has been pretty much a joke in terms of stopping information about commission splits. It shows that when information is valuable in the marketplace, people will always find a workaround.  Reportedly in some homes for sale, listing agents leave three cookies on the kitchen counter, a key fob with the number 3, or even the movie Three Amigos playing on the television to slyly indicate the commission of 3% paid to the buying agent. A recent story in The New York Times turned this into a story of real estate agents acting as supposed villains who are evading new policies.  In fact, it is a rational response to an irrational policy solution of attempting to quash market information.   Indeed, aside from a few reported stories like these, most agents aren’t engaging in such colorful behavior. Without MLS indicating commission splits online, it’s just a far more clunky system. A buyer’s agent who is intent on showing ten homes to a client has to make 10 phone calls or texts to find out the structure of the commission split. Second, the plaintiff’s theory was that after buyers and sellers had the power to negotiate lower commissions, commissions would drop and so would home prices. Yet a year later, very little has changed except that now agents have an upfront conversation with their buyers about who will pay them. That’s the one benefit of the lawsuit.   “It has created a higher level of transparency between buyers and their agents, which I think is terrific,” said Harvey Blankfeld, a Las Vegas-based real estate agent who was quoted in a recent article on the subject. Home buyers now need to sign an upfront contract with their agent as to the structure of the commission and promise to pay if the seller doesn’t. “However, it has not impacted costs here in Vegas,” noted Blankfeld.  The plaintiffs in the lawsuit seemed to forget that few buyers want to come up with the cash themselves to pay their agent when previously the seller paid for it.  Putting them on the hook creates more stress and pressure around a home purchase.  As a result, sellers who thought they would save money by paying, say 3%, to their own agent and 0% to the buyer’s agent faced a lot of problems they didn’t anticipate. When buyers discover this arrangement, more than likely it’s time to move onto another listing that pays their agent. A smaller pool of buyers will translate into fewer offers and lower home prices. This explains the lack of change in the commission structure a year later. The traditional 3%-3% split seems to be an equilibrium towards which the market naturally gravitates.  Indeed, the largest change from last year is that the plaintiff lawyers got massively rich. The plaintiff’s lawyers walked away with a third of the settlement- $208 million- and the estimated 50 million affected homeowners will pocket $8 on average, if they bother to apply for past damages.  The NAR is not an all-powerful oligopoly, contrary to The New York Times reporting. Companies like Open Door and Redfin often pay commissions closer to 2% but they are not that popular, with less than 1% of the market. For sale by owner (FSBO)  is another option for every homeowner. Most pass because they will get a lower home price, and more hassle in selling their home. The FSBO market share hit an all-time low of 7% in 2023 according to NAR statistics.  In other words, even though there are alternatives, most buyers and sellers aren’t seeing the value proposition. Any hungry new real estate company could enter the market paying lower commission splits, yet this is rare. More than 9 in 10  home buyers and sellers apparently prefer the traditional approach of having a highly personal interaction with an agent from a trusted real estate company.   The reason: Buyers and sellers got a reminder that agents provide value that is both tangible and intangible, and often difficult for newcomers to foresee. They have connections to reputable service providers, checking on everything from plumbing to roofing, understand the fair market value of a home relative to other homes in the area, and provide intuition on the negotiating position of the buyer or the seller.  In addition, there are intangibles that include an agent navigating a client’s idiosyncratic tastes that may differ from the spouse, local environment, style of the home, and much more. By attempting to shut down important information about disclosing commissions on MLS, the unintended consequence of the NAR lawsuit could have been a decline in new homeowners,  unable to come up with cash payments for their agents. Luckily, the market innovated with information hacks that helped these prospective homeowners dodge a bullet.  The nearly 80-year-old custom of sellers paying buyers’ agents about a 3% commission may have its faults, but the principal advantage of having commission-based norms is simplicity and open information that greases the wheels for complex and highly emotional transactions. As we have seen, people are never more clever when there is money to be made.  A year after the judgement, in most cases we are right back where we started, with regard to the 5%-6% commission split paid by the seller.  Buyers and sellers transmitted signals to the market that this outcome is what they preferred in most cases, but flexibility still provides options like FSBO. We didn’t need an expensive lawsuit to tell us this.  While greater transparency of the commission structure between buyers and sellers was a needed and welcome outcome, some simple modifications to the buyer’s agent agreement could have spared us the $600 million legal bill that primarily enriched the lawyers.    Craig J. Richardson is the Truist Distinguished Professor of Economics at Winston-Salem State University. His wife Cathy Richardson is a Realtor. (0 COMMENTS)

I like looking at the extremes.  If it were actually true that capitalism causes selfishness, then what are the odds that the world’s most free market country would also be the world’s most egalitarian country?  But it is. If it were actually true that fertility rates are falling because it’s too costly to raise kids these days, then what are the odds that the biggest fall in fertility in the entire world would have occurred in the country with the fastest economic growth over the past 60 years?  But it did. Today, I found another example: As homelessness skyrockets across the country, Mississippi’s numbers are trending in the right direction. According to USAFacts, 3.3 out of 10,000 people experienced sheltered homelessness in Mississippi last year. With 982 people experiencing homelessness in Mississippi in 2023, the state has the lowest rate of homelessness nationwide. This accounts for about 0.0015% of America’s homeless population. This is over five times lower than Mississippi’s share of the country’s overall population. This link provides data for all fifty states: Unfortunately, the color coding here is total homeless population, which is why Wyoming appears lower than Mississippi.  If you go to the link and click on each state, you’ll find the per capita figures, which are more meaningful.  New York and Hawaii have the highest rates, although elsewhere I read that California has the most homeless people actually living on the streets.  Many homeless New Yorkers are in shelters.  Mississippi is lowest in per capita terms. So here’s my question:  If poverty actually did cause homelessness, then what are the odds that the lowest rate of homelessness would occur in America’s poorest state?  Even if there were no correlation, the odds would be only 1 in 50.  If there actually was a positive correlation between poverty rates in a state and homelessness, then it would be even more surprising to find Mississippi having the lowest homeless rate. In my view, homelessness has multiple causes.  For homeless people in shelters, restrictions on building are a major cause.  For those on the street, drugs and mental illness also play a big role.  Poverty is far down the list. (0 COMMENTS)

It is certain that President Trump’s reply to the TACO (“Trump Always Chickens Out”) accusation will not win him a Nobel prize in economics. The Wall Street Journal reports (“The ‘TACO Trade’ That Has Trump Fuming,” May 28, 2025): The president rejected claims that he is backing down on tariffs, saying his strategy involves setting a “ridiculous high number” before negotiating it down in exchange for concessions. “You call that chickening out,” Trump said in the Oval Office, adding that “it’s called negotiation.” It’s called negotiation only when the threat is credible and the author of the threat can, through his reputation or other means, commit himself to follow up on it. To focus on the theory of negotiation proposed by Mr. Trump, we will assume that international trade negotiations are successful if they reach the goal officially pursued by the ruler-negotiator—in this case, maximizing exports and minimizing imports. In other words, we neglect the fact that the cost of protectionist policies is mostly paid by the subjects of a protectionist ruler. The Chicken game, an instance of game theory, provides a useful approach. Consider the table below. The chicken metaphor refers to two players, C (Charlie) and D (Donald), who are driving towards each other on the white line of a road to see who will chicken out first and swerve to avoid the collision. The first payoff matrix at the top of the table gives an index of each player’s ordinal utility. The first number in each cell gives C’s utility, and the second number D’s utility. (These payoffs represent each player’s ordinal preference rankings, not cardinal gains.) If none swerves, the two will collide and produce the worst outcome for each player: 0,0. If they both chicken out, they both survive; the payoffs are 2,2 (meaning better than 0 for both). If only one, say D, swerves, he also gets 2, but since he has chickened out, C wins and gets 3, his best result; the payoffs are 3,2. Mutatis mutandis if C swerves. The interpretation for a trade war between two autocratic rulers is obvious: the one who swerves, who chickens out, loses out compared to his most favorable outcome (which he ranks 3). The bottom part of the table provides a more general characterization of the Chicken game’s structure. In a Chicken game (instead of some other game), T >R >S. The game described in the top part of the table satisfies the condition because 3 >2 >0. Another metaphor can be used for the Chicken game: the Hawk-Dove game, which has exactly the same structure, that is, T >R >S. Each of the players can play hawk or dove, in the sense of attack or submission. A player gains the most if he plays hawk (T) and the other submits (R). But if the other also plays hawk, they both face the worst outcome because the fight can result in each being injured or killed (S, S). If they both play dove (R, R), each realizes that he might be better off switching to hawk if the game continues in other rounds. In a one-shot game, the two so-called “Nash equilibria”—situations where no player has an incentive to deviate unilaterally—consist in one playing dove and the other hawk. The Hawk-Dove interpretation of the game can serve to analyze conflicts and bullying. If one player, the bully, succeeds in persuading the other that he will play hawk, the latter’s interest is to submit and play dove. (The first comprehensive discussion of such games in war or negotiation was economist Thomas Schelling’s seminal 1960 book, The Strategy of Conflict.) In this sort of game (conflictual games with strategic interaction), a threat can only be successful if its author can persuade his adversary that he is committed to following up on his threat—that he is not bluffing. If player D (for example) announces that he wants to play hawk (with “a ridiculous high number”) but that he will retreat as a dove if the other calls his bluff, he is inviting the latter to do exactly that and play hawk. Declaring in advance that one’s threat is a bluff is not a strategy to win but a plan to lose. If I declare that I will play hawk and that you better play dove and, in the same breath, let you know that my threat is not serious, I am inviting you to play hawk. If I tell you that I am ready to chicken out, you are not the one who will. Mr. Trump has told the whole world and shown that, in trade negotiations, he will back down from his threats if the adversary resists. Indeed, many on Wall Street believe that financial markets have not tanked more because “Trump Always Chickens Out.” It is virtually certain that, in the EU or even Chinese governments, some advisers to Ms. Van der Leyen or Mr. Xi know how to think of negotiations in terms of game theory and are not scared to tell their rulers what they may not wish to hear. Why are there no such advisers in Mr. Trump’s entourage?   ****************************** The king studies strategy, by ChatGPT (1 COMMENTS)

Overall, I enjoyed Barry Lam’s book Fewer Rules, Better People: The Case for Discretion. I was initially motivated to read the book because I had been thinking about two different ideas common to classical liberal and libertarians that seemed to be in tension with each other. The first is the idea of dispersed nature of knowledge. Economists, and especially those influenced by the arguments of F. A. Hayek, are aware of the benefits of decentralized decision-making and the way it allows dispersed knowledge to be fully utilized. To the extent that expanding discretion increases the ability of dispersed knowledge to be harnessed according to the particulars of time and place, it would seem that libertarians should be friendly to expanding discretion. On the other hand, there is also an argument within libertarians and classical liberal communities on the issue of rules vs discretion where people come down strongly in favor of rules. One example of this line of thought can be found in John Taylor’s book First Principles: Five Keys to Restoring America’s Prosperity, described by the (grumpy) economist John Cochran as being “fundamentally about rules vs. discretion, commitment vs. shooting from the hip, and more deeply about whether our economy and our society should be governed by rules, laws and institutions vs. trusting in the wisdom of men and women, given great power to run affairs as they see fit. The preference for rules is one of the most important lessons of modern macroeconomics.” I initially thought I’d come away from Lam’s book with more arguments added to the “discretion” camp. Instead, reading the book and thinking through it’s arguments helped me realize I had been muddled in my thinking about whether Hayekian-style discretion based on dispersed knowledge runs contrary to Taylor-style rules. I know think the issue isn’t whether choices should be guided by rules or made by discretion – it’s at what level should rules or discretion ought to prevail. Lam’s argument in favor of discretion is specifically aimed at what he calls “street-level bureaucrats,” something very analogous to F. A. Hayek’s “man on the spot.” And I came away from Lam’s book convinced that there is a scale for where discretion or rules should be favored, and this scale is strongest in favor of discretion for street-level, on the spot choices and moves toward behavior being more strongly rule-bound the more removed you are from street-level, on the spot decision making. There are two primary reasons for this. The first reason is related to the importance of stability and predictability. The higher up you are in an organization as a decision-maker, the more people under your influence will need to be able to predict your behavior in order to be able to effectively plan their own. This makes it very important for your choices to be understandable, consistent, and predictable. This was well explained by co-blogger Jon Murphy in his excellent post The Reason of Rules, where he explains how President Trump’s constant leaps from one policy directive to another undermines the stability and predictability needed by millions of people to carry out their own plans. As he put it, To move out of the classroom and into economics, we are seeing exactly this now with Donald Trump’s arbitrary tariff “policy” (“policy” is in quotes here because, since there is no consistency, it’s hard to call it policy by any reasonable sense of the word).  Trump’s decrees on tariffs change day to day, sometimes even hour to hour.  It’s quite impossible to predict what’s going to happen as there is no rhyme nor reason to these changes.  Consequently, Americans and foreigners have no idea how to invest.  As I write this, the stock market is down about 15% from the beginning of Trump’s 2nd term, with all of the decline during this “will he-won’t he” tariff nonsense. Similarly, John Taylor is famous (among other things) for the Taylor Rule as a guide to monetary policy, and Scott Sumner advocates for a rule-based policy for targeting nominal GDP level growth. At the microeconomic level, individual agents should have wide discretion in how their carry out their activity. At the macroeconomic level, the case for policymakers and central bankers being bound by rules and restrained from engaging in activist discretion is much stronger. The second reason why the case for discretion becomes stronger at the street-level compared to the macro level is when street-level decisions misfire, the damage is much smaller. As I wrote in another context about why decentralized decision-making is a good business practice, “when centralized decisions are mistaken, the mistake is imposed across the entire system. Bottom-up decisions could also be mistaken in any given instance, but they are also smaller in scope and not imposed system wide, allowing them to be weeded out through comparison and competition in a way that top-down decision making doesn’t allow.” This simple distinction is also what led me to believe something I mentioned in my previous post about Lam’s book – I think he actually misclassified one of his examples of discretion when it should have been an example of rules crowding out discretion. That was the case of former San Francisco DA Chesa Boudin. What Boudin did was take discretion away from where it had previously been – at the level of the individual prosecutor – and moved it up, away from the street-level decision makers and up the bureaucratic ladder to a more centralized level. The bad use of discretion regarding a single case by an individual prosecutor does much less damage than the bad use of discretion by a district attorney making decisions affecting their entire jurisdiction. Most of my objections to Lam’s book were rooted in how the distinction between law and legislation was absent. But that is perhaps a pretty niche nit to pick. And I did think some of his ideas needed to be expanded or explained more to account for that. One the other hand, to be fair, the book is part of the A Norton Short book series, which features books designed to be, well…short. Given that the book is by design rather compact, it was inevitable that some lines of inquiry couldn’t be fully explored. And that may also be a virtue of the book. Because there were aspects of the argument Lam didn’t cover, it caused me to spend more time pondering what points and counterpoints might have been made in that regard. This actually caused the book to inspire more thinking on my part than it might have otherwise. Overall, I give the book high marks. But as is always the case, reading a review of any book is never a substitute for actually reading the book itself. (0 COMMENTS)

In a nicely nuanced editorial, “JD Vance is Wrong: The Market Isn’t a ‘Tool’” Wall Street Journal, May 26, 2025, Matthew Hennessey, deputy editorial features editor of the Journal, took issue with Vice-President Vance, writing: On a recent podcast, New York Times columnist Ross Douthat asked Mr. Vance for an example of how his Catholicism influences his politics. His first instinct wasn’t to cite the social issues typically associated with conservative Catholic political concerns—abortion, immigration, sexual ethics—but to launch a missile at the market. “Well, I think one of the criticisms that I get from the right is that I am insufficiently committed to the capital-M market,” he answered. “The market is a tool, but it is not the purpose of American politics.” Later in his editorial Hennessey wrote: Markets, whether for cheap consumer goods or government bonds, can’t be bullied into compliance with a political agenda. They aren’t governed by the philosophies and desires of men like Mr. Vance. They are governed by the laws of economics the way the physical world is governed by the laws of gravity. You can moan about them all you want, you can lament the trade-offs they demand and the constraints they impose, but you can’t ignore or wish them away. No amount of political will or spilled ink can overrule them. Supply and demand are undefeated.   Note: Because of my contract with the Wall Street Journal, I am not allowed to quote more than 2 paragraphs from a Journal article until 30 days after it appears. But you can find a longer segment from Hennessey’s editorial here.   Vice-President Vance wrote a response, and I responded to him. Here are 2 paragraphs of my 3-paragraph response: Mr. Vance writes that President Trump has also “leveraged access to America’s markets” to get “fairer treatment from foreign partners” on trade, illegal immigration and illegal drugs. But that isn’t using markets as a tool, either; it’s coercively regulating markets to get the president’s desired results. Parenthetically, do Messrs. Trump and Vance really believe Canada’s government can substantially reduce the amount of fentanyl passing through its border with the U.S., which at 43 pounds in fiscal 2024 was 0.2% of the volume seized along the U.S.-Mexico border? Mr. Vance asks, “Should we allow enormous volumes of Mexican produce or Chinese autos to decimate productive American industries—or should we use tools like tariffs and trade remedies to protect them?” Allowing Chinese electric vehicles into the U.S. wouldn’t decimate domestic production, especially if Mr. Trump succeeds in ending EV mandates so that U.S. firms can do what they do best: produce gasoline-power vehicles and hybrids. Preventing people from buying cheaper foreign produce disproportionately hurts poorer families. The vice president unwittingly gives the game away: Tariffs, not markets, are the tool. You can find my whole response here. (0 COMMENTS)

The Theory of Moral Sentiments, by Adam Smith Relationships between people of different generations make up some of the most meaningful connections life has to offer. They shape deep-seated beliefs, goals, and priorities. In The Theory of Moral Sentiments [TMS], Adam Smith describes the human actor as one who is guided by relational experiences. Do relationships between the young and the old have a distinct role in moral formation? My experience suggests that the answer is “yes.” In The Theory of Moral Sentiments, Smith argues that one’s sense of right and wrong develops through interactions with other individuals who serve as reference points for moral approval or disapproval. In this framework, relationships are paramount, especially those that challenge our own view of self. Sympathy is the philosophical core from which readers can draw out the massive importance of human relationships for moral formation. We can never survey our own sentiments and motives, we can never form any judgement concerning them; unless we remove ourselves, as it were, from our own natural station, and endeavor to view them at a certain distance from us. But we can do this in no other way than by endeavoring to view them with the eyes of other people, or as other people are likely to view them…. We endeavor to examine our own conduct as we imagine any other fair and impartial spectator would examine it.1 Emotions and passions are experienced by the individual, but interacting with others and experiencing their approval or disapproval of felt sentiments results in sympathy (harmony of sentiments) or antipathy (disharmony of sentiments). Friendship, market relationships, and family all function as “mirrors,” and these interactions can teach one to engage rightly with his or her passions.2 Relationships between the old and the young provide opportunities to sympathize with an altogether different point of view. Smith reflects on several benefits that emerge from intergenerational relationships, which are chronicled below. The Season of Gaiety Youthful gaiety and weathered wisdom are exchanged in interactions between the old and the young. Children relish the smallest delights, spreading laughter and joy to those around them. Smith did not have children of his own but appears to have experienced the contagion of a child’s lighthearted countenance: Nothing is more graceful than habitual cheerfulness, which is always founded upon a peculiar relish for all the little pleasures which common occurrences afford. We readily sympathize with it: it inspires us with the same joy, and makes every trifle turn up to us in the same agreeable aspect in which it presents itself to the person endowed with this happy disposition. Hence it is that youth, the season of gaiety, so easily engages our affections.3 Sympathizing with a child’s cheerfulness changes the spectator’s view. He or she enters into the happy disposition of the child and sees challenges from a more agreeable perspective. Prudent Parenting Though delightful, the passions of youth require temperance for practical purposes. Gaiety is not known for its protective features. Parental wisdom, gained through age and experience, is an important juxtaposition to the lighthearted folly of youth. “The first lessons which he is taught by those to whom his childhood is entrusted, tend, the greater part of them, to the same purpose. The principal object is to teach them how to keep out of harm’s way.”4 Though less whimsical, the instruction of parents demonstrates the virtue of prudence.5 The weaknesses of youth, according to Smith, are folly and lack of self-command. One instance where Smith makes a critique of young people is in his discussion of friendship as a means of mutual good conduct and service. He writes, “The hasty, fond, and foolish intimacies of young people, founded, commonly, upon some slight similarity of character, altogether unconnected with good conduct… can by no means deserve the sacred and venerable name of friendship.”6 Smith’s critique may be generalized to a lack of concern for the good of the whole or service to someone other than self. Children begin in a state of utter self-obsession, having had few opportunities to see themselves through the eyes of their spectators. “A very young child has no self-command,” writes Smith, but “alarms” its nurse or parents to tend to its discomforts.7 Parents can temper these outbursts, but it is not until the child enters “the great school of self-command” among his peers that he begins to see his emotions as others do.8 The man of “constancy and firmness” has been trained by the great school to see himself as an impartial spectator would.9 Though capacity for virtue is not linear with age, young people are less practiced in sympathy and self-command, and they stand to benefit from relationships with those who are well-trained. A Balm for Despair Smith continues with a contrast between the dispositions of youth and old age. “We are charmed with the gaiety of youth, and even with the playfulness of childhood: but we soon grow weary of the flat and tasteless gravity which too frequently accompanies old age.”10 This comment contains a critique of those who allow themselves to be carried away by despair. The “gravity” which some fall into is not without remedy, though. Sympathy with the young reinvigorates a weary heart: That propensity to joy which seems even to animate the bloom, and to sparkle from the eyes of youth and beauty… exalts, even the aged, to a more joyous mood than ordinary. They forget, for a time, their infirmities, and abandon themselves to those agreeable ideas and emotions to which they have long been strangers, but which, when the presence of so much happiness recalls them to their breast, take their place there, like an old acquaintance, from whom they are sorry to have ever been parted, and whom they embrace more heartily upon account of this long separation.11 “Happiness is a passion that flows naturally from youth but must be cultivated in old age.” Happiness is a passion that flows naturally from youth but must be cultivated in old age, especially when one is plagued with infirmities. Entering into another’s experience through sympathy can offer a refreshing alternative to the habits of the mind. Deceptive Ambition Gaiety and joy are perhaps more visible than the virtues of the elderly, but those in old age are far from lacking in moral abilities. In The Theory of Moral Sentiments, Smith reflects upon humanity’s preoccupation with ease, utility, and distinction through the parable of the poor man’s son. During his youth, the poor man’s son wants to attain the conveniences of the rich. He believes that a palace, a carriage, and personal servants will provide him contentment and proceeds to work tirelessly to attain these luxuries. In the heat of ambition, the poor man’s son “sacrifices a real tranquility that is at all times in his power” and abandons “humble security and contentment.”12 In old age, the poor man’s son discovers that “wealth and greatness are mere trinkets of frivolous utility,” providing no more peace of mind than a tweezer-case.13 Smith admits that most men fall for the same empty promises as the poor man’s son. They imagine that all the trinkets of the rich man are the means to greater happiness. Foolish ambition—a dangerous vice—loses its appeal with the man of old age. But in the languor of disease and the weariness of old age, the pleasures of the vain and empty distinctions of greatness disappear. To one, in this situation, they are no longer capable of recommending those toilsome pursuits in which they had formerly engaged him. In his heart he curses ambition, and vainly regrets the ease and the indolence of youth, pleasures which are fled for ever, and which he has foolishly sacrificed for what, when he has got it, can afford him no real satisfaction.14 Experiencing weakness through age and disease results in wisdom that the young, ambitious man lacks. Smith does not condemn all ambition—it motivates people to cultivate, build, and invent. Despite its benefits, Smith maintains the view that ambition is a “deception” of which young people must be warned.15 The elderly person who has tasted what life has to offer guides the ambitious young man who is mistaken about the source of happiness. The narrative of the poor man’s son offers Smith’s readers the chance to sympathize with the character’s disappointment and proceed soberly. Smith’s Regard for the Elderly Beyond highlighting the differences between the old and the young, Smith makes a strong claim regarding the dignity of the old. He says that one’s treatment of the elderly indicates virtue: “The weakness of childhood interests the affections of the most brutal and hard-hearted. It is only to the virtuous and humane, that the infirmities of old age are not the objects of contempt and aversion.”16 It is easy to respond kindly to a child, but the virtuous response may not be natural. Sympathy transforms our natural inclinations and aversions, making it possible to move past a transactional approach to relationships. For more on these topics, see The Theory of Moral Sentiments Reading Guide. AdamSmithWorks.org. Dan Klein on The Theory of Moral Sentiments. EconTalk. “Vernon Smith on Adam Smith and the Human Enterprise,” by Alain Marciano. Econlib, Jan. 6, 2025. I believe Smith would encourage individuals to cultivate relationships across generations as part of their moral development. The benefits of such relationships illustrate Smith’s view that moral faculties are developed in social settings through the exchange of sympathy. Each season of life comes with sentiments that complement the emotions and passions of others, giving each child, parent, grandparent, and mentor a part to play in cultivating virtue. Footnotes [1] The Theory of Moral Sentiments, by Adam Smith. 110.2 [2] TMS 110.3 [3] TMS 42.3 [4] TMS 212.1 [5] “The care of the health, of the fortune, of the rank and reputation of the individual, the objects upon which his comfort and happiness in this life are supposed principally to depend, is considered as the proper business of that virtue which is commonly called Prudence” (213.5). [6] TMS 225.18 [7] TMS 145.22 [8] TMS 145.22 [9] TMS 146.25 [10] TMS 246.21 [11] TMS 42.3 [12] TMS 181.8 [13] TMS 181.8 [14] TMS 182.8 [15] TMS 183.10 [16] TMS 219.3 Anna Claire Flowers is a Ph.D. student in Economics at George Mason University. She earned a BA in Public Administration and a BA in Economics from Samford University. Her research interests include family economics, in particular the economic significance of family relationships and the economic factors that influence family decision-making. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

James Buchanan Virginia Political Economy was born in the foyer of the Social Science Building at the University of Chicago early in 1948. In a casual conversation with a fellow graduate student, Warren Nutter, I discovered that we shared an evaluation and diagnosis of developments in Economics, the discipline with which we were about to become associated as licensed practitioners. We sensed that Economics had shifted, and was shifting, away from its classical foundations as a component element in a comprehensive moral philosophy, and that technique was replacing subject. We concurred in the view that some deliberately organized renewal of the classical emphasis was a project worthy of dreams. –James Buchanan. “Virginia Political Economy: Some Personal Reflections.”1 In James M. Buchanan and Liberal Political Economy,2 Richard Wagner argues that the scholarship of James Buchanan was an effort to update the classical political economy of Adam Smith and John Stuart Mill with the tools of modern neoclassical economics. “Normatively,” Wagner (2017, 58) writes, “Buchanan was a democrat who embraced the democratic ideology of self-governance.” He recognized “democracy as simultaneously desirable and subject to a degradation that required conscious effort to resist.” This constitutional project required both efforts to unearth the governing dynamics of alternative institutional arrangements and the educational effort to prepare future scholars with the necessary intellectual background to engage in the ongoing conversation. Buchanan was identifying the misdirection that public economics and public finance were going in the post-World War II reconstruction of the discipline. Economics had adopted a utilitarian and elitist presumption which was comfortable with the notion of governing elites acting for the good of society. Government was seen as a corrective, policy was a tool to achieve ideal outcomes, and economics was the science of administration that would aid in that task. Buchanan was uncomfortable with that set of presumptions from the start. Instead, he saw the need for the examination of the institutional infrastructure within which policy decisions were to be conceived and implemented. In the first major publication of his career, Buchanan argued that economics cannot be divorced from political philosophy. Before we can decide how to finance government activity, we must first determine what activities are to be in the domain of the state. We must first have a theory of the state. Buchanan rejects the position of some classical economists, such as John Baptiste Say, that state activity is always unproductive. He sees the benefits of collective action of the state, but Buchanan is also aware of the dangers of the state. Throughout his career, he wrestled with the question of how the protective and productive state can be empowered, while constraining the predatory state from emerging and leading to democratic degradation. From Dream to Reality In the late 1950s, Buchanan found the opportunity to promote his scholarly dream and to prepare the next generation to continue in this research vein. As Buchanan (1987) recalled it: … in early 1957, Warren Nutter and I found ourselves in a position to actuate the idea we had discussed. We had simultaneously joined the faculty at the University of Virginia in Charlottesville, and we had more or less inherited a leadership role. With enthusiastic support from the then-minimal university administration, and notably from William Duren, then Dean of the Faculty, we established the Thomas Jefferson Center for Studies in Political Economy and Social Philosophy. The Thomas Jefferson Center for Studies in Political Economy and Social Philosophy [TJC] was to serve first and foremost as a home for a community of scholars who wished to explore the operation of a social order built on individual liberty, and second, “as an educational undertaking in which students will be encouraged to view the organizational problems of society as a fusion of technical and philosophical issues.” The problem as Buchanan, and the others associated with the TJC, saw it was that the “social science disciplines are rapidly becoming more and more specialized and compartmentalized.” And, as a result, “young scholars, both graduate students and beyond, are encouraged to devote most of their intellectual activity to narrow and limited subject matter and methodological fields. Great emphasis is placed upon the mastery of technical tools. Breadth in scholarship is largely eliminated by this emphasis, and the student remains ignorant of contributions in the related social science disciplines and in social philosophy.” This would not be a problem if economics was a purely technical discipline akin to mechanical engineering. But it decidedly is not. In fact, intelligence in democratic action relies on tackling the major problems of the social order from a multiplicity of disciplines and differing perspectives. The exclusive focus on technical proficiency comes with a cost. Buchanan asked, “How can our free society expect to survive unless it produces a continuing line of new thinkers who understand, appreciate, and can implement the philosophy of the free society in this rapidly changing world.” In the October 15, 1958 edition of The University of Virginia Newsletter announcing the founding of the Thomas Jefferson Center, Buchanan stated plainly that the center “strives to carry on the honorable of ‘political economy’—the study of what makes for a ‘good society.'” He also elaborated further what the task of the political economist must be. They must first use the technical tools of economic reasoning to understand and assess how alternative institutional arrangements either hinder or promote productive specialization and peaceful social cooperation. But the political economist cannot be content stopping with that vital exercise. They must “try to bring out into the open the philosophical issues that necessarily underlie all discussions of the appropriate functions of government and all proposed policy measures.” Joining Buchanan in this research and educational mission were not only Warren Nutter, but also Ronald Coase, Gordon Tullock, and Leland Yeager. These individuals and their graduate students initiated a paradigm shift in economics, law, and political science over the next decades, and in so doing, reinvigorated the discourse in political economy and social philosophy. Alas, this academic beacon could only shine for so long at the University of Virginia [UVA]. By the late 1960s its founders had scattered far and wide. In the narrative told by members of the Thomas Jefferson Center, this diaspora was the consequence of ideological persecution by members of the faculty outside of economics and their partners in the upper administration. But the research and educational program and its lofty goal of the reclamation of the practice of political economy at its finest hour had already achieved proof of concept. Social philosophy could indeed be practiced from within the disciplinary home of economics, even during the high modern period of scientism. The moral sciences could be envisioned once more as a progressive research program. Buchanan in Blacksburg As the TJC fell out of favor, an enterprising graduate of UVA and the TJC, Charles Goetz, who had moved to Virginia Polytechnic Institute, saw an opportunity. He understood what was lost by the collapse of the TJC project, and he was able to persuade both Tullock and Buchanan to relocate to VPI, and to create the Center for the Study of Public Choice (CSPC). VPI’s administration sought to establish a world-class economics department, and the opportunity to attract Buchanan and Tullock fit perfectly with that desire. Buchanan would have a considerable role in shaping the curriculum. In a memo to Dean Mitchell proposing the establishment of the CSPC, Buchanan sought to lay out the basic vision of this paradigm shift in economics and political science. The public choice perspective, Buchanan states, “involves looking at problems with the simple tools of economic theory.” Why should there be a research and graduate education center devoted to exploring this simple and elementary mode of reasoning through problems in non-market settings? “Because,” Buchanan was quick to add, “the intellectual establishment, which includes almost all of academia, almost all of the media, a great many political leaders, and far too many students, has got away from the simple idea about the political structures that were indeed elementary ideas to our Founding Fathers.” “If we call upon the government to provide goods and services in the public sector as part of our depiction of the ‘good society’, we must examine what public goods are going to be produced, how are those public goods going to be produced and for whom, and in what way will they be financed to ensure both cost effectiveness and justice in the burden to be borne.” Similar to the project at the TJC, the proposed CSPC was to focus its analytical attention on the constitutional rules of the social game we are playing. Once again, one cannot pursue the technicalities of public finance without postulating a theory of the state. We cannot, in other words, do economic science without thinking seriously about political philosophy. If we call upon the government to provide goods and services in the public sector as part of our depiction of the ‘good society’, we must examine what public goods are going to be produced, how are those public goods going to be produced and for whom, and in what way will they be financed to ensure both cost effectiveness and justice in the burden to be borne. In the 1960s, the research and educational program of the TJC was attacked for being ideologically tainted with classical liberalism and modern-day conservativism. In the 1970s, the CSPC would be criticized on methodological grounds for not employing advanced tools in mathematical and quantitative analysis theoretically and empirically. These heated methodological battles resulted in another dissolution of the institutional homeland. In the early 1980s, as the situation became intolerable, Buchanan et al moved to a more hospitable environment, George Mason University (GMU). Like VPI a decade earlier, GMU had just established its Ph.D. program in economics, and thus Buchanan and his colleagues at CSPC would have considerable latitude in shaping the program upon their move from the hills of southern Virginia to the suburbs of Washington, D.C. Simply put, CSPC closed the doors in Blacksburg and opened new doors in Fairfax, keeping the name and most of the staff. GMU continued to stress public choice as a field of specialization and train students for careers in business, the public sector, or academia. The breadth of economic training was emphasized over technical training for the sake of technical training. There were two major differences, however, from CSPC in the 1970s, and it made the program at GMU more akin to the original aspiration of the Thomas Jefferson Center. First, CSPC joined a department that already had the Center for the Study of Market Processes—a research and graduate education program greatly influenced by the work of Ludwig von Mises, F. A. Hayek, and Israel Kirzner. Second, Buchanan was deeply immersed in pursuing questions of social philosophy and had ceased teaching his courses in public finance, devoting his teaching and research interests to constitutional political economy and economic and social philosophy. By 1980, it was crystal clear what the blind spots induced by the Samuelsonian revolution in economics were. The utilitarian, engineering, and elitist presumptions had distorted the discipline beyond recognition to the practitioner of political economy. Buchanan, in his 1964 Southern Economic Association presidential address, had warned about the intellectual dry rot of the allocation as opposed to exchange approach, and the static equilibrium model as opposed to the dynamic process of higgling and bargaining and the emergent properties of the invisible hand. To avoid the pitfalls, the political economists had to acknowledge the subjectivity of value, costs, expectations, and knowledge that is revealed only in the act of choice, and that choice is always within an institutional context that has its own unique reward and penalty structure. Institutions matter. Buchanan’s research program to move to the constitutional level of analysis was bolstered at GMU by two exogenous shocks to the intellectual universe he occupied. First, in 1986 he was awarded the Nobel Prize in Economic Science. Second, the emerging collapse of communism in East and Central Europe and the fiscal crisis of the social democratic welfare states in Western Europe. Institutional transformations were occurring throughout the globe, and Buchanan was a significant theorist of the institutional infrastructure for a productive and peaceful social order. As we have seen, Buchanan both at the TJC and at CSPC made reference to the constitutional project of the American Founding. It is important to remember that in Federalist #1, Alexander Hamilton tells his readers that it is up to them to determine whether the constitution of society that they live under will be a function of accident and force, or of reflection and choice. Clearly in the implied social dilemma, intelligence in collective action requires us to choose reflection and choice as our approach to constitutional design. Buchanan agreed with that, and his research program as laid out in The Calculus of Consent, The Limits of Liberty, and The Reason of Rules is the elaboration on this reflection and choice of the rules of the social game under which we live better together. A genuine institutional economics, then, is about endogenizing the rule formation process and incorporating that into economic analysis. This project had great synergy with the approach of F. A. Hayek, as well as interesting tensions between Hayek’s spontaneous order approach to institutional evolution and Buchanan’s approach to freedom through constitutional construction. But once more, I want to draw your attention to the original depiction of the research and educational mission of the TJC—to use the tools of economic reasoning to explore how alternative institutional configurations impact the ability of individuals to pursue productive specialization and realize peaceful social cooperation through exchange. Moreover, Buchanan’s original program aimed to bring to the forefront the philosophical issues associated with government action, the questions of liberty and autonomy, as well as peace and prosperity. We cannot do economics without philosophy, and we cannot do philosophy without economics. The separation of these disciplines in the 20th century came with a significant cost intellectually and practically, and little benefit outside the arena of academic gamesmanship. We cannot afford this. Onward and Upward For more on these topics, see “A ‘Window’ into Modern Economics: The James M. Buchanan Archives,” by Peter Boettke. Econlib, March 13, 2024. Don Boudreaux on Buchanan. EconTalk. “What Should Economists Do? A Historical Perspective,” by Alain Marciano. Econlib, January 6, 2025. If at UVA, the TJC ran into trouble after a decade due to ideological opposition outside of economics, and the CSPC ran into opposition from within economics due to methodological considerations after roughly a decade, at GMU the combination of CSPC and CSMP (now Mercatus) has maintained a sustained effort in research and training in political economy and social philosophy for over 40 years. All the twists and turns, triumphs and tragedies that have followed over the past 60+ years have made possible the survival of a cadre of moral philosophers in the age of scientism and created the space for a progressive research program in a genuine institutional economics which adds in the continuing practice of the grand tradition of political economy. May it long continue. Footnotes [1] From the James M. Buchanan papers collection in the George Mason University library. Richard Wagner, James M. Buchanan. “Virginia Political Economy: Some Personal Reflections”, 1987. Lexington Books, 2017. Box: 220, Folder: 1. [2] James M. Buchanan and Liberal Political Economy: A Rational Reconstruction, by Richard E. Wagner. *Peter J. Boettke is University Professor of Economics & Philosophy, George Mason University, Fairfax, VA 22030. For more articles by Peter J. Boettke, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)